Moving operations and functions to overseas locations, known as offshoring, is a well-established restructuring practice, as evidenced by the relocation of many manufacturing activities from developed market economies to overseas locations, such as China. However, the offshoring of services is also notable; in fact, India’s IT sector exports totalled approximately $70¤billion in 2018, up from $52 billion in¤2015.
Political views on offshoring can be highly critical; President Trump’s election platform focused on bringing jobs back (‘reshoring’) to the US from their outsourced locations, while British trade unions have also campaigned to stop the practice of offshoring. Nevertheless, it remains a popular business practice, with firms including Goldman Sachs and Deutsche Bank offshoring service functions to India. In the mid-2000s, India’s high-tech sector was growing at 30 per cent per year and the volume of outsourcing contracts at 50 per cent per year. India has carved itself a reputation as the destination of choice for the delivery of business services, but growth in the IT sector and in call centre operations has been notable. Whereas in manufacturing industries capital investment in new technologies can reduce reliance on human capital, this is not currently possible to the same extent in services, which tend to require a human interface. As a result, labour is a significant operating cost in service industries, which firms can reduce through offshoring to cheaper labour locations.
However, India does have a number of factor conditions which make it a ripe destination for outsourcing. The colonial influence on India’s development has resulted in an institutional environment conducive to the relocation of British and American activities; it has a common law legal system due to prior colonial rule as well as English-language schooling. Furthermore, with a booming population, India has an abundant supply of competitively cheap labour, even for university-educated workers, allowing firms to decrease their operating costs.
Of course, technological developments are at the heart of offshoring decisions; the emergence of the internet is what enabled the separation of firm activities across borders, and now further technical evolutions, such as cloud computing, are enabling the relocation of different types of activities, and are maximising the synergies between geographically distant actors and teams. This is further strengthened by time zone differentials which enable Western firms to benefit from almost continuous operations.
Although India is a leader in the outsourcing of business services, it is also well known for its software industry. The limited supply of software professionals (as well as other STEM expertise) in Europe and North America also fuelled the growth of India’s industry, as Western firms looked to secure knowledge inputs to satisfy demand. This has led to the development of several technology clusters in India, such as Hyderabad and Bengaluru, the latter earning the title ‘the Silicon Valley of India’.
There are some disadvantages of outsourcing; the sourcing of inputs from overseas results in a reduction of jobs in home nations, home country workers can be resistant to working with back office offshore teams, and cultural differences still need to be acknowledged. Yet, offshoring presents valuable opportunities for Western firms to maximise their efficiency and productivity.
While protectionist policies and emergent capabilities to host offshore operations in other nations are on the rise, the depreciation of the rupee is bolstering India’s attractiveness. However, the country’s IT-BPO industry, which employed 3.7 million people in 2017, is under stark threat from artificial intelligence (AI) that could completely replace particular occupations, such as software developers. AI would not just affect offshore activities; with 9 per cent (1.4 million) jobs expected to be lost in the global IT industry by 2021, but its impacts would perhaps be most felt in specialised economies such as India’s. This could result in a polarisation of offshored activities, which would constitute higher-value knowledge-intensive and customised outputs at one pole, with low-value, human capital-intensive activities such as call centres at the other. While India still holds the crown in knowledge outsourcing, countries such as Kenya are preparing to challenge the incumbent; the Kenyan government has identified business process outsourcing as one of six priority sectors as part of its Vision 2030. For Western customers, increased competition in the market could further reduce operating costs as offshore firms compete to secure contracts and result in the increasing movement of activities abroad.