With a huge supply of low-cost workers, mainland China has fast become the world's manufacturing workshop, supplying everything from textiles to toys to computer chips. Given the country's millions of university graduates, is it set to become a giant in offshore IT and business process services as well?

New research from the McKinsey Global Institute (MGI) suggests that this outcome is unlikely. (The full report, The Emerging Global Labor Market, is available free of charge online.) The reason: few of China's vast number of university graduates are capable of working successfully in the services export sector, and the fast-growing domestic economy absorbs most of those who could. Indeed, far from presaging a thriving offshore services sector, our research points to a looming shortage of homegrown talent, with serious implications for the multinationals now in China and for the growing number of Chinese companies with global ambitions.

If China is to avoid this talent crunch and to sustain its economic ascent, it must produce more graduates fit for employment in world-class companies, whether local or foreign. Raising the graduates' quality will allow the economy to evolve from its present domination by manufacturing and toward a future in which services play...