Offshoring- the Next Industrial Revolution

1. Please explain the core thesis put forward by Blinder

Alan Blinder explains the trend to Offshoring and its possibilities, naming this development the next Industrial Revolution. He emphasizes the fact of internationalization leading to an Offshoring of workforce, hence quitting labor in the home country and opening facilities abroad in order to gain competitive advantage through lowering manufacturing and distribution costs.

An historical example is being brought up by the economist Bhagwati, who called this phenomenon kaleidoscopic comparative advantage and comparing it to Great Britain’s ancient comparative advantage in the textile industry because of their offshore colonies.

The advantage of Offshoring nowadays obviously lies at countries with low wage costs, especially in China. Since world economy has already gone through two huge industrial revolutions, the first one changing the sector shares in favor of industry in the 19th century, the second one shifting industry labor masses into the service sector, Blinder now calls the current development the third Industrial Revolution, the “Information Age”. The information Age opens the labor market in the third industry sector, the service sector, to the open, ever more globalized world.

The way of distinction of workforce is moving away from education and/or skills to the point of dividing the work into “deliverable through a wire” and those that are not. This deliberation is applicable to more jobs than obvious at first thought. Not only low-skilled jobs like typing services but also and particularly high-skilled jobs like radiologists and physicians have to fear being offshored in the long run.

Consequently developing this idea the main distinction in future decisions, of whether to offshore or not, has to distinguish between personal and impersonal services, thus, the differentiation between services in which personal contact is necessary or highly appreciated and those where personal contact is redundant. This distinction is, at the same time, the main predication of Blinder’s essay, stating the importance of the rich states to protect their labor force of the threats that come along with the ever-developing technological opportunities.

Moreover, the educational system has to go through an adaption process in order to prepare workers for jobs that are probable to exist in their respective societies. Another factor that must not be neglected is the issue of social security, which Blinder calls “security net” to catch workers who “fall of the labor-market trapeze”. The US can be hardly compared to most other, at least most European, industrialized countries when it comes to the degree of implementation of a social security system, thus, a political turnover seems desirable, however, no movement into this direction can be spotted at the moment.

The other side of the coin is how socially well-developed, industrial countries manage to continue to afford their complicated but stable social security system with the ever – shrinking budgets. As from an economic perspective it is crucial to be part of this development rather than to miss it, because long adaption phases will inevitably lead to a breakdown in a business cycle.

Thus, early adaptors will probably not be in a position of prevent their economies from the Offshoring trend, but at least provide certain infrastructure, to be able to react to the massive transition of workforce. Concluding he emphasizes that there are most likely to be several other very severe effects to adapt to, which we do not even think about at the very time.

2. Question this core thesis using China’s recent economic progress. For this research you may use (i) scientific journals, (ii) newspaper articles, and (iii) the web as resources. Please mind your quotation!

As Blinder stated in his essay about Offshoring of jobs, especially those he calls “impersonalized services”, there is a huge threat for the Western industrialized countries’ pillars of the local labor markets to be extracted by the opportunity for firms to outsource and offshore a part of their workforce. He also sees this development, if we examine it from the English-speaking countries’ perspective, as not so dominated by China, but rather by India. India is in a process of educating a new workforce in English, which is twice as numerous as the whole US-workforce.

Only thinking about this figures might lead to many Americans have the creeping horrors, but as I want to show, an early adaption to the coming trends can facilitate the transition period in many ways. China is an obvious candidate for outsourcing of production of goods, but might it also be suitable for high-level services?

China presents, at the moment, one of the most popular Offshoring countries, which is mainly based on their low labor costs and high-tech manufacturing facilities. In this market, especially SME from industrialized countries gladly take this opportunity of having their products produced very cheaply, compared to produce it in their home country. Main worries refer mostly to the quality, Intellectual Property issues, political risks in the communist country and the probability of rising labor cost in near future. The latter seems to not have such strong impact, as studies show a high probability of stable labor prices within the next 7-8 years.

More and more importance will have to be directed to relationships within, basically all, emerging countries to establish profitable business partnerships. The cooperation with a local intermediary can be suitable because of the specific knowledge as well as ties and network of the respective. Underestimating the degree of difficulty that accompanies any Offshoring process is the main reason for companies’ failure when entering China.

As trust is one of the most rigorously requested virtue of business partner in China, it is a very tough venture to gain access to a pre-existing business network in China, unless the right local intermediary represents you.

Concluding, I want to emphasize the future importance to offshore and outsource impersonalized services to low-wage countries in order to stay competitive in the respective market. This step must be, however, deliberate so as not to fail in the emerging markets’ environments as they show distinctive processes and entry barriers. Offshoring to China already plays an important role in industry fields that show high manufacturing expenditures. Looking at the aspects of service-based industries, India will be playing the key role when it comes to outsourcing capacities.

The enormous number of available, and at the same time well educated workforce is going to undertake a high percentage of duties that are by now done by the more expensive worker in the United States or Europe. The industrialized countries’ governments are now in a position of wandering from the path of duty, as by now no, or not enough measure against the 3rd Industrial Revolution have been implemented.

References:

* Blinder, Alan: “Offshoring: The Next Industrial Revolution?” * Cecilia Johansson, Elisabeth Reischl: „Offshoring to China, A case study of an SMEs offshoring to China“