A location decision is, in many respects, a referendum on a nation’s competitiveness. When a company decides, say, to build a factory with good jobs in China or Poland rather than in the United States, it is effectively voting on the question of which country can best enable its success in the global marketplace. Those votes matter: Each location decision translates into jobs, investments, tax revenues, and economic development. Governments, especially those of the most dynamic countries, compete fiercely for each vote.
The question “Where should we locate?” is more prominent in the minds of executives than it has ever been. Over the past three decades, business activities have become increasingly mobile, and more and more countries have become viable contenders for them. As a result, the number and significance of location decisions have exploded. Considerable evidence, including new data we unveil below, suggests that the U.S. is not winning enough of the location decisions that support healthy job growth and rising wages.
U.S.-based companies and America benefit when some activities—for instance, those tied to scarce natural resources or to customers—are placed in other countries. This boosts growth prospects in the United States. But other activities, such as R&D and advanced manufacturing, are essential to America’s competitiveness as a sophisticated economy. High-end activities have been a traditional strength of the country, but today the U.S. is struggling to attract and retain them.
Our research identifies two sets of avoidable causes. First are poor policies. The U.S. government is failing to tackle weaknesses in the business environment that are making the country a less attractive place to invest and are nullifying some of America’s most important competitive strengths. The government has also failed to eliminate distortions in the international trading and investment system that disadvantage the United States.
Second, in the rush to globalize, companies have overlooked the current and latent advantages of a U.S. location. Many factors affect the profitability of operating in a certain locale: wage levels, skills availability, utility rates, taxes, subsidies, shipping costs and reliability, local productivity, supervision costs, and many more. These factors are complex, interrelated, and dynamic. Locating an activity in one country often has ripple effects on activities elsewhere. Because many companies are still learning how to weigh these factors—indeed, processes for making location decisions have lagged behind those for virtually all other major investment decisions—companies can fall prey to biases that work against the U.S.
Is the U.S. Winning?
According to our survey of HBS alumni who made location decisions in the previous year, the majority of decisions …
For one, companies sometimes overlook or underestimate the hidden costs of locating activities outside the United States, as we heard in interviews we conducted with senior executives of multinationals. Many benefits of locating elsewhere, such as low wages or taxes, are visible and immediate, whereas the drawbacks are frequently subtle and apparent only over the long term. Also, companies often mistakenly view circumstances in U.S. locations as fixed, failing to consider how they might upgrade the productivity of existing U.S. sites or find more appropriate sites within America. Companies move out of U.S. locations when they could improve them. The implication is not that U.S.-based companies should always stay home but that they can make location choices better.
If the U.S. can tackle some of its weaknesses as a business location, there are grounds for optimism. Important trends are beginning to favor a U.S. location, such as rapidly rising wages in emerging economies, increasing transportation and logistical costs, and shortening product life cycles, which makes “near-shoring” attractive. Companies are also starting to understand the hidden costs of offshoring and to see and act on their ability to improve business environments in their U.S. communities.
A generation ago, most location choices boiled down to the question “Which countries do we want to serve?” Today improvements in information, communication, and logistics technology allow firms to serve many markets from a distance, spread discrete activities around the globe, and coordinate them in a global system. Thus, managers must increasingly decide not only which countries to serve but also where to locate each activity in the value chain.
To understand the kind of location choices that matter most for the U.S., we must distinguish among types of business activities with very different characteristics. Some activities require scarce natural resources and must be located near them. Other activities are tied to customers and markets—for instance, direct sales, on-site customer service, and physical delivery. For instance, if you want to sell cars in Vietnam, you must have showrooms there. When U.S.-based firms place such activities outside America, they are better positioned to tap foreign demand, gain insights into local customers, and adapt products to local markets—all of which boost company revenue, the demand for supporting activities at home, and U.S. competitiveness overall.
Customer-tied activities tend to gravitate to large, growing, and profitable markets. As the largest and often most sophisticated market, the U.S. has been a magnet for such activities. However, the rapid growth of markets such as China is weakening the pull of the U.S., while regulatory delays and other barriers are nullifying American market attractiveness.
