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Implications of theGlobalization of Information TechnologyOutsourcing: Three Years Later

Dr. Catherine L. MannProfessor, International Economics and Finance, Brandeis University

Senior Fellow, Peterson Institute for International Economics

CLMann at Brandeis.edu

Technology, Innovation, and American Primacy

Council on Foreign Relations, May 2, 2007



1

Technology ‘Petri’ Dish Accelerates Globalization

• Fast pace of change – In technology

– In geography of production and demand,

– In changing labor tasks and business opportunities

• Strong synergies – Technological change & global sourcing go hand-in-

hand. Having one means having the other.• Innovation intensive

– R&D, venture, human capital



2

(1) Global supply and demand patterns

(2) International Trade in IT Products

(3) Productivity growth differentiated by sector

(4) US IT-related labor markets

(5) Innovation

Globalization of IT: 5 Lens



3

• ‘General purpose technology’

– IT investment wrt income > 1 (growth elastic) – IT investment wrt price >> 1 (price elastic)

– R&D and venture capital intensive

•

Productivity enhancing – Gains from diffusion throughout US…• Not only IT; also IT-induced change in workplace process & practice

– Affects labor tasks, wages, employment• There are winners and losers

• Implications of IT globalization? – Accelerates price declines, diffusion, productivity

growth, monetary gains

–

But also labor market changes

IT is a Special Economic ‘Driver’



4

(1) Global supply and demand patterns – Changing locus for different pieces of the IT package



(4) US IT-related labor markets

(5) Innovation




5

IT marketplace: The global evolution

Software/services-- Industrial countries increase spending.

So the prices of software and services are becoming more important there.

Hardware -- important in developing countries so shift production there.



6

US Companies Excel in Software and

Services, not so much Hardware



7

US Companies Excel in Software and

Services, not so much Hardware



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– What does deficit mean?


(4) US IT-related labor markets(5) Innovation




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Global Sourcing and IT Production

Capital Goods are the largest share of US merchandise trade: 23% of imports and 40% of exports



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Global Sourcing and IT Hardware Prices

For Example, as net imports of PCs increased, prices fell



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Trade in computer and information services

Slide 5

Rising affiliated imports,new deficit in CIS: A worry or not?Potential for the same price-reductions and productivity gains

As from the globalization of IT hardware



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Global Sourcing and IT Services prices?

More globalized software activities show falling prices



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International Services tradeIT intensity International comparative advantage

Slide 5

Leading services sectors run international trade surplusTechnology accelerates fragmentation and globalization of servicesNot just IT, but broad range of services and intellectual propertyBUT, Exposes more of the labor force to global technology forces.



14



– What does deficit mean?


-- Enhanced by lower prices through global sourcing(4) US IT-related labor markets

(5) Innovation




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Why is investment in IT special?Increasingly IT services and in services as an intermediate in production

Slide 1Leading and lagging sectors match productivity variation



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IT Intensity & Productivity Growth

Slide 1

Leading and lagging sectors both are services.Leading sectors—already networked, common software ‘platform’.

Lagging sectors—diverse firm sizes, complex relationships, regulations

New business opportunities to promote IT diffusion into lagging sectors.



17



–

What does deficit mean?(3) Productivity growth differentiated by sector

-- Enhanced by lower prices through global sourcing

(4) US IT-related labor markets – Challenges both for entrepreneurs and workers

(5) Innovation




18

Technology Cycle Drives Business Cycle

Slide 5

Diffusion of IT leads to technology jobs throughout US economy—2/3 of IT workers work outside the IT sector.

So, IT professionals exposed to both the tech cycle and business cycle.



19Slide 6

Globalization & diffusion of IT accentuates wage, employment gaps

Low-wage in real trouble — from trade & technology

Increased ‘codification’ puts some high -wage at risk (programming) Increased jobs at middle & high-wage demand integrative & analytical skills

IT a Microcosm for All ServicesCatherine L. Mann, Accelerating the Globalization of America: The Role for Information Technology, IIE, 2006



20

Do US MNCs Pay Less Abroad?



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The ‘Competition’: High-Skill Immigration



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H1B: US vs. Foreign Employers in the US



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(1) Global supply and demand patterns

– Changing locus for different pieces of the IT package


–

What does deficit mean?(3) Productivity growth differentiated by sector

-- Enhanced by lower prices through global sourcing

(4) US IT-related labor markets – Challenges both for entrepreneurs and workers

(5) Innovation

– Role for R&D, human and venture capital




24

Global R&D Expenditures: IT MNCs

Source: BEA

US MNC parent does the vast majority of R&D spending and is increasing.IT Hardware has more R&D spending than services

despite slower growing domestic market for IT hardware — yields domestic foundation for higher-value added hardware.



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R&D dollars intensity of IT is very high



26

R&D worker intensity of IT is very high



Gl b li ti f V t C it l



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Globalization of Venture Capital:Changing role for VC in ‘innovative’ stage of investment

F2 - Domestic US VC flows - by stage of financing

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F4 - US VC flows abroad - by stage of financing

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Later Stage

Startup

US:Falling role in ‘start-up,’

Growing role later stage& expansion

Abroad:Growing role acquisitionFalling role in start-up, but

higher % than in US

Thomson Financial Venture Economics



30

Globalization of Venture Finance

Most still to other industrial countries, but…

Thomson Financial Venture Economics

Gl b l f T &



31

• Plenty of entrepreneurship opportunities – Lagging IT uptake in key large sectors and SMEs

• Concerns over human capital – IT is R&D-worker intensive

– Challenge to retain, retrain, and maintain pipeline of workers

• Concerns over venture capital – Venture capital still mostly at home

– Role in early innovation is falling, particularly in US

•

Globalization’s Role? – Lowers cost of IT, enhances its uptake – so deficits are not the

issue

– VC and Human Capital concerns are real, but are they more home-grown than foreign-caused?

Globalization of IT &…

Is America Falling Behind?



32

Accelerating the Globalization of America:The Role for Information Technology

Catherine L. MannWith assistance from

Jacob Funk Kirkegaard

www.PetersonInstitute.org

Peterson Institutefor International Economics

doughtery rt mann 20070502

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