The Hindu Business Line : After outsourcing backlash, it's now the turn of `insourcing'

LESS than a fortnight ago, a leading player in software announced about its US consulting subsidiary, and also plans to recruit 500 professionals in the US over three years. Reports spoke of how the company felt that such job creations would defuse outsourcing backlash to some extent.

That makes us somewhat large-hearted, giving that many jobs to foreigners rather than insisting that only Indians be recruited there too. Something better than giving the governance of the country to a `foreigner', a particular party may claim. That aside, let us see if the lollipop of jobs can counter the badmouthing on the outsourcing issue.

"The debate over `outsourcing' as a cause of job loss has taken an interesting twist in recent weeks, as proponents of the practice now tout the phenomena of `insourcing' as a job creator," notes the editorial from Center for Economic & Policy Research (CEPR) of the US. So, a new word doing the rounds on this topic is insourcing, which Word is only too likely to redline. "According to this view, the jobs that US firms outsource to various developing countries are largely offset by the jobs that foreign firms `insource' to workers in the US. In this view, outsourcing and insourcing are roughly offsetting, with the economy in general benefiting from the greater efficiency that both practices allow."

Quite logical, but the edit, titled `bad sources on insourcing' and numbered `public misconception # 103' picks holes in the data of the Bureau of Economic Analysis (BEA) relied on by many proponents of insourcing. This Bureau in the US keeps data on foreign interests owned by US companies and vice versa. "Jobs that have been identified as being outsourced have very little to do with patterns of foreign investment flows," observes CEPR, before proceeding to give an example closer home. "When Hollywood outsourced the special effects work on Men in Black to Compudyne Winfosystems of Bangalore, India, these jobs were not counted in the BEA data because Compudyne Winfosystems is an Indian company." Also, "When a computer company contracts out software development or a credit card company contracts out its call centre these job losses will most often not be associated with an investment flow."

On the same topic, the weekly Snapshot dated April 6 and 7, from Economic Policy Institute (EPI) of the US, sets the alarm bells ringing by stating that as a result of insourcing, "2.78 million US jobs were lost in foreign-owned firms between 1991 and 2001." US President Bush had cited about a month ago the example of Honda plant in Ohio where "American workers draw their pay checks from foreign companies", but EPI counters: "In the aggregate... foreign businesses were shredding jobs each year." One cannot fault Bush because it is in school that one learns that in is the opposite of out, and such. But if he thought he had the right medicine for outsourcing backlash, there is now Bush backlash; that "the so-called insourcing has not boosted US jobs".

In addition to its failure to promote job growth, insourcing has also worsened the US trade balance, observes the EPI's Snapshot. Data for the second accusation are as follows: Total US exports from foreign-owned firms, rose from $97 billion in 1991 to $164 billion in 2001, an increase of 69 per cent, while "all other US exports rose by an even faster rate of 74.2 per cent." If you can pardon that laggard performance, "total imports of foreign-owned companies in the US more than doubled, climbing from $179 billion in 1991 to $369 billion in 2001."

A simple back-of-the-envelope calculation would then show that US trade deficits of foreign-owned firms rose from $82 billion to $206 billion in this period, an increase of 152 per cent.

Hence the charge: "Often these foreign companies are investing in the US in order to obtain access to US marketing and distribution systems (including US brand names) for their imported products— a process that does not create production jobs."

While the moral of the story is that you just can't please them in or out, what is important for Indian software majors setting up shop in the US, as antidote to outsourcing recoil, is to be prepared for some amount of `insourcing' backlash as well.

E&OE@thehindu.co.in

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