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New Research Finds Globally-Engaged Companies Prosper More

Published on Saturday, March 01, 2003

Companies linked to the global marketplace through exports, inward foreign direct investment (FDI), outward FDI, or imports grow faster and fail less often than companies not linked. Plus, their workers and communities are better off.

These are the findings by Howard Lewis III and J. David Richardson in their new report, Why Global Commitment Really Matters!, published by the Washington, DC-based Institute for International Economics. And, the two authors’ analysis holds up when comparing companies of the same size in the same industries, both in the United States and around the world.

Exporting Plants Perform Better

Compared to non-exporting firms, U.S. exporting firms experience 2 to 4 percentage points faster annual growth in employment, offer better opportunities for advancement, expand their annual total sales about 0.6 to 1.3 percent faster, and are nearly 8.5 percent less likely to go out of business. These gains are not dependent on any specific time period or export volume, according to the report.

Additionally, workers employed in export firms have better-paying jobs. For example, wages of blue-collar workers in export firms average 13 percent higher than in non-exporting plants. Deeper analysis reveals that blue-collar earnings are 23 percent higher when comparing large plants, and 9 percent higher when comparing small plants; white-collar employees receive 18 percent more than their non-exporting counterparts. Plus, the benefits for all workers at exporting plants are 37 percent higher, including improved medical insurance and paid leave.

Plants Utilizing Inward FDI Benefit More

American plants that are recipients of FDI employ workers with 19 percent higher productivity, provide them with more machinery and equipment, and use more cutting-edge technology than their nonglobally-engaged counterparts, according to Why Global Commitment Really Matters! These benefits accrue at plants with an equity stake as low as 10 percent. Additionally, the report says blue-collar and white-collar jobs at plants with foreign investment pay 7 and 2.5 percent more, respectively, when comparing plant size, industry and location.

Firms Linked through Outward FDI Excel

Surprising to many, U.S. labor productivity in large and small U.S.-based plants with investments abroad is 11 percent and 33 percent higher, respectively, than in their U.S. counterparts that solely operate domestically. Furthermore, these U.S. multinationals utilize more advanced manufacturing technology as compared to U.S. firms with no overseas investments.

Plus, employee annual average earnings at large and small American multinationals are 18 and 25 percent higher than at their U.S. counterparts. Further analysis indicates difficulty in disentangling white-collar job gains at American-owned multinationals; however, blue-collar job gains are significant.

Importers also Provide More Benefits

Approximately 70 percent of U.S. imports consist of raw materials, components and capital goods that typically do not compete with American jobs. In fact, these imports, which offer unique capabilities and competitive prices, enhance U.S. worker productivity. And higher productivity leads to a host of benefits.

According to the report, investment-engaged firms import more than non-investment-engaged firms. For example, U.S. foreign-backed manufacturing plants imported 16 percent of their intermediate goods in 1992, while U.S. manufacturing plants invested abroad imported 11 percent. By comparison, non-investment-engaged U.S. manufacturers imported approximately 7.5 percent of their intermediate inputs in 1992. The research suggests that one benefit derived from investment-engaged firms is their ability to grow efficiently through savvy importing that is reflected in the use of better tools and methods.

Communities Fare Better

The new report also indicates that U.S. communities which host foreign multinationals incur a positive spillover effect that involves wages, technology and skills. Data is not yet available on U.S. communities that host American multinationals.

But logic holds that communities which host globally-integrated companies benefit through a more stable workforce and a stronger tax base. Furthermore, the revenue generated from global integration flows to local communities through restaurants, retail stores, movie theaters, etc., and spreads risk should the domestic market enter a period of slow or negative economic growth.

Similar Findings Abroad

Microdata research in a variety of countries finds strikingly similar patterns, according to the report. In fact, Lewis and Richardson say, “Foreign firms, workers and communities that commit to all sorts of global linkages prosper relative to comparable counterparts that do not.” This means that companies in the U.S. and abroad not linked to the global marketplace should consider being linked, and companies that are linked should consider deepening their international ties.

Prevent In-House Treasury Fraud and Theft or Pay the Consequences

Published on Saturday, March 01, 2003

A company’s financial information and resources are perhaps its greatest assets. That’s why it would be devastating if they were tampered with or stolen. Unfortunately, today, check fraud poses a significant threat to organizations.

