John K. Mullen and Martin Williams

Public policy debates continue to rage over the employment and broader economic impacts of “offshoring” activities, both for the U.S. and other developed nations.  However, the pervasive and complex nature of foreign outsourcing hampers researchers’ efforts to objectively measure the magnitude of this trend.  In fact, available quantitative evidence on the size of this phenomenon as it pertains to the U.S. is shallow and incomplete, rendering efforts to assess its economic impacts as questionable or non-existent.  The limitations imposed by existing data architectures are problematic for a number of reasons.  Historically, U.S. government statistics have tended to emphasize manufacturing industries; despite recent efforts to address these shortcomings, offshoring impacts arising from the increasingly important services sector of the economy remain highly speculative.  The present research focuses on another limitation of primary data sources: the differential categorization of offshoring activities as occurring through either trade or investment channels. 

The existing literature generally defines “offshoring” as the shifting of services and manufacturing activities abroad, i.e., non-domestic outsourcing.  In essence, this may occur as production is re-located to either unaffiliated firms or foreign affiliates.  Transactions of the first type are generally recognized as cross-border exports and imports, and are recorded in the international transactions account (ITA) compiled by the U.S. Bureau of Economic Analysis (BEA).  However, the second types of transactions are recognized only through the channel of direct investment; thus, offshoring activity by U.S.-based multinationals is recorded under direct investment between parent and affiliate, so they do not appear in the international transactions account.  The BEA’s Benchmark Survey of Direct Investment reports sales (but not purchases) by foreign affiliates to U.S. parents.  Yet the traditional approach to measuring offshoring activity, by treating it solely as an international trade phenomenon, would appear to understate its true magnitude and impacts.  We seek to reconcile these alternative types of transactions in order to produce a broader, inclusive measure of offshoring activity; ideally, such a measure should encompass the full range of transactions between domestic firms and both affiliated and unaffiliated offshore entities.           

The present research proceeds by constructing comprehensive measures of offshoring for the manufacturing and service sectors of the U.S. economy.  Existing data sources are utilized and, where necessary, transformed in order to achieve comparability.  We rely on traditional metrics as indicators of the pervasiveness of offshoring activity; more specifically, we utilize: 1) penetration ratios for imported intermediate inputs, and 2) sectoral and industry level employment changes. 

The primary objective is to compile internally consistent indicators that quantify the importance of offshoring as both a labor market phenomenon and a broader economic trend.  We discuss these measures across and within sectoral classifications, and relate them to the broader U.S. economy.  Ultimately, this endeavor may prove useful to researchers focused on the challenge of assessing the economic impacts of this important globalization trend.