Macroeconomics

No. 91212

Robert B. Reich

Who Is Us? Who Is Them?

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2 HARVARD BUSINESS REVIEW January–February 1990

This document is authorized for use only by Hameeda Lamb in Business & Economic Policy Graduate Online Fall 2018-2019 at Northwood University, 2018.

Across the United States, you can hear calls for us to revitalize our national competitiveness. But wait—who is “us”? Is it IBM, Motorola, Whirlpool, and General Motors? Or is it Sony, Thomson, Philips, and Honda?

Consider two successful corporations:

M Corporation A is headquartered north of New York City. Most of its top managers are citizens of the United States. All of its directors are American citi- zens, and a majority of its shares are held by American investors. But most of Corporation A’s employees are non-Americans. Indeed, the company undertakes much of its R&D and product design, and most of its complex manufacturing, outside the bor- ders of the United States in Asia, Latin America, and Europe. Within the American market, an increasing amount of the company’s product comes from its lab- oratories and factories abroad. M Corporation B is headquartered abroad, in another industrialized nation. Most of its top managers and

directors are citizens of that nation, and a majority of its shares are held by citizens of that nation. But most of Corporation B’s employees are Americans. Indeed, Corporation B undertakes much of its R&D and new product design in the United States. And it does most of its manufacturing in the U.S. The company exports an increasing proportion of its American- based production, some of it even back to the nation where Corporation B is headquartered.

Now, who is “us”? Between these two corpora- tions, which is the American corporation, which the foreign corporation? Which is more important to the economic future of the United States?

As the American economy becomes more global- ized, examples of both Corporation A and B are increasing. At the same time, American concern for the competitiveness of the United States is increas- ing. Typically, the assumed vehicle for improving the competitive performance of the United States is the American corporation—by which most people would mean Corporation A. But today, the competi- tiveness of American-owned corporations is no longer the same as American competitiveness. Indeed, American ownership of the corporation is profoundly less relevant to America’s economic future than the skills, training, and knowledge com- manded by American workers—workers who are increasingly employed within the United States by foreign-owned corporations.

Copyright © 1990 by the President and Fellows of Harvard College. All rights reserved.

Who Is Us? Robert B. Reich

JANUARY–FEBRUARY 1990

Robert B. Reich teaches political economy and management at the John F. Kennedy School of Government, Harvard University. He is author of many books on trade competitiveness, industrial policy, and government. His most recent book is The Resurgent Liberal (and Other Unfashionable Prophecies), published by Random House-Times Books in 1989. This is his fifth article for HBR.

This document is authorized for use only by Hameeda Lamb in Business & Economic Policy Graduate Online Fall 2018-2019 at Northwood University, 2018.

So who is us? The answer is, the American work force, the American people, but not particularly the American corporation. The implications of this new answer are clear: if we hope to revitalize the compet- itive performance of the United States economy, we must invest in people, not in nationally defined cor- porations. We must open our borders to investors from around the world rather than favoring compa- nies that may simply fly the U.S. flag. And govern- ment policies should promote human capital in this country rather than assuming that American corpo- rations will invest on “our” behalf. The American corporation is simply no longer “us.”

Global Companies

American corporations have been abroad for years, even decades. So in one sense, the multinational iden- tity of American companies is nothing new. What is new is that American-owned multinationals are beginning to employ large numbers of foreigners rela- tive to their American work forces, are beginning to rely on foreign facilities to do many of their most tech- nologically complex activities, and are beginning to export from their foreign facilities—including bring- ing products back to the United States.

Around the world, the numbers are already large— and still growing. Take IBM—often considered the thoroughbred of competitive American corpora- tions. Forty percent of IBM’s world employees are foreign, and the percentage is increasing. IBM Japan boasts 18,000 Japanese employees and annual sales of more than $6 billion, making it one of Japan’s major exporters of computers.

Or consider Whirlpool. After cutting its American work force by 10% and buying Philips’s appliance business, Whirlpool now employs 43,500 people around the world in 45 countries—most of them non- Americans. Another example is Texas Instruments, which now does most of its research, development, design, and manufacturing in East Asia. TI employs over 5,000 people in Japan alone, making advanced semiconductors—almost half of which are exported, many of them back to the United States.

American corporations now employ 11% of the industrial work force of Northern Ireland, making everything from cigarettes to computer software, much of which comes back to the United States. More than 100,000 Singaporians work for more than 200 U.S. corporations, most of them fabricating and assembling electronic components for export to the United States. Singapore’s largest private employer is General Electric, which also accounts for a big share of that nation’s growing exports. Taiwan counts

AT&T, RCA, and Texas Instruments among its largest exporters. In fact, more than one-third of Taiwan’s notorious trade surplus with the United States comes from U.S. corporations making or buy- ing things there, then selling or using them back in the United States. The same corporate sourcing prac- tice accounts for a substantial share of the U.S. trade imbalance with Singapore, South Korea, and Mexico—raising a question as to whom complaints about trade imbalances should be directed.

ThepatternisnotconfinedtoAmerica’slargestcom- panies. Molex, a suburban Chicago maker of connec- tors used to link wires in cars and computer boards, with revenues of about $300 million in 1988, has 38 overseas factories, 5 in Japan. Loctite, a midsize com- panywithsalesin1988of$457million,headquartered in Newington, Connecticut, makes and sells adhe- sives and sealants all over the world. It has 3,500 employees—only 1,200 of whom are Americans. These companies are just part of a much larger trend: according to a 1987 McKinsey & Company study, America’s most profitable midsize companies increased their investments in overseas production at anannualrateof20%between1981and1986.

Overall, the evidence suggests that U.S. companies have not lost their competitive edge over the last 20 years—they’ve just moved their base of operations. In 1966, American-based multinationals accounted for about 17% of world exports; since then their share has remained almost unchanged. But over the same period, the share of exports from the United States in theworld’stotaltradeinmanufacturesfellfrom16%to 14%. In other words, while Americans exported less, the overseas affiliates of U.S.-owned corporations exported more than enough to offset the drop.

The old trend of overseas capital investment is accelerating: U.S. companies increased foreign capital spending by 24% in 1988, 13% in 1989. But even more important, U.S. businesses are now putting sub- stantial sums of money into foreign countries to do R&D work. According to National Science Founda- tion figures, American corporations increased their overseasR&Dspendingby33%between1986and1988, compared with a 6% increase in R&D spending in the United States. Since 1987, Eastman Kodak, W.R. Grace, Du Pont, Merck, and Upjohn have all opened new R&D facilities in Japan. At Du Pont’s Yokohama laboratory, more than 180 Japanese scientists and technicians are working at developing new materials technologies. IBM’s Tokyo Research Lab, tucked - away behindthe farside of the ImperialPalacein down- townTokyo,housesasmallarmyofJapaneseengineers who are perfecting image-processing technology. Another IBM laboratory, the Kanagawa arm of its Yamato Development Laboratory, houses 1,500 researchers who are developing hardware and soft-

4 HARVARD BUSINESS REVIEW January–February 1990

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ware. Nor does IBM confine its pioneering work to Japan: recently, two European researchers at IBM’s Zurich laboratory announced major breakthroughs into superconductivity and microscopy—earning them both Nobel Prizes.

An even more dramatic development is the arrival of foreign corporations in the United States at a rapidly increasing pace. As recently as 1977, only about 3.5% of the value added and the employment of American manufacturing originated in companies controlled by foreign parents. By 1987, the number had grown to almost 8%. In just the last two years, with the faster pace of foreign acquisitions and investments, the figure is now almost 11%. Foreign- owned companies now employ 3 million Americans, roughly 10% of our manufacturing workers. In fact, in 1989, affiliates of foreign manufacturers created more jobs in the United States than American-owned manufacturing companies.

And these non-U.S. companies are vigorously exporting from the United States. Sony now exports audio- and videotapes to Europe from its Dothan, Alabama factory and ships audio recorders from its Fort Lauderdale, Florida plant. Sharp exports 100,000 microwave ovens a year from its factory in Memphis, Tennessee. Last year, Dutch-owned Philips Consumer Electronics Company exported 1,500 color televisions from its Greenville, Tennessee plant to Japan. Its 1990 target is 30,000 televisions; by 1991, it plans to export 50,000 sets. Toshiba America is sending projection televisions from its Wayne, New Jersey plant to Japan. And by the early 1990s, when Honda annually exports 50,000 cars to Japan from its Ohio production base, it will actually be making more cars in the United States than in Japan.

The New American Corporation In an economy of increasing global investment, for-

eign-owned Corporation B, with its R&D and manu- facturingpresencein theUnitedStatesandits reliance on American workers, is far more important to America’s economic future than American-owned Corporation A, with its platoons of foreign workers. Corporation A may fly the American flag, but Corporation B invests in Americans. Increasingly, the competitiveness of American workers is a more important definition of “American competitive- ness” than the competitiveness of American compa- nies. Issues of ownership, control, and national origin arelessimportantfactorsinthinkingthroughthelogic of “who is us” and the implications of the answer for national policy and direction.

Ownership is less important. Those who favor American-owned Corporation A (that produces over-

seas) over foreign-owned Corporation B (that pro- duces here) might argue that American ownership generates a stream of earnings for the nation’s citi- zens. This argument is correct, as far as it goes. American shareholders do, of course, benefit from the global successes of American corporations to the extent that such successes are reflected in higher share prices. And the entire U.S. economy benefits to the extent that the overseas profits of American com- panies are remitted to the United States.

But American investors also benefit from the suc- cesses of non-American companies in which Americans own a minority interest—just as foreign citizens benefit from the successes of American companies in which they own a minority interest, and such cross-ownership is on the increase as national restrictions on foreign ownership fall by the wayside. In 1989, cross-border equity investments by Americans, British, Japanese, and West Germans increased 20%, by value, over 1988.

