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Management

Presidential Candidates Want to Bring Back Millions of Outsourced Jobs

Here’s why they can’t

Published: Tuesday, May 31, 2016 - 15:25

One of the big themes in the current presidential race is how decades of free trade have dealt a heavy blow to the U.S. worker as millions of jobs were shipped overseas to take advantage of cheap labor.

That’s even turned some pro free-trade Republicans into protectionists. As a result, the candidates are promising to bring these jobs back to the United States—whether by lowering taxes (Donald Trump), improving skills (Hillary Clinton) or building infrastructure (Bernie Sanders).

But can all these manufacturing, service, and knowledge-intensive jobs that were outsourced or offshored to China, India, and other places really be “brought back,” as the candidates seem to believe?

In short, no. Our own research suggests that many of those jobs are pretty much gone for good. This has a lot to do with how the global economy works. Instead of hoping that firms eventually bring jobs back, the focus should be on developing a new type of worker with a skill set that takes advantage of the needs and reality of our increasingly globalized and networked economy.

History of offshoring

Offshoring of manufacturing took off in the 1980s, followed by offshoring of business services and knowledge work in the 1990s and 2000s.

Labor-cost advantages, increasing availability of qualified personnel abroad, and advanced information and communication technology have made it attractive to create more jobs abroad rather than at home. Free trade agreements and the collapse of the Iron Curtain have also played a huge role. For example, estimates suggest that since 2001, 3.2 million jobs have been offshored from the United States to China alone.

Larger businesses, in particular in the United States and Western Europe, have shifted a large proportion of their operations—from manufacturing to call centers, tech support, accounting, and even innovation—to emerging economies where labor is still a fraction of the cost at home. In business services, for example, initial labor cost savings are reported to average between 20 percent and 40 percent.

Ten years ago, this trend led many U.S. economists, including Princeton’s Alan Blinder, to fear the loss of millions of jobs, in particular in technology and services, to developing countries. Maybe they were right about that. But is the trend reversible? 

Reason for hope?

The presidential candidates aren’t the only ones who think it is.

The Reshoring Initiative,  launched in 2010 by entrepreneur and manufacturing expert Harry Moser, aims to encourage U.S. companies to do just that: “reshore” jobs that were offshored—specifically in manufacturing.

There are claims that the tide is already turning. Approximately 67,000 manufacturing jobs were added in the U.S. economy in 2015, compared with only 12,000 in 2003, according to the Reshoring Initiative. Of course this is only half of the story, as companies also continue to create new jobs outside the United States. For example, while Apple recently moved up to 2,000 jobs back to Arizona, it will keep investing “as aggressive as ever” in China.

But still: reshoring appears to be happening. And why? According to the Reshoring Initiative, wages in emerging economies are rising, which reduces the cost advantages of going abroad. In addition, many U.S. businesses are increasingly caught by serious offshoring challenges. Often, so-called hidden costs add up, such as unexpected quality problems and delays, language difficulties, and coordination costs. For example, having encountered substantial delays and language issues with its Indian offshore tech support centers, Dell Inc. decided in 2003 to bring these activities back to the United States.

If more companies took account of those hidden costs, the group argues, a vast number of jobs could be brought back.

Companies are global

But here’s where the argument runs aground.

Although it’s true that many companies do encounter hidden costs when they ship jobs abroad, reshoring has been only one rather rare response that companies have used to mitigate them.

Instead, we find in our own studies that many businesses take those hidden costs as an opportunity to learn and develop more effective global coordination structures and capabilities that ultimately reduce them and make the companies more nimble as a result.

For example, several U.S. tech companies offshored tech support to Egypt in the 2000s. When the Internet broke down during the Arab Spring in 2008, these companies experienced serious delays. Clearly this was an unforeseen cost that could seriously hurt the bottom line by worsening customer service and lead to defections to rival businesses. But rather than reacting by reshoring those jobs in the United States, where such a problem wouldn’t have occurred, these companies invested heavily in cloud technologies and other infrastructures that now allow them to swiftly move operations to other locations in case of disruptions.

In other words, companies like these doubled down on their global footprint while reducing their dependence on any one location, whether it is Egypt or the United States, thus increasing their flexibility to deal with unexpected problems. This makes it even less likely they’ll bring those jobs home.

Global mindset

And this global mindset means that U.S. locations have become less central for the operations of U.S.-based companies. In fact, companies from Cisco to Google now operate multiple global centers with rotating and flexible workforces.

Global outsourcing service providers, such as Accenture, IBM Global Services, and Infosys, have been at the forefront of this development. In our recent study, we found that these firms have established global networks of operations that not only give them access to talent pools around the world but allow them to process client requests 24/7 by shifting work overnight to operations in a different time zone.

