Reference no: EM131357671

CASE ANALYSIS: Off-Shoring by U.S. Multinational Corporations.

Write a 5 page paper (1500 or more words) in APA format in response to the questions:

Below is a recommended outline.

1. Cover page

2. Introduction

a. A thesis statement
b. Purpose of paper
c. Overview of paper

3. Body (Cite sources using in-text citations.)

a. Provide an overview of this case analysis; summarize the key points.
b. Discuss the three measures (value added, capital expenditures, employment) and how they impact US multinational corporations.
c. The author notes that several factors motivate firms to locate offshore or to move some of their production there. What are these factors and why do they influence off-shoring by US multinational corporations.

4. Conclusion - Summary of main points

a. Lessons Learned and Recommendations

5. References - List the references you cited in the text of your paper according to APA format.

Gerber J. (2011). Regional Trade Agreements. International Economics. 5th Ed. Pearson Education: Boston, MA.

Off-Shoring by U.S. Multinational Corporations.

As technology has made communications easier and as national governments have allowed economies to become more open to foreign investments, firms have responded by shifting production overseas. Data on off-shoring is not routinely gathered, although national statistical agencies, such as the Bureau of Economic Analysis (BEA) in the United States, have increased their efforts over the years so that economists and policymakers might better understand the extent of the phenomenon and the reasons behind it. It still remains difficult to measure how many services have been off-shored, but new efforts in data collection have made it possible to see how much manufacturing has moved abroad and to better understand the motives for off-shoring. Table 4.5 shows two pictures of U.S. multinational corporations, one in 1977 and the other in 2003, the most recent year of data. The table shows the percent of multinational activities, measured in three ways, which are performed off-shore, through a foreign affiliate. The three measures are value added, capital expenditures, and employment. Value added is a measure of the total value of production minus the value of purchased intermediate inputs. It is a measure of the firm's contribution to production. Capital expenditures include things such as machines, laboratories, and buildings, and employment is the number of workers. As shown in the table, the share of multinational's value added created abroad rose from 25 percent in 1977 to 26 percent in 2003, hardly a change during the period of intense globalization. Employment shows the biggest change, with 22 percent of total workers off-shore in 1977 and 28 percent in 2003. How can multinationals produce nearly the same share of output value added at home with a smaller share of its total employment? Two words: productivity increases.

Several factors motivate firms to locate off-shore or to move some of their production there. Most importantly, firms locate production off-shore in order to obtain access to a market and to produce specialized products that fit a particularmarket's need. This finding runs counter to the conventional wisdom that says that firms locate abroad in order to find low wages or to escape environmental or labor regulations. The conventional wisdom is not wrong, but describes only a small, unknown share of off-shoring. The reason economists think so is because the vast majority of off-shoring by U.S. multinationals is in high-income, high- wage economies. According to the BEA, about 67 percent of all U.S. off-shoring is in high-income countries, with the figure for manufacturing alone around 80 per- cent. If the primary motive for locating abroad were to find lower wages or weak environmental regulations, it does not seem likely that a large majority of off- shoring would be in high-wage, industrially developed places such as Europe, Canada, and Australia. Another finding that runs counter to some of the conventional wisdom is that the bulk of off-shoring is horizontal and not vertical. That is, firms often invest abroad to do activities similar to the ones they do at home, rather than off- shoring some piece of their production process that fits into the overall production chain. Again, this reinforces the idea that off-shoring is to serve a new market, rather than to find low wages. It should be clear that some firms do indeed move in order to find lower wages and to cut production costs. However, that is less common than supposed and is far from the primary consideration of firms that off-shore.

TABLE 4.5 U.S. Multinational Corporations and Production Outside the United States

                              1977   2003
Value added              25       26
Capital expenditures  21       26
Employment              22      28

The share of multinational activity outside the United States has not changed dramatically since 1977.