The benefits of outsourcing

by on January 30, 2004 at 4:56 am in Economics | Permalink

Virginia Postrel has been blogging up a storm on outsourcing, click here for a sterling post. In addition Her latest NYT column offers an excellent historical tale of outsourcing:

In the late 1980’s, Asian manufacturers began turning out basic memory chips, undercutting American chip makers’ prices and inciting a fierce policy debate. Many industry leaders argued that the United States would lose its technological edge unless the government intervened to protect chip makers.

In a famous 1988 Harvard Business Review article, Charles Ferguson, then a postdoctoral associate at the Center for Technology Policy and Industrial Development at M.I.T., summed up the conventional wisdom: “Most experts believe that without deep changes in both industry behavior and government policy, U.S. microelectronics will be reduced to permanent, decisive inferiority within 10 years.”

He denounced the “fragmented, chronically entrepreneurial industry” of Silicon Valley, which was losing market share to government-aided Asian businesses. “Only economists moved by the invisible hand,” he wrote, “have failed to apprehend the problem.”

Those optimistic economists were right. The dire predictions were wrong. American semiconductor makers shifted to higher-value microprocessors. Computer companies bought commodity memory chips and other components, from keyboards to disk drives, abroad. Businesses and consumers enjoyed cheaper and cheaper prices.

Far from an economic disaster, the result was a productivity boom. As global manufacturing helped to reduce the price of information technology sharply, all sorts of businesses, from banks to retailers, found new, more productive ways to use the technology.

“Globalized production and international trade made I.T. hardware some 10 to 30 percent less expensive than it otherwise would have been,” Dr. Mann estimates in an institute policy brief. (Her paper, “Globalization of I.T. Services and White-Collar Jobs: The Next Wave of Productivity Growth,” can be downloaded at iie.com.)

As a result, she estimates, gross domestic product grew about 0.3 percentage point a year faster than it would have otherwise, adding up to $230 billion over the seven years from 1995 to 2002. “That’s real money,” she said in an interview.

By building the components for new integrated software systems inexpensively, offshore programmers could make information technology affordable to business sectors that haven’t yet joined the productivity boom: small and medium-size businesses, health care and construction.

I link to Doug Irwin’s excellent outsourcing piece at The Volokh Conspiracy. Daniel Drezner covers the debate in his usual quality fashion. Arnold Kling offers good comments as well. Here’s hoping that this swell of intellectual support for free trade continues. Here is a more ambivalent Glenn Reynolds.

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