December 2, 2016 2:23PM

The Carrier Approach Will Fail to Attract or Retain Investment and Production in the United States

Media and social media have been percolating – mostly with invective – over President-elect Trump’s “deal” to keep Carrier and its 1,000 jobs from moving to Mexico.  I am among the many critics of this ad hoc, interventionist approach to retaining or attracting companies to perform value-added, job-creating activities in the United States.
But there is a broader lesson in all of this, which seems to be getting overlooked: The United States (and the 50 states, individually) is competing with the rest of the world to attract and retain investment in value-added activities – factories, research centers, laboratories, etc. And, in that competition, public policies are on trial.
The revolutions in communications and transportation have made global capital mobile. The proliferation of transnational supply chains and cross-border investment means that businesses – entrepreneurs and other value-creators – have options like never before. Investment and production location decisions are determined by a variety of factors, including: the size of the market, access to transportation networks, wages and skills of the workforce, whether there is healthy respect for the rule of law, stability of the political and economic climates, perceptions of corruption, the magnitude and impact of regulations and taxes, trade policies, immigration policies, energy policies, and whether the general policy environment is conducive to running a successful business.

The United States has long been the premiere destination for foreign direct investment. FDI in U.S. manufacturing operations in 2015 reached $1.2 trillion – by far, the most FDI in any country’s manufacturing sector (and approximately double the amount in China’s manufacturing sector).  But, whereas the United States accounted for 39 percent of the world’s stock of FDI in 1999, today it accounts for about 21 percent. The United States has, to some extent, lost its relative luster as a place to set up shop.
One reason for this is that the rest of the world has come on line – more countries have achieved greater stability, better education levels, work-force skills, transportation systems, etc – so there are alternatives for investment that didn’t exist 20 years ago. All of that is a good news. But a second reason reflects poorly on the United States. To some extent, foreign and U.S. investment is being chased from U.S. shores because of a relatively declining environment.  In recent years, the regulatory environment has become more restrictive; corporate tax rates in the United States are higher than most other countries (certainly, highest among OECD countries); there has been a prolonged period of regime uncertainty with respect to trade, energy, immigration, and other policies.  Perceptions of the existence of corruption and crony capitalism are on the rise.  And companies are often berated and threatened by policymakers (including presidential candidates) for their choices – to perform some of their operations abroad or to keep their profits off-shore, rather than repatriating them at near confiscatory rates, to give a few examples.
Many companies worry about these threats. Sometimes they react by making “political considerations” a more important determinant of their investment/production location decision.  Carrier may have done this, worrying about repercussions.  Certainly, a strong case can be made that General Electric’s decision to bring jobs back from Mexico and China a few years ago, after President Obama made a pitch to U.S. companies to “resource” in the United States, had something to do with expectations of political dividends.
One major takeaway is that political considerations become more important as the size of government increases.  Instead of investing in economic activity in the Rust Belt or the Heartland, companies are incented to invest on K Street because the political investments pay higher returns.  This is among the greatest threats that worry limited government advocates. 
But the main point here is that companies have choices and their decisions to locate in Indiana or Mexico, for example, are influenced by policy.  Carrier is a big consumer of steel sheet and other steel products in its manufacturing operation.  Perhaps the fact that there are numerous and increasing trade restrictions on imported steel has something to do with their original decision to move to Mexico.
Instead of threatening companies with repercussion for outsourcing – hell, they can pick up and leave altogether – or inducing them to stay with tax holidays and other subsidies, U.S. policy in the Trump administration and beyond should be to make sure the United States ticks the most important boxes when companies compare it to other investment location alternatives.