The case for offshoring is not what you think it is

The case for offshoring is not what you think it is
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In today’s political climate, “offshoring” remains a dirty word for many. It conjures up images of American jobs cut in favor of cheaper workers in far-flung countries. But the truth is not that simple.

According to the Congressional Research Service, “Most economists argue there is no conclusive evidence that direct investment overall leads to fewer jobs or lower incomes overall for Americans.” In other words, by spending overseas, companies are not necessarily cheating people at home.

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Likewise, the U.S Chamber of Commerce points out that where American multinationals have invested abroad, more than 90 percent of what they produce overseas is also sold overseas. Foreign expansion has brought new revenue at relatively little cost.

 

This matches research we have conducted at TMF Group. Earlier this year, we asked 250 C-suite executives at U.S.-based multinationals why they chose to expand abroad in a joint survey with Forbes.

The most popular answer — one shared by 46 percent of respondents — was a desire to find new markets and to gain market share. By contrast, a mere 12 percent of respondents said that investing abroad saved them money.

So why is “wage arbitrage” — moving jobs overseas to benefit from lower labor costs — now a failed business model? There are three reasons.

First, there has been a market correction. A decade ago, one could hire analysts in New Delhi at a cost of around $8,000. We recently investigated doing the same thing and discovered the cost had jumped to $24,000. This huge increase cannot just be attributed to inflation.

Arguably, the Indian market has matured, wages have increased and there are no longer huge cost savings to be made. This trend of wage harmonization is not limited to India and is making international investment less attractive to firms who wish merely to cut their labor costs.

Second, the global political climate has become hostile to offshoring. The world is witnessing a rise in protectionism and economic nationalism, symptoms of which include Brexit and the election of Donald TrumpDonald John TrumpTed Cruz knocks New York Times for 'stunning' correction on Kavanaugh report US service member killed in Afghanistan Pro-Trump website edited British reality star's picture to show him wearing Trump hat MORE. More so than previously, public opinion can be turned against a company which decides to move staff abroad to save money.

The final factor is automation. Improvements in technology have meant that computer programs can take over many of the jobs that were once sent offshore: simple, repeatable tasks that are relatively easy to teach. These developments have gradually begun eliminating the need to perform such processes overseas.

For these reasons, workers in other countries are not undercutting workers in the U.S. But American companies continue to expand internationally for other reasons. Our survey found that, besides gaining market share, 42 percent of respondents said they invest abroad to expand existing operations and service lines; 30 percent wanted to improve their research and development.

These are all drivers of growth for American companies. As these trends continue, outsourcing will require companies to engage local stakeholders in the markets in which they operate who can keep them apprised of changing rules and regulations that apply to their operations and facilities there, as well as find new avenues of growth.

Thorough familiarity and compliance with foreign regulations and legislation are critical for industries to protect their investments abroad.

Without local buy-in and regulatory compliance, companies may well find themselves caught off guard and on the wrong side of unexpected policy shifts, such as the European Union’s recent move to claim unpaid taxes from Silicon Valley giants.

Avoiding such a costly surprise is just as relevant a concern for foreign entities investing in American markets.

Offshoring need not be a dirty word. If done well, it will help U.S.-based multinationals, their employees and their shareholders thrive.

Jason Gerlis is regional director, North America at TMF Group, a multinational firm that provides accounting, tax, HR and payroll services.