Globalization and Offshore Sourcing of Knowledge Work: Economic, Relational and ICT Dynamics

Jason Dedrick and Ken Kraemer have begun a new project supported by the National Science Foundation to study the globalization and offshore sourcing of knowledge work. The movement offshore of activities such as software development, R&D, new product development and various business processes has captured the attention of the media, business leaders and policy makers and raised fears about the loss of high quality jobs, and about U.S. technology leadership. To researchers, it is a new stage of globalization, and one that raises new issues and challenges existing assumptions.

Until recently, economic globalization has been concentrated mostly in manufacturing industries, as multinational corporations have created global production networks and trade flows have been dominated by manufactured goods. While this has caused concern about the loss of jobs and industrial capabilities in the U.S., it has been argued that a shift from blue collar production work to white collar knowledge work was a natural progression for an advanced economy in the information age. In their book, Asia’s Computer Challenge: Threat or Opportunity for the United States and the World? (Oxford, 1998), Dedrick and Kraemer concluded that U.S. computer makers used globalization to their advantage, partnering with Asia-Pacific suppliers to remain competitive. They also argued that the loss of hardware manufacturing jobs to Asia was more than offset by job creation in the U.S. in software and IT services.

Today, however, globalization is expanding into those high value knowledge activities, as knowledge work is outsourced to places such as China, Taiwan, Ireland, Israel, Russia, and especially to India. For instance, major PC makers such as Dell, HP, and Gateway have outsourced much of their product development to Taiwanese original design manufacturers. Outside the IT industry, General Electric has moved a wide range of knowledge work offshore and many other U.S. companies have outsourced knowledge work to Indian firms such as Wipro, Infosys, TCS and HCL.

While these trends may be driven mainly by economic factors, such as the desire to tap low-cost labor and enter local markets, relational factors associated with geographical proximity or social networks also come into play. For example, many offshore sourcing projects in U.S. firms are initiated by foreign nationals who have personal and business connections to their home countries. In addition, the spread of low cost information and communications technologies (ICTs) play an integral role. Software developers collaborate on projects from distant locations, using the Internet and collaboration tools to communicate and coordinate their efforts. Design engineers use CAD, 3-D modeling and other tools to exchange drawings and specifications with manufacturing engineers to speed products to market and ensure manufacturability.

The impact of ICTs is potentially greater for knowledge work than for manufacturing. In manufacturing, ICTs help firms manage their operations on a global scale, but manufacturers still must process, store and move materials, parts and finished products. This puts some limitations on the potential for globalization due to shipping and inventory costs and the need to move products to market quickly. Even the most sophisticated ICTs can only reduce, not eliminate, those costs. On the other hand, the products of knowledge workers are information goods and services, and these can be transmitted across or between continents almost as cheaply as across the street once an adequate Internet and telecommunications infrastructure is in place. Thus, the global distribution of knowledge work is not restrained by the same barriers faced in manufacturing.

Some in the U.S. fear that globalization of knowledge work will lead to the loss of well-paid professional jobs; for instance, a report by the Gartner Group projected that over 3 million IT jobs in the U.S. could be moved offshore by 2015. Others argue that the impact will be relatively small and that new jobs will be created through economic growth and entrepreneurial activity. A recent McKinsey Global Institute report argues that offshore sourcing is almost entirely a win-win situation, with benefits to U.S. firms and workers as well as to other countries involved. India’s National Association of Software and Service Companies estimates that U.S. companies saved as much as $11 billion in 2004 by offshoring to India.

With such a rapidly changing situation, and so many different views on the implications of these trends, there is a need for detailed empirical research and analysis based on solid theory to answer a number of questions. Some of the key questions to be addressed in the new study are:
1. What are the dynamics of economic and relational factors and ICTs in determining whether knowledge work is moved offshore?
2. How do these dynamics differ depending on the nature and maturity of a knowledge activity?
3. What are the impacts of sourcing decisions on firm performance, and the potential impacts on employment in the U.S.?

The researchers are currently conducting case studies on the electronics industry, studying global shifts in R&D and product development, while a colleague, Erran Carmel of American University studies shifts in software and IT services development. They also will collect employment data from government agencies and other sources. The findings from this work will be published and will be used in developing a survey of 800 firms to be administered in 2007. The results of the survey will be analyzed using econometric models to determine the factors that influence the location of knowledge work, and the impacts on firm performance and employment. Other researchers involved in the project are UCI professors David Brownstone of the Department of Economics and Gloria Mark of the Donald Bren School of Information and Computer Sciences.