A Discussion on Global Outsourcing!

In an appearance a few years ago at the Stanford Institute for Economic Policy Research, the Alan Greenspan described an emerging economic order, in which physical assets are not the main source of value. Instead, "value increasingly is embodied in ideas rather than tangible capital”. In a study authored by Baruch Lev of the Brookings Institution, it was reported that in 1982, valuation of S&P 500 companies was based on 62% tangible assets and 38% on intangible ones. In 1998, that ratio was 15% and 85% respectively, and the trend continues. These crucial changes that have occurred in our economy should frame the debate over global outsourcing and its effect on corporations’ intellectual capital (intangible assets) and long-term competitiveness. Globalization and “offshoring” have ushered in a new world economic order and its effects can be felt across our manufacturing sector. “Offshoring" is not just about losing manufacturing jobs, but rather about losing leadership in the world of innovation. Global outsourcing is increasingly affecting engineering, design and R&D with potential detrimental effects on US-based corporations’ intangible assets and intellectual capital. Any decline in US intellectual property devalues US corporations by billions of dollars and erode their competitive position and their ability to invest in job creation. Speaking to a global technology summit in Washington recently, Intel co-founder and chairman Andrew Grove said: “The software and technology service businesses are under siege by countries taking advantage of cheap labor costs and strong incentives for new financial investment”. Increasingly companies are making strategic decisions based on accessing available inexpensive labor and intellectual capital around the world. The Gartner Group, a market research firm, estimates that 10 percent of jobs in U.S. information technology will move offshore by next year. Dr. Grove expressed the dilemma faced by executives, when he admitted that he is torn between his responsibilities to shareholders to cut costs and to U.S. workers, who have been responsible for the nation's technological revolution and whose jobs are now threatened by cheaper labor overseas.
In our knowledge-based economy, where intellectual property (IP) represents an invaluable asset, US corporations are transferring their know-how to overseas partners, transferring, practically at no cost, valued assets that they accumulated over time and after large investments. The president of the Alexis de Tocqueville Institution, Dr. Ken Brown, in a recent article stated that, “In the name of globalization, the U.S. has relentlessly pursued business partnerships with countries that are home to relentless intellectual property theft. It almost seems as though the more evidence there is of piracy in a country, the more information technology business and investment we bring in.”

How are we protecting our intangible assets in the face of outsourcing “innovation”? The protection of IP rights in the United States is based on a body of case law, that has evolved considerably in the last 200 hundred years. This legal and cultural environment is not as well developed in parts of the world that lack the legal and cultural foundation for IP protection. For example, in India, trade theft is not recognized as a violation as such and it is treated as a civil theft. And India’s legal and cultural environment is more favorable to IP protection than those in China or Russia. Furthermore, the political and economic incentives to ignore infringements are huge, with outsourcing (i.e. software development) poised to grow, by 20%-30% annually. For India’s IT industry, that will translate to $24 billion of new programs by 2008, from $10 billion last year. Forrester Research is projecting that over 3 million jobs will be exported from the US in the IT sector in the next decade. In light of the scale of global outsourcing and the benefits many countries derive from it, safeguarding IP will be challenging at best.

It is acknowledged that globalization creates trade interdependencies, increases commerce and benefits all parties involved. But adherence to certain “code of behavior” is critical, if we are to establish a fair and sustainable global economic trade. Admission to the World Trade Organization (WTO) is the first step for trade partners to assume their responsibilities on IP and patent protection. Through the Trade-Related Aspects of Intellectual Property Rights (TRIPS), the WTO has sought to establish the legal framework to which countries are held accountable. However, the weakness of TRIPS is that IP protection is only enforceable in the countries where the violations take place, providing that the local laws recognize IP rights. The issue is further complicated by cultural attitudes over private property, as for example in China, where appreciation of “property rights” is at its infancy. However, the WTO through its instruments can create an environment where the cost of engaging in trade violations and unfair practices is high and can serve as an incentive for countries to enforce legislation and to shape attitudes. A 2004 report by the US trade office noted that enforcing IPR protection in China is a US top priority. In part, due to pressure from the United States, there is now a commitment from the Chinese government on the prosecution of IPR infringement violations, as prescribed by WTO.

However, the allure of outsourcing will continue, as long there are countries where the daily wage is $2.00 and the US consumer is enjoying the benefits of low priced products. Developing countries may continue to view IP protection as a luxury they can choose to ignore, in their race to raise living standards and accumulate intellectual capital. Meanwhile, what is our official US policy on this issue? Intel’s Grove has asserted that we are ignoring the problem, by adding, “I am hard put to find a document outlining a policy plan”. Home-bred innovation was largely responsible for naming the 20th Century, The American Century. The question is what country will be lending its name on the 21st. Ultimately, that will be decided by our will to foster innovation here at home and by committing resources in the education of science and engineering.

George Polychroniou

VisionOutsource LLC