Outsourcing and the Us economy

Debunking Outsourcing – Outsourcing and the US Economy 1

Geeta Shah – Lead Instructor

Ijatu Barrie - Instructor

Macro Econ 252. 4203

2 May 2023

Debunking Outsourcing - Outsourcing and the US Economy

by Linval McFarlane, Nathaniel Kirby, Yulia Stets, Cody Elliot, Tarang

Malaviya, Salomon Perez, Salman Syed and Seth Riggins.

A remarkable feature of the U.S. economy over the past several years has been the

continued growth in the outsourcing of not only intermediate inputs and services but also goods,

as firms seek to reduce costs, improve productivity, and increase profits. It is becoming more

evident that the outsourcing of services, especially business, professional, and support services,

has contributed to the growth of the service sector, but this practice has also set into motion

changes in the production sector of the economy as businesses seek cut costs on material inputs

from home and abroad. The unstable nature of energy inputs prices, markedly, imported

petroleum, have considerably affected the costs and profits of several U.S. industries in the

recent past. The increased dependence on imported material and services inputs has heightened

concerns about the effects of import substitution on the indigenous industries that supply these

inputs. However, recently there have been debates arguing that with a better understanding of the

role of domestic outsourcing could help improve our understanding of offshore outsourcing. The

influence of foreign direct investment on U.S. employment continues to attract national and


international attention. In today’s competitive marketplace, local interest groups compete with

each another for investment ventures, whilst many residents of these communities are anxious

about becoming a part of the unemployment statistics as U.S. owned and operated companies

seek out locations overseas and foreign workers to perform jobs that customarily have been done

in the United States, this process is generally referred to as outsourcing. According to the

Merriam Webster dictionary outsourcing may be defined as “the process to procure (as some

goods or services needed by a business or organization) under contract with an outside supplier”.

Some pundits suggest that current U.S. foray into outsourcing is different from those in former

years and posit that Congress must take active steps to buffer the economic backlash of these

activities. Others hold the position that overseas investment whether it is foreign direct

investments or foreign portfolio by US multi-nationals retards the growth of new jobs in the

economy and is counterproductive to nation’s drive for increase investment in the technology

sector. The US economy is also a beneficiary of insourcing. Insourcing (for the purpose of this

paper) is loosely defined in the United States, as the use of U.S.-based subsidiaries by foreign

multinational corporations; these insourcing companies contribute to research and development,

capital investment, exports and job creation. It is the common view among economists that free

unrestricted flow of capital will in the long run have a positive impact on both domestic and

foreign economies. Whereas outsourcing is often looked upon as a negative impact of

globalization that sends U.S. jobs abroad to countries with cheaper labor, outsourcing actually

works both ways because it also sends jobs to the United States from foreign countries.

The United States has the privilege of being both the largest foreign direct investor and the

largest recipient of such investment funds in the world. Its position as the leading protagonist in

foreign investments continues to fuel a national debate over many facets of foreign investment,


including but not limited to its impact on employment; the effect on corporate research and

development; the implications for national security of foreign direct investment in U.S. industrial

firms; and the implications for high-technology jobs, especially on science and engineering

activities that are deemed to be important for continuing economic advancement. One of the

challenges observers face is to distinguish between outsourcing and off-shoring. Outsourcing

involves other parties while off-shoring involves moving the enterprise to another country but it

is still owned and run by the parent company. This paper will include all activities relating to

both under the topic of outsourcing. According to the Code of Federal Regulations, “The United

States defines foreign direct investment as the ownership or control, directly or indirectly, by one

foreign person (individual, branch, partnership, association, government, etc.) of 10% or more of

the voting securities of an incorporated U.S. business enterprise or an equivalent interest in an

unincorporated U.S. business enterprise” (806.15)

Unfortunately, no apparent consensus exists in the economics profession on how to define

outsourcing and international standards provide little guidance on how to treat outsourcing in

national economic accounts. Partly as a result of this void, the data that are available for studying

outsourcing-related issues are quite limited.

