The shift to outsourcing in the developed countries

Connection to other globalization themes:

1. The nature of globalisation. Global actors and driving forces

2. Globalisation Glossary

3. The political aspects of globalisation (a crisis in politics and democracy)

4. The economic dimension of globalisation

6. The Corporations’ Response to Globalisation Problems

7. The social dimension and sociological treatment of globalisation

Question:

What are the negative and positive aspects of outsourcing. And how can governments of developed countries can prevent this development.

Answer:

The government could make their developed country more attractive for the established companies with tax benefits or lower costs so that they don't outsource.

Bibliography:

Konigsberg, Bob (2005). Business risks to outsourcing in developing countries.

from http://expertanswercenter.techtarget.com/eac/expertAnswer/0,295208,sid63_gci1134839,00.html

What are the key business risks associated with outsourcing in developing countries? What role can security risk management play in mitigating them?

Rajan, Raghuram G and Wei, Shang-jin (2004). The non-threat that is outsourcing. Singapore Press Holdings Limited.

from http://www.nber.org/~wei/data/rajan&wei2004/rajan&wei2004.pdf

The text shows the problems of outsourcing. What will come to the countries which looses the jobs and the countries which get the jobs.

Rees, Jonathan (2004) (Mr. Rees is Associate Professor of History at Colorado State University - Pueblo.)

from http://hnn.us/articles/4573.html

The problem of outsourcing from the view of Mr. Rees.

Introduction

Offshoring is part of Outsourcing and means that parts of a company is relocating from one country to another. The parts of the company could be in the operational process like manufacturing or supporting processes like accounting. Outsourcing can be seen in the context of either production offshoring or services offshoring. Later more in “the three main offshoring”. China is part of the World Trade Organization (WTO) since 2001, today it is developed to a prominent destination for production offshoring. Globalisation and the developing in telecommunications make it possible that India is leading as offshore destination in the service sector. Sure, the ambition is to reduce costs. The advantage is to use peoples skills more cheaply than others. Trade the items that cost the least to produce.

Frequently used terms

Offshoring is defined as the movement of a business process done at a company in one country to the same or another company in another, different country. Almost always work is moved due to a lower cost of operations in the new location. A company moving an internal business unit from one country to another could also be offshoring. A company subcontracting a business unit to a different company in another country would be offshoring, too.

Related terms:

nearshoring: which implies relocation of business processes to lower cost foreign locations, but in close geographical proximity (e.g., shifting United States-based business processes to Canada/Latin America)

inshoring: picking services within a country

bestshoring: picking the "best shore" based on various criteria

The three main Offshoring

offshoring of production

Physical restructuring of established products involves relocation of physical manufacturing processes to a lower-cost destination is known as production offshoring. Examples of production offshoring include the manufacture of electronic components in Costa Rica, production of apparel, toys, and consumer goods in China, Vietnam etc. Product design, research and the development process that leads to new products, are relatively difficult to offshore. Accordingly, only the manufacturing will be offshored by a company to reduce costs. The North American Free Trade Agreement (NAFTA) made it easier for manufacturers to shift production facilities from the US to Mexico or somewhere else in north America. This trend now goes to China, which offered cheap prices, few workers' rights laws, a fixed currency pegged to the US dollar, cheap loans, land, and factories for new companies, few environmental regulations, and huge economies of scale based on cities with populations over a million workers dedicated to producing a single kind of product.

services offshoring

The developing of large amounts of reliable and affordable communication infrastructure and Internet expansion of the late 1990s, leads to growth of services offshoring. This was happened up to the year 2000. Coupled with the digitization of many services, it was possible to shift the actual production location of services to low cost countries in a manner theoretically transparent to end-users. There are many English speaking people in India and a technically manpower so they first benefited from the offshoring trend. India's offshoring industry took root in low-end IT functions in the early 1990s and has since moved to back-office processes such as call centers and transaction processing. In the late 1990s, India's abundant and cheap software engineering talent combined with massive demand from the Y2K problem helped to move India up the value chain to attract large-scale software development projects for US based customers. Currently, India's engineering talent has made India the offshoring destination of American high-tech firms, led by HP, IBM, Intel, AMD, Microsoft, Oracle Corporation, and Cisco. As a result of the offshoring boom, India has seen double-digit wage growth for much of the 2000s. Consequently, Indian's operations and firms are concerned that they are becoming too expensive in comparison with competition from the other offshoring destinations listed below. They are now attempting to branch out and diversify to other high-end work in addition to software and hardware engineering. These jobs include research and development, equity analysis, tax-return processing, radiological analysis, medical transcription, and more. The choice of offshoring destination is often made according to cultural concerns. Japanese companies are starting to outsource to China, where large numbers of Japanese speakers can be found — particularly in the city of Dalian, which was Japanese-occupied Chinese territory for decades. German companies tend to outsource to Poland and Romania, where proficiency in German is common. French companies outsource to North Africa for similar reasons.

innovation offshoring

Once companies are comfortable with services offerings and started realizing the cost savings, many high-tech product companies started using countries like South Africa, India, China, Mexico, Russia, etc. for innovating products. Many famed Silicon Valley based companies jumped on this bandwagon not only to cut costs but to shorten their product lifecycle and access the talent pool available in these countries. Less developed countries are usually utilized for this practice. Transfer of intellectual property Offshoring is often enabled by the transfer of valuable information to the offshore site. Such information and training enables the remote workers to produce results of comparable value previously produced by internal employees. When such transfer includes protected materials, as confidential documents and trade secrets, protected by non-disclosure agreements, then intellectual property has been transferred or exported.

Discussion and Conclusion

Offshoring has been a controversial issue spurring heated debates among economists, some of which overlap those related to the topic of free trade. It is seen as benefiting both the origin and destination country through free trade, providing jobs to the destination country and lower cost of goods and services to the origin country. This makes both sides see increased gross domestic product (GDP). And the total number of jobs increase in both countries since those workers in the origin country that lost their job can move to higher-value jobs in which their country has a comparative advantage. On the other hand, job losses and wage erosion in developed countries have sparked opposition to offshoring. Experts argue that the quality of any new jobs in developed countries are less than the jobs lost and offer lower pay. Economists against offshoring charge that currency manipulation by governments and their central banks causes the difference in labor cost creating an illusion of comparative advantage. Further, they point out that even more educated highly trained workers with higher-value jobs such as software engineers, accountants, radiologists, and journalists in the developed world have been displaced by highly-educated and cheaper workers from India and China. More importantly, the argument does not contemplate, nor predict effects of continued offshore outsourcing that may occur 10-20 years from now, for example the possible raise of labor costs in emerging countries and a change in their economic orientations, as happened for example in Japan and South Korea in the previous decades.

Literature:

• Offshoring 2.0: Contracting Knowledge and Innovation to Expand Global Capabilities Offshoring Research Network 2007 Service Provider Report.
• Georg Erber, Aida Sayed-Ahmed, Offshore Outsourcing - A Global Shift in the Present IT Industry , in: Intereconomics, Volume 40, Number 2, March 2005, 100 - 112
• Atul Vashistha and Avinash Vashistha, The Offshore Nation

(see above (Bibliography))