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Don’t Blame ICT for Manufacturing Offshoring

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During the 2000s, globalization took millions of jobs from the United States. Some have been quick to associate this job loss with the technology that ostensibly made it possible, chiefly the adoption of ICT that allowed for global connectivity. So, would the United States have been better off if it had simply never invested in ICT in the first place?

There are those who would love to somehow put the technology introduced by the ICT revolution back in the box. But a new study shows that doing so would have detrimental impact on the economy. Yes, in some cases ICT investment introduced the tools which allowed companies to outsource jobs. But, as new paper, Does ICT Investment Spur or Hamper Offshoring?, finds, the same ICT investment enabled productivity gains that kept companies at home.

Of course, it is difficult empirically to determine whether ICT investments increase the likeliness of offshoring, as causality is difficult to determine. To address this problem, authors Luigi Benfratello, Tiziano Razzolini, and Alessandro Sembenelli examined small and medium-sized Italian manufacturing firms with varying access to local broadband facilities, a random variable that was used to control for ICT investment. They found that in low-technology firms, investment in ICT was associated with a lower propensity to offshore. In short, ICT investment keeps jobs at home.

This result makes sense. While instant connectivity provided by ICT investment gave businesses the tools they needed to move basic tasks abroad it also gave businesses the tools to make many of the low-cost services available abroad wholly unnecessary, keeping production local.

That’s not to say that ICT does not cost jobs, but it does so through ordinary productivity gains. ICT investment increases worker productivity, allowing fewer workers to produce more. In a vacuum, ICT firms that improve productivity would gain an advantage over foreign competitors, allowing them to produce more. However, as international competitors all simultaneously adopt these technologies, competitors are on equal footing, while productivity increases allows fewer workers to produce the same amount of goods. Importantly, with ICT investment the remaining high-paying jobs tend to stay domestic, instead of being offshored, while overall economy-wide productivity and incomes go up.

All in all, ICT investment has been shown to be a powerful driver of robust growth for modern economies. Internet related value-added is estimated to be above 7 percent of GDP in the United States, though this is very difficult to measure, and it is estimated that a 10 percent increase in ICT investment results in a 1 percent increase in GDP for developed nations. In fact, ICT was responsible for two-thirds of productivity gains in the United States between 1995 and 2004, and about one-third of productivity gains since. Europe has seen lower productivity gains derived from ICT, but perhaps only because taxes and barriers prevent full investment in ICT, especially in lower-technology intensive industries that Benfratello et al. show have the biggest impact on retaining ICT jobs.

ICT investment has opened manufacturers up to competition from across the globe. But the very tools that introduced this competition are the tools allowing domestic firms to remain competitive with low-wage nations.

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About the author

Adams Nager is an economic policy analyst at ITIF. He researches and writes on innovation economics, manufacturing policy, and the importance of STEM education and high-skilled immigration. Nager holds an M.A. in political economy and public policy and a B.A. in economics, both from Washington University in St. Louis.