This article focuses on offshoring—the transfer of certain jobs from the United States and other wealthy nations to developing nations. Offshoring has become a necessity in order for multinational companies to reduce the cost of doing business and maintain comparative advantage in the global marketplace. Initially, manufacturing jobs were offshored; however, the jobs currently being transferred to developing nations are certain service sector jobs. These are jobs that can be performed remotely and that do not require one to one interaction. In deciding whether to offshore service sector jobs, businesses must consider a number of factors including cost, turnover rates, risk, infrastructure and the availability of qualified personnel. The following article provides an overview of offshoring and discuss some of the implications for the US labor force.
Keywords Comparative Advantage; Direct Foreign Investment; GATT; Global Delivery Model; Impersonal Services; Manufactured Goods; Multinationals; NAFTA; Offshoring; Outsourcing; Personal Services; Uruguay Round; WTO
International Business: Offshoring
The integration of the world's economies has led to an increase in offshoring; the transfer of jobs from wealthy nations to developing nations. In previous decades, offshoring was limited to the manufacturing sector; however in recent years, service sector jobs like customer service jobs and call center activity have also been sent abroad. In order to better understand this development, it is necessary to differentiate offshoring from outsourcing. Offshoring essentially concerns a variety of functions that can be performed by a firm in another country. This includes a company that establishes a foreign subsidiary or a business that transfers these tasks to a foreign third party enterprise (Harrison, 2006).
Outsourcing, on the other hand, is the purchase of services by one firm from another. A US firm, for example, can outsource the production of goods, such as car parts, as well as services, such as customer service positions. In some cases, US-based manufacturers of electronics may contract with other US businesses to produce electronic components. This is referred to as outsourcing. At the same time, transferring production of these components to a manufacturer in China or India would be considered offshoring (Harrison, 2006).
Benefits of Offshoring
A firm that increases its profits by decreasing its labor costs through offshoring will improve its ability to compete in the global economy. In the US, firms that establish foreign subsidiaries are referred to as multinationals. In addition to establishing a subsidiary in a foreign country, a company may also choose to invest in a company that is not based in the United States. Further, the ownership of 10 percent of a company abroad by a US multinational is referred to as direct foreign investment. Some contend that establishing foreign subsidiaries and direct foreign investments results in job losses in the United States. However, many economists believe that the number and availability of jobs in an economy is determined more by macroeconomic factors than by international competition (Harrison, 2006).
Other beneficiaries of offshoring are those nations where jobs have been transferred or where there has been an increase in direct foreign investment. In particular, India, China, the Philippines and a number of Latin American and Eastern European countries have reaped the rewards of offshoring. Further, in addition to manufacturing jobs that were offshored in previous decades, service sector jobs are now also being offshored to these countries including clerical positions, sales and marketing jobs, accounting and financial services, engineering, and analyst positions (Farrel, 2006).
Considerations for the Offshoring of Operations
There are a number of factors that a business needs to consider when deciding where to offshore jobs and these include cost, turnover rate, available skilled workers, risk assessment, accessibility, and infrastructure. While cost is a significant determinant in a businesses decision to transfer jobs abroad, location is also critical to the future of a company's overseas investment. In this regard, companies often focus on regions with good colleges where skilled employees are available at low wages. In addition, companies also seek out locations that are close to airports so that personnel from outlying areas can be flown in for training. This, in turn, leads to the development of the infrastructure (i.e., power supply, real estate development, telecommunications and transportation) and further encourages other companies to offshore jobs. This is so because these companies will derive residual benefits of offshoring that result from developing an infrastructure and establishing a pool of skilled workers. Development of infrastructure also mitigates the risk of future involvement as it elevates these regions out of poverty and helps to stabilize the government (Farrel, 2006).
India as a Leading Offshoring Sight
While a number of foreign countries have been the beneficiaries of outsourcing, India has become a leader in the international offshore market. This is largely the result of the fact that India has a well-educated and highly skilled workforce — moreover, many workers in India speak fluent English. Initially, jobs offshored to India included data entry and minor software development; however, by the 1990s, these roles expanded into larger software projects, back office operations such as accounting, and even running information technology departments for many organizations. India's workforce tends to be skilled and refined so that its current services include engineering, research and development, aircraft design, as well as microchip development (Dolan, 2006).
In addition to jobs being transferred to India, jobs are also being offshored from India to other countries. Many staffing agencies based in India are establishing offices in other countries where offshore markets are emerging. Outsourcing work to an organization that subsequently outsources the work to a company in another country is referred to as the global delivery model. Understanding this model enables a company to seek locations for offshoring in a region or town that will grow in conjunction with their presence in the area. In the final analysis, offshoring will continue to be a model for businesses in the global economy. Multinationals will continue to seek skilled workers at lower wages as well as new markets for their goods, products and services (Dolan 2006).
Transfer from Manufacturing towards the Service Industry
While there are many benefits that multinational companies can derive from transferring jobs to other developing nations, offshoring is a contentious topic in the United States and other wealthy nations. Some believe that offshoring has resulted in significant job losses and that the labor standards in developing nations are lower than in wealthy nations. On the other hand, there is another school of thought that claims increased employment overseas has led to increased employment domestically. This is so because the cost savings provided by offshoring combined with technological advances have increased productivity in all sectors and has also enhanced the growth of the services sector. However, what is not in dispute is the fact that the American economy and the economies of other wealthy nations like Great Britain, Japan, and many Western European nations have been undergoing a dramatic change away from manufacturing toward servicing (Blinder, 2006).
Rather than producing manufactured goods such as automobiles, durable appliances, and mechanical equipment, these countries now provide more services such as health services, educational services, hospitality and leisure services, financial services and the like. These jobs are known as personal service jobs. This is so because personal services are those that require face-to-face contact or human interaction. At the same time, technological advances are also leading to improvements in global communications and many personal services are now readily delivered electronically over long distances without adversely affecting the quality of the service being provided. These services are termed impersonal services and include such jobs as customer service positions as well as radiologists. Further, international trade of new products and services can be the impetus for improvements in productivity, and this will have an impact on a company's comparative advantage (Blinder, 2006).
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