Economic Nonsense: 27. Outsourcing harms the economy

Outsourcing involves the contracting out of a business process to an outside party, and usually involves something that the business could do, and maybe previously did do, in house. Far from harming the economy, it is usually beneficial, sometimes to an extraordinary degree. It can be domestic outsourcing where firms within the same country provide services to a business under contract, or offshore outsourcing, where part of the activities of a business are performed abroad.

Domestic outsourcing has many advantages. It enables greater specialization, in that it allows a firm to concentrate on its core function, and to have certain functions performed by outside firms that specialize in those areas. By specializing they often acquire the expertise to perform the activity better than the firm could have done itself, and at a competitive price. The firm itself need not meet the capital and overhead costs of performing the activity in-house, but simply pay for the services from others.

Offshore outsourcing is usually done to achieve cost savings. It enables a firm to employ lower cost foreign labour, and thus achieve lower prices for its own products. Many electronic devices such as mobile phones and music players have their assembly outsourced to cheaper countries. This enables the goods to be sold more cheaply in advanced economies, saving customers money to spend on other things. It thus boosts economic activity and makes both countries richer. The poorer country has its workers enter the global labour market and be paid wages, while the richer country receives lower cost goods.

Outsourcing can be beneficial to government when it uses the services of outside contractors to perform some of its functions. Ministers and civil servants are not necessarily (and not usually) particularly good at business, so it can make sense to hire outsiders who are better at it and who have a record of experience at it.