The point is that in today’s global economy, the total return to Americans from their equity invest- ments is not solely a matter of the success of partic- ular companies in which Americans happen to have a controlling interest. The return depends on the total amount of American savings invested in global portfolios comprising both American and foreign- owned companies—and on the care and wisdom with which American investors select such portfo- lios. Already Americans invest 10% of their portfo- lios in foreign securities; a recent study by Salomon Brothers predicts that it will be 15% in a few years. U.S. pension managers surveyed said that they pre- dict 25% of their portfolios will be in foreign-owned companies within 10 years.

Control is less important. Another argument mar- shaled in favor of Corporation A might be that because Corporation A is controlled by Americans, it will act in the best interests of the United States. Corporation B, a foreign national, might not do so—indeed, it might act in the best interests of its nation of origin. The argu- ment might go something like this: even if Corporation B is now hiring more Americans and giv- ing them better jobs than Corporation A, we can’t be assured that it will continue to do so. It might bias its strategy to reduce American competitiveness; it might even suddenly withdraw its investment from the United States and leave us stranded.

But this argument makes a false assumption about American companies—namely, that they are in a position to put national interests ahead of company or shareholder interests. To the contrary: managers of American-owned companies who sacrificed profits for the sake of national goals would make themselves vulnerable to a takeover or liable for a breach of fidu- ciary responsibility to their shareholders. American

HARVARD BUSINESS REVIEW January–February 1990 5

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managers are among the loudest in the world to declare that their job is to maximize shareholder returns—not to advance national goals.

Apart from wartime or other national emergencies, American-owned companies are under no special obligation to serve national goals. Nor does our sys- tem alert American managers to the existence of such goals, impose on American managers unique require- ments to meet them, offer special incentives to achieve them, or create measures to keep American managers accountable for accomplishing them. Were American managers knowingly to sacrifice profits for the sake of presumed national goals, they would be acting without authority, on the basis of their own views of what such goals might be, and without accountability to shareholders or to the public.

Obviously, this does not preclude American-owned

companies from displaying their good corporate citizen- ship or having a sense of social responsibility. Sensible managers recognize that acting “in the public interest” can boost the company’s image; charitable or patriotic acts can be good business if they promote long-term profitability. But in this regard, American companies have no particular edge over foreign-owned companies doing business in the United States. In fact, there is every reason to believe that a foreign-owned company would be even more eager to demonstrate to the American public its good citizenship in America than would the average American company. The American subsidiaries of Hitachi, Matsushita, Siemens, Thomson, and many other foreign-owned companies lose no opportunity to contribute funds to American charities, sponsor community events, and support public libraries, universities, schools, and other institutions. (In 1988, for

6 HARVARD BUSINESS REVIEW January–February 1990

What kind of foreign-owned businesses really con- tribute to national competitiveness? Actually, there are four models to consider, each doing business at a differ- ent level of complexity and local intellectual content: importers, assemblers, plant complexes, and fully inte- grated business operations. For those complex discrete manufacturing businesses such as electronics and auto- mobiles that are at the heart of trade concerns, it is only fully integrated operations that build the local skill base and infrastructure in ways that increase interna- tional competitiveness and consequently raise living standards. They do so by bringing in-country the essen- tial engine of business competitiveness.

The Matsushita consumer electronics complex at Kadoma, Japan demonstrates the importance of a fully integrated operation. All four key intellectual elements of the television and videocassette recorder (VCR) prod- uct and production systems—product design, manufac- turing, process engineering, and vendor management—take place there. Although many com- ponents are outsourced, these key intellectual ele- ments are “insourced” at Kadoma so they can be tightly integrated and optimized. Matsushita even builds most of its manufacturing equipment. Mech decks, the highly complex head and tape transport assemblies for VCRs, are assembled by Matsushita robots.

This tight integration enables Matsushita to raise quality, reduce labor hours, provide a high level of prod- uct variety to the market, and rapidly incorporate new

technology into new products. The mech decks are designed so that every part can be assembled with a simple vertical motion, which facilitates 100% assem- bly automation and high process reliability. This “pro- ducible design,” which can only be accomplished when there is close teamwork among product designers, process designers, component vendors, and manufac- turing managers, in part explains why Matsushita has been able to maintain a leading competitive position worldwide despite the yen shock.

Typical importing and assembly operations are at the opposite end of the scale. Importing companies limit local economic activity to sales, marketing, and distrib- ution; their aim is to win local market share and broaden the business base for an engine of competitiveness located offshore. (We use the term “local” to mean activ- ity carried out in the host country.) Assemblers, a cate- gory that includes the U.S. organizations of many Asian-owned consumer electronics companies, make products locally, using designs, processes, and manage- ment approaches developed in the home country. They may buy some components locally, but they are likely to import key components, and all the sourcing decisions are made in the home country. As a result, it is difficult for local companies to become suppliers, and the most important supply positions often go to local subsidiaries of home-country suppliers.

Plant complexes add a further level of value added and begin to add intellectual content. Typically, a complex will fabricate product components, and the amount of

How Foreign-Owned Businesses Can Contribute to U.S. Competitiveness

continued

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example, Japanese companies operating in the United States donated an estimated $200 million to American charities; by 1994, it is estimated that their contribu- tions will total $1 billion.)1

By the same token, American-owned businesses operating abroad feel a similar compulsion to act as good citizens in their host countries. They cannot afford to be seen as promoting American interests; otherwise they would jeopardize their relationships with foreign workers, consumers, and governments. Some of America’s top managers have been quite explicit on this point. “IBM cannot be a net exporter from every nation in which it does busi- ness,” said Jack Kuehler, IBM’s new president. “We

have to be a good citizen everywhere.” Robert W. Galvin, chairman of Motorola, is even more blunt: should it become necessary for Motorola to close some of its factories, it would not close its Southeast Asian plants before it closed its American ones. “We need our Far Eastern cus- tomers,” says Galvin, “and we cannot alienate the Malaysians. We must treat our employees all over the world equally.” In fact, when it becomes neces- sary to reduce global capacity, we might expect American-owned businesses to slash more jobs in the United States than in Europe (where labor laws often prohibit precipitous layoffs) or in Japan (where national norms discourage it).

Just as empty is the concern that a foreign-owned company might leave the United States stranded by suddenly abandoning its U.S. operation. The typical

HARVARD BUSINESS REVIEW January–February 1990 7

local engineering content increases. Examples in the United States include the Nissan complex in Smyrna, Tennessee, which makes its own transmissions and transaxels, and the Sony television complex in San Diego, California, which makes its own tubes and (together with other Sony operations in California) has a significant engineering force. Still, a plant complex falls well short of a fully integrated business operation. The key intellectual elements of the product and production system are still in the home country, even if the distinc- tions are becoming more subtle. High-resolution tubes for computer monitors and jumbo television tubes that drive the product and process technology are made at Sony’s lead plant in Inazawa, Japan. The U.S. plant makes more mature products.

Assembly operations and plant complexes (particu- larly the latter) look good on simple economic measures. They employ many assembly workers and some middle managers and engineers. They also can help with catch- up in weak areas of management skills: the GM-Toyota NUMMI plant in California, for example, has shown U.S. managers that management approach rather than automation accounts for much of the Japanese advan- tage in assembly productivity. These operations cannot bring the host country to the forefront of competitive- ness, however, because the engine of competitiveness remains offshore. Thus they do not upgrade the local skill base and technology infrastructure to world leader status; they won’t attract the best young managers and engineers; and they are unlikely to stimulate the cre- ative work that spins off new businesses (the “Silicon Valley effect”).

The real payoff from local operations for foreign- owned companies, then, comes in the form of fully integrated business operations—when product design,

process design, manufacturing, and vendor manage- ment are co-located and tightly integrated in-country and the operation is set up to do business in the global market. In this fully integrated operation, the span of activities closely resembles similar operations in the home country.

Examples of fully integrated operations in the United States include the consumer electronics businesses of Philips and Thomson (which were built from acquired companies) and, increasingly, Honda’s automobile busi- ness. These companies appear to have made commit- ments to devolve whole product lines to their U.S. subsidiaries. The new Honda Accord Coupe, for example, was designed and is made only in the United States and is exported in small quantities to Japan. Likewise, U.S. multinational companies have built many successful fully integrated operations in other parts of the world, for exam- ple, IBM’s TI’s, and GE Plastics’s operations in Japan, Hewlett-Packard’s in Singapore, and Ford’s in Europe.

The foreign-owned businesses that benefit national competitiveness most are those that commit their engine of competitiveness to the host country. When foreign-owned companies come only to win local mar- ket share, they add little to the host country’s competi- tiveness. When they come to build a platform to compete in global markets, then they contribute to national competitiveness.

—Todd Hixon and Ranch Kimball

Todd Hixon is a vice president and high-tech practice leader with the Boston Consulting Group. Ranch Kimball, a man- ager with BCG, has worked extensively with consumer elec- tronics and automotive companies. Both worked with the American Electronics Association in its high-definition tele- vision initiative.

1. Craig Smith, editor of Corporate Philanthropy Report, quoted in Chronicle of Higher Education, November 8, 1989, p. A-34.

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argument suggests that a foreign-owned company might withdraw for either profit or foreign policy motives. But either way, the bricks and mortar would still be here. So would the equipment. So too would be the accumulated learning among American workers. Under such circumstances, capital from another source would fill the void; an American (or other for- eign) company would simply purchase the empty facilities. And most important, the American work force would remain, with the critical skills and capa- bilities, ready to go back to work.

After all, the American government and the American people maintain jurisdiction—political con- trol—over assets within the United States. Unlike for- eign assets held by American-owned companies that are subject to foreign political control and, occasionally, foreign expropriation, foreign-owned assets in the United States are secure against sudden changes in for- eign governments’ policies. This not only serves as an attraction for foreign capital looking for a secure haven; it also benefits the American work force.

Work force skills are critical. As every advanced economy becomes global, a nation’s most important competitive asset becomes the skills and cumulative learning of its work force. Consequently, the most important issue with regard to global corporations is whether and to what extent they provide Americans with the training and experience that enable them to add greater value to the world economy. Whether the company happens to be headquartered in the United States or the United Kingdom is fundamentally unim- portant. The company is a good “American” corpora- tion if it equips its American work force to compete in the global economy.

