Service Offshoring: Threats and Opportunities

When asked to provide a framework piece on offshoring, I decided it would be much easier to have the work done by an Indian consulting firm. A quick bit of research turned up a perfect corporate partner. Not surprisingly, the company has a London-based front end—it is a fact of the industry that many customers prefer to work through a Western intermediary. The company quoted the job at $63,000, no taxes. That's about one-tenth of what an American management consulting firm would charge, but still too rich for my academic salary. So you are stuck with me.

The experience taught me two things. First, you can outsource abroad just about anything, from which I conclude that all of our jobs are threatened. Second, the big money in offshore outsourcing goes to the OECD business analysts who help customers communicate their needs to business process outsourcers in low-cost countries. I conclude from this that offshoring brings remarkable opportunities to us all. Therein lies the paradox of offshoring: it is both a threat and an opportunity.

In considering international offshoring, two trends scream out for our attention. The first is the rise of China as the world's manufacturer. Surprisingly, many American firms have yet to wake up to this sea change in their sourcing possibilities. Better information about the strategic offshoring options available to American firms is desperately needed. Aside from this, the rise of China's manufacturing sector poses no new public policy issues. All the familiar arguments hold. On the one hand, international trade is disruptive for workers and firms engaged in import-competing industries. On the other hand, international trade provides the benefits of lower prices to consumers and offers new opportunities for producers (both workers and firms) to expand into foreign markets. In aggregate, the benefits outweigh the costs. What remains for policymakers is the crucial task of ensuring that we generously care for our most disadvantaged, since these unskilled workers are the ones who will bear the brunt of the Chinese offshoring onslaught.

The second extraordinary development in international trade has been the rapid growth of traded services involving innovative, technology-intensive processes and employing high-paid white-collar workers. In the past it was unheard of for low-cost countries such as India to be exporting high-value-added services. Now it is common to find Indian software programmers customizing sophisticated software applications for businesses worldwide. This development fundamentally alters the way we must think about innovation-based corporate strategy and public policies that affect the flexibility of the white-collar labor market.

The United States faces a choice. It can insulate itself from the global competitive pressures that come with offshoring to low-cost countries. Such policies will protect firms and workers in the short run. However, there is at least some weak evidence that protectionism retards growth.¹ In addition, insulating policies will likely encourage foreign countries to deny us market access. Considering that the United States is a major supplier of traded services to the rest of the world, insular policies are about as useful as a blow-dryer in an igloo.

Alternatively, the United States can pursue domestic framework policies that promote the competitiveness of U.S. firms and workers. These framework policies would encourage productivity-enhancing investments both by individuals (for example, in human capital) and by firms (for example, in R&D and advanced technologies). The building blocks for globally competitive American firms are domestic policies that encourage continual investments in upgrading and innovation by individuals and firms. When it comes to the U.S. public policy response to offshoring, my best advice is: think globally, invest locally.

Finally, let's not forget about compassion. The American government must be prepared to generously help its most disadvantaged, for they are at greatest risk from the downside of offshoring.

What Is Offshoring?

There is no universal definition of offshoring, and one task of...