ONE of the statements most commonly made in discussions of our present economic position is that the war changed us from a debtor to a creditor nation. The statement usually is taken to refer to finance, and the man in the street understands it as meaning that whereas before the war we had to borrow money from Europe to develop the country, handle our crops and build up our transportation system, since the war we have been lending to other countries -- either to the underdeveloped parts of the world for the exploitation of their natural resources, or to the older countries of Europe for the restoration of their war-shattered economic structures.

In a general way this is a correct statement of the case, but it fails to bring out one of the most interesting and somewhat disturbing phases of our economic position. For we have not only assumed a creditor position as regards capital in its broad sense, but we have also attained a creditor status in the industrial field, so that at present our position in industrial technique, management, labor policy and certain forms of transportation and communication is decidedly that of a creditor -- we give much more than we receive. It is true that this phase, as distinguished from the purely financial phase, cannot be traced entirely to the war: our industries had begun to gravitate towards Canada, Latin America and even Europe, some time before 1914. But the war undoubtedly accelerated the movement and rapidly furnished our industries with capital for expansion and with opportunities to improve their technique and acquire the experience which has given them a tremendous lead in some of the most essential fields.

This accelerated development has a very important bearing on our international relations. Even under normal conditions of development, the impact of a new industrial power of the magnitude and capacity of the United States naturally would arouse a certain amount of disturbance among the more settled and seemingly secure industrial countries of Europe. The pre-war rise of Germany as an industrial power furnishes a case in point. When such a power, by force of circumstances beyond its control, suddenly accelerates its rate of progress, spreads beyond its national boundaries, and is thrown into competition with its former mentors and financial backers -- who, moreover, are weakened by war -- the disturbance may reach considerable proportions.

There is unmistakable evidence of the fact that the present attitude of the older and more important industrial countries of Europe towards the United States is strongly influenced by this factor of economic disparity; many of the specific instances of economic hostility, whether they take the form of a rationing of the imports of our films or our automobiles or of attempted discrimination against investments of American capital, may be traced to the effort to overcome our lead and to protect the weakened structure of Europe against the new economic force. The same is true of the efforts to bring about some form of economic union among the European countries. The changes made by certain foreign corporations in the voting rights of their shareholders with a view to forestalling outside financial control were directed primarily against American capital. True, some of the European countries are gradually coming to the conclusion that our industrial development contains certain features that they might adopt with benefit, and some of them are doing their utmost to apply our industrial methods within the limitations imposed by local circumstances; but this does not necessarily mitigate the instinctive opposition to our disturbing participation in the economic life of Europe and of those parts of the world traditionally within the European sphere of economic influence. We must keep this background in mind if we are to understand the full significance of our industrial expansion and the complications following the establishment of branches of American industries, not only in the more settled countries of Europe, but also in the newer parts of the world.

In addition to antagonism aroused by the competition of the products of our branch plants, there also is apprehension regarding the influence of our industrial expansion on the labor markets of the countries involved. The tendency of American industry to emphasize the relation between wages and output does not always harmonize with the industrial policies of the countries where our branch plants are located, and the local industrialists maintain that the limitations of their markets and the lack of capital necessary for increasing the productivity of labor handicap them in competing for labor with the American branch plants. That attitude found expression in the discussions of the relative purchasing power of wages recently undertaken by the International Labor Office at the request of the Ford organization.

Even more significant than the movement's influence on our foreign economic and political relations is its effect on our domestic economic situation. This is particularly important, not only from the standpoint of labor, but also from that of internal commerce, transportation, real estate values, municipal finance and even federal finance. For if a considerable number of our important industries which have foreign trade possibilities should adopt the settled policy of supplying the bulk of their foreign business from their foreign branch plants, then sooner or later our domestic industry would be restricted to supplying the domestic market with finished products and (for a time, at least) the foreign branch plants with equipment and parts. The dividends to stockholders and the demand for American technical men to run the foreign plants will not go very far to compensate for the decreased demand for labor and construction and the relative lessening of activity in the industrial centres of the United States. But before going further into a discussion of this phase of the subject, let us see what are the outstanding factors responsible for the movement; we may then be able to forecast its development and evaluate its possible effects on our domestic situation.


