24 Oct 2012Working Paper Summaries

Diasporas and Outsourcing: Evidence from oDesk and India

Diaspora-based exchanges have been important for centuries, but the online world reduces many of the frictions these networks solved. How do the Internet and diaspora networks connect? This study investigated the importance of Indian diaspora connections on the oDesk platforms for outsourcing. oDesk is the world's largest online labor market, processing $30 million per month in contracts as of May 2012. This research finds strong evidence that diasporas still matter and influence economic exchanges even when many frictions are minimized. In fact, the case study suggests more often than not that diaspora use increases as familiarity with the platform increases. This suggests a longer-term complementarity between diaspora networks and online tools that may aid the persistence of these networks. At the same time, the oDesk evidence also makes clear that the role of diaspora networks should not be overstated. While they contributed to India's success on oDesk, diaspora connections were clearly not a driving force in India becoming the top destination for oDesk contracts. Key concepts include:

The frictions that online platforms like oDesk minimize are frictions that diaspora networks have historically been used to overcome. This makes their role for future economic exchanges uncertain.
Diaspora connections still matter. Ethnic Indians working in countries outside of India are 32 percent (9 percentage points) more likely to choose a worker in India than non-ethnic Indians.
Yet, even with the increased likelihood of outsourcing to India, diaspora connections played a very small role in India's rapid development on oDesk. In fact, diaspora connections appear to follow rather than lead the platform's development.
Diaspora connections occur through the actions of many people in small ways and the extreme concentration of impact due to a few key people.
Diasporas will continue to use online platforms in an effective manner, but diasporas will not be responsible for a country's overall success on the platform, at least in countries of moderate to large size.

Author Abstract

This study examines the role of the Indian diaspora in the outsourcing of work to India. Our data are taken from oDesk, the world's largest online platform for outsourced contracts, where India is the largest country in terms of contract volume. We use an ethnic name procedure to identify ethnic Indian users of oDesk in other countries around the world. We find very clear evidence that diaspora-based links matter on oDesk, with ethnic Indians in other countries 32% (9 percentage points) more likely to choose a worker in India. Yet, the size of the Indian diaspora on oDesk and the timing of its effects make clear that the Indian diaspora was not a very important factor in India becoming the leading country on oDesk for fulfilling work. In fact, multiple pieces of evidence suggest that diaspora use of oDesk increases with familiarity of the platform, rather than a scenario where diaspora connections serve to navigate uncertain environments. We further show that diaspora-based contracts mainly serve to lower costs for the company contacts outsourcing the work, as the workers in India are paid about the market wage for their work. These results and other observations lead to the conclusion that diaspora connections continue to be important even as online platforms provide many of the features that diaspora networks historically provided (e.g., information about potential workers, monitoring and reputation foundations).