Chapter I - Introduction

Abstract

This chapter discusses the tax treatment of multinational firms' overseas activities and the effect of these activities on domestic employment and income. In a study described in the chapter, an analytical framework was developed that clarifies these issues and that can be used to evaluate the net effect of overseas investment on both U.S. employment demand in the short run and on the level and distribution of domestic income in the long run. The principal negative contribution can be expressed as the fraction of foreign subsidiary employment that could have been retained in the United States had the MNC attempted to serve foreign markets by exporting from domestic production sites. In the study, it was termed as the export displacement effect. In general, subsidiary imports from U.S. parents and other U.S. firms account for only a small fraction of subsidiary net sales. Several possible sources of positive effects of direct foreign investment (DFI) on domestic employment that work to offset this export displacement have been mentioned. The effects of DFI made abroad on the U.S. economy will very largely depend on whether such investment is apt to be a substitute for investment in the home economy. Other employment stimulating effects that have been noted include increased (white-collar) employment in domestic MNC headquarters, increased employment associated with export of complementary MNC products, and additional domestic employment stimulated indirectly by increased incomes and export demand abroad—all of which are likely to be of second-order significance when compared to the direct, production-related effects.