2 1 of goods and/or services was becoming irresistible for any irresistible environment. firminacompetitive wasbecoming services and/or of goods theattr services), particular (in information inallsectors of digitization andtheincreased However,lower cost. atlowcosts lines of bandwidth thearrival broad with aspayroll, (such invoicing supplyjobs andaccounting)office to at countries provided theycould where be the1990s, of number alarge In multinational firmsha employment in the EU, 18.6 per cent in Canada and 18.1 19.2 represented by offshoring that in2003, cent per theoccupations of potentially total affected reported per cent in the United States (2002). Van (2005) Welsum cent andVickery per of total in2002 USemployment according to Kirkegaard (2004a). to potential occupation subject categories combined which offshoring, nine represent services describes 44 (2002) Research Forrester developers. centers, such to incall assoftware jobs, highskilled phone operators and typists entry such asdata jobs, from ranged low-skilled opportunities in highincome countries. These countries to from firmsandconsumers low-income atfar could provided jobs from lowercosts nowonbe IT of bandwi broad information availability andincreased argued that to thanks digitization theincreased of ofreports these authors The of services. the offshoring indu and firms consulting business by mainly released reports, These locations. –from low-cost services (IT) information technology supplies –inparticular house highlighting thepotential cost emerged for substantial rather fragile, wasstill in2002 2003, bleaktimes andearly anumber therecovery those of reports In when inOECD countries. decreased software orhad to down companies do andtelecom firmsclosed Many dot.com crash in2000-01. theICT inthepayroll after adecline experienced butactually growth, job sources of interms dynamic newemployment inthe1990s of– oneof down themost –not slowed only sector continued information (ICT) to The generate communications sector technology newjobs. services downturns, previous to In anewdevelopment. the be employment seemed sector inservices sluggishness a “jobless recovery”. to about employment levelsrecoveredthe United Kingdom, moderately, wonder only leadingmany observers countries.industrial recovery, astrong Even countries in such those astheUnited reported which States Although and ANDHOPES MORE OFFSHORING: FEARS THANFACTS? employment intheworldeconomy in2003 therecovery Despite growth typically1. lags behind in eachC cyclical output recovery, telecoms infrastructure and a large pool of IT professionals, such as India and the Philippines, are expected professionals, are expected andthePhilippines, such of asIndia IT pool andalarge infrastructure telecoms particular, In economic growth. developing countrie developingFor countries, to seems be offshoring orten years. five overthenext locations (cumulative) number of jobs that would be lost in the United of the of theirprojections because caught attention media States of thereports Most months five of 2004. the first due to the relocation of jobs to low cost in activities outsourcing onservices inUSnewspapers were 2,634 There reports of 2004. quarter the first for the1991-2004 occurred in rise Aspectacular period. andWei by welldocumented Amiti (2004) has been services) offshoring (on reports number of newspaper andChina to inthe of likened jobs Mexico rise manufacturing often to The intherecent theoffshoring past. States and the in onjobs theUnited focused United European to jobs andEast developing of countries. the reports Most services Kingdom anewthreatcountries through to of employment therelocation indeveloped reported stations thatand TV were threatened from management consulting time, firms were reports picked short upby avery themedia.Within Newspapers with relocation to India. This new development was on intimate knowledge of the rel services information digitized using provider activities services and Some abroad. moved need be can face-to-face services digitizable all that imply not does This contact. Table 1). Appendix (see 2003 and in2002 Japan and ofEurope those and 2002 in2001 and US decreased inthe in2001-2003. markets sharply IT slowed software) and hardware (including markets ICT global that reports (2004) EITO OFFSHORING SERVICES: RECENT DEVELOPMENTS ANDPROSPECTS 1 unequivocally beneficial for employment, exports and for exports employment, beneficial unequivocally stry associations, had discovered anew“mega-trend”: associations, stry s with a large English speaking population, a good English alarge population, a good s with speaking dth communication at low prices, a large spectrum of spectrum atlowprices,alarge dth communication action of a significant cost reduction in the production in theproduction of asignificant reduction cost action and 2004, unemployment remained highinmany remained unemployment and2004, savings to of could theirin- firmswhich sourcesavings some such reports during the course of 2003 andthrough duringthecourse such reports d already partially shifted the work of certain back theworkof certain shifted partially d already 265 wnsize as investment outlays in IT hardware and hardware inIT outlays asinvestment wnsize 2

y

III THEMATIC ESSAYS C OFFSHORING SERVICES: RECENT DEVELOPMENTS AND PROSPECTS WORLD TRADE REPORT 2005 III THEMATIC ESSAYS WORLD TRADE REPORT 2005 C OFFSHORING SERVICES: RECENT DEVELOPMENTS AND PROSPECTS 7 6 5 4 3 in the plant/firm which is doing the“outsourcing” isdoing which and in theplant/firm from private sources private from backlash against itinthehighincomebacklash countries against are The most curious aspect of this heated debate is that to be performed overseas or by individuals not authorised billsintend contracts to prohibit theproposed workonstate cases most In andSykes, Klinger to2004). 2004b; work in the United States. allintended states, in34 legislation of proposed a flurry theUnited concerns States, In these have jobs. provoked domestic asked to are legislators being protect to act to and governments foreign inthepast, competition exposed were moderately which only industries services concer widespread public.unions Given andthebroader alarms thetrade both sector international andincreased of losses intheservices competition job prospects flexible. thepotential While reduct for cost substantial inthe higherwages employment andperhaps increased to rise, andthe“loss” by compensated are expected shouldbe andprofits jobs of offshored Productivity inhighincome overall. countries are butpositive mixed, offshoring thatconclude of therepercussions service countries? thedeveloped Notwithstanding about What to 40 per cent in “the next few years.” of 30 services IT inoffshored growth anticipated annual study export (2004) NASSCOM-KPMG The in 2008. the FY 2001-02 level. Employment in from increase the asixfold to reach $57 billionin2008, services processing Indian center call andtransaction of software, IT indu set a software export target of $50 billionby 2008. of $50 target export asoftware set 1999, In Task growth. National IT theIndian thepotential indicated for which export significant Force abound Projections etal., Mattoo 2004). (see sector of theservices expansion onthedynamic dependent to largely be observers by some for economy portrayed theIndian andtrade have been environmentally friendly. Prospects onnatural considered are which not be dependent well paid, andtheycan theyare resources inindustries are relatively newjobs countries. to These these attractive are which of particularly jobs thequality but also isnot thenumber of only jobs It to reap employment large andincome newpossibilities. gains from these been defined as “the act of transferring some of a company’s recurring interval activities and decision rights to to rights decision and activities interval recurring inacontract”. asset company’s providers, a outside of some transferring of act “the as defined been However, the THE DEFINITION OFOFFSHORING term AND OUTSOURCING “offshoring” isThere nocommonly accepted definition of “offshoring” in thepublic debate norin theeconomic literature. is widely used as a particular2. subcategory of “outsourcing”. The latter has related to this activity. this to related meant by “offshoring” and“outsourcing.” onto thengo will consider measurement problems Section The th to ismade clarify anattempt thefollowing Section In are impressive. far less trade, thenumbers of markets, intherelative orasapercentage total labour services andoutflows inflows rates of annual impressive, alonemight cited butasapercentage total look The growth economic perspective. information Recently, oremployment records. balance data ofofficial payments andnewstatistical anumber of studies have pointed to the “modest” size of the services offshoring trend if viewed from a macro- Greaver II (1999). (2003). Morgan see inIndia, activities services ofoffshoring evidence ofanecdotal asummary For ofInd Bank Reserve ofthe behalf on association, industry aprivate byNASSCOM, collected are exports India’s software on Data Sykes (2004). and toKlinger according clause, commerce foreign USConstitution’s the and power affairs foreign federal with inconsistent measures such tofind likely are courts and suspect legally are bans contract state proposed ofthe Most 1999. Services”, December Trade on inSoftware “Report (ICRIER), Relations Economic Council International on Indian See 5 or anecdotal evidence. oranecdotal 7 The typical consequence of such a decision is a decline of employment isadecline consequence of such adecision typical The 6 It has proved difficult upto nowto gleanhard from has evidence difficult proved It 266 3 The NASSCOM-McKinsey (2002) report expected exports exports expected (2002) report NASSCOM-McKinsey The ions attracts the attention of management boards, the the boards, ofmanagement attention the attracts ions all the expectations and fears of offshoring and the of andfears offshoring alltheexpectations to restrict offshoring services activities (see UNCTAD, (see activities services offshoring to restrict based on very partial, selective information, mostly selective partial, onvery based stry, direct and indirect, could reach 4 million people could reach 4millionpeople andindirect, direct stry, n in respect of wage and employment prospects in prospects andemployment ofwage n inrespect medium-term, provided labour markets are suitably aresuitably markets labour provided medium-term, a rise in employment in the plant/firm from which the public concern alluded to above, most studies the publicconcern to above,studies alluded most e discussion by first defining what in this essay is inthisessay what defining by first e discussion 4

ia. 8 flows recorded in balance of payments (BOP) statistics are not generally broken by andcountry, region down statistics (BOP) inbalance recorded of payments flows Moreover, product. incontrast trade to by merchandise animported trade, services produced in-house service to aproduct/ substitute andamanagement decision statistics import between not made allowalinktodo be andnational of “offshoring”, level. thecase atthesectoral In collected generally concepts current statistical atthemicro are made decisions Outsourcing data. economic A major thedefinitions with problem is above that theydonot concord collected officially easily with Types of outsourcing 1 Chart 3. non-af a benefits supplies of sourcing in shift the If 2. 1. criteria: asdistinguishing andcontrol/ownership usinglocation reported, used theterminology Chart helpfulinclarifying 1might be here. narrow discussed to of outsourcing capture thescope too to be replaced seems by definition outputbeing newgreenfield investment abroad. Butthislatter with onoutright debate plant to focus theoutsourcing closures, observers investment abroad, leadssome which new with hand-in-hand goes decision thesourcing cases, certain In or abroad (location). the homecountry same firm or from a non-affiliated firm (control-ownership), areplacement between to distinguish useful isalso It and whether the new sourcing is from result re inanabsolute not do necessarily the outside plants in environmentenvironment, clearinanexpanding additional inwhich supplies from butthemeaningisless term “recurring might agive include activities” interval clear if the change in sourcing of suppliesthe supplies refers are sourced thereafter. of thete vagueness The to the plant level, the firm level or to the national level. The offshoring, are of particular interest. particular of are offshoring, andnon-captive namely captive of outsourcing, categories two thelatter From aninternational perspective, Source: adapted from OECD (2005a). OECD from adapted Source: 4. The fourth variant of outsourcing may be labeled labeled may be variant of outsourcing fourth The 4. as “internal offshoring”. islabeled “captive and OECD offshoring” bythe supply” “internal to as domestic isreferred outsourcing” “Captive onshore of“outsourcing”. “offshoring” asubcategory as considers report This terminology. different asomewhat uses OECD (2005a) Captive offshoring or “domestic”. as economy. outsourcing onshore Captive the new supplier is a non-affiliated firm and located abroad. firmandlocated the newsupplier isanon-affiliated abroad. intra-firm inputs/supplies to inputs/supplies intra-firm non-captive onshore outsourcing onshore non-captive Shifting describes asituation future inwhich supp describes implies a shift in intra-firm supplies to an affiliated firm in the home Non-affiliated firm Non-affiliated Affiliated firm Affiliated . The term “onshore”. The by “local” replaced could be cases inboth of the supplies which takes place between plants of plants the of thesupplies takes which place between duction of employment but tend to limit its expansion. expansion. of employment buttend to limitits duction non-captive offshoring non-captive filiated firminthehomeeconomy, it describe onecan n level of in-house supplies in a stagnant business business inastagnant supplies n levelof in-house 267 later in this essay. Four types of “outsourcing” later are types inthisessay. Four rm is often related to the fact that it is not made level of plants or firms, while the official data are data theofficial or firms,while level of plants onshore outsourcing 8 Located in home home in Located captive onshore

local/domestic/ outsourcing economy lies are sourced from an affiliated firm firm anaffiliated from aresourced lies and refers to the case when outsourcing = captive =captive outsourcing offshore outsourcing Located abroad captive offshore offshore captive = offshoring offshoring offshoring

III THEMATIC ESSAYS C OFFSHORING SERVICES: RECENT DEVELOPMENTS AND PROSPECTS WORLD TRADE REPORT 2005 III THEMATIC ESSAYS WORLD TRADE REPORT 2005 C OFFSHORING SERVICES: RECENT DEVELOPMENTS AND PROSPECTS 10 10 9 Another obstacle arises if one attempts to look atthe to look ifoneattempts arises obstacle Another might reported. not be transactions internalthese across-border of multinational of thelargetransactions internal is dueto firms. theimportance Many services of statistics Obviously, services activities can also be offshored by non-services sectors. theestimate potential ontheoffshore of affect aneconomy. also activities of allocation offshored sectoral inthe difficulties These of (financial automobiles services). intheimports increase acorresponding without might fall asaconsequence of sector offshoring intheautomobile (banking) produced inthehomecountry Employment andthenetvalue-added services. IT its andabankmight offshore accountingits services automobile company An might offshore isoffshored. which of afirmmight orservice not match theproduct outsourcing. It took 700 parts to make 20 intheearly aT-Ford parts 700 took It outsourcing. offshoring. of services aspects of thegeographic analysis hampers which Developments in the car industry over the past centur overthepast industry inthecar Developments Outsourcing isnotanew phenomenon THE ECONOMICS OFOUTSOURCING (a) 3. the number of operations that could be efficiently and the number of that operations efficiently could be outgrew number onesingleplant. of tasks within The andspecialization to production combine mass possible andto of andemissions fuel efficiency, po reduce noise air-conditioning, radios andother entertainment, seats, comfortable with eachfitted were developed, of Amultitude models from designs theircars. andbetter speed more higher comfort, richeranddemanded time, andconsumers emerged, became Over to competitors Ford from raw materials. starting car one single task along an automated assembly line, whil assembly alonganautomated task one single performed Workers andtypically industry. by thecar specialized were highly technology perfected with scale as1736 asearly acknowledged inAdamSmith’s of thepinfactory, atalarge description anddemonstrated of a high degree of specializationnumber within a single of parts, plant. The it gains was from possible this kind of specialization to combine have been the benefits of large-scale mass production with the benefits of total purchases of intermediate inputs were on services. on were inputs intermediate of purchases total of cost of a car came for theUSeconomy tables in2002 showthat input-output 70 The contracts. fromshort-term per cent of the parts, components on components standard afieldandprovide further located may be suppliers plant. Other final assembly and services to the close located manufacturer andhave thecar with typically development jointentailing product purchased from may have suppliers of Some thecomponent entered contract inquestion. along-term importance external suppliers. onthestrategic manufacturer anda supplier acar depends contractual relationshipThe between A quarter inalarge number of countries of located of several time, layers has suppliers emerged. Over anetwork areconsidered andservices ofparts increasing number are considered orcore strategic has overtime. changed that activities ButthetrendWhich an has been suppliers. are andcompetencies purchased from outside tasks onthese. Non-core production in-house and attention andfocused andcompetencies tasks important have thestrategically identified manufacturers car central has of The theindustry. been continuous to themore Outsourcing orless restructuring effectiveness. cost maintaining while complexity increased toaccommodate inorder innovations organizational/managerial marketing design, andmany other fieldswere electronics, Furthermore, skills in mechanical engineering were no longer sufficient to produce and sell a car. Skills in htm. Accessed 25.11.2004. Accessed htm. http://www.bea.doc.gov/bea/dn2/i-o_annual. (2004), (BEA) Analysis ofCommerce, ofEconomic Bureau USDepartment Source: but on level. a rather aggregated product/services data ofpayments balance oftheir breakdown aregional/country USprovide the and EU, Japan the example for traders, Some 268 sectoral breakdown of offshori sectoral llutants. As cars became more complex, it was no longer itwasnolonger more complex, became cars As llutants. along with numerous toalong with improve devices safety, comfort, effectively organized andcoor effectively e the plant was vertically integrated andproduced the e theplant wasvertically y illustrate the processes and driving forces anddriving behind theprocesses y illustrate non-core and are produced by external suppliers. suppliers. external by produced are and non-core required. This multitude of tasks and skills required andskillsrequired of tasks multitude This required. 10 How much of this is imported cannot be be cannot isimported muchofthis How th century. this relatively With limited 9 A further difficulty in services trade in services difficulty Afurther ng. The sectoral affiliation affiliation sectoral ng. The dinated oneplant. within 12 12 11 the foreseeable future. foreseeable the isscarce, workers of thesupply skilled inIndia andislikely to in remain so by etal. Bhagwati (2004) shown narrow. will services As andimported local to andtheprice gapbetween rise start will countries, wages skillsandEnglish-sp sector. for IT demand If in every Market foreign with of way suppliers. dealing forces inmuchthesame toand thecosts apply offshoring of wh to companies to theneed control strategic assets, Strategic of thefirminquestion. relate are from separable thecore limits activities to services which extent At thefirmlevel, there are andmanage technical, strategic at to offshoring atthelimits look close that from thepotential anumber of suggest sources isimmense. isthereforeprojections It to take useful a below, discussed creation. andjob As engine of growth thefuture be will that offshoring andexpectations countries there are inpoor highhopes And on wages. that offshoring will export jobs to low-cost countries leaving are, There however, intheUnited States, countries, behind particularly expected. should be indeveloped worries unemployment and downward pressure industriesServices are undergoing similar developments countries. eveninhigh-income people, of thebudget ordinary beyond would be specialization and outsourcing, today’s cars would either be closer to the T-Ford technology or they adjustments inthereal exchange rate.adjustments deterioration inmotion of andset thecurrent account country of thebalance intheimporting of payments Finally, one firmsin, Africa. for example, orSouth India to state-of-the-art offshored being needs services skilled to are relatively skill-intensiveactivities in theIndian co keep in occupations require highersk allIT industry, outsourcing mind thatEven though the bulk a of offshored sharp services located in increase trade. to horizontal intra-industry subject isoften such asfinancial services, by comparative advantage. in The final product, be it manufactured goods such as cars or computers, or imports services re those than capital-intensive less and skill-intensive less relative are usually services offshored The industry. thesame trade within asvertical characterized for be example, can ti through trade atthesame variety andobtain advantage to exports (“love of variet andservices of goods variety a broader would by isdriven comparative Trade advantage. similar countriesendowments for by ismotivated thedesire between leadare complementary. Trade countries that itcomes are to different significantly when relative factor between to trade forces trade ingeneral. drive two Comparative way asthese andintra-industry in thesame advantage At theinternational level, thefamiliar forces of compar istherefore indemand workers. Arise skilled likely to upwages. drive conduct in-house and which will be purchased from independent outside suppliers? are What theparameters outside purchased from independent be will and which in-house conduct to outsourcin at thelimits takeslook acloser Section This onshore Make-or-buy; oroffshore? (b) from thetables. derived proportion is below the age of 25, the absolute number of skilled people is still large. isstill people ofskilled number of 25, absolute age the the isbelow proportion of1.1 apopulation with ofwhich inacountry billion, ofresources.” Nevertheless, isin“ain India andstarved direstate such as call answering. Furthermore, it is argued inoccup well function make them would that skills that English minimal the has fraction with atiny only of these the And exception universities. and of a few elite institutions, the incoll higher 18 isenrolled ofage 24 and years between education population Indian of the cent 6per only sy (2004) al. et toBhagwati According ofinputs. sources largest the were Mexico and Japan Canada, ofwhich 95 countries from came 8708) 96 (HS vehicles motor for accessories and parts ofcategory Imports classifications. different use Comtrade USand the since networks, production ofinternational extent of the indicator arough isonly This toComtrade. according $31 8707, 8706, billion, about yearwere same the 1996 categories 8708) (HS parts ofcar $132about Imports in2002. billion tables, input-output tothe according was, “own from sector” parts and trailers and bodies vehicles, ofmotor use Intermediate 12 In other words,thesituation In isnot oneof 11 What isclear, What however, towards thedevelopment isthat increased without the firm, industry and international level. andinternational industry firm, the ntext. Furthermore, there are pockets of Furthermore, there relatively high- are pockets ntext. ative advantage and intra-industry trade drive offshoring trade drive offshoring andintra-industry ative advantage y”). Offshoring enables countries comparative to exploit Offshoring y”). eaking workers increase sharply in services-exporting eaking workers inservices-exporting sharply increase developing countries are in the low-skilled endof the countries aredeveloping inthe low-skilled tained intained thehomecountry, andtrade is mainly driven ills than theaverage worker Indian has, andoffshored me. servic of IT Offshoring g at the firm level. Which services activities will afirm will activities g atthefirmlevel. services Which offshoring has hitherto been on a modest scale, but onamodest been has hitherto offshoring 269 as the car industry in the past, andsimilar gains inthepast, industry asthecar ile managerial relate limits to managerial capability rial limits to offshoring. Technical relate to to offshoring. the limits rial limits an almost unlimited supply of adequately es and business processing, processing, andbusiness es a large a large ations ations stem eges

