Global Outsourcing: Implications for the American Economy

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Global Outsourcing Implications for the
American Economy
John F. Mahon John M. Murphy Chair of
International Business Policy and Strategy and
Professor of Management Maine Business School
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Sources Reference Librarians at University of
Maine My research assistant Mr. Abhinav
Tyagi A.T. Kearney Reports ?Global
Business Policy Council FDI Confidence Index V7,
2004 and V8, 2005 ?Outsourcing Strategy for
Sustainable Competitive Advantage (with CAPS
Research) ?Globalization Index, 2006 (with
Foreign Policy) The Changing Nature of
Corporate Global Restructuring The Impact of
Production Shifts on Jobs in the US, China, and
Around the Globe Bronfenbrenner and Luce,
Oct., 2004 Maine International Trade Center
Reports My own prior work
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Two major types of outsourcing 1. Outsourcing
of work to other companies in the form of
subcontracting (an example would be back office
operations like payroll) 2. Outsourcing of
work in the form of direct investment in
building/purchasing a facility in another
location (BOA opens a new facility in Maine
rather than in Virginia). Either of these two
types of outsourcing can be done domestically
(e.g. a Maine firm expands operations in another
state subcon-tracting or direct investment) or
internationally (Intel announced a 1 billion
investment in Vietnam--500,000 sq.ft. First such
invest-ment in Vietnam and the largest in their
history). Both forms of outsourcing can result
in reduced or elimination of employment in the
location from which work is outsourced.
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Why Outsource? 1. Reduce costs 2. Reduce
capital investment 3. Focus on core
business 4. Gain access to technology 5.
Gain increased flexibility and responsiveness
Note little emphasis on revenue growth or on
improved customer service and the like
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Examples of Outsourcing
Manufacturing (electronics games, radios,
televisions, clothing, shoes and
sneakers) Financial Services (including
accounting and tax services) Technical
writing/Architecture/Legal Research Information
Services and backroom operations Call Centers of
all types Newspapers Local Economic Development
Committees
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The marginally employable
The under employed
The appropriately employed
The unemployable
The unemployed
Farming, Fishing, Forestry
The Sub-economy
Manufacturing
Service
Knowledge
Creative Economy?
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The marginally employable
The under employed
The unemployable
The unemployed
This is a constantly changing mix--but note that
this im-poses additional costs on the political
entity--transfer payments in the form of
unemployment, aid to families, new skills
education/training, health care, loss of taxes
and the like. Impact of international
outsourcing on these categories?
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The marginally employable
The under employed
The appropriately employed
The unemployable
The unemployed
For example, assume a firm that employs
individuals in high salary/wage jobs. If this
firm outsources its work, it leaves behind well
trained individuals. If the employment market
cannot absorb these individuals, then (1) they
can become underemployed or (2) unemployed, or
(3) leave the geographic area in search of a new
job.
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To state the facts frankly, is not to despair
for the future nor indict the past. John F.
Kennedy
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Actual data is hard to find and research studies
often contradict one another. Fuqua School of
Business, Duke University (2006) A
collaboration with Booz, Allen Hamilton--surveyed
537 companies in U. S. and Europe.
Conclusions 1. Talent is becoming scarce--in
2004 40 of firms cited this as a reason for
outsourcing, in 2006 70 cite this as a primary
reason 2. Labor cost for engineers is driving
outsourcing to India, China and Eastern Europe
and 3. Increased speed to market--24/7
operations (30 in 2004 50 in 2006).
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Pratt School of Engineering, Duke University
surveyed senior executives compiled by Lou Dobbs
(CNN anchor) (2006) 78 executives responded
from 58 firms and the study concluded that 1.
More than enough engineers, talent availability
is not the problem--firms are outsourcing to save
costs and 2. There is a major qualitative
difference between engineers in U. S. and in
developing nations--therefore no research,
conceptual design, customer interactions or
business analysis is outsourced. SO--WHO
IS RIGHT?
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Source The Changing Nature of Corporate
Global Restructuring The Impact of Production
Shifts on Jobs in the US, China and Around the
Globe, K. Bronfenbrenner and S. Luce, October
2004.
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Source The Changing Nature of Corporate
Global Restructuring The Impact of Production
Shifts on Jobs in the US, China and Around the
Globe, K. Bronfenbrenner and S. Luce, October
2004.
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Source The Changing Nature of Corporate
Global Restructuring The Impact of Production
Shifts on Jobs in the US, China and Around the
Globe, K. Bronfenbrenner and S. Luce, October
2004.
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Foreign Direct Investment Confidence Index
2004 2005 China China U.
S. India India U. S. Germany United
Kingdom France Poland Australia Russia Hong
Kong Brazil Italy Australia Japan Germa
ny Russia Hong Kong
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The top outsourced activities internationally are
in priority order
Estimated Growth Rank Information
Technology 1 Distribution/Fulfillment 2 Legal/
Regulatory 6 Manufacturing/Operations 3 Engin
eering/Detailed Design 5 Call Centers 4
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FDI does occur in the United States. In 2004
there were 2.5 trillion worth of such
investment. The leading countries who invest in
the U.S. are the United Kingdom, Japan, Ger-many,
The Netherlands and France Recently Toyota
opened up their new truck manufacturing plant in
San Antonio, TX. The plant will make 200,000
trucks a year and represents a 800 million
investment. The site also includes facilities
for 21 on site suppliers (this will be an
additional investment of 300 million). When
fully operational, the facility will have an
impact of 1.6 billion on the city and local
region. The state and city had to provide
approximately 130 million in incentives to
secure this facility.
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While the issues of international outsourcing is
interesting, it is reasonable to ask what does
this mean for the state of Maine. Although I
have focused on international outsourcing, I
remind you that investment can migrate from one
state (say Maine) to another state (say Texas).
So many of the issues surrounding international
investment movements do apply within a large
nation-but clearly to a differing degree.
The time to repair the roof is when the sun is
shining. John F. Kennedy
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States that have passed laws on offshore
outsourcing
California Colorado Illinois Maryland New
Jersey North Carolina Maine Washington 40
states have legislation (127 bills) proposed that
restrict outsourcing in some manner
Maine in 2004 was ranked 8th in the United States
in terms of percentage of employees working for
foreign corporations (6.4 of private sector
workforce, an increase of nearly 48 over last
five years). As a result, if these firms decided
to exit the state, it would have a significant
impact on employment.
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Examples of Foreign Direct Investment In Maine

