Why are tech firms hiring so much internationally — and where?

Editor’s note: This is the second of a four-part series on the history, current state and moral implications of outsourcing for tech companies. In the first part, we looked at the history of outsourcing. Look for the next edition, on what business leaders should keep in mind to hire abroad morally, as well as some rules for compensation that tech companies can follow internationally, tomorrow.

When Michael Araten first took over a portfolio of family-owned companies, including construction toy brand K’NEXit seemed natural that much of the company’s growth would come internationally — both manufacturing and other office functions, including IT.

More on Araten in a moment: Most big companies grow global workforces, led by the multinational corporations that flourished in the late 20th century as trade barriers and the costs of international travel plummeted. But it has been rare for smaller companies to directly hire abroad for an obvious reason: It was complicated and expensive to build out international offices. Until they grew big, the only exposure most companies had to international workforces was by contracting an outsourced firm.

That’s changing — and fast. Sped by pandemic remote-work, more startup founders say they consider hiring anywhere, without borders. (One joke several tech CEOs told me: “I’ll hire anywhere in the world, except California,” which is a not-so-subtle jab at the state’s complex hiring regulations and especially expensive salaries.)

Smaller and earlier-stage tech companies are following tech industry titans. As this generation’s tech platform giants grow big, they’ve followed the familiar path of multinational companies before them.

Across the 10 tech giants that employ the most people abroad, more than 50,000 people have jobs, according to data firm Statista. Two-thirds of all Fortune 500 companies have some international presence, according to another report. Nearly all big companies have some international exposure via some contracting firm with international talent.

Most growing tech companies work with an IT outsourcing firm or hire internationally for the same reason they do so many things right now: to combat talent shortages.

That much is familiar — even if globalization may now be in retreat. What’s new is an emerging wave of international remote work among companies of any size that will reconfigure what local tech ecosystems are forever.

The term outsourcing is synonymous with cost-cutting, though it more properly is intended to be an act of specialization. Why build out a help desk call center if it’s not your differentiation and someone else does it better and more cost effectively?

Most growing tech companies work with an IT outsourcing firm or hire internationally for the same reason they do so many things right now: to combat talent shortages. Already in 2019, before the pandemic hiring surge, 45% of 500 tech firms surveyed said that’s why they were hiring abroad. Slightly more cited the chance to add new customers, but an informal focus group of tech CEOs I spoke to overwhelmingly said talent now trumped business development.

Outsourcing your company’s early software development to a third party to save costs still sounds like a shortcut not worth taking to several startup founders I interviewed, but the standards are shifting. With the right oversight and clear focus, it can be done well. The lines are blurring more as companies are hiring abroad directly.

“This all just seems more possible now,” one tech CEO told me of hiring internationally.

In an email thread from earlier this year shared with Technical.lyestablished technology leaders from one US city trade tips on what IT outsourcing firms are best for which projects — and when hiring in house is for the best.

“Prices in a lot of traditionally low-cost countries are increasing rapidly,” one technical cofounder wrote then. “It appears that the pandemic has caused [this] to speed up dramatically.”

Where are tech firms hiring internationally now?

As The Great Recession rocked economies around the world, Araten led a years-long transition to bring back much of the manufacturing and office functions of his family’s company, including K’NEX, from China to the United States. They became a case study for so-called “re-shoring.”

The pandemic disrupted their business far less than other more global companies.

“It was all about shortening our supply chain, and even the ‘cultural’ chain,” Araten said. “Tech firms are about to figure this out, too.”

Look no further than how the war in Ukraine has disrupted tech companies with employees in that region. But Araten acknowledges there are many factors that business leaders need to consider. Manufacturing outsourcing became synonymous with Asia, from Japan to Korea to China — though Africa could be next — not only for cost, but also for speed and specialization.

Tech companies looking abroad say something similar.

Countries in Asia and Eastern Europe still represent 60% of investments, but one of the fastest growing regions in the world for American firms to hire and outsource for technology is Latin America.

Once known as a call center hub, India has been called the world’s IT powerhouse. After its start in the 1990s, it was a standard-bearer of IT outsourcing, due to its well-trained, English-speaking workforce that came at a lower cost, because of the lower cost of living. By 2004, the average salary for an American Java developer was $60,000, and just $5,000 in India, according to an analysis at the time. Other regions of the world caught up, notably Eastern Europe, where the collapse of the Soviet Union coupled with its national investments in math education laid a foundation.

Countries in Asia and Eastern Europe still represent 60% of investments, according to a SHRM analysis. But one of the fastest growing regions in the world for American firms to hire and outsource for technology is Latin America, alongside Mexico and South America. Tech ecosystems are blossoming in cities across the region, aiding a maturing workforce and, critically, they’re on far more similar time zones than Eastern Europe and India.

Outsourcing companies, research groups and trade lobbies routinely tout the best places to hire technical talent. The pivotal question is what you’re doing the hiring for. If it’s in part a plan to open up a new market for business opportunities, you’ll need to better understand where your proposed customers are. If it’s purely an effort to add to your team, it matters how many people you’re really intending to hire. If you just want to open up your existing roles to people from anywhere, discuss the implications with your payroll and accounting provider.

“If your needs are small enough, it’s immaterial where you go,” Dershowitz said. “If you’re hiring five or even 20 people, it’s really different than hiring 1,000. For most business leaders you don’t need to follow the trends.”

Unless, that is, you care about the impact your hiring has.

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Tomorrow, look for part three of this series, answering the questions: What should business leaders keep in mind to hire abroad morally? What are simple rules for compensation that tech companies can follow internationally?

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