Farok Contractor is a management and global business professor at Rutgers Business School, based in New Jersey, US. He teaches an international business course in Beijing and Shanghai as part of the school’s International Executive MBA program. A PhD and MBA graduate of the Wharton School at the University of Pennsylvania, Contractor’s research focuses on corporate alliances, outsourcing and offshoring, as well as foreign direct investment. Before his academic career, he worked as an executive at the India-based multinational firm, Tata Group. Contractor spoke with China Economic Review about his latest book, Global Outsourcing and Offshoring: An Integrated Approach to Theory and Corporate Strategy, and what motivates him as a business professor.
Q: How did the idea for Global Outsourcing and Offshoring come about?
A: It goes as far back as 2004, when I gave a presentation at the Academy of International Business. I spoke about outsourcing, which was a hot topic in US politics at that time. We thought we would study it with some academic rigor. The questions were, and to some extent remain: Why are certain countries outsourcing more than others? What explains their service export success or manufacturing export success compared with other countries? What are the other factors that inhibit or encourage companies to outsource? Even today, it’s not clear if all outsourcing is good or desirable.
Q: Why did you and your co-editors feel it was important to write about this topic?
A: It’s a little known fact that in Organisation for Economic Co-operation and Development countries, about 62% of international trade is already in intermediate products and services. That’s an incredible statistic, which indicates that about two-thirds of today’s goods and services are not finished products and services, but components – sub-assemblies and sub-programs, which are then assembled somewhere else. Much of world trade is moving towards semi-finished items, so the phenomenon of breaking down company operations into smaller and smaller pieces, and then relocating the pieces to different countries, has progressed beyond the recognition of most policymakers and academics. These are dramatic and fast changes, and actual company practices were running away from academic analysis of the phenomenon.
Q: Why do you think this is developing at such a rapid pace?
A: One such example is how pharmaceutical companies are relocating their R&D to India, China and elsewhere – which wasn’t done at all just 10 years ago. This is partly due to an improvement in intellectual property laws and enforcement. The Indian parliament, for example, passed a law in 2005 which recognized pharmaceutical product patents. China started an intellectual property court in 2006. The other reason is that there is a growing body of scientists and engineers in the world who are not only cheaper than employees in the US and Europe, but are also very creative people. Furthermore, companies are codifying their knowledge. Ten years ago, firms’ complex thinking would simply reside in the minds of engineers at headquarters. Today, they are systematically codifying it; sitting down with engineers and debriefing their knowledge into computer algorithms, procedures or code. That can then be transferred from their headquarters to anywhere on the planet.
Q: What kind of contribution is your book making to the business community?
A: It offers companies criteria and a systematic procedure of thinking before pursuing outsourcing activities. It pulls together important considerations into an organized framework, and companies should use this to decide where to locate their activities. In that sense, it’s a major contribution. One area that needs to be studied further is: how finely will you chop the value chain of a company? The more finely you can slice it, the greater the chance that you can relocate each slice to the best location. But more slices also means greater coordination costs to stitch all these components together, across different countries. Knowing the optimum number of pieces is something that both companies and academics don’t know much about, and we want to research this further.
Q: What are the major outsourcing and offshoring issues happening in China?
A: The main issue with China is the identification of talent. There is obviously a lot of talent, but finding it – especially in the context of English-speaking abilities – is not so easy. Another significant issue is that the renminbi will continue appreciating, and therefore the country’s labor costs will escalate. Of course, the government knows this and so China is trying to move up the value chain into more skilled jobs, more R&D. One of the opportunities in terms of outsourcing and offshoring to China is in technologies like alternative energy and pharmaceuticals, where you are not talking just about labor, but also about skilled technicia
Q: How does your research help you as a professor?
A: A lot of the content I teach focuses on my work and research. I think this is what makes my classes current.
Q: You conduct classes in China twice a year. What do you like about teaching here?
A: The tremendous experience of the managers in our classroom. You have middle to senior executives sharing knowledge and perspectives from their own industry. The exchange of knowledge is just fantastic. There is a lot of interaction between students, which helps provide a good blend of theoretical concepts and application.