A Comparative Empirical Study On Determinants Of IT Offshore Outsourcing To China And India As Recipient Countries

Titled as "A Comparative Empirical Study on Determinants of IT Offshore Outsourcing to China and India as Recipient Countries," this thesis aims to comprehensively clarify which external and internal factors dominate IT offshore outsourcing decisions by doing a comparative analysis of China and India as recipients. Moreover, this thesis provides strategies to improve China’s competitiveness as an offshore outsourcing recipient.As globalization accelerates and competition intensifies, outsourcing has increasingly become a strategic solution for multinational corporations to focus on their core competencies. In 2002, only 10 percent of multinationals outsourced IT work offshore, but by 2008 that figure had risen to 70 percent. In 2015, the global IT services market stood at USD 124 billion, which verifies the huge potential in IT offshore outsourcing market.IT offshore outsourcing contributes significantly to the global industrial shift from manufacturing to services in the global emerging knowledge economy. IT offshore outsourcing not only helps outsourcing providers achieve lower costs and higher profitability, but also urges recipient countries to enlarge service exports and transform their industrial structures through innovation. Hence, attracting services outsourcing from abroad is of great significance for China to shift its role from a manufacturer to a service provider on the global stage.However, the status quo is that although China has gained a 31.5% market share, second only to India with a 52.8% market share as a recipient of services outsourcing in 2013, a large proportion is attributed to a surge in domestic demand for onshore outsourcing rather than offshore practices. Therefore, China still has a long way to go. The thesis aims to identify the determinants of IT offshore outsourcing decisions and unveil the reasons why China has lagged far behind India as a recipient country of IT offshore outsourcing over the past two decades.Featured by a comparative and quantitative approach, this study intends to quantify more soft factors driving IT offshore outsourcing through a modified Diamond Model with the latest data. Frequently used to understand the competitive position of a nation in global competition, the Diamond model demonstrates that countries can become competitive regardless of whether they possess natural factor endowments. By identifying six interlinked advanced factors including firm strategy, structure, rivalry; demand conditions; related supporting industries; factor conditions; the role of government and chance, the Diamond theory provides a theoretical framework to measure recipient countries’ competitiveness in IT offshore outsourcing.Given the motivations, factors and impacts of IT offshore outsourcing illustrated in the overview of IT outsourcing theories and previous literature, a modified Diamond model is constructed with one dependent variable, i.e., the volumes of IT offshore outsourcing to the country and seven independent variables. The latter consist of labor costs, skilled workforce with English proficiency, network infrastructure, R&D spending, Intellectual Property Rights (IPR) protection, institutional distance and domestic pressure in outsourcers’countries. Based on the modified Diamond Model, empirical analyses for China and India are respectively performed. Annual data from 1996 to 2014 are selected, which are dealt in advance with unit root tests to avoid spurious regression. Given a limited sample size, two approaches to co-integration introduced by Engle-Granger and Johansen are adopted. Firstly, according to the Engle-Granger two-step procedure, with nonstationary data series integrated of the same order one as well as stationary residual sequence, the regression is run for China and India respectively to unveil the key determinants for each country. Additionally, a comparative analysis of regression equations manifests China’s weaknesses compared to India. Secondly, the Johansen co-integration test is employed to examine the long-run equilibrium relationships among key determinants. Granger causality tests ensue, which further investigates how useful these determinants can help forecast the IT offshore outsourcing volumes in the future.Empirical findings are as follows. Labor costs, institutional distance and domestic pressure in outsourcer countries are negatively correlated with IT offshore outsourcing whereas technical professionals with English proficiency, network infrastructure, R&D expenditure, IPR protection are positively correlated with IT service exports.In the long run, network infrastructure, R&D expenditure, IPR protection and institutional distance are important factors determining China’s competitiveness in IT offshore outsourcing while qualified IT professionals with English proficiency, low labor costs, higher R&D intensity for firms and IPR protection are main drivers of India’s competitiveness.Although China is the second largest outsourcing recipient, it has lagged behind India in IT offshore outsourcing due to the paucity of technically skilled workforce with English proficiency, the lack of IPR protection, insufficient R&D spending of IT firms and the larger institutional distance with outsourcer countries.By comparison, the thesis sheds some light on the gaps between the key success factors for China and India while suggesting ways in which the IT/ITeS industry in China could continue to evolve, strengthen existing leverage points, overcome the weaknesses and differentiate itself from other recipients.In the end, the limitations of the thesis and prospects for future studies are proposed.