IMMIGRATION VERSUS OUTSOURCING: A DEVELOPING COUNTRY’S VIEW

Abstract

This paper provides a comparative study between temporary immigration policy and product outsourcing process, from the low-income developing country's point of view, which is supply side constrained by the availability of skilled labour. A two-country general equilibrium model establishes an inverse relationship between temporary immigration quota and product outsourcing. Though temporary immigration quota enhances world welfare and the developed country welfare, its impact on welfare level of the developing country is uncertain. In the empirical part, a panel data analysis shows that real consumption level of a set of developing countries increases with an increase in product outsourcing, given an inverse relationship between product outsourcing and temporary immigration policy.Keywords: Immigration, Outsourcing, Intermediate Input, Consumption, Panel AnalysisJEL classification: C23, E20, F2, F12, F22(ProQuest: ... denotes formulae omitted.)1. INTRODUCTIONConventionally international trade between a developed and a developing country, from a theoretical perspective, is based on the difference in relative factor endowments among them. International trade helps utilise the abundant factor. Internationally trading countries gain from relative factor abundance and lower relative price of factor inputs. For instance, a relative labour abundant developing country use the abundant factor and the gains from trade follow from lower relative factor price of labour. In recent times, trade in intermediate goods and factor inputs have assumed significance along with conventional merchandise trade in final goods. For a relatively capital abundant country, with regards to trade in factors inputs, the policy options are between import of low-priced foreign labour and export of domestic capital. It has been theoretically established, a la Ramaswami (1968), that importation of low-priced foreign labour is a better option than exportation of domestic capital for capital abundant developed countnes. Now the question is, What is the choice for a labour abundant country: exportation of domestic labour or importation of foreign capital? This paper investigates into the relationship between exports of domestic labour, that is, temporary migration, and product outsourcing from the perspective of a developing country.Migration and outsourcing are the two manifestations of trade in factor inputs: while migration includes cross-border movement of natural persons, international outsourcing1 involves cross-border movement of capital. Both immigration and international outsourcing increase cost-efficiency of the global production system (Murat and Paba, 2003). The labour-intensive part of the production process is reallocated from the developed country to the labour abundant developing country; the developing countries, engaged in such outsourcing contract, become a part of the globally integrated production chain.2 For instance, a growing outsourcing demand is directed towards India from different capital abundant countries including the USA. There are two types of outsourcing; product outsourcing and service outsourcing. Globally while product outsourcing takes place in engineering, automobile, textile, and chemical industries (Dubey, 2003),3 service outsourcing takes place in communication, information technology and information technology enabled sectors. The developing countries, through outsourcing not only expand their market for intermediate products, but also benefit from employment generation, profit maximisation, quality up-gradation, capacity utilisation skill-improvisation and technology transfer.Immigration is another way by which the pool of high-skilled labour in developing countries is being used by developed countries. Temporary immigration refers to the temporary movement of persons from one country to another to provide on-site services, when immigrants do not get the right to dwell permanently in the host country. …