One of the most contested issues in business of late has been the effect that off-shoring has on domestic business. Many people have argued, often simply on the basis of intuition, that any U.S. company that shifts value-added activities to foreign countries must be reducing similar investments at home.
A recent article on VOX, by Theodore H. Moran and Lindsay Oldenski of Georgetown, suggest that the exact opposite may be true in many cases. The authors reached this conclusion after looking at two decades of investment data from U.S. companies compiled by the Bureau of Economic Analysis. Rather than hurt domestic investment, in say R&D, foreign investments often allow for even further parallel economic activity in the U.S.
As the authors note:
It may seem counterintuitive that the creation of new offshore R&D facilities could increase the amount of R&D carried out in the US, but this is what case studies sometimes show. The creation of an R&D campus in Chennai, India has allowed Caterpillar to create a 24-hour R&D cycle on engine propulsion and pollution control. The capital-intensive Caterpillar engine labs in Peoria, Illinois operate two shifts with hundreds of channels of temperature, pressure, and emissions data to map diesel performance and emissions. These streams are sent overnight to Chennai, where the data is analysed and returned to Peoria ready for the US engineers when they come to work the next morning. The chief technology officer of Caterpillar points out that the cost for the engine tests would be much greater if Caterpillar instead had a third shift working in the US, making the company’s overall R&D process less efficient and leaving less room for US engineers to exercise their comparative advantage. Using the growing Indian talent pool affects US operations positively by increasing the through-put and lowering the cost of the asset-intensive US test facilities. Round-the-clock interactions between Caterpillar’s Indian and US test facilities help ensure the company’s international market leadership position, while enabling headquarters to hire more US engineers.
Based on my own personal experience, I think the Georgetown authors are right that foreign investment does not have to necessarily hurt domestic investment, but the impact depends primarily on the function in question. There is no doubt in my mind that the more U.S. firms invested in data and IT centers abroad, the less they did so in the U.S. This applies to manufacturing as well. That R&D is an exception may be the case but only in those R&D functions that support products that can be sold in the U.S. as well as abroad. I wonder if the data would support the view that U.S. firms continue to invest in domestic R&D for products that are primarily exported?
Though the authors are perhaps selective in their conclusions (and I can’t say for sure if they are or not), they make an excellent point: blanket statements about the effects of outsourcing and/or off-shoring should be treated with skepticism. These are complex issues with multiple impacts at home and abroad. Hopefully, the authors will continue to explore this issue further and continue to provide a more balanced than is usual in this discussion.