Outsourcing and the Us economy

Debunking Outsourcing – Outsourcing and the US Economy 1
Geeta Shah – Lead Instructor
Ijatu Barrie - Instructor
Macro Econ 252. 4203
12 November 2015
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/ ITIndustry 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.

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
Production Allocation Value of "American" Car
37% USA
30% 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)

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
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

look to GE as a gauge of global consumer and international manufacturing trends. To respond to
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/#%21
3 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.html
5 http://www.fas.org/sgp/crs/misc/RL32461.pdf

1 http://www.bloomberg.com/news/2013-11-04/apple-to-build-plant-in-arizona-with-2-000-workers-to-make-
parts.html
1 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 __________________________________________

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