In the U.S. Job Market, Can Ebb Offset Flow?

Nippon Restaurant Enterprise Co. came to California to make something it couldn’t make anywhere else: lunch.

The Tokyo company wanted a factory that had access to high-quality ingredients, abundant labor and a business-friendly government. That ruled out Japan, China and Mexico.

So, three years ago, Nippon Restaurant built a plant in Fairfield, southwest of Sacramento, that makes 9,000 bento lunchboxes a day. The meals are flash-frozen and shipped by sea to Japan, where they’re served hot at railway stations. Commuters like them so much they think they’re fresh.

Amid the outcry over the outsourcing of American jobs to other countries, foreign firms that have set up shop and payrolls in the United States are gaining attention. Their “insourcing” of jobs is at the center of a debate caught up in election-year disputes over the health of the nation’s economy and Bush administration trade policies.

The central question: Does the flow of jobs into this country reduce unemployment, stimulate growth and provide good wages? If so, it could offset the migration of jobs offshore. It could also diminish any concerns about outsourcing’s effect on the U.S. economy.

Those resisting restrictions on outsourcing, including the Bush administration and some conservative lawmakers, say that foreign companies have preserved jobs that might have gone away. They also say limiting outsourcing will result in a backlash, as foreign governments restrain their own multinational firms or curb purchases of U.S. goods.

But those advocating tighter restrictions, including some labor groups and liberal think tanks, contend that the positive effect of insourcing is overblown. They say companies like Nippon Restaurant, which create jobs that wouldn’t otherwise exist, are the exception. More often, they say, foreign firms merely acquire jobs.

“The debates over both insourcing and outsourcing are driven by the same big-picture question: What are we going to do to allow the U.S. economy to create good jobs at good wages?” said Dartmouth College economist Matthew Slaughter.

The migration of jobs is the result of globalization, which advocates say helps consumers by providing lower prices and better-quality goods and services. But these benefits don’t provide much consolation for an office worker who gets laid off because his company contracted with an Indian firm to do his job.

Foreign companies have been active employers here for decades. Indeed, 15 years ago, when Matsushita Electrical Industrial Co. bought Universal Studios, Sony Corp. bought Columbia Pictures and Japanese investors bought a controlling interest in New York’s Rockefeller Center, there was widespread apprehension that the United States would become an economic vassal of the then-mighty Japanese economy.

The crash of the Japanese stock market in the early ‘90s put those fears to rest. But investment continued. Honda Motor Co. employs 16,000 people in Ohio alone. Toyota Motor Corp. employs 35,000 people in the United States and is building a truck plant in Texas that will provide jobs for 2,000 more.

New enterprises that are foreign-owned range from a vinyl window assembly plant under construction in West Sacramento by a division of French conglomerate Saint-Gobain to a 1,000-person research facility being built in Cambridge, Mass., by Swiss drug firm Novartis.

According to 2002 government statistics, 5.4 million Americans work for companies whose ownership is at least 50% foreign. That is 5% of all private-industry employment in the U.S.

Job Shift Is Global Issue

There are many reasons these investments make good business sense.

Foreign companies know that hiring people here gets them inside the American market, the biggest in the world. In some cases, a U.S. operation gets a foreign company closer to essential raw materials or skilled personnel. Occasionally, despite the high cost of doing business here, the United States is the logical place to make products to send back to the mother country.

Several of these reasons apply to Nippon Restaurant Enterprise, whose decision to build its $7-million plant in California provoked the same sort of controversy in Japan that high-tech outsourcing to India does here.

Rice farmers put pressure on that nation’s Liberal Democratic Party, which said it was inexcusable to import rice, a staple in the bento lunchboxes, when there was a rice surplus in Japan. The farmers organized demonstrations and successfully campaigned to raise the customs tariff on the lunchboxes. To defuse the issue, NRE agreed not to sell the meals in rice-growing areas.

NRE says it came to California because there were insufficient supplies of organic rice and vegetables in Japan.

“Our first priority is to maintain quality,” said Motoyuki Kobayashi, NRE’s top executive in Fairfield. “The best organic ingredients are here.”

But NRE also wanted a foothold in the lucrative American market. Some boxes are sold through a Japanese foods website based in Los Angeles and selected natural foods grocery stores.

So far, U.S. distribution has been minimal. Of the 9,000 boxes filled daily by the plant’s 54 employees, 90% go to Japan.

Few consumers there realize how far their lunches have traveled. Although the vegetables come from the Central Valley, the pork is shipped from Mexico, and the eel, a seasonal delicacy, hails from China. The flash-freezing removes the need for additives and preservatives.

“I heard a study last summer, everyone thought it was fresh,” assistant plant manager Jeff Nua said.

Todd Malan, executive director of the Organization for International Investment, said companies like NRE demonstrated how globalization can spur employment in the United States.

Foreign firms created or acquired jobs here at a 7.8% annual growth rate over the last 15 years, Malan said. That’s more than twice the 3.8% annual growth in jobs created overseas by U.S. companies.

“People assume that the United States is on the short end of the stick,” said Malan, whose lobbying and research group is supported by 125 foreign companies. “It’s just not true. As a contributor to job growth and high-skill, high-wage jobs, insourcing is vital.”

Malan takes credit for giving the word “insourcing” its new meaning. Late last year, he said, “I was tearing out the last two hairs I had after watching some horrible story on CNN about outsourcing. I was looking for a pithy phrase for the phrase ‘employees of foreign companies who are based in the U.S.,’ and it just came to me.”

A Political Tool

“Insourcing” immediately proved popular among Republicans.