Many activities in the value chain, however, are tied neither to customers nor to resources but instead are mobile: They can be placed in any of numerous locations and moved as circumstances change. Research, software development, and production of goods with modest transport costs, for example, can be located almost anywhere. Mobile activities gravitate toward the location that allows them to be performed the most effectively at the lowest total cost.
More activities have become mobile over time. Technological advances make it economical to develop and produce goods and services far from the final consumer and to coordinate activities at a distance. In fact, specialized companies have emerged to help others create and manage globally distributed supply chains; consider Li and Fung in apparel, for instance, or Flextronics in electronics production.
At the same time, the range of location options for mobile activities has expanded dramatically as many countries have stabilized their macroeconomic policies, opened their markets, improved their infrastructure, strengthened their economic institutions, and upgraded the skills of their workforces. Countries that used to attract activities only on the basis of natural resources or cheap labor can now vie for activities that rely on more skill and involve more-complex manufacturing or services.
Some mobile activities are truly footloose and can be relocated easily when conditions change—for example, a low-skill assembly operation with little fixed capital. Others, often those requiring highly skilled staff or sophisticated facilities, can be placed initially in any of several locations, but once located they are hard to move. In addition, one mobile activity in the value chain often pulls others to its location over time. For instance, a company may enter a new market with customer-tied activities, such as direct sales, but then add mobile activities like product development to build a larger presence and penetrate the market further.
Not all mobile activities are the same from the perspective of national prosperity. Those that generate the most value per worker—R&D, sophisticated manufacturing, and skill-intensive traded services, for instance—are the most desirable. They not only support attractive wages but also often lead to follow-on investments as well as technology and skill spillovers to other parts of the local economy. Low-end activities, such as simple assembly (of PCs, for example) or routine remote customer service, provide far lower wages and are more prone to relocation if local costs rise.
Sophisticated, skill-intensive mobile activities are the key battleground for advanced economies such as the United States. An acid test of U.S. competitiveness lies in questions such as: Do managers select America for their high-end mobile activities? Do they tackle their toughest R&D challenges, their most sophisticated manufacturing, and their most challenging managerial functions on U.S. soil or elsewhere?
Solid answers on how the U.S. is doing at the level of individual location choices are hard to come by. The U.S. government tracks the number of companies that open an establishment in America but does not record whether the activity could have been based elsewhere. Nor are there official statistics that document what other locations, if any, were considered or why one location was chosen over another.
Evidence on location choices by multinationals has been largely anecdotal or based on limited surveys. We know that during the 2000s, hundreds of multinationals, including General Electric, Boeing, and Pfizer, set up R&D centers in China and India. A 2011 Deloitte study reported that 83% of all R&D sites opened by global multinationals from 2004 to 2007 were in China or India. Also during the 2000s, China enjoyed a boom in advanced manufacturing investments, and Eastern Europe saw an influx of labor-intensive scientific and technical activities. Senior executives attributed many of those location decisions not to low costs but to better availability of skilled labor, faster product development, and more government support.
To develop more-comprehensive data on U.S. success in location choices, we surveyed nearly 10,000 Harvard Business School alumni about their experiences with location decisions involving the United States. Of the respondents, 1,767 had been directly involved in such a decision in the prior year. The activities in question were relatively sophisticated: 38% involved some element of research, development, and engineering; 49% were production-related.
Of the respondents, 57% said that the decision at hand was about whether to move existing activities out of the U.S., whereas 34% reported that the decision was about whether to locate new activities in the U.S. or elsewhere. Just 9% said that the decision was about whether to move activities currently located outside the U.S. into the country. In other words, survey participants were six times more likely to have considered moving activities out of rather than into the U.S. (even though U.S. respondents were only twice as numerous as non-U.S. respondents).
Across all types of decisions, the U.S. was chosen as a location just 32% of the time. For decisions about moving existing activities out of the U.S., the U.S. retained those activities in just 16% of cases. We asked respondents to identify the countries that were considered in such decisions and were struck by the diversity. The most commonly considered alternatives were China, India, Brazil, Mexico, and Singapore. But the list included 146 nations, many that are hardly major offshoring hubs (such as Turkmenistan, Suriname, and Senegal). The U.S. is truly competing with the entire world to retain and attract investments.
