10/06/2006: "Insourcing—Opportunity and Challenge"
For several years, there have been outcries regarding the negative impact that outsourcing is having on the US. There have even been myriad predictions as to when this aspect of globalization will cause the American economy irreparable harm.
It is true that some areas of the country have indeed experienced significant economic challenges because firms have shifted various operational tasks to organizations outside the US‘ boundaries. However, absent from most discussions on this matter is the positive impact of the converse of this practice. It’s called “insourcing,” and many Americans have failed to pay much attention to it.
Insourcing occurs when foreign-headquartered businesses establish operations in the US. By creating US subsidiaries, these multinational companies provide jobs—lots of them—while also investing in research and development activities and promoting business practices that make our economy more productive.
Speaking of jobs, these US subsidiaries support approximately 5.1 million American jobs, which is about 4.5% of the nation’s private-sector workforce. On average, the foreign-owned companies pay annual compensation of $63,428, some 32% higher than the average yearly salaries provided by domestic US firms. Annual payroll of US subsidiaries of firms headquartered abroad approaches $324.5 billion—nearly $70 billion more than five years ago.
A report released last week by the Organization for International Investment (OFII) shows that 31% of employment opportunities offered by US subsidiaries are in the manufacturing sector. A substantial portion of the goods produced by these operations are exported around the world and account for nearly 19% of our nation’s total exports.
Last year, the net financial inflow of foreign direct investment in the US was $128.6 billion, a 20% hike above the previous year. Reinvested earnings totaled $59.4 billion in 2005, a jump of $3.5 billion over 2004. Some 98% of foreign direct investment comes from private-sector firms; only 2% is from firms owned or controlled by foreign governments.
Over the years, Texas has been an attractive location for foreign-owned companies to place their operations and is currently ranked third in the nation in “insourced” jobs. California is first with 547,000 jobs, followed by New York with 377,000. Florida and Illinois round out the top five with 238,400 and 235,600 jobs, respectively. The 341,200 Texans now employed by US subsidiaries represent an increase of more than 25% over the past five years.
More than 27% of all the jobs created in Texas by foreign-owned companies (92,600) are in the manufacturing sector. Manufacturing, of course, has proven to have a significant multiplier effect on the economy as it stimulates quite a bit of activity and employment in those sectors that provide supplies to the manufacturing companies.
Although Texas has been very attractive to global investors for the past decade, competition for investment has been intensifying dramatically. As a result, only 900 new jobs were created in the Lone Star State by multinational companies in 2005. Across the US, insourcing employment decreased by 2.4% or 128,000 positions, for the same period.
To ensure that the economies of our state and nation continue to benefit from insourcing, policymakers and business leaders must expand and strengthen their efforts to make Texas and the US viable locations for the placement of subsidiaries by companies from around the world. Even though the trend has slowed recently, these firms are an important source of economic activity including jobs.
Next time you see a headline decrying the “flow of US jobs overseas” or some similar negative regarding the practice of outsourcing, remember that there is clearly another side to the story. Foreign companies employ hundreds of thousands of Texans and millions of Americans. Moreover, the jobs on US shores typically involve good pay and sizable ripple effects through the economy.