US MNCs, Their Role in the Overall US Economy, and the Bailout

Background

The recent global economic crisis had its toll on not one but many multinational corporations.  However, thankfully (you may think otherwise too) the government came to their rescue. Until the end of June 2010 when I last accessed this website, the net US Government outflow on bailout was USD 538 Billion. Of which USD 245 Billion was apportioned to banks & other financial institutions (45.5%); 145 to Fannie & Freddie (26.9%) and auto companies & AIG took USD 80 & 45 billion respectively. In all, 835 US organisations, of which 308 organisations belong to public sector and remaining 527, to private sector covering banking and financial services, insurance & mortgage services, and auto companies etc have been the beneficiaries of bailout.

To many, the government’s initiatives were nothing less than a conundrum, and borderline erratic. Many would also feel that it is better to let a giant fall once than let it stagger perennially. In all, there has been enough criticism on why the bailout is just a stopgap measure and it fails to address the real crisis of capitalism. Most of the critic is directed towards the support government has been extending to US private sector organisations. Private organisations undoubtedly have been a victim of their bad policies, overvaluation of assets, and reliance on speculative ventures. Yet still, the unprecedented scale of the present economic crisis made government intervention indispensable, else, the world could collapse under its own weight.

Still many would feel that the government’s support to US Private Corporations is unjustified. To answer this, simply put, somethings are better said than done. Government action was inevitable, and what follows below is a perspective that we are trying to put forth as the one of the reasons behind.

Rationale behind Bailout

Big US corporations, most of which operate at a multinational level are rather too big to fail. If they ever do, the entire US economy would go down like deck of cards. Letting a multinational corporation die would only initiate a complex cycle of events, starting from unemployment to closing down of firms supplying intermediate inputs and a dramatic increase in the trade deficit. Moreover, these institutions operate in globally competitive sectors. In fact, US MNCs are twice as concentrated in globally competitive sectors as other US firms are. For this reason, any weakness in their performance is only going to hurt US commercial interests and the economic growth. In fact, the performance of US MNCs is an efficient indicator of the overall direction of the US economy.

A recent study by the Mckinsey indicates that the 2270 multinational corporations in US generate 60 percent of their total sales, employ two-thirds of their workforce, and maintain 60 percent of their assets in US alone. Now imagine the fallout if these behemoths are allowed to fail. The multiplier effect of their collapse would be nothing short of an Armageddon. This is when US multinationals are less than 1 percent of total US companies. MNCs in US contribute immensely to several aspects of the US economy, as is shown below

Contribution of US Multinational Corporations (MNCs) to the US economy

• US Multinational Corporations account for almost 50 percent of US exports, and just about one-third of imports, thereby ensuring a positive trade balance
• US MNCs directly employ around one-fifth (19%) of US private sector workforce
• US MNCs provide an average compensation of USD 63270, and which is 26 percent higher than compensation at other companies
• Indirectly, they result in an additional 9 percent employment is US economy; thereby resulting in an overall share of 28 percent in US private sector workforce.
• Direct contribution of US MNCs to private sector GDP is 23 percent
• US MNCs exert positive multiplier effect on other companies. US MNCs source 90 percent of their intermediate inputs from other US based firms.
• From above, their indirect contribution to US private sector GDP is 11 percent, thereby taking their overall contribution to 34 percent of the US private sector GDP.

Interesting, isn’t it?

But, above all, labor productivity is a area where US MNCs score much above all other firms in US. Multinational corporations in US, just about 20 years ago & in terms of labor productivity, were almost at the same level as other firms. However, since then, they have improved productivity at twice the rate of other firms. So much that by 2007, value added per US MNC worker was 40 percent higher than that of other firms in USA. This efficiency has been a result of increased investments in to product, managerial and technological innovations. Just in 2007, US multinationals accounted for 74 percent of the private R&D. In fact, US MNCs spent 4 times the private sector average on R&D investments / employee. It is this contribution of multinational corporations that US has been able to maintain a leadership position across several highly competitive sectors.

Yet still..

US MNCs have been positive about increasing productivity only during the economic expansion period. During recessionary times, their productivity increases have been less (in fact in the negative zone) than the other firms in the US economy have. According to Mckinsey, during period 2001 – 2007, multinational companies together achieved one-third more productivity gains than what other firms in their sector did. However, if we take 2000, as the start of our data point, that is including the dot com bubble burst period, US MNCs, in fact registered a negative growth rate. [Fig.3] Now, since we already have a precedent on US MNC curtailing investments especially on increasing productivity, any rational individual with this knowledge will only try to ensure that they continue investing – not only in this downturn but beyond too. And, this is what the US Government has been trying to ensure.

Summing Up

In the light of this, it becomes pertinent that big US corporations are incentivized to continue to invest resources to (1) increase productivity and competitiveness of US products and services in world economy, and (2) maintain or at least stabilize job growth. Because if these organisations fall, the catastrophic effect of their failure would too much for the economy to handle and may be require a much longer time period to bring America on growth path.There is no other option but let these organisations survive and probably maintain their growth cycle.

Top Image Source: Whers my f*ckin BAILOUT? by ganghiscon

Tagged as: AIG, Auto companies, bailout, business economics, economics, economy, Fannie & Freddie, global economic crisis, government, international business, MNCs, multinational corporations, private sector, TARP, USA, USA economy

~by Nitin Srivastava

Nitin espouses to be a libertarian, he loves to read & learn about anything (make that everything). He has a keen sense of observation, and can tell about the guns in ladies' purses by just looking at their heels. Do you get the drift?

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