High in the hills overlooking Corning, N.Y., the company named after the town has recently broken ground on a $300 million expansion of its research laboratories. Flush with cash from booming overseas sales, the glass giant is amping up its product development efforts at home. "It's important for the functioning of our innovation machine that we be in one location," says Corning Inc. President Peter F. Volanakis.

That's good news for the residents of Steuben County , where Corning is the largest employer. Since 2005 they have watched their unemployment rate drop faster than that of neighboring counties, in part because of Corning's commitment to the area and its ability to sell around the world.

Americans are going to need quite a few more Cornings—global companies willing to invest in the U.S. —to ease the pain of the economic slowdown. The big multinationals are the go-to guys right now: They've got plenty of cash and soaring profits from overseas operations. They're highly productive and innovative, more so than domestic companies. And unlike consumers, banks, and smaller companies, the multinationals aren't constrained by the credit crunch.

Indeed, the top 150 U.S.-based nonfinancial multinationals, which include the likes of Hewlett-Packard, Pfizer, eBay and Sara Lee, had more than $500 billion in cash and short-term investments at the end of 2007. Some of the big global players with extensive operations in the U.S. —companies such as Toyota and Siemens—are equally flush. By contrast, smaller domestic-oriented companies have weaker profit outlooks and more short-term debt and other liabilities on their books and therefore are having a harder time borrowing.

But will the globe-spanning giants come to the rescue of the U.S. economy? Recent history is not encouraging. Figures collected by the Bureau of Economic Analysis suggest the multinational sector has in some ways been a drag on the U.S. economy since 2000. From 2000 to 2005, the last year for which full data are available, U.S. multinationals cut more than 2 million jobs at home, even as employment in the rest of the private sector grew —and there's no sign the trend has significantly reversed. The U.S. operations of foreign multinationals also shrank over the five-year stretch, dropping 500,000 jobs as foreign investors cut costs and sold off U.S. companies. Toyota, perhaps the most successful foreign company in the U.S., added all of 9,000 jobs in the states between 2000 and 2007.

In an age of seemingly rampant globalization, the U.S. economy hasn't become noticeably more global in one key sense: Exports, despite being up in the past few years, equaled 11.8% of gross domestic product in 2007, barely above where they were in 1997. Meanwhile, sales by foreign subsidiaries of U.S.-based multinationals have skyrocketed.

The good news: The combination of the falling dollar and rising costs overseas is making it more appealing for high-productivity multinationals to shift some production and employment back to the U.S. Such moves are already showing up in rising exports and the increased willingness of foreign companies to put their money into the U.S. Indeed, foreign direct investment in the U.S. in the third quarter of 2007 was at its highest level since 2000.

The uncertain role of the multinationals during this downturn makes Federal Reserve Chairman Ben S. Bernanke's job that much harder. His primary tool—cutting interest rates—isn't very effective with cash-rich multinationals that can already borrow on attractive terms. Moreover, the corporate executives who run the multinationals have far more on their minds than interest and exchange rates. Tax considerations, incentives from other countries, labor-force quality, and long-term corporate strategy all loom over their decisions as well.

Politics might soon play a bigger role, too. The Presidential race is raising questions about globalization's winners and losers. Barack Obama, in particular, has talked repeatedly about new policies that provide incentives for companies that expand their U.S. workforces—and penalties for those that do not.

EXPORTING JOBS, NOT GOODS

Multinationals have been the wild card in the economic deck for a decade. Back in 1997, four years after the passage of the North American Free Trade Agreement, the economists at the Bureau of Labor Statistics in Washington put out their biennial projections of job growth over the next 10 years. With a touching note of optimism, they assumed that exports, adjusted for inflation, would double over the next decade —a boom that would have produced a sizable number of good-paying American jobs.

But like almost everyone else, the BLS economists missed an unexpected strategy shift at the handful of big companies that account for most of the exports. Instead of ramping up American operations to sell into global markets, giant U.S. companies such as General Electric, IBM, and United Technologies took their operations overseas, expanding in Asia and Europe and becoming global enterprises with international workforces. The result: U.S. export growth fell 50% short of the BLS economists' prediction. The much prophesied job boom never happened.

In effect, U.S. multinationals have been decoupling from the U.S. economy in the past decade. They still have their headquarters in America , they're still listed on U.S. stock exchanges, and most of their shareholders are still American. But their expansion has been mainly overseas.

At Emerson Electric, for example, international sales more than doubled, to $11.6 billion, from 1997 to 2007. But exports from the U.S. rose by about 20%, to $1.3 billion. At United Technologies, which ranks among the top 20 companies in terms of foreign revenue, export revenues rose by 62%, to $6.2 billion, from 1997 to 2007. But total sales outside the U.S. jumped from $13 billion to $34 billion.

Some executives are quite clear about their strategy. "We have clients who need work done in other parts of the world to serve their clients," says Ronald A. Rittenmeyer, who serves as chairman, president, and CEO of Electronic Data System, which last year granted early retirement to 2,400 U.S. workers. "Our employee base will continue to shift, with the number of jobs located in high-quality, lower-cost areas outside the U.S. growing." EDS expects to have 45,000 offshore employees by the end of 2008, up from 14,000 at the end of 2005.

