Order Code RS21883
Updated May 13, 2008
Outsourcing and Insourcing Jobs in the U.S.
Economy: An Overview of Evidence Based on
Foreign Investment Data
James K. Jackson
Specialist in International Trade and Finance
Foreign Affairs, Defense, and Trade Division
Summary
Foreign direct investment is sparking a national debate.1 Local communities
compete for investment projects, while many of the residents of those communities fear
losing their jobs to foreign outsourcing. Some opponents argue that such job losses
have a disproportionately negative impact on local communities. Economists generally
argue that free and unimpeded international capital flows have a positive impact on both
domestic and foreign economies. This issue is complicated by the fact that broad,
comprehensive data on U.S. multinational companies was not developed to address the
issue of jobs outsourcing. This report provides an overview of CRS Report RL32461,
Outsourcing and Insourcing Jobs in the U.S. Economy: Evidence Based on Foreign
Investment Data
, that analyzes the extent of direct investment into and out of the
economy and the relationship between direct investment and the broader economic
changes that are occurring in the U.S. economy.2 This report will be updated as events
warrant.
1 The United States defines foreign direct investment as the ownership or control, directly or
indirectly, by one foreign person (individual, branch, partnership, association, government, etc.)
of 10% or more of the voting securities of an incorporated U.S. business enterprise or an
equivalent interest in an unincorporated U.S. business enterprise. 15 CFR § 806.15 (a)(1).
Similarly, the United States defines direct investment abroad as the ownership or control, directly
or indirectly, by one person (individual, branch, partnership, association, government, etc.) of
10% or more of the voting securities of an incorporated business enterprise or an equivalent
interest in an unincorporated business enterprise. 15 CFR § 806.15 (a)(1).
2 Data for this report were taken from the annual surveys by the Bureau of Economic Analysis
on U.S. direct investment abroad and on foreign direct investment in the United States. See U.S.
Direct Investment Abroad: Operations of U.S. Parent Companies and Their Foreign Affiliates
;
and Foreign Direct Investment in the United States: Operations of U.S. Affiliates of Foreign
Companies
. Preliminary results from surveys are published in the Survey of Current Business
generally 18 months after the end of the reporting calendar year, with the more detailed reports
issued in the fall of that year.

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The United States is the largest foreign direct investor in the world and the largest
recipient of such investment funds.3 On a historical cost basis, or book value basis, the
Department of Commerce estimates that by the end of 2006 U.S. firms had accumulated
$2.4 trillion worth of direct investment abroad, compared with the $1.8 trillion foreign
investors had spent to acquire or establish businesses in the United States.4 As Figure 1
shows, U.S. and foreign direct investment flows increased sharply in 2006. Foreign direct
investment in the United States on an annual basis peaked at $320 billion in 2000 before
plummeting to about $40 billion in 2002, according to Commerce Department data.5
Recent Department of Commerce data indicate that foreigners invested $180 billion in
U.S. businesses and
real estate in 2007.
New spending by
Figure 1. Foreign Direct Investment in the United
U.S. firms on
States and U.S. Direct Investment Abroad, Annual
businesses and real
Flows 1990-2007
estate abroad, or
(in billions of dollars)
U . S . d i r e c t
Billions of dollars
$350
investment abroad,
Foreign Direct Investment in
rose in 2006 to
$300
the United States
$235 billion, up
$250
sharply from the $8
billion net they
$200
brought home in
U.S. Direct Investment
$150
Abroad
2005, due to a one-
time tax provision.
$100
New investments in
$50
2 0 0 7 l i k e l y
$0
ex ceeded $330
billion, according
-$50
t o balance of
1990
1992
1994
1996
1998
2000
2002
2004
2006
payments data by
Year
the Department of
Source: CRS from U.S. Department of Commerce data
Commerce.6
3 This is true on a historical cost, or cumulative position basis, but the sharp drop in foreign direct
inflows after 2000 has meant that other countries recently displaced the United States as the
largest recipient of annual foreign direct inflows.
