Study: Investing in Mexico linked to U.S. job creation – not losses

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Foreign investment—deployed the right way—can help grow the overall global footprint of U.S. companies, enable increased foreign sales, and support new jobs and economic activity at home.
A new economic analysis of two decades of investment in Mexico by U.S. multinational companies finds that outbound investment in Mexico does not—as commonly assumed—lead to U.S. job losses and reduced investment at home.

Rather, the study concludes that greater Mexican-bound investment is associated with net increases in U.S. jobs and investment—and that these increases can be tied directly to the outbound investment.

Theodore Moran and Lindsay Oldenski of the Peterson Institute analyzed firm-level data collected by the U.S. Bureau of Economic Analysis for hundreds of U.S. manufacturing multinational corporations (MNCs) and their more than 1,000 Mexican affiliates for 1990 through 2009. Their methodology controlled for external factors—like recessions, booms, and company-specific decisions—which allowed them to isolate the relationship between investment in Mexico by these companies and job and investment effects in the United States.

The study found that a 10 percent increase in employment at the Mexican affiliates of U.S. multinational manufacturers led to increases in U.S. spending for research and development (up 4.1 percent), U.S. sales (up 1 percent), U.S. employment (up 1.3 percent), and U.S. exports (up 1.7 percent). According to the authors, “the evidence paints a picture in which outward investment is an integral part of [U.S. company] strategy to maximize the competitive position of the whole corporation,” including the U.S. headquarters.

Among other things, outbound investment can enable U.S. multinationals to find and sell to new foreign customers, can provide increased revenues to support U.S. research and product development, and can make U.S. companies more resilient during bad economic times.

The authors noted that the average company in the study employed 25,642 workers in the United States and 1,311 in Mexico—meaning that a 10 percent increase in Mexican employment for the average company would add 131 workers there, while also increasing U.S. employment by 333 workers (or 1.3 percent of 25,642).

The authors observed that these results are consistent with other studies by Peterson and others that find a positive correlation between outbound investment by U.S. multi-national manufacturers and net positive effects at home. (And their analysis is in step with broader data that, for example, shows strong links between foreign investment by these U.S. companies and increased exports to foreign customers.)

The authors acknowledge that overseas expansion into Mexico and other countries can have negative effects on individual firms and sectors of the U.S. economy. (And excessive investments driven by distortive tax policies—rather than business considerations—can be bad for the nation as a whole.) The authors conclude, however, that this outward investment is, on balance, good for the United States:

[A] dispassionate public policy analyst would have to conclude that the aggregate result from outward FDI [foreign direct investment] on the part of U.S. firms after NAFTA is strongly positive. Conversely, [there] would be less activity at home—not more activity at home—if overseas operations of U.S. [multinational manufacturers] had not been able to take advantage of NAFTA.

As policymakers consider various proposals to promote the kinds of investments that are beneficial for American economic growth and employment—and debate new trade and investment deals like the Trans-Pacific Partnership and the Transatlantic Trade and Investment Partnership—it will be important to keep the results of these detailed studies in mind.

For example, this study calls into question the assumptions and arguments made by some that foreign investment by U.S. companies is inherently a “zero-sum” proposition. Rather, this study shows that foreign investment—deployed the right way—can help grow the overall global footprint of U.S. companies, enable increased foreign sales, and support new jobs and economic activity at home.

Read the full Peterson Institute analysis and review the underlying data here.