Should We Penalize Companies for Shipping Jobs Overseas?

Last Updated Apr 3, 2009 12:12 PM EDT

It's a popular argument these days. If U.S. multinationals are going to ship jobs overseas, let's make it more difficult by adding taxes on their so-called outbound investments.

A majority of Americans believe, according to recent polls, that job outsourcing is a root problem for why the economy is performing so poorly. So a tax would not only be a popular political solution, but also protect against further domestic job loss and raise a significant amount of cash for the country.

Except, this solution isn't supported by the facts, according to Harvard Business School finance professor Mihir Desai. The author doesn't argue against the notion of America job loss, but rather that the losses can't be attributed to multinationals expanding their operations across borders.

In a new working paper called Securing Jobs or the New Protectionism? Taxing the Overseas Activities of Multinational Firms, Desai scours the relevant research to find no evidence that foreign activity necessarily displaces domestic activity; in fact they are complementary and, some studies conclude, net-net beneficial to the home country. When firms expand overseas, resulting growth benefits the home company in the form of greater investment and increased employee compensation.

Concludes Desai:

"Much as the formulation of trade policy requires resisting the tempting logic of protectionism, the appropriate taxation of multinational firms requires a similar fortitude."
  • Sean Silverthorne

    Sean Silverthorne is the editor of HBS Working Knowledge, which provides a first look at the research and ideas of Harvard Business School faculty. Working Knowledge, which won a Webby award in 2007, currently records 4 million unique visitors a year. He has been with HBS since 2001.

    Silverthorne has 28 years experience in print and online journalism. Before arriving at HBS, he was a senior editor at CNET and executive editor of ZDNET News. While at At Ziff-Davis, Silverthorne also worked on the daily technology TV show The Site, and was a senior editor at PC Week Inside, which chronicled the business of the technology industry. He has held several reporting and editing roles on a variety of newspapers, and was Investor Business Daily's first journalist based in Silicon Valley.