Offshoring in Perspective
By Diana Farrell
The heated debate over offshoring might suggest that jobs in
the world’s major economies are moving en masse to China
and India, but the reality is quite different. In fact, only about
4 percent of all jobs lost in the United States over the last few
years can be attributed to offshoring and free trade.
Rather than destroying jobs, offshoring is unlocking
tremendous long-term economic value around the world.
Outsourcing jobs abroad can help keep companies profitable,
thereby preserving jobs. It can also generate substantial cost
savings, which in turn can be used to lower prices and offer
consumers new and better services. By raising productivity,
offshoring enables companies to invest more in the next-generation
technologies and business ideas that create new jobs.
But not every country is reaping the benefits of offshoring.
New research has shown that for every dollar of cost outsourced
to India, the United States receives as much as $1.14 in economic
gain. In Germany, however, offshoring leads to just
€0.80 in value for every euro in cost moved abroad to places
like India and Eastern Europe. In short, as their companies
globalize operations, Europe’s leading economies are leaving
significant value on the table due to lack of flexibility in their
labor and product markets.
Globalization today is creating greater job turnover in the
developed world than ever before, and there are clearly winners
and losers. But protectionism is not the answer. Instead, policymakers should create programs for
wage insurance, transferable health benefits,
and job retraining to reduce the
adjustment costs to those who lose their
jobs. In Europe, policymakers will need
to adopt wholesale reform of labor and
product market regulations that are currently
stifling economic growth.
In
2003, the McKinsey Global Institute
(MGI) analyzed the economic benefits of
offshoring back-office service and IT
functions from the United States to
India.2 Results showed that, rather than
losing out, the United States gained as
much as $1.14 in new wealth for every
dollar of spending that U.S. companies
transfer to India. This value comes from
cost savings to businesses, increased
exports to India, repatriated earnings
from offshore providers in which U.S.
companies have invested, and the additional
economic output created when
U.S. workers are reemployed in other
jobs. India, in contrast, receives just 33
cents of new wealth, through wages paid
to local workers, profits earned by Indian
outsourcing providers and their suppliers,
and additional taxes collected by the
government.
However, not all rich countries reap as
substantial rewards from the practice as
the United States. A similar analysis for
Germany, Europe’s largest economy and
one of the leaders in offshoring, shows
that the country benefits much less from
offshoring than the United States does.
In fact, German businesses lose €0.20
for every euro of spending on service
functions moved offshore.3 To understand
why, consider how offshoring creates
wealth for an economy.