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Wednesday, September 11, 2019
Monday, September 9, 2019
Is Stakeholder Capitalism Really Back? [feedly]
I post this not so much to ask the sincerity of the Biz Roundtable, but to note major progressive economists (like Stiglitz) strong interest in reforms in corporate governance over nationalizations or takeovers, or even antitrust action, in several economic sectors, esp, too big to fail firms.
https://www.project-syndicate.org/commentary/how-sincere-is-business-roundtable-embrace-of-stakeholder-capitalism-by-joseph-e-stiglitz-2019-08
We will have to wait and see whether the US Business Roundtable's recent statement renouncing corporate governance based on shareholder primacy is merely a publicity stunt. If America's most powerful CEOs really mean what they say, they will support sweeping legislative reforms.
NEW YORK – For four decades, the prevailing doctrine in the United States has been that corporations should maximize shareholder value – meaning profits and share prices – here and now, come what may, regardless of the consequences to workers, customers, suppliers, and communities. So the statement endorsing stakeholder capitalism, signed earlier this month by virtually all the members of the US Business Roundtable, has caused quite a stir. After all, these are the CEOs of America's most powerful corporations, telling Americans and the world that business is about more than the bottom line. That is quite an about-face. Or is it?
The Trump Narrative and the Next Recession
ROBERT J. SHILLER thinks an economic downturn could upend a public story that has persisted and grown for nearly 50 years.
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The free-market ideologue and Nobel laureate economist Milton Friedman was influential not only in spreading the doctrine of shareholder primacy, but also in getting it written into US legislation. He went so far as to say, "there is one and only one social responsibility of business – to use its resources and engage in activities designed to increase its profits."
The irony was that shortly after Friedman promulgated these ideas, and around the time they were popularized and then enshrined in corporate governance laws – as if they were based on sound economic theory – Sandy Grossman and I, in a series of papers in the late 1970s, showed that shareholder capitalism did not maximize societal welfare.
This is obviously true when there are important externalities such as climate change, or when corporations poison the air we breathe or the water we drink. And it is obviously true when they push unhealthy products like sugary drinks that contribute to childhood obesity, or painkillers that unleash an opioid crisis, or when they exploit the unwary and vulnerable, like Trump University and so many other American for-profit higher education institutions. And it is true when they profit by exercising market power, as many banks and technology companies do.
But it is even true more generally: the market can drive firms to be shortsighted and make insufficient investments in their workers and communities. So it is a relief that corporate leaders, who are supposed to have penetrating insight into the functioning of the economy, have finally seen the light and caught up with modern economics, even if it took them some 40 years to do so.
But do these corporate leaders really mean what they say, or is their statement just a rhetorical gesture in the face of a popular backlash against widespread misbehavior? There are reasons to believe that they are being more than a little disingenuous.
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The first responsibility of corporations is to pay their taxes, yet among the signatories of the new corporate vision are the country's leading tax avoiders, including Apple, which, according to all accounts, continues to use tax havens like Jersey. Others supported US President Donald Trump's 2017 tax bill, which slashes taxes for corporations and billionaires, but, when fully implemented, will raise taxes on most middle-class households and lead to millions more losing their health insurance. (This in a country with the highest level of inequality, the worst health-care outcomes, and the lowest life expectancy among major developed economies.) And while these business leaders championed the claim that the tax cuts would lead to more investment and higher wages, workers have received only a pittance. Most of the money has been used not for investment, but for share buybacks, which served merely to line the pockets of shareholders and the CEOs with stock-incentive schemes.
A genuine sense of broader responsibility would lead corporate leaders to welcome stronger regulations to protect the environment and enhance the health and safety of their employees. And a few auto companies (Honda, Ford, BMW, and Volkswagen) have done so, endorsing stronger regulations than those the Trump administration wants, as the president works to undo former President Barack Obama's environmental legacy. There are even soft-drink company executives who appear to feel bad about their role in childhood obesity, which they know often leads to diabetes.
But while many CEOs may want to do the right thing (or have family and friends who do), they know they have competitors who don't. There must be a level playing field, ensuring that firms with a conscience aren't undermined by those that don't. That's why many corporations want regulations against bribery, as well as rules protecting the environment and workplace health and safety.
