Off-shoring is an inescapable feature of the economy of the US. The process of off-shoring involves the highly beneficial practice of outsourcing or shifting parts of or the entire production process to a different country with the aim of selling the same products in the home country. Corporations are often driven to engage in this practice in a bid to seek much lower manufacturing costs. It is a common rule of thumb that the process is shifted to countries where the standards of living are far much lower and labor laws are lax, unlike in the US.
Off-shoring has been powered by the world having a far much more integrated economy. This process is further driven by the rapid pace of new investments. Currently, 23% of companies in the US are involved in some type of offshoring, particularly part of their core business roles. Off-shoring brings with it very many advantages to any single multinational corporation. As a case in point, Apple Inc. was turned into the most valuable firm in the world by domestic US consumers, yet they all purchase millions of products that are assembled in China (Bardhan, Jaffee & Kroll, 2013). In order to further understand the impact of off-shoring on US companies, several key variables of this process will be discussed in detail in this paper.
Data on the shift in off-shoring between 1977 and 2003 present some valuable insight. The Bureau of Economic Analysis has been collecting data on how manufacturing has shifted over the years. A comparison between the two periods can be used to highlight three important variables; employment, capital expenditure, and value added. As expected, unemployment has taken the greatest hit with companies now employing up to 28% of their total workforce from off-shore countries as opposed to 22% in 1977. The value added to the companies has stagnated with a difference of only 1% during the 26 year period. The capital expenditure has increased by 5% from 21% to 26% (Gerber, 2010).
The loss of domestic jobs has always been the main bone of contention when it comes to off-shoring. The 6% increase in the number of off-shore employers by US companies proves that the worry is justified. The US tax laws favors the shift of jobs and production overseas since companies get to enjoy a much lower tax rate. Khimm (2012) showed that income to US multinational that came from foreign investments accrued an average tax of 15.7%. In contrast, income from investments within the US got an average tax of 26%. This startling 10% disparity acts as an incentive for companies to set up and retain their off-shore production units. In spite of this, Ottaviano, Peri & Wright (2013) pointed out that domestic workers don’t have to worry about this surprising trend. The numbers of jobs that are lost overseas are equal to the number of jobs created within the country as a result.
The output value added remained largely unchanged in spite of the increase in the other areas. Off-shoring, in essence, increases the productivity of firms in the long run and cuts down on costs. Such gains prompt the company to expand their domestic operations by hiring enough domestic labor to compensate those jobs lost abroad. Furthermore, the more companies off-shore the lower the number of low paying jobs they have domestically. This shows that companies are getting rid of lowly paying jobs and replacing them with higher paying jobs within the same business unit. This should also explain the fact value addition has remained largely unchanged during this period in spite of the obvious reduction in employment figures during the same period. However, it can also be possible that cost-reductions that come as a result of off-shoring increases the demand for a firm’s products, causing a resultant increase in the need for skilled labor in the jobs that have been retained domestically (Bardhan, Jaffee & Kroll, 2013).
Economists point out that multinational corporations stash away a total of approximately $5 trillion in short term investments abroad or as cash. Companies have an excess of liquid assets that they can’t bring back domestically, and most of them opt to divert them into capital expenditures. Most corporations currently opt to make local capital expenditure, as opposed to foreign spending. However, these equipment, machinery, or vehicles that are purchased are usually shipped and leased abroad for profit shifting purposes. Multinational companies can get tax write-offs on such assets, again as a means of avoiding taxes. Additionally, these companies tend to leave most of their profits in foreign countries that are popular tax heavens. If they brought back their profits to the US they would attract a 35% corporate tax that they would otherwise avoid if they left their cash in foreign countries. This can explain the capital expenditure gains made over the same period (Harrison & McMillan, 2011).
Factors that promote offshoring
The main benefit that firms stand to gain by off-shoring is cutting back on labor costs. Labor laws in the US are very strict even the minimum wage is currently much higher than what is set in other countries. The wage that a company uses to pay a factory worker is the US can be used to pay two to five workers in a country with much lower standards of living. A good example is China where most corporations outsource their work. The labor force in the country is highly skilled, cheap, and the labor laws are very favorable on the corporation’s part. Companies can cut back on their overhead costs through outsourcing and in turn increase their profit margins.
Offshoring can get the corporation a chance to insource some of the functions that had to be outsourced earlier. Offshoring some of the primary functions of the firm will give the company the chance to hire more staff to complete functions that were otherwise considered as unimportant and subsequently outsourced. US companies which outsource production tend to hire more skilled staff into their marketing, financial, and sales teams. The company is able to boost its capacity and still get a better level of control.
Another important perk of offshoring is the ability to get access to a very large, cheap, and skilled labor pool. Many developed countries are suffering from a shortage of skilled labor in the more competitive departments. For example, countries such as Philippines, India, Thailand, and China have hundreds of thousands of unemployed and skilled citizens who are willing to work for far much less than the citizens of the US. Furthermore, because of offshoring companies have the ability to work throughout the clock and alleviate the gripes that are brought about by time zone differences. Companies can work all around the clock in different locations in a bid to get the most out of constrained resources. Capital investments can be better utilized though remote usage from the multiple locations.
Corporations can also enjoy much lower taxes by setting up offshore business units. Foreign companies usually enjoy various tax exemptions and the high corporate tax rate in the US further fuels this incentive. In fact, companies often avoid bringing back any of their offshore profits back to the country so as to avoid domestic taxes. Lower taxes translate to higher profits for the companies.
The geographical aspect of off-shoring gives the corporation a different edge as well as a new market for its product. China, where many firms outsource, has a population of well over 1 billion citizens. This presents a ready market for the company’s products, including much lower transportation costs to the Chinese market. Marketing costs are also much lower since consumers tend to have more faith in products that are assembled in their own country (Bardhan, Jaffee & Kroll, 2013).
Conclusion
Offshoring is a core feature of any country’s economy, particularly the US. With up to 23% of US corporations being involved in this practice, there are certainly numerous perks of offshoring. Data from the Bureau of Economic analysis gave greater insight on four important aspects of offshoring, and the changes that have occurred in the sector over the years (Gerber, 2010). Increase in the percentage of offshore workers and capital expenditure reveal an increasing preference among for offshoring. On the other hand, a stagnation of the output value added over the same period shows that offshoring does not lower the number of jobs in the country in real sense. Productivity gains as a result of this process give companies the chance to hire more domestic labor. Multinational corporations have a preference for offshoring because it helps them cut on costs, enjoy lower taxes, access a large labor pool and a new market.
References
Bardhan, A., Jaffee, D., & Kroll, C. (2013). The Oxford handbook of offshoring and global
employment. New York: Oxford University Press.
Gerber, J. (2010). International Economics (5th ed.). Pearson.
Harrison, A., & McMillan, M. (2011). Offshoring Jobs? Multinationals and U.S. Manufacturing
Employment. Review Of Economics And Statistics, 93(3), 857-875. doi:10.1162/rest_a_00085
Khimm, S. (2012). Offshoring creates as many U.S. jobs as it kills, study says. Washington Post.
Retrieved 21 November 2014, from http://www.washingtonpost.com/blogs/wonkblog/wp/2012/07/12/study-offshoring-creates-as-many-u-s-jobs-as-it-kills/
Ottaviano, G., Peri, G., & Wright, G. (2013). Immigration, Offshoring, and American Jobs.
American Economic Review, 103(5), 1925-1959. doi:10.1257/aer.103.5.1925
