Consequences of Offshoring to Developing Nations: Labor‐market Outcomes, Welfare, and Corrective Interventions

Abstract

Our parsimonious two‐country (developed country and developing country) model of offshoring provides nuanced results. These include cases where wages monotonically improve, as well as where wages exhibit an inverted‐U relationship with offshoring cost reductions. We identify conditions under which these relationships hold. Since global welfare always rises with improvements in offshoring technology, we find that there is a role for a minimum wage (alternatively, wage tax) in the developing country. We derive such a policy's optimal level. There is also the possibility of a developed country optimal offshoring tax for extracting terms‐of‐trade benefits. We, finally, analyze the two‐country Nash equilibrium in policies. (JEL F11, F13, F16, F66, O19, O24)

Perils and Paradoxes of Outsourcing: An Ethnographic Study Exploring Hopes and Dissonances Emanating from IT Employment in India

“…This article draws data from ethnographic fieldwork conducted in Delhi-National Capital Region (NCR), Bangalore and Hyderabad-involving in-depth informal interviews with 51 respondents over 4 years, from August 2017 to July 2021. India, with a 55% market share of the US$ 200-250 billion global sourcing business in -2020, 2021), is a leading sourcing destination across the world. While Bangalore accounts for 38% of the total IT exports (Johnson, 2022), Hyderabad, Chennai, Pune and Delhi-NCR are other prominent Indian cities with significant IT footprints.…”

“…International sourcing is an increasingly diverse phenomenon as a wide range of activities-from the system and process-oriented tasks and services to high value, knowledge-intensive functions-are now being distributed across the globe (Bandyopadhyay et al, 2020;Schmeisser, 2013;Strasser & Westner, 2015). Rapid changes in technology (Bottini et al, 2007), shortage of local talent in developed countries (Howcroft & Richardson, 2012) and intense competition for new markets/resources (Arora et al, 2021) are the new imperatives that compel organizations to relocate hitherto internally performed core functions, abroad.…”

On Trade Policy Preference and Offshoring Ties

“…of import as a share of total imports exceeds 10% (7%, 5%, 3%, 1%, respectively) in at least one industry. Interestingly, and just based on raw data, a country-pair is close to more than 37 (12,6,5,7) times more likely to have engaged in a trade dispute with an exporting trade partner if the importer's domestic content of import from the exporter exceeds 10% (7%, 5%, 3%, 1% respectively ) of total imports from the exporter in at least one industry.…”

“…This paper contributes to the literature by shedding light on the potential perverse consequences of import protection on wages when the domestic labor content of imports is su ciently high. 6 This paper also contributes to the literature on the economics of international trade agreements, where the rationale behind market access rebalancing as a dispute settlement device has been extensively explored (e.g. Staiger 1999, Schwartz andSykes (2002), Lawrence 2003, Kohler 2004, Howse and Staiger 2005.…”

“…Bergin, Feenstra and Hanson (2011) shows that o↵shoring stabilizes wages in the developed country, while adding volatility to developing country wages as o↵shoring activities respond to business cycle e↵ects. Bandyopadhyay et al (2020) formulates a model of tasks o↵shoring, and show that whether a developing country benefits from o↵shoring cost reducing technological change in general equilibrium depends in a nuanced way on the labor demand elasticities in the two countries. This paper contributes to the literature by shedding light on the potential perverse consequences of import protection on wages when the domestic labor content of imports is su ciently high.…”