3 Questions: A new look at globalization in business

Debates about the globalization of U.S.-based businesses date at least to the 1970s, but in recent years — following research such as MIT’s Production in the Innovation Economy project — there has been a sharp upswing of interest in promoting advanced manufacturing in the U.S. Now a new study by researchers at MIT and the University of California at Berkeley, supported by the National Science Foundation, aims to add to our empirical knowledge of the subject. Using a representative cross-section of U.S. organizations, the study looks at the prevalence of outsourcing and offshoring, and whether such activity tends to occur in the primary business functions of organizations, or is related to other tasks. MIT News talked about the findings with Tim Sturgeon, a senior research affiliate at MIT’s Industrial Performance Center, who is co-author of the study with Berkeley economist Clair Brown.

Q. What are your major findings on the extent of outsourcing and offshoring among U.S. organizations?

A. On the domestic side we found is that about half of the organizations surveyed have some domestic outsourcing. This is concentrated in tasks you would expect: transportation services; facilities maintenance, such as janitorial services; and IT support.

About a quarter of companies have some international sourcing. That’s a pretty high number. But when we asked about spending, the numbers were surprisingly low: Only 3 percent of primary business function costs were outsourced within the U.S., and 4 percent were offshored, on average. So most organizations in the U.S. are [still] entirely local, and do most of their work in-house. This was true for the primary business function, which accounts for about two-thirds of domestic employment, and support functions too.

But when you start drilling into large goods-producing companies, international sourcing costs go up significantly. That’s why people have the perception they do. When they look at their iPhone or go to The Gap and see [that products] were made in China or Bangladesh, they assume that sourcing from low-cost countries is pervasive. What we found is a tale of two economies, in that you have large goods-producing companies that are heavily globally engaged, and then you have everybody else. Smaller organizations, which account for about 80 percent of employment, tend to be very domestically oriented. These are nursing homes, county and city governments, and retail; these are the sorts of places where most people work.

Q. What findings do you have about the effects of these practices on jobs?

A. In terms of wages, the companies that were engaged in international sourcing had a smaller number of low-wage jobs in the primary business function. But there are a variety of reasons that could happen. Offshoring could be siphoning away low-wage jobs or increasing the need for skilled work. We can’t show causality with a survey from just one year.

There’s been a debate about what the scale of offshoring is and what the trend is — how fast it’s moving into services, for example. While our study provides some baseline answers, you’d need to run larger and repeat surveys to delve into all the important questions. We’d like to see this approach picked up by U.S. data agencies. The approach we used [asking about business functions] is meant to be in tune with the way managers think about their organizations. It worked really well. Managers were able to answer our questions in a very short survey.

Q. What’s the global distribution of these offshore jobs?

A. For the companies that are sourcing internationally, a majority of the work was in high-cost locations. That’s also counter to what popular opinion might be. The EU and Canada are also our largest trading partners, and that’s been the case for many decades. So there’s a historical base of these sourcing relationships, business relationships, across the Atlantic and in Canada. But China’s running a close third and closing fast, and we think a lot of this has to do with international sourcing by U.S. companies. That’s why institutionalizing this type of survey would be so important, to see the change and what’s happening at the margins.

The companies that had services as their primary business function were much less internationally engaged, but when they did source internationally, costs from low-cost countries were higher. What that suggests to us is that these companies are newer to the game of international sourcing, and that the game that’s being played today probably involves a greater focus on cost cutting. Coming out of the [recent global] recession, there’ll be a question of whether to build up capacity here or source offshore. It will be interesting to see what happens now as the economy recovers.

The problem has been that there’s no solid data on this in general. So we don’t know the scale of things. Some people say globalization is the best thing that’s ever happened to the U.S., but in certain communities and industries it’s been pretty devastating, and the manufacturing ecosystem has certainly taken a big hit, so the question is how to have a sober debate. Maybe I’m idealistic, but I think better data can lead to a better debate and better policy outcomes. The differences between large and small firms suggests that compared to cookie-cutter policy ideas, a more targeted approach might be useful. It’s a debate we can only have with better numbers.