The Differences Between Offshoring and Outsourcing, and Offshoring's Benefits

Outsourcing and offshoring have become important topics of contention in this Presidential election season. A few months ago, President Obama criticized Mitt Romney's campaign for saying that Bain Capital outsourced its services instead of offshoring. While criticizing Romney, Obama said "What Governor Romney and his advisers don't seem to understand is this: "If you're a worker whose job went overseas, you don't need somebody trying to explain to you the difference between outsourcing and offshoring." Here, Obama is implying that the worker learns that outsourcing and offshoring are the same thing by their experience of being laid off due to his/her job moving overseas. On the contrary, outsourcing and offshoring are not the same thing. Yes, offshoring and outsourcing both involve the movement of jobs from one place to another. However, outsourcing is more broad than offshoring. Offshoring is the movement of a business process performed at a company in one country to the same or a different company in another country, whereas outsourcing is an occurance in which a business process is contracted out to an independent organization or outside business unit. President Obama is right in the sense that any differences between outsourcing and offshoring would probably not be relevant to the worker who lost his/her job because regardless, he/she is out of work. Thus, the worker would probably not care what the difference between the two is, or about the fact that there is a difference. As for the Romney side, Romney's senior adviser Eric Fehrnstrom was on the attack, depicting outsourcing as "what the Obama campaign does when they hire an outside telemarketing vendor to provide telemarketing services" and that outsourcing "is done by companies every day. They take functions and they allow vendors to do it instead of handling it in house. Offshoring is the shipment of American jobs overseas. And in that Washington Post story, which the president is using now to attack American companies by name, there are no examples of jobs being taken from the United States and shipped overseas." Fehrnstrom was referring to the Washington Post story which said that Bain Capital invested in companies that pioneered the outsourcing of jobs to low-wage countries. Fehrnstrom is correct in his assessment of offshoring and in his examples he uses to illustrate the difference between offshoring and outsourcing. His implied claim that there has been no evidence of negative effects on the U.S. from outsourcing or offshoring is complimentary to what we learned in class. In class, we learned that offshoring results in an expanded PPF because producers can produce more with the same amount of resources. We also learned that a new isoquant is created above the original income line, and the slope (ratio of low-skill wage to high-skill wage) is flatter; thus the wage ratio of low-skilled workers to high-skilled workers declined. However, output increased along with overall income in accordance with the new isoquant so there are net benefits from offshoring. Another key net benefit from offshoring is the increased demand for skilled workers, and since the U.S. is abundant in skilled labor, it actually benefits. Clearly, Obama makes outsourcing and offshoring out to have negative connotations, while Fehrnstrom points out that the Obama campaign outsources all the time by using outside telemarketing vendors. I noticed that neither Obama nor Fehrnstrom explicitly defined outsourcing or offshoring, which is why I felt that defining and further-outlining them would be important. Ultimately, offshoring is more specific relative to outsourcing because when it occurs, the entity receiving jobs in the different country must be either the same company or a different company. Outsourcing, however, because of its definition, can apply to any business unit or organization within the same country or to a different country, thus outsourcing is more general. Overall, both sides of the Presidential race pose legitimate arguments about offshoring and outsourcing, but at the end of the day, regardless of how much Obama and Romney might speak out against outsourcing/offshoring, they both use and encourage them whether they know it or not.      

Sources researched:

http://content.usatoday.com/communities/theoval/post/2012/06/obama-jabs-romney-over-outsourcing-offshoring/1#.UJHguMXhomU

http://www.washingtonpost.com/business/economy/romneys-bain-capital-invested-in-companies-that-moved-jobs-overseas/2012/06/21/gJQAsD9ptV_story.html