A Historical Perspective

The word outsourcing, although widely used in our society today had its first usage come

thirty years ago during the late 1970’s and according to the Oxford dictionary, it is defined as

‘[the process] to obtain (goods or a service) by contract from an outside supplier’. Despite such

a recent start to the usage of the word, outsourcing has been utilized as a business strategy since

the industrial revolution and has since picked up pace towards the end of the 20th century.


Outsourcing in its initial stages after the industrial revolution was not seen or intended to

be seen as a cost effective measure by organizations, nonetheless, according to Robert Handfield,

Ph.D. Director of SCRC, Bank of America University Distinguished Professor of Supply Chain

Management, “most organizations were not totally self sufficient; they outsourced those

functions for which they had no competency internally”. The services that were being outsourced

were never part of the primary business systems, but were usually smaller yet essential functions.

This type of outsourcing was domestic as it would have been uneconomical for these functions to

be outside the country or even the state.

Subsequently, the concept of outsourcing started to gain some traction and was

incorporated as an official business strategy used particularly to help businesses financially i.e.

by outsourcing components of the said business to other organizations, but keeping the core

business component within the firm. This strategy was geared predominately towards third world

countries to which firms would send those modules which would lower costs and raised the

economic efficiency of the firms. Outsourcing, as a go to business strategy has once again

evolved to meet the needs of modern commerce with the intent to make companies more

dynamic; today’s global business practices involve outsourcing as way of not only saving money

on the routine production tasks, but also as a way of reducing complex management structures of

a company by keeping its core function domestic and outsource the other factors such as

manufacture and customer services, to third world and lesser developed countries. By applying

these strategies companies avoid having a large management system which could not only be

expensive but inefficient as well.

Over the course of time outsourcing has immensely evolved with the demands of the

global economy, and during this time it has taken on different names. Off-shoring or offshore


outsourcing is a common term used instead of outsourcing, specifically, outsourcing to another

country. This model of outsourcing targets countries, where factors such as labor is cheap,

government of host country is willing to offer tax break incentives to investors in an effort to

making investing their an awfully attractive venture. This benefits both the organization and the

foreign economy to which companies outsource. Figure 1 below shows how India, one of the

most favored places to outsource, has seen exponential growth and development in its IT

industry over the years due to outsourcing.

Figure 1. Growth of the software/ IT Industry in India [NASSCOM]


Outsourcing has been a topic of much debate on many political and economic stages with

arguments based upon the export of jobs to foreign workers and its effect on the US economy.

The candidates of the 2004 and 2012 United States of America Presidential elections have

strongly debated and built their manifesto around the idea of the value of outsourcing. During

their campaigns each camp postulates to stop the export of jobs and diminish the effects of

outsourcing on the American labor market. Figure 2 shows the media reference to outsourcing

spiking when the campaigns are going on for the 2004 presidential election in which outsourcing

was a key issue.

Figure 2. Media reference to outsourcing


Outsourcing, throughout its short but dynamic history has seen many advancements and

adaptations of its use and has become an internationally recognized business strategy, albeit with

ill defined perimeters.

Advantages of Outsourcing

A country may benefit from outsourcing in various ways. If a country practices trade

policies without outsourcing, that country may experience difficulties the global competitive

marketplace. Many counties, for example, the United States send several jobs overseas where the

cost of labor is much lower than it is on the domestic front. According to the Bureau of Labor

Statistics in a 2011 New Release entitled International Comparisons of Hourly Compensation

Costs in Manufacturing, the hourly compensation manufacturing cost in US dollars for the year

2011 is $35.50, while Mexico’s and the Philippines’ cost are $6.48 and $2.01 respectively as

indicated in chart 1.

Chart 1.1, highlights two other examples of low hourly wages in countries to which the

US outsourced its jobs are China and India. In the same news release by the Bureau of Labor

Statistics, for the period 2003 to 2008, the hourly wage in manufacturing ranges from $0.62 to

$1.36 in China, and $0.81 to $1.17 for India (see chart 1.1). When compared to the wages paid

to US workers, these wages are like a dime to the dollar. These overseas laborers work for much

lower wages and for many companies in U.S.A., such arrangement is more cost effective and

efficient even though in some anti-outsourcing quarters they have likened these work

arrangements to modern day sweat shops. When the U.S. economy slowed, and presented

companies with the decision of either increase the price of their goods and services or cut


production costs the strategy of outsourcing became a viable option with reducing labor cost as

its primary concern.