The most common reason that activities left the U.S. was lower wages elsewhere, which is not surprising. Other reasons were better access to skilled labor and a faster-growing market. (For more survey results, see the exhibit “Rationales for Location Choices.”) More unsettling, however, was evidence of serious weaknesses in the American business environment.
Rationales for Location Choices
In deciding whether to move existing business activities out of the United States, our HBS alumni respondents reported, …
Survey respondents (not just those who made location decisions) expressed considerable concern that business conditions are eroding in the U.S. relative to other countries. As shown in the exhibit “Evaluating the U.S. Business Environment,” respondents pointed to a complex tax code, and ineffective political system, a weak public education system, poor macroeconomic policies, convoluted regulations, deteriorating infrastructure, and lack of skilled labor.
Respondents also identified the greatest impediments to locating and creating jobs in the U.S. (in order): regulations, talent, taxes, macroeconomic conditions, and politics. Respondents framed many of these impediments in terms of uncertainty about the future, not just today’s conditions. For instance, uncertainty about future regulations and taxes was mentioned nearly as often as current regulatory burdens and tax rates.
Evaluating the U.S. Business Environment
How do U.S. locations stack up? Our HBS alumni survey respondents evaluated in which areas the U.S. is falling …
Overall, our findings are sobering. For many business activities, the U.S. was not seriously considered as a location. When the U.S. was a finalist, it won less than a third of the contests. The message was clear: The U.S. is losing business investments and good jobs in no small part because of a failure to address fundamentals of the business environment. To be sure, subsidies and market distortions by other countries play a role in some cases, but according to our survey, those factors were far from the most important.
How Managers Choose Locations
Our research reveals another troubling pattern: The very nature of location decisions may lead some companies to move more high-end activities out of the United States, or locate fewer new activities in the U.S., than would maximize firm value. To examine more closely how managers choose locations for their business activities, we interviewed senior executives at more than a dozen multinationals. Like the surveyed HBS alumni, the executives pointed to skills shortages and government policies that make America an expensive, slow, and uncertain place to do business. But they provided an additional insight: Location-decision processes are so complex and dynamic that they are often made on the basis of simple rules of thumb (“we follow our customers” or “we focus on wage rates”), rough estimates (since “the numbers can be made to say anything”), or history (“mergers have left us with five R&D centers spread around the globe rather than two larger ones in the U.S. and Germany”). Although the best-run global firms have developed rigorous processes for location choices, such sophistication is far from universal.
Why? It is important first to realize that most location decisions are not large-scale movements of entire facilities requiring a detailed investment justification. In fact, large-scale relocations make up a tiny fraction of all American job losses. From 2008 to 2010, mass layoffs (50 or more jobs) involving relocations outside the U.S. resulted in the loss of only 27,145 U.S. jobs, government statistics show. In contrast, mass layoffs not involving foreign relocations resulted in nearly 5 million jobs lost.
The reality is that jobs typically leave America a few at a time, and sometimes in subtle ways. Imagine a bucket with a large number of pinpricks: A software maker promotes its American programmers to higher-end product development positions and hires junior programmers in Eastern Europe for lower-end work. Or a U.S. manufacturer gradually outsources portions of its product line to an OEM with production partners in China. Small decisions like these often are made after only incremental analysis, not a full-blown study that takes into account system-wide consequences.
Location decisions also confront limits on data and depend on accounting systems that make economic comparisons difficult. For example, the CEO of a leading consumer products company generously offered to share data with us on how his firm’s costs varied in factories around the world. It took his team two months to extract the data from a variety of databases, some tied to country operations and others to global functions, and from incompatible ERP systems on different continents.
It is perhaps no surprise, then, that we found few companies revisiting old location choices to see if they had lived up to projections. This may reflect the idiosyncratic nature of location choices, in contrast to more-replicable decisions such as acquisitions, where ex-post assessments are relatively common. Yet retrospective analysis is critical because the impact of poor location choices can cascade over time. As we have seen, location choices often build on one another, with an initial decision leading to more investments in the same location.
