Talk:Outsourcing and its impact on innovation?
aamiralavi: i think outsourcing would impact innovation in a positive way. like mandy wrote, cheaper labor is available abroad. but in terms of information technology, i wonder how great the benefits would be. the labor necessary abroad would be highly skilled, although most likely still cheaper than skilled labor in the united states. i think it would be worth looking into specific goods or services being outsourced. if its produciton of something requiring very little labor but high fixed costs (like making miscrochips?), then the amount saved from cheaper labor compared to high shipping costs and high fixed costs to construct a new factory, then gains would not be that great. this would prevent surplus from being used to promote innovation because there would be little surplus. also, for gains on each unit of production with lower costs, im sure not all of that surplus goes towards innovation, as people may pay themselves more or spend more on advertising to ship more units of product.
[Damon May] Along the lines of a blurb I just wrote on the main discussion page (http://cubist.cs.washington.edu/CSEP590TU-wiki/index.php/Talk:CSE590TU), I think it'd be interesting to do a project on the current state of outsourcing in the IT industry, projections for the future, and the things that government and industry can and/or should do to stem the trend.
Mandy Chang I agree. I'm interested in finding a quantatative view (rather than qualitative--if that's possible) of how the IT industry is doing in regards to outsourcing. I'm also interested in what government can do about this. As ddorwin mentioned, it's not clear what U.S. companies will do with cheaper labor (higher profits). Thanks for mentioning that :). I'm just throwing an idea out there --and I'm sure it has repercussions, but let's imagine that the government has a way to tax all profits of U.S. firms and allocate that money back for R&D within the U.S.-- through universities or firms themselves. That could probably help keep innovation within the country. I think in a situation where it seems outsourcing of innovation seems to be the inevitable outcome, government intervention is imperative. What do you guys think?
SMM: Hint: If you aren't already familiar with them, you should brush up on the economic argument that free trade always makes society richer -- the buzzwords are "comparative advantage" and "returns to trade." The material is not hard: Any intro econ book should have it. Of course, we've never taken free trade to the extreme of letting human beings flow freely back and forth across borders. Outsourcing blurs that distinction.
James Welle: I am interested in this as well. It would be interesting to look at history in other industries ( the auto industry for example ) and try to predict what may or may not happen to the US technology workforce due to outsourcing. It would like to look at other related issues such as unions as well and do an analysis of how this could benefit or harm the industry.
James Welle: Here is a reference on comparative advantage. http://internationalecon.com/v1.0/ch40/40c000.html
Mandy Chang: Is it true that most of the jobs that we outsource have to do with cheaper labor? So if that is the case, and firms can lower their production costs, they can invest more into R&D domestically, incentives for innovation will be greater. However, I've recently read an article in reader's digest that suggests that the competitive level of American human capital is declining because of education standards. There are these situations where high school students' parents will file complaints against school districts to change lower their standards so that their kids will be on the school's honor rolls. This defies the central key of American capitalism and free competition. And because of this, some of the more technical jobs are being outsourced as well. Overall though, if the research and development projects are still being done within the country, outsourcing (referring mostly to production jobs) can only increase the ability for innovation.. right?
Mandy Chang, UCB
Diwaker: I'm also interested in varios aspects of outsourcing (I was the one who added the project topic ;)!) In particular, I would like to investigate (along the lines suggested by Mandy above) what kind of an impact outsourcing is having on the American IT industry. James blurb indicates that outsourcing has a negative connotation. Do we have empirical data to suggest that this is indeed the case? What about the long term impact -- it might very well be that the Google, IBM, HP, GE research labs in India might contribute more as far as innovation is concerned in the long run.
James Welle: I agree that outsourcing could lead to more innovation. Any negative connotation that I implied above was related to how outsourcing may affect the US IT workforce. Even if outsourcing improves innovation worldwide, it could still negatively affect those working in IT in the US.
