The Determinants of Outsourcing from the U. S.: Evidence from Domestic Manufacturing Industries, 1972-2002

The issue of outsourcing as a form of foreign direct investment (FDI) has been widely discussed in the recent past. In this essay, I analyze what determines the outsourcing activity by looking at U. S. manufacturing industries between 1972 and 2002. I concentrate on correlation between the measure of outsourcing and wages, bargaining coverage contracts, transportation costs, and private gross fixed investment in information technology. My analysis finds differences in the effects of wages on outsourcing activity depending on the type of industry (i.e., whether the industry produces durable or non-durable goods). The main regression model finds that wages and union coverage cannot fully explain the colossal increase in outsourcing activity in the last three decades. Rather, the primary factors influencing the increase in outsourcing are likely to be the growth in foreign productivity and technological changes that allow more international specialization in the intermediate production stages of the final good.