Outsourcing

Exploding the Myths of Offshoring

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A better deal for consumers. Ultimately, in a competitive economy such as that of the United States, consumers benefit as companies pass on savings in the form of lower prices. New research by Catherine Mann, of the Institute for International Economics, in Washington, DC, found that the global sourcing of components has reduced the cost of IT hardware by up to 30 percent since 1995, boosting demand and adding as much as $230 billion to the US GDP in that period. (Catherine Mann, "Globalization of IT services and white-collar jobs: The next wave of productivity growth," Policy Brief 03-11, Institute for International Economics, Washington, DC, December 2003.) Trade in services will have similar effects. A technician in India, for instance, can read a magnetic-resonance-imaging (MRI) scan for a fraction of what it would cost in the United States. Transferring that position to India might cause a US medical technician to be laid off, but lower prices for life-saving technologies mean that more sick people can receive them.

Additional exports. Indian companies that provide offshore services also buy goods and services ranging from computers and telecommunications equipment to legal, financial, and marketing expertise. Often, they buy these from US companies. A call center in Bangalore, for instance, could use HP computers, Microsoft software, and telephones from Lucent Technologies, and it may be audited by PricewaterhouseCoopers. We estimate that for every dollar of corporate spending that moves offshore, companies that provide the offshore services buy five cents of goods and services from the United States in return. On top of that, young Indian workers employed by outsourcing firms buy imported goods. Thanks to such corporate and individual buyers, exports from the United States to India stood at $5 billion in 2003, compared with $3.7 billion in 2000; they rose by 22 percent from 2002 to 2003 alone.

Repatriated profits. Many Indian outsourcing firms are owned in whole or in part by US companies, such as GE and EDS, and repatriate some of their earnings. Operations owned by foreign (mostly US) companies generate 30 percent of the Indian offshore industry's revenues. In this way, an additional four cents of every dollar spent on offshoring returns to the US economy.

Productivity and new jobs. The direct benefits to the United States from corporate savings, new exports, and repatriated profits total 67 cents — twice the benefit to India. But the gains don't end there. Corporate savings can be invested in new business opportunities, and this investment will boost productivity and create new jobs. Experience suggests that these jobs will on average have higher value added, as auto assemblers did when they replaced carriage makers and factory workers when they replaced farmers.

Indeed, this is exactly the pattern that developed over the past two decades as manufacturing jobs moved offshore. US manufacturing employment shrank by 2 million jobs over 20 years — but net employment increased by 43 million jobs in other areas, such as educational and health services, professional and business services, trade and transport, government, leisure and hospitality, and financial services. Over the same period, manufacturing output increased despite the decline in the number of manufacturing workers, because factories became more productive. Higher productivity means a higher national income and a higher standard of living.

As jobs in call centers, back-office operations, and some IT functions move offshore, the same thing is likely to happen again. Opportunities to generate higher-value-added jobs by redeploying labor and investing capital will appear, though we can't predict exactly where. The Bureau of Labor Statistics estimates that 22 million new US jobs, mostly in business services, health care, social services, transportation, and communications, will be created in the period from 2000 to 2010. It also predicts that computer-related occupations — often thought to be at high risk of moving offshore — will be among the fastest-growing job categories in the country, for while code can be written abroad, many IT functions, such as systems integration, can't be exported. And there will undoubtedly be jobs we can't even fathom today. Twenty years ago, for example, no one could have imagined the ubiquity of the cellular phone, yet it spawned an industry that now employs almost 200,000 workers in the United States.

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