Thank you, Geoff (Colvin, editorial
director, Fortune magazine). I am flattered to speak before
such a distinguished audience.
My topic today is increasing globalization
and increasing roles of trade and foreign direct investment.
I want to make good many points, so I will come right to the
point.
First, some brief bona fides to establish
why I come before you today, and that the passion I expect
you will find in my remarks is based on experience. United
Technologies is the:
- 18th largest industrial company
in the U.S.
- $24 billion in revenues
- our principal products are
- jet engines (Pratt & Whitney)
- elevators (Otis)
- air conditioning (Carrier)
- helicopters (Sikorsky)
- automotive systems (UT Automotive)
- aerospace systems (Hamilton
Sundstrand)
- 55% of our revenues are outside
the U.S.
- more notably, we have 120,000 non-U.S.
employees vs. 70,000 U.S. employees
- we have presence in 1,900 cities
worldwide
- and two thirds of our new investment
is outside the U.S.
We live in a changing world today. I
will focus on three specific changes in these remarks.
First, the changing locus of wealth
generation. Second, accelerating roles of trade and foreign
investment. Third, open vs. closed societies.
First, some extravagantly general
statements. The world’s GDP today is $30 trillion, with 80%
of it created since World War II. The history of the post-War
half century is that 76% of wealth and incomes are in the
economically advanced societies of Japan, Western Europe,
Canada, and the U.S., but those same societies have only 14%
of the population. Incomes are consequently 19 times higher
in the advanced economies. Alternatively the other 86% of
the population (5 people out of 6 on the planet) make do with
less than one quarter of the incomes.
The startling fact is this will change:
DRI, the U.S. econometrics group, by 2017 sees more than half
of world output in emerging markets, up from less than a quarter
today. Alternatively, nearly two thirds of incremental GDP
will occur in emerging markets vs. one quarter today -- 11%
vs. 5% growth in nominal terms.
I should be precise here. For convenience,
the remarks divide the world’s economies into two parts: advanced
(U.S., Canada, Japan, Western Europe) and emerging (all other,
recognizing that this group includes some high income and
technically very advanced nations too).
What has driven the last decade and
will drive this future is increasing trade and foreign direct
investment: 11% trade growth last decade (compounded annually),
from $2.2 trillion to $6.3 trillion; FDI stock from $900 billion
to $2.7 trillion at historic cost; annual FDI flows compounding
at 14% annually to over $300 billion; and associated value
of output of all cumulative foreign direct investment is $7
trillion, more even than the sum of all trade.
Along with these explosions in trade
and investment are the collapse of closed societies and the
openings of borders among nations, both politically and economically.
The causes? Gorbachev and glasnost
(the word and the fact of opening, 40% of world’s population
emerged).
Second, the growing role of multinationals,
of what critics have called stateless corporations.
Third and growing role, in fact ascendance,
of economic liberalism: deregulation, privatization, diminishing
tariff and non-tariff barriers, primacy of markets and market
and competitive behavior.
There are critics on both sides,
what we might call economic nationalists on the advanced societies’
side and sovreigntists on the emerging societies’ side. Both,
I believe, are wrong.
The economic nationalists are the
“globalization with pauperization” group, in my country the
political extremists like Patrick Buchanan and Pat Choate,
and, in Europe, the isolationists like Sir James Goldsmith.
They espouse the notion that someone somewhere, as well or
even better qualified than you, is willing to work for less.
So, open borders mean everybody works for less, and we’re
all poor. Keep the wealth in, poverty out. Fortress America,
Fortress Europe. Nothing, I believe, could be more wrong or
short sighted.
The wealth generation in emerging
markets is going to happen whether we like it or not. Those
earlier figures are facts, and we can choose to participate
or not.
Go back to the DRI forecasts. $30
trillion global GDP goes to $107 trillion overall in 20 years,
but emerging markets will go from $7 trillion to $55 trillion.
We need to remember that we export
as well as import, and that exports create jobs, and characteristically
the best jobs.
