The View From 1776

In an increasingly globalized market, failure to expand in the most rapidly growing world markets means relative stagnation domestically. 

Ironically liberal-progressives believe that we should be moving toward a single world government, but want to keep the economic realm rigidly divided among nations. 

It’s hard not to conclude that, in berating business, Obama is simply pandering to our socialistic labor unions, counting upon the public’s economic ignorance.

The following op-ed article appears in the December 29, 2010, edition of the Wall Street Journal.

The Mistaken Attack on Outsourcing
When American firms grow abroad, they also grow domestically

By MIHIR DESAI
President Obama concluded his recent meeting with leading corporate executives with a call for more ideas about how to create jobs at home. With this meeting, he has begun to work toward a sorely needed rapprochement with the business community. The continued degradation of the relationship between that community and the White House serves no one.

Sound public policies surely matter, such as the provisions on expensing in the recently passed tax legislation, which will help spur investment. But the president could perform an even greater public service if he changed the way he has talked about the impact of American firms on the economy.

Since his presidential campaign, Mr. Obama has repeatedly said that the global operations of U.S. companies harm the country because they drain the American economy of jobs. His rhetoric about “tax breaks for companies that ship our jobs overseas” has populist resonance at a time of economic uncertainty, but it is also at odds with the available evidence about how globalizing firms affect the American economy. Moreover, it harms the popular understanding of our opportunities and challenges.

When American firms grow abroad, they also grow domestically, as demonstrated by research I conducted with C. Fritz Foley of Harvard and James R. Hines Jr. of the University of Michigan (published in the American Economic Journal: Economic Policy, 2009).

The data do not support the crude, fixed-pie intuition that firms either invest abroad or at home. Ten percent growth in American firms’ foreign investment is associated with 3% growth in their domestic investment. And when firms grow abroad, their domestic exports and R&D activities grow especially, contrary to Mr. Obama’s rhetoric.

Today, CEOs in this country look out on global markets that are growing at four or five times the pace of the U.S. economy. Foreign operations of all sorts are typically considerably more profitable than domestic opportunities would be. And, of course, American CEOs must compete with companies that are based—and that invest—all around the world.

Vilifying or penalizing American businesses for their global operations will only lead them to consider leaving the U.S.—or consider being bought by foreign companies. Such moves would hurt America by removing valuable headquarter jobs. Instead, Mr. Obama should emphasize how Americans succeed when our firms succeed world-wide. That formulation better captures reality and offers a more sensible way to engage businesses in a new spirit of cooperation.

The United Kingdom, Canada and Japan have all initiated reforms that explicitly recognize the benefits of their global firms by lowering penalties on their overseas activities. The U.K. government, for example, has initiated a restructuring of its corporate tax system, including a shift to a territorial system that does not tax the foreign income of British companies. According to the U.K. Treasury, the new system “will better reflect the global reality of modern business and will allow businesses based in the UK to be more competitive on the world stage supporting UK investment and jobs.”

Mr. Obama could manifest a similar appreciation for his country’s global firms by pushing significant corporate tax reform—such as making marginal rates more consistent with global norms and adopting a territorial system.

The president’s recent trip to Asia—on which he was accompanied by CEOs of companies with major foreign operations—may signal a nascent appreciation for this crucial issue, and the president could reinforce the message at his upcoming State of the Union address. Altering the national conversation can help prevent the rise of a new economic protectionism that demonizes global firms.

Mr. Desai is a professor of finance at Harvard Business School.