Globalization, almost by definition, makes this true. Every factor of production other than work force skills can be duplicated anywhere around the world. Capital now sloshes freely across international boundaries, so much so that the cost of capital in dif- ferent countries is rapidly converging. State-of-the-art factories can be erected anywhere. The latest tech- nologies flow from computers in one nation, up to satellites parked in space, then back down to computers in another nation—all at the speed of elec- tronic impulses. It is all fungible: capital, technology, raw materials, information—all, except for one thing, the most critical part, the one element that is unique about a nation: its work force.

In fact, because all of the other factors can move so easily any place on earth, a work force that is knowl- edgeable and skilled at doing complex things attracts foreign investment. The relationship forms a virtu- ous circle: well-trained workers attract global corpo- rations, which invest and give the workers good jobs; the good jobs, in turn, generate additional training and experience. As skills move upward and experi-

ence accumulates, a nation’s citizens add greater and greater value to the world—and command greater and greater compensation from the world, improving the country’s standard of living.

Foreign-owned corporations help American work- ers add value. When foreign-owned companies come to the United States, they frequently bring with them approaches to doing business that improve American productivity and allow American workers to add more value to the world economy. In fact, they come here primarily because they can be more productive in the United States than can other American rivals. It is not solely America’s mounting external indebt- edness and relatively low dollar that account for the rising level of foreign investment in the United States. Actual growth of foreign investment in the United States dates from the mid-1970s rather than from the onset of the large current account deficit in 1982. Moreover, the two leading foreign investors in the United States are the British and the Dutch—not the Japanese and the West Germans, whose enormous surpluses are the counterparts of our current account deficit.

For example, after Japan’s Bridgestone tire com- pany took over Firestone, productivity increased dra- matically. The joint venture between Toyota and General Motors at Fremont, California is a similar story: Toyota’s managerial system took many of the same workers from what had been a deeply troubled GM plant and turned it into a model facility, with upgraded productivity and skill levels.

In case after case, foreign companies set up or buy up operations in the United States to utilize their cor- porate assets with the American work force. Foreign- owned businesses with better design capabilities, production techniques, or managerial skills are able to displace American companies on American soil precisely because those businesses are more produc- tive. And in the process of supplanting the American company, the foreign-owned operation can transfer the superior know-how to its American work force— giving American workers the tools they need to be more productive, more skilled, and more competi- tive. Thus foreign companies create good jobs in the United States. In 1986 (the last date for which such data are available), the average American employee of a foreign-owned manufacturing company earned $32,887, while the average American employee of an American-owned manufacturer earned $28,954.2

8 HARVARD BUSINESS REVIEW January–February 1990

2. Bureau of Economic Analysis, Foreign Direct Investment in the U.S.: Operations of U.S. Affiliates, Preliminary 1986 Estimates (Washington, D.C.: U.S. Department of Commerce, 1988) for data on foreign compa- nies; Bureau of the Census, Annual Survey of Manufactures: Statistics for Industry Groups and Industries, 1986 (Washington, D.C., 1987) for U.S. companies.

This document is authorized for use only by Hameeda Lamb in Business & Economic Policy Graduate Online Fall 2018-2019 at Northwood University, 2018.

This process is precisely what happened in Europe in the 1950s and 1960s. Europeans publicly fretted about the invasion of American-owned multination- als and the onset of “the American challenge.” But the net result of these operations in Europe has been to make Europeans more productive, upgrade European skills, and thus enhance the standard of living of Europeans.

Now Who Is Us?

American competitiveness can best be defined as the capacity of Americans to add value to the world economy and thereby gain a higher standard of living in the future without going into ever deeper debt. American competitiveness is not the profitability or market share of American-owned corporations. In fact, because the American-owned corporation is com- ing to have no special relationship with Americans, it makes no sense for Americans to entrust our national competitiveness to it. The interests of American- owned corporations may or may not coincide with those of the American people.

Does this mean that we should simply entrust our national competitiveness to any corporation that employs Americans, regardless of the nationality of corporate ownership? Not entirely. Some foreign- owned corporations are closely tied to their nation’s economic development—either through direct public ownership (for example, Airbus Industrie, a joint product of Britain, France, West Germany, and Spain, created to compete in the commercial airline indus- try) or through financial intermediaries within the nation that, in turn, are tied to central banks and min- istries of finance (in particular the model used by many Korean and Japanese corporations). The pri- mary goals of such corporations are to enhance the wealth of their nations, and the standard of living of their nations’ citizens, rather than to enrich their shareholders. Thus, even though they might employ American citizens in their worldwide operations, they may employ fewer Americans—or give Americans lower value-added jobs—than they would if these corporations were intent simply on maximiz- ing their own profits.3

On the other hand, it seems doubtful that we could ever shift the goals and orientations of American-owned corporations in this same direc- tion—away from profit maximization and toward the development of the American work force. There is no reason to suppose that American managers and

shareholders would accept new regulations and oversight mechanisms that forced them to sacrifice profits for the sake of building human capital in the United States. Nor is it clear that the American sys- tem of government would be capable of such detailed oversight.

The only practical answer lies in developing national policies that reward any global corporation that invests in the American work force. In a whole set of public policy areas, involving trade, publicly supported R&D, antitrust, foreign direct invest- ment, and public and private investment, the over- riding goal should be to induce global corporations to build human capital in America.

Trade policy. We should be less interested in open- ing foreign markets to American-owned companies (which may in fact be doing much of their production overseas) than in opening those markets to companies that employ Americans—even if they happen to be foreign-owned. But so far, American trade policy experts have focused on representing the interests of companies that happen to carry the American flag— without regard to where the actual production is being done. For example, the United States recently accused Japan of excluding Motorola from the lucrative Tokyo market for cellular telephones and hinted at retalia- tion. But Motorola designs and makes many of its cel- lular telephones in Kuala Lumpur, while most of the Americans who make cellular telephone equipment in the United States for export to Japan happen to work for Japanese-owned companies. Thus we are wasting our scarce political capital pushing foreign governments to reduce barriers to American-owned companies that are seeking to sell or produce in their market.

Once we acknowledge that foreign-owned Corporation B may offer more to American competi- tiveness than American-owned Corporation A, it is easy to design a preferable trade policy—one that accords more directly with our true national inter- ests. The highest priority for American trade policy should be to discourage other governments from invoking domestic content rules—which have the effect of forcing global corporations, American and foreign-owned alike, to locate production facilities in those countries rather than in the United States.

The objection here to local content rules is not that they may jeopardize the competitiveness of American companies operating abroad. Rather, it is that these requirements, by their very nature, deprive the American work force of the opportunity to compete for jobs, and with those jobs, for valuable skills, knowledge, and experience. Take, for example, the recently pro- mulgated European Community nonbinding rule on television-program production, which urges European television stations to devote a majority of their air time

HARVARD BUSINESS REVIEW January–February 1990 9

3. Robert B. Reich, and Eric D. Mankin, “Joint Ventures with Japan Give Away Our Future,” HBR March-April 1986, p. 78.

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to programs made in Europe. Or consider the European allegations of Japanese dumping of office machines con- taining semiconductors, which has forced Japan to put at least 45% European content into machines sold in Europe (and thus fewer American-made semiconductor chips).

Obviously, U.S.-owned companies are already inside the EC producing both semiconductors and television programs. So if we were to adopt American-owned Corporation A as the model for America’s competitive self-interest, our trade policy might simply ignore these EC initiatives. But through the lens of a trade pol- icy focused on the American work force, it is clear how the EC thwarts the abilities of Americans to excel in semiconductor fabrication and filmmaking—two areas where our work force already enjoys a substantial com- petitive advantage.

Lack of access by American-owned corporations to foreign markets is, of course, a problem. But it only becomes a crucial problem for America to the extent that both American and foreign-owned com- panies must make products within the foreign mar- ket—products that they otherwise would have made in the United States. Protection that acts as a domestic content requirement skews investment away from the United States—and away from U.S. workers. Fighting against that should be among the highest priorities of U.S. trade policy.

Publicly supported R&D. Increased global com- petition, the high costs of research, the rapid rate of change in science and technology, the model of Japan with its government-supported commercial technology investments—all of these factors have combined to make this area particularly critical for thoughtful public policy. But there is no reason why preference should be given to American-owned com- panies. Dominated by our preoccupation with American-owned Corporation A, current public pol- icy in this area limits U.S. government-funded research grants, guaranteed loans, or access to the fruits of U.S. government-funded research to American-owned companies. For example, member- ship in Sematech, the research consortium started two years ago with $100 billion annual support pay- ments by the Department of Defense to help American corporations fabricate complex memory chips, is limited to American-owned companies. More recently, a government effort to create a con- sortium of companies to catapult the United States into the HDTV competition has drawn a narrow cir- cle of eligibility, ruling out companies such as Sony, Philips, and Thomson that do R&D and production in the United States but are foreign-owned. More generally, long-standing regulations covering the more than 600 government laboratories and research centers that are spread around the United States ban

all but American-owned companies from licensing inventions developed at these sites.

Of course, the problem with this policy approach is that it ignores the reality of global American corpora- tions. Most U.S.-owned companies are quite happy to receive special advantages from the U.S. govern- ment—and then spread the technological benefits to their affiliates all over the world. As Sematech gets under way, its members are busily going global: Texas Instruments is building a new $250 million semicon- ductor fabrication plant in Taiwan; by 1992, the facil- ity will produce four-megabit memory chips and custom-made, application-specific integrated cir- cuits—some of the most advanced chips made any- where. TI has also joined with Hitachi to design and produce a super chip that will store 16 million bits of data. Motorola, meanwhile, has paired with Toshiba to research and produce a similar generation of futur- ist chips. Not to be outdone, AT&T has a commit- ment to build a state-of-the-art chip-making plant in Spain. So who will be making advanced chips in the United States? In June 1989, Japanese-owned NEC announced plans to build a $400 million facility in Rosedale, California for making four-megabit memory chips and other advanced devices not yet in produc- tion anywhere.