Unfortunately, many of the mega-banks, whose irresponsible behavior brought on the 2008 global financial crisis, are not among them. No sooner was the ink dry on the 2010 Dodd-Frank financial reform legislation, which tightened regulations to make a recurrence of the crisis less likely, than the banks set to work to repeal key provisions. Among them was JPMorgan Chase, whose CEO is Jamie Dimon, the current president of the Business Roundtable. Not surprisingly, given America's money-driven politics, banks have had considerable success. And a decade after the crisis, some banks are still fighting lawsuits brought by those who were harmed by their irresponsible and fraudulent behavior. Their deep pockets, they hope, will enable them to outlast the claimants.
The new stance of America's most powerful CEOs is, of course, welcome. But we will have to wait and see whether it's another publicity stunt, or whether they really mean what they say. In the meantime, we need legislative reform. Friedman's thinking not only handed greedy CEOs a perfect excuse for doing what they wanted to do all along, but also led to corporate-governance laws that embedded shareholder capitalism in America's legal framework and that of many other countries. That must change, so that corporations are not just allowed but actually required to consider the effects of their behavior on other stakeholders.
Joseph E. Stiglitz, a Nobel laureate in economics, is University Professor at Columbia University and Chief Economist at the Roosevelt Institute. He is the author, most recently, of People, Power, and Profits: Progressive Capitalism for an Age of Discontent (W.W. Norton and Allen Lane).
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Private Equity Tries to Protect Another Profit Center [feedly]
Private Equity Tries to Protect Another Profit Center
https://prospect.org/article/private-equity-tries-protect-another-profit-center
Eileen Appelbaum is co-director at the Center for Economic and Policy Research. Rosemary Batt is the Alice Cook Professor Women and Work at Cornell University. They are the co-authors of the book "Private Equity At Work: When Wall Street Manages Main Street," published by the Russell Sage Foundation.
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https://prospect.org/article/private-equity-tries-protect-another-profit-center
Eileen Appelbaum and Rosemary Batt
The American Prospect, September 9, 2016
Surprise medical billing has quickly become a small but critical flashpoint in health care reform. Because doctors and hospitals negotiate separately with insurance companies over reimbursement rates, it's possible for a patient's insurance to cover hospital charges while failing to cover the fees of some doctors in the hospital who are "out of network." Patients who visit an emergency room (ER) or are admitted to an in-network hospital by an in-network doctor may find that some of the professionals who treat them are not covered by their insurance. That is because hospitals have outsourced ER, anesthesiology, radiology, or other specialized services to outside physician practices or staffing firms. Patients often find themselves on the hook for thousands, or even tens of thousands of dollars in surprise medical bills.
Twenty-five states have passed laws with limited protection for patients from out-of-network bills, usually for emergency room or urgent-care services; 20 more states are considering legislation. But these laws do not cover self-insured employer plans, which can only be regulated by the federal government. These plans cover an estimated 61 percent of workerswho have private insurance, up from 44 percent 20 years ago. That means Congress must step in to protect insured patients from unfair and unexpected medical charges.
And that puts lawmakers up against the powerful and influential private equity industry, which plays a major role in supplying hospitals with physicians. They have aggressively bought up large national staffing firms or "physician practice management" (PPM) companies, as well as emergency providers that hospitals and other health organizations have outsourced, such as ground and air ambulance companies. And they are using the typical tools to protect their investments from a legislative onslaught: lobbying cash, dark-money front groups, and allies in Congress pushing loopholes and half measures.
The Role of Private Equity: Driving Market Concentration
Private equity funds use substantial debt to acquire doctors' practices through leveraged buyouts, and to finance mergers of practices into large staffing firms. Emergency medical and specialist practices are a prime buyout target, because patients who need emergency care cannot haggle over price, and third-party payers guarantee payment. This satisfies the private equity business model of promising "outsized returns" to investors.
Private equity firms buy up small specialty physician practices that have begun to consolidate and "roll them up" into umbrella organizations to gain local, regional, and ultimately national market power. Researchers at the Kellogg School of Management found that most individual acquisitions were below the dollar threshold that would have required the transaction to be reported to antitrust regulators.
The new private equity–owned companies evade state laws that prohibit nonmedical ownership of doctors' practices by setting up "physician management" or "management services" organizations, in which the physician group retains ownership of the practice itself and pays a fee to the private equity firm that owns the management company. But while doctors maintain autonomy over medical decisions, they also admit they are likely to be pressured to achieve higher patient volumes and revenues. They also give up any say over other management practices, such as the company's billing practices.
