High-Tech Outsourcing: A Benefit-Cost Framework
American Economist › Vol. 51 Nbr. 1, April 2007
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Summary
Is international outsourcing "efficient" or merely a redistribution of resources from one economic sector to another? This paper looks at this question from the perspectives of: (1) economic theory, which abstracts away from institutions and towards generalized incentives; (2) management theory, which focuses more on institutional issues that economic theory tends to ignore; and (3) a combined perspective within a benefit-cost analysis framework. The paper argues that an evaluation of outsourcing's impacts requires determining how the practice affects overall size of economic output and equity across sectors and countries. A benefit-cost template is developed for considering these questions more systematically.
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High-Tech Outsourcing: A Benefit-Cost Framework
I. Introduction and Overview
Some might call it delicious irony; others might say that the chickens have come home to roost; still others say the whole issue is chicken-little. Whatever the characterization, outsourcing or offshoring of domestic US high-technology jobs has become a hotly debated topic. Estimates for this kind of outsourcing are provided mainly by private studies. These have been widely quoted by sources ranging from The New York Times (Porter, 2004), Foreign Affairs (Drezner, 2004), Economist (2004) and The United Nations Conference on Trade and Development (UNCTAD 2003).A study by McKinsey Global Institute estimates that multinational firms outsourced about $35 billion dollars worth of work in 2002 and that overseas jobs created by this kind of outsourcing would grow 30 to 40% each year through 2008. The Gartner Group says outsourcing is growing 23% per year since 1999 and will reach $300 billion dollars by 2004 while Goldman Sachs places the number at $585 billion by 2005. In India it is predicted that up to 1.1 million people will be employed in information technology-type services by 2008 and, in total, outsourcing could generate some 3.3 million jobs by 2015 with 2.3 million of them in India alone (UNCTAD 2003). The UNCTAD Report groups a series of services under the banner "business process outsourcing" (BPO) and points out that developing countries can take advantage of this outsourcing trend if they provide the necessary information and communications techn...See the full content of this document
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