What motivates software companies to hire locally?

Question

As a US citizen myself, I've been wondering this for years: What motivates software companies to hire locally? More specifically, what motivates Silicon Valley companies to hire talent locally, instead of remotely, for example, from Eastern Europe, where salaries are many times lower for the same quality of a software engineer (with maybe slightly worse English)?

• Are they concerned that productivity will be lower? I think the pandemic remote work showed that if productivity drops, it doesn't drop by a factor of 10 or anything close to that.
• Are they concerned about IP theft by remote workers? Is IP better protected against theft by an H1B employee working from home (due to the pandemic) than by a foreign remote employee working from abroad? If so, I don't really see how.

I'm aware that the 2000s trend of outsourcing to India is widely seen as a failure. If it was indeed a failure, do the reasons apply to software companies specifically and to destinations other than India?

Answer 1

The disadvantages of an employee located in another country or even another continent are myriad. Some of them may be imaginary, but that doesn't stop companies considering them:

• paperwork and taxes. Do I have to send some sort of form to some foreign government? What if that government doesn't even work in English? Is it legal for them to work for me? Do we need a permit or something? Will I have to give them 8 weeks of paid vacation a year or whatever weird laws they have there? Do we have to worry about exchange rates? How do I actually pay them? I don't know how to send money to a bank in another country. What government do I send with-holding tax to? Will my government believe I don't need to send any withholdings to my tax people for them? And so on.
• time zones. Sure my employee may be willing to switch their work hours to 1am-10am their time (or whatever) to sync with us, but will they be at their best? Will they really do that all the time, or just wake up in the middle of the night for meetings some times?
• difficulty of in-person meeting. Maybe we will never need to get together one on one, but with a local person I know it's possible. The further away they are, the more expensive it gets and the longer it takes to arrange, and maybe it will even be impossible.
• difficulty of providing standard equipment. Many large companies rely on everyone having the same laptop, with the same stuff installed, and being on the same network. They are scared of "bring your own." They also worry that "go buy a laptop and we'll reimburse you" is an invitation to various kinds of fraud.
• perceived culture dissonance ("Europeans don't have the same attitude to work as we do", "remote workers bond less with the employer"), language barrier, and other (almost certainly wrong and over-generalized) worries that are hard to test in an interview. See for example anti-outsourcing articles that claimed the Indian teams would always say yes whether they meant it or not.
• a worry that a really good developer would have moved to the "promised land" to work already, so even with an amazing interview performance, perhaps this person isn't quite what they seem? "If you're so good, why do you live there?"
• lack of familiarity with far-away educational institutions (even names of degrees and diplomas) and previous employers. "Does this place even exist? Is it good that the person studied there? Worked there? I've never heard of it."

Meanwhile the benefits are what? You can pay them a little less? So what? I literally turned away people who wanted to work for me for free. Salary is only a tiny part of the cost of an employee. Saving half the salary but taking on a boatload of trouble? Not interested. I know this feels really unfair, but you asked why and this is why.

Answer 2

I saw in a comment you mention overseas remote workers being available for 1/5 of the salary of a local worker. This is probably true, but not the whole story.

The thing is - those developers are cheap for more reasons than simply being in a different country. They're cheap because they're not good.

All the developers who are good are already happily working for more money than that.

Sure, you might be able to get decent remote overseas workers, but the price differential for competent developers is a lot smaller than you seem to think. And there are other costs involved in staffing that are either equal to or maybe even slightly greater than a local worker.

So the benefit of "cheap" overseas developers is quite the myth, though it continues to cost many companies money trying to save a buck.

Answer 3

Although you seem primarily interested in the reasons why US/Silicon Valley software companies hire locally, I think it is also interesting to answer this question from a non-US perspective. In other western countries with high local salaries, (a large part) of the codebase and/or documentation might actually be in German, Dutch, Norwegian etc. Even if the codebase and documentation are in English, the users of the software might not be fluent in English and might prefer to interact with employees of the software company in their native language. This all makes the pool of suitable cannidates in low-wage countries far smaller/almost non-existent.

Answer 4

My first job in the UK was in a huge aerospace company. Their biggest problem was with young engineers coming in, gaining a few years training and experience, then going somewhere else for more money. The company had invested time and money in these people and they left.

The company was big enough to do some statistical analysis on the numbers, and they found that people recruited locally tended to stay longer. Local people had not just loyalty to the region, where their friends and families were, but also to the company itself, which had employed also their friends and relations over decades.

Therefore they tried to recruit locally.

Answer 5

They do, they just don't hire internationally - the big players just set up local branches, most likely for legal and other reasons. In Poland, off the top of my head I can list: Intel, Amazon, Lufthansa, Jeppesen in my metro area. Nokia and Samsung have offices in other parts of the country. And that's only what I can list from memory.

Probably setting up local branches avoids most of the downsides of outsourcing while still allowing those companies to enjoy the local labor market.

