Does the Immigration Innovation Act Help Offshore Outsourcing Firms? Financial Advisory Firm Says Yes

Supporters of the Immigration Innovation Act, dubbed the “I-Squared Act,” claim that legislation to dramatically increase the annual quota for H-1B guest worker visas is urgently needed to keep and create jobs in America. But the I-Squared Act will do just the opposite.

The headline in the leading news daily in India – the Times of India – had this assessment: “Proposed H-1B legislation to help Indian IT [companies]…”

CLSA, a leading financial advisory firm that analyzes the offshore outsourcing industry for investment clients, believes I-Squared will spur the sector’s growth. The firm finds the proposed legislation is “encouraging for Indian IT companies,” most of which are outsourcing companies with a business model that sends high tech American jobs overseas. The report says that passage of such a bill will make it much easier for the outsourcing industry to use the H-1B visa to bring in foreign guest workers from abroad, thus reducing the need for “hiring of locals in [the] US” at higher wages. In other words, if the bill passes, firms could more easily bypass and replace qualified American workers with hundreds of thousands of cheaper H-1B guest workers.

Given the policy proposals by some senators, CLSA has advised clients to “overweight” the Indian IT outsourcing sector in their portfolios. This is a reversal of fortune mostly based on the prospect that the U.S. government will make it possible for the outsourcers to get access to three to four times more guest workers per year.

This report comes more than a year after a previous CLSA report which had downgraded the Indian IT sector because of increased difficulty for firms in obtaining H-1B and L-1 visas. The report cited increased rates of rejections by the U.S. government of H-1B and L-1 visa applications filed by outsourcing companies. As a result the outsourcers would need to hire more American workers. Due to huge loopholes in the H-1B and L-1 laws and regulations, guest workers on these two temporary visas can be paid much less than American workers in the same occupation and locality. Thus, by limiting access to cheaper guest workers, the outsourcing companies would have to hire Americans at market wages. This would diminish the value of the subsidy provided by the government to them in the form of H-1B and L-1 visas, which ultimately means lower profit margins for outsourcing companies.

When examining the impacts of policies on the behavior of businesses, it is more informative to weigh what financial advisory firms are telling their investor clients than to listen to anecdotal stories told by the lobbyists and public relations firms hired by the companies that ultimately take advantage of the policies they advocate. The senators who have co-sponsored the I-Squared Act need to hear from those who analyze the sector for a living.

Or they could simply read the Securities and Exchange Commission filing of Infosys—a key offshore outsourcing firm that is publicly traded. Infosys explicitly identifies the H-1B and L-1 visa guest worker programs as critical to their ability to outsource jobs from the U.S. to India. In fact, Infosys was the third-largest recipient of H-1B visas in 2012, and wrote the following about H-1B and L-1 visas in its annual report:   

Restrictions on immigration may affect our ability to compete for and provide services to clients in the United States, Europe and other jurisdictions, which could hamper our growth or cause our revenues to decline.

… Most of our projects require a portion of the work to be completed at the client’s location. The ability of our technology professionals to work … depends on the ability to obtain the necessary visas and work permits.

As of March 31, 2012, the majority of our technology professionals in the United States held either H-1B visas (approximately 10,115 persons…), which allow the employee to remain in the United States for up to six years during the term of the work permit and work as long as he or she remains an employee of the sponsoring firm, or L-1 visas (approximately 1,988 persons…), which allow the employee to stay in the United States only temporarily. [emphasis in original]

But none of this is news—the use of the H-1B visa as an outsourcing tool has been well documented by many analysts over the past 15 years. The business model of the offshore outsourcing industry is built around exploiting loopholes in the H-1B and L-1 visa programs. I analyzed this more than a decade ago and concluded the same.