Human Capital as a Basis of Comparative Advantage Equations in Services Outsourcing: A Cross Country Comparative study

Abstract

International outsourcing of services has come to occupy an increasingly important part of international trade. Analytically services outsourcing is the export of services by a country to the outsourcing nation. Given this, the pattern of trade in these services would be decided in line with country specific comparative advantage equations. Since services are typically intensive in skilled labour and educated manpower, what matters for a country's comparative advantage in services is its resource base in terms of skilled and educated manpower. This is a cross country study which uses the intuitive logic of the Hecksher Ohlin model to determine comparative advantage for a sample of developed countries such as the US, that essentially constitute outsourcers, and developing nations such as India and China that carryout outsourcing. Different definitions of human capital are compared to identify comparative advantage. A key conclusion is that for services outsourcing, the definition of human capital needs to be restricted to secondary and particularly tertiary students rather than literacy. This is further validated by the significance of size of tertiary students in cross country equations estimating business service exports. Secondly, what matters for comparative advantage is the absolute size of the human capital base rather than in percentage terms