In fact, corporate check fraud now is reaching epidemic proportions and costing banks and companies billions of dollars a year worldwide. If you haven’t experienced the problem already, you may be lucky. Chances are you’ll be faced with check fraud sometime in the near future unless you take steps today to combat it.

Limit Your Exposure to Check Fraud

Even with the ease and abundance of electronic payment systems, checks continue to be the most popular method of making payments in the U.S. They also are just as popular with counterfeiters, forgers and thieves. Why? Because check fraud is a relatively low risk crime with potentially high payoffs and a good chance of success.

Your company could stand to lose hundreds, thousands, or even hundreds of thousands of dollars due to check fraud. That’s why treasurers need to establish strong internal safeguards to protect your company from check fraud. Here are some precautions to take:

Convert as many of your payments as possible to ACH and other electronic payment systems.

Without a check, counterfeiters, forgers and thieves have nothing to steal, alter or copy. Plus, you can save on the check printing and postage costs of payroll, pension payments, vendor payments and shareholder dividends.

Use a positive pay service for your disbursement accounts.

These services provide reports that identify potentially fraudulent checks by comparing the serial numbers and dollar amounts of posted checks with your issued checks. An exception report lets you identify checks that have already been paid, checks with serial numbers that were never issued and checks with incorrect dollar amounts.

Reconcile your accounts promptly, on a daily basis if possible.

The quicker you reconcile, the sooner you can detect a fraudulent check after it has been presented for payment, and the faster you can contact your bank to return the item. Train your staff to look for suspicious items and how to use stop payments and voids.

Request large-dollar payment reports from your bank.

These reports show all large-dollar payments that have posted to your account. As another safeguard, you can specify the minimum dollar amount for reported transactions. Available early in the day, these reports can help you quickly identify fraudulent checks.

Use check stock, fonts and inks that prevent or detect fraud.

Order checks designed specifically for your company, not generic checks. Find number fonts that prevent the dollar amount from being removed or altered without detection. Use inks that smudge or discolor to show alterations and erasures. And, get stock with microprinting, watermarks, pantographs, holograms, borders and patterns that would be impossible to duplicate.

Safeguard your blank checks and signatures

Lock up checks and signature plates and keep them in separate locations. Make frequent, unannounced audits of your check stock. Limit the number of official check signers and immediately notify your bank when authorized signers change. Consider using multiple signers for checks over a certain dollar amount. Centralize your company’s check-writing function as much as possible.

Separate your check-writing and account reconcilement functions

By doing so, you increase the chances of catching dishonest employees and stopping internal check fraud before it can occur.

Employee Theft also Is a Major Concern

Many corporations are learning the hard way that the usual deterrents to theft, such as locks, alarms, security personnel and guard dogs, do not provide all necessary protection. That’s because employee theft is just as prevalent as check fraud. Employees often know a company’s security measures and how to get around them. Some unscrupulous insiders may even devise ways to pay themselves for services not rendered or products not shipped. And it’s difficult to catch employees in any wrongdoing.

Then there is corporate espionage, where security breaches may involve trash searches, utility disruptions and other acts of vandalism. Plus, competitors can use sophisticated techniques to hack into systems, such as impersonating an employee to enter a secure area, wiretapping and eavesdropping. So what measures can be taken to tighten controls and security?

Employees Are Your Greatest Asset, But Some Are a Risk

In addition to protecting your company from check fraud, you also may have to protect it from competitors, as well as your employees. Corporate espionage is a growing problem, but one that can be alleviated or mitigated by taking some simple precautions. Hiring trustworthy employees is the first and best defense. One way to ensure that reliable people are hired is to perform thorough background checks on everyone, including clerical workers, who will have access to your information and accounting systems.

According to Brendan Hewson, senior vice president of Bank of America’s Corporate Security International Services, “Failure to check references can later cause embarrassments, theft, fraud and even reputational damage.” His advice is to “check what is not there.” If there is a gap in employment or something is missing from a potential employee’s background, research it. Hewson feels “you should not assume anything. All circumstances should be treated as unique.”

Once hired, employees should be monitored for behavioral changes that can signal financial or family difficulties, addictions, psychological illnesses or other problems. Be on the lookout for suspicious spending, excessive absences, changes in physical appearance or a decline in job performance. Implementing more formal monitoring programs that include periodic medical exams, mandatory personal financial statements and computer surveillance also are good ideas.

