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Haas School trio explores globalization, high tech

– Foreign outsourcing can boost the profit margins for high-tech firms but it also contributes to the growing earnings disparities between blue- and white-collar workers in California, says a new book by researchers at the University of California, Berkeley's Haas School of Business.

In "Globalization and a High-Tech Economy: California, the U.S. and Beyond," (December 2003, Kluwer Academic Press) the authors analyze the impacts of the globalization of high technology on job opportunities, wage distribution, community resources, regional growth patterns, the prospects for new business development, and the very structure of these businesses.

"This book explains why high tech is a driver of U.S. gross domestic product growth at the same time the sector appears to be bleeding jobs to outsourcing activity overseas," says Dwight Jaffee, Willis Booth Professor of Banking, Finance and Real Estate.

Jaffee co-wrote the new book with senior research associate Ashok Deo Bardhan, and Cynthia Kroll, a senior regional economist. All three are with the Haas School's Fisher Center for Real Estate and Urban Economics.

Their book delves into questions of importance to many economic observers. Questions include why high-tech firms rely on foreign outsourcing for so much of their manufacturing, the implications for the U.S. economy of a continuing trade deficit in manufactured high-tech goods, and why high tech is steadily losing manufacturing jobs while gaining professional service sector jobs.

Among their key findings:

* Foreign outsourcing in high tech can be a mixed blessing, helping firms' profitability but accounting for one-third to one-half of the increase in relative earnings disparities between California's blue- and white-collar workers.

* Foreign outsourcing in U.S. manufacturing overall has grown steadily for 15 years. That's particularly true in high-tech manufacturing, where nearly 40 percent of manufactured materials are imported today, with the major part coming through imports by multinational corporations from their affiliates and subsidiaries abroad.

* Industries undergoing sharp sales declines were more likely to restructure their production processes by resorting to foreign outsourcing, using it as a restructuring tool during recessions.

* The business networks of multinational firms and the transnational social networks of foreign-born immigrants who settled in the United States represent an "information bank" on foreign markets. These networks can provide information and insights that serve to enhance U.S. competitiveness and help increase overall exports.

* Recent global expansion of the outsourcing of service activities, such as software production and business processes in India, China and Russia raises the prospect that a significant share of California's high-tech service jobs may be lost to outsourcing, following the pattern of the loss of high-tech manufacturing jobs.

* A significant portion of growing global demand for products from California and U.S. high-tech companies will likely be met by foreign subsidiaries or affiliates of United States-based multinational enterprises, not by direct exports from California or the United States.

"To me, the most compelling findings of the case-study work center around the huge changes in how computer software and services are produced or provided," says Kroll. "Faster communications, more advanced Internet capabilities, and more powerful computers have allowed software and services firms to go global."

Kroll advises policy makers to recognize that high levels of innovation in high-tech industries are accompanied by frequent changes in production processes and labor force demands, as high tech evolves.

"Demands for newly trained workers may occur at the same time that other workers have been displaced due to the movement of jobs overseas," she notes.

"A big push for outsourcing was the combination of rising labor and facility costs, and very tight supply," Kroll says. "Now costs are down and supply is up in both labor and real estate, making a U.S. location more feasible for many activities."

The authors caution that outsourcing also comes with added costs that can counterbalance salary savings, and some companies will opt to keep certain activities onshore because some communications and management simply work better face-to-face.

Bardhan says the book's key research questions include "how global production and trade have affected the structure of U.S. high-tech firms; and how the growing globalization of highly-paid service jobs in high-tech sectors is challenging the position of high-wage employment centers like Silicon Valley."

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