4 Ibarra, Marilyn, and Jennifer Koncz, Direct Investment Positions for 2006, Survey of Current
Business
, July 2007, p. 21. The Department of Commerce publishes two additional estimates
of the value of U.S. direct investment abroad and foreign direct investment in the United States.
These methods represent the current cost method and the market value method. According to
these methods, U.S. direct investment abroad would be valued at $2.9 trillion and $4.4 trillion,
respectively; foreign direct investment would be valued at $2.1 trillion and $3.2 trillion,
respectively. Nguyen, Elena L., The International Investment Position of the United States at
Yearend 2006, Survey of Current Business, July 2007, p. 10.
5 Bach, Christopher, L., U.S. International Transactions, 2007. Survey of Current Business,
April 2008. p. 48.
6 Ibid., p. 48.

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U.S. and Foreign Multinational Companies
By the end of 2005, there were more than 2,300 U.S. parent companies with 24,000
affiliates operating abroad, as Table 1 indicates. In comparison, foreign firms had about
5,300 affiliates operating in the United States. U.S. parent companies employed nearly
22 million workers in the United States, compared with the 10.3 million workers
employed abroad by U.S. firms and the 5.5 million persons employed in the United States
by foreign firms. Although the U.S.-based affiliates of foreign firms employ fewer
workers than do the foreign affiliates of U.S. firms, they paid almost as much in aggregate
employee compensation in the United States as did the U.S. affiliates operating abroad.
The foreign affiliates of U.S. parent companies, however, had a third higher value of gross
product than did the affiliates of foreign firms operating in the United States. In addition,
the foreign affiliates of U.S. firms had total sales that were a third higher than that of the
U.S. affiliates of foreign firms. The foreign affiliates of U.S. firms, however, paid three
times more in taxes to foreign governments than did the affiliates of foreign firms
operating in the United States. The overseas affiliates of U.S. parent companies also paid
nearly twice as much in taxes relative to their sales as did U.S. parent companies and as
did foreign-owned affiliates operating in the United States.
Table 1. Select Data on U.S. Multinational Companies and on
Foreign Firms Operating in the United States, 2005
(in millions of dollars unless otherwise indicated)
U.S. Multinational Companies
U.S. Affiliates of
Parent
Affiliates
Foreign Firms
Companies
Number of firms
2,303
24,456
5,331
Employment (thousands)
21,768.5
10,333.3
5,530.1
Employee compensation
$1,288,871
$391,846
$363,340
Gross product
$2,303,060
$882,099
$539,869
Total assets
$16,767,078
$9,951,716
$6,848,777
Sales
$7,588,306
$4,224,685
$2,755,941
Taxes
$166,767
$168,811
$49,595
R&D Expenditures
$NA
$28,316
$34,637
Source: U.S. Direct Investment Abroad: Operations of U.S. Parent Companies and Their Foreign
Affiliates, Preliminary 2005 Estimates
; and Foreign Direct Investment in the United States: Operations of
U.S. Affiliates of Foreign Companies, Preliminary 2005 Estimates
.
Within the U.S. economy, U.S. multinational corporations (MNCs) rank among the
largest U.S. firms and play an important role in the U.S. economy. According to the total
output of U.S. parent companies, or gross product, they produced $2.3 trillion in goods
and services in 2005, up slightly from the $2.2 trillion dollars they produced in 2004.
This amount comprised about 21% of total U.S. private industry gross product, a share
of total gross product of U.S. parent companies that has remained fairly consistent since
the early 1990s despite significant changes in the U.S. economy as a whole.

