Monday, November 15, 2004

Offshoring, Impact on US Jobs & Economy - Part IV

posted by ShyK at 15:13

This entry is part 4 of my rants on this subject. The previous rants can be found last week.

Offshoring hurts – but is not offshoring an option?

There have been talks about laws that would make it difficult (if not completely stop) companies from global sourcing jobs. But then who was it who said – every action has an equal and opposite reaction (albeit in a different context)?

Two potential outcomes of preventing relocation –

  • Prices in the USA go up as the cost of production goes up.
  • Other Countries Stop Importing Goods/Services from the USA as a measure of retaliation.

For instance the state of Indiana recently cancelled a contract awarded to an Indian company. The Indian company bid for $15.2 million and the next bid was $8 million higher. Though retaining the contract in the USA will no doubt increase the jobs in USA – but it will also mean that (at least) $8 million of tax payers money that could have been used from some other development will now be used up in this venture. This was a government initiative. A similar increase in the cost of initiative by a private concern would mean that the concern would either can the project or pass on the costs to the customer thus increasing the cost of goods. Depending upon circumstances this might eventually wipe out the company. For instance US car manufacturers did have trouble facing the onslaught of cheap Asian cars until they started manufacturing across the world.

Now consider a couple of other scenarios –

The USA imports 61% of its oil requirements. If the oil selling countries stop dealing with the USA (no doubt at a peril to themselves) – the prices of oil would quickly go up impacting the USA economy.

IBM was not allowed to sell directly or employ directly in India till early 90s but Indian has been a big growth area for IBM since it reopened shop here. For instance for the fiscal year ending Mar 2003 revenues from India, though a meagre 0.5% of IBM's global revenues, grew at approx 16%over previous fiscal as compared to the CAGR of barely 2.5% that IBM has had in its global revenues between 1989-2003. If India closed its economy again – this opportunity will suddenly vanish.

All in all, to paraphrase John Donne – No country is an island, entire of itself every country is a piece of the global economy.

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