The outsourcing of human capital to countries in the developing world is a cost-saving measure employed by an increasing number of companies across the United States. It is estimated that the number of jobs outsourced offshore by 2015 could be as high as 3.3 million. While the practice has preserved capital for many national and international companies, it could be damaging to American industry as a whole, in the long term. The draining of jobs, knowledge and innovation may eventually give other countries a technological leg up on the United States, and depress the American economy further. These are four major threats to U.S industry caused by outsourcing.
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Higher Semi-Permanent Unemployment
Jobs that move offshore often do not come back. The lower wages and operating costs, plus the simpler administrative requirements in countries such as India and Russia, make operating in those countries cheaper and easier.
Without new jobs being created in America, unemployment rises and a higher base unemployment rate becomes the norm. It could be decades before developing countries reach their saturation point and wages are driven higher. In the meantime, more American workers are out of work with few prospects of landing a job.
Loss of Intellectual Capital
In the beginning, the outsourcing movement was meant to transfer low-skill jobs out and retain highly-skilled jobs as an important asset for the advancement of the country's economy. However, as emerging economies work hard to build their own intellectual capital, American companies are increasingly contracting accountants, engineers and IT specialists at a rate far lower than it would cost them in the U.S.
This "brain drain" has long-term repercussions for American industry. Once a skill has been largely moved offshore, it is difficult to regain. For example, if most publishers outsource book design and layout work to Chinese firms, over time there will be fewer designers in the U.S. who have that skill. It also means that there are fewer students of the craft, due to lack of opportunities.
Loss of Manufacturing Capacity
When industry moves offshore, not only do we lose the knowledge, we also lose the manufacturing capacity. For example, the U.S. was once the leader in solar cell manufacturing, but most American solar technology companies have set up new plants in countries that offer significant incentives, such as Germany. The manufacturing capacity is gone and, if the U.S. ever wanted to repatriate these types of industries, it would take years to re-develop the manufacturing equipment and train engineers.
Reliance on Foreign Relations
Another risk that outsourcing companies face is the potential for relations with other countries to change. For example if the U.S. were to engage in a trade war with China, the Chinese government may levy tariffs against foreign companies operating within its borders or on goods crossing the border. In 1996, the Helms-Burton Act restricted U.S. companies from doing business in and with Cuba, forcing many companies to totally redesign their operations outside of the country.
Investors in international markets can also suffer losses to their portfolios if relations between two countries break down or if a foreign country falls into economic duress, which negatively affects the activities of companies operating in that region.
The Bottom Line
The short term gain derived by companies that outsource operations offshore is eclipsed by the long term damage to the U.S. economy. Over time, the loss of jobs and expertise will make innovation in the U.S. difficult, while, at the same time, building the brain trust of other countries.