III THEMATIC ESSAYS C OFFSHORING SERVICES: RECENT DEVELOPMENTS AND PROSPECTS WORLD TRADE REPORT 2005 III THEMATIC ESSAYS WORLD TRADE REPORT 2005 C OFFSHORING SERVICES: RECENT DEVELOPMENTS AND PROSPECTS 15 15 14 13 decisions arethefollowing: decisions of themake-or-buy majordeterminants andcomprehensive The data. of intheabsence good offshoring for thepotential are analysing for questions fundamental decision? These that themake-or-buy determine The make-or-buy decision is thus based onfindingtheba isthus based decision make-or-buy The attractive. andmake less outsourcing, than outsourcing with production are in-house usually lowerwith costs costs variablemanagerial are also There is attractive. why reason outsourcing important isthemost This production. upin-house considerably lowerthan setting be can costs are andthese to limited for searching acontract, asupplier andnegotiating costs managerial such fixed outsourcing, constitute With ahighershare of production. of thesmallerscale total cost and (theyare volume fixed) of theproduction are independent Furthermore, manyindustry. costs of these noted asalready for conducted, thecar being andthenumber of of tasks thetask thecomplexity with more than increase proportionally considerable andprobably companies large be within can costs Managerial costs and production costs) andstandardization. costs) and production costs by Chartillustrated 2, therelationship betw shows which anactivity, more standardized The total costs. the lowest firms must reach a minimum scale in reach aminimumscale firms must asthe1950s. asearly relevance wasrecognized atleast of market The decision If size for themake-or-buy thestandar while codified, be easily cannot that tasks andhigh-skilled that are standardized not (yet) for newtasks goes same The to remain in-house. standar least The in-house. produced be At tohorizontal is thefirm, in specific axis. question lowlevels of thetask itis likely when standardization, to many IT services have also become non-core and can be outsourced. outsourced andare companies, increasingly andservices inmanufacturing both tasks, non-core are typically more. These to specialized andoutsourc codified, standardized that be can services external that worker ortasks reduced to of instructions aset suppliers. standardize be also theycan digitized andseparated, In addition, codified, have been services information-based Once industry. inthecar suppliers independent more orless as computer driving Standardization andautomation wereimportant software has become suppliers. service new independent standardized, for of andcontent media opportunities have opened andnewtypes search services, butalso services, desk of IT. thediffusion with have emerged also Examples andoccupations services Anumber of entirely for newinformation-based candidates outsourcing. become or organize digitized codified, information and be can manipulate collect, that basically intimeandspace. separable Services tasks increasing number of service aprecondition for outsourcing. isobviously Separability • to what extent the task isstandardized; thetask to extent what • andinstitutional separability; technical • thesize of themarket. • • production suppliers; thefirmrelative to within outside costs andmanagerial transaction costs; • and decline more than with the of degree proportionally standardization. managerial isfixed curves cost ofthe point starting side left-hand The form. organizational and location with costs both vary costs managerial plus Fixed ofstandardization. degree the unit with not and form organizational with not but location with differ costs cost production Unit of production. adiscussion. for (2004) Carr See Variable managerialconsumer. costs vary downstream the for iscustomized aninput towhich extent the tocapture used term isthe both “asset literature the specificity” In with organizational form and location and order toorder break even, thenumber of profitably firmsthat operate can dized tasks are typically the strategic or core tasks and these are likely andthese orcore thestrategic tasks are typically dized tasks dized tasks are the first to be outsourced. to be are thefirst dized tasks 13 270 15 A task is more standardized aswemove to theright ismore onthe standardized Atask such asmonitoring andcoordinating These production. s can follow routinely. Examples of information-based follows can routinely. of information-based Examples are software developers and IT consultants andhelp- consultants andIT developers are software d and in some cases automated. Some can even be evenbe can automated. Some cases d andinsome separated from other tasks within thefirm, within andthen fromseparated other tasks ed are accounting,ed andmany billing,payroll, booking een unit cost (including fixed and variable managerial andvariablemanagerial fixed (including unitcost een lance between fixed and variable costs that results in that results andvariablecosts fixed lance between Recent innovations, particularly in IT, have made an forces in the development of extensive networks of forces networks of inthedevelopment extensive the lower the managerial cost of outsourcing. This is This of outsourcing. cost the lowermanagerial 14

16 16 better andthechance of findinganalternativebetter shouldasupplier fail better. isalso and there are of number alarge alternative firmsto match search among,thechance is of findingagood firm’s isnot thevalueof asagreed, theoutsourcing quality brand name deteriorate. can themarket If islarge sy production just-in-time and inanenvironment with brought be can to process ahalt oracomponent. not, theproduction If time,agreed itisaservice whether outsourcing for related The Market onemore to that reason outsourcing. has therisks to with size do isimportant firm must be sure that market. large asufficiently requires suppliers the supplier of outside of anetwork but theexistence isthus away unitcosts, of avoidinghouse. Outsourcing expanding deliversof produced being additional orcomponents in- administration of additional exceeds tasks thebenefits the agreedorder to coordinate andgovern relations activities be quantity and Bu occupied. andkeep themfully inalltasks specialists quality of byis limited thesize of themarket. Likewise, within inputs at the managerial costs and makes captive offshoring cheaper than domestic in-house production athigh levels production in-house than domestic cheaper andmakes offshoring captive costs managerial for andinChart 2thiscompensates higherfixed offshoring, with are lowest costs Unit production production in-house >local Captive offshoring asfollows: of outsourcing thefour types between differ costs managerial Fixed than offshoring) lower within thefirm (captive it while of offshoring, for types thesame both about countries shouldbe related to between differences additional costs The important. isstill communication that 4intheGATS) indicates face-to-face clearly through themovement of (mode natural persons delivery countries of onliberalization service emphasis of many The service-exporting parties. the contracting provisio due to distance,since evendigitized service countries interms involved of language,the two government laws, regulations, currency, andusually also rela additional are costs variablemanagerial also There suppliers. independent to offshoring than resources firms’ the of commitment thus astronger involves Captive acontract. offshoring andnegotiating of searchingfor apartner uporacquiring theforeign additional firm. The setting onhaveregulations, andso inputs theavailability to incurred of be local in non-tradable additionto of the cost and laws about foreign knowledge of supplier. acquiring local thecosts of offshoring, captive thecase In orthrough anindependent entering with acontract offshoring) (captive investment through foreign direct is offshoring onwhether depend latter The butthere additional are also managerial costs. costs, production there location, are additional gains interms of to lower alow-cost offshored be can inquestion the activity are market. purchased inthesame are of thesame, production If since thefactors costs that production firm, oneshouldexpect astheoutsourcing country inthesame supplier islocated theoutside If question. in of far, theactivity So costs theproduction andnot touched upon wehave costs onmanagerial focused outsourcing. intern facilitates inthisessay, standardization elsewhere that are are those standardized. outsourced that are first andcomponents of tasks firmbreach orterminate Also,outsourcing for thecontract. thetypes thisreason should the assets butuseless costly with left may be thesub-contractor contract, theoutsourcing outside customer the with that iscompatible software to install andtheymay have customers American with to way inorder enter contracts intothe American outsourcing Workers development. centres for incall inIndia, example,and product have to English learnhowto speak supplier. andquantity quality theagreed Producing Turning agreemen to theother of side theoutsourcing See Grossman and Helpman (2002) for a discussion of the relation between market size and search costs. search and size market between relation ofthe adiscussion for (2002) Helpman and Grossman See > non-captive offshoring > local outsourcing. >local offshoring >non-captive with outside suppliers (non-captive offshoring). offshoring). (non-captive suppliers outside with n requires some face-to-face communication between between communication face-to-face some n requires ted to offshoring. These are due to differences between are dueto between differences These toted offshoring. may innewskills, new equipment require investment tween divisions and individuals. At andindividuals. thecost onepoint divisions tween a firm a minimum scale is needed in order to employ inorder isneeded a firmminimumscale managerial costs of non-captive offshoring consist only only consist offshoring of non-captive costs managerial still holdsthatstill monitoring are andcoordination costs ational trade, and as observed here, facilitates italso ational trade, andasobserved t asfirmsgrow, in isneeded administration alarger stems this can be extremely costly. extremely Furthermore, be if thiscan stems s’ and so on. If these investments are of little value are of little investments these on.s’ If andso 271 This is the least risky for both parties. As discussed discussed As for parties. both risky istheleast This t, there are also uncertainties facing the outside facing theoutside t, there uncertainties are also 16

III THEMATIC ESSAYS C OFFSHORING SERVICES: RECENT DEVELOPMENTS AND PROSPECTS WORLD TRADE REPORT 2005 III THEMATIC ESSAYS WORLD TRADE REPORT 2005 C OFFSHORING SERVICES: RECENT DEVELOPMENTS AND PROSPECTS Costs, standardization and types of outsourcing and types standardization Costs, 2 Chart 17 17 of standardization. industry as a whole. asawhole. industry firmsprevail andexpa andmore larger while productive outof driven business be firmswill productive theleast where process destruction isacreative This 2004). andHelpman, do, (Antras who outof driven ableto andcouldnot business those be compete evenbe with incontrast, are andmay unable productivity, to offshore thelowest firmswith The competitiveness. cost improve its is to rewardand istherefore further so for doing more likely Its and offshore. to outsource both afford firmcan productive firm. Ahighly productivity firmisable to produce than more from amount alow- agiven of inputs Ahigh-productivity and costs. andthe country that evenfirmsinthesame well known is It of thefirminquestion. onthecharacteristics inChart 2depend of thecurves andposition shape The outsource. to likely are contrast, in activities, low-technology although they activi high-technology mainly firmsundertaking technology do engage high- that mean to interpreted be thus can 2 Chart technology. mature to related closely is instandardization captive offshoring of not. firmwill Ahighdegree asoftware while suppliers to outside maintenance of andadaptation software to firm, itisnot aco ofis thecore asoftware business isimport It activities. standard firm towards non-core, interpreted from be core asmoving thestrategic can of the axis to rightfrom onthestandardization left Moving inthischart. producer, to anindependent to depicted offshore itpaywill off function thecost given the activity to profitable to itbecomes outsource standardization country. further an With to alow-cost production but locate independent that supplier, isreached itisstil threshold it.When outsource but before to itisprofitable levelof standardization to reach needs acertain to that Chart anactivity shows The a local one. Only at relatively high levels of standardization for of al standardization of thedegree as afunction domestic andlowerwith homeorabroad) (at production Total unit cost Chart 2 shows a stylized example using parameters that reproduce the results from Antras and Helpman (2004). Helpman and Antras from results the reproduce that parameters using example astylized 2shows Chart Low degree Make athome 17 Finally it is recalled that monitoring and Finally itisrecalled 272 Standardization offshoring Captive l four types of outsourcing are depicted inChart 2. are depicted of outsourcing l four types some extent. Low-technology firms undertaking mainly mainly firmsundertaking Low-technology extent. some re business of,re business outsource will abank,andthelatter say l the best option to within keep thefirm,l thebest production to pay higher fixed costs than a less productive firm, productive than aless to pay costs higherfixed ant to bear in mind that while developing software nd, improving average productivity in the offshoring intheoffshoring nd, average improving productivity outsourcing than non-captive offshoring. Unit costs Unit costs offshoring. than outsourcing non-captive same industry differ widely in terms of productivity ties are likely to retain most activities in-house, coordination costs are lower with in-house in-house are lowerwith coordination costs suppliers to domestic Outsource Non-captive offshore Captive offshore Outsource domestic In-house offshoring Non-captive High degree 19 19 18 to Central Europe, America. share alarge while to of go Latin Spain’s contracts outsourcing cultural and/or to arewhich homegeographically closer industrial countries to their English- attributed partly hasbusiness been is much less extensive. countries. are theleadingoutsourcing the United Kingdom Furthermore, their sourcing andthefewer thefirms the higherriskof offshoring of services tends weakerforeign The framework thelegal andth suppliers. to be from countries independent with andenforcing of contracts establishing thecosts reduces athomeandabroad frameworks inlegal framework. isthelegal Similarity themore important outsourced, being theservice standardized of enforcing less framework legal reduces thecosts The acontract. partner.the contracting Ahigh-quality of inthelocation theinstitutional quality andinfrastructural are lowerthebetter of outsourcing risks The islikely to increase. offshoring down, go costs these When telecommunications, payment systems andtravel, includ payment systems telecommunications, theweight-to- digitized services, For toeasily offshoring. has lent itself sector isoneof which ratio thereasons whyweight-to-value oftheelectronics theproduct, the with Transport decrease costs types. oneof theoffshoring larger thenumber of firmsthat choose will the locations, thetwo token, option. thesame By between the offshoring thelowertrade costs choose homeandforeign themore firmswill locations, gapbetween larger thewage The locations. in thetwo location thetwo between andtravelcommunication costs countries involved, inthetwo onrelative wages depend inChart 2also of thecurves position The offshoring partner in terms of physical distance and/or language andculture helps. also and/or interms distance of physical partner offshoring record ontheruleof infrastructure, law. telecommunications andareasonably good good to close the Being offshori of countries Host offshoring. in engage to likely standardized concentratedis likely non-core on to be Box 1). To (see namely Ireland andIndia traders, IT conclude, largest offshoring of thetwo performance export dynamic the havecomplemented credits export andlow-interest taxation favourable restrictions, investment of foreign lifting inputs, environment,Improvement inthe regulatory such for astrade liberalization imported on: depends services of offshored location The are of offshored. some which of services, itpo havemade inIT Developments of specialization. leadsto ICT, onahigherdegree andfeeds notably development, Growth technology andeconomic growth. To forces thedriving for outs summarize thisSection, inth eveniftheaveragerunning quality abusiness, fo one-stop-shops excellent andeffective infrastructure zones have andother special parks software inIndia, notably cases, relevant some at.In most variableto look Finally, atthenational noted that the itshouldbe levelare quality institutional not andinfrastructural always countries, large andleast-developed countrlow-income businesses are more together. go Therefore, typically of institutions andinfrastructure quality offshoring andpoor Low wages likely to go to middle-income countries than to least-developed countries. Among the • skills – particularly language andcomputer skills. skills–particularly • telecommunications; particularly – infrastructure of quality the • regime; andinvestment thetax • framework; thelegal of institutions –particularly thequality • • trade costs; • labour costs; See Farrell (2004) and and (2004) Farrell See Table 3. Appendix See 2003. and mid-nineties the between sharply havefallen costs These Financial Times IT Review IT Times Financial 01.12.2004. e country as a whole leaves much to be desired. desired. leaves muchto be asawhole e country speaking workforce. from theotherspeaking leading Outsourcing services. Large and highly productive firms are the most firmsare themost productive andhighly Large services. ssible to anumber standardize, digitizessible andoutsource ourcing and offshoring services are first andforemost are first services ourcing andoffshoring ly. A large share of German outsourcing contracts goes goes ly. contracts share Alarge outsourcing of German e larger the differences between the partner countries, thepartner between e larger thedifferences r sorting out the legal formal outthelegal r sorting ies are more likely to attract outsourcing businesses. businesses. outsourcing are moreies likely to attract that will engage in offshoring. The United States and value ratio is zero, and trade costs consist of costs of value ratio iszero, consist of costs andtrade costs ng activities are likely with ng activities to relatively be low-cost, ing the time and money required to obtain avisa. toing thetimeandmoneyrequired obtain 273 India’s offshoring andIreland’s success inattracting s, and differences in the general business climate business inthegeneral s, anddifferences ities of establishing and of establishing ities 19

