Why We Can All Stop Worrying About Offshoring and Outsourcing

Finally, companies' choice of where to do business across the globe is heavily influenced by a witches brew of complex, often contradictory governmental policies at national, regional and local levels. Governments may seek to attract foreign investment yet also discriminate against it. They may promote non-protectionist policies for economic growth (infrastructure, R&D, more open immigration, skilled work force) or they may, especially in a recession, enact protectionist measures. They may, like China, engage in a host of illicit activities - pay-offs, piracy, hidden subsidies -- to promote national champions. Or to counter state capitalism like China's, they may engage in explicit subsidies or tax breaks or subsides or preferences or soft loans to promote domestic business's ability to compete overseas against state supported or state owned companies -- trade promotion ideas which teeter between reasonable competitive measures and bad crony-capitalism.

Ultimately, governments may recognize that virtually every other government has its thumb on the scale of economic activity and thus frustrate real global competition which can mean new jobs at home (even if old jobs may suffer). As a result, they may seek new free trade agreements to knock down tariffs and other trade barriers -- as in current major trade talks in the Atlantic (between the U.S. and the EU) and in the Pacific (involving the U.S., Japan and others) -- to stimulate economic growth and also to counter the rising power of China's state capitalism. All these currents and cross-currents in present and evolving government policy have significant impact on location of global business activity.

These four trends take place in the context, as noted, of one central change: faster economic growth in developing markets than in developed markets. Much activity of global companies is now an attempt to sell in those new markets by having a powerful new local presence, even as they retain global supply chains. This is called "on-shoring" because it involves creating new, additive economic efforts in emerging markets which are far different than "off-shoring" jobs to cheap markets to export products back to expensive ones. Take China. Foreign auto makers (Japanese, European and American), have roughly 60 percent of a 15 million unit per year market, with tens of production facilities frequently owned with Chinese partners. GM is the leading car-maker in China with about 20 percent of sales (selling more units than in the U.S.) and has 11 assembly plants and four power-train plants in eight Chinese cities. For many U.S. multi-nationals approximately half their revenues, and 30-50 percent of their work-force, are outside the United States, reflecting the need to serve overseas markets.

Similarly, foreign companies have been "on-shoring" in the United States for years. . Foreign automakers built more than 3 million cars at 16 facilities in the United States in 2011 with the 70 percent of Japanese cars sold in the U.S. made in North America. Announcements of acquisitions or new plants in the U.S. are made almost every day by a non-U.S. companies, like Airbus, Siemens, Lenovo, Infosys, Ikea, and Foxconn. Indeed, foreign companies employ nearly 6 million Americans, account for 13 percent of manufacturing jobs and about 18 percent of exports.

Stories of foreign investment in the U.S. have been matched in the past few years with the "re-shoring" of overseas work back to the U.S. Iconic American companies like Apple, Google, Caterpillar, Ford, Emerson, GE, and Intel are adding plants and jobs in the U.S. or North America. The decisions are driven by some of the economic trends noted earlier (competitive overall cost for U.S. markets, desire to "make" not "buy" and integrate corporate functions for innovation close to customer). "Re-shoring" also helps symbolically and politically to counter, to an extent, the old "off-shoring" critiques. But, while "re-shoring" may slow the decades long decline in U.S. manufacturing jobs, from 20 percent of the workforce in 1980 to about 9 percent today, it is not likely to reverse it, much less herald a return to the glory days (the Bureau of Labor Statistics estimates that only 7 percent of the workforce in 2020 will be in manufacturing).

For most of the public, this significant modification in the off-shoring, out-sourcing debate is not well understood and people still revert to the old schematic This is because of politics. Companies are struggling to adjust to new global realities but generally try to present a strong nationalist face in their home countries (now aided by modest "re-shoring"). Importantly, nations that practice some version of "market capitalism" (less government intervention than "state capitalism") are schizophrenic: torn between government policies to support real global competition and policies to support national companies and local workers. Broad adjustments in knowledge and attitudes about changes in global economic integration is necessary in developed "market capitalism" to reach the right balance of policies promoting the long-term ideal of global competition, adopting near term measures that counter state capitalism without engaging in crony capitalism, recognizing that with competition new domestic jobs may replace old ones and protecting domestic workers whose jobs may be lost due to technology and productivity - not just changes in trade.

Presented by

Ben W. Heineman Jr.

Ben Heineman Jr. is is a senior fellow at the Belfer Center for Science and International Affairs, in Harvard's Kennedy School of Government, and at the Harvard Law School's Program on Corporate Governance. He is the author of High Performance With High Integrity.

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