Companies ‘Outsource’ Because That’s Where The Sales Are

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MerrillThe political war against “off-shoring” — which is what the critics usually mean when they use the term “outsourcing” — is raging this election year, in part because of Democrats’ failed efforts to stimulate the economy.  But there is an important reason why many U.S. companies open stores, build factories and hire people overseas: That’s where the sales are.

General Electric Chief Executive Jeffery Immelt, a close Obama advisor, told the Wall Street Journal last year that 30 percent of GE’s business was overseas in 2000; today it’s 46 percent, and the majority of GE’s employees are now overseas.

Ditto for Caterpillar, whose overseas workforce grew by 39 percent between 2005 and 2010, compared to a 7.8 percent U.S. increase.

A 2011 report from the U.S. Commerce Department says that about a third of the roughly 31 million U.S. employees of multinational firms work abroad — and growing.  That’s because with only about 4 percent of the world’s population and a burgeoning middle class in several heavily populated developing countries, such as Brazil, Russia, India and China, the fastest growing markets are outside the U.S.

But first, let’s clear up some of the confusion surrounding the terms.  Outsourcing is when a company contracts with an outside person or company to provide some product or service, such as bookkeeping, payroll processing or janitorial services, or more complicated functions like marketing or IT services.  And families do the same thing when they turn to professionals for major plumbing, air conditioner or car repairs.

Economists refer to this process of turning to those who can produce a product or service at a lower marginal cost as “comparative advantage,” and it’s the key ingredient to an efficient and productive economy.

If a company outsources jobs to another country, that’s off-shoring.  However, companies can also build stores or factories in foreign countries and hire the people who work there.  That’s also off-shoring, but it isn’t necessarily outsourcing.  Those are company employees, both American and foreign.

From an economics standpoint, it makes no difference whether or not that outsourcing is with a person or firm in the same town, state or country.  Economics is unconcerned with national borders; politics, on the other hand, is very concerned, and especially in this economic climate.

Frankly, it isn’t entirely clear what the critics of outsourcing, or off-shoring, want to stop.  An Obama ad says Mitt Romney “supports tax breaks for companies that ship jobs overseas,” and accuses Romney of supporting outsourcing while Obama believes in “insourcing.”

But Wal-Mart is opening stores all over the world and hiring people to man them.  The Wall Street Journal reports the company added 100,000 employees outside of the U.S. last year.  How is the company supposed to staff its stores unless it hires nationals who live there and speak the language?  Should Wal-Mart be forced to pay higher taxes, which is what the president wants, for growing and competing overseas?

We used to praise that type of competitive spirit and success — used to.

Or take International Paper.  The Journal reports that the 114-year-old company is also growing much faster outside the U.S. than at home.  Between 2008 and 2011, sales in the U.S. and Europe remained about the same, while sales in Asia more than doubled, to $1.8 billion.

To add insult to injury in Obama’s view, International Paper is cutting U.S. jobs and closing factories while expanding overseas.  But is that because the company is engaged in some type of corporate tax dodge, as Obama likes to pretend?  Uh, no, it seems that Americans are using less paper as they transition to a digital economy, while there is a growing demand for paper in developing countries.

Should International Paper stay land-locked — or insourced, to use the president’s term — to avoid the extra taxes and accusations of being unpatriotic?

Yes, some U.S. companies produce their products overseas in order to take advantage of lower labor costs — i.e., comparative advantage.  But that means U.S. consumers get cheaper prices.  You’ll notice no one complained when gasoline prices recently fell, even though much of that oil is produced overseas.  The public was elated because lower gas prices means more money left over to spend on other wants and needs.  Well, the exact same reasoning applies to manufactured goods, raw materials and other products and services that U.S. consumers buy for less because of lower foreign costs.

Of course, some off-shoring efforts have not worked as well as others.  U.S. customers often get frustrated when they are connected to a call-center person whose English is barely understandable.  And that negative customer experience has forced some companies to reevaluate their off-shoring strategy.

In addition, Washington needs to understand that some off-shoring is a justifiable response to the quickly escalating number of government regulations, especially under the Obama administration, and the highest corporate tax rate in the developed world.

But instead of reducing regulations and creating a tax structure that rewards U.S. companies’ efforts to grow and enter new markets, most Democrats’ anti-outsourcing demagoguery only demonizes and punishes them.

It’s almost as if these off-shoring critics have spent their whole lives as community organizers rather than business owners.  Had they run a business they might have a better idea how to run a country.

Merrill Matthews is a resident scholar with the Institute for Policy Innovation in Dallas, Texas. Follow at  twitter.com/MerrillMatthews

Anthony-Claret Ifeanyi Onwutalobi

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Anthony-Claret Ifeanyi Onwutalobi

Anthony-Claret is a software Engineer, entrepreneur and the founder of Codewit INC. Mr. Claret publishes and manages the content on Codewit Word News website and associated websites. He's a writer, IT Expert, great administrator, technology enthusiast, social media lover and all around digital guy.
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