Student Projects:Outsourcing PPF:Diwaker Notes

Outsourcing in a Global Economy

Citation

Grossman, Gene M. and Helpman, Elhanan, "Outsourcing in a Global Economy" (January 2002). CEPR Discussion Paper No. 3165.

Also available as National Bureau of Economic Research, Working Paper 8728

Notes

This paper presents a model for analyzing the determinants of the 'location' of sub-contracted activity. Their definition of outsourcing means "finding a partner with which a firm can establish a bilateral relationship and having the partner undertake relationship-specific investments so that it becomes able to produce goods or services that fit the firm's particular needs". The paper cites various sources (that we might in turn cite) to conclude that "the outsourcing of intermediate goods and business services is one of the most rapidly growing components of international trade".

Before I go any further, I must point out that the model of this paper assumes that the firms have no choice but to outsource.

Okay, without going into any of the technical details, let me summarise the conclusions of the paper:

Assumptions/Model:

• producers of differentiated final goods must go outside the firm for an essential service or component
• search for such a firm is costly and firms have to choose which national (or geographic) market to conduct the search in
• the supplier must customize the input fo the final producer's use. Such relation-specific investment is often governed by incomplete contracts, and the contracting environment may vary across national markets

Results:

• as a country expands (in market size and technology) its share of world outsourcing grows
• a 'uniform' global technological improvement does not change the international composition of outsourcing
• a disproportionate improvement in search or investment technology in the outsourcee causes a shift in outsourcing activity
• an improvement in the contracting environment (as expected) raises the relative profitability of outsourcing

Outsourcing versus FDI in Industry Equilibrium

Citation

Grossman, Gene M. and Helpman, Elhanan, "Outsourcing Versus FDI in Industry Equilibrium" (August 2002). Harvard Institute Research Working Paper No. 1965.

Also available as National Bureau of Economic Research, Working Paper 9300

Notes

Determinants of the extent of outsourcing (as compared to FDI):

• the productivity advantage of firms that specialize in producing components (better means more outsourcing)
• an increase in industry size favors outsourcing because it increases the spending on final products relative to prices and costs.
• "thicker" markets are better (more suppliers means searching costs go down and each producer is likely to find a suitable supplier)
• improvement in contracting environment favors outsourcing because fewer investment tasks are left to the discretion of a potential supplier
• an increase in the relative wages at the outsourcee has a negative impact on the profitability of component produces, thereby causing a decrease in outsourcing.

Outsourcing: Review of the commercial activities panel report

Citation

Hearing before the Military Readiness Subcommittee of the Committee on Armed Services House of Representatives, One Hundred Seventh Congress, Second Session. Hearing held June 26, 2002. H.A.S.C. No 107-41

Also available at: http://www.gao.gov/a76panel/index.html

Notes

Actually this piece of document turned out to be a bit of a disappointment -- I guess I was fooled by its title. To quote from the document itself:

"The mission of the Commercial Activities Panel is to improve the current sourcing framework and processes so that they reflet a balance among taxpayer interests, government needs, employee rights, and contractor concerns."

Thus, primarily the report talks about how the government should give out the jobs it needs to get done -- should it go to the public sector, or to the private sector? should it do a cost comparison study or should this depend on the project size since a study doesn't come for free; and other such issues. It doesn't really have any material, related directly or indirectly to the issues that we are focusing on.

Ethical Challenges of Information Systems: The Carnage of Outsourcing and Other Technology-Enabled Organizational Imperatives

Citation

Linda L. Brennan and Victoria E. Johnson. "Social, Ethical and Policy Implications of Information Technology". Chapter 9. Information Science Publishing. 2004.

Notes

This seems to be an excellent book on IT and public policy related issues. I found just this one chapter related to outsourcing directly, but I believe there is a lot more material sprinkled all over the book, which I hope to accumulate as time passes. This particular chapter doesn't really give any hard answers or data. It does however ask the right questions, some plausible theories and some interesting references (which I will look at next).

The author discusses implications of outsourcing on the individual, the corporation and the society in some detail. Very briefly, the article discusses the history of outsourcing: the so called first stage, where it was manifested simply as extended functionality (eg: terminal consumers of main frames who simply could not afford to setup such a facility in house in the 50s); the second stage, where outsourcing involved physical resources (like networking infrastructure); and finally the third stage, where outsourcing has grown to comprise offshoring entire products and services, a variant of which is also known as Business Process Outsourcing.

Some theories have been suggested as well for the origins of outsourcing. I highly recommend that everyone on the team should take a look at this book.

The High-Tech Worker Shortage and US Immigration Policy

Citation

Hearing before the Committe on the Judiciary United States Senate, One Hundred Fifth Congress Second Session. February, 1998. Serial No. J-105-76

Notes

Basically this is the hearing that led to the initial raising of the H1-B visa cap to 65,000 in 1998. There are statements from many companies (include TI, Microsoft, SUN and Cypress) strongly moving for increasing the visa cap on high tech foreign skilled workers to meet the demands of the industry. There is tons of data as well.

The basic premise of this document is this: at that point of time, the US was facing a tremendous shortage of skilled work force. While the government realized that a long term solution lay in the restructuring of basic (K-12) education and better training for local workers, it was also evident that some short term remedy was necessary, otherwise the US would incur huge amounts of losses -- losses in the sense that projects were backlogged due to labor shortage, vacant positions were not being fulfilled, potential revenue pockets were not being tapped.

Thus, the raise on the H1-B visa cap was proposed (and pushed for by various companies) as the short term remedy. The committee also discusses fears of the abuse of this legislation and proposes a few measure to counter such abuse. I still have to look into details as to what actually made it into the legislation, but I would guess that either such restrictions didn't make it, or there were obvious loopholes, since the H1-B raise evidently backfired over the next couple of years.

Also interesting to note is that many of the companies had asserted quite honestly that if the cap was not raised, they would offshore/outsource (and this in 1998). Its not surprising that outsourcing has taken off in such a big way in light of the recent hassles involving H1-B visas.