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Brookings Trade Forum 2005 (2005) 399-409

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The Emerging Offshore Software Industries and the U.S. Economy

Carnegie Mellon University

The possibility that a significant number of skill-intensive service jobs might move from the United States to developing countries has generated widespread recent concern. The newness of the phenomenon has led to rampant speculation, by academics, in the press, and on Wall Street, about the potential scope of such "offshoring" and its likely impact on the U.S. economy.1 Drawing from Arora and Gambardella (2004 and 2005), this paper attempts to shed some light on the development of offshoring by focusing on one of the first skill-intensive industries to move to low-wage economies, namely software.

I first provide an overview of the global software industry. Next I discuss how three emerging-market countries—India, Ireland, and Israel (the "3 I's")—separately developed dynamic software industries that in 2001 together accounted for more than $15 billion in exports. In the next section I examine the impact of this offshoring on the U.S. economy, as well as future prospects for offshoring software R&D, concluding that this is unlikely. Finally, I compare the software industry's experience with that of other skill-intensive industries.

The Global Software Industry

The first task in describing the global software industry is to define what is meant by software industry. At the risk of oversimplification, software-related [End Page 399] activities generally fall into one of three categories: design, coding, or maintenance. Design, which translates approximately into R&D and product development, has the highest value added of the three activities. Coding and maintenance may be thought of as analogous to production in other industries and consequently entail lower-end tasks. As discussed in more detail below, most of the functions offshored (especially to India) involve production, while design has tended to remain local.

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Table 1
Software Employment by Industry in the United States, 2001

A correlate distinction concerns the difference between people who work in the software industry and those who work with software. In the United States in 2001, for example, two out of three people who wrote computer code worked for companies outside the computer equipment or software services industries (see table 1). These people work in universities, for financial funds, and in myriad other sectors that rely heavily on information and computer technology (ICT). Moreover, the bulk of the demand for computer-related outsourcing comes from firms outside the "core" industry. Roughly speaking, banks outsource coding and maintenance; Microsoft keeps its product design activities in-house. Thus, in studying the impact of offshoring, the first place to look is in software occupations outside the software industry.

Of course, the core industry is still quite large, and it is also the appropriate level of analysis for describing the rise of providers in low-income countries that focus exclusively on software-related services. Table 2 gives summary statistics by country for five "newcomers" to the software development process as well as for the three most important industrialized countries. The United States dominates the global market; it had $200 billion in sales in 2002. It is important to note that this figure excludes software written and used in-house. Although in-house-produced [End Page 400] software is difficult to measure, estimates suggest that, if included, it could constitute an additional $300 billion in value.

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Table 2
Summary Statistics for the Software Industry, 2002 or latest available figures

Four of the five newcomers have similarly sized software sectors, as measured by sales revenue; Israel's sector is about half their size (see table 2).2 However, three of the newcomers, India, Ireland, and Israel, earn roughly three-quarters of their revenue from exports. Accordingly, the 3 I's have received most of the attention as offshore locales. Documenting how these three countries have developed their industries constitutes most of the following section. First, two more comments are in order on the present state of the software industry.



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pp. 399-409
Launched on MUSE
Open Access
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Archived 2012

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