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International Trade

Outsourcing, Offshoring and Globalization

Outsourcing refers to a company getting inputs or services from a firm outside the company. This kind of outsourcing has taken place for many years between companies in the United States and takes place when a business has another business carry out some task for it because the other business can do it for a lower cost. The other business has the comparative advantage in that task, thus, outsourcing benefits both sides (VanderWeerdt, 2006).

Offshore outsourcing, also known as offshoring or international outsourcing refers to a company getting inputs or services from a firm in a foreign country. The object of offshore outsourcing is the same as that of outsourcing, but the former involves the transfer of goods or services between countries. The notion of comparative advantage still applies. Businesses have discovered that they can hire employees in other countries for a lower wage rate, which lower their cost of production (VanderWeerdt, 2006).

Outsourcing can lead to reduced costs, greater competence and enable a business to make better use of its workers, enabling them to concentrate on business-critical and value-added operations. This can lead to a competitive environment. Offshore outsourcing can further decrease costs due to the comparatively cheap labour that can be accessed from other countries, particularly from developing countries (King, 2009).

The nature of international trade has changed. For centuries, trade largely involved an exchange of complete goods. Now it more and more involves bits of value being added in a lot of different locations, or what might be called trade in tasks. The well-known paradigm of trade theory, which conceptualizes the production procedure as generating finished goods from bundles of inputs combined at a single plant, was well suited for studying the trade of yesteryear. But the globalization of production and the developing international division of labor suggest the need for a new model, one that puts task trade at center stage (Grossman, 2006).

Arguments for Offshoring

It may not be easy to find local workers with the qualifications, skills, experience and attitude that a business requires. Global outsourcing can widen the search. Businesses exist to make money by making products or producing services to sell to consumers at the lowest price possible. There can be a significant cost difference when employing a local person compared to employing one in a developing country. In addition, local workers often require extra costs such as benefits (King, 2009).

Businesses compete in a global economy so why should they not hire globally? Small businesses must compete with small and large businesses from all over the world. A competitive edge is therefore essential, and employing cheaper labour is one potential way to achieve this due to the extra flexibility small businesses have over larger ones. Paying local workers a higher salary rather than paying offshore workers a lower one does not necessarily benefit the local economy. Employees want the highest possible salary. The more a business pays its employees, the more it must charge its consumers for its products or services. Customers, however, want the lowest possible price, so from a customer's perspective it is beneficial to for a business to pay employees as little as possible as this would lead to lower prices (King, 2009).

Arguments against Offshoring

Goods produced by offshore outsourced labor may not be of equal or better quality and yet the cost to consumers may remain the same. Offshore outsourcing ignores the local employees and community who helped the business obtain its success in the first place. One may consider business success to be more than just profit generation, but also community development. Consumers may have a negative outlook on offshore outsourcing and so it may be counter-productive for a business to participate in the activity if this is true of their customers (King, 2009).

Offshore outsourcing means fewer jobs in the country and therefore a weaker economy. The more people who are working in the country, the more money are available to be spent on goods, meaning more jobs are created to make those goods. This is a virtuous cycle which offshore outsourcing can damage. Due to differences in laws and standards in other countries, offshore outsourcing may make it more likely for inferior, less safe products to be produced and for environmentally damaging production processes to be used. It may also be easier to exploit foreign workers by paying them a much lower salary than is ethical or supporting their working in unfavorable conditions. Offshore outsourcing may lead to practical issues such as language barriers, difficulties with time differences and team and project management complexity. It may also be harder to ensure that the outsourced workers have the necessary skills, qualifications and attitudes. It may also be harder to find reliable references for job candidates (King, 2009).

Another drawback to outsourcing is that it often eliminates direct communication between a company and its clients. This may prevent a company from building solid relationships with their customers, and often leads to dissatisfaction on one or both sides. There is also the danger of not being able to control some aspects of the company, as outsourcing may lead to delayed communications and project implementation. Any sensitive information is more vulnerable, and a company may become very dependent upon it's outsource providers, which could lead to problems should the outsource provider back out on their contract suddenly (What Is Outsourcing, 2012).