If you lay off or fire employees, take immediate steps to safeguard your information systems. Security experts suggest escorting former employees from the building, and requesting the return of ID, badges and keys. Also remember to change passwords and cut off access to computer systems.

Restrict Entry to Buildings and Computers

Confidential information is everywhere in companies — on desks, computers, laptops and PDAs. How can access to these areas be controlled? State-of-the-art electronic security, including passwords, keys and badges and/or eye or fingerprint scans, should be required for entering offices and computer systems. Reinforce these safeguards by locking doors and windows, using guards and watchdogs, alarming entries and exits and installing surveillance cameras.

To protect computers, all communications should pass through a firewall barrier. This allows for the review of all computer traffic and the refusal of any communication not meeting predetermined criteria. Wiretapping into cables to display and record any information that’s being exchanged also is suggested.

Have a Back-Up Plan

With computers and laptops spread throughout companies, backing up information has become extremely complicated and is often ignored. However, it must be done. Be sure to have formal back-up procedures in place, and insist your employees follow them. Encrypt copies of confidential information in case laptops are lost or stolen. Any important information not stored on computers should be catalogued, filed on microfilm/microfiche and stored in a safe location with a designated custodian.

Install Detection and Anti-Virus Programs

Protect computer and telecommunications systems with specialized programs that warn of intrusion. Alarms or warning messages can signal viruses, the use of unauthorized passwords, repeated password attempts, unauthorized users trying to enter your systems, unusual log-ons that occur early in the morning, late at night or on weekends, or major changes in computer usage.

Anti-virus programs, already used for catching bugs before they disrupt computer systems, also can be used to detect slowdowns in processing time, attempts to change protected files, a loss of computer memory and other signs of intrusion. As such, be sure your anti-virus programs run automatically and regularly.

Always Be on Your Guard

The most important advice for protecting your financial information and resources is never to let down your guard and have a comprehensive program in place. “Guidelines should be created and continuously developed,” suggests Hewson.

Since NAFTA, Mexico Has Made Great Strides

Published on Saturday, March 01, 2003

Since January 1, 1994, when the North American Free Trade Agreement (NAFTA) was implemented, Mexico has become one of the world’s most attractive emerging markets. Now, several Latin American countries are on the free trade path with the U.S. in hopes of obtaining similar payoffs.

Mexico Expands Free Trade Agreements

Mexico has negotiated free trade agreements (FTAs) with 32 countries and regions, including the European Union (EU), European Free Trade Area, Israel, and 10 countries in Latin America. Currently, Mexico is negotiating additional accords with other Latin American and Asian nations. Although problems persist, the free trade model has proven successful. But will these agreements compete with NAFTA?

The Mexico-EU FTA, for example, provides EU goods with “rough NAFTA parity from 2003 onwards,” according to the U.S. and Foreign Commercial Service. This could negate many of the advantages U.S. and Canadian companies currently enjoy under NAFTA.

NAFTA at Nine

On January 1, 1994, when NAFTA began, Mexico embarked on a progressive, scheduled reduction of tariffs on U.S. and Canadian goods. Now, Mexican tariffs average only 2 percent, and more than 80 percent of U.S. goods enter Mexico duty free. Consequently, since NAFTA’s implementation, U.S.-Mexican merchandise trade has almost tripled, rising from $81 billion in 1993 to $233 billion in 2001. Due to slower global growth, however, this figure represents a decline from $247 billion in 2000.

Nevertheless, greater bilateral trade promoted by NAFTA has contributed to Mexico surpassing Japan in 1999 to become the United States’ second largest trading partner. U.S. exports to and imports from Mexico of commercial services, which excludes military and government services, were $14 billion and $11 billion, respectively, in 2000 (latest available data).

Increased Trade Is the Minor Benefit

But increased trade in goods and services only represents a portion of NAFTA’s benefits. Since U.S. gross domestic product (GDP) was 20 times larger than Mexico’s prior to the implementation of the agreement, and U.S. tariffs on Mexican goods already averaged a low 2 percent, the free trade agreement would not have a large impact on the U.S. economy.

