Outsourcing & International Trade Economics  Term Paper

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  • Subject: Business
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Ltd., 2007). Furthermore, by 2008, real GDP is expected to be $124.2 billion higher than it would be in an environment without it software and services offshore outsourcing (Flatworld Solutions Pvt. Ltd., 2007). Finally, over the last 10 years, the economy has created an average of 3.5 million new jobs a year, and the vast majority of displaced workers are re-employed within six months.

According to Flatworld Solutions Pvt. Ltd. (2007), between 1983 and 2003, two million manufacturing jobs were lost in the U.S., with the creation of 36 million new jobs in services. Forrester estimates that despite the headlines on offshore outsourcing, it jobs in the U.S. grew in 2003 and will continue to grow at three per cent from 2004 to 2008. Critics of outsourcing argue that it is dangerous to assume that the U.S. has better trained, harder working or more innovative workers capable of higher value added work than its foreign competitors (Flatworld Solutions Pvt. Ltd., 2007). However, proponents of outsourcing counter-argue that the U.S. has more opportunities than its competitors, and that there are not only a fixed number of jobs in the U.S. economy. Unlike its competitors, the U.S. competes in many industries, and new jobs in various sectors are always added. This is because unlike foreign countries that may only compete in a certain type of agriculture or textile industries, the U.S. competes in virtually every industry. Flatworld Solutions Pvt. Ltd. (2007) reports that in the U.S., technology and medicine are expected to be major drivers for domestic job creation.

As companies grow, new jobs are needed to keep up with the level of growth, and the majority of the higher positions are filled in the United States. The lower paid jobs are the ones that are outsourced, such as manufacturing and production, and upper level management positions are filled by domestically located employees. In addition, some countries are moving their plants from foreign countries back to the United States for various reasons. Research conducted by Forrester Research reports that between now and 2013, the U.S. will outsource 3.5 million jobs, or about 300,000 a year (Forbes, 2004). However, while the U.S. economy appears to be at a disadvantage as a result of all outsourcing, the economy is actually benefiting from in-sourcing at the same time. Although less publicized, the U.S. is in-sourcing more jobs than it is out-sourcing. For example, Samsung is placing a half-a-billion dollar plant in Texas, and Novartis is moving its research facility from Switzerland to Massachusetts (Forbes, 2004). According to Forbes (2004), the U.S. economy is creating 2 million jobs plus each year. Thus, outsourcing has greatly assisted in the creation of domestic jobs as well as jobs overseas.

A review of the literature also indicates that in-sourced jobs additionally benefit the U.S. domestic job market. in-sourced jobs pay 16.5% more than the average domestic job, and one-third of them are in the manufacturing sector. These include plants that assemble German and Japanese automobiles and produce pharmaceuticals. In the past 15 years, companies have moved jobs to the U.S. At a faster rate than jobs have been outsourced. For example, in-sourced jobs account for an 82% increase, as compared to a 23% increase in outsourced jobs. Manufacturing jobs have been in-sourced at a faster rate than service jobs, and finally, jobs in-sourced to the U.S. have increased from 4.9 million in 1991 to 6.4 million in 2001.

Benefits to International Trade

Outsourcing additionally carries benefits to international trade, however, these benefits are not widely publicized. For example, even though the U.S. would lose some manufacturing jobs to developing nations where labor costs are lower, the U.S. would gain higher-paying, higher-skilled jobs that poor nations were unable to fill with adequate individuals. The more recent trend of outsourcing service jobs makes that argument less compelling. The Wall Street Journal (2006), reports that a recent study concluded that at least two-thirds of the economic impact from sending jobs offshore flows back to the U.S. economy in the form of lower prices, expanded overseas markets, and fatter profits that U.S. companies can plow back into even more innovative businesses. Companies will sell more of their products if they are able to manufacture at a cheaper cost of labor. Since labor is cheaper, companies are able to hire additional people, and the market becomes more lucrative for U.S. exports. As workers are in desperate need in foreign countries, the low wages paid would eventually disappear, and the gap between low cost and low price will disappear.

Research by Hanson, Mataloni, and Slaughter (2003) examined the substitutability between domestic and foreign workers of U.S. multinational firms. Their research examined data on sales, employment, wages and tax rates, finding that higher sales in foreign affiliates led to an increased labor demand in the U.S. This is because the lower paid wages to lower skilled workers led to higher wages for higher skilled workers location in the United States. Desai, Foley, and Hines (2005) provide further evidence that foreign activity by U.S. multinationals compliments rather than substitutes for domestic activity by the same firms. Desai, Foley & Hines (2002) additionally concluded that an additional $10 of foreign capital investment is associated with $15 in additional domestic investment, and that $10 in additional foreign employee compensation is associated with $18 in additional domestic employee compensation. In research similar to the BLS research, Landefeld and Mataloni (2004) revealed that offshore outsourcing had only a very small impact in the U.S. labor market from 1989 to 1999. Landefeld and Mataloni (2004) found that outsourcing increased substantially over an overall ten-year period. They found that purchases of intermediate goods and services by U.S. multinationals rose as a share of sales from 1977 to 2001 but purchases of imports as a share of parents' sales did not rise by much and actually decreased since 1998 (Landefeld and Mataloni, 2004). Finally, the majority of the research in this area states that job losses cannot be directly related to outsourcing as the media has portrayed in recent years.

Other research on outsourcing concludes that although the short-term affect of outsourcing may appear to be negative, the long-term effect is positive. The positive benefits of outsourcing have been proven good for international trade. For example, in the New York State Study, the evidence concludes that demand for U.S. exports will grow by more than $6 billion by 2008 due to the lower prices of U.S. produced goods and higher incomes in outsourcing destinations. In addition, while outsourcing does result in some short-term U.S. unemployment, its long-term benefits outweigh its costs. This is due to the fact that the cost savings and use of offshore resources lowers inflation, increases productivity and lowers interest rates. According to this study, these benefits "ripple" through the economy, and led to about 90,000 net new jobs through the end of 2003 (Mankiw and Swagel, 2006). According to Makiw and Swagel (2006), approximately 317,000 net new domestic jobs would be created through 2008.

Outsourcing Case Study in India

Outsourcing has focused on many countries overseas, including China, India and the Philippines; however, India has taken the lead the country most often outsourced to now. Although outsourcing to India has been prevalent for a long time, it has never been as large as it is now. According to Flatworld Solutions Pvt. Ltd. (2007), India has been able to attract jobs from the U.S. And other European countries. One of the reasons for this is that communication can be made between two countries without any difficulty, as the development in communication and technology has broken down barriers. Advancements in calling, emailing and chatting have made communication throughout the course of a project easy (Flatworld Solutions Pvt. Ltd., 2007). Organizations in India can send the completed work to organizations in the U.S. For reviewing many times and work can go back and forth with ease. According to Flatworld Solutions Pvt. Ltd. (2007), this is yet another reason why job outsourcing to India has become an ideal choice for outsourcers.

A review of the literature also indicates that another reason for the utilization of India for outsourcing is that India has a different time zone when compared to the U.S. And Europe. For India, this is a major advantage as jobs sent during the evening in the U.S. can be completed in India during the day and sent back to the U.S. (Flatworld Solutions Pvt. Ltd., 2007). Thus, the time zone advantage between India and U.S. has increased job outsourcing to India. In recent years, India has emerged as a new nation with democracy, support from the government, more freedom for businesses, fewer restrictions and regulations, lesser interest rates and fewer restrictions concerning outsourcing. India has benefited from all of the outsourcing; in prior years the population growth overcame the number of available jobs. In India people are satisfied to work for lesser salaries and what people earn from…

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