March 17, 2010

Multinational Companies and Job Creation: How the Boeing-Airbus Rivalry Matters

With joblessness still unmoved by our historically easy fiscal and monetary policies, the political chatter is full of charges that globalization, especially the role of multinational companies, costs America millions of jobs. The facts are less clear-cut, and the impact on job creation depends substantially on whether the multinationals are ours or foreign based.

For several years, for instance, Boeing and the European multinational Airbus have been competing for a $35 billion contract to develop and build the next generation of tanker aircraft that refuel other planes in-flight. Boeing is as close to a domestic U.S. company as a large U.S. manufacturer can be these days, with 96 percent of its physical assets located here and ties to a far-flung global network of suppliers and vendors. Its face-off with Airbus pits it against a division of the European Aeronautic Defense and Space Company (EADS), which maintains 96 percent of its physical assets in Germany and France while also depending on a global suppliers and vendors. For years, PR flacks for both companies have claimed that each would create many more jobs than the other, if it won the contract. In practice, Boeing and Airbus would both need roughly the same number of workers, worldwide, to develop and build the new tanker; and in order to be cost- competitive, most of this work would occur at the two companies’ existing facilities. For an economist or a business person, this means that a U.S. based company would produce most of those jobs here, where its physical plant is, while a European-based firm would have to produce most of the jobs in Europe.

Recently, I was able to test these assumptions when Boeing asked if we could conduct an impartial analysis of jobs and the tanker contract. I agreed with certain conditions. First, our study would ignore the PR claims from both sides. Second, we would focus on the new investments in plant, property and equipment provided under the contract, and construct an objective jobs estimate using historical data on the relationship for aircraft makers between these new investments and job creation. Finally, we would use only publicly-available and verified data, plus the two firms’ formal proposals to the Pentagon.

In its formal submission, Airbus proposed to partner with the U.S.-based Northrop Grumman, a common arrangement for foreign multinationals competing for Pentagon contracts. Airbus’s plans also showed that, as expected, it planned to develop and produce most of the new planes? at its existing facilities in Europe, with Northrop Grumman mainly assembling it here. Furthermore, reams of government data established that U.S. subsidiaries of foreign aircraft makers are much less invested here than their U.S. counterparts. Those subsidiaries also generate substantially fewer new U.S. jobs for every dollar of new investment here, which means they do the more labor-intensive tasks back home.

Whichever firm ultimately wins this contract will use a substantial share of the funds to pay outside vendors and suppliers, as suggested earlier, and these payments will create thousands more jobs indirectly. But there are no public data on where the myriad parts of each company’s global supply chain are located, so no one can say how many new U.S. jobs will be created indirectly under this contract by either rival. One might plausibly assume that the supply chain of a U.S.-based firm is more concentrated here than the supply-chain of a European-based firm; but since we don’t have the data to test that assumption, we set it aside.

These facts and factors produced some definitive results: We found that over the 18-year life of the contract, we should expect Boeing to produce 10 times as many U.S. jobs — roughly 3,500 to 4,000 jobs per-year — as Airbus-Northrop-Grumman. In fact, since the study was completed, Northrop-Grumman pulled out of the competition, leaving Airbus to face-off alone against Boeing.

These findings throw additional light on other common concerns about multinational companies. Perhaps most important, as Airbus’s case suggests, new investments and job creation by a multinational in its home economy are often accompanied by new investments and jobs by its foreign subsidiaries. That’s just the way that multinationals do business. For example, when Ford or Dell build a new plant abroad, the operations of that facility will generate new business back home, including investment and jobs, because the headquarters will continue to provide its subsidiaries with more advanced services and produce the most advanced parts. That makes the economic impact of multinationals here largely “distributional.” The worldwide networks of multinational companies shift many thousands of basic service and basic production jobs abroad, while creating a smaller number of more highly-paid, more advanced service and production jobs here.

The Pentagon should always award its contacts to those firms that can most credibly and efficiently produce the new systems required for American national security. That said, the impact of those contracts on job creation cannot be considered a matter of economic indifference, especially in a period when American businesses seem capable of producing new jobs only at much lower rates than previously.