In-Depth

Outsourcing in Reverse: Foreign Companies Send Jobs to the United States

Not all outsourcing activity is a net loss for American workers

• By Stephen Swoyer
• 10/26/2004

Not all outsourcing activity is a net loss for American workers. A new report argues that job losses from outsourcing are to some extent counterbalanced by another phenomenon, known as insourcing, in which foreign companies send jobs to the United States.

That’s the conclusion of a new report, “Insourcing Jobs: Making the Global Economy Work for America,” sponsored by the Organization for International Investment (OII), a Washington, D.C.-based advocacy group.

In spite of its name, the insourcing phenomenon identified by OII doesn’t really have anything to do with outsourcing. Foreign companies that fuel job growth in the U.S. aren’t outsourcing jobs that would otherwise be performed by workers in their own countries, after all. Nor are they sending jobs to the U.S. in order to reduce costs, improve quality, or ratchet up efficiency. Instead, insourcing describes what happens when foreign companies—like ERP specialist SAP AG or automotive giant Honda—establish operations here in the U.S.

By whatever name you choose to call it, insourcing activity has been increasing steadily over the last decade, says Matthew Slaughter, an associate professor at Dartmouth’s Tuck School of Business and author of the OII report. To the extent that one correlates outsourcing activity with economic growth, a case could be made that the two are to some extent related.

“What has been almost entirely absent from this discussion about outsourcing is the converse dimension of globalization. This process is called ‘insourcing,’ i.e., the expansion into the United States by foreign-headquartered multinational firms,” he writes. “Yes, these companies have created jobs, but that is just the start of the story. More than just creating jobs, these subsidiaries have contributed to rising U.S. living standards both through their own operations and through their interactions with other domestic U.S. firms.”

Even so, most folks will focus on insourcing’s role as an engine for job creation. In this respect, Slaughter says, they won’t be disappointed. “Over the past generation the number of U.S. jobs at these subsidiaries has more than doubled,” Slaughter writes, noting that insourcing companies also contribute to U.S. economic growth by spurring investments in research and development, physical capital, and international trade. Insourcing companies also pay better than their domestic competitors, Slaughter found.

There’s an important caveat, however. OII isn’t exactly an unbiased research house. In fact, it’s a Washington, D.C.-based group that lobbies on behalf of U.S. subsidiaries of foreign companies.

Still, Slaughter cites several statistics that highlight the importance of insourcing. For example, U.S. subsidiaries of foreign companies employ more than 5.4 million U.S. workers—roughly five percent of overall private-sector employment. That’s an increase from three percent in 1987.

As for research and development, insourcing companies now account for a sizeable share—nearly 15 percent, or $27.5 billion—of private-sector R&D activity in the U.S. That’s up from just nine percent in 1992. Similarly, U.S. subsidiaries of foreign companies accounted for 10 percent ($111.9 billion) of private-sector capital investments in the U.S.—up from eight percent in 1992.

What’s most surprising is that insourcing companies also account for a sizeable share (20 percent, $137 billion) of U.S. exports. It's the same on the payroll front, where subsidiaries of foreign companies paid U.S. workers more than $307 billion in compensation—six percent more than overall U.S. private-sector labor compensation. What’s more, Slaughter notes, the average annual compensation at insourcing companies was $56,667—nearly one-third more than the average annual compensation in the non-subsidiary U.S. private sector. This tally has increased sharply from just 20 percent in 1992.

If the OII and Slaughter are correct, insourcing helps the U.S. economy in other ways as well. “The other channel by which insourcing companies contribute to the U.S. economy is their interactions with other domestic U.S. firms,” he writes. For starters, insourcing companies typically purchase a majority of their supplies from domestic (and not foreign) firms—to the tune of 80 cents out of every dollar, or $1.26 trillion.