Global Themes

On Globalization & Venture Capital

India, China, Outsourcing and Globalization

Ed Sim recently wrote a nice post on Globalization (after a long time – his last entry in this category is dated Jan’06). Ed is one of the few VCs who are explicitly thinking about globalization and what it means for the world in general.

I read with interest his views on outsourcing and how it has panned out across his portfolio of investments. I am watching this space closely and trying to get more of our companies to think about leveraging the cost/skills base present not just in India but also in Eastern Europe.

For many European companies, Eastern Europe is a more natural (and less daunting) opportunity than India (although it doesn’t seem to make a difference to some companies).

Having said that, quite a few Indian companies are now setting up shop (or already have offices) in Eastern Europe (see this TIME magazine article from June ’06: “Bangalore Goes Global”). In this sense at least, globalization is truly happening

Ed reproduced a graph from the Economist on his blog to make the point that it is not just low-level work that is now moving offshore. To quote:

“The last graph is quite interesting as it relates to us technology folks. We have always thought of India and China as places to offshore low-level development work. Yes, a lot of that has already been done but what is alarming is what may happen in the future as the comparative advantage that India and China have over us in terms of college graduates in science and math is overwhelming.

Body Count

“Not every one of those graduates according to the McKinsey Global Institute is up to par with the standards that we have in the U.S. (10% in China and 25% in India) but that is clearly changing.”

This point came across in another article I read very recently in Nikkei Weekly (“First Software, Now Hardware Development Moves to India”)

Ed mentions that this (i.e. the increasing numbers of Chinese and Indian graduates that will enter the workforce) will have consequences. He recommends an emphasis on education as a key factor in maintaining (US) competitiveness…I cannot agree more.

In some of my previous posts, (see “Globalization”) I have talked about the gradually eroding competitiveness of western economies and a possible shortfall in science and engineering graduates in Europe.

In Britain, where I have lived for the several years, I am already seeing a declining interest in the sciences and technology…increasing number of students are migrating to softer subjects like media and arts – which although sound cool and sexy, are unlikely to be high value-add particularly when economic balance begins to tilt the other way.

Ed goes on to talk about leveraging this trend to your advantage. Again, to quote:

“Secondly, I always like to say that the trend is your friend so be on the outlook for how to leverage this labor and talent pool in your current company. It could mean offshoring work (only if you and your team can handle it) or creating new companies that enable global labor arbitrage and collaboration leveraging the Internet (wiki opportunities, open source plays, communications like Gizmo Project, one of our investments).“

He also refers to the increasing number of US VCs moving into these countries. I commented on this in a post last month (“VC Stampede to Asia”). Ed says: “as these emerging economies grow, income levels rise and with that comes more disposable cash to buy products and services.

This explosion in terms of market opportunity is something that is often overlooked when people talk about Globalization.

For me, Globalization is really about expanding the market for our portfolio companies.

I don’t belittle off-shoring or outsourcing – but I believe that the most significant value that investors can provide to these companies is in opening doors, introducing to channels, customers, help in recruiting and help in navigating the (often complex and always different) business and regulatory landscape in these countries/regions.

More on this in my next post on the subject…

September 28th, 2006 Posted by | China, Emerging Markets, Globalization, India | 2 comments

2 Comments »

  1. interesting account. Its getting more competitive to do business on a global scale and many factors need to be taken into account before doing outsourcing. Look at the Oil companies. I know they’re trying to move all their non core businesses out to vendors to concentrate on just looking for more oil. Its tough and they are trying to keep costs down in case alternative energy sources don’t come early or cheap yet…Its a tough world nowadays and we have to learn to save cost even as individuals.

    Comment by colbert | October 3, 2006

  2. Agree colbert…the survivors would be the ones that adapt..we are living in interesting times

    Comment by Shantanu | October 5, 2006

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