Outsourcing from the Perspectives of International Protocols, Law, Intellectual Property, and Taxation Amar Gupta Thomas B
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Outsourcing from the Perspectives of International Protocols, Law, Intellectual Property, and Taxation Amar Gupta Thomas B. Brown Professor of Management & Technology, University of Arizona Gio Wiederhold Professor Emeritus, Stanford University David Branson Smith University of Arizona Devin Sreecharana University of Arizona Comments and suggestions should be addressed to the first author at: [email protected] Electronic copy available at: http://ssrn.com/abstract=1324242 1. Introduction “I am a programmer with a Masters degree from a prominent college in the United States. I work 10 hour days and come in on weekends on a regular basis for my company. I pay my taxes and still manage to give back to my community. So why is my country doing nothing when my job is being threatened by international competition?” “I am president of a company that took a hard look at cost numbers before embarking on outsourcing. Apart from the cost of labor, equipment, and incidentals, are there other aspects that we should have looked at? This paper attempts to delineate the relevant pieces of information needed to address the above types of questions, as well as other outsourcing1 related questions, such as: What is the United States doing to encourage/discourage outsourcing? Are these actions legal under current international trading rules? Is the United States a net beneficiary or net loser when outsourcing occurs? How will the continued outsourcing of professional service activities impact different industries? How can intellectual property be equitably protected in an economy that involves growing levels of outsourcing? How can intellectual property be equitably valued and shared amongst concerned constituencies in an environment characterized by significant outsourcing? What is the ‘ultimate scenario’ for outsourcing, and how will this impact the jobs of those in the U.S. and abroad? 1.1 Historical Perspective Outsourcing involves contracting work that can be performed in-house: this is a practice that has been occurring for several thousands of years. Before man could create ‘goods’ as we know them, the production of foodstuffs was outsourced via specialization among members of a tribe or a family. In the United States, the textiles and apparel industries have witnessed significant shifts of operations from factories located in New England to lower-wage, non-unionized labor areas in the Southeast; apart from the ‘lower cost labor’ incentive to outsource, there were two 1 In this paper, the term ‘outsourcing’ refers to outsourced offshoring (except briefly in Section 1.1). The term ‘offshoring’ by itself can mean either outsourced offshoring or in-house offshoring. A good model that describes the different varieties of outsourcing is found in [Cronin, 2004]. Electronic copy available at: http://ssrn.com/abstract=1324242 other factors: cheaper electric power on the Southeast and a non-unionized labor force. As transportation technology continued to evolve, it became more cost-effective to acquire textile and apparel from foreign countries. While products, agricultural or otherwise, have been imported from abroad, the outsourcing of services is a recent phenomenon and has been made possible mainly by the proliferation of very low-priced telephone and Internet communications technology around the world. In the late nineties, the demand for computer programmers needed to fix the ‘Y2K problem’ far exceeded the supply of programmers in developed nations. Because of the inflexibility in the time available to complete the conversion process, many companies in the US and other developed countries contracted with foreign companies. This led to a surge in outsourcing, and greater awareness of the availability of low-cost skilled workers abroad. In recent years, outsourcing has become a subject of concern, both economically and politically. During the economic contraction experienced by the U.S. from 2002-2004, some observers attributed the domestic layoffs to outsourcing, when in fact many companies were scaling down their workforces on a global basis. As the 2004 election drew near, contentions were made that offshoring was to blame for the woes of the workforce. Apart from financial and legal issues that relate to outsourcing, one sees that the ongoing outsourcing debate is characterized by many other facets, including political tensions, accounting conventions, health concerns, and sociological effects. 1.2 Multi-Layer Framework for Analysis This paper attempts to analyze the myriad of overlapping facets from the following vantage points: International Obligations: The United States is a member of the World Trade Organization (WTO), a consortium of nations whose common goal is to reduce tariff and non-tariff barriers and to promote free trade of both goods and services between nations. Membership in WTO and other international organizations implies inherent commitment to certain principles of these organizations. The first part of this paper examines in detail the ramifications on the outsourcing arena, along with the origins of these ramifications. Intellectual Property Issues: Marx focused on labor and financial capital as the primary drivers of economic activity; in today’s knowledge-economy, however, it is the intellectual capital that acts as labor’s counterpart. When work is outsourced, new issues of intellectual property arise. First, there is concern that the intellectual property may be compromised in a foreign country. Second is the issue of which governmental agency will protect the intellectual property in a foreign country and how relevant decisions will be enforced. Using examples from other arenas, a new model is proposed for handling intellectual property issues in a global economy. Governmental Issues: In the US, different state governments have adopted dissimilar policies on issues related to outsourcing. Using several examples, this paper attempts to show the impact of these policies. This paper also attempts to analyze how far these policies are consistent with international obligations of the US and the provisions of the US constitution. Taxation Issues: Governments around the world are taking closer look at taxation aspects of outsourcing. This paper looks at the US situation in detail, and highlights how the issue of outsourcing has sparked a renewed interest in the area of valuation of software. Statistical Data: Outsourcing across national boundaries usually leads to a two-way flow with some jobs coming into the country, and other jobs going out. Available data are analyzed to assess the relative magnitudes of the two flows in the case of the U.S. The advent of new information technologies has led to outsourcing of many types of tasks related to information technology. In addition, the availability of new information technologies is enabling outsourcing in other service-oriented industries. Examples of such ripple effects are also considered in this paper. A top-down approach is used in this paper. First, the issues are considered at an international level, then at governmental level, and next at corporate level. Subsequently, the intellectual property and taxation aspects are considered in detail. 2. International Obligations The international obligations are dictated by multilateral agreements and bilateral agreements. Multilateral agreements involve multiple countries, whereas bilateral agreements involve only two countries. In general, multilateral agreements involve more time and effort to evolve, based on the need for several countries to agree to the same terms and countries. In some cases, multilateral agreements may include special provisions, such as for developing countries or the waiver of certain provisions in emergency conditions. Multilateral international obligations related to offshoring are dictated primarily by the General Agreement on Trade and Tariffs (GATT) and currently coordinated under the aegis of the World Trade Organization (WTO). More than 100 countries, including the US and nearly all developed countries, are Contracting Parties of the GATT and Members of the WTO. 2. 1 Core GATT Principles The GATT can be viewed as a conduit for increasing market accessibility and reducing trade barriers. The GATT offers its member nations a means to enhance trade across national borders and to reduce, but not prevent, customs duties on imported goods. The current version of GATT reflects several core principles: unconditional “most-favored-nation” (MFN) treatment among members (Art. I); non-discrimination and national treatment (Art. III); and a prohibition against most quantitative restraints (Art. XI). Although there are many exceptions, the majority of trade restrictions, besides tariffs, especially quantitative restrictions and non-tariff barriers are fundamentally prohibited. Nondiscrimination serves as the most vital principle within the GATT/WTO system— including all interaction between Member Nations and between foreign and domestic goods producers and service providers. The process surrounding the proper use of the above principles, as well as the exception scenarios, has itself become intricate and contentious among WTO Members. The WTO’s Dispute Settlement Body (DSB) is a unique aspect of the GATT/WTO system and provides compulsory third-party resolution of trade disputes; member nations face sanctions if they fail to abide by the rulings of the DSB. In approximately the first thirteen years of WTO’s existence, the DSB has had over 365 disputes referred to it. MFN Treatment: Essentially,