As the big companies have moved abroad to expand their global operations, smaller U.S. companies haven't taken their place as exporters. According to data from the Census Bureau, exporting is just as dominated by big companies as it ever was: In 2006 companies with 500 or more employees accounted for 71% of goods exported, the same as in 2000.

Only a relatively small number of U.S.-based corporations have established a substantial global presence. When the nonfinancial companies in the Standard & Poor's 1500 are ranked by their reported foreign sales, the top 150 account for 84% of the total. Virtually all of the names are easily recognizable. "There are only a few truly global companies," says John Dowdy, a partner in McKinsey's London office who recently helped lead a study on multinationals.

The dominance of a few top companies holds true in Europe as well. In a new report titled The Happy Few , economists Thierry Mayer of the University of Paris and Gianmarco I.P. Ottaviano of the University of Bologna write: "The international performance of European countries is essentially driven by a handful of high-performance firms." The same is true in Japan , where Toyota , Honda, Sony, and a few other big names carry the flag.

The "globalization gap"—a yawning gulf between big multinationals and everyone else—helps explain why Americans are so conflicted about trade. On the one hand, research by Dowdy and others suggests that multinationals are more productive, pay more, and are better managed than their domestic counterparts." They are high-wage, high-productivity firms, and that's what every economy wants to have," says Andrew B. Bernard, an economist at Dartmouth 's Tuck School of Business and an expert on multinationals. Bernard estimates that multinationals pay workers 6% more on average than domestic companies, while Mayer and Ottaviano find a bigger difference in most European countries.

In some industries, multinationals have cut jobs less aggressively than comparable domestic firms, perhaps because the multinationals held on to R&D and headquarters jobs to serve the global market. From 2000 to 2005, overall employment in manufacturing fell by 18%. But U.S.-based multinationals cut by only 12.5%.

Still, multinationals are not big job producers, either in the U.S. or abroad. The top U.S.-based multinationals provided only 47% of jobs in the S&P 1500 nonfinancial companies in 2006 while accounting for 57% of the sales and 62% of the profits. These figures include all jobs, not just the domestic ones.

What's more, the government figures show that the share of domestic output generated by U.S. multinationals shrank from 21.8% of GDP in 2000 to 18.5% in 2005. It could have bounced back in the years since then, but it doesn't seem likely.

Of course, there are other paths by which the success of U.S.-based multinationals can boost the economy. One is through the stock market. Despite large influxes of foreign money into the country, U.S. stocks are still owned mostly by Americans, either directly or through mutual funds and pension funds. The reason is simple: Foreign investors have mostly chosen to put their money into supposedly safer investments, such as Treasury securities, corporate bonds, and mortgage-backed securities, much to their dismay. As a result, foreigners own only 13% of U.S. equities, according to the Federal Reserve.

What's more, most research and product development is still done in the U.S. "The center of mass [of R&D] isn't going to suddenly move somewhere else," says Jonathan Eaton, an economist at New York University . "R&D is still extremely concentrated." In the short run, that's good news, because those kinds of jobs tend to be well-paid and relatively immune to the business cycle.

At Corning, the top executives made a conscious decision to keep virtually all of their R&D at headquarters. "We want to invest in creating a pool of expertise that is relatively stable here in Corning, N.Y.," says Mark A. Newhouse, senior vice-president for new business development. Adds David L. Morse, senior vice-president for corporate research: "This country is still the best place to do industrial research."

Even in the semiconductor industry, which has spread plants and research facilities around the world, the big U.S. companies have banded together with 25 top American universities to do research into the use of cutting-edge nanotech materials and processes. Formed in 2004, the alliance is now in full swing. "I'm confident that we'll blow through these barriers, and I'm confident the U.S. will be a leader in this industry for decades to come," says John E. Kelly III, director of research at IBM.

The alliance is spending just $70 million a year on collaborative research right now, far too little to jolt the economy out of its short-term doldrums. But over time, as the group puts its research into action, its members will spend several billion dollars implementing the changes, says Kelly. For IBM, most of its investments will be in the U.S. , since its two chip plants are in East Fishkill , N.Y., and Burlington, Vt., and its largest research labs are in Westchester County, N.Y., and Silicon Valley. Says George M. Scalise, the president of the Semiconductor Industry Assn.: "Basic research and manufacturing will be more tightly woven geographically, in spite of our ability to communicate so freely via the Net."

But globalization raises other questions. Does a company's nationality matter from the perspective of the U.S. economy? Does it matter whether jobs come from Google or Toyota ? Is a U.S.-based global company any more likely to invest in the U.S. during a downturn?

Many economists believe a multinational's nationality is unimportant. "You want the jobs in the country, but it ultimately doesn't matter who owns the firms," says Nicholas Bloom, a Stanford University economist who studies multinationals. Robert B. Reich, the Labor Secretary under Bill Clinton, agrees: "Nationality matters almost not at all today. "

Certainly some foreign companies have moved into the U.S. in a big way. Siemens, for example, has invested heavily in the U.S. in the past few years. That includes opening a facility making wind turbine blades in Fort Madison , Iowa , in 2007, which Siemens plans to expand this year. "That business is very robust in the U.S. market," says George Nolen, president and CEO of Siemens Corp., the U.S. subsidiary of the German multinational.

