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

The impact of foreign direct investment on U.S. employment continues to attract national attention. 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 mid-career 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 ultimately 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