Chart 1.1


When the US outsources labor to countries like China or India, the cost of labor reduces.

The reason for this cheap labor is due to the lower costs of living in those countries. When there

is a lower cost of living, people need less money to buy the things they need; therefore, the

wages do not need to be as high as they are in places where there is a higher cost of living. In

addition to lower labor costs, overhead costs, such as rent and utilities, are also lower in these

countries. These lower costs allow US companies to sell more products at a lower price. Because

of this increase in affordability, people can purchase more products from these companies

resulting in higher revenue.

Another catalyst for outsourcing was the shortage of skilled labor. There were not

enough “skilled” laborers to do what some considered being rudimentary jobs, as a result US

companies set their sights on other nations for help in acquiring the laborers with the skill-set and

pay scale that will make their investment profitable. The reduction in labor cost drastically

affects the price tag on the final good or service. “The labor costs overseas are too great to

ignore, and with well-trained people available, companies are often compelled to at least try

outsourcing” (Kakumanu 2). Improving time utilization is another way outsourcing positively

impacts the US economy, particularly with skilled jobs that involve daytime work. When US

companies outsource work to a country located within a different time zone, there are more hours

that are available for productivity. For example, there are 168 hours in a week. Let us say that of

these 168 hours, a company solely using local labor has 112 hours of productivity. If that same

company were to outsource labor to a country whose daylight hours were opposite theirs, then

their productivity would increase from 112 hours to the full 168 hours. Granted, there may be

some hours where both local and foreign laborers work at the same time so they can effectively

communicate and keep projects running smoothly; however, the increase in productivity would


more than compensate for the brief overlapping work load. Outsourcing helps U.S. firms to

maintain flexibility and remain competitive. If the U.S. did not outsource, chances are, it would

lose its competitive edge and experience lower production levels or increase the price of the final

good or service.

Amidst the numerable benefits that outsourcing presents, in some quarters of the

economy the benefits of outsourcing seems to be on the decline for several reasons. One reason

is the gap in labor arbitrage is narrowing. For example, the United States capitalizes on labor

arbitrage by outsourcing cheaper labor from China. However, wages have steadily been

increasing in China over the past few years. Tamzin Booth, a journalist for The Economist,

reveals that “wages in China…have been going up by 10-20% a year for the past decade.” Based

on her findings, Booth predicts that by 2015 the labor in China will be just as expensive as labor

in the US. Another reason for the decrease in the value of outsourcing is industrial automation.

Many factories are becoming partially, or even completely, automated. This increased

automation means that fewer workers are needed, reducing the cost benefit of outsourcing.

Disadvantages

As with many aspects of economics, outsourcing has its disadvantages, including but not

limited to: Unemployment; Poor Service Quality and Lack of Costumer Focus; Poor Fit with

Outsourcing Company; Perceived Loss of Control and Decreased Employee Morale.

Of these disadvantages, unemployment is arguably the biggest area of concern. When US

companies outsource work to other countries, it eliminates certain job opportunities for US

citizens. Although many people theorize that outsourcing renders unemployment, most

economists believe that unemployment caused by outsourcing is a short-term problem. Their


reasoning is that outsourcing enables companies to be able to afford services that otherwise

would be too expensive. This ability to continue operating efficiently preserves the profitability

of such companies. With more companies thriving and increasing their revenues, it in turn

increases the amount of money in our economy. This increase of funds in the economy leads to

the creation of more jobs in the long-run by providing job stability and the ability to pay

worker’s wages.

The research does not always show that service quality is improved through outsourcing.

While the objective of internal company is to save money when outsourcing products or services

to external partners, some consumers are generally dissatisfied with the poor quality of service

experienced with the outsourced products or services. More often than not, the external company

deals with multiple companies and amid the “noise” of transacting business for these several

companies focus about details is lost and poor customer relations becomes the end result.