18

III THEMATIC ESSAYS C OFFSHORING SERVICES: RECENT DEVELOPMENTS AND PROSPECTS WORLD TRADE REPORT 2005 III THEMATIC ESSAYS WORLD TRADE REPORT 2005 C OFFSHORING SERVICES: RECENT DEVELOPMENTS AND PROSPECTS which are at the centre of the IT offshoring phenomenon. arewhich atthecentre offshoring of theIT it highlights in particular the offshoring of IT servic concentrated isalso below regionally, discussion The few overthelast years. as attention themost attracted on focuses small atamore aggregate Section level. This of that branch remain rates thesize while overacouple annual of of theactivities years, growth spectacular records which onanewbranch of business, economy.or eventheglobal report that could thesurveys be It to integrate by easy relatingtheir findingsare not into them to always picture theentire abroader domestic ar surveys evidence. these andanecdotal While surveys economy. onprivate isbased istherefore It offshoring not surprising of that theinformation most onservices Statistical classifications ofavailable are industries ingeneral not adequate to record aphen or activities THE SCOPE OFOFFSHORING SERVICES need TODAY quite is activities services Gauging thesize of theoffshored some time to adjust to structural changes in an 4. Source: thisshare to later, has 81 risen hadten expanded, years greatly India’sper when cent. exports 1992-93, In and accounted units for exports. 8 per cent exports STPI oftotal software India’s software inIndia’s units intheshare by therise of STPI illustrated isbest exports centres inIndia’s software STPI of increasing importance The exporters. of software have regulations) created clusters FDI and liberal (trade facilitati variousforms of publicsupport These centers? inSTPI for firmsestablished areWhat themainbenefits software in 2002-03. exports Tamilnadu, of Karnataka, ofthose India’s accounted Maharastra Pradesh andAndra for three-quarters found in16 be centers can States, Indian STPI Although software. exporting are already of 3,544 which units, 4,644 centers have combined attracted allSTPI March In 2004, eight years. planned inthenext centres Twenty are more STPI of STPI. theaegis upunder set have been parks technology software 40 services such as technology assessments and professional training of software exporters. By July 2004, in 1991. This Society Technology anAutonomousPark” Society, the“Software Park andestablished scheme of India” (STPI) is in charge of thegovernment Technology introduced the“Software exports, to of software theexpansion managingobstacles da and training” economic aprominent inits position development software exports, “software giving 1986,In government apolicy promulgated theIndian andthedevelopment Public policies exports Box 1: ofIndia’s software • foreign ownership up to 100 per cent allowed for firms established in STPI centers. inSTPI upto 100 foreign cent for per ownership allowed firmsestablished • for clearance; government window single • exemption upto from March corporate income 2010; tax • exemption from duties; payment of local • • duty-free imports; facilities and35 Communication Data (HSDC) HighSpeed state-of-the-art provides STPI • Based on STPI website information, in particular from its Annual Report 2003-04 (http://www.stpi.softnet/areport3.html). international gateways; international 274 es between India and the United States, the two countries States, andthe United India thetwo between es ta communication infrastructure facilities and other andother facilities infrastructure communication ta on, infrastructure, a favourable tariff and tax regime,on, infrastructure, andtax afavourable tariff not a small task. The various official statistical sources sources statistical variousofficial The not asmalltask. omenon which in the field of services israther new. inthefieldofomenon which services e useful in catching early emerging developments, incatchinge useful emerging developments, early policy objectives. In order to address various to order address In objectives. policy the offshoring of IT services, the activity which has which theactivity services, of IT the offshoring billion and$1,800billion in2003. billion compared andworldcommerci to be world GDP can values 20 available trade isnot always atthenational level. the Second, of services reporting sectoral detailed out. First, of thelimitations BOP Among different economies. two entities economic resident in between record transactions data BOP services. valueof offshored estimated limitfor any anupper trade provides services cross-border Thus, included. shouldbe services all offshored services, activities result from offshoring imports not allservices Although data. balance (BOP) of payments The IT services trade second as measured by Balance of Payments (BOP) approach statistics (b) to measuring the size and evolution of services offshoring is based on (national) years recent in offshoring size services of the on Surveys (a) . services process) business (and IT offshored include which professional services), transa oncross-border data BOP official with possible, information This for compared, issubsequently recent where years. sector intheIT andoffshoring outsourcing consulting firms) are presented. are These estimates are at Two offshoring to approaches measuring services in 2003. are estima services andBP IT Offshored (2004b). Gartner to $710 billion in2003. Total services IT outsourced of $650 intheorder worldwide expenditure andsoftware IT suggest above recent studies most two The • Gartner (2004b) reports that global software and IT expenditure amounted to $663 billionin2003. BP amounted to $663 expenditure andIT software that global reports (2004b) Gartner • market aglobal services for IT reports (2004) (EITO) European The Information Technology Observatory • worth services (BP) process andbusiness IT that UScompanies offshored reports (2003) McKinsey • • The OECD (2005a) reports the size of the global market for outsourced IT and business process (BP) (BP) process thesize andbusiness market of theglobal IT for outsourced reports OECD The (2005a) • the increase in global trade of computer and information and other business services between 2001 and 2003. 2001 and between services business other and information and ofcomputer trade inglobal increase the rateas same the cent, upby25 per in2001 isgrossed services IT offshored for of$35 billion estimate (2003) McKinsey The activities and software expenditure isnot taken into expenditure account. andsoftware activities inthetotal of outsourced $285 services for are IT given thesharebillion in2003. data of offshored No market in2004”. services IT worldwide to equivalent $322 wouldbe This andabout billion in2004 $568.9 claims that “outsourcing account will for (2004a) 53 billion. Gartner per cent of thetotal alonereached$93.8 expenditure Software are againexcluded. services billion andthat of IT services period; inthe2000-2004 growth than dynamic GDP less butbecame period, 2000 in significantly the1995- markets faster had of than been IT GDPgrowth indicates thatalso thegrowth coverage. narrower (2004) EITO sectoral that by margin, alarge exceeds its of OECD despite (2005a) 2001 and2002, for estimate exchange rate theEITO between Adjusted andmarket growth services. BP to anamount of isequivalent thisestimate dollars of and software $26 billion to 12 majormarkets in2001. share of The estimate somewhat underestimates the global offshoring of $35 USof atleast companiesbillion in2001. 12 The markets worldwide; at70 va cent aglobal andthisimplies per estimated terminology); firmsinthehomemarket “internal from affiliated (or provided supply” intheOECD domestic services to intra-firm trade. This estimate of the total IT an IT total the of estimate This trade. intra-firm to $227 billion. Two-thirds of all offshoring is estima put at$32 billion, representing 12.3 at isgiven market. outsourcing cent per IT of Domestic theglobal are to activities close $260 to be billion in2001. service services andbusiness IT valueof offshored The 20 For the same year, world exports of business servic of business year, thesame For worldexports € 591 Converted into in2002 exchange current rates). billion in2003 2003 (measured (excluding software) are about $285 are about software) on (excluding billion(based ctions in computer otherctions (and andinformation services d business process services market does not include IT IT not market include does services process d business of of markets andthedevelopment thesize of IT exclude majorEUexclude markets andtherefore theabove ted to be captive offshoring, inother wordsreferring offshoring, captive toted be tempted below. First, estimates (including of private private of (including estimates First, below. tempted 275 ted to have been in the order of $40 to $45 of $40 toted intheorder havebillion been about $710 about excludes billion in2003. estimate This data in measuring services offshoring, three stand three stand offshoring, inmeasuring services data lue for all offshored IT and BP services in the order intheorder services andBP IT lue for alloffshored al services exports, valuedal services exports, respectively at $36,000 US companies in global offshoring activities is es are estimated at close to $500 billion. These billion. These to $500 atclose are estimated es

III THEMATIC ESSAYS C OFFSHORING SERVICES: RECENT DEVELOPMENTS AND PROSPECTS WORLD TRADE REPORT 2005 III THEMATIC ESSAYS WORLD TRADE REPORT 2005 C OFFSHORING SERVICES: RECENT DEVELOPMENTS AND PROSPECTS ate 20b 036332...... 45 32 35 322 ...... 260 ... 663 710 ...... 2003 2003 21 2001 2003 2001 B. Balance of Payments Statistics Gartner (2004b) (2004)(WTO) EITO (WTO) (2003) McKinsey (WTO) (2003) McKinsey OECD (2005a) A. Surveys (Billion dollars) services IT offshored and trade markets, IT Global Table 1 T n M O 03wrdeprs4475 494 exports world 2003 BOP IMF and WTO detailed information ontheirtrade incomputerdetailed andinformation services. not do supply any traders other which countriescategories exclude, majorservices ifsome andevenmore so includes ifIndia isconsiderably overstated services of IT thatcould theshare be inworldexports of India consequence of this One theresearch findings. tend to distort statistics by of variousnational BOP providers more adequately classified under “other professional serv for “computer andinformation services,” butthiscategory mistaken could which be “software” exports report data BOP elsewhere. Indian grouped shouldbe which level. In some cases, the reported data of computer and information services might also include services professional at the detailed services level, but subsume categories these two into others at a more aggregated orother of computer andinformation services anybreakdown. imports countries Numerous not do report of category problem availability. according standard Many data to countries BOP thedetailed not do provide there isa because quite often but also of methodology Classification not because only arise problems BOP category “other professional services” are estimated of the imports) (and of inasmallnumber countries. World exports of thiscategory account part to for thelargest amount to at least $420 billion in 2003. than likely one-half, butmight ismost less services”. inthiscategory services share process of The business servic centers, transcription call anddevelopment, research inTable are reported above 1. discussed pr data Business of “computer at$75World were exports andinformation estimated services” and other billion in2003. These in but includes services process principal, catch business at combine computer andinformation services statistics BOP large smallortoo iseithertoo statistics inBOP services of IT classification that thestandard isthefact inimports services to capturing offshored majorobstacle Another size. of varying than from of number alarge importers from afew exporters large that dueto side. islargely thefact This on theimport by that thefact international is likely services trade in IT trade might in computer introduced be also andinformation report Adistortion economies, only 80 services. However, 2000-2003. trade intheyears 130 fromrepresent more these cent than 95per of worldservices cover 130 Balance statistics of which Payments economies intheIMF trade provided onservices data BOP Missing BOP data can be a serious chal aserious be can data BOP Missing offshoring. in captive any without change affected sharply firmsmight be trade amongaffiliated services cross-border of recorded detailed sectoral definition available might be inadequate van Welsum (2003). also 95.See 92 through pages on statistics inBOP trade services ofIT problems measurement the discusses OECD (2005a) Source Source 21

srie information services Business services Computer and Reference 03wrdiprs4847 458 imports world 2003 year lenge in estimating accurately world exports (imports) of IT services. services. of IT (imports) accurately inestimating worldexports lenge 276 to measure and IT business process Official services (BPS). a statistical agency can obtain information obtain more can easily agency astatistical ocess services suchocess services as accounting, auditing, bookkeeping, IT Market to be better registered on the export side rather registered to than better be ontheexport formation services (mainly services of news agencies). agencies). of news services (mainly formation services es etc. are included in “other the category professional size to capture IT and BP services and third, the volume ices.” differences These in classification approaches also includes IT-enabled which services should be the most detailed level. This category does not, in Outsourced IT services IT services (incl. BPS) Offshored 22 as a supply of IT service. company) asaninsurance company, woul thetransaction affiliate’s primary industry classificationof payments data is in would IT services record thisUS insurance company, flow for example, as offshores imports some of its IT services to an affiliated (debit firm in India. US balance sector want to replace their in-house service IT suppli isthat compan prominent feature services of offshoring noted, previously a As problems. classification sectoral several pose also can affiliates But trade with industry. inagiven offshoring incaptive expansion therate of for theleveland/or proxy therefore trade can apoor Affiliated be activities. offshoring captive 2). Both countries reported net exports of computer and information services in excess of inexcess $10 of computer andinformation services netexports Both countries reported 2). billion and Table (see services IT for offshoring considered themaindestinations to generally are be which also and India, in2003 are, of computer according andinformation Ireland data, to services BOP majorexporters two The (21than that of (16 total commercial services per cent) andmerchandise exports per cent). was31 period combined overthe2000-2003 categories per of thetwo cent, andthus growth faster export 4and24 are about exports inworldcommercial services categories per cumulative cent The respectively. 2003, amountedbillion. services In to $420 theshare two of these (OPS) of other professional services Exports are of computer and information services World exports (e.g. countries). andmany Denmarkestimated andSwitzerland developing Therefore, from had nation added to data be themissing available. isnot always breakdown services above, for countries for the detailed IT butasseen most data balance provide of payments statistics BOP exercise. IMF istherefore The not astraightforward (CIS), services Major traders in trade, global tr for 2000-2003 ITservices global atanestimate to arrive data Using BOP (c) affiliates”. through US in 1998-2001 of services insales accounted acquired of affiliates for thegrowth newly most notes that “... of Commerce of anacquisition. USDepartment inthecase applies The reasoning (BEA) same themerger. trade after considered asaffiliated be The firmswill thetwo trade between as theunaffiliated even wi trade firms leadsto inaffiliated anincrease ahi with isassociated years inrecent trade affiliated trade, to of onehas theevolution affiliated to take into respect in account ofWith therise that part alarge to activities. cannot offshoring attributed be from affiliated firm(s) abroad might have not all trade amongaffiliated firm activities, offshoring never been produced in-house in the home internat Although country, offshoring. of captive the expansion and therefore Unfortunately, for thesize trade asaproxy or there are anumber of of to limitations affiliated theuse case different from others? India’s Is companies. by Indian-owned largely are provided of 2003-04 exports India’sNASSCOM software According to exports. software However, theinformation onIndian with above given thisconflicts services. process for business aproxy professional of services, 77 other andtechnical business, per cent of USimports imports. services IT US on data by supported is view andfor trade accounted 2003, In for affiliated 63 per This imports, cent of UScomputer andinformation services offshoring. captive of form the takes offshoring most confirm of that companies resident States. intheUnited atpresent, Many for offshoring surveys captive proxy an ismade thisdistinction statistics, USBOP In firms. cross-bo allowusto divide national statistics Few BOP Borga and Mann (2004). Mann and Borga 22 Therefore, the BOP (and MNC sales through affiliates) data tend to overstate the growth of thegrowth tend to overstate data through affiliates) sales Therefore, MNC (and theBOP thout any change in production and employment patterns, patterns, andemployment thout any change inproduction gh level of mergers and acquisitions. The merger of two of two merger andacquisitions. The gh levelof mergers ade in IT services, defined ascomputer defined andinformation services, inIT ade rder transactions between affiliated and non-affiliated andnon-affiliated affiliated between transactions rder es with purchases from specialized IT firms abroad. A firmsabroad. IT purchases from specialized with es d affiliated services imports could be considered asa could be imports services d affiliated . If the foreign affiliate is also classified (as theparent (as classified isalso theforeign. If affiliate s is due to offshoring. Some of the imported supplies of theimported Some s isdueto offshoring. al sources (e.g. India and the United States) or crudely (e.g.al sources orcrudely States) andtheUnited India ional trade among affiliated firms includes (captive) (captive) firmsincludes ional trade amongaffiliated 277 estimated to be in the order of $75 intheorder to be estimated billionin2003. ies with their main business activity outside the IT theIT outside their mainies with activity business d be classified as an insurance service flowandnot asaninsurance classified d be service s) in IT services from a foreign affiliate only ifthe only from aforeign affiliate services inIT s)

