Relevance of the H1-B visa to offshoring …

I spent a good amount of time at Vel‘s place last evening drinking a couple beers and talking about the economy, university life, and other general stuff. During the course of our fun conversation, and after I had had 2 beers, the topic of the H1-B Visa provisions was brought up.

I believe that the H1-B Visa program, if implemented well, could actually curb the offshoring of jobs to a great extent. Ofcourse, like Vel said, an H1-B employee is akin to a regular employee for all practical purposes. Offshoring is inevitable, and the low end jobs are always going to be offshored to a cheaper country/location. We have seen this everywhere including India.

Before I explain my thesis, we must realize that one of the factors fuelling offshoring is the lack of a good primary education system in America. It is increasingly becoming harder for technology companies to find skilled and qualified people within this country. At the same time, it is crucial for these companies to maintain “primary” presence in the US on account of a good judicial system, mature company laws, and availability of global marketing resources. For example, Intel has 60% of its business outside America today. This is a common scenario across technology companies as the developing world plays catch-up and comes up as a big market for American products.

As a lot of people have pointed out, H1-Bs work with their American peers in America to further enhance the economy by paying taxes, buying billions of dollars worth of goods and services etc. This also means that they are being paid at par with the current wages prevalent in their industry. So, how exactly is this better than just offshoring the entire group to a cheaper place for the parent company?

You have to understand that it is not always cheaper to set up new operations in a cheaper country. We touched upon this last evening, and one argument against this was that it is always going to be cheaper in the long run. Well, when you offshore, you also have to factor in the quality of labor, and the value of such an investment. Value is derived from project turn-around times and other factors. These factors include local government policies etc. It is cheaper to offshore mundane tasks like call centers, basic IT development, and even telemarketing. At the same time, it is very difficult to offshore anything strategic. It is cheaper in other countries because of the availability of a large quantity of “mundane” labor. The very best is still in the developed world, and especially the US because of the quality of life and the higher institutes of learning that ensure that the very best stays in the US.

Sure, we are seeing the offshoring of research as well as product development now, but this is because of the growth of the developing world’s economies as a whole. USA is unable to keep development on its shore at such a high pace, and a lot of it has to do with politics, Govt. policies, and again, lack of etremely qualified and diversified people here.

Now, imagine if companies like Microsoft had their way, and the H1-B scheme was liberalized. The local companies would be able to hire the top talent from the world and stop other countries from getting forward. Sure, offshoring would still continue abated, but it would be more strategic than not. Surely, there is a reason why companies want to hire foreigners when they could just as well go with cost. I have been a firm supporter of the belief that costs catalyse offshoring, not fuel it. If costs were the only factor, then there would be no software companies in the Western Hemisphere. The McKinsey Global Institute has links to some very good articles and a panel discussion that touches on the need for a more liberal H1-B program.

If the H1-B caps are maintained at their current levels, at a time when the US economy needs more specialised workers than ever, it could prove catastrophic in the long run. I see offshoring as a short term solution. Other countries are not at all in a position politically, economically, or even socially to be havens for a global business. A car made by Ford in Mexico could cost the same as a car made by Toyota in the US. What matters is that Ford is still an American company and Toyota is a Japanese company having a bigger American business unit than a Japanese one.

I hope that the US policy makers realize this sooner than later.

Addendum: Interesting read – Immigration and Offshoring: The Graying of America