• RHI Engineering Austria
• Albatrans SpA Italy
• Delhaize Belgium
• Emera Canada
• Domtar Industries Canada
• J.D. Irving Ltd. Canada
• Fraser Paper Canada
• McCain Foods Canada
• Huhtamaki, Inc. Finland

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• Chocoladefabriken Lindt Sprüngli Switzerland
• Nestlé Switzerland
• Angostura International Ltd. Trinidad Tobago
• Tate Lyle United Kingdom
• First Technology PLC United Kingdom
• Hydro International United Kingdom

• RHI Engineering Austria
• Albatrans SpA Italy
• Saint-Gobain BTI UK Ltd. France
• Kassböhrer Geländefahrzeug AG Germany
• Lohmann Animal Health Germany
• Osram GmbH Germany
• ZF Lemforder Sonic Ishikawa Germany and Japan
• Konica Corp. Japan
• Fjord Seafood ASA Norway
• Teknoinvest Management AS Norway
• SAPPI Limited South Africa

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No farmer ever plowed a field by turning it over
in his mind George Woodbury The eyes are
of little use if the mind be blind Arab
Proverb Opportunity is missed by most people
because it is dressed in overalls and looks like
work Thomas Edison If we are facing in
the right direction, all we have to do is keep on
walking Buddhist Proverb
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Employment in some key sectors
1993 2005 Change Local Govt 51,791 65,60
0 26.7 10.5 10.2 State Govt 22,935 3
1,000 35.2 4.6 4.8 Services 125,036
242,600 94.0 25.3 37.7 Mfging 90,
847 59,800 -34.2 18.4 9.3
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The Governor cited ..business attraction and
youth out-migra-tion as his top two priorities in
his inaugural speech.
Joshua Chamberlain 1867
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State Business Activity
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Median Income and Tax Comparisons
(2003/2005) Maine CT MA NH
RI VT Median family Income 59,596
86,001 82,561 79,339 71,098
65,876 Income Disadvantage
-26,405 -22,965 -19,743 -11,502 -6,280
State and Local Tax Burden 13.5 11.3
10.3 7.3 11.5 11.1 RANK
1 9 28 49 8
10 Income after Taxes 51,551 76,283 74,057
73,547 62,922 58,564 Income
Disadvantage -48 -43.7 -42.7
-22.1 -13.6
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1980 1990 2000 80 - 90 90-00 80 -
00 Males 546,235 599,648 621,381 9.8 3.6
13.8 Females 578,425 632,071 655,907 9.3 3.8
13.4 0 - 14 256,970 258,067 235,871 .43 8.6
8.2 15 - 19 107,412 87,777
89,340 18.3 1.9 16.8 20 - 24 98,438
86,626 71,545 12 17.4 27.3 25 -
34 178,799 205,350 158,633 14.8 22.7 11.3
35 - 44 122,725 195,863 215,510 59.6 10
75.6 45 - 54 112,021 125,529 197,070
12.1 57 75.9 55 - 64 107,377 108,865 125,494
1.4 15.3 16.9 65 - 74 82,288 91,822
96,088 11.6 4.6 16.8 75 - 84 44,531
53,638 64,131 20.5 19.6 44 85 14,099
18,182 23,606 29 29.8 67
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So what do we do? 1. Recognize the importance
of international out-sourcing as a source of
economic activities 2. Outsourcing comes in
and goes out--which side do we wish to be
on--receiving or transferring? 3. Attempts to
improve the economy of the state are incomplete
if they do not include considerations of foreign
direct investment 4. Make clear decisions as
to what industries and from what
countries/states we wish to pursue and then be
aggressive in pursuit of them
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• Be aware of the changing context in which these
• decisions are made
• Globalization
• Demographics
• Changing consumers
• Natural Resources and Environment
• Regulation and NGO activism

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The marginally employable
The under employed
The unemployable
The unemployed
Remember this figure? Recall the date on
Maine-- increasingly aging population that will
be either un-employable or marginally employed.
This will result in increases in governmental
transfer payments--with a concurrent impact on
taxes and government spending. Add to this the
potential loss of employers, further reducing
jobs and we can see further increases in these
categories, continuing the cycle of increased
pressure on state budgets. All of this can occur
on national level.
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Three Final Thoughts
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As in a game of cards, so in the game of life we
must play what is dealt to us and the glory
consist, not so much in winning, as in playing a
poor hand well. Josh Billings
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Everything I did in my life that was worthwhile,
I caught hell for. Earl Warren