III THEMATIC ESSAYS C OFFSHORING SERVICES: RECENT DEVELOPMENTS AND PROSPECTS WORLD TRADE REPORT 2005 III THEMATIC ESSAYS WORLD TRADE REPORT 2005 C OFFSHORING SERVICES: RECENT DEVELOPMENTS AND PROSPECTS 1Fac 0 257213 120 814 61 511 1253 124 -21 n.a. 816 1235 -680 n.a. 1179 742 1543 4073 -1172 2421 1662 1067 3051 1187 2287 1227 n.a. 1255 7245 n.a. 1993 2915 4970 803 2054 5198 2916 1191 3657 1270 4435 1166 and (computer B information services Business and services other (OBS)) business services 2043 6565 4119 Memo items: France 6987 3798 7619 Sweden 11 Netherlands 10 9 4321 6722 Spain 8C Israel 7 a6 Germany n Kingdom United 5 a States United 24 d3 8222I a24 8 9101I n 2 289 3 5 r d 715 012 911 e i 5A Computer and information (CIS) services 2 l a70 6 8 a(Million 0 9 dollars) 346 2003 and 2000 services, business and incomputer 565 traders major The 255 n 610 014Table 2 d74 8 3since 1 7 2000. 1 738 672 growth of CIS theirexport However, has exceeded growth computer andinformation theirimport services. 7 227 213 of theUnited States are majornetexporters both andtheUnited Kingdom services, of IT offshorers global 9 for serv asamajordestination thiscountry report which 8 other exporter, surveys againinlinewith largest ranked Israel asthesixth than halfless of Ireland’s exports. 7 ata leaders andGermany followedKingdom thetwo States, United theUnited The period. overthe2000-2003 isfaster exports than global growth their export computer services are Japan, Brazil andGermany.computer services of netimporters of CIS three largest JapanandSpain. are Kingdom, theUnited The majorimporters Other of of States, theUnited eventhose CISGermany. ranked which exceeded in2003. second Germanimports was of computer 2003, andinformationIn according services importer to thelargest current data, BOP 4 rne21623012227139 -380 1315 -508 3894 -996 2113 -2033 -1316 -8819 -1180 2305 25721 11827 n.a. -9127 28752 4259 16935 -1526 16232 18992 8669 26132 11436 19865 n.a. 3638 11429 -4693 19482 17873 10525 47141 25340 13141 37128 23033 11475 20126 n.a. 22641 16427 33477 13549 24099 7673 Source: Note: 6771 17915 14091 27922 10113 12830 16693 n.a. 38322 Memo items: France 15734 51785 28001 21115 (4) Sweden 52469 (10) Netherlands 6780 10409 (5) Canada 37780 9398 Spain 47404 (9) (7) 6903 Israel (11) Germany Kingdom United (3) States United (2) (1) India Ireland (8) (6) Figures in brackets indicate export rank in 2003. export indicate in Figures brackets U(5 26347013626196 20049 28403 9367 13146 20651 46703 14316 38590 40700 75106 23683 51736 EU (15) World U(5 181 693104 591-7416012 36339 -1724 10949 251981 457828 180341 365170 267993 494167 178616 376119 EU (15) World IMF, Balance of Payments Statistics, CD ROM December 2004, national statistics and WTO estimates. WTO and statistics national 2004, December CD ROM Statistics, ofPayments IMF, Balance 0020 0020 002003 2000 2003 2000 2003 2000 0020 0020 002003 2000 2003 2000 2003 2000 xot mot Balance Imports Exports xot mot Balance Imports Exports 278 distance. The United Kingdom and Germany exported andGermany exported Kingdom United distance. The ices offshoring. Despite their reputation asthemajor theirreputation Despite ices offshoring. 23 and the United States. India between trade statistics inthebilateral discrepancies services to is made reconcile thereported attempt subsequent peri butmight (in appear statistics in theBOP country. of thehost considered residents Thereafter, counted are no longer employees theearnings of these abroad for more than staying oneyearshouldbe isarulethat employees There residents. local not become by Indians employed the“onsite” Third, data. 3)andthus inBOP countries are not mode (GATS included of CISpartner delivery abroad should migh deliveries onsite that could service these wellbe It be considered as Indian exports only as long as these employees have Second, a large, although decreasing share of India’s “software exports” are reported to be delivered “onsite”. delivered to be are reported alarge, shareSecond, of although decreasing India’s exports” “software in Fiscal Year (FY) 2003-04 include IT-enabled business $12.2 worth billion that“software” Indian shows exports 2004 services, Annual Report Bankof India’s (RBI) the Reserve such as call centers, valued at $3.6 billion. example, For “software” inits are exports. included services, such asIT-enabled services, non-CIS that some there isthequesti First, of India’sreporting CIS exports. of CIS dueto could over- be andimports worldexports majorsource ofAnother thedifference between in 2003. classified under “royalties the category and licence fees,” licence shouldbe fees Manual, BOP According software to theIMF of Ireland’sover-reporting CIS exports. is given. Therefore, it to go by theEU EU (15), detail Member country isWestern Europe. CIS of butnofurther theIrish exports Most currently impossible of computer hardware, centre for Ireland isamajordistribution in which merchandise with exports included to link istheinclus exports services feature IT special of Irish in2003. A than larger “only” States, times theUnited itemployed while specialists two IT 24,000 services of IT exports takes into inIreland. Ireland isreporting account levelof thelimited inthissector employment of large ifone Ireland are astonishingly exports therecorded atthemajorexporters, more closely Looking side, orto acombination of ontheimport thetwo. orto side under-reporting the export on dueto could which over-reporting be services, of IT andimports exports global inreported discrepancy aconsiderable exists followed There by India. worldwide services of IT exporter Ireland tothelargest be report andthecountries theoffsho providing major offshorers by provided of the crucially thedata ontheaccuracy depends estimated size activities The of offshore global however, category, from number ranking CIS inaggregated decreases 2 to export andOBS number 11. India’s position. in2003, anetexporter retains India while exports exceeded imports exporter,a large butits of CIS Ireland remains andOBS. Germany while andJapanare netimporters large netexporters large are also wellahead ofGermany,Kingdom, France andtheNeth in2003 (for CIS Table are theUnited States andOBS) andtheUnited (see thetop exporters Now B). 2, Part of chan positions thevariouseconomies net-exporting noting itisworth large. Nevertheless, very becomes aproblem, are nolonger butthecoverage categories of thesector thetwo between misclassifications in (OBS) Combining CIS services andother business billion $6 in (about 2002). side andintra-trade side recorded ontheimport export intra-trade measured onthe between observed be can discrepancy Even theEU(15), awide within period. throughout the2000-2003 billion) $30 margin(nearly by awide imports exceed level. World CIS exports isthela data BOP of theofficial aspect A disturbing similar trend. increase to theglobal not do showasteady of CIS andthat theirimports importers inTable feature provided modest data of theBOP that are very Ireland andIndia outstanding 2isthefact An NASSCOM (2005) reports that nearly 41 per cent of India’s IT offshore revenues stem from onsite delivery in FY 2003-04. rge discrepancy between exports and imports at the global attheglobal andimports exports between discrepancy rge with certainty the $6 the $6 billion intra EU certainty tradeto surplus with an ion of software licences. Previously, licences were these ion of software that atthismore leveltheranking aggregated and on of allocating BPS with CIS. Indian sources indicate indicate CIS. sources Indian with BPS on of allocating red services. As mentioned above, national data As BOP red services. in which Ireland reports a large deficit (of $10 (of deficit alarge billion) Ireland reports inwhich erlands. The United States and the United Kingdom States United Kingdom andtheUnited The erlands. to business services has the advantage that the has theadvantage services to business ge dramatically from those observed for CIS only observed from those dramatically ge 279 ods) in the form of worker remittances. In Box 2, In intheform ofworker an ods) remittances. t be classified as local sales of foreign affiliates in of foreign affiliates sales aslocal classified t be 23

III THEMATIC ESSAYS C OFFSHORING SERVICES: RECENT DEVELOPMENTS AND PROSPECTS WORLD TRADE REPORT 2005 III THEMATIC ESSAYS WORLD TRADE REPORT 2005 C OFFSHORING SERVICES: RECENT DEVELOPMENTS AND PROSPECTS 24 24 survey-based estimates of globally offshored IT and IT offshored of globally estimates survey-based amounted “computer to onglobal 2003, $75In data billion, BOP exceeding exports andinformation services” Survey data versus BOP data (d) to offshoring services to India. attributed losses of trade USjob than from mightgleaned thediscussion be for USservices picture positive amore provide data that theUSBOP concluded abilateral may be It trade surplus. States consistently reported at $2.1 billion, while to stood India imports exports travel, androyalties At andlicense fees. less thislevel, transport USservices services amounted to $1.1 bill “Other astotal private private services,” isdefined which refers to the category trade) and non-affiliated United States.services The from most India thegeneral perceptionWhile amongtheUSpublicappear detailed than it is exporting, sectoral US balance breakdown of payments of US statistics data by report country a surplus (which in favour covers of the both affiliated $4.8 $4.8 billion, asum cl could which largely annualearn average the with number employee this that theirnumber couldTable ha itispossible 9), StatesUnited for more than oneyear. inAppendix theannual Given (provided approval of beneficiaries of H-1B andbeneficiaries had worked specialists already who inthe visas on thenumber IT of Indian Department of Commerce arebeneficiar which specialists IT as ofIndian earnings local residents. Unfortunately, ifonetakes into account possible isonly the exports to India’s software inrespect andUSdata Indian it was not possible evenatamore aggregate level. isnot Areconciliation between possible numbers USBOP official with to obtain information many include business that India’s “software” exports in2003. data EvenBut the$0.9 ifonetakes into account CISbillion remains theIndian far export off data. US broader the with consistent remains figure million that the$900 suggests This from India. limitfor total anupper USCIS imports represents This travel androyalties amounted andlicense fees, transport, to without from $1,139 India, million in2003. 36.5 (namely per cent imports IT asinUSglobal same that million, theshare provided of unaff $900 reaches amounted to $330 million in2003. the(e Including Turning to the adjustment on the side of US imports, US unaffiliated importswould be equivalent of IT services to $6.77 billion from in India calendar year 2003. assumption that 60 per for theUSmarket, destined this cent had been of India’s “software” exports year2002-03. the infiscal On America went to North thatBank, indicates cent 69 exports per of these this collects year2003.which NASSCOM, in calendar to numbers? India’s theworldamounted these to oneget $11.282 does “software”How exports billion to close $0.9 billion. from India CIS to imports suggest $6.8 theUSofbillion, about theUSdata while services) IT-enabled (including exports IT records for that indicate 2003 India data adjusted Our andUSsources. Indian bilateral from to levelof reconcile thedetailed data CIS are needed trade,sectoral estimates some India and US Department Bankof by theReserve to States theUnited reported services of IT exports Indian of between discrepancy Commerce data on US to imports the of CIS attributed be attheworldlevelcan overimports of of theexcess exports part One of IT services from India. At the detailed trade onbilateral andUSstatistics CIS Indian Closingthegapbetween Box 2: See also van Welsum (2004). Welsum van also See 24 ose the gap found in the statistics above. thegapfoundose inthestatistics 280 ion in 2003. Throughout the 2000-03 period, theUnited period, ion in2003. the2000-03 Throughout ve been close to 80,000 in2003. onemultiplies If to 80,000 close ve been stimated) imports from affiliated firms the number firmsthenumber from affiliated imports stimated) ings (about $60,000) one obtains total earningsof oneobtains $60,000) ings (about business process services of about $45 $45 of about services process business billion by a ies ofies USH-1B andare considered by theUS visas information Central itto theIndian andprovides iliated trade inUSbilateraliliated isthe India trade with ). US services imports (including affiliated imports US services ). trade) services other than IT services, areconciliation services, other than IT services s to be that the United States is importing more thats to States theUnited be isimporting 26 25 increased offshoring, orperhaps toincreased offshoring, other factors. ingeneral, to inmany highincome countries in2002 was dueto services afall for in demand IT observed Therefore, onehas to askifthedecline as offshoring). level of national employment to inorder grasp theimpact data employment andwage (and wages) is subject to both cyclical variations and structural changes (such will be situated in emerging markets by 2010”. by 2015 “that projected upto 25 andGartner per cent countries inmany of jobs thetraditional developed IT total number of intheUSeconom accumulated losses job the C. of deal John attention. McCarthy, projected agood (2002), president vice have of Forrester attracted of tw projections The activities. services in offshoring have highlighted thecurrentVarious andpotential linked onemployment repercussions to anincrease reports of employment. andconcerns inrespect has expectations raised activities services emergence of offshoring The Trade and employment in ITservices (e) Bof Table part (see 2). ifCIS records atrade deficit in2003 OBS are actually combined with services, of IT Ireland, thetop exporter nettransfer not to point amassive of jobs. and2003 does which 2000 billionbetween $0.6 by only rose taken trade balance be asanindicator of can a“jobsectoral balance.” trade surplus India’s services business that is “losing” India view trade andis“gaining” inOBS jobs inCIS trade, assumption that onthecrude the the wouldtend to data support BOP Indian The period. inthe2000-03 of imports theexpansion behind group lagged services inthislarger of exports butthegrowth and OBS), (CIS services of business exporter anet isstill Table amongCIS exporters, asnumber two (see according ranks which India, data to theBOP 2). for theUnited Kingdom observed be and 2003, can theopposite 2000 between fastergrown than exports of CIS have combined andOBS for States While theUnited imports services. of business netexporters largest related trade. to total andtheUnited States international Boththeworld’s theUnited Kingdom are still services if rather modest has been services offshored valueof these recently theestimated butuntil very elsewhere), to Ireland (and India, center offshored andcall being jobs jobs of IT evidence anecdotal isstrong There statistics. partner bilateral mirror via trade flowdata onreported acheck provides supplied by partners data BOP cases, some in Second, of allowthecalculation netexports. trade andalso intotal services services the relative size of IT BOP data have several advantagesof over commercial services the in 2003. survey data andfor 2.5 cent per ofaccounted services worldexports of business than for 10 less cent per of worldexports provided by The exports. business total worldservices orwith ($494 billion), consultants.services First, ($45 they process andbusiness of CIS. IT theother hand, On theoffshored intotal worldexports services IT offshored reveal billion) andtherefore no“guesstimate” services process of andbusiness theshare made be of can services of IT can be compared abreakdown not provide does (2003) McKinsey services. IT-enabled –include theoretically not –atleast to world andCIS does services offshored reflect asnot allimports exports, services IT of global for more than one-half expo account considerable services margin. IT However, that offshored numbers from these deduced itcannot be activities. Thereafter, recent are employment trends discussed. inIreland andIndia activities. States,United considered intheforefront isgenerally to which be of the“new” services trend inoffshoring onempl thefocus be, will first, thefollowing Section In recent a not is jobs IT of offshoring the that agree momentum buthasdevelopment, observers gained only few inthelast years. Most India. in particularly countries, developing in to created have been were reported jobs newIT while countries dueto offshoring, occupations indeveloped 33757_34238742_1_1_1_1,00.html. Accessed 02/03/05. Accessed 33757_34238742_1_1_1_1,00.html. http://www.oecd.org/document/22/0,2340,en_2649_ online OECD. Available Paris: employment, and skills Chapter ICT 6, Information on migration of ITS specialists can be found at OECD (2005a) atOECD (2005a) found be can specialists ofITS migration on Information (2004b). Gartner 25 Press provided articles anecdotal evidence of job losses in IT o consulting firms on the repercussions of offshoring o consulting of firmsontherepercussions offshoring oyment and wage developments of the IT sector in the the in sector IT the of developments wage and oyment rts of CIS other combined professional with services rts in employment in the IT industry or in IT occupations occupations in IT or industry IT inthe in employment $45 billion of offshored IT services (broadly defined) defined) (broadly services IT offshored of billion $45 281 of offshoring, onehas to takeof offshoring, into account that the y due to offshoring to be in the order of to intheorder 3.5 be y dueto million offshoring OECD Information Technology Outlook 2004 Outlook Technology Information OECD 26 In reviewing therecent reviewing In ,

