The internationalization of production and its effects on the domestic behavior of United States manufacturing multinational firms

While there is a general impression expressed by many in the media and among policy makers that the economy is becoming more globalized and internationally competitive, these claims are not agreed upon among economists. This dissertation attempts to clarify the validity of these crucial claims through empirical research. This dissertation focusses on one aspect of economic internationalization and integration--the behavior of U.S. multinational manufacturing corporations and their foreign direct investment activities. The research presented here attempts to test two main hypotheses; first, that the extent of internationalization within U.S. manufacturing firms has grown in the recent past and, second, that production abroad by U.S. manufacturers substitutes for production in the domestic U.S. economy by these firms. Using industry data from the Department of Commerce Surveys of U.S. Direct Investment Abroad, this dissertation supports the view of growing globalization by U.S. manufacturing multinational firms in the period from the late 1970s through the 1980s as measured by a range of measures. In particular, the data show that slow or non-existent domestic production growth combined with steady growth in foreign production to result in increased internationalization for these firms. The Department of Commerce data is also consistent with the claim that U.S. multinational manufacturing firms are increasingly substituting away from their domestic production base towards production in foreign countries in response to lower factor costs abroad. Next, merging the Compustat Industrial File and the Compustat Geographic Segment File allowed the construction of a unique cross-section, time-series data set of 123 U.S. manufacturing multinational firms. Employing this firm level data, regression analysis is used to test if foreign production growth by U.S. manufacturing firms represents a substitution away from domestic production. Results of the analysis suggest that whether increased internationalization will displace domestic growth for a U.S. manufacturing firm is dependent on the degree of indebtedness of the firm and the concentration of its foreign operations in low wage areas of the world. For the high debt firms in the sample, the substitution effect of foreign growth on domestic growth outweighs the stimulating effect, while the opposite is true for less indebted firms. Regression analysis also shows a tendency for foreign affiliate growth to substitute for domestic growth when the firm\u27s foreign operations are concentrated in developing countries, a result consistent with the analysis of the Department of Commerce data described above