As a CMO in a technology company, I am sure you and your fellow senior leadership have been looking at the state of the technology industry and wondering if the paradigm shift to off shore outsourcing will ultimately bleed your business model dry. The potential impact of outsourcing seems to suggest that the U.S. High Tech industry is on a crash course for an unhealthy future, according to some.
But in a recent Harvard Business review article authored by Laura D’Andrea Tyson, she recommends to look at the macro data more carefully and suggests that the U.S. High tech industry is not as bad off as it may seem. In her article she points out that the U.S. retains significant shares of global markets for high-tech products and services. And the reduction in costs and prices made possible by outsourcing upstream component production to low-cost foreign locations has helped U.S. companies maintain their competitiveness in high-value-added downstream products.
Between 1995 and 2005, the U.S. maintained about a 40% global share in knowledge-intensive services and about a 35% global share in high-tech industries, keeping the lead in four of them. In fact, The U.S. share in communications equipment increased by more than 20 percentage points as Japan’s share plummeted, and the U.S. doubled its share in computers and office equipment, although it was overtaken by China in 2003. These are the two sectors that encompass most of the products and companies that are the focus of the argument that outsourcing is hurting the U.S. Tech Industry.
The increase in China’s share in computers and office machinery — from 2% in 1995 to 46% in 2005 — was remarkable, but it is not a sign that China has gained on the U.S. in innovative capacity in this sector or others. China’s exports of high-tech products turn out to be not very high tech and not very Chinese: 80%-90% of China’s high-tech exports come from firms that are partially or wholly foreign-owned — in many cases by American Multi-National Companies. Moreover, the evidence suggests that the off-shoring of activity by U.S. MNCs — either to reduce the costs of their supply chain or to serve foreign customers — increases rather than decreases their U.S. activities. According to a recent study by Mihir A. Desai and C. Fritz Foley of Harvard Business School and James R. Hines Jr. of the University of Michigan at Ann Arbor Law School, both the domestic and foreign investment and the domestic and foreign employment of U.S. MNCs move together.
As Laura points out, overall, the data do not indicate that the U.S. has lost its innovative capacity or that the outsourcing of production to low-cost locations has undermined the global competitiveness of U.S. high-tech companies — at least not yet.
