Justification and Perils of Outsourcing: the Cases of Korea and the U.S.

The 1997 Asian financial crisis had fundamental impact on many parts of Korean society and industries. Korean SMEs were one of those hit hard by the crisis. Many of them were low-value added suppliers to chaebols. During and after the Asian crisis, they either went bankrupt or moved their manufacturing operations to China due to cost-competitiveness. In consequence, much of small or medium-scale manufacturing operation which holds up a good part of the Korean manufacturing sector was lost, leading to job losses among the middle class.

Although Korean chaebols have turned around after the crisis and have been able to build the stronger globally competitive manufacturing base, outsourcing to China or other Southeast Asian countries caused domestic manufacturing job erosion. Some Korean high-tech firms prefer to locate their production facilities in the region where they sell their products for several reasons (e.g., better serving the local needs, reducing transportation cost, and using local tax break and exchange rates). Outsourcing trend has been confined not only to chaebols and but to mid-size business survived from the Asian financial crisis, as mentioned. Rising wages and hostile labor relationship were the major driving forces behind outsourcing abroad.

In the case of the U.S., the reason behind the U.S. firms’ massive outsourcing to China in particular is appalling, since it entails the consequences of the U.S. policies. In exchange for purchasing U.S. securities, China has had access to the U.S. market with their manufacturing goods. The U.S. firms were given tax incentives to outsource their manufacturing operations abroad. This demonstrates how bad policies could affect the overall health of the economy. The U.S. firms have also been willing to outsource their operations to China for the very practical reasons: they couldn’t be cost-competitive in the U.S. In essence, the U.S. has born consequences of globa wagel arbitrage. Coupled with overconsumption driven by easy credit, outsourcing has imposed a significant impact on its competitiveness by letting the U.S. lose a good portion of production capacity of the economy and income base for the middle class.

There has always been (and will be) a contention between the national interest and corporate interest as free flow of capital, talent, and technology intensifies across the globe. Outsourcing is no exception. Some questions arise as to: whose interests are best served by outsourcing?; what are the ultimate consequences of outsourcing? These questions may have to be addressed in pursuit of a balance between social interests and corporate interests, which is not an easy undertaking, of course.

At the public level, some policies should be crafted to reduce the dissonance between national interests and home grown corporations’ interests. Any government may have to provide incentives and a good support environment (e.g., reducing unnecessary red tapes and providing social infrastructure) where home grown firms can maintain their facilities domestically and foreign corporations are willing to locate their manufacturing operations. If necessary, educating the ordinary people and labor union leaders about the perils of outsourcing and offshoring. It is important to remember that when there is enough purchasing power at home, MNCs and home grown companies would be more likely to run their manufacturing operations in the region. At the corporate level, short-term profit oriented mindset shouldn’t dictate outsourcing decisions; more long-term benefits of operating manufacturing facilities at home need to be factored in.

The manufacturing sectors have been the backbone of the Korean economy. When this base deteriorates, the entire economy would be in trouble. This is one of the biggest lessons from the 1997 financial crisis. While Korea has to continuously upgrade its process and product technologies, close the technology gap with advanced economies, and develop cutting edge technologies in the upstream sectors like it has done in some areas such as flat panel display, it shouldn’t lose its manufacturing operation at home not only for the sake of further technological progress, but for the sake of the expansion of the middle class.

Since the global economic conditions are getting tough, there are signs that the Korean union leaders seem to accept the reality, taking more a moderate position. For instance, the labor union leaders of Hyundai had been regarded as hard-liners, but the newly elected union leader is known as being moderate. There are some good things to come out of the economic debacle.