Andy Grove on offshore development

There is an interesting opinion piece by Andy Grove on the negative impact of offshore development at http://www.bloomberg.com/news/2010-07-01/how-to-make-an-american-job-before-it-s-too-late-andy-grove.html  

The article caught my attention since I have always found books and articles written by Grove to be very informative and it is therefore impossible to dismiss this piece as yet another Lou Dobbs kind of tirade against offshoring . Also since I have mostly heard business leaders in the US making the case in favour of offshoring, I was intrigued to find Grove positioning himself on the other side of the fence.

In brief Grove's argument is that startups these days tend to scale up operations in countries like China and India instead of expanding operations in the USA on account of cost. This leads to a number of problems such as high levels of unemployment (as the high-value work which remains in the US does not need too many people) and a loss of ability to innovate (since the complete ecosystem no longer resides in the US; also people lose out on experiencing all stages of development which hinders their ability to innovate in the next cycle). 

Grove suggests that the government should provide incentives to encourage companies to scale up in the US (for e.g. by taxing products of offshored labour), thereby creating jobs in the US and also protecting the ability to innovate in the future.

While I understand the arguments made by Grove, I am not convinced that the solution is that easy. For e.g. 

- Companies mostly offshore work on account of costs and availability of talent. These two factors can be addressed to some extent by having a liberal immigration system (e.g. lots of H1-B visas) thereby ensuring that all the requisite talent can be found in the US. The ready availability of talent would also reduce salaries, thereby reducing costs. However the reduced salaries may make careers in the technology industry (in the US) unattractive, thereby pushing people (American residents and new immigrants) away. Also given that the cost of living in the US will always be higher, people in industries such as the technology industry which are more integrated and prone to offshoring will be at a disadvantage when compared to their neighbours in other industries (where salaries do not face the downward pressure to the same extent). And then there are the social issues that would arise from having a sudden increase in the number of temporary workers and immigrants. 

- Addressing costs (other than manpower) is a harder problem; while the costs of doing business in the US are likely to be higher than in many other parts of the world (for e.g. higher rents), these are offset at this time as it is easier to do business in the US as compared to other countries (i.e. easier to set up a business, get VC funding, file for patents etc). But what happens when other countries catch up with or outscore the US on these parameters - will the offshoring tax be increased to compensate? 

- While other countries can come close to providing a similar environment as in the US, the costs of doing business in these countries will also go up over time; salaries will increase, costs of accommodation and office space (especially in some pockets such as Bangalore and Shanghai) will also rise. A colleague in the US once told me that he keeps wishing that my salary and those of my colleagues in India increase rapidly so that the temptation for his bosses to reduce costs by offshoring comes down :-)

- I guess this boils down to the classical question on the competitive advantages that the US (or any other country) can sustain. Should the US focus on those areas, instead of attempting to compete with China on electronics assembly or with India on low value services?

- What if each country wants to create jobs, expand the ecosystem and have the ability to innovate? For e.g. would it be fair and efficient if India or China were to insist on local development for all equipment they buy from Cisco or Nokia? Should such countries be pressurizing companies to move the high value roles within the country so that they too can aim to build the complete eco-system? Governments do try to influence companies even today to invest more in a country if they want to do business there. A senior manager visiting from the US once told us that in meetings with government officials in India and China the former would push the company to set up manufacturing plants whereas the latter would ask for software development centres. 

- Senior personnel in multinational technology firms in India often complain that the high-value work is not coming to India as fast as they would like - hope to write more on this in a later post.

- How obliged should a multi-national company be towards creating jobs in each country that it operates in? I was thinking that one way to measure fair distribution would be that over time, their expenses on employees in each country (i.e. whatever they spend on salaries and other benefits in each country, adjusted for cost of living) should be in proportion to their revenues (or profits?) in each country. In other words, if a  company makes USD 1 billion in China and USD 3 billion in Germany, their expenditure on employees in the two countries should be in the 1:3 ratio. Or more generally, should what a company spends in each country (on employees, in sourcing input materials etc) be proportionate to its revenues from the country? Would this be a fair measure? If yes, how do the big multi-national firms perform on this metric?