Offshore Outsourcing: Effect on American Competitiveness Subhash C. Jain University of Connecticut Presentation made at the Fairfield Economy Conference December 2, 2004

Concept of Outsourcing In open markets, greater competition requires allocation of labor and capital to more profitable sectors of the economy Job requiring series of simple rules disappears Job goes to either computer (voice recognition) or offshore (phone inquiries) New jobs emerge to replace those lost

Benefits of Outsourcing Home Country Cost reduction Other advantages Host Country Employment Technology

Estimated Benefit of $1 of Spending “Offshored” 2002 ($) $1.00 previously spent in US now offshored in India $ $ $1.47 …..delivers value to India ……brings savings and returns to the US… …….and creates new value from re- employing US labor ….…creating $0.46 in additional economic value

Further Value creation potential through Increased global competitiveness of US business Multiplier effect of increasing national savings Savings accrued to U.S. investors and / or customers Import of US goods and services by providers in India Transfer of profits by US providers in low wage country to parent Total direct benefit retained in the US Value from US labor reemployed (conservative estimate) Potential for total value creation in the US economy (conserva tive estimate) Current direct benefit * Potential future benefit  Estimated based on historical reemployment trends from jobs loss through trade in the US economy Source: McKinsey Global Institute Value Potential to the US from $1 of Spending Offshored to India 2002 (Dollars)

Problems of Outsourcing Short Term Unemployment in the home country Long Term Migration of brain jobs

Service Jobs Brainpower jobs Clerical jobs Low-end jobs

Increasing Complex Transaction Back OfficeCustomer Contact Common Corporate Functions Knowledge Services and Decision Analysis Research and Development Basic Data Entry  Application forms  Data Conversion Transaction Processing Document Management Customer Relations  Call Centers (inbound and outbound)  On-line customer service Telemarketing Collections Shared Corporate services  Finances  HR  Procurement  IT Help Desk Maintenance Infrastructure Applications Development Insurance  Applications and Claims processing  Benefits Administration Research Services Customer Analysis Portfolio analysis Claims Processing Risk Management  Credit underwriting Converting text, engineering drawings, architectural designs and maps from paper to digital format Desktop publishing  Page layout  Advertising campaign  Type setting and color separation Content development, engineering and design New product design  Design specs  Pilot/prototype  Production and design optimization Animation  3-D animation special effects  Linear and nonlinear editing Medical  Remote diagnosis

Two Pillars of Innovation Education Immigration Policies

Education Shortage of people with skill of brain or cerebral skill

Source: U.S. Census Bureau

Immigration U.S. Population Trend Falling Birth Rate Career Cost of raising a child: Over $200,000 No incentive for having children Latin Population 25% of population in 2050 Mexican 65% of Latin Population Students from Asian countries Develop realistic immigration policy