Outsourcing is Not the Root of America’s Economic Woes

When was the last time you wore a jacket that you stitched yourself? Many of you, like me, would say “Never.” You probably didn’t manufacture the car you drive or build the home you live in. We all outsource to make our lives comfortable and luxurious, and with good reason. Outsourcing is not a new phenomenon. Adam Smith understood the value of this 200 years ago, before the term was even coined. In his words:

“It is the maxim of every prudent master of a family, never to attempt to make at home what it will cost him more to make than to buy.”

Recognizing that this logic can be extended to apply to entire economies, Adam Smith said, “What is prudence in the conduct of every private family, can scarce be folly in that of a great kingdom.”

Then Comes the Government and the Politicization of Outsourcing

With increasing globalization and technological developments, outsourcing has grown at an unprecedented scale over the past couple of decades. Unfortunately, it also became the scapegoat of politicians, who have been running entire political campaigns by conjuring up images of low-wage workers in India and other Asian nations stealing jobs from developed countries across a wide range of occupations.

The 2007-08 financial crisis added fuel to such fears with rising public opposition to outsourcing, fanned by political statements. This made companies increasingly hesitant to outsource. We have continued to witness such fearmongering in government rhetoric. From outsourcing to imports, various aspects of free markets have been cited as a reason for high unemployment.

However, the reality is that businesses understand the benefits of outsourcing. Little wonder then that the global spending on outsourcing grew to a whopping $731 billion in 2023.

• 57% of businesses cited cutting costs as the main reason to outsource, according to a Deloitte survey.
• 67% of companies consider outsourcing to improve operational scalability, as per a McKinsey study.
• 37% of businesses cited gaining access to expert services as a key benefit of outsourcing, according to a Clutch survey.

How Outsourcing is Benefitting the US Economy

Outsourcing isn’t the root of America’s economic woes because its benefits far outweigh the costs. Outsourcing enables businesses to save costs. The amount saved can be transferred to customers as lower prices of finished products or be used internally to offer higher wages to employees or ploughing back of profits for business growth. Both lower prices for customers and higher wages translate to either more demand for goods produced or increased savings. Both these propel economic growth. If a business decides to keep the profits for growth, it creates new job opportunities.

When cost savings from outsourcing is used to lower prices, it makes American businesses more competitive in the global economy.

Will Outsourcing Damage the US Economy?

Contrary to political argument, there is very little evidence of outsourcing having slowed US innovation or made the nation less competitive on the global stage. In fact, we have seen the US IT industry dominate the world with innovation over the past two decades, while allowing other nations to lead in component technologies. This is the biggest example of the power of free markets. Apple dominates in providing cutting-edge smartphones with its design, software, marketing and retail competencies, while sourcing various critical components of its devices from Asia. The same holds true for IBM, Hewlett-Packard, Qualcomm, Google and Amazon.

These companies have used their market dominance to drive upstream vendors to invest to make downstream innovations cheaper and quicker. The brands still control the knowledge of transferring innovations into manufacturing at scale by collaborating with vendors who do not have such knowledge. The result is higher profitability for the brands.

This strategy can also be used for the “greater good.” One example of this is the One Laptop Per Child program run by MIT, where Taiwanese LCD manufacturers produced innovative displays at affordable prices.

The benefits are not limited to the IT sector. The key benefits are available for other industries to exploit. For instance, low-cost solar modules from China can benefit the US by making solar panels more affordable for Americans. The completed panels can then be sold at competitive rates outside the US as well, while American brands hold on to the intellectual property required to drive innovations in these panels.

The bottom line is that prudent outsourcing can make the American economy more competitive rather than being an obstacle to growth.