The same situation applies to HDTV. Zenith Electronics is the only remaining American-owned television manufacturer, and thus the only one eligible for a government subsidy. Zenith employs 2,500 Americans. But there are over 15,000 Americans employed in the television industry who do not work for Zenith—undertaking R&D, engineering, and high- quality manufacturing. They work in the United States for foreign-owned companies: Sony, Philips, Thomson, and others (see the accompanying table). Of course, none of these companies is presently eligible to partici- pate in the United States’s HDTV consortium—nor are their American employees.

Again, if we follow the logic of Corporation B as the more “American” company, it suggests a straightfor- ward principle for publicly supported R&D: we should be less interested in helping American-owned compa- nies become technologically sophisticated than in helping Americans become technologically sophisti- cated. Government-financed help for research and development should be available to any corporation, regardless of the nationality of its owners, as long as the company undertakes the R&D in the United States—using American scientists, engineers, and technicians. To make the link more explicit, there could even be a relationship between the number of Americans involved in the R&D and the amount of government aid forthcoming. It is important to note that this kind of public-private bargain is far different from protectionist domestic content requirements. In

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this case, the government is participating with direct funding and thus can legitimately exact a quid pro quo from the private sector.

Antitrust policy. The Justice Department is now in the process of responding to the inevitability of global- ization; it recognizes that North American market share alone means less and less in a global economy. Consequently, the Justice Department is about to relax antitrust policy—for American-owned compa- nies only. American-owned companies that previ- ously kept each other at arm’s length for fear of prompting an inquiry into whether they were collud- ing are now cozying up to one another. Current antitrust policy permits research joint ventures; the attorney general is on the verge of recommending that antitrust policy permit joint production agreements as well, when there may be significant economies of scale and where competition is global—again, among American-owned companies.

But here again, American policy seems myopic. We should be less interested in helping American-owned companies gain economies of scale in research, pro- duction, and other key areas, and more interested in

helping corporations engaged in research or production within the United States achieve economies of scale— regardless of their nationality. U.S. antitrust policy should allow research or production joint ventures among any companies doing R&D or production within the United States, as long as they can meet three tests: they could not gain such scale efficiencies on their own, simply by enlarging their investment in the United States; such a combination of companies would allow higher levels of productivity within the United States; and the combination would not sub- stantially diminish global competition. National ori- gin should not be a factor.

Foreign direct investment. Foreign direct investment has been climbing dramatically in the United States: last year it reached $329 billion, exceeding total American investment abroad for the first time since World War I (but be careful with these figures, since investments are valued at cost and this substantially understates the worth of older investments). How should we respond to this influx of foreign capital?

Clearly, the choice between Corporation A and Corporation B has important implications. If we are

HARVARD BUSINESS REVIEW January–February 1990 11

U.S. TV Set Production, 1988

Company Name Plant Type Location Employees Annual Production

Bang & Olufsen Assembly Compton, Calif. n.a.† n.a.

Goldstar Total* Huntsville, Ala. 400 1,000,000

Harvey Industries Assembly Athens, Tex. 900 600,000

Hitachi Total Anaheim, Calif. 900 360,000

JVC Total Elmwood Park, N.J. 100 480,000

Matsushita Assembly Franklin Park, Ill. 800 1,000,000

American Kotobuki (Matsushita) Assembly Vancouver, Wash. 200 n.a.

Mitsubishi Assembly Santa Ana, Calif. 550 400,000

Mitsubishi Total Braselton, Ga. 300 285,000

NEC Assembly McDonough, Ga. 400 240,000

Orion Assembly Princeton, Ind. 250 n.a.

Philips Total Greenville, Tenn. 3,200 2,000,000+

Samsung Total Saddle Brook, N.J. 250 1,000,000

Sanyo Assembly Forrest City, Ark. 400 1,000,000

Sharp Assembly Memphis, Tenn. 770 1,100,000

Sony Total San Diego, Calif. 1,500 1,000,000

Tatung Assembly Long Beach, Calif. 130 17,500

Thomson Total Bloomington, Ind. 1,766 3,000,000+

Thomson Components Indianapolis, Ind. 1,604 n.a.

Toshiba Assembly Lebanon, Tenn. 600 900,000

Zenith Total Springfield, Mo. 2,500 n.a.

* Total manufacturing involves more than the assembling of knocked-down Source: Electronic Industries Association, kits. Plants that manufacture just the television cabinets are not included HDTV Information Center, Washington, D.C. in this list. † Not available.

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most concerned about the viability of American- owned corporations, then we should put obstacles in the way of foreigners seeking to buy controlling shares in American-owned companies, or looking to build American production facilities that would compete with American-owned companies.

Indeed, current policies tilt in this direction. For example, under the so-called Exon-Florio Amend- ment of the Omnibus Trade and Competitiveness Act of 1988, foreign investors must get formal approval from the high-level Committee on Foreign Investments in the United States, comprising the heads of eight federal agencies and chaired by the secretary of the treasury, before they can purchase an American company. The expressed purpose of the law is to make sure that a careful check is done to keep “national security” industries from passing into the hands of foreigners. But the law does not define what “national security” means: thus it invites all sorts of potential delays and challenges. The actual effect is to send a message that we do not look with favor on the purchase of American-owned assets by foreigners. Other would-be pieces of legis- lation send the same signal. In July 1989, for instance, the House Ways and Means Committee voted to apply a withholding capital gains tax to for- eigners who own more than 10% of a company’s shares. Another provision of the committee would scrap tax deductibility for interest on loans made by foreign parents to their American subsidiaries. A third measure would limit R&D tax credits for for- eign subsidiaries. More recently, Congress is becom- ing increasingly concerned about foreign takeovers of American airlines. A subcommittee of the House Commerce Committee has voted to give the Transportation Department authority to block for- eign acquisitions.

These policies make little sense—in fact, they are counterproductive. Our primary concern should be the training and development of the American work force, not the protection of the American-owned cor- poration. Thus we should encourage, not discourage, foreign direct investment. Experience shows that for- eign-owned companies usually displace American- owned companies in just those industries where the foreign businesses are simply more productive. No wonder America’s governors spend a lot of time and energy promoting their states to foreign investors and offer big subsidies to foreign companies to locate in their states, even if they compete head-on with exist- ing American-owned businesses.

Public and private investment. The current obsession with the federal budget deficit obscures a final, crucial aspect of the choice between Corporation A and Corporation B. Conventional wisdom holds that government expenditures

“crowd out” private investment, making it more dif- ficult and costly for American-owned companies to get the capital they need. According to this logic, we may have to cut back on public expenditures in order to provide American-owned companies with the necessary capital to make investments in plant and equipment.

But the reverse may actually be the case—particu- larly if Corporation B is really more in America’s competitive interests than Corporation A. There are a number of reasons why this is true.

First, in the global economy, America’s public expenditures don’t reduce the amount of money left over for private investment in the United States. Today capital flows freely across national borders— including a disproportionately large inflow to the United States. Not only are foreign savings coming to the United States, but America’s private savings are finding their way all over the world. Sometimes the vehicle is the far-flung operations of a global American-owned company, sometimes a company in which foreigners own a majority stake. But the old notion of national boundaries is becoming obso- lete. Moreover, as I have stressed, it is a mistake to associate these foreign investments by American- owned companies with any result that improves the competitiveness of the United States. There is sim- ply no necessary connection between the two.

There is, however, a connection between the kinds of investments that the public sector makes and the competitiveness of the American work force. Remember: a work force that is knowledge- able and skilled at doing complex things attracts for- eign investment in good jobs, which in turn generates additional training and experience. A good infrastructure of transporation and communication makes a skilled work force even more attractive. The public sector often is in the best position to make these sorts of “pump priming” investments— in education, training and retraining, research and development, and in all of the infrastructure that moves people and goods and facilitates communica- tion. These are the investments that distinguish one nation from another—they are the relatively non- mobile factors in the global competition. Ironically, we do not ordinarily think of these expenditures as investments; the federal budget fails to distinguish between a capital and an operating budget, and the national income accounts treat all government expenditures as consumption. But without doubt, these are precisely the investments that most directly affect our future capacity to compete.

During the 1980s, we allowed the level of these public investments either to remain stable or, in some cases, to decline. As America enters the 1990s, if we hope to launch a new campaign for American

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competitiveness, we must substantially increase public funding in the following areas:

M Government spending on commercial R&D. Current spending in this critical area has declined 95% from its level two decades ago. Even as late as 1980, it com- prised .8% of gross national product; today it com- prises only .4%—a much smaller percentage than in any other advanced economy. M Government spending to upgrade and expand the nation’s infrastructure. Public investment in critical highways, roads, bridges, ports, airports, and waterways dropped from 2.3% of GNP two decades ago to 1.3% in the 1980s. Thus many of our bridges are unsafe, and our highways are crumbling. M Expenditures on public elementary and secondary education. These have increased, to be sure. But in inflation-adjusted terms, per pupil spending has shown little gain. Between 1959 and 1971, spending per stu- dent grew at a brisk 4.7% in real terms—more than a full percentage point above the increase in the GNP— and teachers’ salaries increased almost 3% a year. But since then, growth has slowed. Worse, this has hap- pened during an era when the demands on public edu- cation have significantly increased, due to the growing incidence of broken homes, unwed mothers, and a ris- ing population of the poor. Teachers’ salaries, adjusted for inflation, are only a bit higher than they were in 1971. Despite the rhetoric, the federal government has all but retreated from the field of education. In fact, George Bush’s 1990 education budget is actually smaller than Ronald Reagan’s in 1989. States and municipalities, already staggering under the weight of social services that have been shifted onto them from the federal government, simply cannot carry this addi-

tional load. The result of this policy gap is a national education crisis: one out of five American 18-year-olds is illiterate, and in test after test, American school- children rank at the bottom of international scores. Investing more money here may not be a cure-all—but money is at least necessary. M College opportunity for all Americans. Because of government cutbacks, many young people in the United States with enough talent to go to college cannot afford it. During the 1980s, college tuitions rose 26%; family incomes rose a scant 5%. Instead of filling the gap, the federal government created a vacuum: guaranteed student loans have fallen by 13% in real terms since 1980. M Worker training and retraining. Young people who cannot or do not wish to attend college need training for jobs that are becoming more complex. Older workers need retraining to keep up with the demands of a rapidly changing, technologically advanced workplace. But over the last eight years, federal investments in worker train- ing have dropped by more than 50%.