The offshoring of facilities, labor, capital, technology, and information not only hurts American workers, but also threatens the backbone of our knowledge-based economy. Emerging nations such as China and India have realized that technological leadership leads to economic prosperity. Their governments are committed to attracting business investments, technology transfer, and knowledge inflow into their countries through industrial policies, subsidies, and business incentives. The offshoring trend will most likely accelerate and spread as more U.S. companies figure out how to efficiently exploit these incentives, not to mention the large pools of educated low cost foreign labor. Enabled by high speed telecommunication connections, the recent migration of labor intensive services jobs was primarily motivated by the potential of up to a 90% savings in labor costs (Offshore Outsourcing and America's Competitive Edge: Losing out in the High Technology R&D and Services Sectors, 2004).

Traditional economic theory and business practice has tended to pose a contradiction or trade-off between efficiency and equity: what is good for one may be bad for another (Pastor, 2005). This idea can be seen in regards to offshoring in the fact that there are both good and bad concepts surrounding it and what may be good for one company and business may not be good for another.

Dell, Inc.

When looking at Dell, Inc. And its offshoring practices both good and bad things can be said about their experiences. Dell has located the majority of their customer service call centers abroad. Offshoring is simply an economic consequence of the high cost of skilled labor at home compared with the low cost of skilled labor elsewhere, and therefore it can be an opportunity to save money. For certain jobs offshoring could well be a good solution. But when offshoring is used to save money and at the same time degrades critical business attributes such as quality, reliability, integrity and security, then it is not just a bad solution, it can easily become a financial and PR disaster (Gibbs, 2004).

The company's India operation has, at times, been at the centre of those accusations by both consumers and businesses, with each sometimes complaining of lacklustre service. Dell responded by taking measures such as rerouting some tech support calls from businesses to its U.S. support technicians. Company executives also have said Dell invested in more training for its India staff. As a result, Dell's support has recently received better marks from businesses. Executives say its India service also has improved. Dell, along with other large companies, has been chided for hiring numerous employees overseas, making the move to open a new call centre in India a potentially controversial one for the PC maker. But the company's top executive has shot back at those charges by pointing out that it also has added numerous jobs in the United States (Spooner, 2005).

One case in particular is that of Dell's Bangalore facility had the type of institution-building problems that often are seen when an organization from one country tries to establish and maintain a project overseas. Dell's support center manager reportedly was poorly recruited, their training programs were too brief and support from the U.S. For the center was inadequate. These are common problems in technical support operations both onshore and offshore. None of this is the fault of Dell's Indian agents or the offshore support model (Mitchell, 2004).

Today, Dell employs more people overseas than it does in the U.S. As of January 30 of this year, the computer systems giant employed 23,800 workers outside of the U.S. And 22,200 domestically. This underscores a growing trend among it companies to position jobs overseas, where labor costs are cheaper. "Dell recently established customer and technical support centers in India, China, Morocco, Panama, and Slovakia and has set up design centers in Taiwan and China. Furthermore, it not only has manufacturing facilities in Texas and Tennessee, but also in Brazil, Ireland, Malaysia, and China" (Pruitt, 2012).

Eeven though Dell has come under fire along with other companies by critics who say that offshoring is robbing U.S. citizens of jobs, the company's new chief executive officer has said that Dell will carry on to engage in the practice. The company's current chief operating officer has said that the issue of offshoring in regards to Dell has been overblown. Dell has said that it will persist to employ people overseas, where it sees market growth. The company derived almost forty percent of its revenue from international sales for its fiscal year 2004. In addition, it says that its potential growth is dependent on its success in international markets (Pruitt, 2012).

Conclusion

Even though there are disadvantages, outsourcing and offshoring are trends that show no sign of stopping. The capability of companies to outsource or offshore their non-foundation functions to capable companies saves them millions in overhead and payroll costs. Cost successful information technology is coming on the scene daily making it even easier for companies to flawlessly work together and communicate as one virtual corporation. So, the profit reason coupled with cost-effective technology corresponds to a fundamental guarantee that outsourcing and offshoring will be alive and well throughout the 21st century (Chestnut, 2012).

The outsourcing and offshoring trends have had and will continue to have a spectacular affect on jobs in all participating countries. The jobs and the superiority of jobs in each country depend on the global competitiveness of each country. The global competitiveness of each country depends on how well each country innovates. "For example, if you think of the global economy as a ladder and competing countries as rungs on that ladder, right now the United States and other developed countries are at the top rungs on the ladder, and developing nations are at the lower rungs on the ladder. To stay on the top rungs, the United States and other developed nations try to effect favorable world trade policies and continue to cultivate innovation and the creation of new industries and products; otherwise, these countries could be overtaken by the developing nations who are hungry and continuously innovating and upgrading their standards of living" (Chestnut, 2012).