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July 19, 2005
Confronting offshoring
Professor Ron Hira has been tracking the outsourcing phenomena for the IEEE for a number of years. He and Anil Hira have written a new book, Outsourcing America, where he examines not only the previous wave of offshoring, but what is to come. From Chapter 1: Outsourcing of High-Wage Jobs
Some have argued that the positions moving offshore are not the type of work Americans would like to do. For instance, in software development, they claim that the testing and maintenance tasks that have been moving offshore are mundane and uninteresting. An out of work U.S. software programmer may differ with this opinion, but those who argue that only low level work is moving overseas are missing two key trends.
First, engineering design, and even research and development, is moving offshore. This is not low level, but rather some of the most interesting, important, and cutting edge technology work. Many companies have announced new facilities in China, Singapore, Russia, and India that house high level functions like research, design, and development. In describing the rationale for raising its R & D investment in China to 100 million, a chief technology officer of France's telecom giant Alcatel said, "Our goal is to develop China as an R & D center not just for China, but for the rest of the world." Texas Instruments has had an R & D facility in Bangalore, India, for more than ten years, and General Electric Medical Systems also performs R & D at its Bangalore facility.
Second, companies in countries such as India and China are not satisfied with doing low level work. In fact, the major Indian IT firms Infosys, TCS, Wipro, and Satyam are competing with and beating U.S. IT firms EDS, Accenture, CSC, and IBM for large jobs. Indian generic drug maker Ranbaxy has partnered with British based pharmaceutical company GlaxoSmithKline to lower the costs of and speed up drug research and to conduct clinical trials. With laboratories that meet U.S. Food and Drug Administration standards, India is poised to capture many of the emerging biotechnology jobs.
. . .
It is clear that even though India is the current destination of choice, many more countries are beginning to target these jobs and industries and a vast seemingly endless supply of low cost and high skilled workers will become available for Western companies. While some economists, such as Jagdish Bhagwati, argue that the overseas talent pool is severely limited, they seem to ignore how fast developing countries will adapt to the new opportunities presented by outsourcing. Also, as companies become as comfortable doing business in Ukraine as they are in India, certain things are likely to happen:
* More companies will outsource more tasks.
* High skilled wages will remain low.
* Companies will force different country governments to compete with one another for those jobs by offering tax incentives, free training, and other incentives.
In this sense, it seems unlikely that offshoring will be reversed.
The authors are realistic about what can be done. They call for more focus on adapting to the trend rather than futile attempts to block it. One key suggestion echoes something that Athena Alliance has long advocated: finding geographically "sticky" solutions. By "sticky" we mean those economic activities that have strong local roots and are not easily moved (see various papers on Athena website). These could be because of a specific jurisdictional advantage that is not easily created elsewhere . It could be because of local amenities and localized intangible assets. It could be due to localized tacit knowledge that is not easily codified and transferred. It could also be due to specific customer needs. In the case of software, Defense applications and Homeland Security are two immediate areas of potentially "sticky" markets for software based on specific customer needs.
Creation of sticky jobs is one important way of adapting to the new I-Cubed Economy. We need to give a lot more thought to this concept.
Posted by Ken Jarboe at July 19, 2005 10:56 AM
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