Friday, March 12, 2004
A contrarian view on outsourcing - part deux
A few days back, I had posted Walker Duhon's piece on outsourcing, written from an American techie's perspective. Walker follows his earlier post with this post on the post-industrial economy.
Why Postindustrialism is a Recipe for Chronic Trade Deficits
In my first post "Outsourcing is the wake up call America needs", I pointed out that the United States is incurring a very large trade deficit and laid the blame on America's rapid shift to a postindustrial service economy. But what is it about a postindustrial economy that makes it a trade loser compared to a manufacturing economy? The short answer is that postindustrial goods and services do not trade very well compared to manufactured goods.
For one, cultural barriers figure more prominently with postindustrial goods and services than with manufactured goods. This is one reason why the software industry as a whole is a very poor exporter. A packaged software product typically must be tailored to the language and practices of the individual locale. Few software producers can overcome this obstacle, but those that do only do so at significant cost. In addition much of that work is done in the foreign market concerned, taking a significant chunk out of foreign exchange receipts. Entertainment and media products face an even greater challenge on this front, as exports from music, television programming, internet content, and movies are inherently limited by language and local taste.
Second, regulatory barriers are often stiff for many postindustrial services. Financial services, the most bloated and babied of all new economy industries, hits a brick wall of regulatory barriers in trying to do business abroad, as most nations prefer to keep a tight grip on their systems of finance. Regulation also affects entertainment products; even postindustrial cousins Britain and Canada regulate to protect their culture from American media content.
Finally, intellectual property, the main currency of postindustrialism, is subject to extensive piracy. Software and Entertainment products are particularly susceptible; Microsoft alone lost $12 billion in revenue from piracy in 2002. The high worldwide rate of piracy is unlikely to change any time soon, as there is really no reason for nations that primarily consume intellectual property to crack down on the behavior. Even the United States, which has every incentive to promote intellectual property rights has a software piracy rate of ~25%. A second and just as significant cost of piracy is that products are brought into direct competition with their pirated clones; this means that the price point for the legitimate product must be lowered, further decreasing export revenues.
All of these obstacles explain why postindustrial goods and services do not add up to much in exports. Combine this with a steady demand for manufactured goods, that now must be imported, and you will have trade deficits in a postindustrial economy.
In addition, future prospects look even worse, at least for the United States and other first world nations, as import competition from the third world becomes a threat in many postindustrial areas. For software, easy entry into the industry and a glut of talent in places like India and China mean that the center of the industry will assuredly move east. And, it doesn't stop there, any task that doesn’t require a lot of cultural awareness and can be done by telephone, computer, and teleconferencing can potentially go abroad.
None of this is to suggest that postindustrial services are not an important part of any developed economy, but poor trade performance is just one reason why they should be a complement to and not a replacement for strong manufacturing.
By Walker Duhon
Why Postindustrialism is a Recipe for Chronic Trade Deficits
In my first post "Outsourcing is the wake up call America needs", I pointed out that the United States is incurring a very large trade deficit and laid the blame on America's rapid shift to a postindustrial service economy. But what is it about a postindustrial economy that makes it a trade loser compared to a manufacturing economy? The short answer is that postindustrial goods and services do not trade very well compared to manufactured goods.
For one, cultural barriers figure more prominently with postindustrial goods and services than with manufactured goods. This is one reason why the software industry as a whole is a very poor exporter. A packaged software product typically must be tailored to the language and practices of the individual locale. Few software producers can overcome this obstacle, but those that do only do so at significant cost. In addition much of that work is done in the foreign market concerned, taking a significant chunk out of foreign exchange receipts. Entertainment and media products face an even greater challenge on this front, as exports from music, television programming, internet content, and movies are inherently limited by language and local taste.
Second, regulatory barriers are often stiff for many postindustrial services. Financial services, the most bloated and babied of all new economy industries, hits a brick wall of regulatory barriers in trying to do business abroad, as most nations prefer to keep a tight grip on their systems of finance. Regulation also affects entertainment products; even postindustrial cousins Britain and Canada regulate to protect their culture from American media content.
Finally, intellectual property, the main currency of postindustrialism, is subject to extensive piracy. Software and Entertainment products are particularly susceptible; Microsoft alone lost $12 billion in revenue from piracy in 2002. The high worldwide rate of piracy is unlikely to change any time soon, as there is really no reason for nations that primarily consume intellectual property to crack down on the behavior. Even the United States, which has every incentive to promote intellectual property rights has a software piracy rate of ~25%. A second and just as significant cost of piracy is that products are brought into direct competition with their pirated clones; this means that the price point for the legitimate product must be lowered, further decreasing export revenues.
All of these obstacles explain why postindustrial goods and services do not add up to much in exports. Combine this with a steady demand for manufactured goods, that now must be imported, and you will have trade deficits in a postindustrial economy.
In addition, future prospects look even worse, at least for the United States and other first world nations, as import competition from the third world becomes a threat in many postindustrial areas. For software, easy entry into the industry and a glut of talent in places like India and China mean that the center of the industry will assuredly move east. And, it doesn't stop there, any task that doesn’t require a lot of cultural awareness and can be done by telephone, computer, and teleconferencing can potentially go abroad.
None of this is to suggest that postindustrial services are not an important part of any developed economy, but poor trade performance is just one reason why they should be a complement to and not a replacement for strong manufacturing.
By Walker Duhon