Let’s be specific, and may I confine
myself to my own country, and its manufactured goods trade
with emerging markets, for a moment? We exported $190 billion
worth of such manufactured goods in 1995, and these supported
great jobs: wages averaging $24/hour, 18% above the American
average. We imported $240 billion of manufactured goods from
these same nations, with wages embedded in these averaging
$3/hour, one eighth of the American exports average.
The fact of the matter is that this
is a good deal for Americans. What we should want to do more
of is the export sector at $24/hour, not to reduce the imports
and generate consequently either low paid American jobs or
higher prices or both.
And remember that emerging economies
are going to expand nearly eight fold in nominal terms over
the next 20 years, with demand for American exports rising
correspondingly, while our own economy only slightly more
than doubles.
The second argument is that foreign
direct investment is profitable, and in the aggregate extremely
so, and out of this profitability we secure the wealth of
all Americans, the pensions of retirees, and even the current
period incomes of large numbers of knowledge work based employees.
The proof is in the results: the
overseas stock of U.S. foreign direct investment has grown
over the last 40 years from $12 billion to $712 billion, both
measured at historic cost, for a compound growth rate of 11%.
Not only did we fund this entirely out of earnings from foreign
investments, which would mean a rate of return equal to the
11% growth rate, but we had another $277 billion in cash income
repatriation, surplus to funding the new investments.
And the $712 billion in investment
stock is at historic cost, and arguably worth 3 to 4 times
that sum today. Without qualification whatever, this is one
of the best single classes of investments anywhere, ever.
The third argument is geopolitical
and, since I am neither a politician nor statesman, I will
be necessarily brief.
What United Technologies Corporation
is, instead, is an employer, and we learn one lesson very
well and very fast: stable and secure employment and a good
paycheck and a safe and challenging place to work and opportunities
for training and betterment for an employee and his family
are the fastest way to democratic, market economy, pro freedoms,
pro human rights behaviors anybody in the whole world can
fashion.
Recognizing that our company alone
employs more than 25,000 people in the former Soviet Union,
China, and the formerly Eastern and Central European satellites,
I make this statement with confidence and passion and experience.
Engagement and persuasion by leadership and example pays off
dramatically, and negative reinforcement by sanctions, punishment
and criticism, especially unilaterally, flatly does not.
Broaden this experience and realize
that more than 73 million people work for multinational companies
worldwide, a work force equal in size to the entire population
of the Philippines. About 30 million of these work outside
the parent companies’ home countries. American companies alone
employ more than seven million people outside the US.
These numbers will only increase:
72 of the 100 largest international corporations surveyed
by the UN planned to increase FDI, and presumably foreign
employment, in the next five years; the remaining 28 expected
to maintain current FDI levels. None projected a decline.
We can also note that foreign direct
investment is a growing source of gross fixed capital formation.
FDI flows now account for nearly 10% of gross fixed capital
formation in all emerging markets, but the average masks the
stunning numbers among Asia’s fastest growing economies: 20%
in Malaysia, 25% in Singapore and, on a much larger scale,
25% in China, the 1990s model of a foreign direct investment
driven economy.
Some host countries have concerns
with the impacts of foreign investment, and these give rise
to restrictions, typically of local ownership or control,
on foreign investment. These are, I believe, ill founded.
Let’s consider, first, what control
actually means. There are many American companies doing business
in America. These are subject to the laws of our nation (just
as they would be if foreign owned), they pay taxes (just as
they would if they were foreign owned), and they are subject
to the regulations of the Environmental Protection Agency
and the Occupational Safety & Health Administration (just
as they would be if they were foreign owned). In fact, with
certain notable exceptions, they can be entirely foreign owned,
right now, period. And most informed Americans reject quickly
the few residual restrictions we have on foreign ownership,
for example, the limitation to less than 25% of the voting
control for American flag airlines, and comparably for electric
power producers. After all, where are the assets going to
go?
