- The Washington Times - Friday, November 6, 2009

ANALYSIS/OPINION:

The convergence of technology, ease of digital collaboration and ready access to abundant overseas engineering talent allow multinational corporations to move research and development, product development, manufacturing and overall management to many places in the world. Increasingly, multinational executives are having difficulty in justifying operating major portions of their business and being incorporated in the United States. A shocking thought for sure, but it’s the new reality.

After Japan, the United States has the highest corporate tax rate in the world, and there is seemingly no willingness on the part of Washington to bring those rates down to make us more competitive. In fact, recently the Obama administration proposed taxing the foreign profits of U.S.-based multinationals even when those profits were not repatriated, but backed away under pressure from executives who threatened to move offshore. Obama aides acknowledge that the administration has set aside the idea for now but plans to revisit it in a broader tax overhaul next year.

This ambiguity and the threat of new taxes from Washington, such as “cap-and-trade,” have already prompted 11 major American companies to move offshore in the past year. Tyco International Ltd., Foster Wheeler AG, Weatherford International Ltd., Nabors Industries Ltd., Noble Corp., TransOcean International Group, United America Indemnity Ltd., Cooper Industries, Covidien, Ingersoll-Rand PLC and Accenture Ltd. have all taken or completed steps to change their domicile of incorporation, with Switzerland and Ireland as the most popular relocation destinations. Commenting on his company’s decision, an Accenture board member asked, “What shareholder would ever vote to incorporate in a country that taxes your worldwide income?”

But it is not just taxation that is chasing corporations out of America. Another top consideration is access to talent. The U.S. government’s National Assessment of Educational Progress generates the Nation’s Report Card annually. For the last 10 years, less than 25 percent of American high school seniors achieved a rating of “proficient” in either math or science. In August 2009, the ACT college admissions test service announced that only 23 percent of this year’s high school graduates tested adequately in reading, writing, math and science to succeed in college. This is a national embarrassment.

Since the Department of Education was formed in 1979, the kindergarten through 12th grade public education system has deteriorated. The United States now spends more per capita on public education than any other Organization for Economic Cooperation and Development country, but its students test near the bottom. In the Third International Mathematics and Science Study, a worldwide competition among 21 nations, the American students scored 19th out of 21. Washington forms commission after commission to find solutions, but nothing much happens. Why? Because no one wants to take on the teachers’ unions, which are a major source of re-election campaign dollars.

Everyone understands teacher quality is the key determinant of academic success. However, teachers’ unions don’t allow performance appraisals and merit pay. So many top-performing teachers get frustrated and opt out, leaving behind the less competent, who keep the bar low.

With the scarcity of technical talent in the U.S. resulting from failing schools, many corporations try to recruit foreign students. But with corporations running into anti-immigrant sentiment from Washington, many of them may chose to take the easier course of hiring talent abroad. Recently, Bank of America, among others, had to rescind job offers to dozens of foreigners because it had received federal bailout money.

Another major concern for American multinational executives is the increasing political risk in the United States. They now worry about the high cost of uncertainty associated with excessive government activism, radical change and a hostile culture.

A culture that turns a blind eye to government failure, but is quick and unrelenting to blame society’s ills on business will naturally and subliminally embrace socialist solutions. The problem is that when one intervention fails, the government attempts to fix its errors with yet more interventions. The result is “creeping socialism” and a compounding of waste and inefficiency.

So the nationalization of General Motors Corp. was followed by “cash for clunkers” and successive bailouts of GMAC. The Troubled Asset Relief Program rescue of banks was followed by government intervention and micromanagement, with a recent mandate on punitive salary caps for highly compensated talent. These bank executives were accused of excessive risk-taking and malfeasance in lending, even though Washington was to blame in first pushing the socialization of homeownership that required the banks to lower their loan standards for subprime borrowers.

What is alarming now is that the class warfare promoted by government in the form of punitive wage controls and interference with employment policy in our financial sector will drive talent offshore. Deutsche Bank CEO Josef Ackermann recently commented, “We can’t wait to get our hands on all that top talent.”

Americans must realize that the geese that lay the golden eggs can take flight. Most U.S.-born multinational board members and executives want their native country to be successful. On the other hand, their fiduciary duty requires that they face reality and respond to global competitors who increasingly have an edge in taxation, access to educated talent, and a more supportive political and cultural climate. Taking no action and losing out to the competition breaches their duty to shareholders.

Washington needs to wake up and see the big picture. Now more than ever, it is all about keeping and creating jobs. We can’t afford to chase multinational corporations out of the United States.

Robert J. Herbold is a retired COO of Microsoft Corp. and managing director of the Herbold Group LLC. Scott S. Powell is managing director of AlphaQuest LLC and a visiting fellow at the Hoover Institution.

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