III THEMATIC ESSAYS C OFFSHORING SERVICES: RECENT DEVELOPMENTS AND PROSPECTS WORLD TRADE REPORT 2005 III THEMATIC ESSAYS WORLD TRADE REPORT 2005 C OFFSHORING SERVICES: RECENT DEVELOPMENTS AND PROSPECTS 28 27 IT specialists. In FY 2001, Competitive through foreign andWorkforce of theAmerican 1998, Improvement to Act inorder attract policy 191,000 foreigners situ particular This 2000). obtained (Windows software business an H-1B visa in order toaccentuated instandard by millennium thedot.com andamajor upgrade or2YKbug, of fears theIT boom, work in the United States specialists, exceptional of IT situation attheendof States theUnited the1990s in when faced shortage asevere incomputerUS employment the andwages compared occupations not shouldperhaps with inrecent be years onwards. 2004 January and 1.3 per cent amongall separationsrelocation by (acr caused layoffs annually from of Labor,are According linked theshare to to theUSDepartment offshoring. of separations dueto overseas 2000 to 2003. Unfortunately, this information is no longer reported from time series. pe previous with comparison terms, althoughaprecise levelincomputer represented anewpeak andrelative occupations This absolute inboth at theendof 2004. 174,000, accounting intotal for 3.357 or2.4 millionpeople, cent per of thetotal USoccupational workforce workforce by increased thecomputer mathematical) (and of 2004, thecourse In before 2000. in theyears asithad done overall employment growth, occupations againexceeded inthese employment growth 2004 by thedownturn than alloccupations in2002 and2003. moreoccupations affected However, had been in from learned thisinformation be can onUS What forthose allnon-farm by cent. employment 2.2 increased per slightly, decreased while sector andrelated services design inthecomputer systems wages theweekly 2004, In inallsectors. analysts paidto for computer taken might thewages be systems asaproxy industry services IT inthe developments wage but wages, occupational on available information recent isnomore there writing, of those of thisgroup behind slightly remained wages 1997 September average 2003. between andJuly However, from 2002 to outtheperiod 2003 ifonebreaks for than those alloccupations increases on have stronger recorded analysts Wages of computer systems inalloccupations Table (1.2 markedly cent growth per andagainexceeded Appendix cent) 5). (see per incomputeremployment. occupations However, wasupby 5.5 employment growth of 2004, inthecourse inoccupational 2003 atarate than theoverall 2002 slightly recovery andDecember less December between occupations contracted sharply. Thereafter, employment incomputer andmathematical occupations recovered onaverageincreased that 2002, slightly while of In alloccupations stagnated. thenumber of computer larger than tencent, times for almost alloccupations. and relative terms. The average annual growth in the employment of computer system analysts was 13.3 per theannual averageand 2000, number of computer inabsolute occupations sharply rose andmathematical 1997 to to atwhat happened theemployment levelby look occupation. Between and itistherefore necessary theUnitedIn industry States, of computer themajority occupations thecomputer are found services outside in the first three quarters of 2004. three quarters in thefirst (industries not occupations) decreased andcomputer services that insoftware theannual by layoffs number of separations caused reported steadily from 36,016 inStatistics 2001 to 16,230 in 2003 on and layoffs declined further also indicate occupations upto onoverall had USemployment theendof inthese amarked 2004. impact specialists an improved employmentresilience of wages of computer situation occupations, do not support the view that in offshoring andthe inemployment in2004, asmuchallother intherebound occupations in2003. strength The twice 2004. services of high-skilled IT The US Departmentit should of Labor be recalled than forrelative thisrecent to less alloccupations. increase Despite other weakness wages, didwages in 2004, that at an average in2003, Only andperhaps of computer inthewages analysts. 2002, weakness there wasnosignof aparticular hourly wage of to asquickly Until theeconomic downturnAccording asdidemployment levels. didnot react to wages USdata, $33.25, computer and system analysts earned nearly US Department of Labor News, November 18, 2004, 18, 2004, November News, ofLabor US Department US Department of Labor, 27 The employment situation: 2004 December 28 Typically, only a very small fraction of the mass layoffs in these industries industries inthese Typically, layoffs of themass smallfraction avery only 282 Extended Mass Layoffs in the Third Quarter of 2004, Quarter Third the in Layoffs Mass Extended employment andwages? Employment in US computer oss all non-farm industries) ranged between 1 per cent 1per between ranged allnon-farm industries) oss ation led the US administration to relax its immigration to its theUSadministration ation led relax In 2001, In thenumber of employedcomputer analysts all occupations (see Appendix Table At Appendix thetimeof all occupations 6). (see ak employment is not possible dueto abreakak employment inthe isnot possible and http://www.bls.gov. Table 6. Table 29 delivered “onsite,” while in recent years direct exports (supplied from India) have “onsite,” more prominent. become delivered from India) (supplied exports direct inrecent while years were exports software most that inthepast interpretation Table reports could This fitwith Appendix 8). (see identified employeramong allthefour sectors thelargest remained butstill 2003-04, 2001-02 andFY FY employment in captive user organizations. Employment in this sector reported the smallest increase between Indian IT specialists covers by NASSCOM provided that statistics employment seems It defined). (narrowly specialists IT recorded working abroadIn recent but years, employed this country. inthereceiving considered asresidents could theyshouldbe according standards to international statistical by an easily Indian add up software globally andth months residents considered Indian to are still be to house more than as 200,000 part workingabroad for than longer 3 that could India’s be It employment figures. country’s specialists the host IT of people, Indian roughly software abroad, one-third oneshouldcount in point for period himatsome alonger works However, specialist IT iftheIndian of India’s for abroad, firmstemporarily oneshouldco Indian works whether they should be included in India’s or in the host country’s employment data. If an Indian specialist IT “onsite”. services to workabroad deliver specialists IT number ofA large Indian thequestion poses This expansion was less dynamic than that of business of India’s accountedstill for total so more than two-thirds specialists, IT sector, high-skilled uses which software defined) 245,000 Employment people. inthe(narrowly reaching 2001-2002 FY 2003-04, more between thancare, doubled andFY finance andpayment services, customer comprise which sector.them worked inthedomestic Employment ITES) in“business (or services” NASSCOM (2005) India’s to adding150,000 thepayroll inthesector. people According to 2003-04, 2001-02 andFY FY between software industry employedin India’s 568,000 software people Table Appendix 8). than (see Ireland specialists more IT industry in FY 2003-04. (excluding About 5 perCompared with Ireland, cent IT-enabled India’s software of industry is in services (ITES)) expanded markets. on employment inmajorIT to have asignificant impact are modest too steadily by more Appendix than (see period throughoutforeigners the2000-2003 one-third employ feature known IT of Aless Irish from offshoring. 2001 any gains and2003, inemployment Irish more which between than offset services fordemand IT Iris in2003.2003, The falling people to alevelof 24,000 2001 and between one-quarter by nearly declined services employment inIT thecountry’s (IDA), Agency industry IT of intheemployment its dramatic decline a recorded itnevertheless services, IT for offshoring location Ireland remained anattractive Although services. largest IT services exports in recent years. IT theworld’s services andreports activities IT of offshoring to amongthemainbeneficiaries be said Ireland isoften employment in Ireland depends largely on exports of IT driven be to beneficiaries unlikely H-1B prominentmost role in approvals of of H-1B therefore is visas. beneficiaries H-1B earnings employing annual intheUS economy play the more likely skillshortages considerations. services seems cost by that wage It persistent IT of median providers the domestic to services IT of FY2003, and FY2002 in TableAppendix in given 9andannualized wages hourly $60,000 at that note in computer-related to match occupations closely theaverag interesting is It November 2000 and November 2003 (160,000). accounted inUScomputer of occupations for thedecline between most it islikely thatspecialists foreign IT that indicates than 100,000) 2003 (more 2002/FY 2001 andFY FY of approved H-1B between specialists IT to fill specific vacant IT jobs in the United States to foreigners recruit aneed 2003 there wasstill theother hand, occupations. On for eveninFY demand IT (see Appendix Table 9). The absolute decline 2003. decline of H-1B The in FY 2002 and85,000 reduced reaching in FY 75,000 clearlyreflects beneficiaries in the number of 9/11, andthetragedy com boom thenumber of approved for petitions H-1B wasmore than visas halved, of thedot. ofcomputer-related theburst shock thedouble andunder thefollowing years, occupations. In Kierkegaard (2004a) draws a similar conclusion in respect of the decline in approved H-1B inapproved visas. decline ofthe inrespect conclusion asimilar draws (2004a) Kierkegaard 29 services, which employs primarily low-skilled workers. low-skilled primarily employs which services, after 2001.after According to Ireland’s Development Industrial quite adifferent 20 league, atleast times asitemploys Contrary to the United States and Ireland, employment erefore inIndia’s included although employment data, Appendix Table by USfirms Onshore outsourcing Appendix 6). h experience illustrates thedramatic illustrates fall intheglobal h experience ment is that the majority of its employees had been had been employees of its ment isthat themajority 283 ftware industry (incl. ITES) in 2003. FY However, its nsider him as part of India’s IT sector employment. of India’s sector himaspart nsider IT e wages paid domestically in this occupation (see inthisoccupation (see paiddomestically e wages Table any In case, Ireland’s 7). employment levels

III THEMATIC ESSAYS C OFFSHORING SERVICES: RECENT DEVELOPMENTS AND PROSPECTS WORLD TRADE REPORT 2005 III THEMATIC ESSAYS WORLD TRADE REPORT 2005 C OFFSHORING SERVICES: RECENT DEVELOPMENTS AND PROSPECTS 30 industries in the US. The shares are calculated from the input-output table from 2002. table shares from are theinput-output calculated The intheUS. industries clearlyillustratetheir total structure. This is cost very factor is labour. Typically, production in-house important i.e. most The theshare produced in-house. valuethat has of been thesales vertically integrated industriesindication have of a the high extent share to of which compensation a sector is vertically to employees in the services sector to this has opened IT to higher-technology theareas of activities. specialization andshifting and human capital, dynamic, and verticalAt thenational is oneof theaccumulation changing with leveltheprocess comparative of advantage physical disint and hence the tasks that contribute directly to distin that contribute directly and hence thetasks theorgan within retained istypically what and services, providing andimproving treatment rather Both in than manufacturing alot spending of time onroutine tasks. thehealthsector, In thisco routine tasks. and outsource country. importing ofthe infirms in-house provided previously services IT by driven islargely industry inIndia’sexpansion software market share in the muchfaster Butnot than allthegains worldmarkets. inIndia’s expanded exports India’s global years. last software supply of IT services Obviously, years. fiscal India’s has over two increased over the thelast share services in thesupply IT of global should be attributed India’s while of 2004, employment in(thenarrowly de to offshoredUS IT employment services. growth in IT occupations Although was marginal the economies. oneach of these of outsourcing thepotentialfully impact more appreciate to order in debate offshoring current the in employment IT of size actual the recalling worth is It 2003-04. at320 cent of inFY force oneper of India’s labor million) aquarter (estimated about active represent the813,000 India, defined) In (broadly inthe“software“ employees data). sector establishment amounted to 1.16 industry services or0.9 millionpeople, cent on per of total non-farm employment (based andrelated design cent Employment of inthecomputer total occupations systems attheendof 2004. country. States, theUnited In incomputer the3.4 occupations millionemployees accounted for 2.3 per most prominent service sector subject to this dynamic. However, services such as entertainment, media, software software media, entertainment, as such services However, dynamic. this architecture, andev engineering, to development, design subject sector service prominent most or andproductive afocused maintaining while and services atthefirmlevelisoneof addingnewinnovation process st matures, orprocess itbecomes service the product, However, to theinnovating firmandare in-house. produced specific as are typically andservices goods New orprocesses. 3, take innovation can theform services inSection of of development newgoods, explained As isno comparative It advantage. andshifting diffusion integration, technology through specialization, trade to asashare where andled has growth of increased GDP international increased of trend War II post-World the of continuation a to contributes offshoring short, In andtrade inserv during thepost-World War period II anddevelopment engineof worldgrowth were not traded. World animportant trade has been if services slowdown wouldprobably worldtrade growth economies, aswellemerging constitute share andgrowing alarge indeveloped of GDP Furthermore, since services andimprovements are gains essential in to welfare. in economic this growth sector economies, productivity of total employment indeveloped country andthree-quarters two-thirds account for between Since services Implications for theoutsourcing/offshoring OFFSHORING AND OUTSOURCING OF IMPLICATIONS (a) 5. States employment intheUnited account andIndia IT IT services provided within manufacturing firms are also subject tooutsourcing. subject also are firms manufacturing within provided services IT 284 guishing the final product guishing thefinal product andardized and a possible candidate for outsourcing. The The for candidate outsourcing. andardized andapossible t new, but represents a deepening of existing trends. trends. oft new, existing adeepening butrepresents integrated istheratio to output, of gross valueadded d inTable shares different 3, cost infive shows which egration in service sectors is increasingly common. An sectors egration in service fined) software industry expanded by about one-third one-third byabout expanded industry software fined) ization are those tasks that are of strategic importance importance that areofstrategic tasks are those ization en education and health, have started to standardize to standardize andhealth, haveen education started s at the technology frontier,s atthetechnology mature goods spinning off uld enable highly skilled health personnel to focus on healthpersonnel uld enable skilled highly for asmallshare only of total ineither employment in 2003, but strengthened significantly in the course in 2003, inthecourse significantly butstrengthened ices, including offshoring, will sustain this process. thisprocess. sustain will includingoffshoring, ices, its IT services exports, not allof themare replacing exports, services IT its ganization. The finance sector springsto mindasthe finance sector The ganization. relative to world income growth in the long run run long inthe growth income toworld relative from that of competitors. 30

31 31 services IT Motor vehicles Cost component Cost structure in selected United States’ industries, 2002 Table 3 Ttlvleaddsae2. 595. 0482.4 2.8 17.7 60.4 3.6 63.3 12.8 3.1 1.4 58.3 2.8 4.8 46.3 0.2 19.0 0.6 5.9 45.9 1.3 6.9 11.4 0.4 3.2 6.9 0.4 38.6 0.7 1.5 27.4 1.7 0.0 8.3 3.8 0.4 5.7 0.7 33.7 2.4 7.8 8.2 1.7 1.1 2.2 0.5 18.6 6.6 Source: 0.1 0.9 0.7 share Total added value 8.9 0.6 0.2 Memo: 0.8 5.7 1.4 0.8 0.5 2.8 Gross operating surplus 1.7 0.4 1.8 Taxes less subsidies on and production imports, 1.2 Compensation of employees 1.1 10.3 1.7 2.3 services 6.0 Other 0.1 services and support Administrative 0.4 enterprises and ofcompanies Management 53.6 6.2 2.3 0.2 services andrelated design systems Computer 0.4 technical services 0.0 and scientific professional, Miscellaneous services legal and Financial services processing anddata Information andtelecommunications Broadcasting software) (includes industries Publishing services storage and Transport trade retail and Wholesale inputs Total material the cost saving is 40 is40 per saving the cost cent. and forward linkages, but these are not taken butthese into linkages, accountand forward here. only the direct effects of offshoring. Indirect effect billion (5.1 in intotal cost per cent) andthereduction reduced from $90 to wouldbe 10 $85.4 billion. If to costs to centwere India, $90 close per were offshored intheUSeconomy forAccording 2002, table to theUSinput-output intermediate services purchases of IT Scenario 1: towards theendof theSection. are discussed offshoring captive with made tothat be need offs assumes discussion andabroad. The locally suppliers to outside in-house that are atpresent performed of theactivities some could suppliers outsource service local to Second, foreign suppliers from suppliers. sourcing local firmscould shift from outside that purchase services andoffshori ofoutsourcing impact thepossible assess inTable depicted to onthebasisof structure are 3inorder thecost done experiments thefollowing, some In valueadded. Both have ahighshare of in-house services. support for other intermediate producing services sectors large shift in the industry’s core activities from manufacturinginput isquite low, is theshare while of material inputs to services such as R&D, design and wo marketing. isfurther It companies. the within isgenerated value The cent andasmuch as82per of total sales costs are cent wage more per where design, than of 60 total costs iscomputer systems from sourced At endof share other thespectrum firms. of theopposite highest inputs of thefive, motor ha vehicles, mature most industry The are purchased from other companies. inputs of services andthedifferent categories materialwhile inputs surplus andoperating Compensation taxes of employees, See Farrell (2004) for an estimate of net costs savings of outsourcing of services toIndia. ofservices ofoutsourcing savings costs ofnet estimate an for (2004) Farrell See US Department of Commerce, Bureau of Economic Analysis (2004). 10 per cent of servic intermediate purchases of IT 31 . . 04531.7 5.3 10.4 7.5 2.8 s would be transmitted in the economy through backward intheeconomy through transmitted backward s wouldbe ng. Two types of changes are analysed. First, companies companies First, ofareng. Two analysed. changes types the economy would be hardly discernible. This includes hardlythe economy discernible. wouldbe includes This very high in the motor vehicle industry, suggesting a highinthemotor suggesting vehicleindustry, very sectors are other business services and administrative andadministrative services are other business sectors rth noticing that the share of services inintermediate noticing that theshare ofrth services horing to non-affiliate firms, while the modifications firms,while themodifications horing to non-affiliate represent thevaluethatrepresent companies, iscreated within 285 s by far the lowest wage cost share, cost s by wage far andby thelowest far the es from all US industries are shifted to India and to India are shifted from allUSindustries es Other businessOther services Administrative support services Computer systems design

III THEMATIC ESSAYS C OFFSHORING SERVICES: RECENT DEVELOPMENTS AND PROSPECTS WORLD TRADE REPORT 2005 III THEMATIC ESSAYS WORLD TRADE REPORT 2005 C OFFSHORING SERVICES: RECENT DEVELOPMENTS AND PROSPECTS 33 32 house activities to outside firms, half to India and half to local suppliers. It is assumed that outsourcing to local local to outsourcing that assumed is It by 10 unitcosts firms reduces cent. suppliers. per local to half and India to half firms, outside to activities house 10 companies outsource cent per of theirin- services thelocal suppliers, from competition Indian increased cent to supply. per lowerthan areaction local is40 As service of netunitcost theoffshored to The India. Scenario 2: more than 0.1 per cent intheUSeconomy. of total costs to at40 India was offshored per this cent lower costs, administrative amounted services support to $824 and $412 (i.e. and “Miscellaneous professional, services”) scientific andtechnical services Purchase of business Chart 3. in way isdepicted through for theeconomy. ifgains price are used reductions structure change incost The thetimeittakes andprobably for thegains to worktheir effects of these difference istherelative importance The arespent. andoffshoring outsourcing gainsfrom waythe whichever investment, andmore income reality,In of are thes amix thegains from outsourcing customers through lowerprices. customers onto more themarket, competitive The passed thelarger theshare be will higher wages. savings of cost through captured lowerprices, ortheycould by orby be thefirmsthrough workers higherprofits through onto customers passed could be savings cost are spent. The onhowthesavings depends sectors services two inthe ontheeconomy of reduced costs total impact The 0.5 cent Statesvalue intheUnited per of (or GDP). output cent of total industry per to 0.3 close wouldbe steps of thetwo savings total cost The saved. would be activities to outside suppliers, of which half went to In 10 by to competition offshoring respond increased sectors intermediateper services thetwo If cent of their • higher wages. If the cost savings from outsourc savings thecost If higherwages. • theiroutput andmaintain onto customers, savings higherprofit cost firmsavoid margin. passing If • rate andprofit thetax marginare kept If Lowerprice theprice of constant, theservice. of business • Total costs are equal to total output value. output to total equal are Total costs suppliers. todomestic outsourcing from level atasectoral saved is much how exactly about isknown little since example, an as serves and arbitrarily somewhat ischosen percentage This consumption expenditure; consumption ofthe part and allor marginandinvestment, profit relationship between is, however, There bulletpoint. theprevious under discussed noone-to-one asalowerprice, run, inthelonger could which inturn as have asimilar effect services and better could leadto This rate ahigherinvestment inthesector 18 services. centper support inadministrative theprofitprices, from marginwouldincrease 24 to 27 per andfrom 15 services cent to inbusiness 2.5 $750 about per 0.05 adding cent, or million investment; per cent tototal could real increase cent investment price reduction A2.5 per sectors. toother products investment supplies also sector services business cent. The per 0.3 noted, already 2.5 theprice by levelinthetotal cent about economy per woulddecline inthiscase. As - asthecost percentage by thesame woulddecline services support andadministrative services sectors. draw on the same pool which leadto pressureinother also for sectors wouldprobably to higherwages It higherinvestment. of skills – and of thegains companies, some wouldbe outsourcing subsequent pressure to outsource to save costs also in these 5 per cent services of USpurchases of business 32

