What Tata Tells Us (Insourcing is good for the economy)

Wall Street Journal ^ | March 27,2008 | MATTHEW J. SLAUGHTER

[SeekAndFind]

Yesterday Ford Motor Company announced it will sell its Jaguar and Land Rover divisions to India's Tata Group. Upon the closing of this transaction, the many Ford associates currently working in these divisions in the United States will join the ranks of Americans who work at insourcing companies -- i.e., at U.S. affiliates of foreign multinational firms.

Foreign direct investment (FDI) has long been a source of strength for the American economy. In 2005, insourcing companies employed nearly 5.1 million Americans, 4.4% of the private-sector labor force. Beyond their employment, insourcing companies perform large amounts of the crucial activities that make their workers and the overall economy more productive. They invest in physical capital and in research and development, and they help connect the U.S. to the global economy through international trade. The bottom line is larger paychecks. In 2005, compensation per worker at insourcing companies was $66,042 -- 31.8% above the average for the rest of the private sector of $50,124.

What is notable about the Tata transaction is not its incremental addition to these numbers, but its demonstration of two critical but little-known aspects of insourcing: how and from whom it arises.

Consider first the how question. How do foreign multinationals undertake new FDI into the U.S.? It is well known that new FDI can come via "greenfield" investments that build new businesses from scratch. Think photo opportunities of business executives and government officials turning fresh dirt with shiny shovels.

But foreign multinationals can also merge with, or acquire part or all of, an existing U.S. company. Greenfield investments can protect proprietary technologies. Acquisitions can yield quicker presence, and can build on target-firm assets such as customer connections and managerial talent.

[SeekAndFind]

So what do the data show? From 1987 through 2006, the U.S. received a lot of greenfield FDI: $220 billion worth. But over that same period, it received $1.78 trillion of new FDI via mergers and acquisitions (M&A) with existing U.S. businesses.

M&A activity, not greenfield investment, is far and away the predominant method foreign companies use to invest in the U.S. It accounts for more than 88% of new FDI in the U.S. over the past two decades. M&A transactions have been essential for insourcing companies to expand in -- and generate benefits for -- the U.S.

[gondramB]

Maybe that's what tatas say to Mr. Slaugter but they say something else to me.

[Old Sarge]

[Old Sarge]

Eleven seconds, just eleven ^&*%$% seconds!

[gondramB]

[King_Corey]

Thanks, that was nice.

[TChad]

The 2009 Bodacious

[Centurion2000]

NOT GUILTY !!