Others believe those stateside expansions serve the U.S. better when the multinationals are U.S.-owned. "The reality is that the value chain tends to keep the knowledge and expertise near the center," says Christopher A. Bartlett, a professor at Harvard Business School . "I'd prefer to have U.S. multinational companies."

The success of U.S.-based multinationals can also affect the quality of life in parts of the country where they have a big presence. In particular, there are lots of spillover effects from having the headquarters of a global company in a town, including monetary support for local colleges, museums, hospitals, and other nonprofit activities.

Hutchinson , Minn., home to Hutchinson Technology, illustrates the link between global success of a U.S.-based company and its impact on a local community. The maker of high-precision disk-drive components, which now sells about 90% of its output outside the U.S., was co-founded in 1965 by a Hutchinson native. "The local ownership has had a tremendous impact on the local community," says Mike Boehme, chairman of the board of the Hutchinson Chamber of Commerce and a dean at Ridgewater College in town. "If a foreign group took over, we wouldn't be the community we are."

COST-BENEFIT ANALYSES

The lack of jobs and investment coming from U.S. multinationals didn't matter too much during the housing boom. Even as U.S. jobs at global firms slumped, domestic employers in construction, health care, and restaurants took up the slack.

But now Americans—and the Fed—need the multinationals to help out. Will they start investing enough in this country to cushion the downturn? The value of the dollar has fallen by more than 20% against the currencies of U.S. trading partners since 2003, the biggest sustained decline since the index was started in 1973. In particular, the dollar has dropped by 15% against the Chinese yuan. Meanwhile, labor costs in China and India have jumped, while real wages in the U.S. have fallen by 1% in the past year, according to an experimental index that covers all jobs, even the highest-paid ones. Transportation costs have risen as well, making shipping more costly. All of that makes producing in the U.S. more attractive today than it has been in a while.

But the chief executives of multinationals don't make location decisions based on short-term economic fundamentals alone. For one thing, they worry about taxes. The U.S. has one of the highest corporate income tax rates among industrialized nations, according to data from the Organization for Economic Cooperation & Development.

Moving operations overseas gives a multinational an almost infinite number of legal and quasi-legal strategies for reducing U.S. corporate taxes. It can borrow in high-tax countries to take maximum advantage of interest-rate deductions; it can transfer intellectual property to low-tax countries, in exchange for below-market royalty payments; and when it ships goods to its foreign affiliates, it can charge low prices to shift profits to low-tax jurisdictions. The result is that collections of U.S. corporate income taxes have been dropping significantly as a share of total global profits for U.S. companies. "Companies have taken advantage of these favorable cost-shifting agreements," says Jack Mutti, an economist at Iowa 's Grinnell College and an international tax expert. "The law gets so complicated that very few people can understand what the trade-offs are."

BIG TAX SHIFT?

To encourage multinational expansion in the U.S., it may be necessary to revise the corporate tax system, a step for which there is surprising support from Democrats and Republicans alike. One proposal—with the arcane name "formulary apportionment"—would tax the earnings of multinationals based on the proportion of their customer base in the U.S. For example, under this system it's possible a U.S. company that only exported would pay virtually no corporate income taxes, while a foreign company that was a big importer to the U.S. would pay a hefty chunk of change on its worldwide income. Other economists believe the corporate income tax hasn't adjusted to the global economy and think it should be eliminated.

The other big question is whether the U.S. needs to subsidize multinationals to entice them to keep jobs in the U.S. That comes up a lot in industries such as semiconductors, which require heavy capital investment. "We have to choose to compete on the investment level and match other countries' offerings on incentives and tax breaks," says Scalise of the Semiconductor Industry Assn. "If we don't do this, it will be very difficult for us to maintain our leadership in technology and innovation." Adds Hector Ruiz, CEO of Advanced Micro Devices: "It's not corporate welfare. [This is] a competitive world."

Perhaps the smartest long-term policy would be to cultivate future multinationals. The real boost to national economies comes from the formation of new multinationals, which in their early hypergrowth years create an enormous number of jobs and put down deep roots. No American would deny that the U.S. is better off because Google started there rather than somewhere else. The European economists Mayer and Ottaviano argue that policymakers shouldn't "waste time helping the incumbent superstars." Instead, they should "nurture the superstars of the future." That may mean simplifying the amazingly complicated system for taxing multinationals, which both collects relatively low revenue and imposes big compliance costs. "Put in place as few barriers as possible for all companies," says Bernard. "The good ones will rise to the top."

These new multinationals of the future won't arrive in time to help the U.S. in this credit crunch, however. It's going to be the big multinationals of the present who will—or won't—make the difference.

With Steve Hamm in New York and Christopher Farrell in St. Paul, Minn.

© 2008 Business Week

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