The Impact of Offshoring on Developing Countries





The past decades have witnessed an unprecedented shift in the global economy toward a greater dependence upon intangible industries; that is, the production and trade of ideas and processes rather than material objects. Chief among the growth sectors of intangibles is the IT industry. As such, computers and global connections are becoming much cheaper and widespread, particularly in developing countries. The intangibles industries, and the IT industry in particular, are highly prone to outsourcing and offshoring because of the ease by which companies can modularize their processes and because the cost of transmitting information overseas, as opposed to shipping tangible products, is extremely low. Developing countries have taken advantage of these tendencies, and are working hard to capture the IT capital being invested in offshoring operations. With its enormous population, large pool of educated and semi-educated English speakers, and low cost of living, India has been extraordinarily successful in developing an IT industry. American companies understand that the disparity in living wages between the U.S. and developing countries makes offshoring economical, and have seen that outsourcing companies can complete the contracted work adequately in most cases.

Indian outsourcing companies like Mastek bear witness to the massive growth in the IT industry that has taken place in the past decade and a half, particularly in Bangalore. Mastek is a $79.5 million outsourcing company that partners with numerous A-list Fortune 500 companies. A quick look around their website gives the impression of an established high-tech firm, little different from any Silicon Valley company.

Further reading provides insight into how Mastek, and presumably other Indian firms in the same position, view their role in the development of the Indian economy. Although they admit that the IT sector is still a very small percentage of the Indian GDP, they point out that it is growing rapidly, and has already had a large impact on local economies with high IT concentration. In an article entitled “Transforming a Nation,” Mastek optimistically discusses the rapid IT growth due to foreign direct investment (FDI), and provides a few personal-interest stories of people whose lives have been drastically improved by acquiring jobs in the outsourcing industry. Mastek thus posits itself and its industry as the savior of many people in the destitute Indian economic landscape, and expresses hope that these effects will come to pass on a broader scale for the Indian people as a whole.

Despite their optimistic and sometimes nearly heroic self-image, Indian IT companies are well aware of their true raison d’etre: “Offshore outsourcing is simply moving work from high-cost, developed countries to low-cost, developing ones” ( In effect, outsourcing works because these companies pay their employees less than half what same-status American workers make. Much controversy surrounds this issue, and many argue that such salary schemes exploit Indian workers. Before making such an argument, however, one must take into account the differences in cost of living between the two countries by adjusting the dollar value of Indian salaries in accordance with the purchasing power of the dollar in India. The truth is, although those salaries seem low by American standards, they are in fact high by Indian standards. One can certainly find counterexamples in which Indian IT employees have been underpaid, but the overall trend is that the IT industry has produced better paying jobs than most economic sectors at comparable skill levels. Software outsourcing is, therefore, not simply another example of Western companies exploiting developing ones’ labor supplies, but a mutually beneficial relationship.

According to the McKinsey & Company report “New Horizons: Multinational Company Investment in Developing Economies,” Indian IT “output has grown at a rate of 48 percent a year, rising from a level of $3 billion a year in 1998 to over $10 billion today.” High growth rates are expected to continue, reaching $70-80 billion by 2008. In 2003, the IT sector directly employed 500,000 people, but comprised only 1.4% of the GDP. These, as well as foreign exchange (Forex) figures, are also expected to increase tremendously.

While the McKinsey report cites the rapid growth of the outsourcing industry, it notes that it has not yet produced a large system of domestic IT providers in India with a non-export focus. In fact, the study found that those companies that do exist lag behind even the lower end of the outsourcing companies in productivity. This is not a very good indicator for the potentiality of long-term effects on the Indian economy, as it shows that Indian IT companies remain wholly dependent upon foreign involvement to survive, undermining levels of Indian economic independence. Although an independent and viable IT sector has not yet come to pass, FDI has laid some groundwork which may lead to greater autonomy in the future. For example, foreign investments have funded and encouraged the development of IT infrastructures, such as better telecommunications connectivity and greater integration of technology into ordinary business processes. Indian companies thereby have lower barriers to entry in such markets because a system for IT development is already being instituted. Indian companies have also been instrumental in taking the initiative to produce outsourcing opportunities and build the IT industry, a sign that the desire, drive, and experience necessary for more independent action is growing, although it is becoming increasingly stifled as foreign companies set up subsidiary operations with more direct oversight.

In sum, Indian companies may still be dependent upon FDI at the present, but the infrastructure built by and experience resultant from FDI has also made it easier for Indian companies to move toward independence, even though this has not yet happened on a large scale.


The Impact on the Gender Gap

As IT industries in developing countries have grown, new opportunities have appeared for many types of workers in those nations. Although one most often thinks of educated males in these countries supplanting American programming roles, the influx of capital from offshoring produces jobs at highly varied skill levels. Although women in general have less access to the higher education required for many of the most skilled occupations, women have been able to make inroads into lower value-added jobs requiring moderate levels of education. Such jobs range from secretarial work in local software establishments to customer service in outsourced call centers; these are jobs that require a familiarity with high technology and good English, but not higher level degrees. Further, these jobs provide women with higher salaries than they would earn in other industries with similar skill levels. As a result, some women have been able to secure greater financial independence and stability, leading to increased autonomy and a narrowing of the gender gap. Preliminary research in the young Indian IT sector indicates that the numbers of women gaining higher levels of education and penetrating higher levels of employment is growing, but this process is slow and has had little impact as of yet on women’s position in the workforce.

At the same time, it has been observed that traditional male-female roles have carried over into the IT industry, which has developed its own gender divisions analogous to those in established industries. As a result of the lack of highly educated women and their consequently lower status in the IT industry workforce, women are generally excluded from decision-making and earn lower salaries. In large part, women are confined to shorter-term secretarial work at moderate wages. Thus, the IT industries in developing countries have witnessed a feminization of certain types of high-tech labor, giving women a similar lowered status to that in other industries. It is important to note that despite these divisions in the industry, women are using the lower-level IT jobs as a step toward greater equality by working slowly up the status chain.

Women have, however, benefited from the greater availability of IT systems resultant from the booming offshoring industry, as Hafkin and Taggart discuss in “Gender, Information Technology and Developing Countries: An Analytical Study.” With more high technology equipment at their disposal has come a greater connectedness of women’s communities. Women have thereby increased their autonomy and collective strength through online collaboration and political organization. Further, the wealth of information readily available over the internet has increased women’s ability for self-education by providing otherwise unreachable knowledge resources for poor women in underdeveloped and/or rural areas. With access to such great stores of information, women have been able to garner increased psychological independence and have been encouraged to pursue formal education with greater ferocity. As such, the growth of the IT industries is indirectly leading to greater education for women, and thereby may aid an eventual narrowing of the gender gap.