These are the priorities of an American strategy for national competitiveness—a strategy based more on the value of human capital and less on the value of financial capital. The simple fact of American own- ership has lost its relevance to America’s economic future. Corporations that invest in the United States, that build the value of the American work force, are more critical to our future standard of living than are American-owned corporations investing abroad. To attract and keep them, we need public investments that make America a good place for any global corpo- ration seeking talented workers to set up shop.

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“We” are seated at a negotiating table. “They” are seated across from us. The outcome of these talks will shape America’s future competitiveness and eco- nomic well-being. But “us” is not necessarily compa- nies based in the United States. “Them” is not foreign nations. Rather, us is the people—most prominently, the work force—of the United States. And them is the growing cadre of global managers— supranational corporate players, whose allegiance is to enhanced worldwide corporate performance, not to any one nation’s economic success.

Unlike their preglobal predecessors, global man- agers feel little allegiance to us. In the global enter- prise, the bonds between company and country —between them and us—are rapidly eroding. Instead, we are witnessing the creation of a purer form of capi- talism, practiced globally by managers who are more distant, more economically driven—in essence more coldly rational in their decisions, having shed the old affiliations with people and place.

Today corporate decisions about production and location are driven by the dictates of global competi- tion, not by national allegiance. Witness IBM’s recent decision to transfer 120 executives and the headquarters of its $10 billion per year communica- tions business to Europe, a move that is partly sym- bolic—a recognition that globalization must take companies beyond their old borders—and partly practical—an opportunity for IBM to capitalize on the expected growth in the European market.

As this and countless other examples show, business competition today is not between nations. Nor do trade flows between nations accurately keep score of which companies are gaining the lead. For the past two decades, U.S. businesses have maintained their shares of world markets even as America has lost its lead.

Nor does a nation’s wealth turn on the profitability of corporations in which its citizens own a majority

of shares. Cross-border ownership is booming: Americans are buying into global companies based in Europe and East Asia; Europeans and Asians are buy- ing into companies based in the United States. And most corporate profits are plowed back into new investments spread around the world.

Ultimately, our wealth and well-being depend on the value that the world places on the work we do, on our skills and insights. Hence the importance of the negotiations between us and them about what jobs we are to perform in the new global economy.

In this regard, the logic of the global manager is clear: to undertake activities anywhere around the world that will maximize the performance of the company, enlarge its market share, and boost the price of its stock. Our logic is just as clear: to get global managers to site good jobs in the United States. Our best interests are served by making it easy, attractive, and productive for them to do so, regardless of the nationality of the company they represent. At the same time, we need to structure the talks between us and them over the kinds of jobs they put here in a way that represents and secures our interests.

The Logic of the Global Manager

The image out of the past is a compelling one. A strong and proud American company is centered in an American community and is run by American man- agers. The offices, the factories, the community all

14 HARVARD BUSINESS REVIEW March–April 1991

Who Is Them? Robert B. Reich

Robert B. Reich teaches political economy and management at the John F. Kennedy School of Government, Harvard University. His article, “Who Is Us?” appeared in the January–February 1990 issue of HBR. His newest book is The Work of Nations: Preparing Ourselves for 21st-Century Capitalism, to be pub- lished in late March by Alfred A. Knopf.

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bear the unmistakable mark of connectedness. But it is an image that is fading, an ideal that is more in our memories than in reality. Gone is the company town, the huge local labor force, the monolithic factory, and the giant vertically integrated corporation that domi- nated the entire region. Gone is the tight connection between the company, its community, even its coun- try. Vanishing too are the paternalistic corporate heads who used to feel a sense of responsibility for their local community. Emerging in their place is the new global manager, driven by the irrefutable logic of global capitalism to seek higher profits, enhanced market leadership, and improved stock price. The playing field is the world.

This is not to impugn the patriotism of those Americans (or Italians or Germans) who manage globally. In their private lives, global managers are no doubt one of “us”: no less patriotic, no less con- cerned about their countries’ futures, no less involved in civic causes or social issues. But it is in business that global managers become “them.” Their outlook is cosmopolitan—corporate citizens of the world, wherever they conduct their business. As one top IBM manager told a reporter, “IBM has to be concerned with the competitiveness and well- being of any country or region that is a major source of IBM revenue.”

When it comes to global managers, no group of citi- zens, no government, has a special claim. Edzard Reuter, chairman of Daimler-Benz and one of the most powerful men in German industry, insists that the company has no special duty to invest in the for- mer East Germany. “We are not national or national- istic pioneers, but entrepreneurs,” he has said. “When [there are good returns] in East Germany, we will invest. But not to do some politician a favor.”

Regardless of the manager’s national background, the principles are the same. The emerging global manager invests in the most promising opportunities and abandons or sells off underperforming assets—no matter how long they have been part of the corporate family or where they may be located. “You can’t be bound emotionally to any particular asset,” Martin S. Davis, chairman and CEO of Paramount Communications, told a reporter. Charles (Mike) Harper, head of ConAgra, the giant food-processing and commodity-trading company, which is crucial to the economy of Omaha, Nebraska, recently threat- ened to move the company unless the state changed its tax code. The bonds of loyalty could slip over the weekend, Harper warned: “Some Friday night, we turn out the lights—click, click, click—back up the trucks, and be gone by Monday morning.”

While the tone of such a statement may sound menacing, in fact Harper’s logic is anything but sin- ister. The new global manager’s job is to exploit the

opportunities created by the high-powered technolo- gies of worldwide communication and transporta- tion and by the relaxation of national controls over cross-border flows of capital. The global manager efficiently deploys capital all around the world, seeking the highest returns for shareholders or part- ners. Competition is intense and growing. The global manager who fails to take advantage of global opportunities will lose profits and market share to global managers who do.

In deciding where around the world to do what, the global manager seeks to meet the needs of customers worldwide for the highest value at the least cost. Some production will be done under the company’s direct supervision; much will be outsourced. Often design and marketing activities will be sited close to the markets to be served; research and complex engi- neering, where skilled scientists and engineers can be found; routine fabrication and assembly, where work- ers are available at lowest cost. But there are excep- tions—depending on products, markets, and circumstances. When there is danger that a market might be closed to imports, production might be shifted there. When two or more locations are about the same, the decision will be based on where the global manager can secure the most profitable deal.

The global manager’s task is to put it all together, worldwide. For example, Mazda’s newest sportscar, the MX-5 Miata, was designed in California, financed from Tokyo and New York, its prototype was created in Worthing, England, and it was assem- bled in Michigan and Mexico using advanced elec- tronic components invented in New Jersey and fabricated in Japan. Saatchi and Saatchi’s recent tele- vision advertising campaign for Miller Lite Beer was conceived in Britain, shot on location in Canada, dubbed in Britain and the United States, and edited in New York. An Intel microprocessor was designed in California and financed in the United States and Germany, containing dynamic random-access mem- ories fabricated in South Korea. Chevrolet’s best- selling Geo Metro was designed in Japan and built in Canada at a factory managed by Japan’s Suzuki. Boeing’s next airliner will be designed in Washington state and Japan and assembled in Seattle, with tail cones from Canada, special tail sec- tions from China and Italy, and engines from Great Britain.

The logic of the global manager is not confined to large, well-established global companies. In 1989, in the first six months of its cosmopolitan life, the tiny Momenta Corporation, headquartered in Mountain View, California with 28 employees, had raised almost $13 million from Taiwanese and American investors. A small band of U.S. engineers was designing Momenta’s advanced computer; the com-

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ponents would be engineered and produced in Japan; the actual product would be assembled in Taiwan and Singapore. Kamran Elahian, Momenta’s Iranian- born founder, said to a reporter that global financing was “one of the only ways we [could] be assured of the $40 million we needed,” and global production was required to “make use of the best technology that is available to the company.” Switzerland’s Logitech, the world’s leading supplier of the “point and click” mouse for personal computers, relies on just 20 Swiss and Italian engineers, 520 technicians and marketing specialists in California, and 350 pro- duction workers in Ireland and Taiwan. Weng Kok Siew, president of Singapore Technologies, another upstart, has described his worldwide strategy in words that could stand as the global manager’s credo: “We plan to manufacture in any country in the world where there is an advantage—to make things in Thailand where the cost is low, in Germany because the market is big, to do R&D in Boston.”

As competition globalizes, so must the vision of the manager. The dictates of capitalism are clear: the global manager gains profits and captures mar- kets by putting worldwide resources to their most efficient uses.

The Logic of the Global Web

If the company town, a relic of the 1950s, is van- ishing, so too is the old multinational corporation disappearing, a reminder of the 1960s and 1970s. Like the company town, the multinational exuded a sense of hierarchy, place, and order. World head- quarters was, very simply, both in the center and at the top of the worldwide corporate pyramid. The location of the headquarters was a reflection of com- pany history (the founder had begun the company in this place) or of industry requirements (headquarters had to be where the biggest factory was located or where the research and engineering was done). Managers in worldwide headquarters made all the crucial decisions, of course. Foreign subsidiaries were just that—subsidiary to headquarters. Their work usually consisted of exporting materials and components back to the parent corporation for assembling and finishing or of selling the parent’s finished products in a foreign market. The lines of power, of communication, of corporate decision making and corporate governance all led back to headquarters.

The Fading Significance of World Headquarters. The emerging global manager works within a global web, which operates according to a new and different

logic. The location of headquarters is not a matter of great importance; it is not even necessarily in the country where most of the company’s shareholders or employees are. Headquarters for the new global web can even be a suite of rooms in an office park near an international airport—a communications center where many of the web’s threads intersect.