Again only direct effects are estimated. effects direct Again only 286 dia and half to local suppliers, anadditionaldia andhalf suppliers, $28 to local billion e three elements, but lower costs contribute to butlowercosts higher e three elements, would save theeconomy 25would save billion orslightly dollars, ing was captured by the remaining workers in the inthe remainingworkers bythe ing wascaptured 33 additional profits could addtoadditional simply profits shareholders’

in these investment products, possibly by around byaround possibly products, investment in these and administrative support services are shifted are shifted services support andadministrative spent, and some would be saved, contributing contributing saved, be would some and spent, billion respectively in2002. 5 If billion respectively per cent of this

34 a shift in employment from capital-intensive to labour-intensive sectors in the capital-exporting country. inthecapital-exporting to labour-intensive sectors inemploymentfrom capital-intensive a shift in results andrecipient of country. capital intheoutsourcing both andlabour general anoutflow In of capital therelative endowments introducesCaptive anadditional dimension offshoring into since itaffects theanalysis tradable. that changes make changing andtechnological services comparative with advantage would expect what one isprecisely This analysts. system and computer andnetwork engineers created forbeing software inbasicprogramming. were jobs However, were2003. jobs more These skill-intensive period inthesame that about 100,000 computer programmer jobs were lost due to offshoring to India during the period 2000- lagging behi period, during thesame 541512) code (NAICS services design 1.8 earningsofsystems only inweekly anincrease cent per experienced to of anincrease 9.5 cent per for earningsinthetotal USprivate average sector. weekly However, computer 5415) code by (NAICS 10.8 increased cent, andrelated per ascompared services design computer systems workers in earningsof average production weekly 2004, toof thebubble. September From 2000 September clearly distinguished be cannot ofoffshoring effects by andlarge has dominated, althoughthe effect that theproductivity far so Empirical evidence suggests (Eckel, 2003). offshoring of captive inthecase of capital sector,outsourcing onaverage both and intheactivities of the intensity onthehuman capital andphysical anddepends question isanempirical isthestrongest effect workers. Which for allowing higherrewards to domestic andreduce costs, tend to productivity raise inputs of imported lowercosts tend while to down, go offshored being intheactivities andwages demand Labour ways. runboth infact does Butthecausality decision. theoffshoring affect wages, notably prices, in factor Section In howdifferences 3 itwasshown countries, there are likelydeveloped effects. distributional to be Although offshoring is unlikely Bhagwati etal. 2004). gains (see the productivity to havedeterioration of terms of trade outweighed which a negative a that wouldcause are nearthescale nowhere im developments during couple the next of decades, likely and present, at offshoring of However, scale the US supply, terms of there isanegative trade effect. inworldmarkets asaresult ofdecline additional andtherelative price of these andservices goods information-intensive relatively exports States United worldmarket prices. affect the If structures cost States economy, isalarge and trade volumes its and for States. theUnited However, since theUnited thisimproves welfare forcases theworldasawhole conceivable most In activity. the import-competing that factor intensively isof used the production in of therelative reducing income has theusual effect Further, of inputs. it and throughvariety abroader byChart 3, asillustrated input, offshored individual of each firmthrough lowercosts in theoffshoring productivity itimproves ingeneral: inputs intermediate astrade in effect firms abroad has thesame toemployment. non-affiliated services Offshoring of thecomposition trade and and abroad affect athome changes andtechnical trade policy while policy, macro-economic domestic by determined the aggregate trade balance of aneconomy are that thetotal isknown employment leveland It This is a prediction of the so-called Rybczynski theorem. Rybczynski so-called ofthe isa prediction This nd the overall economy. A recent study (Baily and Lawrence, 2005) finds nd theoverall andLawrence,2005) economy. (Baily Arecent study from the effects of thedot.com bubbleandthebursting from theeffects Scenario 2 Cost before structure and outsourcing after 3 Chart pact ontotal welfarepact intheUnited States andother being outsourced (Kohler, 2004), and on the mobility andonthemobility (Kohler, outsourced being 2004), Cost 2002 =1 Cost 2002=1 287 0.0 0.2 0.4 0.6 0.8 1.0 0.0 0.2 0.4 0.6 0.8 1.0 Administrative supportservices culOutsourcing Actual culOutsourcing Actual Other businessservices Services inputs Wages surplus Gross operating Material inputs Services inputs Wages surplus Gross operating Material inputs 34 The

III THEMATIC ESSAYS C OFFSHORING SERVICES: RECENT DEVELOPMENTS AND PROSPECTS WORLD TRADE REPORT 2005 III THEMATIC ESSAYS WORLD TRADE REPORT 2005 C OFFSHORING SERVICES: RECENT DEVELOPMENTS AND PROSPECTS 35 44 per cent of employment accounted butthese for cent 77per of atenth turnover of and were theenterprises foreign-owned About (Central accounted in2002. Statistics for cent 7per of services total employment inservices ICT and Curran, Barry, 2004). 2004; Office, theleadingEU of with Ireland’spart amazingcatch-up Ireland, 2004). animportant has been andhardware) software (both ICT bubble(OECD, of IT 2005b). theburst following and 1986. unemploymentrate to went The 3.9 down cent per in2001, 2001 butpicked upslightly after itwasamongtheEuropean unemployment rate,ago countries thehighest with 17 atalmost cent per in 1985 not have today, anunemployment problem anddoes 15-20 butsome Ireland is not capital-constrained years professionals” in2003, figure for thecorresponding was20,000. while thePhilippines that 135,000, there wereis about 195,000 IT focused suggests “active (2005) NASSCOM while export jobs estimates that thenumber of2005) software-related andLawrence, are likely netadditions to to be (Baily totalsector employment andinvestment. Arecent study exporting services intheIT Therefore, made created andinvestments jobs capital-constrained. also probably have unemploy andthePhilippines substantial India $15.9 in2003/04. billionsales andservic inthe software sales domestic Indian (2005), According to NASSCOM 2004). (ITU, inChina to 100for 33 example inMexico per inhabitants lines and40 22. compares This about was it Philippines in2002, inthe while 100 inhabitants per 5.2 only was lines) mobile and computer andtelecommunication penetration in Indi requires that thesupplier both have andthecustomer is unlikely them. This to have orsustained initiated is for demand such services since local of there exporting, atallifnot fornot thepurpose have established countries from andother wouldprobably poor India that enterprises export Many services of theIT-enabled country. inthehost exist constraints unemployment andcapital isun of FDI type This category. FDI the export-platform andthus falls under for producing exports ismainly andthePhilippines) Ireland (India, the majorexporters inmany of sector services IT-enabled The industries. crowding outof be local can effect negative A possible countries are inhost thefollowing: gains from FDI andtrade. possible FDI The enterprises, on the impact for service-exporting countries therefore for service-exporting on theimpact discussion The offshoring. of captive isinthecategory services thebulkof trade inIT-enabled noted in4(b), As country of outsourcing Impact onthe service-exporting (b) market tomaintain company share in order offshoring by the adefensive may strategy wellbe It to askwhatisthealternative to offshoring. important isalso It onthetotal of composition employment intheUnited States. to have effect adiscernible of services for offshoring captive have probably than larger to will observed be flows any In case, thecapital of profits. country. counterbalanced is extent to This some by therepatriation is truein thecapital-importing opposite low-skilled activities, where the low-skilled activities constitute arelatively large share of total activities costs. thelow-skilled where activities, low-skilled relevant market isparticularly This share anddownsizing. of butaloss market production final that for output.In case, thealternative isnot its domestic to offshoring • linkages to the local economy. to thelocal linkages • • technology countries); host capital-constrained intotal (in investment increase spillovers; • of unemployment andunderemployment); cases employment creation (in • owned and accounted for 84 per cent of employment and 97 per cent of turnover (Central Statistics Office, Ireland, 2004). Ireland, Office, Statistics (Central ofturnover cent 97 and per ofemployment cent per 84 for accounted and owned foreign- were of136 97 out where enterprises manufacturing, inICT role important amore play enterprises Foreign-owned 288 because the existence of specialized services suppliers suppliers services of specialized theexistence because IT hardware (computers and telecommunication lines), lines), telecommunication and (computers hardware IT ment andtheyare problems andunderemployment economies since it became a member in1973 amember since economies itbecame (Barry es industry accounted for $3.4 industry billionoutatotal ofes in the face of increased import competition inthe competition in theface import of increased draws on insights from the theory of multinational from thetheory oninsights draws in industries that perform a mix of high-skilled and of high-skilled amix that perform inindustries a islow. rate penetration telephone The and (fixed likely to crowd out local industries, particularly if particularly likely industries, to crowd outlocal created in India in order to service theUS market to service inorder created inIndia 35 Ireland has been highly successful in successful highly has Ireland been 37 36 sector by sector andaccording by sector tosector four of modes supply. “positive approach”, list onaso-called Based sectors. Since 1995,arrangements. theGATS aframew has provided multilateral transparent under andpredictable for offshoring trade involving opportunities for extending OFFSHORING ANDTHE GATS: WHAT ISAT STAKE? might isrelated exist to theGATS howoffshoring Agreement, andwhat opportunities discusses Section This 6. contributing companies,higher than wages further local gaps. wage to wider multinational companies tend to Besides, pay what theaverage workeris wellabove Indian possesses. intensive labour States intheUnited an is low-skilled services to e.g. India, although coun thetwo between structure the inindustrial the differences evidence is more andlabour-intensive unskilled relatively andHanson, are (Feenstra outsourced country being a poorer 1997). isthat reason theactivities while The opposite –the inequality inwage andanincrease skills for to from indemand led States anincrease theUnited has actually of activities manufacturing outsourcing that inMexico, shown ithasbeen countries, inexporting Turning distribution income on impact tothe integrated economy over thelocal time. with become services to these which ontheextent depends services offshored of hosting effect development integratedtime become economy. into thelocal that concluded the be itcan onthisexperience, Drawing zones, incontrast, dev has not generated sustained asenginesof creating linkages andthereby serving suppliers, to from transfers local abroad andchannels of diffusion technology forrecipients technology had not yetreached levelsthat ascale- could sustain demand that andfor were domestic which atthefrontierin industries of thecountries’ capacity technological inthe1960s oninvestments wasfounded countries (NICs) Asian industrialized inthenewly growth Export-led more likely to follow suit (Barry, 2004). country.the same particular, In ifoneormore of to themajormultinationals acountry, offshore are others entreprene inspiring local effect, ademonstration could be benefi also but firms, foreign accommodate or attract to that inorder are ininfrastructure made foreign draw. from can companies investments stems impact Another and domestic onwhich askillspool via for transfers, to example measure technology andentail difficult are found small to Linkages be effect. development its linkages creates offshoring captive which to extent The has inhuman investment motivated for capital. labour and theirdemand skilled fore the time over Furthermore, 2004). (Barry, 2002 in firmsaccounted forexports cent 89per of Ireland’s andforeign-owned FDI platform services export attracting distribution, at least in the first instance. inthefirst atleast distribution, bu inIndia, likely andexports to employment increase to supply aservice. to supply (B) Member of another territory the entering (A) Member ofone ofpersons consists 4) (mode persons ofnatural presence the and aservice; toprovide (B) Member of another territory inthe presence acommercial establishes (A) Member one of supplier aservice that implies 3) (mode presence commercial B; Member ofanother consumer Atoaservice Member of territory inthe issupplied aservice where tosituations refers 2) (mode abroad consumption (B); Member of another territory intothe (A) Member of one territory the from flows services tocover 1) isdefined (mode supply Cross-border ofFDI. effects country host and home on asurvey for (2002) Lipsey example for See in the United States,in theUnited theyare relative it allows governments to undertake specific commitments commitments specific undertake to governments allows it of an anecdotal nature. of ananecdotal Routineinformation processing d other developed countries, buttheskillsrequirementd other developed ign firms have established li ign firmshave established growth. Rapid export growth from export processing processing from export growth Rapidexport growth. of what one would expect in trade between arichand intrade between of what onewouldexpect t may onincome not have favourable asimilarly effect effective industry. These exporting industries became became industries exporting These industry. effective elopment unless the exporting industries have over industries theexporting elopment unless for export-platform FDI in general. Spillovers are more ingeneral. Spillovers FDI for export-platform t local firms and the community atlarge. Finally, firmsandthecommunity t local there 37 and/or spillovers economy to is thelocal crucial for and/or 289

urs aswell asother foreign in to companies urs invest tries. A similar effect is observed in outsourcing of of outsourcing in observed is effect similar A tries. ork for the liberalization of virtually all services allservices ork for of virtually theliberalization ly skills-intensive in Mexico dueto inMexico skills-intensive ly nkages to the local economy to nkages thelocal 36 Therefore, is offshoring