That said, for a proper employment contract in Poland (and probably rest of EU), whatever a person takes home is probably somewhere around a half to a third of what the employer actually pays.

Answer 6

I'd like to expand on the first point of Kate's answer. I once worked online for an employer that will only hire people living in a few states within the US. The reason is tax reporting and payment. That employer was only registered in a few states. In order to hire employees in other states, they would need to handle the tax paperwork for those additional states. They didn't have enough remote employees to make it worth the cost and effort. The same is even more true for other countries.

The more governments (state or national) you need to deal with, the more you can expect to spend in Human Resources and Payroll. You need to comply with all of the tax laws and workers' rights laws for every government involved. For a large company, the added cost is worth it to access the larger talent pool. On the other hand, if you have to hire a Payroll employee fluent in Greek just to handle the new paperwork for the two employees in Greece, then you really aren't saving much, even if you only pay the Greek employees half. (This example is made up. I don't know the cost of Greek labor compared to US labor.)

Answer 7

1. Abundant talent locally. Especially in US, there are a lot of developers already, and new ones from universities, boot camps, requalification come too in large numbers. There is a very small need to look elsewhere with all the associated cost, paperwork, cultural and border barriers, etc.
2. Time. Going through the same process abroad, with all the little details, usually takes more time than going locally. This is quite important, if you want to hire fast and get a top notch quality too.
3. Evaluation criteria. Usually companies in US already know what universities are good, that are bad and so on, their recruiters know about the specific market in hand. When you dealing with Europe, a lot of variables come in, country location, culture, level of education, these are all quite different.

Answer 8

I'd like to add one more point to the already excellent answers above.

Recomendations from existing employees drive a lot of hiring and employees tend to know (and recommend) people they worked with previously, went to school with, or live near and know from their personal lives. All that adds up to more local hiring.

Answer 9

This would be an example of the network effect. You have clusters of companies in similar industries in the same geographical area, which means that there is a concentrated pool of people with the skillsets you desire readily available. This increases the likelihood of a company finding suitable employees quickly, making expansion easier.

It works both ways as well - because there are a significant number of companies in that area, people with those skillsets move to the area as it is easier to get a job in their field.

Answer 10

Let add one more perspective. I have hired locally when I have gotten many calls from India companies wanting me to hire their developers.

Why?

Because I can talk to people here who not just understand my words, but also understand the context. I can argue over methods, tool choices, and why the client wants things done a specific way. I can bring my understanding of business practices and the specifics of how this client wants to operate and do that verbally instead of writing a detailed specification. I can interact with the developers, reviewing their code on the fly, and clarifying their understandings of the problem.

I can't do that with someone who is in a different business culture. (Or I can, but it will be a very large learning curve for both of us. For me on how to explain things to that person and that person on the very real differences in business culture that my client has.)

For me to be able to send a project to that part of the world, I need to

a. Specify the project in far, far more detail than I need to locally

b. Specify the testing processes to the level where I could have written the tests myself. (For example, I sent one project to India years ago. I specified the project quite well. But didn't specify the tests well. It came back satisfying the definition, but failed the testing that was needed.)

That is a heck of a lot more work in order to manage that project. It is almost impossible to do an "Agile development" that far remote. In short, there are very good reasons to hire locally.

Answer 11

In addition to Kate Gregory's fantastic answer concerning the practicalities of hiring internationally for the perceived benefit of lower short-term costs (as seems to be the intention of the question, not simply "locally", e.g. a company in Silicon Valley hiring someone in a different part of the country where the cost of living is much lower), I'd like to offer an additional motivation: ethics. Be it "patriotism", camaraderie, or the general sense of duty to one's craft, society and locality and that enabled you to ascend to the position of being able to hire others in the first place.

This is especially true when it comes to hiring junior and mid-level developers (some of us once were one!) From a personal standpoint, my commitment to enabling someone's growth and development is far greater than my commitment to the abstract principle of unfettered movement of capital. From a business standpoint, I know that the increased productivity and low turnover repays in spades over the medium- and long-term. In addition to creating positive relationships that fan out over time.

Hiring someone, locally or not, is an investment, and again echoing Kate, the difference in salary would have to be large for it to be worth considering. And if it is-- what are the externalities? And when we're in a crunch, would I feel as comfortable asking someone making pennies on the dollar to stay late or give up a weekend? And if not, how is that fair to my local employees?

As others have pointed out, the truly committed to the neoliberal way set up satellite offices in Costa Rica, Poland, etc. to exploit local markets directly. Earlier in my career I was part of a company that did this due to holding company mandate, and though many of the developers were talented, the work suffered because everyone hated the process, which is intended to reduce cost first and foremost. There are also many shops in South America or Eastern Europe that retain project managers in their target market to give the perception of cost effectiveness & local presence, but in reality people are where they are, subject to all the above and the daily friction quickly adds up. All the while those are more dollars leaving your community.

In summary: not only is it more often than not a poor business decision, but some may also find it to be a question of personal ethics as well.