“NAFTA was more about foreign policy than about the domestic economy,” says Dan Griswold, associate director of the Center for Trade Policy Studies at the Washington, DC-based CATO Institute. “Its biggest payoff for the United States has been to institutionalize our southern neighbor’s turn away from centralized protectionism and toward decentralized, democratic capitalism. By that measure, NAFTA has been a spectacular success.”

The typical Mexican boom-and-bust-cycle, high inflation, large debt, and the election-cycle economic crises seem to be things of the past. This has resulted in a more stable environment, increasing Mexico’s level of global attractiveness in terms of its ability to capture foreign direct investment (FDI).

Foreign Direct Investment Climbs

Although global FDI flows fell by approximately half from 2000 to 2001, Mexico continues to be one of the largest recipients of global FDI among emerging markets.

Under NAFTA, U.S. and Canadian investment is accorded “national treatment,” which grants U.S. and Canadian investors the same rights as Mexican investors. Exceptions exist, especially in the energy sector, but overall, Mexico is relatively open to FDI. In fact, approximately 95 percent of all investment transactions do not require government approval. As a result, from 1994 through 2001, the United States and Canada accounted for 72 percent of Mexican inward FDI, the European Union provided 18 percent, and Japan, 3 percent. During this period, Mexico received an annual average of $12.3 billion. However, from 1989 through 1993, years prior to NAFTA, Mexico only received $3.7 billion annually, according to the Mexican government.

Economic Growth To Accelerate

Mexican gross domestic product (GDP) registered a 0.9 percent increase in 2002, slightly below expectations, according to Country Alert, a Banc of America Securities publication. This reflected a slower-than anticipated U.S. economic recovery, to which Mexico is closely tied. However, Mexico’s GDP is anticipated to exceed 3 percent in 2003 and continue to rise through 2004. According to the World Bank, Mexico’s average annual GDP during the 1990s was 2.7 percent, more than twice its 1980s rate of 1.1 percent.

The Mexican peso remains somewhat volatile as a result of recent jolts of depreciation, according to the Bank of America publication, Global Economic Outlook. On February 18, 2000, the peso was almost 9.4 to the U.S. dollar. By February 18, 2003, its value had declined, requiring 10.8 pesos to the dollar. In addition to various current factors, the peso is under downward pressure amid a contentious political environment as mid-year congressional elections take place. Additionally, the inability to achieve compromise among political parties has resulted in fewer structural reforms than anticipated.

Mexican Global Trade Is Strong

The world’s current population growth rate of 1.16 percent annually has continued to decrease since 1963. Mexico’s rate is also decreasing, but not as rapidly. As a result, its population is anticipated to reach almost 105 million this year, making it the 11th largest population. Consequently, the country’s demand is continuing to accelerate. Thus, Mexican world imports jumped from $44 billion in 1990 to $183 billion in 2000. Due to slower growth, imports decreased slightly to $176 billion in 2001. The country’s exports increased from $41 billion in 1990 to $166 billion in 2001. But due to slower world trade, Mexico’s world exports decreased to $159 billion in 2001, according to the World Trade Organization. On the services side, Mexico’s world exports and imports registered $13 billion and $17 billion, respectively, in 2001.

Mexico’s most promising sectors for trade and inward investment include:

• Automotive parts and supplies,
• Computers, software and services,
• Inter-modal transportation equipment,
• Oil and gas field equipment/services,
• Franchising,
• Security and safety equipment/services,
• Water resources equipment/services,
• Pollution control equipment,
• Plastic materials and resins, and
• Telecommunication equip./services.

More Latin American FTAs Coming

In December 2002, after two years of intensive negotiations, the U.S. and Chile reached an agreement on an FTA. This was welcomed with much enthusiasm by the Washington, DC-based National Association of Manufacturers, who claim U.S. companies have lost $800 million annually due to preferential access granted to Canadian products under the 1997 Canada-Chile FTA. If the new FTA is passed by Congress, more than 85 percent of U.S. and Chilean bilateral trade in consumer and industrial products will become duty-free upon implementation.

In January 2003, U.S. Trade Representative Robert Zoellick announced the launch of U.S.-Central American FTA (CAFTA) negotiations. The participants, Costa Rica, El Salvador, Guatemala, Honduras and Nicaragua, who have more than 20 trade agreements in place with various countries, wish to significantly increase inward FDI. This is a goal a U.S. FTA could make a reality. Many in the U.S. view CAFTA as a stepping stone to the creation of the Free Trade Agreement of the Americas based on the NAFTA model.

