Richard Irving, a partner at venture capital firm Pond Venture Partners, says success depends on finding a balance between outsourcing and innovation
Much has already been said about globalisation and in particular outsourcing and the loss of jobs to foreign competition. Yet in Silicon Valley we have the opposite problem: not enough engineers, resulting in business leaders campaigning to lift immigration limits.
With Google alone hiring over 2,000 people last quarter, this is an acute problem. These two contrasting situations sound contradictory, yet the answer is essential for success. If you have a business which requires basic skills, outsourcing can work well. One example is the trend for call centers to locate in India. Further, if your start-up is going after a commoditised market, you need the lowest cost base possible. This is the theme behind several recent chip successes in China.
By contrast, Silicon Valley needs innovators. This arises due to success - there are too many start-ups. While immigrant engineers can alleviate the problem, a more scalable solution is to have R&D wherever the right talent pool exists, and other management locally. Such an organisation is harder to manage, but you will tap into a rich talent pool without which you won't succeed.
These two examples suggest different solutions for different start-ups. If your business is a body-shop, go to developing countries. If you rely on leading-edge innovators, go where they are.
But there are two significant complications: today's leading edge is tomorrow's commodity; and today's me-too manufacturer becomes tomorrow's innovator. Just contrast those cheap and tinny Japanese cars of the 1960s with today's luxury models.
So today's entrepreneur must think carefully about where to start and where to grow. An innovative start-up will always have a core group of leading-edge engineers. This drives where the start-up originates. But as the company grows, there will be other tasks which can be outsourced. As time goes by, these engineers will get smarter, helping the core team innovate and even innovating on their own.
In today's global economy, success depends neither on outsourcing nor innovation alone, but the right balance between the two.