International Management

Offshoring

« Do we have to fear the globalization of human capital? »

Jean-Luc Baer

Basile Blancpain

Felix Lademacher

Vladimir Mun

Group Assignment

« International Management »

University of St. Gallen

Dufourstrasse 90

CH - 9000 St. Gallen

Prof. Dr. Winfried Ruigrok

Offshoring: Do we have to fear the globalization of human capital?

Group 12: Jean-Luc Baer, Basile Blancpain, Felix Lademacher, Vladimir Moon 1

Table of Content

1 INTRODUCTION 2

1.1 Term clarification 2

1.2 Development of offshoring 3

2 INFLUENCE OF OFFSHORING FROM A COMPANY PERSPECTIVE 5

2.1 Influence on companies from developing countries 5

2.2 Influence on companies in developing countries 7

2.3 Summary 8

3 INFLUENCE OF OFFSHORING ON AN ECONOMY AS A WHOLE 9

3.1 Influence on developed countries 9

3.2 Influence on developing countries 10

3.3 Summary 11

4 INFLUENCE ON EMPLOYEES 12

4.1 Influence on employees in developed countries 12

4.2 Influence on employees in developing countries 13

4.3 Summary 14

5 CONCLUSION 15

REFERENCES 17

Offshoring: Do we have to fear the globalization of human capital?

Group 12: Jean-Luc Baer, Basile Blancpain, Felix Lademacher, Vladimir Moon 2

1 Introduction

The authors would like to begin this paper with a quote of the famous night show host David

Letterman: "President Bush is on an eight-day tour of Asia. He's visiting American jobs."

Especially in the United States a great fear of offshoring exists. Many politicians, some

economists and a considerable part of the population have the opinion that their country will,

at least in the long run, suffer strongly as a consequence of offshoring. They opine that

offshoring is an irreversible fact that will lead to huge job losses in developed countries and

that politicians have to counteract this development through protectionist regulations. The

authors of this paper try to give an overview of the consequences of offshoring and to answer

the question: "Offshoring: Do we have to fear the globalization of human capital?"

This paper is divided into several parts. First comes a clarification of different terms and then

a short overview of the development of offshoring. Then, we analyze the effects of offshoring

on companies, the economy as a whole and on employees in both developed and developing

countries.

We are going to focus mainly on the newest developments of offshoring and therefore mainly

look at the offshoring of services. This also means that we will mainly talk about the US and

India as those countries are the main actors in this area at the moment.

1.1 Term clarification

It is important to differ between the two terms offshoring and outsourcing. Even though they

are sometimes (mistakenly) used synonymously, it is important to differentiate between the

two terms. One differentiation comes from Alan Blinder (2005): "Outsourcing is a common

domestic phenomenon which has nothing to do with either international trade or globalization.

Offshoring means outsourcing the work to firms or subsidiaries employing labor outside the

home country." According to ebstrategy (2007) "a common misconception is that all

offshoring involves outsourcing. This is not true. While outsourced processes are handed off

to third-party vendors, offshored processes can be handed off to third-party vendors or remain

in-house."

Offshoring can further be divided into production offshoring, services offshoring and

innovation offshoring ("offshoring", found on November 2 on www.wikipedia.org ).

Production offshoring involves the relocation of physical manufacturing processes to a lowerOffshoring:

Do we have to fear the globalization of human capital?

Group 12: Jean-Luc Baer, Basile Blancpain, Felix Lademacher, Vladimir Moon 3

cost destination. Examples of production offshoring include the manufacture of electronics

components in Taiwan or the production of apparel or toys in China or Vietnam. Product

design and R&D is harder to offshore because it requires a more specific skill set. The strong

growth of services offshoring is closely linked to the fast spread of telecommunication and the

Internet during the 1990s. Services that can easily been offshored are mainly IT-functions and

back-office processes such as call centers or transaction processing, but over the last years,

more