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The Economic Impact of Offshoring

With the economy and labour markets contracting around the globe, attention is often turned to the role offshoring plays in the local economy. There is growing sentiment in many western countries against the sourcing of work in lower-cost destinations. U.S. President-elect Barack Obama at the Democratic National Convention stated, "...I will stop giving tax breaks to companies that ship jobs overseas, and I will start giving them to companies that create good jobs right here in America." But is this really a positive step towards strengthening the economy?

Global Net Gain
Outsourcing and offshoring increases the total number of jobs worldwide. Unlike digitisation and automation, outsourcing takes the delivery of a business or technology service out of one business and moves it to another. If a service moves to a lower cost country, more people may be used to compensate for the lack of business knowledge and cultural complexities. Additional people will likely be involved in the transition, management and governance of the outsourced service.

The Local Impact
In many cases, jobs in the sourcing country may be lost in the movement of a service to an offshore location. However, studies have shown that the local economy and job market can still benefit... "The economic benefits from offshore outsourcing will create more than 337,000 jobs by 2010, on top of jobs lost through outsourcing", according to a study by economic analyst Global Insight Inc.1

The impact goes well beyond the job market. Offshoring is essential for many local industries to remain competitive. There are few growth industries protected from foreign competition - look at the Japanese automobile and the Indian technology industries as prime examples of companies from emerging markets surpassing incumbent local providers. Businesses - particularly in smaller western economies - need to invest in their core competencies if they are to continue growing, and offshoring supporting services provides an effective means to do so.

The Myth Of Economic Entitlement
In 1800, China and India accounted for approximately 50% of the world's GDP - by 1950 their share had dropped to 10%. Conversely, the U.S. grew from roughly 3% to nearly 30% during that same period.2 Additionally, most forecasts see India and China regaining the majority of their global share in the next 50 years. Western companies must position themselves as leaders within a global economy - not a national economy - if they want to remain on top as wealth shifts from West to East. Policies that encourage protectionism and closed-borders will only hasten the loss of relative economic strength. On the flip side, offshoring puts western countries in a position to share the benefits of developing nations' growth - by affording greater control over industrial and service sectors, as well as providing access to an increasingly wealthy customer base.

In summary, a move back towards more protectionist policies may provide some very brief respite to domestic unemployment pressures. However, taking a defensive approach in an economy that is (and will continue to be) more global than ever before puts Western economies in serious risk of losing competitiveness very quickly.

Sources
1. http://www.infoworld.com
2. http://www.visualizingeconomics.com/2008/01/20/share-of-world-gdp/
 

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