The Global Payoff from Outsourcing
By Christopher Farrell
A tantalizing hope, an alluring vision, is taking shape in the global economy. After decades of disappointing economic development strategies pushed by the major industrial nations, including import-substitution policies and recycling petrodollars, prospects for sustained gains in incomes and material wealth are improving for much of the developing world.
India and China are growing at a phenomenal rate, and the numbers of middle-class citizens, as well as people leaving poverty behind, is rapidly expanding. With a spectacular surge of energy, other developing nations and a number of former members of the Soviet bloc are building bridges of commerce with the richer nations. The glimmering of a transforming payoff comes from the most reviled word in current political economy: outsourcing.
The Internet and other sophisticated network-communications technologies are facilitating the export of highly skilled American, European, and Japanese brainpower jobs to cheaper regions of the world. The competition from developing nations to land software design, medical technology, accounting services, and other white-collar work is heating up. Low costs matter, of course. Companies that go offshore are looking to cut their overall compensation bill. But it isn't just cost savings.
Education, technical skills, infrastructure, and a welcoming business and political climate also play a critical role in the outsourcing decisions of industrial world corporations. That's one conclusion from the latest Offshore Location Attractiveness Index created by global consultants A.T. Kearney. India and China clearly dominate the business. But smaller countries like Singapore and Chile are also grabbing a fair share of contracts, and neither is a low-cost hub in their region.
In the vanguard of the movement for better living standards in the developing world is an unlikely institution, one held in opprobrium in much of the world: multinational corporations. These giants are aggressively harnessing the Information Revolution to forge strong links between rich and poor nations. Their ability to offer better wages and jobs are putting pressure on emerging-market governments to pursue liberal economic policies, especially spending more on education and maintaining open borders with the outside world for trade and foreign investment.
Multinational corporations are accelerating the worldwide exchange of innovations and ideas. Management's wariness of political instability -- and their ability to transfer business elsewhere -- can even be viewed as a mild force against military adventures and domestic terror.
CASE FOR OPTIMISM.
Key to understanding the impact of multinational corporations in the Information Age is not to focus on low wages but to realize how much knowledge and incentives for hiking skill levels they bring into developing markets. "Countries that integrate with the rest of the world and invest in education are moving up the economic ladder," says Paul Laudicina, a managing director at A.T. Kearney and co-author of the study.
The heated debate over outsourcing in the U.S. has been colored with gloom during a period of sluggish job growth. Many economists believe that robust economic growth would ease much of the job angst, as well as its causes. Push the employment rate dramatically higher, and outsourcing will become much less of a problem.
Domestically at least, history is on the optimists' side. What's different today is that the competitive rewards of a successful outsourcing strategy in the developing world may be tipping the scales toward fast, sustainable gains in living standards around the globe.
Offshoring Hot Spots
4. Czech Republic
12. New Zealand
Data: A.T. Kearney
Farrell is contributing economics editor for BusinessWeek. His Sound Money radio commentaries are broadcast over Minnesota Public Radio on Saturdays in nearly 200 markets nationwide. Follow his weekly Sound Money column, only on BusinessWeek Online
Edited by Beth Belton