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Congressional Research Service (CRS)

Outsourcing and Insourcing Jobs in the U.S. Economy: Evidence Based on Foreign Investment Data

James K. Jackson, Specialist in International Trade and Finance

May 10, 2012

http://www.fas.org/sgp/crs/misc/RL32461.pdf

[full-text, 47 pages]

Summary

The impact of foreign direct investment on U.S. employment is provoking a national debate.

While local communities compete with one another for investment projects, many of the residents

of those communities fear losing their jobs as U.S. companies seek out foreign locations and

foreign workers to perform work that traditionally has been done in the United States, generally

referred to as outsourcing. Some observers suggest that current U.S. experiences with outsourcing

are different from those that have preceded them and that this merits legislative actions by

Congress to blunt the economic impact of these activities. Other observers argue that investing

abroad by U.S. multinational companies impedes the growth of new jobs in the economy and

thwarts the nation’s investments in high technology sectors. Some opponents also argue that midcareer

workers who lose good-paying manufacturing and service-sector jobs likely will never

recover their standard of living.

Economists and others generally argue that free and unimpeded international flows of capital

have a positive impact on both domestic and foreign economies. Direct investment is unique

among international capital flows because it adds permanently to the capital stock and skill set of

a nation, but it also challenges the general theory of capital flows because of the presence of

strong cross-border and intra-industry investment. Supporters contend that to the extent that

foreign investment shifts jobs abroad, it is a minor component of the overall economic picture and

that it is offset somewhat by the investment of foreign firms in the U.S. economy (referred to as

insourcing), which supports existing jobs and creates new jobs in the economy.

Broad, comprehensive data on U.S. multinational companies generally lag behind current events

by two years and were not developed to address the issue of jobs outsourcing. Many economists

argue, however, that there is little evidence to date to support the notion that the overseas

investment activities of U.S. multinational companies play a significant role in the rate at which

jobs are created in the U.S. economy. Instead, they argue that the source of job creation in the

economy is rooted in the combination of macroeconomic policies the nation has chosen, the rate

of productivity growth, and the availability of resources. This report addresses these issues by

analyzing the extent of direct investment into and out of the economy, the role such investment

plays in U.S. trade, jobs, and production, and the relationship between direct investment and the

broader economic changes that are occurring in the U.S. economy.

Contents

Overview.......................................................................................................................................... 1

U.S. and Foreign Multinational Companies .................................................................................... 4

Employment .............................................................................................................................. 6

Employment Trends................................................................................................................. 10

Employment by Sector and Area............................................................................................. 12

Gross Product................................................................................................................................. 16

U.S. Multinational Companies ................................................................................................ 17

Foreign-Owned Firms ............................................................................................................. 19

Cyclical vs. Structural Changes ..................................................................................................... 20

Trade .............................................................................................................................................. 28

Sales............................................................................................................................................... 31

Sales of Services...................................................................................................................... 33

Research and Development ........................................................................................................... 35

Why Firms Invest Abroad.............................................................................................................. 36

Ownership-Specific Advantages.............................................................................................. 38

Location Advantages ............................................................................................................... 39

Commercial Benefits ............................................................................................................... 40

Conclusion ..................................................................................................................................... 41

Figures

Figure 1. Foreign Direct Investment in the United States and U.S. Investment Abroad, Annual Flows 1990-2009 ............................................................................................................. 2

Figure 2. Inward and Outward Global Direct Investment Position, By Major Area, 2009............. 3

Figure 3. Index of Employment of U.S. Parent Companies and Their Foreign Affiliates, 1992-2008 (1990 = 100)............................................................................................................... 9

Figure 4. Employment of the Foreign Affiliates of U.S. Parent Companies as a Share of the Total Employment of U.S. Multinational Companies, 1985-2008 ....................................... 11

Figure 5. U.S. Direct Investment Position Abroad and Foreign Direct Investment Position in the United States, Cumulative Position by Country, 2009 ..................................................... 14

Figure 6. Employment of U.S. Foreign Affiliates Abroad and Affiliates of Foreign Firms in the U.S., by Country or Region, 2008 .................................................................................... 15

Figure 7. Average Annual Percent Change in Gross Product of U.S. Parent Companies and Their Foreign Affiliates, Selected Periods ........................................................................... 22

Figure 8. Average Annual Percent Change in Employment of U.S. Parent Companies and Their Foreign Affiliates, Selected Periods.................................................................................. 24

Figure 9. Average Annual Percent Change in Manufacturing Gross Product of U.S. Parent Companies and Their Foreign Affiliates, Selected Periods ........................................................ 25

Figure 10. Average Annual Percent Change in Manufacturing Employment of U.S. Parent Companies and Their Foreign Affiliates, Selected Periods ........................................................ 26

Figure 11. Intra-Firm MNC Trade as a Share of Total U.S. Exports and Imports, 1990-2008 ............................................................................................................................................ 29

Tables

Table 1. Global Annual Inflows of Foreign Direct Investment, By Major Area.............................. 4

Table 2. Select Data on U.S. Multinational Companies and on Foreign Firms Operating in the United States, 2008................................................................................................................. 5

Table 3. Gross Product and Manufacturing Gross Product by U.S. Multinational Companies, 1994-2008................................................................................................................. 6

Table 4. Employment of U.S. Multinational Companies and the Affiliates of Foreign Firms, 1992-2008.......................................................................................................................... 8

Table 5. Employment of Non-Bank U.S. Foreign Affiliates by Major Sector and Area, 2006-2008................................................................................................................................... 12

Table 6. Gross Product of U.S. Parent Companies and Their Majority-Owned Foreign Affiliates ..................................................................................................................................... 16

Table 7. U.S. Direct Investment Abroad; Investment Outflows for Selected Regions and Countries, 2005-2009 ................................................................................................................. 18

Table 8. Average Annual Percent Change in Gross Product and Employment of U.S. Parent Companies and Their Foreign Affiliates, Selected Industries, Selected Periods............. 23

Table 9. Changes in Gross Product and Employment Among U.S. Parent Companies and Their Foreign Affiliates for Selected Industries ......................................................................... 27

Table 10. Multinational Corporations’ Intra-Firm Exports of U.S. Goods, 1992-2007................. 30

Table 11. Multinational Corporations’ Intra-Firm Imports of U.S. Goods, 1992-2008................. 31

Table 12. Sales of Goods and Services by U.S. Foreign Affiliates by Destination and Industry, 2008 ............................................................................................................................. 32

Table 13. Sales of Services by U.S. Foreign Affiliates by Destination and Industry, 2008........... 34

Table 14. Sales of Services by U.S. Foreign Affiliates, Average Annual Rates of Change for Selected Periods .................................................................................................................... 35

Table 15. Expenditures on Research and Development by U.S. Multinational Firms and by the Affiliates of Foreign Firms Operating in the United States ............................................. 36

Contacts

Author Contact Information........................................................................................................... 43

Acknowledgments ......................................................................................................................... 43

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