THE EMPLOYMENT BLACK HOLE

Read “Case 14” on pages 420-423 of the textbook. Prepare thorough answers to questions 1-3 by applying the concepts discussed in the chapter.

CASE 14 INDIA: THE EMPLOYMENT BLACK HOLE? After independence from Great Britain in 1947, India established a socialistoriented government that discouraged foreign investment. Major industries were state-owned and government heavily regulated private businesses. Westerners viewed India as a very poor country with little to offer the international business community. In 1991, India experienced a currency crisis and was forced to fly its remaining stock of gold to London as collateral for an IMF loan. Faced with a very difficult situation, India then began to reform its economy. Since the early 1990s the Indian economy has transformed itself into a very competitive global competitor. With an abundance of workers and very low wage levels, India is attractive to international companies for low-end manufacturing and service delivery. Of special interest is the recent outsourcing of service jobs that can be performed over satellite and fiber-optics communication channels. India produces over three million college graduates a year.With high unemployment, companies have no difficulty in finding young college graduates who are content to handle customer service for American and European companies, at a fraction of the cost of their American and European counterparts. Typical of this new approach is AOL which now employs 1,500 people in India to answer its calls for customer service. Even though AOL is not available in India, AOL customers in the US and elsewhere call an 800 number and may never realize that they are talking with someone halfway around the world.AOL reports much lower operating costs and lower turnover in its Indian call center than it experiences in the United States. Costs are lower, even though training costs are higher and the company must provide employees with transportation to and from work. Like AOL, other well-known American companies have beaten a path to India to outsource their back-office services. Recently, Microsoft announced that it was moving some of its customer service jobs to India. Microsoft joins a long list of American companies already operating back-office operations in India, such as Oracle, IBM, Intel, and HP. Lloyds TSB, one of the UK’s largest banks, has announced the closing of its call center in England and its movement to India. Lloyds TSB call center workers in the UK earn on average ten times the wages to be paid to their Indian substitutes. Even the World Bank has moved its accounting function from Washington to India.American businesses are realizing that almost any back-office or service job can be moved overseas. While the call center and other lower-level service jobs which have moved to India are becoming commonplace, India is also embarking on a much more ambitious approach to job creation. India has attracted work from the United … States and Europe in software development, chip design, IT consulting, financial services, and drug research. An estimated 20,000 US tax returns were prepared in India last year, and the number is expected to skyrocket to 200,000 this year. The returns are prepared by Indian accountants familiar with the US tax code and are signed by CPAs in the United States. Indians now process mortgage applications, do legal and medical transcription, and book travel reservations. The management consulting firm McKinsey now outsources to India the design of its PowerPoint presentations that it shows its clients. The skill level of jobs being outsourced is increasing. GE has established the Jack Welch Technology Center in India and employs 1,800 engineers, many with doctoral degrees, to conduct basic research.The relatively new center has already earned 95 patents in the United States. India has an abundance of well-trained engineers and scientists, and MNCs are beginning to realize the potential of this human capital. According to the managing director of the Welch Center, it isn’t about saving money on labor costs.”The game here really isn’t about saving costs but to speed innovation and generate growth for the company.” Nevertheless, a top-of-the-line electrical engineer in India earns only about US$ 10,000 a year, a fraction of the salary of an American or European with the same qualifications. While GE may not be primarily concerned with cost savings, most companies moving to or establishing operations in India are doing so because of the labor rate differential. One UK travel agency has put a different spin on the outsourcing concept. Ebookings is moving both its work and workers to India. The Londonbased travel agency is not only moving the jobs of selling and booking travel, but also moving workers to India, and paying the prevailing Indian wage level. Ebookings is selling the idea of living in India as an adventure and a way to sell the world. The firm’s employees in India, both European and Indian, will be paid about US$ 6,000 a year, resulting in a significant cost saving to the company. While most companies that have moved their back-office operations to India are American or British, India is seeking additional jobs from other Englishspeaking countries such as Australia, and non-English-speaking countries in which customer service is conducted in