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
April 15, 2010
Congressional Research Service
7-5700
www.crs.gov
RS21883
CRS Report for Congress
P
repared for Members and Committees of Congress
Outsourcing and Insourcing Jobs in the U.S. Economy
Summary
Foreign direct investment is sparking a national debate. 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. This report will be updated as events warrant.
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Outsourcing and Insourcing Jobs in the U.S. Economy
Contents
U.S. and Foreign Multinational Companies ................................................................................. 2
Employment ............................................................................................................................... 3
Trade .......................................................................................................................................... 4
Conclusion.................................................................................................................................. 5
Figures
Figure 1. Foreign Direct Investment in the United States and U.S. Direct Investment
Abroad, Annual Flows 1990-2008 ............................................................................................ 2
Figure 2. Index of Employment of U.S. Parent Companies and Their Foreign Affiliates,
1992-2007 (1990 = 100)........................................................................................................... 4
Tables
Table 1. Select Data on U.S. Multinational Companies and on Foreign Firms Operating in
the United States, 2007............................................................................................................. 3
Contacts
Author Contact Information ........................................................................................................ 6
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Outsourcing and Insourcing Jobs in the U.S. Economy
he United States is the largest foreign direct investor in the world and the largest recipient
of such investment funds.1 On a historical cost basis, or book value basis, the Department
T of Commerce estimates that by the end of 2008 U.S. firms had accumulated $3.2 trillion
worth of direct investment abroad, compared with the $2.3 trillion foreign investors had spent to
acquire or establish businesses in the United States.2 As
Figure 1 shows, direct foreign
investment flows generally have increased since 2003, while U.S. direct investment abroad
dropped sharply in 2005 as a result of one-time tax provisions, but then rebounded sharply in
2006.3 Recent Department of Commerce data indicate that foreigners invested a record $325
billion in U.S. businesses and real estate in 2008, according to data published by the Department
of Commerce and invested more than $200 billion in 2007.4 New spending by U.S. firms on
businesses and real estate abroad, or U.S. direct investment abroad,5 rose sharply in 2006 to $235
billion up from the $8 billion net they brought home in 2005.
1 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 have occasionally displaced the United States as the largest recipient of annual foreign
direct inflows.
2 Ibarra, Marilyn, and Jennifer Koncz, Direct Investment Positions for 2008,
Survey of Current Business, July 2009, p
32. The position, or stock, is the net book value of U.S. parent company’s equity in, and outstanding loans to, their
affiliates abroad. A change in the position in a given year consists of three components: equity and intercompany
inflows, reinvested earnings of incorporated affiliates, and valuation adjustments to account for changes in the value of
financial assets. The Commerce Department also publishes data on the U.S. direct investment position valued on a
current-cost and market value bases. These estimates indicate that U.S. direct investment abroad increased by $247
billion, but fell when measured by market value by $2.2 trillion in 2008 to reach $3.7 and $3.1 trillion, respectively.
Nguyen, Elena L., The International Investment Position of the United States at Yearend 2008,
Survey of Current
Business, July 2009, p.10.
3 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).
4 Weinberg, Douglas B., Erin M. Walker, and Gregory A. Tenentes., U.S. International Transactions: Fourth Quarter
and Year 2008.
Survey of Current Business, April 2009. p. 28. Direct investment data reported in the balance of
payments differ from capital flow data reported elsewhere, because the balance of payments data have not been
adjusted for current cost adjustments to earnings.
5 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).
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Outsourcing and Insourcing Jobs in the U.S. Economy
U.S. and Foreign
Figure 1. Foreign Direct Investment in the
United States and U.S. Direct Investment
Multinational
Abroad, Annual Flows 1990-2008
Companies
(in billions of dollars)
Billions of dollars
$350
By the end of 2007, there were more than
Foreign Direct Investment in
$300
the United States
2,300 U.S. parent companies with more than
$250
26,000 affiliates operating abroad. In
$200
comparison, foreign firms had about 11,000
$150
affiliates operating in the United States. U.S.