In order for outsourcing company to be successful, the company has to build a good

relationship with its partners, external companies. If two companies are not compatible, then the

desired symbiosis may be poor or even not occur. The effects that such dissonance creates can

lead to greater expense on the part of the parent company than it would have incurred if it had

not venture into outsourcing. Loss of managerial control can also negatively impact the

company. When US companies outsource, they are usually required to sign contracts that, may

in part, require them to relinquish some managerial authority to either the country or the

company they are outsourcing to. This decrease in control means that the outsourcing company

will no longer have the same mission or standards that the company once had, which can

potentially lead to a lower quality of product, less revenue, or an unwanted perception of the

goods being produced.


Outsourcing in a Global Economy

Outsourcing is a complex and at times divisive issue that has long been debated on both

national and international stages. To better understand the issue of outsourcing, its causes, and its

effects an observer should examine the products and services which are being outsourced. The

products being outsourced are a diverse mixture of both consumer and commercial goods and

services, the majority of which can categorized into three major industries; medical services,

professional services, and the manufacturing of goods.

Medical services are a relatively new candidate for outsourcing, and thus offer many new

applications of its principles. In his February 2006 article entitled, "The “Dis-location” of U.S.

Medicine — The Implications of Medical Outsourcing", published in the New England Journal

of Medicine, Robert M. Wachter, states that “the medical field’s acceptance of outsourcing can

largely be attributed to advancing technology rendering the total ‘physicality’ of medical

examinations and treatments unnecessary”. He continues to argue that as a result of so many of

a doctor's duties “ranging from diagnostic imaging to the manipulation of laparoscopic

instruments” no longer requiring the physician to be physically present to perform them, thus

their knowledge and expertise are effectively “rendered borderless” (Wachter). The potentially

outsourced services include remote monitoring of ICU patients, interpreting test results, and even

surgery (Wachter). All of these services being outsourced would potentially free up on-site staff

and allow specialists and surgeons to help more people than ever before (Wachter). These

developments in medicine may offer not only the cost saving benefits often associated with other

forms of outsourcing but also increasing the quality and accessibility of care to those who need


it. Medical outsourcing, while still examined for its viability, offers arguably some of the most

innovative and tangibly beneficial applications of outsourcing today.

Professional services such as tax preparation, IT, customer service, and accounting

services are also being adapted to various forms of outsourcing. Customer service and IT have

long been objects of practice of outsourcing; however, as said by BMO Harris Bank Voice. In a

Forbes magazine article entitled, “Why Outsourced Jobs Are Returning Stateside”. Some

companies have begun to reverse their role in this trend. General Motors is one example, recently

deciding to change its allocation of IT jobs from 90% outsourced and 10% in-house, to 10 %

outsourced and 90% in-house (BMO). The United States has even become the location for

outsourcing for international companies such as Indian based Aesgis, which is opening a 4000

employee customer service call center in Texas (BMO). But while some companies have moved

away from outsourcing others have adapted it to new facets of the service industry, including

accounting and tax preparation. Jesse Robertson of the Social Science Research Network posits

in a research entitled “The Coming Accounting Revolution: Offshore Outsourcing of Tax Return

Preparation”, “many US accounting firms have outsourced accounting services such as ensuring

tax compliance overseas, and to India in particular, with some estimations putting the number of

accounting jobs relocated overseas as high as two million since 2004”. This outsourcing frees up

US based accountants to handle “higher margin” accounting services and increases overall

market efficiency (Robertson). While outsourcing of professional services is undergoing

changes, with some companies choosing to move away from their previously strong relationship

with outsourcing, other industries are taking full advantage of the benefits outsourcing offers.

Perhaps the oldest and most established form of outsourcing is the outsourced

manufacturing of consumer and commercial goods, as it produces tangible goods seen and used


every day. In a researched commissioned by the Congressional Research Service, James K.

Jackson report, “Outsourcing and Insourcing Jobs in the U.S. Economy: Evidence Based on

Foreign Investment Data”;

Manufacturing is by far the largest industry for outsourcing and the variety of goods

produced is vast The total number of foreign workers employed by non-bank US firms

increased for the third straight year and reached 13,255,800 in 2010, with 6,074,900 of

those workers being employed in manufacturing . The largest employing sector within

manufacturing was the production of transportation equipment, with 1,311,300 workers;

this equipment may include anything from passenger cars to trains, airplanes, or boats.

