4 Ways Outsourcing Damages Industry

Outsourcing human capital to developing countries is a cost-saving measure employed by many companies in the United States. It is estimated that 66% of U.S. businesses outsource at least one division, and about 300,000 jobs are outsourced every year.

While the practice has preserved capital for many national and international companies, it could be damaging to American industry as a whole in the long term.

The draining of jobs, knowledge, and innovation may eventually give other countries a technological leg up on the United States and depress the American economy further. There are four major threats to the U.S. industry caused by outsourcing, which are discussed in this article.

Key Takeaways

• While outsourcing saves U.S. companies money, it could hurt the American economy in the long run by increasing unemployment and weakening industries.
• As more skilled jobs move overseas due to outsourcing, the U.S. risks losing intellectual capital, making it harder to regain certain expertise and industries.
• Outsourcing makes the U.S. reliant on foreign labor and manufacturing, which opens up vulnerabilities to shifting global relations, trade wars, and economic instability abroad.

Higher Semi-Permanent Unemployment

Jobs that move offshore often do not come back. The lower wages and operating costs, plus the simpler administrative requirements in countries such as India and Russia, make operating in those countries cheaper and easier.

Without new jobs being created in America, unemployment rises, and a higher base unemployment rate becomes the norm. It could be decades before developing countries reach their saturation point and wages are driven higher. In the meantime, more American workers are out of work with few prospects of landing a job.

Loss of Intellectual Capital

Initially, the outsourcing movement was meant to transfer low-skill jobs out and retain highly-skilled jobs as an important asset for advancing the country’s economy.

However, as emerging economies work hard to build their own intellectual capital, American companies are increasingly contracting accountants, engineers, and IT specialists at a rate far lower than it would cost them in the U.S.

This “brain drain” has long-term repercussions for American industry. Once a skill has been largely moved offshore, it is difficult to regain

For example, if most publishers outsource book design and layout work to Chinese firms, over time, there will be fewer designers in the U.S. who have that skill. It also means that there are fewer students of the craft, due to a lack of opportunities.

4.5%

The percent of American jobs outsourced each year.

Loss of Manufacturing Capacity

When the industry moves offshore, not only do we lose knowledge, but we also lose manufacturing capacity.

For example, the U.S. was once the leader in solar cell manufacturing, but most American solar technology companies have set up new plants in countries that offer significant incentives, such as Germany.

The manufacturing capacity is gone, and if the U.S. ever wanted to repatriate these types of industries, it would take years to re-develop the manufacturing equipment and train engineers.

Reliance on Foreign Relations

Another risk that outsourcing companies face is the potential for relations with other countries to change. For example, if the U.S. were to engage in a trade war with China, the Chinese government may levy tariffs against foreign companies operating within its borders or on goods crossing the border.

In 1996, the Helms-Burton Act restricted U.S. companies from doing business in and with Cuba, forcing many companies to redesign their operations outside of the country.

Investors in international markets can also suffer losses to their portfolios if relations between two countries break down or if a foreign country falls into economic duress. This would negatively affect the activities of companies operating in that region.

Why Is Outsourcing a Problem?

While outsourcing makes financial sense for businesses, it comes with a host of problems. In the domestic market, it can lead to lower wages and job losses due to fewer opportunities for workers whose jobs have been outsourced. In the foreign market, it can lead to less oversight, communication issues, reduced quality control, and ethical problems, like poor working conditions.

What Is an Example of Outsourcing?

An electronics company, Tech Star, designs, produces, and sells various cutting-edge electronics products. To keep costs down, the company decides to outsource its manufacturing to Vietnam. Tech Star partners with a local company in Vietnam that has a factory, machinery, and skilled labor force.

By partnering with them, Tech Star avoids the high costs of building its own factory, buying machinery, and training a workforce. The local manufacturer’s process and cheap labor allow Tech Star to significantly save on production costs. These cost savings are passed down to consumers who can buy Tech Star’s electronics for less than if the products were produced in the domestic market.

How Many Jobs Are Lost to Outsourcing?

It is estimated that 300,000 U.S. jobs a year are lost to outsourcing, which equates to approximately 4.5% of American jobs.

The Bottom Line

The long-term damage to the U.S. economy eclipses the short-term gain derived by companies that outsource operations offshore. Over time, the loss of jobs and expertise will make innovation in the U.S. difficult while building the brain trust of other countries.