Globalization, broadly defined as the increasing interdependence between countries, has changed the rules of competition in business by enhancing capabilities that allow the transfer of information, skills, technology, products, and culture (Bodislav et al., 2015; Wiesmann et al., 2017). It has allowed companies to develop critical strategy approaches that leverage the different alternatives available to them to survive in complex, dynamic, and competitive global value chains. One such type of strategic approach is offshoring/outsourcing. Offshoring is a popular strategic practice where companies disaggregate fine pieces of activity from their value chains and relocate them across national objectives to save on cost, enhance performance, or learning opportunities (Mykhaylenko et al., 2015). Companies will typically outsource their services from high-cost to low-cost environments, mostly characteristic of developing countries. However, the success of this offshoring depends on the ability of the low-cost environment to balance supply and demand. The failure to which the offshoring company could seek alternatives in the form of reverse offshoring. According to Wang & Song (2017), reverse offshoring can involve a backflow of offshoring where companies move their offices back home from developing countries, outsourcing tasks of enterprises in developed countries, and developing countries becoming contract issuers.Read more
Money/Jobs Offshored in the US
An analysis by Princeton University economist Alan Blinder, conducted in 2008, notes that the manufacturing and information technology services sectors are the most vulnerable industries, with other information-intensive sectors like insurance and financial services significantly offshoring (PRB, 2008). Amadeo (2017) provides a more contemporary perspective on what type of jobs the US is offshoring, noting that the hardest-hit sectors are manufacturing, technology, call centers, and human resources. India is perhaps the greatest recipient of jobs offshored from the US, but other low-income countries in Asia like Mongolia, China, Korea, and Taiwan, as is the case of Apple Inc. The primary objective of offshoring is to reduce costs, which is perhaps why the preference for US companies offshoring jobs outside is to target developing countries. However, there has been a focus on whether the job can be done remotely, especially with the rapid technological innovation and development (Ray & Thomas, 2019).
The offshoring of jobs to developing countries has critical implications for the economy. First, it diverges revenue streams from the US into these offshored countries. According to Barbe & Riker (2018), decades of offshoring to developing countries by companies in the US saw a decline in employment within the manufacturing sector, traditionally linked with offshoring activities, from 20 million in 1980 to a little over 12 million in 2017. Although seemingly declining, the amount of money being offshored outside the country also has implications for employment and the level of income or wages for employees in the country. Consequently, these outcomes adversely impact disposable income and consumer spending ability, which reduces the demand for products (Schröder, 2020). A declining demand threatens the survival of local businesses, whose success is hinged on existing demand for products or services. Hence, offshoring has far-reaching implications for the economy other than the direct impacts on the offshoring company.
Money/Jobs Reverse Offshored to the US
Given the significance of outsourcing and the increasing preference by companies in developed countries, most developing countries need to be innovative and flexible to keep up with the competition for outsourcing contracts. For example, Indian companies contend with competition from the Philippines and Vietnam find it prudent to innovate by leveraging the latest innovations to enhance perceived value and market position. Although a relatively new concept, reverse outsourcing is among the strategies leveraged by such companies, primarily for growth. The consequence is outsourcing coming back to the US, meaning that the outsourced companies create money and employment opportunities in the US (Glader, 2011). Many job opportunities are related to the freelance industry and information and technology services (Pofeldt, 2018). An example of a company that hires from the US due to the growing outsourcing market in the US is Infosys, noted to hire more than 10,000 US employees (Wood et al., 2018).
According to a report by Perry (2020), reverse outsourcing has contributed to the employment of more than 7.8 million US citizens. Over 8,000 foreign US affiliates of foreign multinational enterprises have set up employment programs in the US due to the increasing demand within their countries due to offshoring and outsourcing. Based on the Bureau of Economic Analysis data, the total number of employees hired by foreign countries comprises 6.2% of all private-sector jobs in 2018. The number of people employed by foreign companies has been on the rise, suggesting a potential increase in the amount of money being channeled back into the US, potentially countering the adverse impacts – loss of jobs and money out of the country, caused by offshoring strategies. Out of this population, over 3 million are factory jobs, which accounts for 23% of the total American manufacturing employment. Estimates show an approximate 12.7 million factory works as of 2018. Also, over 100,000 US employees are employed in the wholesale trade category involving such services as motor vehicles and motor vehicle parts and supplies. An overall takeaway from the insourcing of US labor by foreign companies is a significant and positive impact on the economy.
Comparing the Tradeoff
There is not much data on the offshoring versus reverse offshoring paradigm. However, it is increasingly clear that the two share a bidirectional cause-effect relationship. An increasing need to offshore operations from the value chain motivate the need for reverse offshoring as a strategic response for survival and capability development by companies in developing countries. However, despite official data not being recent or available, it is possible to make inferences based on fragmented information collected from different sources. Available data on the number of employees hired by foreign companies from developing countries and the number of outsourced jobs shows a gap favoring reverse offshoring. Perry (2020) finds that foreign companies offered about 7.8 million jobs to US citizens in 2018, an overall increase from the 2017 findings. The Economy Policy Institute noted that the number of jobs lost to offshoring reached 5 million in 2018 (Hrubenja, 2017). The evidence suggests that the number of jobs returning to the US from reverse outsourcing/offshoring is higher than those lost to developing countries.
Regarding the money moving out compared to that which comes back into the country from reverse offshoring, a contextual approach is needed since various metrics can be used to compare the two strategies. These include the amount of wages earned, total investment, or the total productivity from the operationalization of labor in either strategy. Nevertheless, it is estimated that offshoring by US companies resulted in revenues totaling $92.5 billion. Though, the amount depends on the source of information, with a 2019 report by BrandEssence Research valuing the BPO market at $188 billion for that year (Hrubenja, 2022). These figures are significantly lower than those from reverse offshoring, with insights placing total revenues for 2019 settling at $645 billion. These findings corroborate the positive relationship between offshoring and reverse offshoring, where the increase in offshoring value results in the increase of the reverse offshoring outcomes, although disproportionately.
Based on the above, it would appear that there is an increasing tendency for offshoring companies in developing countries to offshore or subcontract labor in the US to help achieve efficiency, meet the demands on their supply chain, and also enhance competitiveness by creating and enhancing value through differentiation. Ultimately, an investment in offshoring activities promotes the US economy and reduces the adverse implications of shifting production away from US-based companies. Nevertheless, there is still not much done on reverse offshoring, which is perhaps why there is not much focus on the potential benefits it poses for the US economy, making the concept go relatively unnoticed. The significance of reverse offshoring to the US economy should motivate an increased emphasis on its exploration, including ways to enhance the sustainability of such strategies in an increasingly globalized world. The increased dollars from reverse offshoring compared to those spent on offshoring activities will eventually promote growth and development for the US and offshored developing countries.
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Glader, P. (2011). As Indian companies grow in the US, outsourcing comes home. The Washington Post, 20.
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Wood, M., Hughes, S., & Ainpour, S. (2018). An Indian tech company is hiring 10,000 workers in the U.S. Here’s why. [online] Marketplace.org. Retrieved from https://www.marketplace.org/2018/06/08/indian-tech-company-hiring-10000-workers-us-heres-why/ on 30 April, 2022.
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