Outsourcing and Offshoring: Key Trends and Issues

Abstract

This paper provides a discussion of key issues which emerged from a review of the debate on offshoring and outsourcing. Although offshoring is not a new phenomenon, the current phase of offshoring is marked by the increased tradability of services enabled by ICT. The paper puts forward a clear definition of offshoring - defined as a combination of trade flows, FDI, and employment shifts - before doing three things. First, official statistics on international trade and FDI were examined to gauge the extent of offshoring in services. Second, the paper analyses the causes and consequences of different types of outsourcing seen as strategies for corporate restructuring. Third, the impact of outsourcing on jobs and professions is assessed in terms of the repackaging of tasks, skills and knowledge. Our challenge in having an informed debate about offshoring is (a) to articulate the benefits and costs of offshoring by linking the three areas, namely trade and FDI, corporate strategy, and employment; and (b) to collect better data – both official statistics and private surveys - that enable us to link micro-level business decisions on outsourcing and offshoring to sectoral and economy-wide outcomes. Even with inadequate data, however, this paper provides pointers to answer such questions as: *Why is outsourcing and offshoring happening now? *What is the impact of outsourcing/offshoring on home and host economies? *What policies should be devised to address the causes and consequences of offshoring? The key points raised in this paper are as follows. 1. Definitions: Offshoring happens when private firms or governments decide to import intermediate goods or services from overseas that they had previously obtained domestically. It is therefore about sourcing decisions which involve (a) imports, (b) displacement of domestic production and associated jobs, and sometimes (c) foreign direct investment (FDI) outflows if sourcing happens from overseas affiliates. It is difficult to combine three separate sources of data to measure the precise extent of offshoring defined in this way. 2. Trade and FDI: Bearing in mind the limitations to official statistics, they indicate that offshoring of services is quite small, relative to that in manufacturing. In particular: *World trade in services, valued at $1.8 trillion in 2003, is still only a fifth of that in manufacturing. *Only 10% of services output enter international trade, whereas 50% of manufacturing does, indicating that offshoring of services is small relative to outsourcing within national borders. 4. Despite this small size, the tradability of services is expected to grow, especially in business services (including IT and professional services) which make use of ICT. *The top two exporters of computer services are Ireland and India, but the top two exports of other business services are the US and the UK. Unlike in manufacturing, the US and the UK maintain a trade surplus in business services. *In part because of such trade surplus, job losses embodied in offshoring is quite small, at 2.4% of total employment in the US in 2003. *For emerging markets, the Indian model of promoting export-platform FDI in software and business services provides one, but not the only, template for promoting them as offshore locations. 3. Corporate Strategies: Growth in outsourcing and offshoring of business services depends on the nature of corporate strategy and business models. Corporate strategies to outsource business services became established only in the late 1990s, driven primarily by the ICT revolution and the Anglo-American shareholder value business model, in which CEO/CFO takes a lead to reduce costs and improve return on assets. Asset sales are therefore just as important as relocating to low-cost areas. *The current phase of outsourcing and offshoring is marked by two distinct types of outsourcing: first, the unbundling and re-centralisation of corporate functions, and second, vertical dis-integration of inputs. The former affects all sectors of the economy, including manufacturing and the public sector. *These two distinct types of outsourcing offer emerging market suppliers different opportunities to upgrade their capabilities and to create higher value added. In particular, these suppliers that entered markets via the provision of low value added standardized services may move up the supply chain (e.g. in software) or deepen their functional knowledge in business services. 4. Jobs and Professions: The movement of service jobs from developed economies to low cost emerging market locations is being accompanied by significant repackaging of tasks, skills, and knowledge into a job, occupation, or profession. This is leading to changes in occupational and professional identity, and is creating new challenges for governments formulating their policies for education and training, and for professional associations thinking about the upgrading of capabilities.