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Insourcing: Palliative for the U.S. Manufacturing Sector?
A new word has entered the vernacular of American
foreign economic policy. On March 4, Senate Majority
Whip Mitch McConnell became the first U.S. politician to
coin “insourcing” in reference to the creation of jobs by the
American subsidiaries of foreign corporations. Other
Republican leaders are seizing on the term as a riposte to
the furor over outsourcing. Previously disengaged from
foreign economic issues, House Majority Leader Tom
DeLay is now extolling the virtues of insourcing—a
position no doubt influenced by Toyota’s announcement of
its plan to build a truck factory in San Antonio
complementing its Camry plant in McConnell’s Kentucky.
The term “insourcing” is little more than a re-description of
an old and familiar phenomenon—incoming foreign direct
investment—that has long been an important source of job
creation in the United States. According to the
Organization for International Investment (which
represents the American subsidiaries of Japanese and
German auto manufacturers and other multinationals),
foreign-owned companies employ 6.4 million people in the
U.S.. While that figure does not fully offset the total
number of outsourced American jobs, over the past 15
years insourced jobs have grown more rapidly than
outsourced ones (7.8 percent annually versus 3.8
percent). Equally significant, incoming FDI plays a critical
role in American manufacturing: 34 percent of jobs in
foreign-owned companies are in manufacturing, more than
double the share of manufacturing-related employment in
all U.S. companies. Multinational subsidiaries also occupy
an outsized position in U.S. trade, accounting for 22.4
percent of American exports.
However, three caveats are in order regarding the
Congressional leadership’s zeal for insourcing:
First, while the United States remains the global leader in
stock FDI, inflows of foreign direct investment have fallen
precipitously in recent years. From a peak of $314 billion
in 2000, incoming FDI tumbled to $30 billion in 2002. A
combination of factors—the recession, September 11,
corporate scandals—instigated the decline of the U.S. as
a foreign investment host. The global falloff in M & As,
which represent the preferred form of foreign investment
in the U.S., exacerbated the effects of the FDI downturn.
Copyright © 2004 Global Economics Company
During the same period foreign direct investment in China
has boomed, leading that country to surpass as the U.S.
as the world’s foremost recipient of FDI. Notwithstanding
persistent investor concerns about intellectual piracy,
China has also supplanted the U.S. in the top position of
AT Kearney’s annual “FDI Confidence Index”.
Second, provisional data released by the U.S.
Department of Commerce indicate a healthy rebound
($72.1 billion) in inward FDI in 2003. But the sectoral
destination of current investment flows to the U.S. reveals
important differences from the pattern of the 1990s.
Manufacturing represented 26.6 percent of inward FDI in
2003 against 33.5 percent in 2000. Within the
manufacturing sphere, chemicals accounted for 76.5
percent of sectoral foreign investment. Computers,
electrical equipment, and consumer electronics—
industries that figure prominently in China’s FDI
portfolio—registered sharp declines. Wholesale and retail
trade posted a significant gain in 2003 (22.5 percent of
incoming FDI versus 18.0 percent in 2000), signaling a
reallocation of American foreign investment from
manufacturing to distribution.
The U.S. retains a number of assets—an immense
domestic market, high productivity, strong technological
base—that ensure its continued allure to foreign investors.
But China—70 percent of whose inward foreign
investment goes to manufacturing—now poses a
formidable threat to the U.S. in the bidding for
manufacturing-related FDI.
Third, much of the manufacturing FDI reaching the United
States involves highly advanced process technologies
exhibiting low labor content. The American subsidiaries of
Honda, Nissan, and Toyota rank among the best
automotive plants in the world, illustrating FDI’s utility as a
medium for transmitting lean manufacturing techniques.
While these foreign transplants have generated a
significant contribution to the global competitiveness of the
American economy, their very efficiency precludes their
making a major dent in the replacement of the 2.8 million
manufacturing jobs lost since 2000—dashing expectations
of Congressional leaders that “insourcing” will relieve the
woes of the U.S. manufacturing sector.exporters on truly equal footing is
unlikely to pass muster with the WTO.