Reforming Global Finance

Should We Expect Multinationals to Be Loyal?

Why would a European CEO be “shunned” if he moved much of his production to China?

Credit: Darren Brode/Shutterstock.com

Takeaways


  • Instead of U.S. companies off-stating, today they are offshoring. Instead of multi-state companies, we now have multinationals.
  • Few other nations' CEOs or consumers see the pursuit of self-interest as leading to socially optimal outcomes to the extent the United States does.
  • The United States now competes for investment against other nations the way Michigan and other states have competed for investment since World War II.
  • America will never be like Austria, Japan or Korea where country, corporation and consumer are tightly linked. It is too individualistic for that.

In 1953, Charles “Engine Charlie” Wilson, then the president of General Motors, was asked during his confirmation hearing to become the U.S. Secretary of Defense in the Eisenhower Administration if he could make a decision adverse to the interests of GM.

Wilson famously answered that he could — but also that he could not conceive of such a situation “because for years I thought what was good for the country was good for General Motors and vice versa.”

As the U.S. economy has globalized and U.S. corporations have become, in the words of former IBM CEO Sam Palmisano, “globally integrated enterprises,” such a statement would likely seem anachronistic to many Americans today.

But it might not to citizens of most other nations — where the interests of country, consumers and corporations are still seen as more tightly aligned.

It’s never really been this way in America. Note that, six decades ago, Charlie Wilson did not say what’s good for General Motors was good for Michigan, where GM is headquartered.

By that time, GM had expanded significantly its production operations outside of Michigan. It had already located some of its production in lower-wage Southern states. GM had moved beyond its roots as a “Michigan company” to become an “American company.”

Hence, in a logic that would later play itself out again in the move toward globalization, what was good for GM in the 1950s was evidently not always good for Michigan.

And if GM had no complete loyalty to Michigan, neither did Michigan car buyers, who were indifferent to what state their car was made in. U.S. consumers and U.S. corporations had moved from regional to national in their orientation.

The same tradeoffs played out at the level of local elected officials. State governors now realized they were “price takers,” not price makers.

They could no longer afford to have excessively high corporate tax rates or overly burdensome regulations if they wanted to attract a company to their “shores.” They also knew their assets were a well-trained workforce and other economic development incentives.

That’s why Michigan’s governor at the time, Mennen “Soapy” Williams (why did everyone seem to have such colorful nicknames back then?), didn’t call Wilson a “Benedict Arnold” for “off-stating” GM’s production to other states. Instead, the governor put his efforts into making Michigan a more attractive state for economic development.

After World War II, states in the Northeast and Midwest of the United States woke up to the realization that their factories could be relocated anywhere in the country, and increasingly were.

To deal with those pressures, they began to compete fiercely with each other (and with states in other regions) to retain and attract geographically mobile investment.

Economic interests and economic patriotism

Today, the situation is really no different. Instead of U.S. companies “off-stating,” they are offshoring. Instead of multi-state companies, we have multinationals.

And instead of American consumers who buy nationally, they buy globally, demonstrating almost no “loyalty” to buying American made goods. Price and quality are king, origin and production location at best an afterthought.

In fact, the United States is perhaps the only truly global economy in the sense that its businesses and consumers believe that their economic interests, not some vague sense of economic patriotism, should determine where to locate production and where to source consumption.

Most other nations see it differently. I recently asked the CEO of a large manufacturing company in Austria why he had not moved much of his production to China. Among the reasons he listed was that he would be “shunned” socially if he did this.

This is not unusual. Asian CEO’s are reluctant to offshore production because of social pressures, including pressures from their governments. And most foreign consumers show considerable loyalty to buying national.

Take Japan and Korea car purchasing patterns. In both nations, fewer than 2% of automobile sales are from the other nation. Yet, both countries make excellent cars and are located quite close to one another. If their consumers were “rational,” each nation would see a much higher share of auto imports from the other.

So in a world where few other nations’ CEOs or consumers see the pursuit of self-interest as leading to socially optimal outcomes to the extent the United States does, what should America do? One path is to try to become like other nations.

The United States can appeal to consumers’ patriotism to buy American. It can attack CEOs for being unpatriotic for moving production offshore. And, in fact, this does happen.

During his 2004 presidential campaign, Democratic Party candidate John Kerry called U.S. CEOs who moved jobs offshore “Benedict Arnolds.” And for years CNN anchor Lou Dobbs made a good living of accusing corporations of fighting a “War on the Middle Class.”

Russell Shaw, a technology writer and Huffington Post blogger, even went so far as to call CEOs who moved jobs overseas “evil.” And more recently, the New York Times has pilloried Apple for making iPhones in China.

But this kind of social pressure on U.S. consumers and CEOs has not worked before and it won’t work now. The only thing that will work is to do what Soapy Williams, the Michigan governor, did when faced with same challenge.

He put in place an economic development strategy on the state level to attract national corporations. To enable America to win the global race for innovation advantage, it must do likewise. The United States needs a national economic development strategy for the age of global competition.

To do this, the country’s economic policy elite needs to recognize that the United States is now, in essence, a large state — in the sense that a large share of its economy is now, literally, traded the way much of state economies are traded outside their borders.

The United States now competes for investment against other nations the way Michigan and other states have competed for investment ever since World War II.

This means overturning at least two key components of the dominant Washington Economic Consensus: The first is that countries don’t compete, only companies do. The second is that no one sector of the economy is any more valuable than any other.

The reality is that the United States is in competition with other nations and ensuring the health of its traded sectors that are in global competition, like manufacturing and information industries, is critical to ensuring the health of the overall U.S. economy.

America will never be like Austria, Japan or Korea where country, corporation and consumer are tightly linked. It is too individualistic for that. But the United States can still win the race — if Washington wakes up to the new reality and puts in place a national economic development policy.

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About Robert D. Atkinson

Robert Atkinson is president of the Information Technology and Innovation Foundation.

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