In 1988, for example, when RJR Nabisco moved its worldwide headquarters to Atlanta, Georgia from Winston-Salem, North Carolina—where, years before, it had built the city’s largest skyscraper, cre- ated a community arts center, and been the chief patron of Wake Forest University—the citizens of Atlanta were expecting great things. But the new worldwide headquarters turned out to be leased space in a suburban mall, housing only 450 execu- tives and staff (about a third of 1% of the company’s worldwide work force). Ross Johnson, then RJR- Nabisco’s president, cautioned Atlantans to expect no more from the business than they would from any tiny 450-person company in their midst.

In fact, the global web may have several world- wide headquarters, depending on where certain mar- kets or technologies are. Britain’s APV, a maker of food-processing equipment, has a different lead country for each of its worldwide businesses. Hewlett-Packard recently moved the headquarters of its personal computer business to Grenoble, France. Siemens A.G., Germany’s electronics colossus, is relocating its medical electronics division headquar- ters from Germany to Chicago, Illinois. Honda is planning to move the worldwide headquarters for its power-products division to Atlanta, Georgia. ABB Asea Brown Boveri, the European electrical-engi- neering giant based in Zurich, Switzerland, groups its thousands of products and services into 50 or so business areas (BAs). Each BA is run by a leadership team with global responsibility for crafting business strategy, selecting product-development priorities, and allocating production among countries. None of the BA teams work out of the Zurich headquarters; they are distributed around the world. Leadership for power transformers is based in Germany, electric drives are in Finland, process automation is in the United States. (For more on ABB, see “The Logic of Global Business: An Interview with ABB’s Percy Barnevik” in this issue.)

The global web’s highest value-added activities—its most advanced R&D, most sophisticated engineering and design, most complex fabrication—need not be in the nation where most of the company’s shareholders and executives are. Ford’s state-of-the-art engine factory is in Chihuahua, Mexico, where skilled Mexican engi- neers and technicians produce more than 1,000 engines per day with quality equal to the best in the world. Texas Instruments is fabricating some of its most com-

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plex wafers in Japan at its Sendai facility and is building an R&D center in Japan’s science city of Tsukuba. Other recently or soon-to-be opened research labs in Japan: Procter & Gamble’s technical center on Rokko Island in Kōbe; Ciba-Geigy’s facility in Takarazuka; and Carrier Corporation’s engineering center in Shizuoka prefecture. By 1990, Hewlett-Packard’s German researchers were making significant strides in fiber- optic technologies; its Australian researchers, in com- puter-aided engineering software; its Singaporean researchers, in laser printers.

A recent study of where U.S.- and European-based global corporations site their high value-added activ- ities confirms the trend. There was little evidence of any bias in favor of the headquarters nation, except in companies that had only recently become multi- national and had not yet had an opportunity to site their high value-added activities abroad. Among more advanced companies working to spin their global webs, the tendency is to site high value-added activities all over the world.1

The Cosmopolitan Management Team. Increasingly, the managers who inhabit the global web come from many different nations. Take, for example, Whirlpool’s approach to going global in the white- goods business. Headquartered in Benton Harbor, Michigan, Whirlpool recently formed a joint venture with the Major Appliance Division of Philips, head- quartered in Eindhoven, Holland. The administrative headquarters of this U.S.-Dutch joint venture— Whirlpool International—is in Comerio, Italy, where it is managed by a Swede. On the six-person manage- ment committee sit managers from Sweden, Holland, Italy, the United States, and Belgium, with a German to be named later. Such cosmopolitanism is equally apparent at the top of the world’s leading companies: IBM prides itself on having five different nationalities represented among its highest ranking officers, and three among its outside directors. Four nationalities are represented on Unilever’s board; three on the board of Shell Oil. Sony has attempted to address the global team in a characteristically compact fashion: recently named as president and chief operating officer of Sony America was Ron Sommer, who was born in Israel, raised in Austria, and carries a German passport.

The threads of the new global web extend, as well, across the old boundaries of the company to include transactions between global managers in different companies. Investment decisions travel through far- reaching relationships between global companies headquartered on opposite sides of the world. Profit- sharing agreements, strategic alliances, joint ven- tures, licensing agreements, and supply

arrangements tie together units and subunits. In the 1980s, for instance, Corning Glass abandoned its national pyramidlike organization in favor of a global web, giving it the capability to make optical cable through its European partner, Siemens A.G., and medical equipment with Ciba-Geigy. In 1990, these kinds of foreign alliances generated almost half of Corning’s earnings. AT&T has also sought to trans- form itself from a self-sufficient bureaucratic monop- oly into a multilateral global web: Japan’s NEC helps AT&T supply and market memory chips; Dutch- owned Philips helps AT&T make and market telecommunications switching equipment and application-specific integrated circuits; Mitsui helps it with value-added networks.

No nation or continent is immune to the logic of the global web. In the 1950s and 1960s, for example, Europe sought to create and nurture “national cham- pion” companies in key industries as a way to shelter domestic businesses from the onslaught of U.S. multinationals. Today these same champions are transforming into global webs with no particular con- nection to their own countries: France’s Renault has teamed up with Sweden’s Volvo to create Europe’s fourth-largest industrial group; Daimler-Benz, Germany’s largest industrial group, is discussing a wide assortment of links with Mitsubishi; Fujitsu, Japan’s largest computer company, has acquired Britain’s ICL; Pilkington, Britain’s largest glassmaker, has joined with France’s Saint-Gobain and Japan’s Nippon Sheet Glass; Italy’s Olivetti is distributing mainframe computers for Hitachi and developing lap- tops with Japan’s YE Data.

The Japanese Exception? If there is one country that is criticized for not playing by these emerging global rules, it is Japan. But the logic of the global web is so powerful that the Japanese will either be forced to comply over time or else face a stiff penalty from the marketplace, the talent pool, and competi- tors and governments. For example, in the competi- tion for global talent, corporations that are reluctant to consider foreign nationals for top managerial posi- tions will lose out: the most talented people simply will not join an organization that holds out no promise of promotion. Japanese-owned companies that have been notoriously slow to open their top executive ranks to non-Japanese will operate at a competitive disadvantage.

Similarly, Japanese companies that have tradition- ally done most of their highest value-added work in Japan now must reconsider the economic and politi- cal advisability of this strategy. Indeed, there is evi- dence suggesting that the leading Japanese companies—those that are already the most interna- tional—are beginning to change. Many of the compa- nies that were the earliest to recognize the need to

HARVARD BUSINESS REVIEW March–April 1991 17

1. John Cantwell, Technological Innovation and Multinational Corporations (Oxford: Basil Blackwell, 1989).

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establish manufacturing facilities in Europe and the United States are now investing in R&D laborato- ries and complex fabrication facilities outside Japan. By 1990, more than 500 U.S. scientists and engineers worked for Honda in Torrance, California; another 200 worked in Ohio. At Mazda’s new $23 million R&D center in Irvine, California, hundreds of U.S. designers and engineers are undertaking long-term automotive research. Nissan employs 400 U.S. engi- neers at its engineering center in Plymouth, Michigan; Toyota employs 140 at its technical research center in Ann Arbor. Fujitsu is now con- structing an $80 million telecommunications plant and research center in Texas. NEC has opened a research laboratory in Princeton, New Jersey.

Japanese investment in Europe has also skyrock- eted. According to the Bank of Japan, direct invest- ment in the 12 European Community countries totaled $14 billion in 1989 and grew by a factor of eight between 1985 and 1989, even faster than in the United States. And much of this new investment is at the high value-added end. Fujitsu, for example, has established an R&D center in Britain for semi- conductors used in communications equipment; Hitachi, a British R&D laboratory for telecommuni- cations switching equipment.

As the Japanese experience shows, to be success- ful globally, the global manager cannot bias invest- ment decisions in favor of the corporation’s home base. Even the appearance of bias is likely to cause political problems for the company in less favored nations—making it more difficult for the global manager to utilize the people, capital, technology, and natural resources across the global web. Successful global competitors like IBM, GE, McDonald’s, Ford, Shell, Philips, Sony, NCR, Unilever, The News Corporation, and Procter & Gamble have willingly shed their national identities and become loyal corporate citizens wherever they do business around the world—siting high value- added activities in many nations, hiring foreign nationals for senior positions, and giving local and regional managers substantial discretion. As a result, these companies are usually treated by gov- ernments around the world on an equal footing with locally based companies.

By contrast, the worldwide operations of multina- tional giants like NEC, Fujitsu, and Mitsubishi, and even some European-based companies like Siemens, are still considered to be foreign subsidiaries—sub- units whose identities derive from the nation where their worldwide headquarters are. As a result, these companies sometimes have difficulty gaining equal treatment with locally based companies. In fact, even the most cosmopolitan Japanese companies are finding that the general reputation of Japanese busi-

ness for putting Japan’s interests first is creating a competitive disadvantage, making it increasingly difficult for these companies to export their prod- ucts or undertake foreign investment around the world without encountering political opposition.

Furthermore, the well-known predilection of Japanese companies to do business with each other and in a way that uniquely benefits Japan has created a backlash among corporate competitors. In recent years, U.S. and European global managers have grown wary of depending too heavily on Japanese companies for critical high-tech components. Specifically, they worry that Japanese suppliers will allocate the parts they make to other Japanese companies first and with- hold them from foreign partners or that Japanese com- panies will use the parts to gain a predatory foothold, gradually displacing their foreign partner as the rela- tionship becomes more and more lopsided.

These concerns of Western managers about Japanese corporate practice are not necessarily yield- ing more investment in the United States; they are leading to more alliances across the Atlantic or with non-Japanese Pacific Rim partners. For example, IBM’s recent efforts to ensure itself a supply of ran- dom-access memory semiconductor chips indepen- dent of Japanese companies has led it into a spate of investments and alliances across Europe—a joint venture with Siemens, membership in the European Community’s semiconductor research consortium called JESSI. IBM’s strategy, like that of other Western global corporations, is not pro-United States—it is pro-IBM and non-Japanese.