III THEMATIC ESSAYS C OFFSHORING SERVICES: RECENT DEVELOPMENTS AND PROSPECTS WORLD TRADE REPORT 2005 III THEMATIC ESSAYS WORLD TRADE REPORT 2005 C OFFSHORING SERVICES: RECENT DEVELOPMENTS AND PROSPECTS 40 39 38 of services through telecommunications or mail, as well international include thesupply transport, delivery as of cross-border services Examples embodied I:2(a)). (Art. another Member” in exported goods. “mode of into of 1”), theterritory oneMember from theterritory as“the isdefined which supply of aservice relevant most The of mode supply for activiti offshoring in a Member’s Schedule.”in aMember’s through by mail allmeans whether of delivery, a service 1.mode [...] amarket access commitment to theright suppliers 1implies for supply for mode other Members’ under [...]indicates means of delivery neutral possible that not theGATS limitthevarioustechnologically does “does cross-border. This not contain to any asto supply services indication used themeans that be can I:2(a) panel. the In dispute settlement by arecent WTO endorsed has been neutrality principleof technological The transactions. during theUruguay Internet Round, wasnot when widely referred to as“technological means, neutrality” in particular, undertaken commitments 1specific that mode financial services, but also health and education, for instance) do guarantee a certain level of transparency levelof transparency guarantee do acertain for healthandeducation, instance) butalso financial services, computer services, (professional services, 2–inrelevant sectors 1–andmode mode under undertaken na specific to themto tailor its thus allowing aMember Moreover, commitment commitments. specific specific these of supply for theyare which to andmodes ready undertake thesectors to select have thepossibility Members treatment favourable noless Members than suppliers. thetreatment accorded andservice to national services of suppliers other National treatment refers andservice to torestrictions. theobligation accord to services vis by foreign services national guarantees aslegal enjoyed defined schedule. inits be GATS can by commitments eachMember specific suppliers, governingThe degree of market opening consolidated under the GATS is determined by specific commitments undertaken conditions of access to a market 1and2.of for commitments modes both and conditions solution might facilitate Pendinganagreed negotiations. of competition supply relevant for electronic 2are/is mode 1and/or mode onwhether among Members understanding An 2(fordifferent 1andmode instance, for there mode isan“Unbound” 1anda“None” for mode 2). for mode as well. However, when, for inpractice, sector, arise may agiven aproblem only thelevelof commitment is the development of theInternet, this means that thesc have with supplied electronically, increased andasthese be can services where inallsectors arises problem thesame it.As onhowto address andhave notrelation reached aclearunderstanding to financial services in mainly thisissue have far, discussed So Members of aservice. WTO for theplace determining of delivery presence physical andthe distinction, this blurs delivery 2. of mode inthecase However, theterritory for of theformer andoutside theMember mode electronic theterritory within isdelivered 2isthat theservice 1andmode mode between theory, themaindistinction In 1, thecommitment. mode having For undertaken of theMember theterritory thesupplier issituated outside “consumption consumer of any to theservice otherof (so-called abroad”, Member” oneMember I:2(b)). Art. “in considered 2, be asmode asthesupply also of defined aservice theterritory Should anInternet transaction Members. toearly consider by asformally WTO this statement endorsed transactions also fall also transactions between the different technological means through which a service may be supplied.” may be means through aservice thedifferent which technological between neutral, thatthe GATS “it inthesense not wastechnologically contain any provisions that does distinguish that commerce, Members onelectronic thediscussions there amongWTO sharedIn wasagenerally view domestic suppliers. In GATS terms, the concept of market access entails six quota-type and other specified Note that the Report was appealed on 7 January 2005; the Appellate Body Report is expected at the beginning of April 2005. ofApril beginning at the isexpected Report Body Appellate the 2005; 7January on appealed was Report the that Note document Services Betting and of Gambling Supply WT/DS285, Cross-Border the Affecting States–Measures United circulated 4. paragraph S/L/74, document 19 on 1999, July WTO Services on 10 November Council General tothe Report –Progress Commerce Electronic on Programme Work 2004 (hereinafter 28. paragraph S/L/92, 2001, document 23March on WTO Council Trade for bythe inServices adopted See Guidelines for the Scheduling of Specific Commitments Under the General Agreement on Trade in Services (GATS) Trade on Services in Agreement General the Under Commitments of Specific Scheduling the for Guidelines United StatesUnited –Gambling inter alia 40 One shouldnote, One isthus however, too It appealed. has been that thispanelreport under mode 1. dispute, thePanel considered that thedefinition 1 in of Article mode 290 tional policy objectives. Therefore, specific commitments Therefore, commitments specific objectives. tional policy ope for potential controversialope situations has expanded es is the so-called “cross-border supply” of services (or (or “cross-border supply” of services istheso-called es of the consumer is not necessarily arelevant of the consumer criterion isnot necessarily , telephone, Internet, etc., unless otherwise specified specified , telephone, Internet, etc., otherwise unless , the best approach may be to may approach ensure be asimilar level , thebest used by the business community, cover do Internet business bythe used s can be qualified with various types of limitations, varioustypes qualified with be s can United States – Gambling , adopted by the Council Trade for bythe in , adopted ), paragraph), 6.281 and 6.285. , Report by the Panel, WTO WTO Panel, bythe , Report 39 This principle, 38 Electronic Electronic vis-à- , 42 41 negotiations? A WTO Secretariat study Secretariat negotiations? AWTO inprevious schedules consolidated inMembers’ Buthowfar 1and2been new commitments. have modes anopportun negotiations offer currentThe services records andaccounts, andto of andfraudulent individual preventconfidentiality practices. deceptive alia permits, XIV(c) the maintenance noting of that publicorder. Article worth itisalso thiscontext, In of publicmorals such and astheprotection objectives, publicpolicy to achievecertain measures necessary from their to GATS depart conditions obligati Members for elec general exceptions pertinent are which obviously of theGATS ex framework relevantAnother isits aspect of the“importing” theterritory to situated suppliers enforced Member? outside respect with inst approaches? For of regulatory for different types call supply of services theelectronic Does 3and4)? (modes of theMember are theterritory present within to supplied by who those suppliers asopposed supplied electronically differently onservices measure impact a consideration. instance, closer given does For shouldbe which anumber of trade raises questions border measures to these cross- Applying to trade inservices. barriers criteria, not anddo constitute unnecessary andtransparent onobjective are based andlicensing requirements) standards technical and procedures, developing disciplines to ensure that manner, are currentlyand impartial Furthermore, Members andare not than more necessary. burdensome aframework of to rules ensureestablishes that services but thequalifications of thesupplier. objectives, to GATS influence not seek The policy does and/or service include, objectives Policy this principle in the inthe this principle theirterritories within inorder the supply of services recognizes“the GATS right The explicitly of develops. to regulated isheavily regulate andtheneed islikely to ascompetition increase sectors trade inmost Services andalso practice, of behaviour monopolies, the application of other GATS disciplines, regulatory related to requirements, good transparency in particular Mo suppliers. andservice facto, foreign against services and cannot discriminate, XVI implement any market of thesix inArticle access measures listed market access andnational treatment meanthat commitments the“importing” cannot maintain Member or Full services. includingoffshoring-related modes, these under to countries services supplying and predictability interpreted since, care to with another. for mode, there bigvariations agiven may from be onesector countries. However, anddeveloping developed to be wouldneed such general patterns between significantly the that is characteristic interesting Another andtheyare found infinancial, mainly andprofessional requirements) telecoms presence services. (the are used fewer3, types forthan instance; for mode is that they are consolidated mostly as “None” (i.e. no limitation) or “Unbound”; limitations are less common forprohibit allsuppliers reasons of “regulatory prudence”. 1commitments of mode Butthemaincharacteristic to situated suppliers another prompted abroad may which to explanation be theright governments retain to howto about enforce measures respect Uncertainties with regulatory result developments. of technological may have since changed theendof theUruguay Roundasa cross-border of tradingfeasibility” services However, for instance). one shouldnote that theassumptions concerning services, hairdressing the“technical theconsumer services, andrestaurant andthesupplier (hotel nature, between proximity require physical which, by theirvery supply isirrelevant –for remain –andwill so anumber of activities cross-border Indeed, an“Unbound*”). with indicated explicitly theysometimes (which feasible for technically to sectors given be have of 3, supply notthan considered thismode mode for that may explanation Members instance. be One , Members to take measures necessary to protect the privacy of the personal data of individuals andthe of individuals data of thepersonal theprivacy to protect to take measures necessary , Members WTO (2001). WTO in Services on 28 March 2001, WTO document S/L/93. Trade on Services in Negotiations the for Procedures and Guidelines Negotiating Guidelines inter alia , the protection of theconsumer, theprotection to ortheneed ensure of the thequality level of bindings for individual modes, including mode 1, includingmode notdiffer modes, does for ofbindings individual level certain types of non-discriminatory measures (qualification requirements requirements measures (qualification of non-discriminatory types certain 42 reveals that mode 1 has attracted overall far fewer commitments 1has reveals attracted that mode the Annex onTelecommunication theAnnex Services. which provide theframework provide for which thecurrent negotiations. to national meet objectives”. policy reaffirmed Members Members to regulate,Members andintroduce newregulations, on ance, howare andlicensing qualification requirements reover, the undertaking of specific commitments triggers triggers commitments reover, of specific theundertaking ity to improve existing commitments, and undertake andundertake commitments, to improveexisting ity regulations are administered in a reasonable, objective regulations areinareasonable, administered objective y include mainly nationality, residency andcommercial nationality, mainly y include residency ception provisions. Article XIV, for instance,ception contains Article provisions. 291 ons, including their specific commitments, to commitments, takeons, includingtheirspecific tronic transactions. This provision allows in certain incertain allows provision This tronic transactions. , adopted by the Special Session of the Council Trade for ofthe Session Special bythe , adopted de jure orde inter 41

III THEMATIC ESSAYS C OFFSHORING SERVICES: RECENT DEVELOPMENTS AND PROSPECTS WORLD TRADE REPORT 2005 III THEMATIC ESSAYS WORLD TRADE REPORT 2005 C OFFSHORING SERVICES: RECENT DEVELOPMENTS AND PROSPECTS 45 44 43 This list is based onthe1991 isbased list This Provisional Central UN Classification Product consider that thecurrent framework is“far from ideal”. Is the GATS equipped to promote liberalization further of offshoring-related services? Some commentators countries. indeveloping inparticular centers, by thecountries “exporting” may activities offshoring commitments 3 Mode countries. “exporting” in activities offshoring developing to contribute may restrictions foreign investment that lifting suggests 4(c)) is“captive” of Section alloffshoring (see two-thirds offshoring relevant 1and2are most for nodoubt the modes While suppliers. anddiscip procedures andappeals reviews administrative of establishment information requests), to to mandated other respond Members’ points enquiry to establish (obligatio requirements disciplines transparency include ontheirna based suppliers orservices among services of such discip important most The commitments. specific scheduling course, Of of trade evenintheabsence general to GATS that apply to services some do recall useful disciplines isalso It liberal. rather be to tend outsourcing, process business and operators. for business andpredictability wouldaddtransparency inrelevantcommitments sub-sectors services technology information access conditio actual fact, In of trading opportunities. not meantheabsence does sector inagiven commitments that to of theabsence recall specific isimportant It transactions. electronic of surrounding thediscussions thestatus given 2. apotential may source of be mode This difficulty under of supply.other three modes of thetime, 1have for repeated mode not Most scheduled limitations been 2are more to significantly liberalthan for mode those the respect with undertaken commitments Specific stated that the negotiations should preserve the existing structure and principles of theGATS structure the (including theexisting that thenegotiationsstated shouldpreserve Secondly, theframework defining for when thenewro consideration services. give to of BPO theclassification result far. notangible so –butthere has been torelated had services proposed 2005, early no Member By –including computer and of to varioussectors theclassification review have started Commitments, Members such asenergy,sectors, telecommunication, environm other important equally theyaffect services; relatedproblems andBPO are to not to classification limited IT that are noted, covered. shouldbe nevertheless, It activities andBPO IT a result, individual itisunclearwhere The Services Sectoral Classification List is generally for indicating eachof CPC themthecorresponding number. acknowledged 160 inabout disaggregated sub-sectors, sectors, to be outdated in a number of sectors. As which, coupled with the request-offer process used in used process which, therequest-offer coupled with “n wouldinadequately which reflect system, classification above, themaincriticismconcerns thecurrent 2discussed asinrelation 1andmode to mode delivery called “Services Sectoral Classification List”, Sectoral in1991. of theGATT “Services by theSecretariat called wasestablished which far, So ontheso- have theirschedules based Members most andsub-sectors. sectors committed to describe toTurning system follow classification any GATS not specific require Members The does first. to classification 1and2). for modes wo horizontal commitments (such range of services wide ahorizo to undertaking for instance), maritime transport, were schedules (such services andBPO trade of IT border for cross- schedules range of from deficiencies model theuse perceived these to correct Proposals efforts. Services Sectoral Classification Sectoral List Services WTO document MTN.GNS/W/120, dated 10 July 1991. (2004). Wunsch-Vincent and Mattoo , Note by the Secretariat, WTO document MTN.GNS/W/120, (hereinafter ‘W/120’). (hereinafter MTN.GNS/W/120, document WTO Secretariat, by the , Note 292 tionality (MFN obligation). Other generally applicable applicable generally Other obligation). (MFN tionality further contribute tofurther of thedevelopment offshoring n to publishallmeasures and of general application used in the negotiations on telecommunications and telecommunications on negotiations inthe used ental services, etc. theCommittee onSpecific In ental services, ntal commitment to liberalize cross-border trade in a a in trade cross-border liberalize to commitment ntal the negotiations, would slow down liberalization liberalization thenegotiations,wouldslowdown ns for services supplied electronically,ns for services in particular uld mean, in fact, adopting a negative list approach approach list anegative adopting uld mean, infact, lines ontheoperations of andexclusive monopolies 43 ew” services, aswell asthe“positiveew” services, list approach” lines is no doubt the obligation not to theobligation discriminate isnodoubt lines development of offshoring activities, the fact that thefact development activities, of offshoring und of services negotiations, Members explicitly explicitly negotiations, Members und of services In addition to the uncertain status of electronic 45 (CPC Prov.) and lists 12 Prov.) (CPC andlists services 44

47 47 46 They should be addressed as such. commercial raise reality, for instance) classification, liberalization into taking without (obsolete atonly targeted afew account activities services the of may which offshoring-related impairtheliberalization trade. of theGATS Weaknesses systems cross-border the GATS allows specific of supply. andother modes of current The structure inother for liberalization sectors made strengthening be commitments to be undertaken to for regime agreement inorder create offs aspecial to andto different warrant solutions, runtheriskof fragmenting drastically the initself sufficient be necessarily As a result, mode 1 already figuresprominently negotiations. 1already aresult, intheongoing mode As andthedevelopment acti ofimportance offshoring-related has significant economic gained trade inservices cross-border aresult developments, of technological As services). asenergy (such for made could other sectors be case strong butanequally have merits, does for similar proposals trigger wouldinevitably initiative Moreover, such 1and2wouldcontravene an modes for such under approach expectations. commitments list indeci flexibility more them give would principles these ofProponents this approach deve –amongthemmost managerial skills to take advantage of both low-cost labour of andthedigitization many lines communication inform and new market opportunities. countries. Realizing thepotential of new two in these industry However, credited services alonecannot for be andIT-enabled government thesuccess of support theIT trade facilitation, training,educational butincluded created afavorable environment. wasnot to limited and business infrastructure Government support which governments, by therespective supported wasstrongly sector of theIT therise Ireland andIndia, In accounts than for 0.25 cent less force. per labor of Indian sector theemployed IT defined broadly eventhe Nevertheless, years. two thelast within inIndia doubled sector. Employment sector inthelatter offshoring component dynamic of indicate that services employment themost andtrade data Indian employment data. is not within country’s andmany workabroad inthehost of themare still included of India’s specialists part A large IT the high-skill-intensive employmentisexport-oriente industry India’s software an increase of 37 per cent since IT fiscal year se 2001-2002.industry Again, according to employment NASSCOM(2005), 95 per cent of information are to reported services amount to $14.4 (narrowly defined) in2003, alevelmarkedly lowerthan in 2001. industry of computer and software Ireland’sin its exports amounted to 568,000 are Irelan Ireland andIndia. offshoring service the IT people in fiscal ifrelated to of theirtotal employment. According theleadingbeneficiaries data, to BOP services IT exporting year 2003-04, affected most countries representing developed inthe levels employment today by offs number of affected jobs The trade patterns. is far jobs in perception employment thepopular stronger and production, than onactual services offshoring related to andfears expectations one istempted to of conclude that theexpressed most services, of IT the offshoring the size theinternational reviewing In and trade andtheemployme dynamics of offshoring7. CONCLUSIONS of IT services are exaggerated. At present, the impact of therequ andtheyestablished approach), list positive negotiations, Mexico, Chile, and from India Communication the instance, for See, Trade on Services, in Negotiations the for Procedures and Guidelines on Services on 28 March 2001, WTO document S/L/93. WTO document JOB(04)/87, 28 June 2004. 28 June JOB(04)/87, document WTO more horizontal questions because they affect nearly all services sectors. sectors. nearlyall services more theyaffect horizontal because questions est-offer approach asthemainest-offer of method negotiation. technological innovations such as low-priced bandwidth bandwidth innovations such aslow-priced technological d reports “only” were employed people 24,000 about d reports horing-related services. Equally strong arguments could arguments Equally strong services. horing-related ctor, but in the generally low-skilled business services services ctor, business low-skilled butinthegenerally other modes, in particular mode 3. A model schedule a favorable tax regime and FDI-friendly regulations. a favorable regime andFDI-friendly tax d and only 5 per cent works for the domestic market. for cent thedomestic 5per d andonly works loping countries – were motivated by the expectation countriesloping –were motivated by theexpectation ding which sectors to liberalize. anegative Adopting sectors ding which ation-based services also needed companies with the companies with needed also services ation-based nt data ofnt major countries data in prominently engaged 293 billion, the largest in the world. Indian software software intheworld.Indian billion, thelargest vities certainly contributed to interest. thisrenewed certainly vities and should be able to further the liberalization of theliberalization ableto further and shouldbe horing IT services is small if related to the overall . It is also small in the countries which have started smallinthecountries have which isalso started . It Joint Statement on Liberalization of Mode 1 under GATS 1under of Mode Liberalization on Statement Joint adopted by the Special Session of the Council Trade for ofthe Session Special bythe adopted 47 However, thisfocus may not 46