English. India has the advantage of having an educated workforce that can speak English and is willing to work for a fraction of the wage level of developed country workers. It does, however, have a number of disadvantages to consider when companies decide to outsource work. India has experienced very impressive economic growth in the years since economic liberalization; however, it is still very much a less developed country. An estimated one-third of the population is illiterate, and only the higher classes speak English well. The official language of India is not English but Hindi. And India still possesses a very poor infrastructure, with unreliable power sourcing and frequent flooding. Government bureaucracy is still very much a factor in business activity, and presently India’s fiscal deficit is running at over 10 percent of GDP. While India has made great strides in eliminating excessive government, much improvement needs to be made. In addition to concerns over budget deficits, political tensions are also troublesome. India has an uneasy relationship with its neighbor, … Pakistan, and the tension between Muslims and Hindus produces violent conflict at times. While educated Indians speak English, it is considered to be “the Queen’s English” and has a different accent from American English.Although many Indians are enrolling in accent-reduction classes, some American customers have complained about the ability to communicate with Indian customer service personnel. Indians tend to speak rapidly, averaging 180 words a minute, compared to 120 for Americans and 90 for the British. Dell recently announced that it was moving its call center operations out of Bangalore, India, and back to Texas because it “had issues with differing Indian accents.” GE, while investing heavily in research in India, nevertheless moved its appliance call center from India back to the United States. GE had discovered that many Indian employees could not relate well to the concerns of GE’s customers because many did not own, or were not familiar with, the appliances they were discussing. At the present time, India is the lead country in attracting service outsourcing, but other countries are now beginning to compete. Like India, the Philippines is an English-speaking country with a low wage level. Unlike India, the Philippines, a former colony of the United States, is closer to the US in language and culture.While the number of jobs outsourced to the Philippines is currently much lower, estimated to be around 30,000, the number is expected to grow rapidly. Currently, Filipinos work in the Philippines for American companies, doing medical and legal transcription, answering call centers, and providing technical support. In addition to the Philippines, a number of Eastern European countries may rival India for job outsourcing. One indication is the bidding process on a website for programmers called Rent-A-Coder. Companies, mostly small and medium-sized firms from the United States and Europe, post jobs for freelancing software developers. Indians still are able to solicit most of the programming jobs from the site, however, Romania is the second most popular country for this outsourcing. Under Soviet domination, Romania, like many Eastern European countries, emphasized science, math, and engineering instruction and now has an abundance of technically qualified people who are willing to work at low wage levels. Like Romania, the Czech Republic has an abundance of technically qualified workers who are available at a lower wage level. The Czech Republic also has the advantage of impending membership in the European Union. Recently, DHL announced a 500 million investment that will employ Czechs to track shipments, provide customer service, and perform billing operations. The Czech Republic has a strong telecommunication infrastructure, workers who are proficient in many languages, and a skilled and inexpensive labor force. An additional factor, which may slow the growth of outsourcing to India is the political backlash caused by job losses in the United States and Great Britain. In the United States, the state of Indiana recently cancelled a $15 million contract with the software arm of large Indian company, Tata Group, over fears of unemployment in the United States. Protection of domestic jobs is a very strong political motive and one that will likely be raised as more and more jobs are outsourced to India. Many will argue the costs and benefits of overseas … outsourcing. A study by the McKinsey Global Institute found that for every dollar invested in overseas outsourcing, $1.25 returned to the United States. Supporters of foreign outsourcing argue the benefits of free trade and comparative advantage, while critics argue that foreign workers are taking jobs and potentially destroying the country’s technical competitive advantage.
CASE DISCUSSION POINTS

1. From the perspective of American and European companies, analyze the advantages and disadvantages of outsourcing work to India.

2. What would you recommend to Indian government officials to ensure continued job creation?

3. Is it fair to workers of developed countries when companies shift work to lower wage countries?

Explain. Sources: J. Slater, 2001, “Back-office bonanza,” Far Eastern Economic
Questions

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