MG ---------------------------------------- The 'Insourcing' Problem WSJ December 1, 2004; Page A10
Now that the election is over, all the wailing about "outsourcing" seems to have vanished, as it certainly should. So maybe we can all begin to pay attention to the more important economic subject known as "insourcing," where some of the recent data really are worrisome.
Insourcing is what happens when foreign-headquartered multinationals operate subsidiaries in the U.S. These companies contribute both to U.S. economic growth and living standards, but a precise measure of these gains is hard to come by. That's why the Bureau of Economic Analysis's recent data about insourcing through 2002 is worth noting. As is the study of this data by Matthew Slaughter, an economist at Dartmouth's Tuck School of Business.
Mr. Slaughter finds that insourcing companies boost the U.S. economy in two ways: through their own operations and their interactions with domestic firms. Insourcing provided jobs for more than 5.4 million U.S. workers in 2002, or nearly 5% of total private-sector employment. These are good-paying jobs, too. Payroll came to more than $307 billion -- or 6% of all private-sector compensation. The average annual compensation at such companies was a tad over $56,000, or some 31% more than the average annual private U.S. compensation.
The internal operations of insourcing companies also contribute to research and development and to capital investment. Their share of private-sector R&D expenditures came to 14% (or $28 billion) and their share of capital investment topped 10% (or $112 billion). Just as eye-popping, insourcing companies accounted for 20% of U.S. goods exports.
Insourcing companies also purchase a high and rising share of their intermediate inputs from domestic suppliers -- in 2002, nearly 80 cents of every dollar, or $1.3 trillion. Just as important, these companies share technology and other knowledge with these U.S. suppliers to improve quality and reliability.
As Mr. Slaughter points out, the vitality of U.S. insourcing has depended upon several strengths -- talented workers across many occupations, deep capital markets and a culture that supports innovation and risk-taking.
However, and here's the worry, the past is not necessarily prologue. There's no guarantee that the world's best companies will continue to invest as much in the U.S. They now have plenty of other choices. China and India are the world's two most populous countries, have been growing rapidly, and have liberalized their trade and investment policies. Ditto for some of the newer members of the European Union.
And that's what makes some other data, through year-end 2003, a bit disturbing. Total flows of Foreign Direct Investment capital into the U.S. have collapsed since 2000 -- from a peak of $314 billion in 2000 to $29.8 billion in 2003. That's down 90%. No doubt some of that decline is a cyclical response to the giant surge in the late 1990s. But some of the falloff might be structural. In 2003, for the first time, China attracted more FDI than the U.S. ($53 billion). This comes as the U.S. share of world FDI inflows fell to only 5.3% in 2003, from 22.6% in 2000.
It's too early to say whether the attractiveness of the U.S. for business and capital is diminishing. But it's not too early to do what is necessary to maintain our status. That means pressing for more accountability in public schools, and trying to broaden the appeal of science and math. The U.S. remains heavily reliant on foreign-born scientists and engineers -- a virtue of immigration. But they are increasingly difficult to retain in America when opportunities for innovative R&D beckon in their homelands.
As Mr. Slaughter says: "Insourcing companies have contributed a lot to the U.S. economy, but the country is facing rising competition to attract and retain them." He's right.
--------------- Businesses Save in Wake Of Technology Bubble; Economy's Nature Changes By CHRISTINE RICHARD WSJ December 1, 2004; Page C3
If Microsoft Corp. is Santa Claus, spreading good cheer and dividends everywhere, then most other U.S. companies are Scrooge.
Even as Microsoft this week moves to distribute the largest dividend ever -- a stocking-bursting $32 billion -- most other companies are hoarding cash.
The evidence is writ large on balance sheets, which are swelling with short-term, liquid investments, turning companies away from their traditional role as users of capital.
Treasury Strategies Inc., a Chicago consultant, estimates that total corporate liquidity -- investments in short-term, marketable securities -- now tallies up to about $4.7 trillion, up from $3.6 trillion in 1999. Further, the consultant, which advises treasury-management officers and other clients, surveyed over 360 midsize and large, nonfinancial companies and found that over half consider themselves net investors rather than net borrowers. Net investors are those companies with more short-term investments than short-term debt outstanding, while net borrowers have more short-term debt than short-term investments.
"The cash is piling up," says John Lonski, chief economist with Moody's Investors Service in New York. Since 1999, corporate liquidity has increased by around 30%, Mr. Lonski says, citing Federal Reserve data.
Part of the explanation for the growing corporate cash pile is the changing nature of the U.S. economy, research firm Bridgewater Associates pointed out in a recent report: Industries that spend heavily on plants and equipment -- oil and gas, mining and metals, manufacturing -- make up a smaller share of the economy than they did even a few years ago. At the same time, Bridgewater said, "low-capital expenditures and heavy cash flow producing sectors, like the financial sector, have blossomed.
And Mr. Lonski of Moody's cites a reluctance by companies to spend heavily after the 1990s technology-shopping spree backfired. He also cites fear of a "China shock": Companies may be holding back on equipment and other capital because they fear they can't compete with low-cost facilities abroad.
So much for the convention of businesses as natural investors. In fact, that dynamic has been fading for years: Corporate savings now stand at an all-time high of nearly 2% of gross domestic product while the individual savings rate has fallen to record lows.
"There's no doubt that liquidity in financial markets is being fueled by businesses rather than consumers," says Anthony Carfang, a Treasury Strategies partner.
The majority of corporations surveyed see themselves as net investors because "they have cash that goes beyond what the capital structure needs for day-to-day operations," Mr. Carfang adds. "Companies reduced inventory, tightened accounts receivable and deferred spending on property, plant and equipment."
But companies probably aren't signaling a permanent reduction in their cash needs, Mr. Carfang believes, or they would be more likely to follow Microsoft's lead and distribute the cash to shareholders or use it to buy back stock and debt.
So what are treasurers and financial officers doing with all this money? According to the Treasury Strategies survey, 36% is in money markets; 21% in bonds and notes; 15% in commercial paper, "repurchase agreements" and certificates of deposit; and 9% in fixed-income and bond funds.