In a typical contract, physicians receive a large up-front cash payment, which is calculated based on a multiple of the group's EBITDA (earnings before interest, taxes, depreciation, and amortization)—with recent contracts reaching 12 times EBITDA. In addition, the doctors pay for an equity investment in the company by taking a large salary cut—up to 30 percent of their compensation. The payoff for the physicians is a "liquidity event" a few years later, with large payouts to the investors, including the doctors. The deal is particularly attractive to senior doctors who are nearing retirement, although that leaves the more junior doctors saddled with lower pay and greater uncertainty.
The Biggest in the Business
Private equity firms have accelerated buyouts of physician practices in the last decade. Leaders in this market include mega-PE companies Kohlberg Kravis Roberts (KKR) and the Blackstone Group, which own the two largest physician staffing firms in the country, Envision Healthcare and TeamHealth. These two firms have cornered 30 percent of the market for outsourced doctors, and collectively employ almost 80,000 health care professionals that staff hospitals and other facilities across the U.S.
Envision Healthcare, formed in 2005, went private in October 2018 in a leveraged buyout to KKR. Its sprawling organization supplies doctors in 774 physician practices to hospitals and ambulatory surgical centers throughout the United States. Its emergency physician staffing company, EmCare Holdings, provides ER doctors, anesthesiologists, radiologists, hospitalists, and other specialists covering intensive care, medical, neonatal, pediatrics, psychiatric, skilled nursing, rehabilitation, and other inpatient units. Its outpatient ambulatory surgical arm (AMSURG) provides trauma and acute care general surgery in 260 facilities in 35 states.
TeamHealth was established in 1999 by a consortium of private equity firms as a platform for a physician staffing company. The Blackstone Group acquired it in 2005 in a leveraged (secondary) buyout. Blackstone returned TeamHealth to the public market in 2009 via an IPO, but then took it private again for $6.1 billion in February 2017. With passage of the Affordable Care Act in 2010, TeamHealth anticipated revenue growth via bundled payments and started buying up a series of ER and physician specialist practices—51 companies between 2010 and 2016. It also bought IPC, a hospital management services company, allowing it to diversify across a wider range of care areas.
Two of the three air transport companies that together control two-thirds of this U.S. market are private equity–owned—Air Medical Group Holdings (AMGH) and Air Methods. KKR owns AMGH, a leading operator of medical helicopters, and merged it in 2017 with American Medical Response, the largest provider of ground ambulance services in the U.S. Air Methods, sold in 2017 to private equity firm American Securities, reported that it accounts for nearly 30 percent of total U.S. air ambulance revenue. Its profit increased sevenfold from 2004 to 2014.
Our recent paper at the Institute for New Economic Thinking goes into more detail on these companies.
How Private Equity Drives Surprise Billing
Surprise billing has increased substantially because hospitals, under financial pressure to reduce overall costs, have turned to outsourcing expensive and critical services to third-party providers as a cost-reduction strategy. In an April 2019 survey, 41 percent of Americans reported they or a family member received an unexpected medical bill, with half of them attributing that bill to out-of-network charges.
Rates of surprise billing are highest among patients treated in an emergency room. In a review of 12.6 million ER visits by insured patients between 2010 and 2016, Stanford University researchers found that by 2016, 42.8 percent of all ER trips resulted in a surprise medical bill.
A team of Yale University health economists examined what happened when private equity–owned companies EmCare (part of Envision) and TeamHealth—the two largest emergency room outsourcing companies—took over the emergency departments at hospitals. An EmCare takeover translated into an 82 percent increase in charges for caring for patients. EmCare's egregious surprise medical billing practices have resulted in a congressional investigation headed by former Missouri Senator Claire McCaskill, lawsuits from shareholders, and court actions involving Envision and UnitedHealth Group, the largest U.S. insurer.
Blackstone's TeamHealth has taken a different approach to billing that has nonetheless led to higher physician charges. It uses the threat of sending high out-of-network surprise bills for ER doctors' services to an insurance company's covered patients to gain high fees from the insurance companies as in-network doctors. TeamHealth emergency physicians typically would go out of network for a few months, then rejoin the network after bargaining for higher in-network payment rates—on average 68 percent higher than in-network rates received by the previous ER doctors. These practices contribute to higher health care costs—and ultimately higher insurance premiums for everyone—even if they do not directly lead to surprise medical bills. UnitedHealth, the nation's largest insurance company, is pushing back on this by reducing TeamHealth's higher in-network reimbursements by up to 50 percent.
Patients in a hospital may encounter out-of-network physicians among ER doctors, specialties such as radiologists and anesthesiologists, assistants to a procedure, or hospitalists who check in on a patient. In a case that drew media attention, the patient's own in-network surgeon billed $133,000 for his services, but accepted a fee of $6,200 negotiated with the insurance company. The out-of-network assistant surgeon, however, sent a bill for $117,000 and is seeking full payment of his charges.
