South-Westerns' Economic News Summaries
Outsourcing Is a Problem-Firms are Taking Their Business From Bangalore to Beijing
Topic International Trade
Key Words Comparative Advantage, Labor, China, India. Outsourcing Business Services

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Reference ID: A145343031
News Story

When we think of outsourcing business services, our thoughts turn immediately to India and other parts of the Asian sub-continent. Call American Express, and you're likely talking with someone half a world away. Since Indians work for much lower wages than American or European workers, it has been cheaper to hire people from India for such tasks. Soon, that may no longer be the case.

Firms in the U.S. and other developed nations are taking notice of the many advantages of hiring Chinese workers to perform business services. Long the stronghold of manufacturing processes, western China is beginning to look like a hub of computing services activity. In fact, it has even caught the attention of some Indian firms that seek to lower their own costs!

Xian, China presents some distinct advantages over India in providing business services from a distance. China's infrastructure and tax system is designed to attract business service providers. Workers are well-educated in computers, mathematics and science. Further, they appear better able to perform repetitive tasks than are Indians are. And they work much more cheaply than Indians do.

On the other hand, China presents a number of weaknesses. Although Chinese workers read English well, they speak and write it badly. Further, Chinese workers are trained in more theoretical terms than in practical terms. The Chinese government is spending vast sums to improve its workers' English and their ability to engage in practical solutions rather than simply knowing the theory behind computer systems and business structures. The government must also solidify ongoing intellectual property regulations--a key concern of firms bringing software or any other kind of intellectual services into China.

We can now consider India a victim of its own success. Given the focus on college-level education to help it compete globally, salaries have increases 40% over the last several years. While still lower than what an American worker earns, those salaries are beginning to price India out of the outsourcing market. Thus cost-minimizing firms look toward China for the next round of low-cost labor.


Why is India losing its comparative advantage in business service processing to China?

2. Could China someday lose the comparative advantage that it is gaining right now in this industry? Why or why not?
3. Would it ever make economic sense for a firm to keep production in a high-wage country instead of moving production to a low-wage country?
Source "Watch Out, India." The Economist,May 04, 2006.
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