In fact, as corporations spin their global webs, other corporations, rather than governments, are likely to engage in strategic countermoves. The more companies decentralize their operations, the less authority and control any single government can assert over them. A company that is comfortable investing all over the world can negotiate with gov- ernments all over the world and, with enough lever- age, dictate the specific terms and conditions of its investment.

The National Interest

They, as global managers, want to increase their world market shares, profits, and share prices. We, as citizens of a particular nation, want to secure national wealth and national economic well-being. They parcel activities around the world according to economic cri- teria, putting them wherever they can get the best return, intentionally playing no favorites to avoid set- ting off political alarms. But we do play favorites. We feel a special allegiance to our country and to our com-

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patriots. Global corporations exist within world mar- kets; we are members of a society.

Our interests diverge from theirs for two specific reasons: we are concerned about our nation’s rela- tive wealth and power, and we want to capture for our nation the public benefits that spill over from global investment.

Relative Wealth and Power. Consider the follow- ing two possible scenarios for economic growth between now and the year 2000 for the United States and Japan:

The United States economy grows 20%, but the Japanese economy grows 90%.

The United States economy grows only 8%, and the Japanese economy grows 8.2%.

When I have offered this choice in classes and cor- porate training seminars, a majority of the Americans in my audience usually select the second option. Many Americans are more concerned with our country’s relative wealth and power compared with Japan’s than with our country’s absolute growth. We not only want global managers to favor the United States—locating their high value-added activities in America—more than they favor Japan, but many would also sacrifice some additional wealth in order to prevent the Japanese from enjoy- ing even greater gains. Whether or not these senti- ments should be commended as a principle of international economic behavior, they cannot be ignored. Despite the logic of the global manager and the global web, national wealth and power continue to drive us to think about our national interests not only in absolute terms but also relative to our per- ceived national competitors.

Spillovers from Corporate Investment. Even those of us who select the first option might still want global managers to favor the United States because of national benefits that do not typically appear on the global manager’s balance sheets. Specifically, these spillovers might include the jobs that result from having sophisticated factories, labo- ratories, and equipment in the United States, whose high wages multiply throughout the economy, rais- ing other incomes. Good jobs also generate higher tax receipts, which permit government to invest in public facilities such as improved schools and trans- portation and also to care for the elderly and the dis- advantaged in society. Moreover, on-the-job training and the resulting technical know-how enable Americans to innovate and thus generate more wealth for the United States in the years to come. This know-how spreads beyond individual Americans to create entire regions of U.S. innova- tion—the San Francisco Bay area and greater Boston in science and engineering; Los Angeles in music and film; New York in law, advertising, and publish-

ing; Minneapolis in medical devices and instru- ments; Irvine and Pasadena, California in industrial design, and so on.

The logic brings us to this central issue: Their goal is to maximize profits by siting their

production activities around the world for the high- est return and investing wherever it is most efficient and strategically profitable.

Our goal is to attract into the United States the most high value-added global activities with the greatest positive spillovers—and to keep and grow them here.

We can pursue our goal by ensuring that we give America’s children a first-class education—starting with preschool and extending through college or vocational training—and that our transportation and communications infrastructure is second to none. But even if we make the United States an attractive place for high value-added investments, that alone will not be enough to guarantee the kind of global investment we need. In a world in which every other nation is bidding for high value-added jobs, America must negotiate as well.

The Logic of Global Negotiations

When trade was the primary engine of global eco- nomic integration and corporations were rooted in particular countries, negotiations were government- to-government. Each nation’s objective was to open foreign markets to the exports of its own companies or to protect its own companies from foreign compe- tition at home. Countries measured their success by the extent to which they were able to sell their goods and services within foreign nations and how much world market share their own companies could command.

But the new global economy renders obsolete these old forms of negotiating and keeping score. Global investment is supplanting merchandise trade as the major engine of world economic integration— and the key to a nation’s wealth and well-being. And negotiations between governments and global man- agers—between the new “us” and the new “them”—are displacing the old government-to-gov- ernment talks.

The Growing Importance of Direct Investment. Bet- ween 1983 and 1988, world trade volumes grew at a compounded annual rate of 5%. Over the same period, global direct foreign investment increased by more than 20% annually in real terms. As a result, sales by foreign-owned affiliates within a nation now typically exceed foreign exports to that nation. In fact, when the

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foreign sales of U.S.-owned companies are calculated against the total purchases by Americans of the prod- ucts of foreign-owned companies, America’s trade deficit turns into a net surplus. The foreign operations of U.S.-owned corporations now account for more than $1 trillion in annual sales around the world, roughly four times the total export of goods made in the United States and about seven to eight times the value of America’s recent trade deficits.

Today much of what is actually “traded” across borders are intangible services—research, engineer- ing, design, financial, management, marketing, and sales—transferred within global corporations from one location to another. IBM exports relatively few machines from the United States to the rest of its global web; most of its U.S. “exports” are ideas and insights. Honda now imports relatively few automo- tive components into the United States from Japan; most of its Japanese “imports” are technological specifications and management know-how. The threads of the new global web are computers, facsim- ile machines, satellites, high-resolution monitors, and modems—linking up ideas and money from each of the company’s worldwide locations with every other. In 1990, some 20,000 privately leased interna- tional telephone circuits carried video images, voices, and data instantaneously back and forth among man- agers, engineers, and marketers working together on different continents.

The New Negotiations. This change in the locus of economic activity—from trade to direct invest- ment—implies a change in the nature of negotia- tions: while we focus our attention on the Office of the United States Trade Representative in Washington, D.C., looking for government-to-gov- ernment talks to open up foreign markets to the products of “our” companies, that is no longer where the important action really is. Even when these old-fashioned trade talks succeed in opening a foreign market to a U.S. company, the effect on us, on our incomes and standard of living, is often tan- gential. For example, the recent agreement secured with Japan after intense government pressure to per- mit Toys “R” Us to open a large retail outlet in Tokyo will have almost no effect on the U.S. work force, apart from a few U.S. managers. Almost every- thing that Toys “R” Us sells in Japan will be con- ceived, designed, and manufactured outside the United States.

Another sort of negotiation is becoming far more important—one that occurs between a different set of parties. On one side of the bargaining table still sit the government representatives; but on the other side they sit—the global managers. The government negotiators represent the citizens of the nation, not the nation’s corporations. Their job is to induce the

global managers to site certain activities in the nation and thus provide the nation’s citizens with good jobs. In return, the government negotiators offer a carrot—an assortment of tax breaks, financial inducements, and public investments. There is also a stick: government negotiators may threaten to close the national market to the company unless it makes the desired investments.

Third World nations have long bargained along these lines with multinationals headquartered in advanced nations. But the logic of the global web means that practically every nation now ends up sit- ting on that side of the table, including some of the most unlikely parties. Hoping to attract labor-inten- sive light industries like electronic-parts manufac- turers, Vietnam has recently created an industrial zone on the outskirts of Ho Chi Minh City; the gov- ernment is prepared to negotiate rock-bottom leases to global companies willing to invest in production facilities there. In these types of negotiations, more- over, governments make virtually no distinction between domestic and foreign-owned companies. “There is no flag on capital,” says Argentina’s President Carlos Menem. “I ask myself, what is national capital? Is it the $50 billion in flight capital that has left the country via Argentine business executives? Or resources used by multinationals to produce here?”

America’s Negotiators. Like every other nation, the United States is taking an active part in these new sorts of negotiations. But unlike other countries, we are not represented by a high-ranking federal official like the United States Trade Representative. Instead, we are represented by 50 state governors and hundreds of mayors and city managers. Like the bargaining agents of other nations, these governors and mayors pay no attention to the nationality of the global man- agers on the other side of the table. In fact, 43 U.S. states maintain permanent offices and staffs in foreign capitals to conduct negotiations with foreign man- agers full-time. And these offices are not limited to the major commercial centers of the world: 10 states have recently opened offices in Taipei, and 4 more have announced plans to locate there. Just as often, the global managers sitting across the table are American, whose companies are headquartered in the United States—but they drive just as hard a bargain as the global managers from other countries.

The process works in a crude but effective fashion: the possibility of a new factory, laboratory, headquar- ters, or branch office within a state or a city sets off a furious auction; a casual threat to move an existing facility starts an equally impassioned round of negoti- ation. The governor or mayor who successfully lures or keeps the jobs is a hero; the one who loses the bid- ding may soon lose his or her own job.

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The problem for us is that our U.S. bargaining agents often compete against themselves. A case in point: in the early 1980s, the Hyster Corporation, a manufacturer of forklift trucks, notified public offi- cials in eight locations where Hyster had factories— five U.S. states, three foreign locations—that some of the facilities would be closed. Hyster invited each political jurisdiction to bid to keep its local jobs. The resulting auction was a great success for Hyster. By the time the bidding had closed, American states and cities had surrendered a total of $18 million to preserve about 2,000 Hyster jobs. The big “winner” was Danville, Illinois—a town with a population of only 39,000. In exchange for 850 blue-collar jobs, Danville and the state of Illinois agreed to provide Hyster with roughly $10,000 in subsidies.

Just as frequently, these kinds of auctions are global affairs. For example, when Diamond Star Motors, the Mitsubishi-Chrysler joint venture, announced in 1985 that it would begin assembling automobiles in the United States, four states competed for the factory. Illinois came out the winner with a bid of ten years of direct aid and incentives worth $276 million—roughly $25,000 for every new job the factory would create in the state. The city of Bloomington, Illinois threw in an additional $10 million of land and $20 million in local tax abatements.

Over time, the bidding has become more ferocious and the incentives more generous. In 1980, Tennessee paid the equivalent of $11,000 per job to entice Nissan to Smyrna. By 1986, Indiana had to spend $50,000 per job to induce Subaru-Isuzu to set up shop in Lafayette. When ConAgra threatened to leave Omaha, the state of Nebraska felt the heat of the bidding war directly. “It’s like a poker game,” said Donald Pursell, former director of Nebraska’s Bureau of Business Research. “Nebraska makes a bid, Iowa ups it.”