Surprise ambulance bills are even more common, occurring 86 percent of the time when an ambulance took a patient to the ER. A patient in an emergency situation who requires an ambulance to get medical help doesn't get to choose the ambulance company. The result is another perfect opportunity for surprise medical bills, and a perfect target for unscrupulous investment funds.
In one study of air ambulance charges, Johns Hopkins University researchers found extremely large rate increases between 2012 and 2016. In 2016, these charges ranged from four to nine times higher than Medicare payments for air ambulance services. Some of the largest providers had among the highest charges. A 2019 study by the Government Accountability Office (GAO) found that the average cost of an air ambulance is over $36,000, and that 69 percent of the companies studied were out of network for the patient, who ended up being billed for most of the charge.
Congress Steps In—and Private Equity Fights Back
More than three-quarters of Americans want the federal government to protect them from surprise medical bills, with 90 percent of Democrats, 75 percent of independents, and 60 percent of Republicans supporting federal legislation. While everyone—physicians, corporate staffing firms, hospitals, insurance companies, and patient advocates—purports to agree that insured patients should not be required to pay more than their plan requires for in-network doctors, questions remain about how proposed solutions will affect doctors' pay, physician staffing firms' revenues and profits, insurance company payouts, health care costs, and patients' premiums.
At the beginning of the summer, it appeared that Congress would act to protect consumers from surprise medical bills, with the introduction in the Senate of the Lower Health Care Costs Act (S. 1895) by the Health, Education, Labor, and Pensions (HELP) Committee, and in the House, the No Surprises Act (H.R. 3630), by the House Energy and Commerce Committee. The main framework for these bills involves paying out-of-network doctors a rate "benchmarked" to rates negotiated with in-network doctors—the median in-network payment for this service or, alternatively, 125 percent of the Medicare payment.
Employers, patient advocates, and insurance companies favor this approach, which restricts how high an out-of-network doctor's fee can go, restrains the growth of health care costs, and limits payouts that insurers can be made to pay. Major insurance companies and associations have formed the Coalition Against Surprise Medical Billing, which includes the American Benefits Council, America's Health Insurance Plans, America's Physician Groups, Blue Cross and Blue Shield, and the ERISA Industry Committee to lobby for benchmarking out-of-network doctors' charges.
Not surprisingly, this solution is opposed by specialist physician practices, and by large physician staffing companies that want to continue to charge more than the in-network fees to patients. These companies, some backed by private equity firms, are lobbying intensively for a second option that would allow doctors to seek a fee higher than the benchmark via an arbitration process—in the belief that most settlements would ensure higher physician pay and higher company revenues and profits. Individual patients would no longer receive surprise medical bills, but arbitration awards would mean higher health care costs and would drive up premiums, deductibles, and co-pays for everyone.
Physicians for Fair Coverage, a private equity–backed group lobbying on behalf of large physician staffing firms, launched a $1.2 million national ad campaign in July to push for this second approach. Their argument is that insurance companies have created the problem of surprise medical bills by "forcing emergency room doctors, radiologists, anesthesiologists and other providers out of their networks." The reality is that hospitals are outsourcing ERs, anesthesiology and radiology departments, and specialized care units to cut costs. Large physician staffing firms have positioned themselves to supply doctors to fill these positions or take over these units altogether.
The opposing camps lobbied for their positions over the summer, as seen in the jockeying over the House Energy and Commerce Committee's No Surprises Act. It was supported by Committee Chair Frank Pallone (D-NJ) and ranking member Greg Walden (R-OR) and would have benchmarked fees paid to out-of-network doctors to the negotiated rates paid to in-network providers. But in July, Representatives Raul Ruiz (D-CA) and Phil Roe (R-TN) introduced the arbitration amendment, amid intense lobbying from large corporate and investor-owned physician staffing firms.
Pallone and Walden accepted the amendment because it allowed arbitration only in special cases, and required the arbitrator to use negotiated rates—not provider charges—when deciding on disputes over payment. Supporters of the original bill were unhappy. As Loren Adler, associate director of the USC-Brookings Schaeffer Initiative for Health Policy, noted, the amendment is a giveaway to private equity interests that will have adverse effects on patients, employers, and taxpayers—even if the arbitration option's limited scope would limit potential harm. As the bills move forward, compromise on including limited use of arbitration panels in the legislation may be necessary in order to win passage.
