Policymakers are deeply concerned about the impact of hiring workers from different locations on firm profitability and the substitution or complementarity of domestic and foreign workers. But assuming that these workers are interchangeable is a myth that may not lead to productive directives and policies for everyone involved. Despite the critical nature of this issue, there is a significant lack of empirical research on the topic at the firm level, especially when it comes to high-skill IT professionals. Fortunately, the work of study HKUST’s Yanzhen Chen and colleagues sheds timely new light on how hiring domestic and foreign workers can jointly influence firms’ profits.
“Globalization allows firms to become more competitive, innovative, and profitable by acquiring ideas and inputs from multiple locations and by serving diverse markets,” note the researchers. Increased access to global talent also raises questions about the substitution or complementarity of local workers and workers recruited from overseas, and how this influences firms’ profits. Focusing on information technology (IT), “one of the most globalized of all professions,” the researchers set out to empirically determine “how foreign and domestic IT professionals influence the profits of U.S. firms as potential substitutes or complements.”
Their approach was pioneering, based on a highly granular firm-level dataset that provided geographical information on IT professionals within and outside the U.S. “No study to date has used firm-level data for a specific occupation,” say the researchers, “as we do in this paper.” Matching their geographical data with profit and industry data, they leveraged the exogenous shock induced by the American Competitiveness in the Twenty-First Century Act to analyze the relationship between foreign and domestic IT employment and firm profitability.
Breaking new ground, the authors found evidence of a complementary relationship between American and foreign IT workers with regard to firm profits. Rather than acting as perfect substitutes, say the authors, “IT professionals in foreign countries and the U.S. contribute to profitability by working synergistically.” Accordingly, investing in IT human capital overseas can enhance firms’ profitability—challenging common assumptions regarding the negative impact of hiring foreign IT professionals. “Put differently,” the researchers explain, “a job in Bangalore can very well create or save a job in Buffalo while also improving firm profits, potentially creating a win–win for everyone.”
“Our findings should provide a basis for informing policies and decisions on deploying offshore and onshore workers,” the authors conclude. Meanwhile, “managers should treat foreign and American IT professionals as complements and use their complementary skills to create products and services for global markets,” note the authors. The study’s findings also have implications for U.S. universities. “They need to revise their curricula to impart an understanding of foreign languages, cultures, and business practices,” say the researchers, “to help American workers more effectively collaborate with business partners overseas.”
Overall, this research offers pioneering insights into the role of IT human capital in the knowledge economy and opens up new pathways for further research, dialogue and policy formulation regarding the employment of workers in and outside the U.S.