James Welle: I see the main issues as the following. What situations in history are similar to the outsourcing situation today and how were those handled? Can we look at any current trends in outsourcing and predict or model how it will affect the US IT workforce. What about looking at it from the perspective of another country such as India or China. How would unionizing affect the US IT workforce and does that have any relation to outsourcing? Can we predict whether or not outsourcing will affect the level of innovation in the world-wide IT industry. What else are you guys interested in researching about outsourcing?
David Dorwin: Regarding "outsourcing... can only increase the ability for innovation.. right?", I don't think this is necessarily the case. On a worker to worker basis, companies will theoretically save money, but how they spend (or save) that money is completely up to them. They aren't necessarily going to hire more (R&D) workers to do innovation. Some companies will hire more workers overseas than they had in the US so that they can expand their projects/products. Others may just pocket the difference and increase their stock price.
As the overseas operations mature, more R&D is likely to follow. I agree with James in that while worldwide innovation may increase but it's not clear that innovation in the US will. This could be another angle for the project. Is outsourcing high tech putting our future economy (and perhaps even our national security) at risk? If innovation moves overseas, it may follow that innovation may eventually move to non-US companies. The logic here is that workers with experience at and trained by US companies may go to work for or start foreign companies. The US companies then face competition from these companies, and the US government has no influence on them to assist in national defense.
Reasons and impacts of outsourcing
Seems to me a good topic to begin with is understanding the various reasons that a company might outsource/offshore. Also, the various ways in which outsourcing/offshoring might feed back. It's not nearly as simple as "it's either a job here or a job there."
A few examples: By locating in a foreign country, you might gain access to markets. Or you might gain access to government officials who could change the way that intellectual property is viewed.
I don't want to be blind to the downsides -- only to suggest that it's a nicely complex issue, and recently there has been far more heat than light, so there's an opportunity to shed some light.
James Welle: Does anybody know of any good information from either George Bush or John Kerry on what if anything they plan to do on this issue? I haven't been able to find anything substantial on either of their campaign sites.
Avichal Could not find a definitive site, but a google revealed some links which may be of interest
- ABCNEWS.com : Where They Stand: Jobs
- Election 2004: Where Kerry & Bush Stand On IT
- The presidential candidates' stand on outsourcing
- Where Bush, Kerry stand on outsourcing
Hmm..these are the opinions I have formed from what I have heard in debates/news sorces etc.
Kerry - states he'll give tax breaks to those who create US jobs, and eliminate tax breaks under Bush's government which assist companies moving jobs offshore
Bush - I believe their team came out with a study stating that outsourcing would help the US economy in the long run. And Bush mentioned in debates that he would counter this trend by focussing on education.
Walker For those doing projects on outsourcing, this may not be relevent a week from now, but John Kerry just released his plan -- [1]
IT Worker Demand and Outsourcing
I moved this discussion from the main discussion page so that we can concentrate the discussion on outsourcing in one place.
Damon This topic has come up in the last two lectures, hence the main page post.
A couple times so far in class, we've seen some very optimistic projections of IT job growth, particularly for "Software Analysts", over the next 10-20 years. There are a number of inferences that can be made from the projection; it would be easy, for instance, to come away with a warm and fuzzy feeling that we're all in a field that will be booming for quite some time.
However, as we discussed in last night's (10/14) class, an increasing trend is to fill this talent vacuum with overseas resources. I myself manage a team with one developer in the US and three in India. This situation presents communication and other issues, but there's no denying the fact that companies are turning to outsourcing in great numbers. In the last three years, my department (6,500 people) has gone from roughly 5% of new development performed overseas to roughly 30%.
Along these lines, USA Today has an interesting article. It's a rather alarmist piece, describing US IT workers as an endangered species (here's the slashdot reference that led me there).
There are a number of policy issues related to outsourcing. As was discussed in last night's class, the US has a high standard of living and high wages relative to India, China, and other traditional outsourcing societies. What can the US do to make its workers productive enough to justify keeping the jobs here?
In a more protectionist vein, the article above mentions the idea of tightening the caps on H-1B visas or imposing additional restrictions on them.