Finally, dispersing value chains around the world is a relatively new practice for many firms, one that has ramped up rapidly in recent years. The bias a decade ago may have been to do things locally, but the pendulum has swung the other way as awareness of offshoring has spread. Today many companies seem to believe that most activities can be carried out more economically outside the U.S. Indeed, an entire industry has emerged to support offshoring, promising near-term cost savings.
These findings suggest that the geographic configuration of activities in many companies might not be optimal. When a company chooses to move an existing job out of the United States or to create a new job somewhere other than the U.S., this may be bad news not only for America. Such decisions can reduce value for the company itself.
The Hidden Costs of Offshoring
One of the primary reasons that location choices may turn out to be less effective than expected is because managers sometimes overlook the current and future hidden costs associated with operating outside the United States. For instance, a recent report from AMR Research found that 56% of companies moving production offshore experienced an increase in total landed costs, contrary to their expectations of cost savings. According to a 2010 Ernst & Young survey, more than a third of CFOs reported that the overall costs of entering rapid-growth markets like Brazil, India, and China turned out to be higher than expected.
Common savings from offshoring, such as lower wages, benefits, energy costs, or taxes, are visible and immediate. In our interviews, we found that hidden costs are both direct and indirect. Some arise quickly, while others emerge only over time (see the exhibit “The Economics of Offshoring”). Costs are sometimes masked by the subsidy trap—when companies disregard higher direct and indirect costs of doing business in a location because of tax breaks or outright subsidies offered by the country.
The Economics of Offshoring
The economics of moving business activities out of the U.S. to another location can be thought of in terms of a …
Some hidden direct costs are becoming better known. The rush to arbitrage wage rates, for instance, is giving way to a deeper understanding of the need to take into account total wage costs. If lower-wage workers in emerging economies are less productive or less skilled, firms wind up hiring more workers. They also end up using raw material less efficiently or experiencing lower first-pass quality levels and higher scrap rates.
More subtle, and more often overlooked, are the indirect costs of moving an operation out of the United States, including the effect on costs in other parts of the value chain. An offshore location often requires extra supervision and training, more product inspections, more local security, and higher costs of freight (base and expedited) to deliver products to customers in the U.S. or elsewhere. The firm may incur extra capital and obsolescence costs from carrying greater inventory in the supply chain as well as higher packaging, travel, and telecommunication expenses. Higher costs associated with developing distant suppliers are also possible, in addition to increased overtime charges at headquarters because of time-zone differences.
Moreover, companies have found that distant operations—which involve longer delivery lead times—make it difficult and costly to respond rapidly to shifts in customer demand. Offshore makers of fashion apparel, for instance, can find themselves marking down substantial portions of their goods even as they run out of popular items.
Both direct and indirect costs change over time, sometimes radically. Dramatic wage inflation in some emerging economies has shrunk the labor savings that many managers hoped to enjoy. Hourly wages of a typical line production worker in Shanghai, for instance, rose roughly 125% between 2006 and 2011. Middle management salaries in India reportedly surged 13% in 2011 alone. High rates of personnel turnover (often reported in the range of 10% to 20% per year in China) reduce productivity and raise hiring and training costs. In addition, the trade-weighted basket of emerging-economy currencies has appreciated against the dollar since 2006, further raising costs in dollar terms. At the same time, the cost of transporting goods back to U.S. customers has risen with increases in fuel prices.
Intellectual property rights are also significant, and often underestimated, source of long-run costs. Firms operating in countries with weak IP protection can wind up losing their secrets or taking costly measures to protect them. One executive we interviewed described how his firm, fearing the loss of production know-how, has removed units of measure on the gauges in its Chinese factory. Another bemoaned the expense of defending a trademark in India’s byzantine legal system.
Finally, management teams that have moved some functions offshore, but not others, have struggled with costs of coordination across activities. For example, when manufacturing facilities are moved abroad but research and development centers remain in the U.S., innovation can suffer (see Gary P. Pisano and Willy C. Shih’s article “Does America Really Need Manufacturing?”, HBR March 2012). And when managers take on local partners to move offshore—sometimes a precondition for entry into a country—they can find themselves mired in drawn-out, time-consuming negotiations. Such costs can quickly turn what appears to be a worthy investment into a money loser.
