Implications of the

Globalization of Information Technology

Outsourcing: Three Years Later
Dr. Catherine L. Mann
Professor, 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
(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
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
8
(1) Global supply and demand patterns
Changing locus for different pieces of the IT package
(2) International Trade in IT Products
What does deficit mean?
(3) Productivity growth differentiated by sector
(4) US IT-related labor markets
(5) Innovation
Globalization of IT: 5 Lens
9
Global Sourcing and IT Production
Capital Goods are the largest share of US merchandise trade: 23% of imports and 40% of exports
10
Global Sourcing and IT Hardware Prices

For Example, as net imports of PCs increased, prices fell
11

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

12
Global Sourcing and IT Services prices?
More globalized software activities show falling prices
13

International Services trade
IT intensity International comparative advantage




Slide 5
Leading services sectors run international trade surplus
Technology accelerates fragmentation and globalization of services
Not just IT, but broad range of services and intellectual property
BUT, Exposes more of the labor force to global technology forces.

14
(1) Global supply and demand patterns
Changing locus for different pieces of the IT package
(2) International Trade in IT Products
What does deficit mean?
(3) Productivity growth differentiated by sector
-- Enhanced by lower prices through global sourcing
(4) US IT-related labor markets
(5) Innovation
Globalization of IT: 5 Lens
15
Why is investment in IT special?
Increasingly IT services and in services as an intermediate in production

Slide 1
Leading and lagging sectors match productivity variation

16
IT Intensity & Productivity Growth

Slide 1

Leading and lagging sectors both are services.
Leading sectorsalready networked, common software platform.
Lagging sectorsdiverse firm sizes, complex relationships, regulations
New business opportunities to promote IT diffusion into lagging sectors.

17
(1) Global supply and demand patterns
Changing locus for different pieces of the IT package
(2) International Trade in IT Products
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
Globalization of IT: 5 Lens
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.
19
Slide 6
Globalization & diffusion of IT accentuates wage, employment gaps

Low-wage in real troublefrom 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 Services

Catherine L. Mann, Accelerating the Globalization of America: The Role for Information Technology, IIE, 2006
20
Do US MNCs Pay Less Abroad?
21

The Competition: High-Skill Immigration
22

H1B: US vs. Foreign Employers in the US
23
(1) Global supply and demand patterns
Changing locus for different pieces of the IT package
(2) International Trade in IT Products
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
Globalization of IT: 5 Lens
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.

25
R&D dollars intensity of IT is very high


26
R&D worker intensity of IT is very high

27
Human Capital for Innovation Leadership

The US was the leader in human capital attainment,
But ranks 10
th
for younger workers!
28
F1 - Domestic US VC flows - by stage of financing
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Globalization of Venture Capital?
Similar pattern, five-fold difference in magnitudes

Thomson Financial Venture Economics
29

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

F2 - Domestic US VC flows - by stage of financing
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1
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F4 - US VC flows abroad - by stage of financing
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US:
Falling role in start-up,
Growing role later stage
& expansion
Abroad:
Growing role acquisition
Falling 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
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
Globalizations 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. Mann
With assistance from
Jacob Funk Kirkegaard


www.PetersonInstitute.org

Peterson Institute
for International Economics