How big a threat do people see to the US IT industry (and the larger US economy) from outsourcing? How much does it counterbalance the projected growth in IT jobs? Left unchecked, will the trend continue, stabilize, or reverse itself? What can government or industry do, economically and ethically, to slow or reverse the trend?
I think this might make an interesting project idea.
[Andrew Pardoe] That's a very alarmist article. Note that the only quotes were from the "Programmer's Guild" and the "National Hire American Citizens Society". It's pretty well accepted that the dot-com boom was wildly overstaffed--after all, money was free. 25% unemployment sounds low: a lot of the people who never should have been hired must have learned something while on the job.
There's a lot of paranoia about outsourcing which I haven't seen supported with relevant fact. Do you remember when Japan was going to take over the world? In 1983 a song called "Mr Roboto" was all over the disco floors. It was about a robot (Japanese made, of course) who was going to replace the American worker. Detroit was shaken by Datsun/Nissan, Honda, Toyota and Suzuki. Americans had invented TVs and VCRs but you couldn't even buy an American-made model. Even the Empire State Building was sold to a Japanese businessman in 1991. There weren't going to be any jobs left and in a decade or so all Americans were going to be doing low-paying service jobs (probably rolling sushi for export!) Worse yet, we weren't going to own any of our own nation. We'd beaten the Japanese is a bitter world war and they'd come back to beat us by buying us out with our money that we paid them for stuff we had invented!
What happened? Why is Ford still in business? (Why is Chrysler a German company?) Why are they building Hondas in Marietta, Ohio? And who put all the Hummers in the supermall parking lots? It looks like the Japanese didn't take over the America after all.
I believe that the national fear of Japanese competition was very racially driven. We were afraid of computers and afraid of people with different-colored skin. At the time when the Empire State Building was sold to Hideki Yokoi the British owned 5% of American business (I don't have a reference and my memory of this fact is fading...) Why weren't we afraid of the British? In 1987 they bought out Standard Oil of Ohio (Rockefeller's company) and started sticking their foreign-owned petrol stations all over our American soil.
I'll grant that the per-capita GDP of America is 13 times higher than that of India. But it's only 36% higher than the UK's and 37% higher than France's [ http://www.cia.gov/cia/publications/factbook/rankorder/2004rank.html]. But we aren't discussing European worker efficiency. In France they're working a 35-hour week. And yet they manage to sell (roughly) as many airplanes as Boeing.
It takes money a long time to make it from one place to another. The Rockefellers are still pretty rich, even without Standard Oil. The first world is wealthy and will stay that way for a long time. And when India becomes a rich nation we'll start selling more of our stuff to them.
"What happened? Why is Ford still in business?"
Note that Ford was recently overtaken by Toyota as the #2 auto producer in the world.
"Why are they building Hondas in Marietta, Ohio?"
For one there is a substantial duty placed on imported automobiles, especially trucks. Also, foreign car companies are typically given very generous tax breaks and subsidies to set up shop in the United States. This factory might be in Ohio, but foreign manufacturers are mostly clustered in the southern United States, where they can expect the most generous breaks from local governments, and very little union presence with the associated hassle and high wages. Much of the component parts and materials, which face smaller to non-existent duties, still come from Japan. Japanese car companies in general have been concentrating more on car parts and components, supplying many Korean and American auto manufacturers as well.
"It looks like the Japanese didn't take over the America after all."
There's still time :-) For one Japan is purchasing U.S. assets at a higher rate now than it ever was in the 80's -- mostly in the form of U.S. government bonds.
"I believe that the national fear of Japanese competition was very racially driven"
Of course there was some of that, but it is important to separate out legitimate causes for dispute from the racism. The British and Dutch were indeed more heavily invested in the U.S. than the Japanese at that time, but fueled by an asset bubble the Japanese were making up that gap quickly. Only when the Japanese real estate bubble finally collapsed did the torrid pace of the purchases subside a bit. The other thing to remember is that the Netherlands and Britain were open to U.S. investment and the U.S. had substantial assets in both countries; in contrast, Japan was (and is) more closed to foreign investment.