As already pointed out, while the armistice is generally regarded as marking the beginning of the creditor phase of our economic history, that is not true of our investments in foreign branch plants. The industrial expansion across the Canadian border started long before the war, and such typical American products as harvesting machinery, heating equipment and certain electrical machinery were produced in foreign branch plants about a quarter of a century ago. This is more or less true also of some of our mining and packing enterprises in Latin America, and of sugar investments in Cuba. Many such enterprises started at a time when the United States was still dependent on Europe for capital to develop domestic industries and transportation facilities and also for current financing. In general, however, the postwar foreign investment movement has put the emphasis on manufacturing and public utility activities as distinguished from those based on the exploitation of natural resources[i]; our manufacturing abroad of industrial and agricultural equipment and laborsaving devices is increasing, as is also our furnishing of services which represent the results of American research and industrial technique and which have been developed to meet our own special economic conditions and our own standards of living.

When we try to examine motives we find it rather difficult to arrange them in order of importance, for their influence varies from industry to industry and even from time to time. For instance, the transportation factor, which may prove decisive in the case of harvesting machinery, may be of no practical importance in the case of a camera or a safety razor. Or the tariff considerations which may have been the principal inducement for the establishment of an industry in a foreign country may later be eliminated or modified by a change in commercial policy. Furthermore, motives seldom operate singly and it is rather difficult to assign each one the proper degree of influence.

In general, the establishment of branch factories for the manufacture of such commodities as have already found a place in the American market is motivated essentially by the desire to bring the product within the purchasing power of the foreign consumer by saving on transportation and import duty, or by inducing the foreign consumer to buy the product of the foreign branch plant when he is prejudiced, for some reason or another, against foreign products in general or against the American product in particular.

The general motive which perhaps has figured most prominently in the current discussion of the branch factory movement does not seem of very pronounced practical value. It is usually assumed that the outstanding inducement to start an American branch plant in a foreign country is to take advantage of a lower wage level. I am not in a position to state that this factor has not been considered very seriously by American industrialists contemplating foreign expansion, but I have serious doubts as to its actual value. Motives usually have a psychological character and do not lend themselves to statistical demonstration, so that I can support my assertion only by indirect proof. Canada, which has far more American branch plants than any other foreign country, probably comes nearest to duplicating American wage conditions, as evidenced by the interchange of labor between Detroit and Windsor. The standard of living and general consuming psychology of the two countries also are similar; and these, combined with the tariff factor, explain the special position occupied by Canada in our branch factory movement. Turning to industries, we may note that the automotive industry is probably most active in establishing branch factories. But when we examine the automobile branch plants we find that most of them are engaged primarily in the assembling of cars from American parts, so that even if the lower foreign wage scale is a factor in the assembling operations, along with the advantage of lower transportation cost and duties, it is not sufficient to overcome the advantage of our large-scale production of parts.

It would, therefore, be safe to assert that the difference in wage level does not figure very prominently in the case of Canada in general or in the automobile industry in particular. This is probably true of some other typical American industries, or industries producing by large-scale methods American specialties primarily for the American market. It naturally would not apply to American investments in Porto Rican embroidery or Turkish rug factories, where the chief factor is native skill developed under conditions that bear no resemblance whatever to those obtaining in the United States. It should also be realized that even in the case of the typical American industries there are signs of a tendency to extend the operations of the branch plants beyond mere assembling, but whether it is due to the difference in wage level or to factors like transportation or tariffs or, perhaps, to the desire for a better utilization of the foreign plant capacity (which in some cases is in excess of the immediate demands of the foreign markets involved), is something that can be ascertained only by an intensive investigation of the separate plants. Such an investigation would of course involve considerable difficulty.

Specific motives can be roughly divided into two classes, one positive, the other negative. The first includes the desire to utilize the advantages derived from original inventions and patent control and from the financial strength, general industrial experience and, particularly, large-scale production methods, which are regarded as the outstanding American contribution to industrial progress. The second class includes the desire to escape disadvantages like import duties, transportation costs, national prejudices and patent-law provisions which hinder the importation of the products of American factories. We might also mention the desire to take advantage of favorable conditions as regards raw material and power, or to get in "on the ground floor" in a new country with a promising future.

