Why Obama can’t stop outsourcing

The US firms are no longer US firms, but effectively global firms. By doing harm to what Americans call outsourcing, Obama may be axing a branch he is sitting on, writes N Madhavan.

The Indian information technology industry has reacted with a mix of hope and caution after President Barack Obama said last week that he will not allow US companies that send jobs away to enjoy his tax breaks.

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Obama is presumably talking about industry-specific tax breaks, though the details are not clear yet. But it is clear to me that he cannot go very far.

For instance, the US plan can affect General Motors, which is getting government help. I know from experience that GM is doing advanced design for its next generation of automobiles using aviation-standard materials in Bangalore. Does Obama’s budget mean that GM will stop using India as a base for innovation? How will GM keep a global edge?

Now, take Accenture, which many think is a US company. It is actually incorporated in Bermuda. Will a US-based retail company (like J.C. Penney, for instance), handing over IT work to Accenture suffer from Obama’s moves? If it does, and rival IBM gets a deal that Accenture might have had, remember that IBM has tens of thousands of employees in India, doing work for US clients. The simple point is that US has itself led efforts in making the world economy in an inter-connected web. The nitty-gritty of crunching IT spending is going to be painful.

In other words, US firms are no longer US firms, but effectively global firms. By doing harm to what Americans call outsourcing, Obama may be axing a branch he is sitting on. Which is why I see his speech as little more than symbolic post-election posturing. If the benefits of tax breaks are outweighed by the gains of outsourcing, US firms will do what makes more sense to them.