Commentaries
Comments and observations by Paul Strassmann
Wednesday, June 15, 2005
The Benefits of Offshore Outsourcing
From Senior Corporate Executive in Australia:
I wonder what you think about the study by the MicKinsey Global Institute that showed that offshoring creates wealth for the United States as well as for India, the country receiving the jobs.
For every dollar of corporate spending outsourced to India, the US economy captures more than three-quarters of the benefit and gains as much as $1.14 in return. Far from being a zero-sum game, offshoring creates mutual economic benefit.
COMMENTARY:
Free trade to take advantage of the global
division of labor has all the benefits described
in the MGI excellent paper.
There is a catch, however. The outsourcing
benefits can be captured only if the outsourcing
country can replace the outsourced labor with new
higher value-added (e.g. higher Knowledge Capital)
labor. If it can not (or will not) then outsourcing
will impoverish the country.
The best example of that is Germany and
particularly East Germany these days as well
as Italy. These countries were at one time export-based
powerful economies depending on imports to
balance their economies (2004 data):
US Imports / GDP 13.5%
France Imports / GDP 28.7%
Germany Imports / GDP 33.6%
Italy Imports / GDP 25.2%
UK Imports / GDP 26.6%
The UK (and the USA) has so far managed to create
new Knowledge Capital/worker. Germany and Italy
have not and are sinking economically. France has
been able to manage slightly better (not much) than
Germany and Italy largely on account of military
and electronics sales where it competes against
the USA in countries that favor France.
To sum up : The MGI paper is an excellent paper
but does not give a balanced story. The India
case is unique and certainly not
applicable to Australia. The paper is also self
serving because it supports a consultancy that
offers advice that consistently promotes greater world trade.
I wonder what you think about the study by the MicKinsey Global Institute that showed that offshoring creates wealth for the United States as well as for India, the country receiving the jobs.
For every dollar of corporate spending outsourced to India, the US economy captures more than three-quarters of the benefit and gains as much as $1.14 in return. Far from being a zero-sum game, offshoring creates mutual economic benefit.
COMMENTARY:
Free trade to take advantage of the global
division of labor has all the benefits described
in the MGI excellent paper.
There is a catch, however. The outsourcing
benefits can be captured only if the outsourcing
country can replace the outsourced labor with new
higher value-added (e.g. higher Knowledge Capital)
labor. If it can not (or will not) then outsourcing
will impoverish the country.
The best example of that is Germany and
particularly East Germany these days as well
as Italy. These countries were at one time export-based
powerful economies depending on imports to
balance their economies (2004 data):
US Imports / GDP 13.5%
France Imports / GDP 28.7%
Germany Imports / GDP 33.6%
Italy Imports / GDP 25.2%
UK Imports / GDP 26.6%
The UK (and the USA) has so far managed to create
new Knowledge Capital/worker. Germany and Italy
have not and are sinking economically. France has
been able to manage slightly better (not much) than
Germany and Italy largely on account of military
and electronics sales where it competes against
the USA in countries that favor France.
To sum up : The MGI paper is an excellent paper
but does not give a balanced story. The India
case is unique and certainly not
applicable to Australia. The paper is also self
serving because it supports a consultancy that
offers advice that consistently promotes greater world trade.