Improve, Not Move
As companies have globalized, they have focused less on their home location or any one location. Conventional wisdom has been to migrate from one location to another to capture the greatest near-term benefits. Some athletic-shoe makers, for example, moved production activities to follow low wages—from Japan in the 1960s, to South Korea and Taiwan in the 1970s, and then on to China, Indonesia, and Vietnam. There is certainly logic in this approach, especially for low-end activities in mature product categories where innovation is limited, few skills are required, and input costs are paramount.
When companies shift locations, however, they can overlook two things. First, productivity improvements are often rooted in investments in individuals, innovation teams, and infrastructure as well as in long-term relationships with local suppliers and supporting institutions. It is difficult to cultivate such assets while moving from place to place. Second, the local business environment is not fixed. Acting individually and collectively, firms in a locale can improve the economics of undertaking activities there. So managers have an alternative: Improve rather than move.
Consider Corning, a leading maker of specialty glass and ceramics, including optical fiber and liquid crystal display (LCD) glass. The firm is best known for patient investment in innovation, success in pioneering breakthrough technologies, highly sophisticated production processes, and manufacturing costs among the world’s lowest.
Less well-known is the company’s commitment to Corning, New York, a town of 11,000 located about four hours from New York City. The region is home to five Corning plants as well as the company’s main research center, where employees generate some 250 patents each year. Corning develops new products in its U.S. plants, close to the research center, and then rolls them out globally. The company has a long history of investing in local infrastructure and talent. Some recent grants made by the Corning Foundation include $3.7 million to the Corning school district and $110,000 to a regional science and discovery center. Such investments, sustained over decades, have helped turn a rural town into a prime location for developing world-class technologies.
But Corning does not do everything at home. In 2010, nearly three-quarters of its revenue came from outside the U.S., where it has 60 plants in 14 countries and almost two-thirds of its fixed assets. Internationalization has been particularly far-reaching in product areas such as LCDs, whose customers (consumer electronics makers) are clustered in locations outside the U.S. Interestingly, the company has replicated its pattern of deep local investment in its major international locations, including in communities near LCD plants in Taiwan, Japan, and China. Instead of dispersing activities or migrating from place to place, Corning has concentrated its investments to build a handful of centers of excellence.
Efforts to upgrade a local business environment often are most effective when firms collaborate to make investments in collective assets that no single firm can justify. Since 2004, for instance, chief executives in the Minneapolis-St. Paul region have worked with Minnesota’s governor, local mayors, and university leaders to identify priorities and deploy teams to investigate issues, make recommendations, and “unite public, nonprofit and business interests behind common goals and solutions for faster, better results.” This “employer-led civic alliance,” known as the Itasca Project, has sparked an initiative to give businesses better access to University of Minnesota technology, a summer jobs program for Minneapolis students, and distribution of “Close the Gap” tool kits to help employers reduce socioeconomic disparities within the workforce. (See Bill George’s Harvard Business School case on Minneapolis-St. Paul as well as Rosabeth Moss Kanter’s article, “Enriching the Ecosystem,” HBR March 2012.)
Sophisticated business leaders understand that a company can benefit by building local clusters and upgrading the business environment. In our HBS alumni survey, we asked each respondent whether his or her business would be more, equally, or less successful if it were to undertake more activities to benefit its local community. Twenty-two percent believed that such activities would make the company itself more successful, and 71% said that such activities would be neutral to company success, suggesting that they would pay for themselves. Only 7% thought that additional activities would make a company less successful. Cultivating the business environment in a company’s locations, the survey suggests, is not charity but self-interest.
Making the U.S. More Competitive
America has much work to do to address the fundamental causes of declining competitiveness that are driving location decisions outside the United States. The government must tackle business environment weaknesses and the trade distortions introduced by other countries. At the corporate level, managers must learn to make location decisions better and invest to upgrade their U.S. (and foreign) communities.
Agenda for policy makers
Our findings on U.S. location decisions point to an agenda for American policymakers at federal, state, and local levels.
Address U.S. business environment weaknesses.
