How Information Technology Outsourcing Impacts the Economy

Why the Best IT Jobs Don't Go to Americans

Indian businessman working at desk in office
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Information technology outsourcing is when jobs that used to go to American workers are sent to IT workers in other countries. It also occurs when foreign-born tech workers are given H-1B visas to work for companies in the United States. 

What Causes IT Outsourcing?

India and China provide a large pool of expert, proficient IT workers at a low cost. A company that has moved its factory overseas to take advantage of low labor costs will want its technology workers near its manufacturing plant.

Often a company must locate manufacturing and technology jobs overseas if it wants access to the domestic market. The governments of China and India often require this type of technology outsourcing for a company to get an inside track to selling its products to that country's market. Another advantage for India's IT workers is that they already speak English.

U.S. technology workers just can't compete price-wise. An entry-level IT worker earns $7,000 a year in China and $8,400 in India. IT managers in China only make $22,600 while those in India make $30,800 a year. That's because the cost of living is cheaper in these countries. A U.S. technology company must keep its costs low to compete in the global marketplace. If it can get trained workers at a lower price, it makes good business sense to do so.

Three Ways to Reduce IT Outsourcing

The U.S. should reduce IT outsourcing to regain its competitiveness, make sure high-paying jobs go to U.S. citizens and even support the democratic process.

 The advanced education and exposure to innovative thinking will encourage informed decision-making. These skills are needed to keep a democracy running, as often mentioned by Thomas Jefferson.

First, federal funds should be used to address the supply side of the problem. Grants, loans, and subsidies will more U.S. college students graduating in the STEM (Science, Technology, Engineering & Math) areas.

Educating the American workforce will help to decrease reliance on importing new workers. But, this will only go so far, as U.S. workers still need higher wages than Indian or Chinese workers.

Second, reduce the number of H-1 visas. Again, this is just a temporary solution. U.S. companies can save as much as 10 percent by technology outsourcing, whether the worker is in the United States or overseas. Reducing technology outsourcing through reducing the visa, or even enacting laws prohibiting outsourcing, will only raise costs, and reduce competitiveness, for U.S. based companies. (Source: CIO, IT Outsourcing White Papers)

Third, do as the emerging market countries do -- require foreign companies to hire U.S. workers before they sell to the U.S. market. The downside of that is higher prices for these imported goods. That's exactly what's happened with Japanese cars that used to be much cheaper before they opened U.S. manufacturing plants.

Protectionism Won't Stop Tech Outsourcing

Suzanne Berger, of the M.I.T. Industrial Performance Center, argues that high-tech capabilities enable outsourcing. That's why protectionism won't stop it. Her book, How We Compete, explains how  globalization has affected companies' ability to remain competitive.

Based on thorough research, it debunks the myth that globalization has robbed Americans of jobs. The authors prove the point that technology has replaced most workers. As a result, that protectionism is not the answer. 

Technology is also what allows U.S. companies to more call centers to India. For this reason, laws to restrict immigration will also not protect any U.S. jobs/ Technology allows capital to go across borders. In fact, countries are even losing the ability to set their own interest rates and money supply, since capital is so fluid.

Without technology, jobs could not go to China and India just because they are low cost. Companies can no longer compete based on just low cost, they must add service and individualization as well. Target is a perfect example of a low-cost provider that added service, in terms of branded designer merchandise, and individualization, in terms of its Baby Shower and Wedding gift services.

Technology has also meant that companies who modularize will compete more effectively. Each portion of the supply chain can be outsourced to the company in the country which does it best. This increases quality and lowers costs.

Even though China and India are growing quickly, the authors find that the world is not flat yet. It will take a long time for them to "catch up" to the Western world, despite the growth in Bangalore and Shanghai.

The strength of U.S. companies are due to the open environment that allows innovators, technologies, and organizational forms to emerge and compete. This encourages productivity and reduces stagnation. This is a result of venture capital, connections between a product's research and its end users, and flexible labor markets. To remain competitive, the U.S. needs to foster this environment, and not focus on protectionism and tax penalties that inhibit it.

Tech Outsourcing Is Slowing Down

Between 2016 and 2021, tech outsourcing will grow 8 percent a year. That's about half its annual growth rate of 15 percent between 2010 and 2015, according to IDC

One reason is because U.S. wages are becoming more competitive. For example, an American software developer said domestic workers cost five to seven time as much as Indian workers 10 years ago. Today, that gap is only twice as much. That is close enough to allow the companies other advantages to be worthwhile. Since they are U.S.-based, they can deliver services more efficiently. They can also provide a more personal touch, flying in to see the client when necessary.