Wall Street analysts have been closely monitoring these debates, given the substantial debt funding that private equity firms rely on to create large physician staffing firms, such as KKR's Envision Healthcare. Investors fear that any congressional deal that limits what out-of-network doctors are paid will seriously jeopardize Envision's business model, which relies on collecting excessive fees from unsuspecting patients who are hit with surprise medical bills. Envision's creditors are concerned that without the ability to charge these high fees, the company will have difficulty repaying the debt it took on as part of the financing when KKR bought it out for $9.9 billion in 2018. The value of Envision's $5.4 billion loan due in 2025 tumbled to 87.8 cents on the dollar at the end of July 2019 and to 77.3 cents by the end of August. As Envision's creditors are well aware, the company's solvency and KKR's returns are threatened by legislation that protects patients.
By midsummer, an aggressive "dark money" campaign emerged that many believe is intended to derail any legislation. In July and August, Smart Media Group subsidiary Del Cielo Media poured $13 million into TV, social media, and radio ads on behalf of a mystery group, Doctor Patient Unity, in the home districts of 13 Republican and Democratic senators who are up for re-election. The ads oppose any limits on what doctors can charge and accuse insurance companies of not wanting to pay their fair share of doctors' fees.
Congressional staff are concerned that the big-money displays will intimidate legislators who may fear even larger expenditures to unseat them if they support any of the legislative proposals under consideration. This could thwart the passage of consumer protection measures altogether, leaving patients on the hook for large, unexpected medical bills—a continuation of current practices that have enriched PE-backed and other corporate physician staffing and management services firms.
The debate over surprise medical bills has been framed as doctors who only want to be paid for their lifesaving services and insurance companies that don't want to pay them fairly. Viewed that way, it's a debate that insurance companies are sure to lose. But these are not the true protagonists. Private equity firms are buying up specialty doctors' practices at an alarming rate because surprise medical bills allow them to extract high payments for medical care from patients and/or insurance companies. It's private equity whose interests are opposed to those of insurance companies. And insurance companies which, in defending themselves against exorbitant payments to these doctors, are also acting to hold down health care costs and health insurance premiums for consumers.
Now, even as compromise bills appear ready to advance, the question is whether politicians will stand up to the multimillion-dollar dark-money campaign launched in the summer. Will intense negative lobbying scuttle attempts to rein in surprise billing? Patients hit with these bills will be the biggest losers, but everyone will lose as health care costs and insurance premiums rise. Whoever is behind this campaign, private equity firms like Blackstone, KKR, and Welsh, Carson, Anderson & Stowe will be the big winners. PE's role is hidden from view, and the campaign may well succeed in diverting blame for unexpected and outrageous charges to the insurance companies.
Eileen Appelbaum is co-director at the Center for Economic and Policy Research. Rosemary Batt is the Alice Cook Professor Women and Work at Cornell University. They are the co-authors of the book "Private Equity At Work: When Wall Street Manages Main Street," published by the Russell Sage Foundation.
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Wednesday, September 4, 2019
Urgent message from Gary Hoffman Esq.
Hello dear,
Hoffman & Associate Chambers is conducting a standard process investigation and we would like you to assist with this independent inquiry.
My name Gary Hoffman. I am an attorney at law, private investigator and also a reunion counselor/analyst. This investigation and inquiry involves my client, who shares the same last name with you and also the circumstances surrounding deposited amount in one of the banks here in USA prior to his untimely death.
My client, his wife and only daughter died in an auto crash in June 2017 and no successor in title over the investments made here in London. The essence of this communication with you is to present you as the heir/next of kin to the deceased so that the deposited amount USD 7,500,000 {Seven Million Five Hundred Thousand USD} can be paid to you as the successor hence I cannot find any of the relatives of the deceased.
The bank has given me an ultimatum as his lawyer to present the next of kin within 14 days otherwise his assets will be moved to the government treasury. I want us to utilize this opportunity hence I have tried to locate any of the relatives but to no avail. I will provide all relevant legal documents to facilitate the transfer of the money to you and all I need is your full cooperation. If you are interested in this business, please let me know immediately so that I can give you more information as to how this business will be completed. Kindly send the following information if you are interested in this transaction:
1. Your full name
2. Contact address
3. Contact telephone and mobile numbers
4. Age and occupation.
I look forward to your reply.
Gary Hoffman.
Principal Partner, Hoffman & Associate Chambers.