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Employment
A major source of contention in the United States regarding foreign investment
focuses on the impact such investment is having on U.S. employment.7 Some observers
argue that recent actions by U.S. parent companies are different from previous
experiences with foreign investment because the parent companies are shifting jobs,
capital, and technology offshore to their foreign affiliates in ways that are distinctly
different from previous periods, and thereby are reducing employment in the United
States. The Department of Commerce’s Bureau of Economic Analysis provides the most
comprehensive set of data on U.S. direct investment abroad and on foreign direct
investment in the United States. These data, however, were not designed to link
employment gains or losses in the United States, either for individual jobs, individual
companies or in the aggregate, with the gains and losses of jobs abroad. The data
indicate, though, that the employment trends of U.S. parent companies are sensitive to
economic conditions in the U.S. economy, particularly during periods in which economic
growth slows down, as it did in the early 1980s, 1990s, and in the early 2000s.
Foreign investment data seem to indicate that, despite, or perhaps because of, the
growing international linkages between economies, an expansion or a contraction in the
rate of growth in the U.S. economy affects employment among U.S. parent companies
more than it affects employment among the overseas affiliates of these parent companies.
Nevertheless, changes in
jobs among U.S. parent
Figure 2. Employment of U.S. Parent
companies that are related to
Companies and Their Foreign Affiliates, 1992-
the overall growth rate of the
2005 (1990 = 100)
economy also affect the
160
growth in employment
among the foreign affiliates,
150
Affiliates
though not necessarily by
140
the same magnitude. As a
130
result, the number of
120
employees in the parent
companies and in the
110
Parents
affiliates tend to rise and fall
100
in a generally similar
90
pattern, as indicated in
1982
1986
1990
1994
1998
2002
1984
1988
1992
1996
2000
2004
Figure 2.
Year
International linkages
Source: Department of Commerce
between U.S. and foreign
economies mean that economic conditions in the United States have an impact on
economic conditions abroad, there appears to be no distinct pattern between the creation
or loss of jobs within U.S. multinational companies and a commensurate loss or creation
7 For a comprehensive look at how offshore outsourcing is affecting U.S. workers, see CRS
Report RL32292, Offshoring (a.k.a. Offshore Outsourcing) and Job Insecurity Among U.S.
Workers
, by Linda Levine. Also, see Drezner, Daniel W., The Outsourcing Bogeyman. Foreign
Affairs
, May/June, 2004; and Engardio, Pete, Aaron Bernstein, and Manjeet Kripalani, Is Your
Job Next? Business Week, February 3, 2003. P. 50-60.

CRS-5
of jobs among the foreign affiliates of those companies. Indeed, within most of the major
developed countries, those economic forces that spur direct investment inflows also boost
direct investment outflows. As a result, foreign direct investment may create jobs in the
foreign affiliate that substitute for jobs in the parent company, but foreign investment may
also positively affect job creation in both the parent company and the foreign affiliates,
which makes it difficult to identify any broad trend regarding outsourcing.
Trade
Another aspect of foreign direct investment that causes concern is the impact foreign
direct investment has on the amount of foreign trade associated with those investments.
Some observers argue that U.S. direct investment abroad supplants U.S. exports, jobs, and
research and development funds, thereby reducing employment and wages in the U.S.
economy. Others are concerned that outward direct investment alters the industrial
composition of domestic production and trade flows, which can affect the sectoral and
regional distribution of employment and the relative demand for skilled and unskilled
labor.8 According to this scenario, as firms invest abroad, they shift production abroad,
thereby eliminating jobs in the United States. As production shifts abroad, jobs are lost
in the United States and goods once produced in the United States are now imported from
abroad. Most studies indicate that, on balance, direct investment abroad increases U.S.
exports and helps sustain employment and wages at home.9
There is little doubt that some firms do indeed replace domestic production with
production from abroad, which would shift trade patterns, but the share of U.S. trade
represented by U.S. parent companies and their affiliates during the 1990s did not increase
as would be expected. Instead, intra-firm exports and imports fell as a share of total U.S.
exports and imports during the 1990s. From 2000 to 2003, intra-firm trade, both exports
and imports, increased as a share of total U.S. exports and imports respectively, but since
2003, intrafirm trade in exports and imports fell as a share of total U.S. exports and
imports.