A 2005 study found that even automobiles assembled in The United States depended on

overseas workers and industry, as demonstrated in figure 3.


Production Allocation Value of "American" Car

37% USA30% Korea (Assembly)17.5% Japan (Components)7.5% Germany (Design)4% Taiwan/Singapore (Minor Parts)2.5% UK (Advertising)1.5 Ireland/Barbados (Data Processing)

Fig. 3. The value of a particular American car categorized by country and percentage of car’s value generated within that country.

As This figure shows even transportation products not explicitly manufactured through

outsourcing are results of a global system of outsourced workers. Computers and other

electronics make up the second most outsourced goods, with 870,200 workers making both

commercial and consumer electronics (CRS). The third largest facet of manufacturing is the

production of chemicals, which is accomplished using 827,900 workers (CRS). These three

industries account for 3,009,400 workers, or nearly half of all those employed in outsourced

manufacturing (CRS). Manufacturing then would seem to have a strong record as the major


market for outsourcing and, based on recent growth a promising future, especially in the three

areas of transportation, technology, and chemical productions.

Outsourcing can be examined through many views and ideologies but the large role it

plays in the world economy cannot be dismissed, and the various ways in which outsourcing is

being implemented in new sectors will likely present never before seen opportunities. The

medical field’s implementation of outsourcing will likely change the manner in which medicine

is practiced in a large way, both within the United States and around the world. Even though the

growth of outsourcing professional services may be slowing down in areas such as IT and

customer support, it is booming in new spheres of the financial services industry and continues to

be a valuable resource to US based firms. In recent years outsourced manufacturing has been

growing steadily and based on this data is likely to continue expanding its already dominating

share of outsourcing. Examining these current developments in outsourcing with historical trends

in mind one is able to see that though outsourcing appears to be changing in key areas of its

historical roles and applications, newly created opportunities would seem to promise continued

evolution and growth.

Insourcing in America

While discussing offshoring, its history, and its effects on both the local and the global

economy, it is vital to look at outsourcing’s converse, or onshoring/insourcing. The following

pages will address onshoring and insourcing in a way that lends a holistic nature to this paper. By

looking at what insourcing and onshoring are, certain examples of these economic functions, and

how the flow of capital between countries impacts job creation and growth, it is possible to see

the bigger picture than would otherwise appear in a perusal of only outsourcing. In any study, it


is important to understand the difference between terms that are easily confused. Before delving

into specific examples and numbers that surround this aspect of economics, the following terms

must be dealt with and discussed.

First to be examined is the term, insourcing. Insourcing is a firm’s move to bring an

outsourced operation back “in-house.” When an American company makes the decision to stop

contracting their IT work to a company in India and instead hires U.S. workers to perform that

same task, they are in sourcing. Companies may do this because they recognize the hidden costs

of outsourcing – public image, security, high turnover, distance and language barriers, and

international obstacles that arise when using a foreign workforce. Insourcing is specific in that it

in involves the internalization of a process that was previously contracted out to another firm.

While discussing the international trade of goods and services, it is also possible for a U.S. based

firm to in-source a process back from another U.S. based firm.

The next economic function, onshoring, is different than insourcing in that it specifically

implies a domestic firm bringing jobs back to the United States. A firm may do this for the same

reasons listed above – to save on the added cost of offshoring and to have more control of their

own business practices. It can be difficult to quantify exactly how many jobs are created each

year as a result of onshoring because even as organizations move manufacturing and other

departments back to the United States, jobs are both created and lost as a result of internal

restructuring.

The term, insourcing, may be used by some to describe jobs created in the United States

by foreign firms, but this function can be more aptly described as foreign direct investment.

Foreign direct investment (FDI), describes the investment by foreign-majority-owned


multinational corporations that operate U.S. affiliates in our own country. A study of FDI is

crucial in understanding insourcing because as dollars are invested in our own economy, jobs are

created by foreign entities. While the popularity of outsourcing still causes U.S. based companies

to outsource jobs to foreign countries, it is prudent to keep in mind that other countries outsource

jobs to the United States by expanding their presence and workforce in our own country. While

some may refer to the jobs created by FDI as insourcing, FDI stands as a more accurate and

academic term to describe and quantify the creation of jobs and investment of wealth within a

country.