U.S . Direct Investment
Abroad
$100
parent companies employed over 22 million
workers in the United States, compared with
$50
the 11.7 million workers employed abroad by
$0
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
U.S. firms and the 6 million persons
Year
employed in the United States by foreign
Source: CRS from U.S. Department of Commerce
firms. Although the U.S.-based affiliates of
data.
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 data also
suggest that U.S. parent companies are more efficient than either the U.S. affiliates of U.S. firms
or foreign firms operating in the United States with higher output per employee. Foreign firms
operating in the United States are more capital intensive relative to employment than U.S. parent
firms or U.S. affiliates, likely reflecting the newer age of the capital stock of the foreign firms.
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 more than 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.
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Table 1. Select Data on U.S. Multinational Companies and on Foreign Firms
Operating in the United States, 2007
(dollar amounts are in millions of dollars)
U.S. Multinational Companies
U.S. Affiliates
Parent
of Foreign Firms
Companies
Affiliates
Number of firms
2,270
26,342
10,941
Employment (thousands)
22,003
11,738
6,016
Employee compensation
$1,392,180
$475,595
$433,065
Gross product
$2,588,811
$1,117,585
$657,558
Total assets
$19,964,935
$14,201,291
$12,732,967
Sales $8,614,733
$5,517,143
$3,553,593
Taxes $257,292
$179,922
$57,731
R&D Expenditures
NA
$35,019
$44,158
Source: U.S. Direct Investment Abroad: Operations of U.S. Parent Companies and Their Foreign Affiliates, Preliminary
2007 Estimates; and
Foreign Direct Investment in the United States: Operations of U.S. Affiliates of Foreign Companies,
Preliminary 2007 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 $2.59 trillion in goods and services in 2007, up
slightly from the $2.54 trillion dollars they produced in 2006. 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.
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.6 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.
6 For a comprehensive look at how offshore outsourcing has affected 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 Berstein, and
Manjeet Kripalani, Is Your Job Next?
Business Week, February 3, 2003. P. 50-60.
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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,
Figure 2. Index of Employment of U.S.
despite, or perhaps because of, the growing
Parent Companies and Their Foreign
international linkages between economies, an
Affiliates,
expansion or a contraction in the rate of
1992-2007 (1990 = 100)
growth in the U.S. economy affects
180
employment among U.S. parent companies
170
more than it affects employment among the
Affiliates
160
overseas affiliates of these parent companies.
150
Nevertheless, changes in jobs among U.S.
140
130
parent companies that are related to the
120
overall rate of growth of the economy also
Parents
110
affect the rate of growth in other countries
100
90
and, therefore, in employment among the
1982
1986
1990
1994
1998
2002
2006
foreign affiliates, though not necessarily by
1984
1988
1992
1996
2000
2004
Year
the same magnitude, as indicated in
Figure 2.
Source: Department of Commerce.
International linkages 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 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.7 According to this scenario, as firms invest
abroad, they shift production abroad and replace U.S.-based production with exports back to the
United States, thereby eliminating jobs in the United States. As production shifts abroad, jobs are
lost in the United States and goods that once were 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.8
7
International Investment Perspectives: 2006 Edition, the Organization for Economic Cooperation and Development.
p. 99.
8 Ibid., p. 101; Brainard, S. Lael and David A. Riker,
Are U.S. Multinationals Exporting U.S. Jobs? NBER Working
(continued...)
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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 since 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 has fallen
as a share of total U.S. exports and imports.
For some observers, another concern is 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.9 U.S.
foreign affiliates had $763 billion in services sales in 2007. Of this amount, 5.2% consisted of
service sales back to the U.S. parent company. The largest share—73%—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..
Conclusion
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
(...continued)
Paper 5958, National Bureau of Economic Research, March 1997.
9 Lohr, Steve. “High-End Technology Work Not Immune to Outsourcing.”
The New York Times, June 16, 2004, p. C1.
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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.
Author Contact Information
James K. Jackson
Specialist in International Trade and Finance
jjackson@crs.loc.gov, 7-7751
Congressional Research Service
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