The risks and opportunities of virtual offshoring
The pandemic will soon be over, but the cultural changes it has brought will continue to shape the economy for years to come. Among these, the normalization of remote work is one of the most consequential. The massive telecommuting experiment forced by the great lockdown shattered many myths about what a remote workforce can achieve. With permanent telecommuting no longer a taboo, employers will be increasingly tempted to hire teleworking talent in developing countries. Many emerging economies are quickly catching up on education and technological development; yet labour costs remain lower by an order of magnitude. More and more office work will be performed in the developing world and then immaterially exported to wealthier countries at a fraction of its domestic cost. This trend towards "virtual offshoring" is driven by strong financial incentives. For instance, firms in a country like France would reduce labour costs by an estimated 7% if 1 out of 4 teleworkable jobs were virtually offshored. Coface estimates the total number of teleworkable jobs in high-income economies at around 160 million. In turn, the number of potential teleworkers in low and middle-income economies is close to 330 million.
For wealthy countries, large-scale virtual offshoring could become a source of political risk. The pressures of global competition can provoke economic anxiety among white-collar service workers, fuelling political polarization. For emerging economies, virtual offshoring can become a pillar of their development model.
To single out countries with the potential to become virtual offshoring hubs, we used an indicator based on criteria such as human capital, competitive labour costs, technological infrastructure and business climate. Economies with low labour costs and large stocks of potential teleworkers (such as India, Indonesia or Brazil) seem well prepared to follow this path. This is also true of countries with relatively strong human and technological capital, such as Poland. While China and Russia would, on paper, be ideal virtual offshoring destinations, rising geopolitical and cybersecurity tensions with the West will be a significant obstacle.
During the last few decades of globalization, the offshoring of industrial activity and rise of global supply chains was one of the main drivers of productivity growth1. In recent years, however, productivity gains from the reallocation of industrial activity seem to be stifling.
With corporate debt skyrocketing in 2020, firms will be more hard-pressed than ever to become costcompetitive. One option will be to intensify the offshoring of services and knowledge-intensive activities to countries with lower labour costs. This trend is not new: countries like India or the Philippines are already established offshoring hubs for ICT and business services. What has changed, however, is the ubiquity of remote work. Indeed, up to 40% of the EU workforce engaged in some form of regular telework during the first lockdown2 in Q2 2020. With managers favourably surprised by the productivity of their remote staff3, attitudes quickly started shifting. While "if it can be done from home, it can be done from abroad" is surely an overstatement, firms are increasingly lured by the idea of a partially globalized virtual workforce. In a sample of 330 large U.S. firms, the share of organizations willing to hire foreign-based remote workers on a full-time basis soared to 36%, vs. 12% pre-pandemic4. Therefore, it is likely that firms will increasingly recruit qualified white-collar labour in the Global South5 thanks to digital innovation, an argument most notably made by economist Richard Baldwin6. The phenomenon of virtual offshoring (or "tele-migration", as Baldwin calls it) does not need to become the norm to be of macroeconomic significance, as it only has to involve a large enough share of the work currently done in high-income economies.
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1 - See Den Butter & Pattipeilohy: “Productivity gains from offshoring” (Tinbergen Institute Discussion Paper, 2007) or Tillmann: “Offshoring, domestic outsourcing, and productivity: Evidence for a number of European countries” (Kiel Working Paper, 2012)
2 - Eurofound: “Living, working and COVID-19” (COVID-19 series, 2020)
3 - PwC’s US Remote Work Survey (December 2020 edition) reports that 52% of managers find that productivity has improved over the prolonged work-from-home period.
4 - The Conference Board: “Adapting to the Reimagined Workplace: Human Capital Responses to the COVID-19 Pandemic” (2020)
5 - We will use “Global South” as shorthand for both lower-income countries and middle-income emerging countries.
6 - Baldwin: “The Globotics Upheaval: Globalisation, Robotics, and the Future of Work” (Oxford University Press, 2020)