To look specifically at onshoring, consider the following study: a German financial news

organization stated the results of a Boston Consulting Group report that delves into onshoring

and the current change of tide in that “more than half of U.S.-based manufacturing executives at

companies with sales greater than $1 billion are planning to bring back production to the U.S.

from China or are actively considering it.”1 This consulting group estimates that upwards of five

million manufacturing-related jobs could be created by 2020 if this trend continues. The top

three reasons given by executives for this shift were labor costs, proximity to customers and

product quality.

One of the most prolific American manufacturing companies, General Electric (GE),

gives a perfect example of what successful onshoring looks like in the 21st century. Four men

(one of whom was Thomas Edison) started General Electric in the late 19th century and

developed the firm into one of the most recognized and respected brands in the world. Many

look to GE as a gauge of global consumer and international manufacturing trends. To respond to

1 http://www.finanznachrichten.de/nachrichten-2013-09/28091613-majority-of-large-manufacturers-are-now-planning-or-considering-reshoring-from-china-to-the-u-s-a-survey-by-the-boston-consulting-group-finds-th-256.htm%20


the post-WWII middle class, GE built a massive complex outside of Louisville Kentucky. This

complex, known as Appliance Park, was so large that it was given its own zip code. In the early

1970s, employment peaked at Appliance Park with over 23,000 employees. With the turn of the

century, the outsourcing boom, and the housing market crash, General Electric’s massive

facilities in Louisville were all but abandoned. In 2011, the number of employees at Appliance

Park dropped below 2,000.2

Recently, however, GE has been constructing new assembly lines in Appliance Park,

training workers, and restructuring their organization in an effort to bring back – to onshore their

appliance manufacturing processes. Executives realized that the disconnect between design and

manufacturing was a gap 7,000 miles wide. According to an article in The Atlantic Magazine,

Appliance Park ended 2012 with 3,600 employees and 55% of its revenue coming from products

manufactured in the United States.3 This plant is turning out nearly the same number of

appliances as it did during its manufacturing prime and with less than one third of the workforce.

In fact, one of the first products GE brought manufacturing back to the U.S. for, the GeoSpring

water heater, retails for around 20% less than it did when manufactured in China - $1,299 versus

$1,599. This gap goes against intuition by showing that it can be cheaper to manufacture goods

domestically. Similar to General Electric’s efforts to bring back manufacturing to the United

States is Apple’s recent announcement that the company plans to build a plant in Mesa, Arizona.

Apple claims that the new facility will create 2000 jobs. Additionally, the company already paid

a $578 million to New Hampshire-based technology company, GT Advanced. These jobs and the

2 http://blogs.hbr.org/2013/07/insourcing-at-ge-the-real-stor/#%213 http://www.theatlantic.com/magazine/archive/2012/12/the-insourcing-boom/309166/?single_page=true


near $600 million investment made by Apple in the American economy decidedly create positive

benefits for the domestic economy, the consumer, and Apple themselves.4

While the United States remains the largest foreign direct investor in the world, it is also

the largest recipient of foreign investment. Shifts in foreign investment inevitably impacts

employment and this section of the report will deal primarily with foreign direct investment

made by multinational corporations in their affiliates based domestically in the United States.

Generally speaking, the most developed countries are the ones to devote the greatest portion of

funds to investing internationally and also receive the greatest amount in the form of investment

from abroad. As stated before, the United States is no exception. Consider the following graph,

which illustrates the international flow of stock, both in an out of major countries and regions.5

4 http://www.bloomberg.com/news/2013-11-04/apple-to-build-plant-in-arizona-with-2-000-workers-to-make-parts.html5 http://www.fas.org/sgp/crs/misc/RL32461.pdf


http://www.bloomberg.com/news/2013-11-04/apple-to-build-plant-in-arizona-with-2-000-workers-to-make-parts.html http://www.fas.org/sgp/crs/misc/RL32461.pdf


This next graph shows specifically the flow of investment in the United States since

1990. Note that the general trend is upward in nature but fluctuates from year to year.

Investment from abroad is impacted by many factors, notably the current state of the U.S.

economy. Note that the significant drop of FDI in the U.S. after the turn of the century and again

in 2008 correlates with the early 2000s recession and the Great Recession. While these periods of

shrinking GDP certainly factor into the flow of FDI, they are not the sole causes, and the exact

source of influence on FDI is debated by economists.


