Jim Moore’s blog: Innovation, Strategy, Public Policy

Here is a NY Times article that takes the position that outsourcing may be a big problem for the US economy and society.

http://www.nytimes.com/2004/02/15/business/15JOBS.html?ex=1392181200&en=8b20c92f0f49c2a1&ei=5007&partner=USERLAND

I agree.  The outsourcing issue, globally, is much bigger than the
current tip of the iceberg suggests.  There is an academic
conference to be had on this topic, because a fundamental issue in the
economics of innovation is almost never addressed in current discussion
of ourtsourcing.  Here is my best shot at suggesting the outlines
of this issue:

Think of it this way.  If you lived in Ghana (where I have done
recent research on economic development and information technonology),
would you think it better if Ghana did its own white collar work, or
worse?  You’d think it better, because of the anciliary
benefits that come with having high tech and white collar workers in
your local economy and society:  educated people, stronger middle
class, more effective political advocacy, higher value on education,
etc. etc.

Most important from a productive standpoint, having local experts in
information technology and financial services helps other businesses in
the economy to become more effective and to grow.  This positive
“spillover” effect is huge in impact.  This effect is largely
unmeasured, but is more and more a subject of World Bank and other
programs for development. 

This effect is not focused on by most traditional economists.  By
traditional free trade economics, Ghana should concentrate on palm oil
and gold, and forego information technology and financial services
because it has no comparative advantage in the latter. 

But if we think in terms of innovation economics, information
technology and financial services is a secret sauce that makes all
other businesses, including palm oil and gold, more effective. 
And the best–perhaps the only–way to employ this secret sauce in
businesses is to have available local people who are experts in these
fields, to “spill” their expertise into the rest of the economy.

So when one is working to help “developing countries” develop, one
tries to help them create at home high value whiter collar jobs in, at
least, information technology and financial services.

Now, what is happening in the US? We are outsourcing our high value
infomation technology and financial services jobs, and relocating them
into other economies and societies.  This is a good thing for the
world–it is perhaps the most generous thing this country has ever
done–bigger than the Marshall Plan after World War II.

But the way we are doing this, we are losing our own core competencies
in our economy.  We are reducing our local access to information
technology and financial services expertise.  Long term, this
means less and less spillover of expertise into our  other
businesses, and slowing innovation.  This effect is difficult to
measure, but quite real.  It is the inverse of the positive
spillovers in developing countries.

Traditionalists will respond that we have plenty of information technology and
financial services people in our economy, and that the number of jobs
moving is small.  I would counter that the spillover effect of
such expertise is local, and that local areas depend on clusters of
critical masses of such jobs in order to benefit from them.  When
a local area experiences the loss of a large number of jobs, the cluster may
collapse.  Not only do the primary workers move when they no
longer can depend on their jobs, but the local colleges may stop
training in related courses, and a variety of other suppliers may be
forced to close.   Areas such as Buffalo, NY and Rochester,
MN are examples of places where there are such clusters that are
important to other local businesses, and where moving jobs–by IBM for
example–could have a decimating effect.  Even in stronger centers
such as the Silicon Valley, both primary and spillover innovation will
be slowed as jobs and expertise moves away.