American policy makers must tackle the weaknesses in the country’s business environment summarized earlier. Most pressing, in many ways, is the corporate tax code, which is highly visible in location calculations. The code sets a high statutory rate but collects at a low effective rate because of loopholes and subsidies, and is complicated in ways that serve only the interests of accountants, lawyers, and bureaucrats. Lowering the tax rate, while eliminating loopholes and subsidies, could attract investment without reducing government revenue.
Then there’s regulation. Although sound regulation is essential to level the playing field among competitors and protect society’s interests, our research uncovered examples of complex or distortionary rules and administrative procedures that raise the cost of doing business in the U.S. without benefiting society. Whereas state governments get good marks for being responsive to business, the U.S. federal government often does not work collaboratively with businesses to reduce obstacles to investment and growth.
Survey respondents also told us repeatedly how much more time it takes to align government officials across agencies and jurisdictions in the U.S. than in, say, Eastern Europe or China. We do not want to copy China, whose speed comes partly from a political system unacceptable to Americans, but we do welcome recent efforts by the Commerce Department and others that make it easier for would-be job creators to navigate multiple government entities.
Protect core U.S. strengths.
Many of America’s unique strengths center on the creation and commercialization of new ideas. The country enjoys well-endowed universities with close connections to business and strong property rights that encourage people to invest in new ideas and facilities. The U.S. also offers an entrepreneurial system that funnels capital and talent to promising ventures, capital markets that reward success, and social norms that forgive failure. These strengths attract talent from around the world and, with talent, high-end mobile activities such as R&D.
U.S. policymakers must reinforce rather than nullify those strengths. Three threats stood out in our interviews with senior executives. First, immigration restrictions are preventing innovative, highly skilled individuals from entering the U.S. to work or from staying in the U.S. after earning advanced degrees. Second, some regulations hold up innovation without generating offsetting benefits to the country. In medical devices, for example, slow FDA approvals in the U.S. are driving clinical trials, production, and even research to Europe, where regulatory standards are equally stringent but more expeditiously applied. Third, the U.S. system of intellectual property protection is slow to prevent foreign IP infringers from selling in the attractive U.S. market and is vulnerable to abuses such as patent trolling. (See “Reviving Entrepreneurship,” by Josh Lerner and William Sahlman, HBR March 2012.)
Should Companies Undertake More Activities to Benefit Their Local Communities?
Nearly all the respondents in our HBS alumni survey believe that companies can do more to improve their local …
Eliminate trade and investment distortions that unfairly disadvantage the U.S.
At a federal level, U.S. government officials must work, bilaterally and multilaterally, to reduce or eliminate the distortions that some countries introduce into location choices. Countries can bias decisions, for instance, by holding down exchange rates artificially, suppressing wages below market levels, not allowing foreign ownership or control in certain sectors, or denying companies access to the local market unless they locate high-end mobile activities within the country. All of these measures encourage or pressure firms to locate activities in places other than where they can be performed most economically. Companies have little ability to resist such pressure individually; the U.S. government has largely abdicated its leadership in this area and can do much more to level the playing field. (See “Shattering the Myths About U.S. Trade Policy” by Robert Z. Lawrence and Lawrence Edwards, HBR March 2012.)
Avoid the subsidy trap.
When seeking to bring capital, jobs, and expertise into a region, many policymakers resort to large tax breaks and cash incentives. In using subsidies as the primary strategy to attract a company’s activities, policymakers “train” business leaders to think of locations as interchangeable, and they draw to their regions the companies that are least likely to put down deep roots. Local leaders should aim to attract businesses not by outbidding rival locations on tax subsidies but by offering a compelling value proposition, such as access to talent, technological knowledge, supporting institutions, or a local market that fits the firm’s strategy and cannot be matched elsewhere. Incentives should focus on investments in local infrastructure, in workforce training, and in other assets that will be valuable to other firms and citizens even if particular companies relocate.
Work collaboratively to enhance local competitiveness.
Government organizations can take a variety of steps to encourage companies to invest in their local business environments. For instance, they can match corporate funds for skills training, make supporting investments in infrastructure, streamline regulations, realign workforce development, and take any other steps. This support is often best handled at the local or regional level, where government and business have a common agenda, business leaders can provide effective leadership, and the connection with political leaders is greatest.
