Many service sector jobs could be outsourced offshore suggests a new report from TD Bank, and it counsels that Canada must reinvest the resulting cost savings on improving productivity to stay competitive.

The report, authored by TD economist Carl Gomez, notes that outsourcing manufacturing tasks has become a cost-effective strategy that can improve efficiency and free up capital for domestic investment. However, the provision of some information-based services has only recently begun to move offshore, made possible only thanks to dramatic improvements in information and communication technologies over the past few years, Gomez notes.

“In fact, almost any service job whose output can be traded with the help of information technology, whose work has a high explicit information content, and whose work does not necessarily require face-to-face contact, can be potentially outsourced offshore to lower cost providers,” Gomez writes. “As a result, offshore outsourcing is not likely to be just a passing fad but rather, the beginning of permanent structural shift similar to that seen in the goods sector.”

Gomez notes that, although the phenomenon of offshoring is still limited in Canada, “concerns have been raised given this practice’s implicit threat of domestic job displacement and its potential for expansion into higher skilled areas of work”.

However, he says the good news is that Canada currently remains a net importer of business related services, predominantly from the U.S. “Therefore, its economy has not experienced any significant adverse effects from offshoring so far,” Gomez writes. “But Canada cannot afford to be complacent as more work is potentially moved offshore in the future. That’s because emerging countries like India and China are aggressively developing their comparative advantages in an attempt to move higher up in the value chain. Meanwhile, much of what Canada appears to be ‘inshoring’ remains stuck in low-value added services.”

“As such, Canada’s long-term challenge will be to sufficiently invest in its knowledge infrastructure, innovation and skills in order to boost its productivity and remain competitive by moving further up on the value chain,” TD concludes. “Paradoxically, outsourcing parts of a supply chain offshore may actually provide some Canadian firm’s with the deeper pockets necessary to raise Canada’s currently sagging rate of productivity growth. To this end, offshore outsourcing should not be viewed as a threat, but as an opportunity that Canadian firms cannot afford to waste.”