or gains to trade but not improvements in the output of American labor.”83 Houseman believes this solves “one of the great puzzles of the American economy in recent years … the fact that large productivity gains have not broadly benefited workers in the form of higher wages … productivity improvements that result from offshoring may largely measure cost savings, not improvements to output per hour worked by American labor.”84 The important point here is that Houseman’s argument applies just as much to the outsourcing of low value-added production tasks as it does to the outsourcing of services.
Three years before Houseman published her paper, Morgan Stanley economist Stephen Roach made the same point: “In the case of the United States … offshore outsourcing of jobs [is] the functional equivalent of ‘imported productivity,’ as the global labor arbitrage substitutes foreign labor content for domestic labor input. In my view, that could well go a long way in explaining the latest chapter of America’s fabled productivity saga.”85 Where Houseman and Roach are wrong is in thinking that this solves the “productivity paradox,” which they narrowly define as the divergence between wages and productivity in U.S. industry, thereby calling into question something that is an article of faith for these bourgeois economists, namely the direct relation between wages and productivity. On the contrary, the paradoxical effects of outsourcing on measures of productivity are merely superficial and relatively trivial consequences of the profoundly contradictory nature of labor productivity in capitalist society, which can be defined either as the physical quantity of useful goods (use-value, in Marxist parlance) created by workers in a given time or as the quantity of money they generate for their employer. In different ways, each chapter of this book tries to cast empirical and theoretical light on this most important of questions, and it will be given special attention in chapter 6.
TO SUMMARIZE THE FINDINGS OF THIS CHAPTER, export-oriented industrialization is extremely widespread throughout the Global South. It is just as true that this industrialization is extremely uneven, and is highly concentrated in some countries and some regions within those countries. The Global South has made significant progress in implementing the export-oriented industrialization strategy urged on them by imperialist governments, international financial institutions (IFIs), and mainstream academics. The large majority of the roughly five billion inhabitants of the Global South now live in countries where manufacturing exports—mainly to the imperialist economies—form more than a half of their total exports.
Outsourcing has been a conscious strategy of capitalists, a powerful weapon against union organization, repressing wages and intensifying exploitation of workers at home, and has led above all to a huge expansion in the employment of workers in low-wage countries. The wage gradient between imperialist and developing nations also generates migration of low-wage workers in the opposite direction. Outsourcing and migration should therefore be seen as aspects of the same process, driven by the efforts of capitalists to profit from divisions among workers and from the huge wage differentials these divisions give rise to.
It is widely insinuated that if large parts of the Global South remain mired in extreme poverty it is because of the failure of many Southern economies to successfully integrate into world markets, “integration” meaning that if they have no natural resources, they must export more manufactured goods. Evidence presented in this chapter, and in chapters to come, indicates that, with few exceptions, those poor nations that have found success in reconfiguring their economies in line with neoliberal prescriptions have succeeded only in joining a race to the bottom.
The Two Forms of the Outsourcing Relationship
Production outsourcing takes two basic forms: foreign direct investment (FDI), where the production process is moved overseas but kept in-house, and arm’s-length outsourcing, when a firm outsources part or all of the production process to an independent supplier, independent in the sense that the “lead firm” owns none of it even though it may control its activities in many ways. Yet, according to the conventional definition, transnational corporations are “enterprises comprising parent enterprises and their foreign affiliates,”1 in other words, enterprises that indulge in FDI. According to this definition Tesco and Walmart only count as TNCs to the extent that they operate retail outlets in other countries—Walmart’s 2.1 million global workforce (up from 2,600 in 1971) does not include any of the workers who produce the goods that fill its shelves.2 Until the first decade of the twenty-first century, both mainstream and Marxist analysts tended, as William Milberg observed, “to see globalization through a foreign direct investment lens. Like the proverbial drunk who searches for his lost keys under the streetlight only because that is where he can see best, economists have overemphasized the relevance of foreign direct investment.”3 The rapid growth of arm’s-length outsourcing has made this approach increasingly anachronistic, and has also stimulated the rise of value-chain analysis and related approaches that see in-house FDI and arm’s-length contractual relations as two different types of links comprising global value chains. Similar considerations have led many analysts to propose a fundamental change to the definition of transnational corporation, which, instead of denoting a firm with wholly or partly owned subsidiaries in other countries, should be redefined as “a firm that has the power to coordinate and control operations in more than one country, even if it does not own them.”4
UNCTAD’s World Investment Report 2011 is a watershed in research into arm’s-length, contractual relationships, defining these as
a cross-border nonequity mode of TNC operation [in which] a TNC externalizes part of its operations to a host-country-based partner firm in which it has no ownership stake, while maintaining a level of control over the operation by contractually specifying the way it is to be conducted…. the defining feature of cross-border NEMs, as a form of governance of a TNC’s global value chain, is control over a host-country business entity by means other than equity holdings.5
The differences and commonality between these two forms of outsourcing can be seen with the help of a thought experiment. A TNC can, and often does, convert a direct in-house relation with a subsidiary into an arm’s-length relation with an independent supplier simply by signing some legal documents, erecting new signage, opening up a new bank account—without making any changes to the work regimes or to the labor processes, or to the price of inputs, or to the profits realized upon the sale of the output. The actual process of production and value creation/extraction would then be identical in every respect. Nothing would change except titles of ownership. Yet surface appearances would show a profound change: a visible South-North flow of repatriated profits from subsidiary to HQ would vanish without trace, even if the new arrangement turned out to be more effective in squeezing production costs and boosting the HQ’s profits. As we saw in the case of the three global commodities in chapter 1, in the arm’s-length relationship all of the lead firm’s profits appear to arise as a result of its own value-added activities in the countries where the commodities are consumed, while their suppliers and the super-exploited workers employed by them make no contribution whatsoever.
This chapter examines these two forms of the outsourcing relationship, first separately and then together, in order to further enrich our concept of the globalization of production, and in order to identify questions and paradoxes that both mainstream and heterodox approaches cannot explain.
FOREIGN DIRECT INVESTMENT
According to the internationally accepted UN definition, “FDI is made to establish a lasting interest in or effective management control over an enterprise in another country…. As a guideline, the IMF suggests that investments
