New Horizons: Multinational company investment in developing economies

By Martin Baily, Richard Cooper, Dani Rodrik
New Horizons: Multinational company investment in developing economies

Offshoring has, in large, been enabled through recent advances in communications technology, the increasing penetration of PCs, and removal of trade barriers in developing countries.

Information technology/business process outsourcing (IT/BPO) case study

Companies are moving critical IT (information technology) and BPO (business processes operations) to offshore locations, particularly in India.

India, with its English speaking, educated, and technically proficient workforce, offshoring is growing at 30 percent per year and is projected to grow to more than US$ 200 billion by 2008.

Despite widespread concerns that offshoring eliminates jobs at home, in reality the revenue saved through offshoring is being reinvested at home.

Information technology (IT)

As the largest global supplier of offshore IT, India accounts for roughly a quarter of the global market for IT talent. India has added hundreds of thousands of high tech jobs though, relative to the economy overall, the impact to date has been small. Because many of the IT facilities tapped for offshoring already existed, FDI impact has been on increasing employment and bringing higher value-added functions to India.

Business process outsourcing (BPO)

Facilities and infrastructure for BPO, unlike IT, have been created entirely through FDI. The Indian government offers lucrative incentives to attract MNCs but without significant positive effect since MNCs are already committed to establishing BPO functions in India. Government funds lost through tax incentives would be better used to improve the country's infrastructure. Lack of reliable power, for example, poses a major threat to BPO growth.

Conclusions

Offshoring of IT and BPO has been a boon for India, and the sector is expected to grow in the years ahead. Numerous new jobs have been created, and higher value-added functions have been brought to India. As international companies enter India, increased competition is beginning to drive sector productivity.

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