Two-thirds of India’s software exports are to the United States, a share that has remained nearly steady over the past decade.
The impact is perhaps better appreciated by calculating the Indian share of employment within the American supply chain of software. The share of Indian employment has risen from 3 percent of the programmer pool used in American software production in 1995 to over 30 percent in 2005.2
Meanwhile, work besides programming has also been offshored. Some of this newer work is even lower-end work than programming, such as installation of software and maintenance of software programs. This has happened largely because of the Internet. However, as will be shown below, new tasks, hitherto considered both difficult to offshore and high value-added relative to the programming function, such as product development and contract R&D for the software industry, have been offshored over the past decade, particularly to India. For example, as of 2006, the world’s largest contract R&D firm in software, employing 14,000 persons, is the Indian firm, Wipro. A decade ago, Wipro, like others in the Indian software industry, did not do such work.
This paper fulfills two objectives. First, it explains the genesis of software offshoring. This includes a consideration of why programming was the function that was most commonly offshored right from the earliest stages. Second, it examines the scope for offshoring software work other than programming. This includes a consideration of whether the additional scope is higher or lower value-added, how it is linked to the earlier phase of programming offshoring, and its likely evolutionary trajectory.
The paper proceeds as follows: in the next section, we discuss the current status of the debate on software offshoring. The following section provides a historical overview of developments that led to offshoring in the software industry, with a focus on developments in India. This is followed by a theoretical framework for analyzing how skilled work may be offshored. We conclude with a discussion of the impact of software offshoring on employment and innovation in the United States and other developed countries, and the implications for policy on education.
A lively discussion is under way about the impact of globalization on employment and productivity in the American software industry. An assessment published in 2006 by the Association for Computing Machinery (ACM) notes that “attracted by available talent, work quality and, most of all, low-cost companies in high-wage countries, such as the United States and United Kingdom, are increasingly offshoring software and software-service work to … low-wage countries.” The report concudes that “the globalization of, and offshoring within the software industry will continue and, in fact, increase” (ACM, 2006).
As Bhagwati et al. (2004) and Mankiw and Swagel (2006) have pointed out, the offshoreability of the software industry means, first, that software services are now tradable, whereas in the past they were not. Second, given that international trade is usually beneficial to both trading partners, they conclude, ipso facto, that globalization will have positive implications for the U.S. economy. They argue that workers in the services sector of developed nations will shift to jobs in which they have a comparative advantage, thus ensuring full employment in the long run. As Mankiw and Swagel (2006) note, “Economists see outsourcing3 as simply a new form of international trade, which as usual creates winners and losers, but involves gains to overall productivity and incomes.” By contrast, Samuelson (2004) has cautioned that these gains may largely be captured by developing countries; and Gomory and Baumol (2000) have argued that nationally located high-growth industries are important for national growth because of their spillover effects on overall productivity.
To some, these latter cautions suggest potentially dramatic negative impacts for software-related employment in developed countries. These argue that if software development overseas increases in quantity and, especially in scope, to include the most highly skilled work, the result may be unemployment, even for the most highly skilled software engineers in developed countries (Hira and Hira, 2005). The ACM report and other evidence points to the fact that higher skilled work is already being moved offshore in some fields of software, such as computing research (ACM, 2006; Dossani, 2006; Sridharan, 2004).
There is no comprehensive empirical evidence on software offshoring, primarily because of the poor quality of primary data. See Figure 1 for an example of contradictory data reported by the U.S. Bureau of Economic Analysis and the Indian software industry association, Nasscom. As far as we can tell, there is no systematic evidence yet of significant losses of high-value jobs in the United States to services offshoring. As noted in NAPA (2005), “The number of jobs impacted (by services offshoring in general) appears relatively small, when compared to total annual job losses in the United States.”
Other empirical studies offer indirect evidence in support of the NAPA findings. For example, Mann (2006) shows that the elasticity of demand for U.S. exports of services is lower than for U.S. imports of services. If this finding is applicable to software, it would imply that globalization could have positive implications for the U.S. balance of payments.
Landefeld and Mataloni (2004) show that the share of