Unshackle U.S. Exporters or Risk Job Losses: Battle Over the Extraterritorial Income Exclusion Act

Published on Wednesday, January 01, 2003

What do you get when you continually change and manipulate tax codes? A big mess! Now, throw convoluted subsidies into the mix and you also end up with a lot of unintended consequences.

Thousands Could Lose Jobs

Today, that’s the situation in both the United States and European Union (EU). And as a result, thousands of U.S. workers stand to lose their jobs at a time when the U.S. economic recovery appears shaky.

What’s happening now is tied to actions of the past. For decades, EU industries, such as aerospace and telecommunications, have been subsidized to boost their international strength or to shield them from global competition. Additionally, the EU has exempted and continues to exempt its exporters from paying a substantial value added tax.

FSC and ETI

To counter these unfair actions, in 1984, the United States crafted the Foreign Sales Corporation (FSC) tax code so exporters could compete fairly in global markets. This proved beneficial, as evidenced by a National Foreign Trade Council report that said 3.5 million U.S. export-related jobs benefited from FSC tax incentives in 1999. Unfortunately, the EU challenged the FSC rule through the World Trade Organization, and won in 2000.

In an attempt to satisfy the global trade body, the U.S. repealed the law and in its place created the Extraterritorial Income Exclusion (ETI) Act of 2000. However, the new law still didn’t satisfy the EU, who again challenged the law, and won.

Consequently, the EU is now authorized to impose sanctions of more than $4 billion annually on U.S. exports, which include steel, beef, sugar, wood and paper products, cotton, apparel, cosmetics, and electrical machinery.

Although Europe’s tax loopholes and subsidies distort trade by artificially increasing the attractiveness of its goods and services on world markets, its indirect tax system is technically WTO-compliant. WTO language doesn’t cover indirect taxes, only direct taxes like those used in the U.S.

Small Companies Are Impacted Most

So, what can the U.S. do? If Congress terminates ETI without establishing a suitable replacement, approximately 6,000 U.S. exporters who rely on ETI to compete will be hurt. And the majority of these firms are small.

Hutchinson Technology, Inc., headquartered in Minnesota, exports 90 percent of its computer disk drive components. If ETI is repealed, President and CEO Wayne Fortun, says “The company could be forced to move production operations to the Far East, resulting in the loss of 3,000 of our 3,400 employees.”

Power Curbers, Inc., a manufacturer of concrete paving equipment, employs 130 workers at its North Carolina, Iowa and Tennessee facilities. Company President and CEO, Dwight Messinger, says “Without ETI, our exports would decrease, especially to Europe. This could result in layoffs of 5 to 10 percent of our workforce.”

Small companies, many of which are struggling just to survive the economic downturn, aren’t the only ones that stand to lose. Boeing alone estimates that repealing ETI will result in the loss of nearly 10,000 of its high-tech jobs, as well as 23,000 more jobs with its suppliers.

Airbus, Boeing’s heavily subsidized European rival, has received more than $30 billion in EU financial support. This gives Airbus an unfair advantage, and affects the entire U.S. aerospace industry that employs nearly 800,000 highly-skilled workers.

The Mess Needs To Be Cleaned Up

There is no doubt that multiple layers of loopholes and convoluted subsidies artificially create winners and losers in international trade. That’s why this mess needs to be cleaned up. The U.S. response to the ETI challenge is currently being debated in Congress. And one thing remains certain: U.S. exporters need a mechanism that counters their EU rivals’ government handouts. Small and medium-size companies, which account for about 96 percent of all U.S. exporters, and large companies, as well as farmers, all need a level playing field.

Exports Are Key to Our Economy

Exports support more than 12 million higher-paying U.S. jobs, strengthen companies and farms, and improve the tax base, while sending important revenue to local communities. Plus, one in three acres of U.S. agricultural production is exported. In short, exports are a key piece of our economy.

Congress certainly has a difficult job ahead. In order to prevent the European Union from implementing $4 billion worth of trade sanctions against U.S. exports, our Congressional Representatives must act quickly. But they must do so in a way that unshackles our exporters from a system of unfair competition, does not force them out of business or offshore, and protects U.S. jobs.