The same arguments apply in emerging
markets. What nations care about is the intellectual property
of the nation, and this is resident in the minds and skills
of the people. Arguably, some entrepreneurial returns of the
enterprise belong to a nation too, but never confuse this
with control.
Otis and Carrier, to name two big
multinationals I know well, operate in countries all over
the world. They operate, not untypically, with local minority
partners, entirely content to share in the local entrepreneurial
returns of a global enterprise and to leverage off that company’s
global scale and R&D and knowledge.
The alternative is, frankly, local
control of a necessarily weaker enterprise. In moments of
impatience, I observe that if control -- in some abstract
sense greater than or more important than that granted by
the power of law, the power to tax, the power to set environmental
and employee health and safety standards, to set product safety
standards -- is so important, then go and buy control of the
global market leader on whatever stock exchange it happens
to be listed. Control is an abstract and a false theory, with
no practicable meaning in everyday life.
In most cases, multinationals set
higher standards in local economies. They characteristically
pay more and train more. Many, my own included, have gone
to globally uniform standards for environment, health and
safety.
In this last area, we flatly rebut
and repudiate theories held by some environmentalists on both
sides of the advanced/emerging societies divide, that multinationals
export environmentally objectionable activities to less regulated
societies.
In our own case, to name one, our
policy and practice is clear and unqualified: the higher of
U.S. or local law and regulation. And in a number of our foreign
plants, including in emerging markets, our environmental,
health and safety performance exceeds that in our plants back
home.
To close these remarks, foreign direct
investment is the most powerful force in our 21st century
economic world. Notably, and as of just the last two or three
years, its production value globally exceeds that of all trade,
the preoccupations with trade of politicians and the media
to the contrary notwithstanding. And this foreign direct investment
production value is growing half again faster than trade,
and the latter is itself growing half again faster than world
GDP.
There are obligations on us, however,
to ensure the continued success of this globalizing agenda.
The first is no more than corporate good citizenship in host
countries, compliant with local law or with higher international
standards where local laws are still in formation or transition:
laws and regulations on corruption, cartelizing behavior and
monopolistic practices; self dealing and securities and other
kinds of fraud; ensuring environmental compliance, safe and
healthy work places, products compliant with international
codes and standards; and trained and effective work forces.
Naive idealism? As the employer of
more than 50,000 people in emerging markets and nations, I
say flatly “no,” and you will find most other big multinationals
comparably proud to stand on their records. Like virtually
everything else that we do, the good practice is the profitable
practice.
We have one other obligation back
home, and this is the right point of emphasis on which to
conclude. The equations are simple, and I will speak for convenience
as they apply to America.
We are one of the higher, if not
the highest, standard of living nations in the world. We are
comparably and automatically high cost and especially high
wage cost. As the high wage economy, we can close our borders
and keep low wage work, or we can open our borders, let the
low wage work migrate, and seek and provide higher value added
work that will sustain higher wages. The latter requires education
and at higher degree levels, especially for the population
already in the work place.
I note these statistics: Americans
21 years of age and under spend 70 billion hours in classrooms
annually. Americans over 21, far greater in number, spend
4 billion hours in classrooms.
Employer sponsored education at the
college and advanced degree level is a powerfully effective
solution to maintaining employment at home at increasing wage
levels, in the face of borders remaining economically open.
To name one large domestic employer,
again United Technologies Corporation, we made our college
and advanced degree tuition reimbursement program a good deal
more attractive a year ago, with the startling and great result
that employees enrolled in college or higher level courses
jumped 48% in one year to a total of one employee in 10, roughly
twice the national average, and we’re on our way to one employee
in five, roughly four times the national average.
This is how employees at home, and
indeed all over the world, will face the future with confidence
and vigor. We are at an optimistic time in our world: the
barriers between nations are down, economic liberalism is
decidedly afoot and proven to be sound, trade and investment
are soaring, income disparities between nations are narrowing,
and wealth generation globally is at record high levels, and
I believe likely to remain so.
Thank you for your attention and,
again, Geoff, for the opportunity to appear here.