“Outsourcing is a matter of concern, but we are proud of the insourcing that is going on too,” Sen. Mitch McConnell (R-Ky.) said on the Senate floor in March.

“Over 157,000 jobs in Tennessee are the result of insourcing. That is the flip side of outsourcing,” Senate Majority Leader Bill Frist (R-Tenn.) told colleagues last month.

In India, where cheap labor does many of the call center and business processing jobs that used to be done in the United States, Malan’s numbers have fueled accusations of hypocrisy.

“What is this hue and cry about American companies outsourcing and off-shoring to India?” said the India Times in an article headlined “Ha Ha.” “More jobs are created by foreign companies outsourcing and off- shoring to the U.S.”

In an effort to help clarify the noisy debate over the exporting of jobs, the Bureau of Economic Analysis, a nonpartisan government agency, accelerated by several months the release of its latest figures. They provide more comfort to the foes of outsourcing than its fans.

The report said the number of people employed by U.S. corporations in their overseas affiliates in 2002 exceeded the number of Americans employed here by foreign companies by 2.8 million.

In the decade after 1988, the two job categories grew at exactly the same rate, 4.5%. In 2000, the last year of the dot-com boom, more than twice as many jobs were created here as overseas.

But in the two subsequent years -- a time of economic queasiness in the United States highlighted by a widespread corporate effort to reduce costs -- there was an abrupt change in direction.

In 2001, foreign companies cut 39,000 jobs here, while U.S. companies added 9,500 overseas. In 2002, the last year for which there are data, the split widened: foreign companies cut 169,000 jobs, while U.S. multinationals added 53,000 jobs in their offshore subsidiaries.

There are various and overlapping explanations for this new trend. U.S. companies are setting up divisions in China and other countries that offer the possibility of spectacular growth. India is also loosening restrictions on foreign investment.

The United States, by contrast, may be a rich market, but it’s also a mature and comparatively expensive one, full of regulation and competition. If a multinational firm can employ someone in, say, the Philippines to do more cheaply a job that used to be done in Philadelphia, it will.

These two factors explain why American corporations are becoming less American. Dell Inc., for instance, is trying to double its share of the worldwide computer market and keep as lean as possible.

In pursuit of both goals, it added 7,100 people last year, the vast majority of them at customer support centers in India, Panama, Slovakia, Morocco and China, at design centers in China and Taiwan and at factories in China, Ireland, Brazil and Malaysia. More than half the company is now employed overseas.

Dell is an extreme example, but the Bureau of Economic Analysis says it is part of a trend. Over the last 15 years, the percentage of U.S. companies’ employment that is American has fallen from 79% to 73%.

The Economic Policy Institute, a Washington-based think tank that has been highly critical of Bush administration economic policies, used another set of government figures to argue that most of the U.S. jobs supposedly created by foreign firms were really just acquired.

For instance, when Daimler-Benz merged with Chrysler in 1998 to form DaimlerChrysler, 121,000 workers were moved into the “foreign” column. But no new jobs were created.

Total jobs actually created by foreign firms between 1991 and 2001, according to EPI: 274,000, a relatively minuscule number.

“ ‘Insourcing’ is yet another public relations term that has been invented by the Bush administration with support from industry groups to respond to concerns about outsourcing,” said EPI economist Robert Scott.

Creating Jobs, Concern

Malan, the insourcing advocate, says foreign investment often saves jobs that might otherwise disappear. Chrysler, for example, might have floundered without Daimler’s purchase.”You can’t take a label and say ‘good’ or ‘bad.’ You have to look at each company and see how it contributes to the United States,” Malan said.

When jobs do get created, U.S. and local government enthusiasm -- and incentives -- have proved crucial. Essel Propack Ltd., an Indian company that is the world’s largest laminated tube manufacturer, built its first U.S. factory two years ago in Danville, Va. The facility employs 120 people to make toothpaste tubes for a nearby Procter & Gamble Co. plant.

“The town authorities of Danville were highly supportive,” said R. Chandrasekhar, Essel Propack’s chief operating officer. “More than the monetary support, the city did a superb job of hand-holding during the project implementation.”

If Essel Propack was applauded for bringing jobs to a distressed area, another Indian firm is being viewed more warily. Infosys Technologies Ltd., an outsourcing giant, is setting up a consulting operation in the Bay Area that will employ as many as 500 people.

The news, announced last month, sent tremors through opponents of outsourcing.

“They’re going to use those 500 jobs to try to get 50,000 jobs for India,” predicted Paul Almeida, president of the department of professional employees at the AFL-CIO.

Paul Cole, a managing director at the new Infosys Consulting, said his team would encourage outsourcing only if that was best for the client. “We’re not a commissioned sales force for Infosys in India,” he said.

Debating the merits as well as the extent of insourcing will soon become impossible. The current vagueness in definitions will blur completely.

Take the example of LightPointe, which makes equipment that allows computer systems in two adjacent buildings to wirelessly communicate.

The company is based in San Diego, but the equipment is built in Germany. That would seem to make LightPointe one of those maligned outsourcers.

Except that the company was founded by a German entrepreneur, so it would be just as easy to argue that the San Diego office was the result of insourcing.

But really, neither of the labels applies, a condition that is increasingly true for new technology companies.

LightPointe Chief Executive John Griffin calls the 70-employee company “a German idea that germinated in California.”

Small as it is, LightPointe is already global. Only 25% of its $10 million in revenue last year was derived from the United States. Its most recent investors are from Europe and Huawei Technologies Co., a Chinese firm that markets LightPointe’s products in China.

“This is capitalism at work,” Griffin said. “Money flows to where people think they have an opportunity.”