♠ Posted by Emmanuel in Trade at 7/10/2007 01:24:00 AMLest you think that offshoring/outsourcing/globalization are concerns peculiar to those in the United States, the Work Foundation based here in the UK has an interesting recent report on Offshoring, a Threat to the UK's Knowledge Jobs? To me, it makes two very helpful distinctions. The first one I have already touched upon before--that offshoring and outsourcing are different things. A business process can be (1) offshored without being outsourced, (2) outsourced without being offshored, or (3) both. How so? Offshoring is concerned with moving processes elsewhere geographically whereas outsourcing is concerned with contracting out these processes to another firm. For instance, IBM may offshore certain basic research to its subsidiary in India without outsourcing it to another company. Conversely, Dell may outsource its call center operations to an operator based in Texas without offshoring these operations abroad. Or, Hewlett-Packard may offshore and outsource its customer support functions at the same time by contracting with an Indian business process outsourcing (BPO) firm like Tata, Wipro, or Infosys. Here is the relevant illustration:
Another noteworthy if debatable distinction raised in the paper is that knowledge workers are different from information workers. Whereas Western Europe has many of the former who deal with novel solutions to nascent problems through the clever application of knowledge (like your humble blogger, I suppose), what BPO firms have are the latter who are more accustomed to the application of routinized solutions to existing problems. So, despite the lower wages in India, some problems may yet be too novel to entrust to BPO firms:
It's a good report to read backed up with empirical evidence and BPO industry expert interviews in India. In fact, I'd say it has a certain bias towards depicting a win-win situation where tasks lower down on the knowledge food chain can be hived off to Asia or Eastern Europe while the nitty-gritty, knowledge-intensive stuff at the cutting edge is kept in Western Europe or the US. I can't say that I am necessarily in agreement with the author of this research, but it makes for good, provocative reading nonetheless. It also offers a counterweight to US-based economist Alan Blinder's recent pronouncements [1, 2, 3] that more developed-world jobs are vulnerable to outsourcing than previously thought. I am attaching the conclusions below for your consideration:
Offshoring in the service sector has received a lot of media attention, despite or perhaps because of, the lack of solid evidence when it comes to the scale of the phenomenon.
Commentators are quick to link offshoring to trade, rather than to explore the more complex relationship between economic and structural developments, such as the shift to knowledge intensive sectors in mature capitalist economies.
When it comes to the alleged future offshoring of knowledge jobs, there is no data confirming this, even though the supply side of the BPO market argues that it is `most definitely moving towards high value added, knowledge intensive tasks.'
But most of the workers in offshore locations are `information workers' not `knowledge workers', the services provided by BPO companies are solutions to existing problems, but `they do not pose problems themselves'.
High value knowledge intensive services are still principally located in developed countries. Despite the media frenzy, India's growth in services has, in large measure been driven by an expansion of more routine support services. Progress towards higher end knowledge intensive services has, so far, been rather slow.
Indian business insiders see future offshore outsourcing as an advantage for Europe enabling it to focus on the `thinking part of the job', providing opportunities for `better jobs' and `knowledge work' in Europe.
For Jayant Pendharkar from Tata Consultancy Services it is a `no-brainer': Europe should further invest in education and skills and `continue to do what it does best: product design, creative work and patents'.
The benefits of service offshoring will, in the long run, outweigh the cost as long as policy-makers focus their efforts on the adjustment process in the short run. Increases in trade in knowledge based services will overall benefit all economies involved.
To the rest of the world it seemed perfectly obvious that Europe's comparative advantage is its `high skilled work force', its `ability to provide research, science and design'.
The fear of `jobs moving abroad' is often linked to less specific, more general structural change, particularly when this is taking place against a background of high unemployment. The shift towards a knowledge based economy seems to increase, sometimes carefully manufactured, perceptions of fear.
The tradeability of knowledge jobs might increase, but this does not automatically mean that all jobs that are tradeable will be offshored.
Distance and lack of control may harm the flexibility and speed of delivery due to practical implications of language, time, cultural difference and the lack of face-to-face interaction often needed to resolve complex problems. Some services can be done anywhere in the world in theory, but even multinationals rely in practice on local delivery of services with a global brand image supported by global expertise.
Whether offshoring is going to increase slightly or stay the same, policy-makers should not shy away from the real questions of adjustment and compensation as the pace of structural change, driven by markets and technology speeds up. The key policy issues are still how to equip people for change, especially within the industries most affected.
We would therefore like to warn against simple extrapolation. Any attempt to forecast what the future might hold is of course a speculation and the world could indeed change in unexpected ways. But meanwhile, on the basis of the evidence, we can say that the scale and the impact of the phenomenon have often been exaggerated. This means that the future pattern of offshoring would need to be very different from the one today if it was going to affect knowledge jobs on a large scale.
It also shows that our economies are able to cope with all sorts of change when combining competitive markets with social networks in order to manage transitions.
The debate should thus focus on (a) consolidating the UK's and Europe's strength in higher value added knowledge services where investment in human capital will prove decisive. The Prime Minister has for example suggested that advanced industrialised countries will have to invest at least 10 percent of GDG in education and skills. And (b) it should focus on domestic policy choices for the losers of rapid structural change within countries rather than on the winner and loser debate between countries.