KDnuggets : News : 2004 : n05 : item3 < previous | next >


From: Gio Wiederhold
Date: 24 Feb 2004
Subject: Outsourcing as export of intellectual property

Outsourcing of jobs is only possible because at the same time the companies that outsource jobs instruct the foreign workers on how to perform those jobs. That may be done by training foreign workers here, training leaders here and then having them train more people at the foreign site, or/and sending U.S. staff to the foreign sites for training of workers there.

While some of the training covers routine knowledge, much of what is conveyed is valuable intellectual property (IP) of the companies that do the outsouring. Such IP is part of the value of the company, as recognized for instance in their stock valuation (market value). Market value of modern companies typically exceeds their book value (which excludes intangibles unless purchased externally and not yet written off as goodwill) by several factors.

Hence, as part of outsourcing valuable property (IP) is being moved overseas as well, property that has been created by prior generations of workers, and now is now exported without any corresponding generation of income in the U.S., and without any corporate tax being paid on those export sales. This is one of the reasons why today corporate taxes amount to about 17% of the total federal tax take, while (in constant dollars) it was about 35% fiften years ago. The workers that remain have to pay the difference in taxes -- if they still have jobs.

The market value of the companies stays high of course, because that value includes IP wherever it is globally located. It may well increase, because the profit margins earned on the exported IP are typically much higher than the margins that can be achieved in the U.S.

Sorry for this lengthy diatribe, but much of the whining about jobs, and the gloating about new corporate efficiencies misses ignores the IP transfer that makes it all possible.

Gio Wiederhold, emeritus, Stanford


KDnuggets : News : 2004 : n05 : item3 < previous | next >

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