August 29, 2007 — Coming to America

The offshoring of jobs from the United States to emerging nations may be reversing direction
By Ernie Siciliano

Wipro Technologies sounds like an American success story. With 12 locations nationwide — including Reston, Va. — and plans to open a software development office in Atlanta, the company increased its earnings by 44 percent in its last fiscal year. But Wipro isn't American. It is the third-largest information technology company in India.

Wipro's expanding presence in the United States is part of a trend among businesses based in emerging nations like India and China: Many of these firms are shifting work to our shores. This counters the common perception that offshoring — the relocation of business processes from one country to another — exclusively involves American companies shifting jobs to low-paying, nonunionized countries abroad. Offshoring is often an integral part of an outsourcing contract in order to contain costs. But in the information technology industry, at least, the chase for cheap labor seems to have slowed.

Economists have long argued that in a global economy, capital will flow to where it is most efficiently used. Many IT jobs have been moved to India where employees perform the same work for a lower salary. According to an April 2007 report by Deutsche Bank, an IT project manager in India commands a third of the salary of his American counterpart.

For highly skilled positions, however, many companies will pay a premium for quality workers. In America, it seems that the information technology sector has found a comparative advantage in such highly skilled work. The Deutsche Bank report noted that between 1999 and 2005, highly skilled IT employment increased by 15 percent in the United States, while low-skilled work decreased by 32 percent.

Jeff Lande, senior vice president at the Information Technology Association of America, says companies are now demanding higher levels of customer service and domain expertise, which encompasses advanced technical and business skills as well as industry-specific knowledge. For example, American firms may prefer to have their IT suppliers nearby to minimize the transfer of confidential data.

While some IT jobs require domain expertise, others known as commoditive jobs can be easily automated and performed by workers in low-cost countries. However, as the required level of domain expertise increases, the focus on cost cutting decreases and the premium on quality rises.

"Major outsourcing contracts are all going to firms that have domain expertise," Lande says. "If [the work is] straight commoditive, then there is a chase for the lowest cost, but if something requires efficiency and intelligence, then [companies] need domain expertise."

The growing demand for domain expertise favors the United States because of its highly skilled work force. In the IT industry, for example, 12 percent of the work force in India receives university-equivalent education, compared with 80 percent in the United States, according to the Deutsche Bank study.

Roy Dahlquist, international investment manager at the Virginia Economic Development Partnership, adds that Virginia is well positioned to attract expanding foreign businesses. The state has a stable tax code and "pro-business" climate. Also, businesses can access the Port of Virginia and major airports.

Wipro is considering adding facilities in Richmond, Raleigh, N.C., and Austin, Tex., pending the success of the planned location in Atlanta. Company executives have stated in press reports that they are interested in these cities for several reasons, including their wealth of local universities and available scholarship programs, their young populations, and their low cost of living. The jobs created by Wipro will most likely be for people with an associate degree, not those with a four-year or graduate degree.

Foreign companies that expand to the United States often create jobs that demand higher skills and, in turn, pay higher salaries to get those skills. Dahlquist cites the example of such firms expanding to Northern Virginia to compete for government contracts. Those jobs often pay six-figure salaries.

Foreign investment is not new in America but has historically been dominated by European firms; a 2002 survey in Expansion Management magazine ranked Richmond as the best city for European expansion. Companies from emerging nations like China and India are making inroads too.

"If you look at their stats it's fairly small, but growing rapidly," Dahlquist says about the number of businesses from emerging nations with a presence in Virginia. "We just had 57 executives from a Chinese corporation here looking for ways to open a business."

Dahlquist says that while European companies expand to the United States primarily to exploit a weak dollar, companies from China and India come here to learn American business practices. Also, foreign companies can cut costs by eliminating the middleman in distributing to the United States.

Company executives who move to America reap another benefit — they can send their children to American universities. "That's worth a whole lot of profit," Dahlquist adds.