Trump taunts China as trade war rattles economy [feedly]
Trump taunts China as trade war rattles economy
https://www.asiatimes.com/2019/09/article/trump-taunts-china-as-trade-war-rattles-economy/
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https://www.asiatimes.com/2019/09/article/trump-taunts-china-as-trade-war-rattles-economy/
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Vox/CEPR: The IT revolution and the globalisation of R&D | VOX, CEPR Policy Portal
https://voxeu.org/article/it-revolution-and-globalisation-rd#.XW_jfyBtVNM.gmail
Despite rising globalisation after WWII, corporate R&D spending remained highly concentrated in the same small group of advanced industrial countries that dominated it for decades – until recently. Since the 1990s, the distribution of US multinational R&D investment across countries and industries has shifted dramatically toward non-traditional R&D destinations like China, India, and Israel (Kerr and Kerr 2018). Today's leading US multinationals have developed a global innovation system that increasingly relies on emerging market talent to propel innovation for the global frontier.
Why these emerging markets – and why now? In new research, we argue that the rising importance of software and information technology as drivers of innovation and new product development across a wide range of industries led to a shortage in software/IT-related human capital within the US (Branstetter et al. 2018a). This has driven US multinationals abroad in a search for talent.
To support this argument, we show:
- the extent of globalisation of R&D by US MNCs,
- the growing importance of software and IT in firm innovation across industries,
- the rise of new R&D hubs, and
- the differences in the type of activity done there.
We also document that IT-intensive and software-intensive firms were more likely to conduct R&D abroad, and that foreign R&D is most pronounced in IT-intensive and software-intensive countries.
The increase in demand for an IT and software workforce
Software and IT patents have been growing in importance since the 1990s; Figure 1 shows the share of all USPTO patents that are based on software. The share grew from 5% in 1990 to nearly 40% by 2015, and from 10% to 45% for IT. This growth in the IT intensity of invention was explored by Arora et al. (2013) and Branstetter et al. (2018b), who interpret the rise in IT intensity as the emergence of a 'general purpose technology' in new production development that applies across manufacturing industries.
The advent of powerful microprocessors, memory chips, sensors, and digital control systems has enabled new generations of devices to become smarter and more responsive to their environment. Improvements in product functionality can often be achieved through better software alone. This has made IT, and especially software engineering, more central to success in innovation and new product development, increasing demand for IT and software engineering talent.1
Figure 1 The growing IT/software intensiveness of US MNC invention
Importing talent from abroad
According to the National Survey of College Graduates, the IT/software workforce – made up of programmers, computer scientists, and electrical engineers – grew by 112% between 1993 and 2010, while the overall workforce grew by 70%. The foreign share of IT workers grew from 16% in 1993 to 32% by 2010. This phenomenon has been documented by Bound et al. (2015). These changes suggest an extremely large increase in demand that was partially met by importing talent from abroad, through mechanisms like the H-1B programme.
Wage comparisons provide evidence that the foreign talent supply did not meet demand in the software and IT sectors. Figure 2 shows average compensation per worker for US multinationals across different countries, using publicly available Bureau of Economic Analysis data [https://www.bea.gov/iTable/index_MNC.cfm].
Figure 2 Average compensation per employee at US MNC foreign affiliates
Source: Bureau of Economic Analysis.
For average compensation per employee in aggregate, the US is in the middle of the country distribution. If we consider IT-specific industries2 like Electrical Equipment Appliances and Components, or Computers and Electronic Products, however, the average compensation per employee at US headquarters was much higher than pay for employees at a foreign affiliate. Average compensation represents many functions within US parents and affiliates, the wages of skilled R&D personnel are likely to be relatively high in both the US and in other countries. Nevertheless, these numbers are clearly consistent with the view that:
- demand has outpaced supply of IT and software workers in the US, and
- raw engineering talent of high quality is available in large quantity and at relatively low prices in emerging markets – especially India and China.
Interviews with the R&D managers of leading US multinationals both inside and outside the US supported the perception that there is a global shortage of IT and software talent. We also confirmed the need to move abroad to gain necessary access to large foreign supplies of skilled engineers.
New R&D destinations have an abundant supply of human capital
The supply of technically skilled workers is abundant in many of the same countries in which we found an increase in US MNC foreign R&D activity – notably India and China. Applications for Indian and Chinese high-skilled workers made up 85% of H-1B visa applications in 2017 (US Department of Homeland Security 2016), and Indian and Chinese students combined made up 18% of doctorates in science and engineering from US universities in 2016.3This share was even larger in some key disciplines.