In speaking of the advantages enjoyed abroad by American producers owing to the fact that they cater to the needs of the most extensive domestic market in the world, and the one with the highest purchasing capacity, I must put forward a few reservations. The advantages of industrial experience and large-scale production methods are naturally somewhat diminished by the necessity of carrying on operations in an unfamiliar environment, especially as regards labor conditions and labor psychology. American labor seems more likely to respond to the economic stimulus of higher wages based on greater productivity than is labor in many foreign countries, where traditional wage policies and a chronic uncertainty of employment may disincline labor to coöperate whole-heartedly in carrying on efficient production based on American methods. Financial strength is undoubtedly one of the most important factors and figures very prominently in the European discussions of American industrial advance. The fact that some of our large industrial corporations are in a position to finance their foreign expansion from their own reserves may be an advantage of considerable importance when considered in the light of the capital situation in some of the more important industrial countries of Europe.

Of the factors which I have called negative the one that comes first into the mind of the American manufacturer when he plans to send his product to a foreign market is undoubtedly the tariff. The migration of some of our industries to Canada presents the most striking manifestation of the tariff's influence. In the case of Canada, moreover, the advantage of manufacturing inside the Canadian frontiers is enhanced by the fact that Canadian products enjoy preferential treatment throughout a large part of the British Empire. Consideration of the tariff factor is particularly likely in the case of a product adapted to assembling, such as the automobile, where the lower import duty on parts offers an opportunity for savings in duties without going to the extent of building a foreign plant adequate to manufacture the entire product. This factor is also effective in the case of luxury commodities, where the saving in duty is sufficiently important to overcome the handicap of less favorable technical conditions. Incidentally, one of the outstanding examples of the influence of the tariff in the case of a luxury article is to be found in the establishment of branch plants of French perfumery houses in the United States. Even if the tariff consideration is insufficient by itself to justify the establishment of a branch plant in a particular country, it may turn the scale when taken in combination with other advantages connected with savings in transportation charges, with being able to provide facilities for "servicing," and with satisfying national prejudices in favor of domestic products.

The part played by the transportation factor is naturally affected by the character of the product and the distance involved. With certain types of foodstuffs or other perishable commodities, it may be decisive. In some cases it may exert an influence based on more than one market; for example, it sometimes happens that a certain centre enjoys considerable advantages for international distribution and may therefore be selected as a location for branch plants in spite of the comparatively narrow market presented by the country in which it is located.

National sentiment is an influence that has been greatly intensified since the war. Many industries came into being as a result of the disruption of international economic relations by the war; certain industries were seen to be essential for national safety; and the post-war economic reaction has prevented certain countries in Europe from resuming their pre-war economic position. All this has served to strengthen protectionist sentiment and even to create it in countries which before the war were the exponents of more liberal tariff policies. In some countries regular campaigns are carried on to influence purchasers in favor of domestic products on patriotic or other grounds. In countries with extensive colonial interests, preferential arrangements or other means for placing the trade of the mother country in a privileged position operate to a certain extent against imports from other countries. While this tendency varies in intensity from country to country and is influenced to some extent by the economic progress of the countries involved, it is nevertheless a factor of considerable importance and in so far as it handicaps imports from abroad, either through a sentimental appeal or through tariff obstacles, it creates an inducement for the establishment of foreign branch plants. In the case of the British Dominions, the desire for industrial development operates in the same direction.

One of the most important reasons for the establishment of foreign branch plants is the desire to take advantage of convenient supplies of raw material or power. Outstanding examples are furnished by the tremendous development of the Canadian newsprint industry, to a considerable extent under the financial control of American paper interests; the expansion of the aluminum industry in Canada and Norway, with the participation of American finance; and the setting up of branch plants of American packing houses in certain parts of Latin America. When the foreign country's superiority as regards raw materials or cheap power is very pronounced, the centre of gravity in a particular industry may even shift to the foreign branch plants.

