1. 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

2. 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 © Catherine L. Mann, Institute for International Economics

3. 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 © Catherine L. Mann, Institute for International Economics

4. 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 © Catherine L. Mann, Institute for International Economics IT is a Special Economic ‘Driver’

5. 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 © Catherine L. Mann, Institute for International Economics

6. 5 IT marketplace: The global evolution © Catherine L. Mann, Institute for International Economics 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.

7. 6 US Companies Excel in Software and Services, not so much Hardware © Catherine L. Mann, Institute for International Economics

8. 7 US Companies Excel in Software and Services, not so much Hardware © Catherine L. Mann, Institute for International Economics

9. 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 © Catherine L. Mann, Institute for International Economics

10. 9 Global Sourcing and IT Production Capital Goods are the largest share of US merchandise trade: 23% of imports and 40% of exports © Catherine L. Mann, Institute for International Economics

11. 10 Global Sourcing and IT Hardware Prices © Catherine L. Mann, Institute for International Economics For Example, as net imports of PCs increased, prices fell

12. 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 © Catherine L. Mann, Institute for International Economics

13. 12 Global Sourcing and IT Services prices? More globalized software activities show falling prices © Catherine L. Mann, Institute for International Economics

14. 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. © Catherine L. Mann, Institute for International Economics

15. 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 © Catherine L. Mann, Institute for International Economics

16. 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 © Catherine L. Mann, Institute for International Economics

17. 16 IT Intensity & Productivity Growth Slide 1 Leading and lagging sectors both are services. Leading sectors—already networked, common software ‘platform’. Lagging sectors—diverse firm sizes, complex relationships, regulations New business opportunities to promote IT diffusion into lagging sectors. © Catherine L. Mann, Institute for International Economics

18. 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 © Catherine L. Mann, Institute for International Economics

19. 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. © Catherine L. Mann, Institute for International Economics

20. 19 Slide 6 © Catherine L. Mann, Institute for International Economics Globalization & diffusion of IT accentuates wage, employment gaps Low-wage in real trouble—from 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

21. 20 Do US MNCs Pay Less Abroad? © Catherine L. Mann, Institute for International Economics

22. 21 The ‘Competition’: High-Skill Immigration © Catherine L. Mann, Institute for International Economics

23. 22 H1B: US vs. Foreign Employers in the US © Catherine L. Mann, Institute for International Economics

24. 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 © Catherine L. Mann, Institute for International Economics

25. 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. © Catherine L. Mann, Institute for International Economics

26. 25 R&D dollars intensity of IT is very high © Catherine L. Mann, Institute for International Economics

27. 26 R&D worker intensity of IT is very high © Catherine L. Mann, Institute for International Economics

28. 27 Human Capital for Innovation Leadership © Catherine L. Mann, Institute for International Economics The US was the leader in human capital attainment, But ranks 10 th for younger workers!

29. 28 © Catherine L. Mann, Institute for International Economics Globalization of Venture Capital? Similar pattern, five-fold difference in magnitudes Thomson Financial Venture Economics

30. 29 Globalization of Venture Capital: Changing role for VC in ‘innovative’ stage of investment © Catherine L. Mann, Institute for International Economics 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

31. 30 Globalization of Venture Finance Most still to other industrial countries, but… © Catherine L. Mann, Institute for International Economics Thomson Financial Venture Economics © Catherine L. Mann, Institute for International Economics

32. 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 Globalization’s 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? © Catherine L. Mann, Institute for International Economics

33. 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