If we view the large number of Indian and Chinese students pursuing graduate education at American research universities as the extreme right tail of a distribution of science and engineering talent, most of which remained at home, then this suggests a massive amount of software- and IT-trained human capital available in China and India. Indeed, Arora and Gambardella (2005a and 2005b) record an abundant supply of engineering and technology graduates in emerging economies.
The types of activity done in new R&D destinations like China, India, and Israel suggests why they have been chosen as R&D hubs. Bureau of Economic Analysis data shows that R&D-performing affiliates in China, India, and Israel are concentrated in computer and electronic production manufacturing and professional, scientific, and technical services. In more traditional destinations like Germany, Japan, Canada, the UK, and France, R&D is concentrated in traditional manufacturing.
This suggests the need for human capital to meet the demand of software- and IT-intensive US multinationals has motivated US MNC decisions to do R&D in these locations. Figure 3 shows that patenting and the R&D investment of US multinationals outside the US has grown disproportionately in those regions where IT and software skills are well developed.
Figure 3 US patenting and R&D investment growth is increasingly concentrated in regions specialising in IT and software
In the two graphs, the horizontal axis measures the degree to which local inventors in a country tend to specialise in IT and software invention, as measured by their USPTO patent grants. This obviously tends to be places in which local IT and software skills are well developed. Regression analysis also implies this positive relationship, which is robust to the inclusion of control variables.
Conclusions and implications
Our analysis suggests that the increasing reliance on IT and software in innovation, and the growing endowments of specialised human capital in countries like India and China, have induced US MNCs to conduct more R&D in these locations. This has important implications:
- It suggests that there is a constraint on the supply of IT and software human capital in the US, and that these human resource constraints limit the invention possibilities for US-based multinational firms, even for those firms in which innovative activity and technological opportunity seem to be at the highest levels.4
- Global flows of investment, people, and ideas can help relax these constraints through open immigration policies and liberal trade and FDI policies. When successful, these flows raise growth, productivity, and consumption possibilities around the world. When US multinationals are able to import talent or export R&D work to the regions in which talent resides, this reinforces US technological leadership. Conversely, politically engineered constraints on this response clearly undermines the competitiveness of US-based firms.
We do not directly explore the impact of immigration policy in our paper, but existing evidence suggests that the openness of the US' labour market to immigrants in the 1990s allowed US-based firms to quickly adapt to the software-biased shift in technological opportunity. This created an unexpected and sharp increase in demand for software engineers, met at the height of the internet boom by importing more software engineers than the US was training in its own universities.5
Since the early 2000s, however, the US labour market has become more closed to immigration. Caps on high-skilled visas like the H-1B visa programme have grown more restrictive, and evidence from Glennon (2018) shows that these restrictive high-skilled immigration caps drove US MNCs to shift some high-skilled activity abroad in an effort to address these constraints.
Relatively liberal trade and FDI policies have allowed MNCs to address their human resource constraints by sourcing from abroad, but an open immigration regime for highly skilled workers would further ease this constraint.
- Finally, in addition to open immigration and liberal trade and FDI policies, the constraint on the supply of IT and software human capital in the US could be addressed with education policies that expand the supply of domestic IT and software human capital.
Authors' note: We gratefully acknowledge financial support from the National Science Foundation through two grants: 1360165 and 1360170. The statistical analysis of firm-level data on US multinational companies was conducted at the Bureau of Economic Analysis (BEA), United States Department of Commerce under arrangements that maintain legal confidentiality requirements. The views expressed do not reflect official positions of the US Department of Commerce or the NSF.
References
Arora, A, L G Branstetter, and M Drev (2013), "Going Soft: How the Rise of Software-Based Innovation Led to the Decline of Japan's IT Industry and the Resurgence of Silicon Valley", Review of Economics and Statistics 95(3): 757–75.
Arora, A and A Gambardella, eds (2005a), From Underdogs to Tigers: The Rise and Growth of the Software Industry in Brazil, China, India, Ireland, and Israel, Oxford University Press.
Arora, A and A Gambardella (2005b), "The Globalization of the Software Industry: Perspectives and Opportunities for Developed and Developing Countries", Innovation Policy and the Economy 5: 1–32.
Bloom, N, C Jones, J Van Reenen, and M Webb (2018), "Are Ideas Getting Harder to Find?", working paper, Stanford.
Bound, J, B Braga, J M Golden, and G Khanna (2015), "Recruitment of Foreigners in the Market for Computer Scientists in the United States", Journal of Labor Economics 33(S1): S187–223.
Branstetter, L, B Glennon, and J B Jensen (2018a), "The IT Revolution and the Globalization of R&D", in Innovation Policy and the Economy, Volume 19, edited by J Lerner and S Stern, University of Chicago Press.