Some observers are concerned that U.S. parent firms have started moving service
jobs offshore, or outsourcing, in sectors that once were thought to be immune to such
activities.10 As Table 13 indicates, U.S. foreign affiliates had $574 billion in services
sales in 2005. Of this amount, 5.5% consisted of service sales back to the U.S. parent
company. The largest share — 77% — of sales of services were made in the local
market. This share is substantially higher than the comparable share for sales of goods
and services combined and is consistent with the general view that the distinguishing
feature of services is that they are consumed where they are produced.
8 International Investment Perspectives: 2006 Edition, the Organization for Economic
Cooperation and Development. p. 99.
9 Ibid., p. 101; Brainard, S. Lael, and David A. Riker, Are U.S. Multinationals Exporting U.S.
Jobs?
NBER Working Paper 5958, National Bureau of Economic Research, March 1997.
10 Lohr, Steve. “High-End Technology Work Not Immune to Outsourcing.” The New York
Times
, June 16, 2004, p. C1.

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Conclusions
Data published by the Bureau of Economic Analysis offer no conclusive evidence
that current investment trends are substantially different from those of previous periods.
The data also show that U.S. direct investment abroad and foreign direct investment in
the United States generally move in the same direction so that those forces which
encourage U.S. firms to invest abroad also encourage foreign firms to invest in the United
States. From the data examined, it is not apparent that U.S. parent companies are
outsourcing jobs at a faster pace or in a manner that is fundamentally different or distinct
from previous periods. There is an important caveat to these conclusions, however. The
data published by the BEA were not developed to address the issue of jobs outsourcing
and it is not possible with the BEA data to track job losses or gains in specific industries,
specific companies, or specific plants with changes in jobs abroad. In addition, the BEA
data lag behind current events by two years, which means that assessing these activities
may seem to be out of sync with the more limited anecdotal examples that appear in the
popular press.
The data do indicate, though, that an increase in economic growth in the U.S. parent
companies relative to the rate of growth in the foreign affiliates likely increases pressure
within the economy to complete structural changes and to shift capital and labor from
declining sectors to expanding sectors. Such changes may also lead to a greater number
of jobs being outsourced, but this effect likely would be muted by the overall strong
demand for jobs within the economy and by new foreign investments in the economy.
On the other hand, an economic slowdown among U.S. parent companies relative
to the rate of growth among foreign affiliates likely would lead to an overall decline in
employment throughout the economy. U.S. parent companies may or may not respond
to an economic slowdown by outsourcing jobs abroad because the dominating presence
of the U.S. economy in the world economy means that an economic slowdown in the
United States likely reduces economic growth abroad as well and that the foreign affiliates
of those parent companies may not be a position to add more jobs. The uneven effect of
an economic slowdown among U.S. parent companies on their investment behavior
abroad likely means that jobs outsourcing may appear to be more acute during periods in
which the long-term structural changes in the economy coincide with the short-term
economic adjustments that arise from a slowdown in the rate of growth of the U.S.
economy.
For Congress, the data on direct investment seem to indicate that the number of jobs
created by U.S. parent companies and by the foreign affiliates of those parent companies
is tied closely to the overall performance of the U.S. economy. Such economic measures
as employment, trade, and investment will rise and fall among U.S. parent companies and
their foreign affiliates generally in tandem. Swings in the rate of growth in the economy
that are associated with the business cycle tend to affect U.S. parent companies more than
they affect their foreign affiliates and more than those U.S. firms that are purely domestic.
Policies that ameliorate the business cycle, especially the downside of the cycle when the
economy is experiencing a slow rate of economic growth, likely would do the most to
help U.S. parent companies. Furthermore, Congress may choose to address the economic
plight of those workers and communities that experience a disproportionate share of the
adjustment costs that are associated with the business cycle by providing specialized
assistance or other types of short-term support.