Internationalization, business performance and employment

Public opinion often associates the internationalization of companies with relocations, factory closures, more intense foreign competition, and more generally, the destruction of the French industrial fabric. An analysis of the most recent  studies reveals that the reality is more mixed.

The 24/09/2012

On the one hand, companies’ first internationalization has a positive impact on their turnover, innovation and employment levels in France, and thus  contributes to the development of industrial activity  in the country. On the other hand, it mainly benefits high-skilled workers (design, support functions) and brings about the destruction of low-skilled jobs.

Globalization cannot take all the blame for deindustrialization

The decreasing share of the manufacturing sector in France’s GDP is not just due to globalization: it also comes from several natural evolutions in developed economies. When manufacturers outsource some service activities (e.g. cleaning, catering, support functions for production plants), the corresponding jobs statistically move to the service sector while there is no effective change on site. In addition, productivity gains in the manufacturing sector have the effect of reducing its need for labour. Although these efficiency gains also lower relative prices of manufactured products, and thus increase the demand for these goods, the latter effect does not compensate the initial effect of reduction in labour requirements. Lastly, as income rises, there is a shift in consumption from goods to services. All of these phenomena, which occur in all developed economies, owe nothing to globalization.

The main motivation for locating abroad is to win new markets

For multinational companies, accessing a growth market is the main deciding factor when choosing a location, over and above optimizing production costs or tax levels. 87% of French multinational business leaders say that the main motivation of their foreign location is to access high-growth markets. Only 10% of them are considerably motivated by manufacturing goods abroad to import back to France.

Investing abroad creates value in France

Empirical studies reveal that internationalized companies are bigger, more productive and pay higher wages than other companies, regardless of the country, sector or economic climate. The question is whether this good performance is the consequence of, or the reason behind, their decision to go multinational. In reality, the causality is two-fold. Setting up abroad requires a critical size, innovative products, skilled workers and a solid financial structure, which creates a natural selection of the most productive firms on foreign markets. However, firms investing abroad for the first time consolidate their initial advantage ex-post: during the three years following their investment, their parent company in France enjoys faster growth of sales, value added, employment and exports than companies that decided to remain domestic. There is also a positive effect on their innovation activities.

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