The advantages of establishing an industry in a new country with a potential capacity for economic development have not been overlooked by the more important industries of the United States. This policy, in addition to its promise of future profits, has also the advantage of gaining for the foreign investor a certain amount of good will on account of his manifestation of faith in the future of the country. It is hardly necessary to point out that such good will cannot be relied upon under all circumstances and that it sometimes evaporates under political stress.

In a number of foreign countries the patent laws provide that the patented product is to be manufactured locally within a certain time limit. In some cases the requirement is met by a licensing arrangement with a local concern; in others, especially where the market is of some value, a branch factory is found advisable.

The necessity for providing service facilities, especially in the case of complicated machinery and appliances requiring frequent adjustment, may operate as a secondary motive in the establishment of a branch plant. Again, a branch factory may sometimes be established for reasons of prestige, as a sort of advertisement for the main concern, rather than for legitimate economic motives. The desire to forestall the expansion of a competing concern has also been known to serve as a basis for such a policy. There are probably a few factors that may have escaped our notice, but we have examined the principal ones.


When we come to deal with the branch factory movement from the standpoint of its effect on the economic situation in the United States, we find that the public discussion which the subject has received so far has centred primarily on the possible effect which it may have on labor. The attitude of organized labor as expressed at the last convention of the American Federation of Labor, as well as in speeches and statements of Federation officials, is that the establishment of foreign branch plants by American concerns is detrimental to American labor in so far as the foreign-made product prejudices the export of the product of the American factory. It is also pointed out that in some instances an attempt has been made to import the foreign branch product into the United States to compete with the domestic product, and fear has been expressed that such a tendency might develop to the detriment of American labor. It has therefore been urged that such imports should be prevented by some provisions in our tariff law. Considering the prominence given to comparative production costs in framing our tariff policy, it is not likely that an American corporation will risk any considerable investment in a foreign branch for the purpose of supplying the American market. The duplication of plant involved and the fact that in many cases it would probably be uneconomical to reimport the foreign product, would also militate against such a policy.

I therefore shall confine myself to considering the phases of competition based on the assumption that the foreign-made product displaces the American product in the market in which the branch factory is located, or in the secondary markets which may be supplied more economically from the branch plant than from the main plant in the United States. Since no statistical study -- in so far as the subject lends itself to statistical treatment -- of the effects of the branch plant movement on our export trade has so far been made, the discussion must be limited to its theoretical phases.

The assumption that the branch factory prevents the sale of the American-made product in the country in which the branch factory is located involves the further assumption that the purchasing capacity of the foreign market is sufficient to absorb the American product at the American price plus transportation charges and import duty and other expenses incidental to the delivery of the product to the point of consumption. If this latter assumption is not true -- that is, if the sale of the branch factory product depends on the reduced price made possible by the savings in transportation and import duty and other expenses -- it would be incorrect to regard the entire sale of the foreign product in the market where the branch factory is located as a measure of the loss incurred by the American plant. But it could hardly be claimed that Canada or Europe would now be taking as many agricultural machines, heating plants or cash registers from American plants as are now produced in the foreign branch plants; there is no basis for the assumption that those countries would have been in a position to pay the enhanced price or that their tariff policies would have been adjusted so as to overcome the tariff handicap against the American product. Take the illustration furnished by a case involving the establishment of an Americantype industry in foreign countries through the branching out of the American industry manufacturing the production equipment involved: American shoe machinery, manufactured in the United States or in foreign branch plants, is generally admitted to have revolutionized the shoe industry of a considerable part of the world, but one would hardly claim that American shoe manufacturers would now be exporting shoes to the amount of the foreign production of shoes based on American machinery if such machinery had never been seen outside of the United States. American shoes, made at home or in foreign branch plants, are sold in many foreign countries, but they are intended primarily for the luxury trade and are beyond the purchasing capacity of the average consumer in foreign countries.

It would be extremely difficult -- if, indeed, it is not impossible -- to devise a method for measuring the actual loss to the American export trade involved in the establishment of an American branch plant in a foreign country. A mere comparison of the exports to a particular country before and after the establishment of the branch plant would necessarily involve certain assumptions as regards purchasing power and development of local competition which could not be supported by actual proofs; it would also have to be modified by the advantages derived from the shipment of parts and equipment and general returns from the investment. This does not mean that no loss is involved, but it suggests the difficulties in working out a basis for measuring it.

