Introduction and Economic Impacts of Offshoring

Offshoring is the process of relocating a specific business operation to a foreign country. Over the past decade, work related to software, like many other jobs, have been sent overseas to countries like India, Indonesia, and China. According to the Association of Computing Machinery (ACM), some of the software jobs being offshored include: programming, software testing, software maintenance, IT research and development, software architecture, product design, and project management ¹.

One of the major reasons for offshoring is the major economic benefits that participating businesses receive.  The McKinsey Global Institute (MGI) has the statistics to show that offshoring jobs save businesses money in a variety of ways.  By sending jobs overseas, “businesses capture 58 cents for every dollar spent offshore.”  Also, “offshore service providers purchase an additional 5 cents for every dollar spent offshore worth of goods and services” and “companies that repatriate their earnings in the US generate an additional 4 cents for every dollar offshored. In addition, for every dollar of US labor cost offshored, $1.45-$1.47 is created globally (US captures $1.12-$1.14) ².”

However, Forrester Research published in 2002 that an estimated 3.3 million jobs in the United States will be lost due to offshoring by 2015, which is equivalent to $136 billion in wages. Since this report was published, businesses that offshore jobs have been harshly criticized by the public. Critics argue that although companies and their customers will benefit from the reduced costs of offshoring, the middle class will take the biggest hit. The US government would lose valuable tax revenue from jobs going overseas. According to Cohen, over five years, the US government would lose an estimated $13.4 billion in tax revenue from offshoring jobs. “This figure translates into $7.5 billion in lost Social Security and Medicare, $4.4 billion in federal revenue and $1.5 in state and local government taxes. Hence the middle-class Americans will be the group most widely impacted ².”

The practice of offshoring does not just occur in the United States but in Western Europe and other parts of Asia as well. However, the United States has offshored the most jobs by far (roughly 2.3 million as of 2011³). In other countries like Germany and France, the number of offshored jobs was extremely limited because of the strength of unions.  Unions there forced businesses to compensate workers who lost their jobs to offshoring. In France, a one billion euro fund was created to motivate companies to keep their jobs from moving to a foreign country. In other countries like the UK and Ireland, the real threat of strikes has forced companies to keep jobs local ⁴.

A major reason why software related jobs in the United Sates are more susceptible to offshoring is because workers in these fields aren't well represented in American unions ⁴. Because there isn't much resistance to offshoring, major corporations have little trouble tapping into the huge savings that offshoring provides.