III THEMATIC ESSAYS C OFFSHORING SERVICES: RECENT DEVELOPMENTS AND PROSPECTS WORLD TRADE REPORT 2005 III THEMATIC ESSAYS WORLD TRADE REPORT 2005 C OFFSHORING SERVICES: RECENT DEVELOPMENTS AND PROSPECTS 48 less uncertainty asto their implications. uncertainty less nomenclature, to contemplatescheduling with Members newcommitments wouldmake iteasierfor WTO mode between asthedefinitional distinction matters however, wasnoted, It that impr opportunities. trading multilateral andtransparent market GATS under access atincreasing commitments predictable aimed auspices, Finally, as far as the GATS is concerned, offshoring ahead. intheyears forcelabour growth is one of many services sectors that could be subject to change theoverall employment situation inthecountr the countries thenormalturnover offshore, which given ra will increase national significantly in size employment upsetting inlevels in without thecoming services years (accounting in2004. cent than for 2per of sales less USretail distribution nicheintheretail has found its butthisnewtechnology wasnot assignificant aspredicted, 90s with previous revolutions suchIn as e-commerce. ten years’ The time, pr “the new wave of globalization”IT sector in the brought coming years. by the offshoring to of offsho theexpansion inrespect other companies) of services will be (and by Forrester made of theprojections Some to changes alargeextent. markets accommodate compared structural andth overasignificantstretched trialanderror period isusually andmanagement methods of newtechnologies adoption The atthebeginning. experience will economies, flexibility in periods of adjustment reduce an capacities require ofchanges adjustment production gains, are majortechnological which income thesource All of gains. alllasting productivity economy-wide change contribute by technological markedly provided to that has opportunities shown experience Past US Department of Commerce, News, Quarterly E.Commerce Sales, 3rd quarter 2004, 19 November 2004. 19 November 2004, 3rdquarter E.Commerce Sales, Quarterly ofCommerce, News, US Department 294 s the losses which some firms and employees inevitably inevitably firmsandemployees some which s thelosses ojections of the expansion of e-commerce inthe mid- of of theexpansion e-commerce ojections 1 and mode 2 and the need for clarity with regard to regard with for clarity 2andtheneed 1 andmode ring might be chilled in a harsher environment inaharsher chilled ring might be for the ies providing the offshored services, given their large theirlarge given services, theoffshored providing ies e normal turnover rates (or churn rates) in the labour churn inthelabour e normalturnover rates) rates (or d the employment structure. In the (net) offshoring offshoring the(net) In d theemployment structure. ovements in GATS, particularly inrelation to inGATS, such ovements particularly tes in labour markets. Neither will it dramatically itdramatically will Neither markets. inlabour tes 48 Likewise, offshoring of IT and IT-enabled andIT-enabled Likewise, of IT offshoring der Arbeit), Arbeit), der zurZukunft (Forschungsinstitut profitability?’, increase IZA outsourcing ‘Does H.andHanley,Görg, (2004a) A. mark indifficult global goes ‘Outsourcing (2004b) – 18/11/04. Accessed Available onlinehttp://www4.gartner.com/5_about/press_releases/asset_61528_11.jsp. 3 March 2004. inEurope reach will $25 outsourcing billionin2004’, Process ‘Business release Press (2004a) Inc. Gartner moveoffshore?’, will why onemillionjobs ‘Two Europe: August. speed (2004) – et al., November. Amiti, M. and Wei,Agraval, V. and Farrell, S. D. 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III THEMATIC ESSAYS C OFFSHORING SERVICES: RECENT DEVELOPMENTS AND PROSPECTS WORLD TRADE REPORT 2005 III THEMATIC ESSAYS WORLD TRADE REPORT 2005 C OFFSHORING SERVICES: RECENT DEVELOPMENTS AND PROSPECTS McKinsey Global Institute (2003) (2003) Institute Global McKinsey reform andinternationaldomestic negotiations Evidence from plant leveldata’, ‘Internationalandproductivity: outsourcing (2004b) – Mattoo, A., Mishra D. and Shingal A. (2004) Mishra A., D.Mattoo, (2004) andShingalA. Journal of International 7:765-800. Economic Law, 2004; Dec (2004) S. andWunsch-Vincent, A. Mattoo, Business of Current Survey Mataloni Jr, R. J.(2004) ‘US multinational companies, operations in 2002’, U.S. Department of Commerce, B. andStephan, andfi Görzig, (2002) ‘Outsourcing A. – (2005b) – (2005b) – (2005a) OECD. Chapter Paris: policies, June 2004. employment onRelocation, and structural Organization for (2004) Economic andDevelopment (OECD) Co-operation id=1435. 01/02/05 Accessed (2002) Kinsey –Mc NASSCOM nasscom.org. Accessed 18/11/04. NASSCOM-KPMG (2004) Accessed 02/03/05. Available online http://www.nasscom.org. ‘. Sheet Fact Industry IT ‘Indian (2005) companies (NASSCOM) andService of Software National Association Economics Arbitrage’, Labor andtheGlobal Research, Equity Protectionism ‘Outsourcing, (2003) S. Morgan, structure’, ‘Globalization andvertical J. (2000) McLaren, forInstitute International Economics, growth’, wave of productivity next The andwhite collar jobs: services ‘GlobalizationMann, of IT C. (2003) L. of FDI’, effects country Lipsey, andhost (2002) ‘Home R.E. 17, 2004. ‘Job andTrade.Lindsey, Losses B. Check’, (2004) AReality Cato Institute, Journal, Kohler, production’, ‘International prices multistage andfactor with W. outsourcing (2004) 16/11/04. Accessed net/researchactivities/studies/NFAPStudyExportingLaw_0404.pdf. Legislation?’, of State Outsourcing theLaw. Analysis andFederal ALegal Klinger, T. S. ‘Exporting andSykes, (2004) M.L. what?’, about muchado outsourcing- ‘Offshore (2004b) – onthewhite collar?’, stains Kirkegaard, J.F. ‘Outsourcing- for Institute International Economics. (2004a) series Working Paper of trade andwages’, (2001) Asurvey R. Hanson, G.andFeenstra, andinequality: ‘Global production ofJournal Economics equilibrium’, inindustry outsourcing versus E.(2002) ‘Integration andHelpman, G.M. Grossman, York.initiatives’, New Management Association, American Maurice F.Greaver II, and decisions to approach outsourcing (1999) Astructural ‘Strategic Outsourcing. Berlin). (DIW Research OECD/eng/TableViewer/wdsview/dispviewp.asp. Accessed 02/03/05. Accessed OECD/eng/TableViewer/wdsview/dispviewp.asp. 2003/20. International sourcing of ICT-enabled services, Paris: OECD. Paris: International services, sourcing of ICT-enabled 1:9,C6 C185. - C166 114:494, , 11 2003. November OECD Information Technology Outlook 2004 The National Foundation for American Policy National FoundationThe forAmerican Quarterly Labour Force Statistics, Force Labour Quarterly No. 8372. 1:1 5-120. 85 1, 117: Strategic Review 2004 Review Strategic , July. Report 2002 Report Offshoring: is it a win-win game? is itawin-win Offshoring: International EconomicsBrief Pre-empting protectionism in services: theGATS andoutsourcing protectionism inservices: Pre-empting Sustaining markets, revolution. toforeign India’s Access services . Available onlinehttp://www.nasscom.org/artdisplay.asp?Art_ , Washington, DC: World Bank. 296 , Summary with statistical data. Available data. onlinehttp://www. statistical with , Summary Paris: OECD. Available online http://oecdnt.ingenta.com/ online OECD. Available Paris: rm levelperformance’, for GermanInstitute Economic American Economic Review , Chapter 2, Globalisation of the ICT sectors and , Chapter sectors 2, of the ICT Globalisation NBER WorkingNBER Paper , April 2004. Available onlinehttp://www.nfap. 2004. , April CESifo , McKinsey Global Institute. Global , McKinsey No. PB03-11, December. 2/2004. Trade Briefing Paper Economic Outlook of theOECD Economic Outlook 9293, October. 9293, 90, 1239-54. GEP paper research No 19, No March The EconomicThe The Quarterly Quarterly The Global Global NBER , ,

Information Economy Working Paper van Welsum, D. of ICT-intensive usingoccupations’, ‘Potential andVickery, offshoring G.(2005) – (2004) ‘In search of “offshoring”: ‘In of services’, (2004) Evidence from USimports – DvWTradeinservices.pdf. Accessed 02/03/05. Paper van Welsum, D. andConcepts’, ‘International Issues Trade (2003) inServices: benefits of internationalbenefits trade andinvestment’, of Trade Department United Kingdom, (200 andIndustry, economy’, of ontheUK offshoring Price ‘Impact Waterhouse Coopers (2004) US Bureau of Labor (2004) ‘Occupational to 2012’, Employment Projections (2004) US Bureau of Labor Offshoring’, Economist, Report The ‘Special 13 2003. December The Economist, ‘A survey of outsourcing. A world of work’, 13 November 2004. Washington,2004, DC: Institution. Brookings The – (2004b) ‘The shift towards services. Chapter IV, ‘The offshoring of corporate service functions: The next next The Chapter functions: of corporate towards IV, service services. offshoring shift ‘The ‘The (2004b) – competitiveness’. improved of search In Europe. in off takes offshoring United Nations Conference Roland Berger ‘Service onTrade (2004a) Development (UNCTAD) And Accessed 25/11/2004.doc.gov/bea/dn2/i-o_annual.htm. Available onlinehttp://www.bea. (2004). of Commerce,US Department Bureau of (BEA) Economic Analysis February. recovery’, andthejobless competition import ‘Offshoring, Schultze, C. (2004) L. Bulletin and2001-02, inIndia’s Invisibles Bankof India, 2000-01 Balance of Payments, Reserve BWPEF0402.pdf. Accessed 02/03/05. Accessed BWPEF0402.pdf. Paper global shift.’,global 2003 No. 4, Birkbeck College, 2003 4,Birkbeck No. London. Avai May 2003 andvariousissues. 2004 No. 2, Birkbeck College, London. Available online http://www.econ.bbk.ac.uk/wp/PDF/ World Investment Report 2004, 2004, World Investment Report , DSTI/ICCP/IE(2004)19/FINAL, Paris: OECD. Paris: , DSTI/ICCP/IE(2004)19/FINAL, DTI Paper Economics Geneva: UNCTAD.Geneva: lable online http://www.econ.bbk.ac.uk/wp/ewp/ online lable 297 4) ‘Liberalization and globalisation: Maximising the Maximising andglobalisation: ‘Liberalization 4) No 10, July 2004. UK Economic Outlook Birkbeck Economics Working Economics Birkbeck Birkbeck Economics Working Economics Birkbeck Monthly Review Labor Policy Brief Reserve Bank of India Reserve #136, August . DSTI DSTI ,

III THEMATIC ESSAYS C OFFSHORING SERVICES: RECENT DEVELOPMENTS AND PROSPECTS WORLD TRADE REPORT 2005 III THEMATIC ESSAYS WORLD TRADE REPORT 2005 C OFFSHORING SERVICES: RECENT DEVELOPMENTS AND PROSPECTS Source: oa 009 . . 1.4 -0.8 4.7 0.7 0.0 3.3 5.0 2.8 -2.7 7.0 1.2 6.7 -1.3 2070792 0.1 254502 514381 3.2 670897 631012 Total World of Rest Japan United States Europe) Eastern (incl. Europe Information Communication Technology (ICT) Source: Memo items: ( 2001-2003 byregion, markets ICT International Table 1 Appendix APPENDIX TABLES (Million dollars) 2000-2003 services, business inother traders major The Table 2 Appendix € million at constant 2002 exchange rates and percentage) and rates exchange 2002 constant at million oa 171 . . 2.5 -1.1 5.9 4.5 -0.6 6.8 0.0 6.3 6.3 2.8 -0.5 1.4 3.0 10.0 -3.6 8.2 0.4 -0.8 3.9 1137316 1.7 3.2 -0.7 139889 -6.3 3.8 386331 -0.8 2.8 4.8 278480 933476 -4.5 -3.0 114613 128050 332616 1.6 392417 Total 298395 Rest of World Japan United States Europe) Eastern (incl. Europe Telecommunications Total ofRest World Japan United States Europe) Eastern (incl. Europe Information Technology (IT) usa14 3321 9836 5448 5046 4379 2234 4583 231330 24644 411126 3543 1779 3594 195194 357958 10371 20370 4203 ... 176535 333217 3367 23149 7957 19962 10648 166025 3434 24486 326580 ... 24715 9512 7504 17799 2978 19227 227293 419061 10409 4133 23808 6959 15273 186926 8777 2012 10358 22254 358727 9505 2387 24589 24296 4319 172228 12376 333750 7602 17043 15490 17427 1343 11010 21038 9576 154934 2069 3624 4613 324383 11266 18042 39896 17024 10419 18537 7673 1740 24086 11148 9626 ... 10202 22255 17401 3533 4568 35877 8448 13789 16686 EU (15) 28279 6771 20693 20118 8659 19384 World 16245 36234 3935 13511 11266 ... 7663 24959 19045 22045 21804 6218 16597 32158 6912 17709 Russia 10233 10931 3700 21630 Brazil 17782 20074 19323 13814 Italy 9856 9402 31757 6482 4452 Luxembourg 23487 16645 16562 3124 China 6743 25318 Japan 8070 10402 4358 15527 44850 44797 2908 France 25832 5208 Sweden 3889 40567 40612 Netherlands 2892 24203 4386 Canada 38078 35404 3350 Spain 2784 Israel 1908 33459 40682 Germany United Kingdom United States India Ireland EITO (2004). EITO IMF, Balance of Payments Statistics, CD ROM December 2004, national statistics and WTO estimates. WTO and statistics national 2004, December CD ROM Statistics, ofPayments IMF, Balance 0020 0220 0020 022003 2002 2001 2000 2003 2002 2001 2000 xot Imports Exports 298 Value 2003 0120 2003 2002 2001 Annual percentage change 0 m10119 18 76 44 13 431 32 percentage) and (Thousands 48 34 US Total employment by and occupation, total computer 1997-2004 occupations, 35 Appendix Table 5 52 37 32 38 32 54 41 56 33 42 32 60 48 58 46 35 37 62 44 42 66 37 39 63 65 64 71 42 44 101 77 77 41 77 41 107 82 83 63 81 68 112 91 87 121 71 111 76 98 120 92 2004 77 110 (Billion 89 dollars and percentage) 101 exports IT inIndia’s ofIndia Parks Technology 2003 ofSoftware role Increasing 139 101 106 102 Appendix 2002 Table 4 94 100 132 100 2001 108 100 103 Source: 2000 123 101 1999 101 km 200 100 100 1998 km 50 100 1997 km 100 2 1996 2 Mbit/s 1995 km 200 km 1994 50 km 2 1993 kbit/s 56/64 1992 OECD average 1992=100) (Indices, 1992-2004 linepricing, inleased decline The Appendix Table 3 9720 . 1613.3 ...... -3.8 0.7 16.0 5.3 19.0 11.6 ... 5.5 ... 0.6 -3.5 1.4 1742 1810 12.3 5.7 1797 16.9 1549 1471 1236 1.4 1.2 1.0 1.4 3357 -0.1 3183 1.3 2030 1.5 2103 1.5 Source: 2074 1847 a 1747 1494 1997-2000 140278 2004-Dec 138556 2003-Dec 136485 2002 135073 2001 135208 2000 133488 1999 131463 1998 129558 B. Percentage change (annual) 2004-Dec 2003-Dec 2002-Dec 2002 2001 2000 1999 1998 1997 A. Thousands Source: Break in series. in Break OECD, OECD Information Technology Outlook 2004. Outlook Technology Information OECD, OECD US Bureau of Labor Statistics, the Current Population Survey (CPS) (Household data). (Household (CPS) Survey Current Population the Statistics, ofLabor Bureau US Software Technology Parks of India (STPI) (http://www.stpi.soft.net/areport12.html). (STPI) ofIndia Parks Technology Software a Fiscal Year India STPI units exports Share of STPI units ofSTPI Share exports units STPI India Year Fiscal 000 .0 .8 71 4.389 6.206 2000-01 990 .5 .7 68 2.679 3.958 1999-00 989 .0 .9 58 1.497 2.600 1998-99 949 .8 .7 16 0.078 0.489 1994-95 959 .5 .1 29 0.217 0.753 1995-96 969 .9 .0 46 0.501 1.099 1996-97 020 .2 .8 81 7.682 9.526 2002-03 939 .2 .3 11 0.037 0.325 1993-94 010 .5 .9 81 6.190 7.653 2001-02 979 .2 .2 54 0.921 1.722 1997-98 929 .2 .1 8 0.017 0.220 1992-93 All occupations 35936 ... 3163 136599 Computer and mathematical and Computer 299 occupations of which: Computer systems analysts and scientists analysts

III THEMATIC ESSAYS C OFFSHORING SERVICES: RECENT DEVELOPMENTS AND PROSPECTS WORLD TRADE REPORT 2005 III THEMATIC ESSAYS WORLD TRADE REPORT 2005 C OFFSHORING SERVICES: RECENT DEVELOPMENTS AND PROSPECTS 03(uy 77 32 1.87 1.91 1.87 1.85 1.85 1.77 1.78 33.25 32.86 30.33 29.26 28.49 27.89 26.79 17.75 17.18 16.23 15.80 15.36 15.72 15.09 Source: (July) 2003 (July) 2002 2001 (Jan) 2000 (July) 1999 (Sept) (Dec) 1998 (Sept) 1997 (Dollars) 1997-2004 States, United inthe analysts systems ofcomputer wages Hourly Table 6 Appendix 03-4-5-14 3 -7 -17.4 77.8 16 11 38 13.2 15.3 16.5 16.0 -15 13.8 -23.5 12.4 7 -16 52.2 9.0 6.0 26 4.4 20 1 10.7 -14 -20.2 12.6 64.8 -11 5 15.0 14.0 Foreign nationals 21 11.1 15 9.3 19 9.2 Source: 5.8 4.5 2000-2003 23.9 1997-2000 27.9 2003 31.5 2002 30.0 Irish nationals 2001 24.9 2000 21.6 1999 18.2 11.8 1998 8.9 change B. Percentage 2003 Total 2002 2001 2000 1999 1998 1997 1995 1993 A. Thousands Year and percentage(Thousands change) 1993-2003 industry, software inIreland’s Employment Table 7 Appendix IDA, Ireland. US Department of Labor, National Compensation Survey (www.bls.gov/ncs/home.htm). Year occupations All (a) 300 analysts and scientists analysts Computer systems (b) systems analysts and scientists analysts systems Relative wage of wage Relative computer (b):(a) 030 32 284 16 18 16 49 43 61 51 568 67 490 416 8 360 16 242 26 245 171 55 106 70 12 42 14 280 10 260 18 224 27 178 21 115 5 28 25 47 23 22 27 20 21 17 260 51 205 170 Source: 813 162 110 661 2003-04 522 2002-03 430 2001-02 284 2000-01 B. Percentage change 2003-04 2002-03 2001-02 2000-01 1999-00 A. Thousands Y20 130814716... 47477 136646 103763 79166 64980 161561 124697 83114 75114 191397 148426 217340 197537 331206 257640 2003 FY 2002 FY 2001 FY FY 2000 (Petitions approved and annual median approved earnings) (Petitions Indian speciality occupation workers in the United States (H-1B), FY 2000-2003 Appendix Table 9 percentage) and (Thousands 2000-2004 industry, software inIndia’s Employment Appendix Table 8 Y20 00 9645 ... 2849 7925 5707 4750 3899 9371 6858 4986 4356 11101 8163 60000 60000 58000 55000 2003). Sources: Note: FY 2003 FY 2002 2001 FY FY 2000 Fiscal year 2000 refers to the period October 1, 1999 through September 30, 2000. 30, 1, September 1999 through October period tothe refers 2000 year Fiscal NASSCOM, Indian IT Industry Factsheet (available at http://www.nasscom.org/download/IndianITIndustryFactsheet.pdf). US Immigration and Naturalization Services (FY 2000 and 2001) and US Department of Homeland Security (FY 2002 and and 2002 (FY Security ofHomeland Department US 2001) and and 2000 (FY Services Naturalization and Immigration US Median value dollars Median Earnings (annual) computer related related computer Wages and wage sum of H-1B computer specialists of all origins and Indians and origins ofall ofH-1B specialists sum wage and computer Wages Total Total (d) All nationalities Indian nationals Indian nationalities All Export sector Software Estimated earnings computer analysts computer Million dollars Million related (03) related (e)=(a)*(d) computer Domestic sector a b (c) (b) (a) Software H-1B petitions approved 301 Captive user org. user Captive Software Estimated earnings of Million dollars Million Indians (b)*(d) Total Services (ITES) Business Estimated earnings of Indians IT specialists IT Indians Million dollars Million related (03) related computer (c)*(d) Total (excl. Total ITES)

III THEMATIC ESSAYS C OFFSHORING SERVICES: RECENT DEVELOPMENTS AND PROSPECTS WORLD TRADE REPORT 2005