Interestingly, the term "Japan-Bashing" was coined by Robert Angel, a prominent scholar formerly under the employ of Japan's Ministry of Foreign Affairs. According to this article http://archives.cjr.org/year/92/6/trade.asp he was inspired by the PR effectiveness of the term "anti- Semitism" and had first tried out "anti-Japanism" but that term did not stick.
David Dorwin: One interesting thing about outsouricing programmers and other "tech jobs" is the question of what industry these people are supposed to move to. In the 80s and 90s, all the people that were losing their auto industry, manufacturing, and timber jobs were told to "re-train" for "high-tech" jobs. (If "The Graduate" had been made in the 1990s, it would have said "just one word - software".) Now that they've been retrained, those jobs may no longer be the answer. And for those currently in the software or high-tech industry, what industry will they be retrained for when they get down-sized in favor of foreign labor? The answer might be bio-tech since it's the "next great thing", but it's not easy to retrain someone for bio-tech, and as far as I know, there aren't that many jobs available. The only true constant is the service industry, but those are often lower paying. (We could start an entirely different thread on the pressures on service industry wages.)
Sure Ford is still in business, but as stated above, they're losing ground. The Big 3 automakers appear to continually struggle to make a profit.
The reason for Honda plants in the US is the same reason that US companies put factories in other countries. It's marketing and money. (Ask yourself, "Why does Intel have a fab in Ireland?" Hint: European Union) It sounds good to the US public if they can say they "build cars in the US" even if most of the cost (parts, etc.) comes from Japan or elsewhere in Asia. And as already mentioned, they get tax breaks and avoid tarriffs. Even BMW has a plant in the US. From their webiste: "BMW Manufacturing Corp. in South Carolina ... is the exclusive manufacturing plant for all Z4 roadster and X5 Sports Activity Vehicles."
France is apparently reconsidering its 35-hour work week because it is hurting their economy (here and more background here). If we were all willing to lower our standard of living, we could keep jobs in the US or have 6-8 weeks of vacation like much of Europe. (Although one might consider more vacation as a higher standard of living.) As we've heard over the last 2 weeks, productivity is key to the economy. So if Americans start working less, our productivity may suffer. Here's an article on vacations in Europe. According to this article Europeans are even being forced to give up these "perks" in order to avoid losing their jobs to other countries. Also check out the nice chart of work hours and vacation/holidays. This page has also has some tables with minimum vacation days around the world and vacation time for US companies. The DoD looks like a nice place to be; your tax dollars at work.
Hmm, it looks like you might be able to work this Europe/work hours/vacation/unemployment/productivity topic into a term paper topic, though it's not specific to IT.
P.S.
If you think you work to much and want a longer vacation, go to the Take Back Your Time website.
Mandy Chang: This is definitely worth reading. It narrows the scope of the effects of outsourcing to the silicon valley. http://www.sfgate.com/cgi-bin/article.cgi?file=/c/a/2004/03/07/MNGRT5G2C11.DTL
Brad Struss: There was a study just completed by Seattle University regarding the impact outsourcing has had on companies here in Washington State. The study of ten companies showed that only one company performed layoffs as a result of hiring outsourced workers. Here's an article in the Seattle Times with more details: http://archives.seattletimes.nwsource.com/cgi-bin/texis.cgi/web/vortex/display?slug=outsource21&date=20041021&query=outsourcing (requires users registration)
The complete report is here: http://www.rateconline.org/docs/RATEC%20-SEASIM%20Global%20IT%20Soucing%20Study%20FINAL%20DOC.pdf
US Government Policies
David Dorwin: How do the polices of the US government and the behavior of US politicians affect the US workforce, outsourcing, etc.?
Intel CEO Craig Barrett recently spoke about how the presidential nominees are ignoring the tech industry.