These numbers matter because investment in our economy means the creation of jobs.

This creates a quantifiable source of insourcing – foreign companies moving jobs and money

into the United States economy. From 2009 to 2011, the inflow of foreign direct investment grew

by 58%, from $143.6 billion to $226.9 billion. This flow of money represents real dollars being

spent on the worker in the United States. In 2010 alone, the U.S. affiliates of foreign firms spent

$45,251 billion on research and development. The process of research and development creates a

demand for skilled workers in highly paid fields within the United States. As it turns out,

workers employed by U.S. affiliates of foreign companies account for a 4% share of the entire

U.S. civilian workforce, or around 5,800,000 people, a percentage share that has remained

relatively steady since 1992, fluctuating by fractions of a percentage point. What is interesting is

that even while foreign direct investment has grown substantially through the past two decades,

the number of workers employed as a result of this investment has not grown with that number.

The report that these graphs and numbers came from concludes, even after highlighting the

trends and data surrounding FDI, that it is “difficult to identify any broad trend regarding the

employment effects of direct investment.”

Effects on GDP and the Economy

Exactly how outsourcing impacts the US economy is difficult to figure out. Although

there are several ways in which outsourcing helps the economy, the permanence of those benefits

and also the negative aspects associated with outsourcing are two very important things that

demand keen attention.

The majority of the arguments that are put forward against outsourcing are best

described as a lack of knowledge about the principle itself. Research suggests outsourcing does


not have a significant adverse impact on the United States gross domestic product (GDP). A

study conducted by economists Mary Amitti and Shang-Jin Wei in 2004 shows how far apart the

United States of being at risk from outsourcing activities in the country. Their study shows that

only around .4 percent of the U.S’s total gross domestic product was earn from business service

imports. Therefore, one may argue that the wellbeing of U.S. economy and GPD in particular is

almost independent of the possible effects of outsourcing. During economic downturn in 2000,

the value added share of GPD originating in the outsourcing sector declined from 11.6 percent to

11.5percent; outsourcing had a negligible impact on the American economy even though it was a

period of instability.

Regardless of the small impact that outsourcing currently has on the U.S. GDP;

outsourcing by American corporations continues to expand. According to data from “Domestic

Outsourcing and Imported Inputs in the U.S Economy” by Robert E. Yuskavage the share of

U.S. GDP accounted for by domestic providers of outsourcing services has increased 12 percent

compared to the 7 percent increase in 1982. The advancements in communications technology

services will eventually make outsourcing have a much greater impact on the U.S. GPD.

Outsourcing will eventually become an important fact affecting domestic industry output and

internal employment; however, we as American do not have to feel threatened by outsourcing.

Summary

Outside the strategic implications, the current financial undercurrents of outsourcing are

changing rapidly. The following realities about the global economy are becoming more evident

or are unfolding now: Crude oil prices have tripled since 2000, making cargo ship fuel a much

more expensive option. Wages in China are now five times what they were in 2000 and rising at


an annualized rate of about 20 percent. Several American unions have learned an agonizing

lesson about the need to reevaluate their purpose. Their previous strategies of annual negotiations

and threats of strikes in the absence of economic reality must be replaced with more comparable

global competitive strategies. The natural gas boom has lowered operating and facility costs

dramatically in the United States.

The outsourcing process is a complex network of physical and transactional processes.

Many organizations could have hundreds of new opportunities for improvement depending on

the size, scope, content and geographical logistics of their outsourcing activities and according to

Terence T. Burton is president and CEO of The Center for Excellence in Operations Inc., there

are five outsourcing improvement opportunities that companies can act upon and eventually

generate significant savings, namely: Cost of outsourcing strategy. This is a rationalization and

reassessment of the current outsourcing portfolio in terms of the relationships in creating revenue

versus sourcing decisions. The multifaceted global economy necessitates organizations to remain

somewhat fluid when it comes to outsourcing strategies. Shifts in markets over time, may drive

logistics and management costs up resulting in business ventures reviewing their commitment

level and strategize on how the “pack up shop” and return the manufacturing to the U.S.

