The Economic Implications of Outsourcing
28 Pages Posted: 2 Jan 2006
Date Written: January 31, 2005
For a developing economy such as India with a large pool of trained manpower outsourcing represents a huge economic opportunity. In the West there has been considerable media led agitation against outsourcing due to the unemployment it causes. The key point is that jobs created by outsourcing are not really in Indian hands. It becomes imperative to understand what the political and economic imperatives are governing outsourcing in the West. If political conditions in the West turn adverse towards outsourcing it is likely to lead to protectionist tendencies and restrictions on companies outsourcing to India.
This paper examines the economic implications of outsourcing within the context of the standard Ricardian Comparative Advantage framework. An attempt is made to identify what are the benefits and costs of outsourcing to both the US and India both theoretically and empirically. Key predictions from trade theories are identified and the analysis distinguishes between losers and gainers both in the short and medium run. This is further explored by looking at the evidence regarding employment and outsourcing trends in the US and identifying future trends in outsourcing. The implications of increased protectionist tendencies in the West for growth, and outsourcing are also explored.
Keywords: Outsourcing, services, Comparative Advantage
JEL Classification: F11, F19
Suggested Citation: Suggested Citation