Bidding to attract new plants or keep existing ones requires that such state and local largess be routinely parceled out. Few global managers expect to pay the same rate of property tax in proportion to the assessed value of their land as local residents pay. Using the threat of the global web, it is relatively easy for global managers to insist on a better deal simply by pointing out to state or local officials that, without more favor- able tax treatment, the company will move to one of its other global locations. Partly as a result of this kind of leverage, corporations now contribute a much smaller percentage of local taxes in the United States than they did in the past. In 1957, corporations accounted for about 45% of local revenues; by 1989, corporate taxes comprised only 16%.

Paradoxically, such tax breaks and subsidies make it more difficult for states and communities to finance public education and infrastructure. For example, General Motors’s successful effort to cut its annual taxes by $1 million in Tarrytown, New York, where the company has had a factory since 1914, has forced the town to lay off dozens of teach- ers and administrators and to cut back on school supplies and routine school maintenance. Ultimately, these kinds of “beggar thy neighbor” ploys by some global managers undermine our abil- ity to attract global investments—since the quality of the work force, good transportation facilities, and a good quality of life are ultimately more important lures for attracting global managers’ investments than tax concessions and subsidies.

The Advantages of Bargaining as a Whole. It is simple common sense that large nations that bargain as a whole with global managers—or groups of smaller nations that pool their bargaining strength behind a single agent—have much more clout than small nations or separate states and cities. By avoiding inter- nal bidding contests, they end up paying far less to attract investment and have an easier time getting the jobs they want when and where they want them. For example, the European Commission reviews location incentives offered by member nations in order to min- imize bidding by one against the other. As a result, when Honda decided in 1989 to locate its first European plant in Britain, it did not receive a shilling of inducement from Downing Street.

After 1992, a united Europe will be in an even stronger bargaining position in negotiations with global managers. Access to Europe’s newly inte- grated market of 230 million people will itself be a powerful lure. Global managers are already scram- bling to set up facilities there in anticipation that Europe’s gates will shut. “You can’t pick up a piece of paper that says why Intel has got to manufacture in Europe,” one Intel executive told a reporter. “The rules don’t exist.” But when they do, Intel wants to be already well-established inside the gates.

Another illustration of the same principle: for years, before Japan caught up with the West techno- logically, Japan’s Ministry of International Trade and Industry acted as a single bargaining agent for the country, acquiring foreign technology at cut-rate prices. By effectively barring auctions for licenses in Japan, MITI forced foreign licensors to sell at a frac- tion of the cost of developing the technology origi- nally. According to estimates, between 1956 and 1978 Japan paid some $9 billion to acquire U.S. tech- nologies that cost between $500 billion and $1 tril- lion to develop.

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The Logic of a United States of America

Think back to any earlier time. Before the ratifica- tion of the U.S. Constitution, every state carried out its own trade policy, negotiating separate trade pacts with foreign nations. This approach allowed the other nations—Britain in particular—to play one state against another, gaining agreements that favored Britain at the expense of the states.

When John Adams, representing the Continental Congress, sought Britain’s agreement to open its ports to U.S. shippers, British Foreign Secretary Charles James Fox contemptuously suggested that ambassadors from all 13 states would have to sign any such treaty. As a result, when the founding fathers met in Philadelphia to devise a new consti- tution, they agreed with little debate that Congress should have the power to “regulate commerce with foreign nations and among the several states.” This unprepossessing clause in Article I became the char- ter of our national economy.

Today no one would seriously propose that each U.S. state conduct its own foreign trade policy. That responsibility is firmly lodged in the federal govern- ment. Trade negotiations are centralized in the Office of the United States Trade Representative, with its own expert staff. But today, with direct investment supplanting trade as the engine of world commerce, we lack any similar vehicle to negotiate on our behalf with global managers. As a consequence, we are rela- tively easy pickings for them.

What is needed is a shift of authority over global investment, from states and cities to the federal gov- ernment. What little authority the federal government now exercises over global investment is negative. That is, under the Omnibus Trade Act of 1988, the federal government can block foreign investors from gaining a controlling interest in a U.S.-owned corporation if the purchase is likely to “impair national security.” Under several other recent statutes, the federal government subsidizes private sector R&D only if it is undertaken by a U.S.-owned company. Even more recently, Congress has sought to impose special tax and disclo- sure burdens on non-U.S. companies operating in the United States.

Most of these investment disincentives make little sense. Global managers at U.S.-owned companies are no more “us” than are the global managers of non-U.S. companies. And it is in our interests to attract invest- ment from global managers all over the world, rather than raising investment barriers on the faulty basis of national identity. Most important, while other nations are improving their bargaining power to attract global investment, the United States continues both to dissi-

pate its bargaining power by permitting state and local bidding wars and to discourage foreign investment by creating federal barriers.

A United States Investment Representative. A response that would serve our interests and accede to the logic of the global manager and the global web is both the creation of an Office of the United States Investment Representative, paralleling the United States Trade Representative, and the preemption by federal law of separate state and local laws that authorize their officials to offer investment incen- tives. In other words, the federal government should effectively bar states and cities from bidding for global capital; just as the USTR negotiates national trade issues, the USIR would negotiate investment issues.

The USIR would determine what sorts of global investments we need in order to enhance our wealth and create important spillovers, but which would not be made without special incentives. Do we want more of the public benefits associated with micro- electronic fabrication and manufacturing? More microbiological research? More state-of-the-art auto assembly plants? Just as important, where do we want to see these investments located—in regions of high unemployment and relatively low skills? In regions where there already exist the beginnings of a critical mass of suppliers and relevant skills? The USIR would also monitor major factories, laborato- ries, and offices in the United States that global managers were planning to close and move abroad. Is it worth trying to keep them here? Why, and at what cost?

The tools available to the USIR in negotiating on our behalf already exist but are now scattered across the national landscape: tax abatements, tax credits, R&D incentives, loans and loan guarantees, use of public lands, public capital investment, and more. Moreover, working with the USTR, the USIR could offer trade concessions in exchange for the invest- ments we seek—lowering tariffs on certain compo- nents to be used in the proposed U.S. manufacturing facility, providing relief from voluntary restraint agreements on other parts and components, granting immunity from certain antidumping levies. And if other nations threaten to close off their markets to global corporations unless they make certain invest- ments there, America would be in the position to use similar threats as a means of ensuring its fair share of such investments.

The creation of a USIR would thus solve four problems at the same time. By pooling our now dif- fuse bargaining power, the USIR could bargain more effectively and at a lower cost on our behalf—thus preserving scarce resources for the important tasks of educating our work force and building a world-

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class infrastructure. It would bargain only for those global investments that promised large beneficial spillovers and that would not come to our shores automatically. It would seek to guide these invest- ments to locations that would maximize the benefit to us. And it would put America on an equal footing with other large nations and emerging trading blocs that are already bidding effectively for global invest- ment.

Without question, the activities of the USIR would be the subject of intense political interest. State and local governments would still compete against each other, but the competition would be contained among us, rather than channeled as pay- ments to global corporations. And yes, the USIR would be selecting certain technologies and indus- tries as more critical than others—which is exactly what Carla Hills, the United States Trade Representative, does now when she gives priority to certain industries during trade negotiations.

A GATT for Direct Investment. Just as we need a United States Investment Representative to parallel the efforts of the United States Trade Representative, so we need a GATT for Direct Investment to parallel the GATT that establishes rules for global trade—and for precisely the same reasons. So long as relative eco- nomic wealth and power figure prominently in national calculations, some framework for negotia- tions is necessary—lest nations fall prey to the same zero-sum investment bidding as America’s states now engage in. Moreover, in the absence of such a new international forum, wealthy nations will always have the capacity to outbid poorer ones.

A GATT for Direct Investment would establish international rules by which nations bid for global investment and processes for settling disputes over such bids. For example, threats to close off a domes- tic market unless certain investments were made in it would be carefully circumscribed—for it is pre- cisely threats such as these that rapidly unravel into zero-sum contests. The amount of permissible sub- sidies to attract investment might be proportional to the size of the nation’s work force, but inversely pro- portional to its average skills—so that nations with large and relatively unskilled work forces would be allowed greater leeway in bidding for global invest-

ments than nations with smaller and more highly skilled work forces.

Other kinds of investment subsidies would be pooled and parceled out to where they could do the most good globally, as the European Community has begun to do regionally. For instance, nations would agree to fund jointly those basic research projects whose fruits are likely to travel across international borders almost immediately—projects such as the high-energy particle accelerator and the exploration of space. How such funds were apportioned and toward what ends would, of course, be subject to negotiation. The rules of the GATT for Direct Investment would also specify fair allocations of tax payments by com- panies operating across several borders and would rec- oncile various regulatory regimes.

Come back to the global negotiating table where we started. We are on one side; they are on the other. There is nothing sinister or hostile about this setting. It is, in fact, an inevitable, practically inexorable extension of the emerging global economy. It is not, however, absolutely true that our interests and theirs conflict. Both sides, for example, benefit from our having a well-educated, well-trained work force; a well-developed, well-maintained public infrastruc- ture; a high-quality environment and a high overall standard of living.

But there are differences as well, places where our interests naturally diverge. Many global managers, more sensitive to the requirements of the bottom line and thus more agile in adapting, have realized the implications of globalization. We and our govern- ments are still struggling to catch up. They are chang- ing the shape, size, location, and operating principles of global businesses. We are mired in the obsolete prac- tices and attitudes of a previous era; our government lags behind the epoch-shaping events unfolding around the globe. Other nations—other groups of “us”—are reacting to these same events: EC ‘92, Japan’s cautious emergence in world councils. Now we must move in the United States to create the new institutions and new attitudes that will permit us to negotiate effectively with them—that will allow us to negotiate as if our future depended on it.

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