“If they have to pay you to move to their location…I consider that a danger sign,” one executive told us.
In Charlotte, North Carolina, for example, city and state governments collaborated with local businesses to create an innovative program to reduce energy consumption in the central business district by 20% by 2016. Duke Energy and Cisco covered the initial cost of wiring 65 buildings with digital technology to track energy use, while the state approved an energy efficiency program that added a fraction of a cent per kilowatt-hour to nonresidential customer utility bills—and helped the two companies recover their upfront investments.
Agenda for business leaders
Improving the competitiveness of the U.S. as a business location is often seen as the job of the government. But we cannot expect the government to solve the problem on its own. Businesses must lead the way through initiatives within individual companies and joint actions across companies.
Capitalize on changes in business conditions that favor the U.S.
Some of the economic trends that led many companies to relocate outside the U.S. are shifting, as we have discussed. This is creating new opportunities to reexamine a U.S. location, especially for activities that supply or serve the U.S. or nearby markets.
Near-shore instead of offshore.
In thinking about moving activities out of the U.S., managers have often overlooked the opportunity to “near-shore”—that is, to find another location in the U.S. with economics better suited to the activities involved. This capitalizes on the substantial economic heterogeneity within U.S. borders. A firm looking for inexpensive electricity, for instance, can find it in Idaho, while a company seeking low wages will discover hourly rates in Mississippi and South Dakota that are a third lower than in New York or Massachusetts. There may be locations within the diverse United States that are more attractive for certain activities than offshore locales once hidden costs and the ability to improve local conditions are taken into account, especially for activities serving the North American market. Near-shoring can reduce some hidden costs of distant locations—for instance, by reducing transportation costs, management oversight costs, and the risk of lost intellectual property. Also, executives we interviewed emphasized that some of the benefits of offshoring come not from the foreign location per se but from the opportunity a move brings to reexamine and improve processes—an opportunity that a move within the U.S. might afford.
Avoid the subsidy trap.
Firms should be wary of choosing a location simply because local authorities offer direct subsidies. As one chief executive told us, “If they feel they have to pay you to move to their location, there’s probably a reason. I consider that a danger sign.” Instead, companies should work with policymakers to face tough choices about spending priorities, educational reform, tax overhauls, and other controversial issues that affect the business environment. Business leaders should convey to policymakers that improving the economics of locating in the U.S. is crucial for the nation’s long-term prosperity.
Upgrade U.S. communities.
Business leaders must stop taking their local business environments as given. We have discussed how improving a location, rather than moving, can benefit a company. Of course, investing at home does not mean that firms should stay there exclusively. Globalization has important competitive benefits. But most companies should invest deeply in fewer sites around the globe rather than moving repeatedly, proliferating sites, and spreading local investments thin. For many if not most multinationals, one base should be in the United States, which offers many advantages, including a world-class university system, strong intellectual property protection, sophisticated managerial talent, ready access to capital, and a huge domestic market. Investing in local communities will improve the legitimacy of business and garner more support for government policies that boost competitiveness.
Improve the quality of location decision-making processes.
As managers learn to recognize the hidden costs of offshoring as well as the benefits of making investments to improve U.S. locations, some activities will flow back to the U.S. and others will be retained in the country.The days when every major multinational had a substantial share of its activities in the United States are long gone. U.S. and non-U.S. companies alike must compete globally, and this requires global networks of activities. For America to prosper in a world of truly global firms, the U.S. must address some serious and unnecessary weaknesses in its business environment and tackle distortions to the trading system that are driving investment out of the country.
Nonetheless, we come away from our examination of corporate location choices hopeful about America’s prospects. Sophisticated management teams are reevaluating their rush offshore and, in some instances, are beginning to move high-end mobile activities back to the United States. To a degree, these choices reflect the trends we noted, such as rising wages in emerging economies. But they also reflect conscious efforts by some executives and policy makers to understand better, and to change, the economics of location in a global economy. We are optimistic that with concerted action by government and business, more and more companies will find that for many high-end mobile activities, the right choice is the United States.