Offshore Outsourcing: A Dynamic Causal Model of Counteracting Forces

Abstract

Many argue that offshoring is an inexorable trend, since a variety of information technology (IT) skills have become global commodities and they are vastly cheaper in other parts of the world. According to this view, most IT work would be drained from the United States to overseas locations. However, the loss of jobs to offshoring has increased pressure to impose restrictions. On the supply side, as IT salaries in outsourcing vendor nations increase, they become less attractive for offshoring. The literature identifies multiple factors--some enhancing, others inhib-iting--that affect the growth of offshoring. In this paper, we attempt to add to that knowledge by asking, "What are the mechanics by which these factors interact to produce the observed growth in IT offshoring?" We use the system dynamics methodology to build a two-country simulation model of offshoring growth that captures individual cause-effect relationships generated by its supply and demand drivers. Examined as a whole, these individual relationships reveal larger feedback loops that constitute the mechanism underlying offshoring growth between the two countries. Simulation experiments show how the dynamic behavior of offshoring is likely to evolve beyond the current high-growth period. The model contributes to our understanding of offshoring by offering a causal foundation for its growth pattern. It can also be used to computationally study different scenarios of offshoring growth.

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