Outsourcing, or the process of allocating certain jobs to oversees countries to realize cost benefits, has traditionally had negative connotations in the American vocabulary. As a quick and easy filler, many people blame outsourcing as the cause for lost American jobs and the falling economy. Interestingly, however, outsourcing is not the cause for American economic problems. Rather than complaining about oversees customer support or Made in China labels, Americans should first look at other domestic problems that may be the cause of the slowed American engine.

Rather than complaining about oversees customer support…Americans should first look at other domestic problems that may be the cause of the slowed American engine.

In fact, outsourcing has benefited the United States with more jobs. According to the National Center for Policy Analysis, about 15 million jobs are lost annually to other countries from 1996 to 2006. But during this same time 17 million jobs were created annually, resulting in a 2 million net gain for the U.S¹.

Especially recently with a depreciating dollar, many foreign firms are choosing to outsource to America (the Japanese auto industry provides a typical example, with both Nissan and Toyota opening new plants in the U.S.)².

The Problem

The American economy is going through one of its worst periods in history. Just shy from being labeled a recession, the United States economy is characterized by unemployment, a falling dollar value, and uncertainty about the future. Those affected by the slowed economy, particularly those who have been laid off, are quick to blame oversees employees in China, India, the Philippians, or other developing nations, as the cause.

While these critics of outsourcing are rightfully correct, often times they may overlook the macro benefits of outsourcing for the economy as a whole and for individual firms.

The Reality

In contrast to popular belief, outsourcing has several benefits for both individual firms and for the macroeconomy. Outsourcing has produced notable benefits for the economy and is therefore not the cause of the slowed American economy. Rather, outsourcing is more of a correlation coupled with other problems (such as the falling dollar and the rise of developing nations) that may be hampering the American economy.

Firm Benefits

The benefits of outsourcing to businesses is often overlooked by individual Americans. However, outsourcing has allowed companies to lower production and support costs substantially in face of rising costs worldwide. This, of course, is directly translated to consumers in lower prices. By reducing overhead and routine costs, American businesses can allocate more funds to either secondary activities such as research and development or lower prices for consumers.

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Outsourcing also has intangible benefits for companies. First, multinational firms can now reach a global talent pool that is highly educated and motivated. Consider, for example, a firm managed and based in the U.S. but outsources manufacturing to Indian engineers. This mutual relationship allows the firm to focus on management while also hiring world-class engineers from India. The education system in developing nations is evolving rapidly with an increased amount of skilled professionals.

In this case, the company can have around-the-clock operation with the Indian manufacturers working while the American employees sleep. Furthermore, the company can reach the best engineers in America and India. With a larger available pool of employees, the company can hire the best talent.

Finally, the firm can reach a new market by outsourcing. Again, considering the example of the previous firm, the company can eventually open a distribution center in India. The company has developed a strong knowledge of the other country through outsourcing and can now tap into a new market of consumers.

Individual Benefits

Outsourcing has several benefits for individual Americans as well. Most importantly, Americans can enjoy lower product costs. While many critics argue that prices for staple products are rising, they would be even higher without outsourcing. The rising costs are due to other factors such as gasoline and transportation costs and inflation, not production. Interestingly, Americans are quick to complain (and rightfully so) about rising prices (see airline fees), but are also quick to complain about outsourcing that, while may be taking some jobs away, is at least keeping some costs lower.

Finally, firms that produce and market oversees retain the profits. For example, a company that sells a product in another country that earns $5 profit (after expenses) retains the profit, meaning that the $5 per product comes back to the United States. Indirectly, this profit from oversees operations results in a higher stock or market price as the book value of the company increases. Americans therefore benefit from the higher stock price or from increased wages (consider, for instance, that the American managers receive higher compensation for the increased profits).

10 Benefits to Outsourcing

Overall, outsourcing benefits U.S. firms in many ways:

1. Allocate expensive support activities to cheaper locations
2. Achieve economy of scales with few production centers situated in low-cost areas
3. Redirect key personal to more value-added activities
4. Gain access to specialized and professional skills
5. Reach a global talent pool of employees
6. Reach a new market
7. Level out seasonal fluctuations
8. Mitigate and spread out risks of doing business in only one country
9. Stop seasonal hiring
10. Keep pace with advances in technology and manufacturing

In summary, the benefits for outsourcing certain American jobs outweighs the negatives of lost jobs. Unfortunately, however, some Americans consistently adhere to the traditional status quo against outsourcing rather than acknowledging the real causes for a slowed business economy.

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References

1. National Center for Policy Analysis [↩]
2. Preparing America to Succeed [↩]