The-offshoring-of-America

9-708-030REV:APRIL22,2008RICHARDH.K.VIETORJANW.RIVKINJULIANASEMINERIOTheOffshoringofAmericaWhenagoodorserviceisproducedatlowercostinanothercountry,itmakessensetoimportitratherthantoproduceitdomestically.ThisallowstheUnitedStatestodevoteitsresourcestomoreproductivepurposes.—TheCouncilofEconomicAdvisors1PresidentBushisonaneight-daytourofAsia.He’svisitingAmericanjobs.—DavidLetterman,late-nightcomedianAsthe2008U.S.presidentialcampaignheatedup,candidatesscrambledforpolicypositionsonatrickytopic:themovementofjobsfromtheUnitedStatesoffshore,oftentodevelopingcountriesandwithinAmericancompanieswhohadsetupsubsidiariesinforeigncountries.InJune2007,amemofromBarackObama’sstaffhitanerve.ThememoreferredtoHillaryClintonasasenatorfromtheIndianstateofPunjabandsuggestedthatClintonwastooclosetoexecutivesandcompaniesthatweremovingjobstoIndia.Thememobackfired,forcingObamatoapologizetoIndian-Americansandtoreassurehisbusinessbackersthathedidnotopposealloffshoringefforts.2Presidentialcandidateshavestruggledtoexplainwhatsteps,ifany,theywouldtaketolimitoffshoring.Atthesametime,seniormanagersstruggledtodecidewhichactivities,ifany,tomoveoffshoreandwheretomovethem.Manycompanies,suchasIBM,hadtakendramaticsteps.IBMhadmoveditsglobalprocurementchieffromNewYorktoShenzhen,Chinain2006;performeditsback-officefinancialworkinRiodeJaneiro,Brazil;providedglobalsupportforitsWebsitesoutofIrelandandBrazil;andmovedresearcheffortsintoChina,India,andIsrael.3IBM’sworkforceinIndiagrewfrom3,000in2002to53,000in2007.Duringthesameperiod,itsheadcountfellslightlyintheUnitedStates,wherecomputerprogrammers’salariesweretwototentimeshigherthaninIndia.4Theshiftinemploymentwascontroversialinsideandoutsidethecompany:unionorganizershadinterruptedarecentIBMshareholders’meetingwithchantsof“OffshoretheCEO.”5Policymakersindevelopingcountriesalsofacedchoicesaboutoffshoring—butasanopportunityratherthanachallenge.Forinstance,Mexico’smaquiladoras,China’sSpecialEconomicZones(SEZs),andIndia’ssoftwareoutsourcershadattractedbillionsofdollarsinforeigndirectinvestment.TheMexicanmaquiladorashadexistedsincethe1960s,buttheyhadbecomeespeciallypopularafterthepassageoftheNorthAmericanFreeTradeAgreement(NAFTA)in1993.TheChineseSEZswereformedinconjunctionwithreformsofthepost-MaoisteratousheringradualeconomicopennessProfessorsRichardH.K.VietorandJanW.RivkinandResearchAssociateJulianaSemineriopreparedthiscasewiththeassistanceofResearchAssociateTroySmith.Thiscasewasdevelopedfrompublishedsources.HBScasesaredevelopedsolelyasthebasisforclassdiscussion.Casesarenotintendedtoserveasendorsements,sourcesofprimarydata,orillustrationsofeffectiveorineffectivemanagement.Copyright©2008PresidentandFellowsofHarvardCollege.Toordercopiesorrequestpermissiontoreproducematerials,call1-800-545-7685,writeHarvardBusinessSchoolPublishing,Boston,MA02163,orgoto—electronic,mechanical,photocopying,recording,orotherwise—withoutthepermissionofHarvardBusinessSchool.708-30TheOffshoringofAmericaandtradewiththeWest.India’sintellectualcapitalcreatedapotentialforinexpensivewhite-collarlaborafter1991afterthecountry’sbrushwithbankruptcyforcedaliberalizationprogramthatcontinuedin2008.Thegovernmentsinallthreecountriescreatedfavorablebusinessenvironmentsthatenabledforeigncompaniestoseizeopportunitiesforsalesgrowthorcostreductionnotavailableintheirhomecountries.Inturn,Mexico,China,andIndiasoughttoincreaseinflowsofforeigndirectinvestmenttofundthisgrowth,employment,andtheacquisitionofmanagementskillsandtechnology.TheNatureofOffshoringDebatesaboutoffshoringweremuddiedinpartbythelackofanagreed-upondefinitionfortheterm.6Initsbroadestsense,offshoringinvolvedthetransferofjobactivitiesabroad,oftentoattainlowerlaborcostsandcenteredmainlyaroundmanufacturingoperations(e.g.,aPCmakershutsdownassemblyoperationsinTexasandopenssimilaroperationsinChina)andservicedelivery(e.g.,aPCmakershutsdownitstechnicalsupporthotlineinColoradoandopensasimilarhotlineinBangalore,India).Theterm“offshoring”alsodescribedboththeshiftofactivitiesfromtheU.S.facilitiestowholly-ownedsubsidiaries(e.g.,acompanysetsupanIndiansubsidiarytorunitsdatacenters)andtheoutsourcingofactivitiestoothercompaniesabroad(e.g.,acompanysignsacontractwithWiprotorunitsdatacentersinIndia).Furthervariationsofoffshoringarosewhen,forinstance,aU.S.companyexpandeditsoperationsoverseasbutmaintainedexistingoperationsintheU.S.,orwhenitopenedanoffshorefacilitybutsoldthenewoutputexclusivelyoverseas.Exhibits1and2showtwoeffortsbytheU.S.GovernmentAccountabilityOfficetodistinguishoffshoringfromotherpractices.Thecharacterofoffshoreactivityshiftedovertimeasconditionsinhostcountrieschanged,ascompaniesgrewskilledandcomfortableinmanagingdistantoperations,ascompetitioninvariousindustriesintensified,andascommunicationandcomputingtechnologyevolved.Amongtheearliestjobstomoveabroadenmassewerelow-skillassemblyoperationsthatmigratedtoMexicoandAsiainthe1980s.Thegradualeconomicopeningof