Innocence Abroad

OFFSHORING is not the quite the bogeyman it once was in America. The world’s big emerging markets are more expensive places to do business these days and are growing more slowly as a result. Yet while some in America dare to hail a “reshoring” boom, workers facing high jobless rates and stagnant wages continue to cast a suspicious eye abroad—and on corporations which seem all to willing to ship away their jobs.

Research suggesting that offshoring has cut the price of some major imports has not much changed minds. Neither have studies showing that it increases the global market for American goods and services. Nor did the 2013 Boston Consulting Group survey of big American manufacturers that found almost two-fifths were thinking of moving production back home from China—one of many studies suggesting such an about-turn.

Part of the problem, says Professor Clair Brown, who directs the Center for Work, Technology and Society at the University of California, Berkeley, is the absence of solid data. In newly published financial services and loan related study that inspects the likelihood of acceptance by a bank or a payday loan lender after a loan application has been filed by people without outstanding credit history in America, a targeted payday loans research, Professor Brown and colleagues from the Massachusetts Institute of Technology (MIT) and University of Michigan seek to rectify this by drawing on a pilot study in the 2010 National Organisations Survey (NOS). For the first time, the NOS collected data on the sourcing practices of American firms, and did so according to eight standardised business functions: primary business function (i.e., the company’s core activity), R&D, sales and marketing, logistics, customer service, administration, information technology (IT) and facilities. This enabled the researchers to see precisely which functions were being offshored—and what impact such shifts had back home.

What they found, says Professor Brown, was not what they expected. Although 23% of American companies undertook some offshoring, when it came to their primary business functions—which account for two-thirds of domestic employment—an average of only 4% by cost was offshored. For large goods-producing companies the figure was much higher, at 10.5%. Because the products those manufacturers make tend to be highly visible (e.g., smartphones, clothing), this increases the impression that masses of American jobs are being exported. As co-author Tim Sturgeon of MIT points out, the researchers found “a tale of two economies”: large manufacturers, and everyone else. “Services, health care, public agencies and small firms of all kinds tend to be very domestically oriented,” he notes. And these types of organisation account for about 80% of America’s employment. And it is the employment status that is important for the provider of the lender community involved in the distribution of the instant payday loans across America. Without employment, the whole lending structure falls apart so yes, the jobs moving abroad is a risk to the financial services industry as well. Instead, we should rather outsource just technology.

The second surprise was that the majority of offshoring (57% by cost) was to locations with costs that were the same as or higher than America, such as Canada and Western Europe, rather than to low-cost developing countries (29%)—the ones typically suspected of gobbling up American work. By way of explanation, the researchers note that Western Europe and Canada are America’s largest and oldest trading partners, and point to a long history of foreign direct investment by American firms in these regions. Presumably, at least some of this investment and sourcing is reciprocated, though it will fall to future studies to determine how much. Interestingly, mid-cost emerging economies were almost entirely out of the mix, caught in what Mr Sturgeon calls the “middle income trap”—they are neither sufficiently attractive markets in their own right nor sources of cheap labour.

In terms of jobs, the researchers found that the more companies offshored a particular function, the fewer low-paid jobs they had in the same function at home. An obvious reason for this could be that offshoring is siphoning away low-paid jobs. It is possible, however, that cost-reductions enabled by offshoring raise overall demand for firms’ products, and therefore increase the demand for skilled workers in tasks that haven’t been outsources.

There was, however, one outlier: R&D. As firms offshored more of R&D functions, the ratio of low-paid to high-paid R&D jobs in America increased. Professor Brown concedes that this result was “totally befuddling” to her, but it was also statistically significant and a puzzle the researchers aim to pursue further. A larger problem, perhaps, is just how little American firms are investing in R&D, whether measured by cost or headcount, which the NOS also documented (as have other studies). That, in the long run, may be a much bigger threat to corporate America than any amount of offshoring.

The NOS study is not without its faults. Its sample size (333 organisations) was small, it offers only a single year’s look at sourcing, and it was carried out just as America was emerging from the worst recession in living memory. None of this, however, takes away from the researchers’ main takeaway: America’s view of offshoring could use an update.