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short essays and reports on the economic issues of the day
2008 ■ Number 14

Multinationals Make the Most of IT
Silvio Contessi
he U.S. dollar has depreciated by more than 26 percent in trade-weighted terms since its peak in 2002.
The lower relative prices paid by foreigners for U.S.
goods and services are expanding exports and helping reduce
the current account deficit. At the same time, however, there
is concern over a potential “firesale” of U.S. firms—i.e., a
case in which U.S. firms become so cheap that foreign
investors trigger a new wave of international takeovers.
Although economic theory has no clear-cut way to forecast the welfare effects of international changes of ownership or entry of new foreign firms, empirical research can
shed light on how multinational corporations have contributed to aggregate productivity. And wages—as discussed
previously in this publication1—tend to track productivity.
Thus, understanding how multinationals affect productivity growth can help to evaluate the impact of foreign acquisitions on the U.S. economy.
U.S. labor productivity (output per hour) has increased
at an average annual rate of 1.84 percent between 1977 and
2006—faster than most countries, at least since 1995. To help
find the source of this impressive productivity, we can separate U.S. gross domestic product and productivity growth
into that produced by exclusively domestic firms and that
produced by multinational firms (i.e., foreign firms with
U.S. production units and U.S. firms with foreign production units). The results of a recent study2 show that private
multinational nonfarm, nonfinancial firms contribute only
40 percent of the output of nonfinancial corporations but
more than 75 percent of the increase in labor productivity
between 1977 and 2000. Moreover, all of this new productivity in nonfinancial corporate sectors in the late 1990s
can be traced back to multinationals.
How have such large productivity gains been possible?
Various studies suggest that the productivity advantage of
multinationals is caused by technological and organizational
advantages that are specific to these firms, rather than to
the country in which they operate. Although similar technologies are available at approximately the same prices to
both multinational and non-multinational firms, the man-


agement structure of multinationals allows them to use new
technologies more efficiently, particularly information
technologies (IT). The largest productivity advantages are
recorded in sectors that make substantial use of IT, such
as retail and wholesale, and sectors with superior people
management. As the authors of one of these studies put it:
“It ain’t what you do...but the way you do IT.”3
Hence, even though the ownership of some companies
may be transferred abroad because of a “firesale” effect, these
firms, along with U.S. multinationals, provide an important
contribution to U.S. productivity growth and ultimately to
the growth of wages, particularly in IT-intensive sectors. ■



Corrado, C.; Lengermann, P. and Slifman, L. “The Contribution of MNC’s to
U.S. Productivity Growth, 1977-2000,” in M. Reinsdorf and M. Slaughter, eds.,
International Flows and Invisibles: Trade in Services and Intangibles in the Era of
Globalization. Chicago: University of Chicago Press, 2008 (forthcoming).


Bloom, Nicholas; Sadun, Raffaella and Van Reenen, John. “Americans Do I.T.
Better: US Multinationals and the Productivity Miracle.” NBER Working Paper
No. 13085, National Bureau of Economic Research, 2007.

Share of GDP


Multinational firms



Domestic firms



Financial firms
Nonfinancial firms





Growth of U.S. Labor Productivity

Multinational Firms
Domestic Firms
Financial Firms
Nonfinancial Firms



Views expressed do not necessarily reflect official positions of the Federal Reserve System.