Where the branch plant is used to supply a market which is outside of the country where it is located and which was formerly supplied from the American plant, the loss is obviously more direct and lends itself to a more definite estimate. Cases might occur where on account of seasonal fluctuations or the more strategic position from the standpoint of service it might be found advisable to transfer a part of the export trade of the home plant to the foreign branch. The final justification for such a policy should be looked for in the validity and permanence of the economic motives involved and the competitive situation to which they might have given rise if the transfer had not been made. But whether the policy is justified from a purely economic standpoint or not, the immediate loss to the American plant cannot be denied.

One of the interesting points involved in any investigation calculated to ascertain the effect of the branch plant movement on our domestic industrial situation is the fact that not only has the proportion of our manufactured exports greatly increased since the war, but that some of the industries most conspicuous in the establishment of foreign branch plants have shown an unusual growth both in their domestic development and in their exports. The percentage of finished manufactures, excepting manufactured foodstuffs, in our export trade has increased from slightly more than 31 percent for the five-year period 1910-1914 to over 40 percent for 1924-1928. The absolute increase, of course, is still greater in view of the fact that the value of our domestic exports has just about doubled during the above periods. When we examine the groups of products theoretically most affected by branch factory competition, we find very considerable increases in the post-war exports of rubber manufactures, electrical, industrial and agricultural machinery, office appliances, photographic goods, and iron and steel manufactures in general. The increase in exports of automotive products is nothing short of phenomenal; in 1929 they constituted 10 percent of our total exports.

In the absence of detailed calculations based on an intensive study of each particular industry involved, this development does not necessarily mean that the results might not have been more favorable if there had been no branch factories. However, it does seem to indicate that such industries have not suffered absolutely from the branch factory movement, and lends a certain amount of support to the views held by many economists and students that an economic policy which serves to raise the purchasing capacity of foreign countries is likely, in the long run, to benefit the United States. The basis for this belief is found in the fact that for practical purposes our exports may be divided into two main classes: products intended to improve production methods, and those intended to raise the standard of living. It is quite obvious that in so far as our prosperity rests on our export trade, it is closely tied up with the economic welfare of our export markets; in so far as the establishment of American branch factories in foreign countries serves to increase the purchasing capacity of the population in those countries, the movement is likely to prove beneficial to us in the long run.

The critics of the movement do not overlook its broad economic significance or possible benefits, but are not convinced that the ultimate gains are sufficient to counteract the immediate and potential losses to certain specific industries and to the labor which is dependent on them. They also maintain that if the energy and capital put into the foreign expansion of our industry were utilized for a more intensive cultivation of the domestic market and the building up of its purchasing capacity, the foreign branch movement would lose a good deal of its economic justification. It is obvious that no definite conclusion is possible without having first settled some of the fundamental differences of opinion about our national economic policy, which is, we admit, somewhat beyond our capacity.


In discussing the extent of the branch factory movement, one is handicapped from the outset by the lack of even approximately reliable data as to the amount of American capital employed in that form of investment. While a number of private and government organizations have for years been collecting figures regarding foreign investments in general, no attempt has yet been made to isolate the investments in branch factories abroad. One of the reasons for the lack of information, in addition to the comparatively recent origin of the movement, is the fact that many of the branch factories are financed without recourse to separate public issues, so that any reliable investigation of the subject would have to be based on information obtained from the thousands of American corporations with foreign branches. An investigation by the Department of Commerce is now under way, but it will be some months before the results become public.

