Obama ban Outsourcing / Offshoring
Obama’s ban on outsourcing and offshoring is in the news again. I shared my views on this topic one and half year back when Obama became the President . I wrote then
“If Obama discourages companies to outsource to countries like India, then companies will have a choice either do work in house in US or outsource the work to companies in US. Both the above solutions will not be economically attractive, so companies will have to reconsider Make Vs Buy option and increasingly rely on third party products rather than in-house customized IT solutions.”
I revisited my earlier analysis today and I believe that this analysis still holds true. The only major development in last couple of years is the rise of Cloud Computing. So in Make vs Buy Analysis, choice has become wider in Buy Option – apart from Third Party Products, Cloud Computing is also an available option now.
Obama’s ban will only accelerate the trend towards Cloud Computing
Will this create new jobs?
The problem of Job creation needs to be analyzed from the global perspective. Global Solution may be creation of additional new jobs for all abilities in all countries.
Every country produces its own mix of "creative or knowledge minds", “process oriented minds” and “ physical labour”. So each country needs to create jobs for all three above categories.
Earlier in general logic of offshoring was that if US is able to offshore its physical labour and process oriented jobs then majority of workforce will move upwards in creative or knowledge jobs. Hence US will be better off. This logic however proved to be flawed. Process oriented minds and physical labour cannot find employment in creative or knowledge professions thus leading to unemployment in US.
Similarly current logic of banning offshoring and leting the process oriented and physical jobs remain in US is also flawed.
You cant eat your cake and have it too. One one hand US wants to have dominant share of worlds knowledge and creative jobs on the other hand US doesn’t wants to let go physical and process jobs. This wont be sustainable.
US has disproportionate large share of Worlds capital and number of MNC's, If other countries stop importing and encouraging local production and services then how will US companies survive? Profit that MNC's create worldwide supports corporate functions and investors income in US.
Only sustainable solution for job creation is to work towards increasing global jobs pie and attain global optimum.
However Governments are always tempted to achieve country level optimum by giving incentives for creating the jobs in their country at the expense of the jobs in other countries ( offshoring, reverse onshoring, local production, tariff barriers, tax incentives etc)
If all countries follow local optimum, this will self stabilize at new inefficient solution where majority is worse-off.
Solution is to increase the Global job pie, rather than fight for additional share of existing job pie by creating artificial incentives.
I believe, the long term solution is to create large R&D in further new areas and increase share of R&D employment in total global employment. Once new technologies become viable, market will take care of creating additional jobs in downstream- manufacturing, agriculture, infrastructure and services.