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Thursday, July 01, 2004

Exploding the myths of offshoring via Mckinseyquarterly

Far from damaging the economy of the United States, offshoring should enable its companies to direct resources to next-generation technologies and ideas —if public policy doesn't get in the way. The problem of job loss in america is neither trade itself nor globalization more broadly but rather the question of how the country should allocate the benefits of global trade. Trade in services, like other forms of international trade, benefits the United States as a whole by making the economic pie bigger and raising the standard of living. Outsourcing jobs abroad can help keep companies profitable, thereby preserving other US jobs. The cost savings can be used to lower prices and to offer consumers new and better types of services. By raising productivity, offshoring enables companies to invest more in the next-generation technologies and business ideas that create new jobs. And with the world's most flexible and innovative economy, the United States is uniquely positioned to benefit from the trend. After all, despite a large overall trade deficit, the country has consistently run a surplus in its international trade in services.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.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.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.The current debate over the offshoring of US jobs misses the mark. Short-term disruption from job losses must be weighed against the much broader benefit to US consumers and businesses, as well as the consequences of resisting change. If US companies can't move work abroad, they will become less competitive—weakening the economy and endangering still more jobs—and miss the chance to raise productivity and to concentrate resources on the creation of higher-value jobs.

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