To understand why the Obama administration has acted against outsourcing and to counter its arguments, let?s have a good look at ground realties. First, let us take a look at employment creation scenario.

According to the latest figures released in April this year, employment created by private industry in the US decelerated sharply from 1.9% in 2006 to 1% in 2007. However, employment creation in the US multinational companies (MNCs) accelerated much faster, from 2.6% in 2006 to 2.9% in 2007 pushing up their total worldwide employment to 32 million. But unfortunately for the domestic stakeholders in the US economy, most of the new employment created by US MNCs was located abroad.

While employment in the parent companies of the US MNCs rose by 351,000 and pushed up their total employment by 1.6% to 21.9 million in 2007, the employment of the majority owned foreign affiliates of US MNC increased by 551,000, pushing up their total employment by 5.8%, to almost 10 million. But this is not a sudden development that should push the current US administration to throw a spanner into the works. In fact, the long term trends show that local employment of the parent companies of US MNCs have steadily declined from a peak level of 23 million in 1999 to a low of 21.1 million in 2003. Though the employment levels crept up in the later years, the 21.9 million employed in 2007 remained much below the earlier peak.

This is in sharp contrast to the employment created in the majority owned foreign affiliates of the US MNCs who increased the manpower employed abroad from 7.7 million in 1999 to 9.9 million in 2007. Thus while the employment of the parent companies of US MNCs in the US economy has declined by 1 million between 1999 and 2007 the employment of the majorityowned foreign affiliates rose by 2.2 million during the period. A clear case, some would argue, of cutting down on domestic employment in favour of foreign workers who can be hired at much lower cost.

And obviously it was the new investments made by the US MNCs that facilitated such an outcome.

These finding raise two important questions. The first is, do these trends in investments and employment allow one to say that the activities of the US MNCs clearly abet the flight of capital and employment to foreign countries? And the second and more important is whether the rewriting of the tax codes and the curbing of the flight of capital to tax havens would help strengthen the US economy.

The answer to the first question is quite clearly a strong no. What the Obama advisors fail to grasp is that the increasing investments and employment made by the majority-owned foreign affiliates of US MNCs is in clear response to the growing markets outside the US, particularly in emerging economies. Trends in sales of the parent companies of US MNCs and the majority owned foreign affiliates show that growth in the latter has far outnumbered the former. While the growth of sales of the US parents has fluctuated and even declined from 5.9% to 9.1% to 7% and 4% over the last four years that of the majority-owned foreign affiliates has shot up from 8.3% to 12.6%, to 10.5% and 14.5%. In fact, long term trends show that the ratio of sales of parent MNCs and foreign affiliates has come from one third in 2000 to around 55% in 2007. Going a step further, if one looks at the proportion of sales and employment in the parent companies of US MNCs and the majority owned foreign affiliates, one can even say that contrary to the US administration assertion of a flight of employment the reverse is true.

After all even though the sales of the majority owned foreign affiliates of US MNCs are around 55% of the sales generated in the parent companies their level of employment is just about 45% of the parent companies. So one can even probably argue to the contrary and say that far from encouraging flight of employment, the higher employee output in the foreign affiliates adds to the competitiveness of the parent MNCs in the US economy and even props up their survival. That answers the second question.

p.raghavan@expressindia.com