Branstetter, L, M Drev, and N Kwon (2018b), "Get With the Program: Software-Driven Innovation in Traditional Manufacturing," Management Science.
Glennon, B (2018),How Do Restrictions on High-Skilled Immigration Affect MNC Foreign Affiliate Activity?, working paper.
Jones, B (2009), "The Burden of Knowledge and the Death of the Renaissance Man: Is Innovation Getting Harder?" Review of Economic Studies 76(1): 283–317.
Kerr, S P and W R Kerr (2018), "Global Collaborative Patents", The Economic Journal 128(612).
US Department of Homeland Security (2016), "Characteristics of H-1B Specialty Occupation Workers", Fiscal Year 2016 Annual Report to Congress.
Endnotes
[1] Arora et al. (2013) presented evidence that superior access to software engineering human resources enabled US IT firms to out-innovate their Japanese rivals in the 1990s and 2000s. Branstetter et al. (2018b) found evidence that firms better positioned to exploit technological opportunities realise higher returns to their R&D investments.
[2] Classified using the industry of the foreign affiliate.
[3] National Science Foundation, National Center for Science and Engineering Statistics, Survey of Earned Doctorates.
[4] This is consistent with research by Jones (2009) and Bloom et al. (2018), documenting the rising human resource requirements of innovation.
[5] Arora et al. (2013) argue that Japanese firms were constrained in their ability to respond to this shift, as a result of their rigid and closed-off labour market, and that part of Silicon Valley's evident resurgence vis-à-vis their Japanese competitors was based on American firms' greater access to immigrant talent.
Trump taunts China as trade war rattles economy [feedly]
Trump taunts China as trade war rattles economy
https://www.asiatimes.com/2019/09/article/trump-taunts-china-as-trade-war-rattles-economy/
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https://www.asiatimes.com/2019/09/article/trump-taunts-china-as-trade-war-rattles-economy/
Amid fresh signs his trade wars are rattling the US economy, President Donald Trump on Tuesday sent stern warnings to China, urging the Pacific power not to drag its feet in trade negotiations.
After a month of escalations in the year-long battle with Beijing, Trump fired off another Twitter blitz, saying Chinese negotiators may be holding out for a better deal in hopes he will be voted out in next year's presidential elections.
The latest invective from the White House ended the more conciliatory tone struck last week by both sides, which had helped soothe markets.
"While I am sure they would love to be dealing with a new administration … 16 months PLUS is a long time to be hemorrhaging jobs and companies," Trump said, claiming China's deteriorating economy could ill afford to wait.
"And then, think what happens to China when I win. Deal would get MUCH TOUGHER!"
While Trump pointed to China's weakening economy, a survey showed Tuesday that the US manufacturing sector – which Trump has long championed – had contracted last month for the first time in three years.
While this does not necessarily mean a US recession is now on the horizon, economists said Tuesday it is a worrying sign.
Senate visit to Beijing
"The canary in the mine may be falling off its perch," economist Joel Naroff told clients in a note.
Wall Street sank into the red early Tuesday, the first trading session since Trump jacked up duty rates on more than $100 billion in Chinese imports over the weekend.
The benchmark Dow Jones Industrial Average fell 1.1 percent. Yields on 10-year US Treasury notes briefly touched three-year lows.
The grim results for the US manufacturing sector were only the latest sign of a softening US economy, which has seen slower hiring and a sharp drop off in investment by businesses.
Forecasts still call for growth of about two percent in the third quarter, however.
Chinese state media reported Tuesday, meanwhile, that Republican Senators Steve Daines and David Perdue had met in Beijing with Vice Premier Liu He, China's top negotiator in the trade talks.
Liu said China hoped for a negotiated resolution based on "equality and mutual respect," according to state news agency Xinhua.
US and Chinese negotiations are due to resume this month after a sharp deterioration in the year-long trade war in August. But Bloomberg reported Tuesday the effort may be faltering.
Officials are having difficulty scheduling a time to meet after Washington rebuffed Beijing's demands to hold off on imposing the weekend's latest round of tariff increases, the news agency said.
Thomas Donohue, head of the US Chamber of Commerce, long a powerful Washington voice, told CNBC on Tuesday that lifting the latest tariffs would have instead allowed for a resumption of the talks.
But a White House strategy that involves creating such high levels of uncertainty could take the United States in a direction he said was unacceptable.
"Uncertainty leads to eventually no good," he said.
AFP
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