Estimates of the amount of American capital invested in Canadian industries have been published for several years by the Department of Trade and Commerce of the Dominion of Canada. According to the estimate for the end of 1927, the latest available, American investments in Canadian industries exceeded $1,300,000,000, of which about half was in pulp, paper, lumber and mining industries, which are based primarily on natural resources and power; the other half was in manufacturing proper. Current estimates of investments in Canada or in the rest of the world must be sheer guesswork. Even the Canadian official estimates are subject to a margin of error and must be considered in the light of the tendency on the part of Canadian capital to obtain control of the foreign branch plants in the Dominion. Another difficulty in estimating the capital invested is presented by the lack of a clear line of demarcation between the different forms of investment. Our natural tendency would be to include only manufacturing establishments and omit enterprises based on the exploitation of raw materials, like mining and lumbering, so that in the case of our large investments in the Canadian newsprint industry we should have to segregate the capital invested in the manufacture of pulp and paper; likewise in mining enterprises involving the refining process, only the latter would come within the scope of our classification. In the case of public utilities we should find another difficulty, not only because some of them manufacture equipment, but also because in so far as they are based on American technical achievements and efficiency in management, their contribution to the "Americanization" process is not essentially different from that of a manufacturing plant; in fact, their influence may be more widespread on account of the large number of consumers directly affected by them. While some form of arbitrary classification could undoubtedly be worked out, it would be futile to attempt any estimate of the investment involved on the basis of the fragmentary data available at present.

Some idea of the scope of the movement may be obtained from a brief discussion of the character of the industries participating in it. In the case of Canada, it is sufficient to point out that while industries like paper, automotives, aluminum, rubber and agricultural machinery are most conspicuous, probably thousands of other American products are manufactured or assembled there. In fact, if the Dominion maintains its present tariff policy, the scope and variety of the movement will probably be influenced primarily by the growth of the Canadian market on the one hand, and of Canadian capital on the other.

In Europe the range of industries involved is naturally much narrower; it includes primarily the production of automotive products and certain accessories, agricultural and industrial machinery, railway supplies, heating plants, photographic appliances, cash registers, certain office appliances, elevators, sewing machines, safety razors and even, strange as it may seem, toilet preparations. In the field of utilities, especially in telephone communication, American influence is beginning to be felt. In the rest of the world, American investments are gravitating more towards the exploitation of natural resources and public utilities, with potential developments in the purely manufacturing field in certain parts of Latin America and some of the British Dominions.

This more or less cursory outline should be sufficient to indicate that we are dealing with a movement of considerable significance from a national and international standpoint. It is clear that our foreign industrial expansion is an integral part of our economic development in the domestic field and is receiving its impetus primarily from our general industrial and financial progress. To the student of economic history this development is quite in keeping with the economic traditions of the more important industrial countries of Europe. Leaving out of consideration the industrial expansion into colonial possessions and dominions, which is often influenced by political as well as economic factors, we find that the industrial countries of Europe have in many cases manifested the same readiness to branch out into foreign countries as is now shown by the United States. The energy and initiative displayed by British financiers and textile men in developing the cotton industry of the world was probably as great, allowing for differences in scope and economic background, as that shown, let us say, by our own automobile manufacturers; in the public utility field, the pioneering work of the British railway contractors and gas engineers did not differ essentially from the functions of our telephone and power corporations. The same is true of the German chemical and electrical concerns and, to a smaller extent, of the Dutch margarine and the Belgian plate-glass producers. With all our present resources and industrial initiative, an extensive rayon industry and some important chemical concerns in the United States are still controlled to a considerable extent by foreign capital, and it is not at all improbable that as Europe recovers from the war there will be more instances of this kind, with or without the participation of American capital.

There is absolutely no reason, then, for regarding our foreign expansion as something apart from the broad movement of international industrial migration and international movement of capital that has been going on more or less since the beginning of our present economic era. We must recognize, however, that the change in the international alignment and the acceleration of our economic development since the war must be considered in appraising the international implications of our economic expansion.

[i] Except in Canada, where the industrial migration is influenced by exceptional economic and social factors.

You are reading a free article.

Subscribe to Foreign Affairs to get unlimited access.

  • Paywall-free reading of new articles and a century of archives
  • Unlock access to iOS/Android apps to save editions for offline reading
  • Six issues a year in print, online, and audio editions
Subscribe Now
  • LOUIS DOMERATZKY, Chief of the Division of Regional Information of the Bureau of Foreign and Domestic Commerce in the Department of Commerce
  • More By Louis Domeratzky