Reference no: EM133211684
Closing Case Emerging MarketsEthical Dilemma
Are US Multinationals Good for America?
Most debates on multinational enterprises (MNEs) around the world focus on their impact on host countries that receive foreign direct investment (FDI). Recent debates highlight the role of homegrown MNEs in the US economy itself. On the positive side, US MNEs are productive, innovative, employing more skilled workers, and paying higher wages-at least 6% more than non-MNEs in the country. Shareholders pocket the fruits of these firms' global success, and executives enjoy bigger power, more pay, and higher-profile global celebrity status. However, on the nonpositive side, in the past two decades many US MNEs have been delinking from the US economy. They still have headquarters in the United States, are still listed on US stock exchanges, and most of their shareholders are still American (foreigners own approximately 15% of US equities). But their expansion has often been overseas. In 2007, Delphi filed for Chapter 11 bankruptcy protection in order to slash its US headcount from 32,000 to 7,000.
Its bankruptcy filing was careful to exclude its 115,000 foreign-based headcount, which would grow. IBM reportedly endeavored to reduce the number of permanent employees in the United States from 30% to 20% of its total global headcount. US MNEs are also increasingly shy about paying US taxes. One of their leading concerns is one of the world's highest corporate income tax rates imposed by Uncle Sam, and many other countries lure them away with lower taxes. Legally, Google Ireland is not a branch of the US-based Google Corporation. Although 100% owned by Google Corporation, Google Ireland is a separate, legally independent corporation registered in Ireland. Technically, Google Ireland is an Irish firm.
Although Google Corporation intentionally lets Google Ireland earn a lot of profits, the US Internal Revenue Service (IRS) cannot tax a dime that Google Ireland makes unless Google Ireland sends back (repatriates) the profits to Google Corporation. Google Corporation does not have just one subsidiary. It has many around the world. Overall, more than half of Google's profits are parked overseas and not taxable by the IRS. Google is not alone. The list of leading US firms that have left (or invested) a majority of their profits overseas includes Chevron, Cisco, Citigroup, ExxonMobil, GE, HP, Microsoft, P&G, PepsiCo, and Pfizer. Prior to the 2017 US tax reforms, US MNEs would need to pay a 35% federal corporate income tax. While the reforms brought it down to 21%, Ireland's 12.5% corporate income tax is still much more attractive. Overall, in their eagerness to chase new markets, cheap labor, and low taxes, many US MNEs, according to critics, have abandoned some of their most important corporate social responsibility (CSR). Such MNEs stand accused of unleashing "carnage" on ordinary Americans, in the words of President Trump during his inaugural speech in 2017.
The solution? "Domesticate" such globe-trotting multinationals, according to the Economist. Lower taxes would draw them back, and open threats with "a big border tax" (again, Trump's own words) would make them think twice before "doing business as usual." The list of US MNEs being publicly named and shamed by Trump includes Boeing, Carrier, GM, Northrop Grumman, and others. Getting the message, Apple, Ford, IBM, and other US MNEs pledged to grow thousands of jobs at home. Non-US firms such as Alibaba, Fiat Chrysler, Foxconn, and Toyota also played along by pledging to invest in the United States. Now with a less combative Biden administration, many MNE executives reportedly have slept a little better. Are US MNEs good or bad for the US economy? Of course, given the complexity, "good" is simply a short-hand for benefits outweighing drawbacks, and "bad" is the other way around. Abandoning the benefits of low-cost labor and employing high-cost American labor would jack up the price of goods and services. Few would appreciate this outcome. If US MNEs shifted a quarter of their foreign jobs back home at US wage levels, their profits would drop 12%, and dividends would plummet. Clearly, shareholders and executives are not going to be happy. Debates on how to strike the balance thus rage on.
Discussion Question 1: Who are stakeholders of US MNEs? Have US MNEs done a good job to take care of them?
Discussion Question 2: ON ETHICS: As CEO of a major US MNE, you are in a private meeting seeing the president of the United States, who asks you: "When can you start moving jobs back?" What are you going to say?
Discussion Question 3: ON ETHICS: Switch the country to Australia, Britain, Canada, China, France, Germany, India, Japan, or any country where you are studying. Are MNEs from that country good for that country?