Secondly, cost of management and coordination. This hidden cost area shellshocks executives

when the total annualized cost of management and coordination is developed. It includes the cost

of people’s time and travel expenses. It also includes other lost opportunities such as late new

product introductions due to resources involved in sustaining engineering, quality improvement,

process improvement, or simply getting new products to work in the marketplace. These

activities and associated costs quickly add up to millions of dollars, and much of it is

symptomatic of deeper problems such as weak local leadership, a bad outsourcing strategy,


fragmented design and development or poor supplier selection. Many managers have an “it

comes with the territory” attitude, but there are real unplanned and hidden costs. It takes the right

experience to identify and isolate these activity-based wastes and their recurring root causes. But

such analysis leads to evidence-based improvement and cost reduction. The third strategy that

companies may give attention to for improvement is the cost of sales and operations planning.

Cost of sales and operations planning is probably one of the most challenging undertakings in an

organization. Outsourcing has lengthened the proverbial pipeline, so schedule changes have a

much larger impact than when we could walk out to the plant or drive down the street to a

supplier. An added complexity factor is managing multiple demand streams to a network of

outsourced contractors. A thorough understanding of the hidden costs and their root causes is the

first order of business. The goals are more realistic schedules, continuous communication, and

frequent performance reviews around the true issues hiding in this process. A fourth area for

improvement is the cost of inventory performance. Outsourcing reduces flexibility in design and

the ability to respond to schedule changes. This usually translates to more inventory in the

pipeline, more mismatches between supply and demand, more shrinkage, more excess and

obsolete inventory and higher risks of things going wrong. This translates into millions of dollars

of negative cash flow. Additionally, think of what happens in many organizations at the end of

the month. Rather than selling the higher margin items that were planned, they sell whatever is

available to sell, sometimes with negative margins. In addition to the aforementioned aspects

cost of quality is another straightforward concept, although the hidden costs often are difficult to

quantify. Obvious costs like scrap, rework and repair can be found on financial statements. The

remaining costs like prevention, detection, and internal and external failure are more challenging

and require assumptions and a good activity based approach. Finally, the cost of unplanned


logistics and premium freight, is another opportunity when fine-tuned will save a firm money in

the long run. The expenditure incurred when products have to be moved around with last-minute

jet trips and partial containers can become quite expensive. Often, a product needed for a U.S.

customer is in the European distribution center or vice versa. Then there is the mismatch and

movement of product from distributor to distributor, or a non-value-adding conversion process to

get the right mix of product.

Ultimately, outsourcing helps the US economy more than it hurts it. Resource-based

theorists argue that organizations will attain competitive advantage by building superior

performance positions in activities that are valued by customers (Barney 1991, Peteraf 1993).

Superior performance in the activity is considered sustainable where it is difficult for competitors

to replicate. Determining the relative capability position in an activity involves identifying the

performance disparity between the sourcing organization and competitors and suppliers. For

outsourcing purposes, the sourcing organization can possess either a ‘higher relative capability

position’ or a ‘lower relative capability position’ in the activity. The logic of the RBT is that

organizations should perform internally activities that are valuable, rare and difficult to imitate,

to gain sustainable competitive advantage. This logic is integrated into the ‘relative capability

position’ construct. Therefore, organizations should perform internally, and build capabilities in

areas that deliver competitive advantage.

Outsourcing represents situation of delegating of originally own activities of an economic

venture to an external supplier. It serves a myriad purposes including focus on core business,

cost restructuring, improvement of quality, access to larger talent pool and sustainable source of

skills, capacity management, catalyst for change and innovations and risk management.


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Honor Project Participants

Elliot, Cody __________________________________________

Kirby, Nathaniel __________________________________________

Malaviya, Tarang __________________________________________

McFarlane, Linval __________________________________________

Perez, Salomon __________________________________________

Riggins, Seth: __________________________________________

Stets, Yulia __________________________________________

Syed, Salman __________________________________________

Outsourcing and the Us economy

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