Outsourcing Less Harmful than Public Believes

Even as outsourcing remains a hot political issue in USA, there are indications that the process is not just one way – of Americans losing jobs, a theme that has worked its way into political campaigns since about 2000 and stirred increasing rage, particularly among labor unions in the US.

Many economists believe the issue is seriously overblown, and that the net effect has been relatively small. In two new reports, one published in New Delhi, economists argue that in fact as many as 30,000 jobs have been created directly by Indian companies investing in the United States, for instance, with a considerable multiplier effect beyond that. Admittedly, that tally hardly shows up in US job counts. Even during the seven lackluster years of the administration of President George W Bush, some 5.7 million net new jobs had been created by the end of 2007 in the US, with about as many as 7 million gained and lost each year, meaning that the 200,000-odd that disappear overseas each year hardly show up in the employment tallies.

According to the study, by the US-India Business Council and the industry body Federation of Indian Chambers of Commerce and Industry (FICCI), which came up with the 30,000 figure, the top Indian job generators in the United States include Essar, HCL, Tata, Mahindra and Wipro. Twelve Indian firms, including Essel-Propack, ITC Kitchens of India, Ranbaxy, Satyam and Wockhardt, are making a positive impact on the US economy. It may be small at this point, but it is growing and, in addition to demonstrating the integration of the global economy, it holds positive signs for the future. Added to the job generation is the fact that outsourcing is positive for the larger economy in that the reduced costs of production are passed on to consumers or provide capital for additional investment, which also generates jobs.

In the other paper, a five-year, 64-page study of outsourcing trends, two economists, Daniel Trefler and Ruanjan Liu for the National Bureau Economic Research that was published in June, argue that the net effect of outsourcing on employment itself is much smaller than anybody anticipated.

“The rise of service offshore outsourcing to China and India has brought with it something new –for the first time ever, educated U.S. workers are competing with educated but low-paid foreign workers,” the two wrote in the paper, entitled “Much Ado About Nothing: American Jobs and the Rise of Service Outsourcing to China and India.”

“There are some darker spots in the US labor market experience with offshore outsourcing. For workers in industries exposed to offshore outsourcing, the effects tend to be smaller (i.e. less positive). The effects tend to be negative for workers without a college degree or who work in less-skilled, white-collar jobs. As with all labor-market impacts of international trade, there are winners and losers and, in the current U.S., the losers are less educated.”

The economists wrote that they do not minimize the effect on losers. “The loss of one’s job can be enormously damaging both financially and psychologically. These darker spots should not be allowed to obscure the big picture.” But, they add: ”All of these effects are remarkably small given the hype associated with offshore outsourcing. Further, they were estimated with sufficient precision that even the upper bounds of 95 percent confidence intervals involved small effects. The estimates were also shown to hold across a wide variety of alternative specifications, There can thus be only one way of describing the hype surrounding the labor-market impacts of inshoring and offshore outsourcing: Much Ado About Nothing.

Tata Group alone employs 19,000 Americans, according to the report by the US-India Business Council and the Federation of Indian Chambers of Commerce and Industry, and has invested over US$3 billion besides operating 16 businesses in US. With a presence in states such as Arizona, Colorado, Florida, Missouri, New York and Texas, Essar's American operations generated more than US$110 million revenues last year, employing 7,200 people currently, expected to rise to 8,500 by next year.

Jet Airways has purchased 72 aircraft from Boeing, has 120 direct employees with offices in New York, New Jersey and California and has paid US$36 million into the US market in wages, taxes, and airport fees. The pharmaceutical company Ranbaxy, recently taken over by Japanese firm Daiichi Sankyo, has created 600 jobs and produced 142 drugs, the report added. In software, Satyam employs 5,000 Americans; Wipro has created more than 8,000 jobs in US, with 1,000 new jobs in Georgia and Michigan. HCL Technologies has helped develop safety and navigation equipment for Boeing's new 787 'Dreamliner' jet aircraft. With a US presence since the late 80s, HCL employs 3,000 in 21 locations and services clients in 200 cities.

In the past, Indian companies have set up offices in the United States, but they have been largely restricted to marketing, generating new clients and establishing a countrywide network that has created very few jobs and those mostly for Indians. However, as Japanese and German auto manufacturers discovered decades ago, Indian companies today feel the need to hire western employees to deal with local populations and markets, riding on profits generated in part due to huge international business deals.

Meanwhile, new opportunities offered by the emerging Indian economy are proving to be an attraction as well, underlining the assertion that in a globalized situation, growth can benefit anybody.

Siddharth Srivastava is a New Delhi-based journalist. He can be reached at sidsri@yahoo.com