On top of that, face-to-face communication—both inside the firm and with external clients—is needed less and less thanks to advanced communication technology. For example, many firms today use videoconferencing tools such as telepresence, which creates virtual meeting rooms with multiple participants who, in reality, sit in offices around the world.

Jobs of the future

So what does this all mean for the United States and claims that a future president could bring these jobs back?

First, it’s best to accept that most jobs that were once offshored are gone. Instead, it’s better to prepare the U.S. workforce for the new global economy and take advantage of the jobs that will be up for grabs in the coming years. For example, significant technological advancements in robotics and 3D printing will clearly offer rich opportunities for domestic manufacturing and job growth.

To reap such opportunities, education and training are key—though in a different way than most people think. In today’s economy, generic STEM skills in science, technology, engineering, and math can be easily replaced in emerging economies thanks to the increasing standardization of knowledge work and tech jobs around the world. What is needed instead is a more unique blend of qualifications combining local and global expertise, and technical and interpersonal skills.

Certainly U.S. workers need to be technically trained to the highest standards. But this is not enough, as emerging economies are catching up fast. Thanks to population growth and improving education, India and China produce more than 10 times as many science and engineering graduates as the United States. That’s why U.S. workers also need to be equipped with strong interpersonal and leadership skills as well as local expertise to remain competitive.

More specifically, they need to learn to work in international and intercultural teams, lead local and remote staff, and become intimately familiar with both local and global client needs and supplier expectations, so they cannot be so easily replaced.

Therefore, old recipes, such as lowering corporate taxes, and investing in infrastructure and technical training, will barely help the United States to bring back old jobs. Nor will “building new walls” make the United States less dependent on foreign talent pools and expertise.

The focus instead needs to be on preparing a U.S. workforce for an economy that is increasingly globally connected.

This article was originally published on The Conversation. Read the original article.

Discuss

About The Authors

Stephan Manning’s picture

Stephan Manning

Stephan Manning, Ph.D., is an associate professor of management and co-founder of the Organizations and Social Change Research Group at the College of Management, University of Massachusetts Boston. His research mainly covers sustainability standards, global outsourcing, and project-based organizing. He has done field research in various countries, including China, Germany, Guatemala, Kenya, Romania, South Africa, and the United States. His research has been published in numerous top-tier academic journals. He teaches international business and strategy at the undergraduate, master, and Ph.D. level. He has specific industry expertise in automotive engineering, coffee production, global business services, and film-making.

 

Marcus M. Larsen’s picture

Marcus M. Larsen

Marcus M. Larsen, Ph.D., is an assistant professor of strategic and international management at the Copenhagen Business School in Frederiksberg, Denmark. His research—which has been published in top-tier academic journals and received several international prizes—lies on the intersection of strategy, organizational theory, and international business, with a particular focus on offshoring and emerging economy multinationals. He teaches students at all levels on issues relating to strategic management and international business, and is the author of several teaching cases which are actively used around the world.

Comments

The Reshoring Initiative Can Help

Thanks for mentioning the Reshoring Initiative. We are perplexed by the use of “so-called” in the article since the Reshoring Initiative is the leading organization promoting and enabling reshoring and has been recognized as an industry expert by the U.S. Commerce Department.

With that said, the economic bleeding of jobs has stopped. Reshoring, including FDI, balanced offshoring in 2015 as it did in 2014. In comparison, in 2000-2007 the United States lost net about 200,000 manufacturing jobs per year to offshoring. That is huge progress to celebrate!

Probably one million or more of the lost jobs are of the technical skill level that the article suggests we should embrace. A lot more can come back if we level the playing field: skilled workforce, currency, VAT, corporate tax rates.

The trade deficit (a good measure of the number of lost jobs) is not getting worse but it is not getting better. The candidates calling for manufacturing jobs to be reshored are correct that change is needed to bring these jobs back. We have lost cumulative 3-4 million manufacturing jobs to offshoring over the last decades. The impact of closing the trade deficit would be:

a. 3-4 million manufacturing jobs at current U.S. levels of productivity b. 6-8 million total jobs c. Improved income equality d. Cut U.S. budget deficit by about 50% e. Provide more funding for other programs f. 25% - 30% increase in manufacturing g. Reduced economic volatility

The Reshoring Initiative Can Help

In order to help companies decide objectively to reshore manufacturing back to the U.S. or offshore, the not-for-profit Reshoring Initiative’s free TCO Estimator can help corporations calculate the real P&L impact of reshoring or offshoring. http://www.reshorenow.org/tco-estimator/

Fair point

"So-called" has been removed from this article.