There is has been much attention paid to international outsourcing and its effects on western economies in particular the United States. Outsourcing of 'American' jobs was a presidential election issue this past November. There are many contrasting opinions on the subject and this paper will try to clarify some of the hypes and show what the facts really are. Unions and other left wing politicians have been against the idea of American companies outsourcing. They have encouraged a protectionist approach to outsourcing and forcing companies to keep jobs in America. Corporate profits have led large corporations to outsource work to South Asia and they have been strong advocates of outsourcing and the efficiency it allows them. There is a great deal of literature on the topic of outsourcing and it is difficult to cover all the ideas surrounding it. This paper will discuss some of ideas and controversies surrounding outsourcing.
What is Outsourcing?
Outsourcing is simply contracting out some work that was done in house to an outside company. This enables companies to specialise on one part of a complicated task. The supporters of outsourcing say that this specialisation allows companies to be more efficient (The Economist, 11/13/2004). This process could be used a in a variety of different industries where technology has made manufacturing very complex. Electronics and automobiles are two products which have many parts that could be made in a variety of different countries and assembled wherever the company chooses to. This flexibility allows companies to deal with the growing complexity of current manufactured goods. Outsourcing is a major concern outside of manufacturing for Americans; they are concerned with the white collar jobs that are being outsourced to developing countries.
There are two types of international outsourcing that has been occurring recently. There is the Business Process Outsourcing (BPO) and the Information Technology outsourcing (IT). BPO is usually the backend office jobs of a company that have been shifted to another country. General Electric (GE) did this in 1997 when they setup a subsidiary, GE Capital International Services to do accounting, insurance claims processing, supply chain and IT management in India(The Economist, 11/13/2004). IT outsourcing is a much smaller setup where the company is setup to deal with the task of managing information systems. The growing complexity and rising costs in the IT sector was a reason why the companies began to setup in the Asian market (The Economist, 11/13/2004). IBM is one of the many large corporations that has led the way in IT outsourcing by shifting jobs from America to companies in India.
Outsourcing and Employment
There has been much press about outsourcing leading to unemployment problems in the west. Unions especially have called for a protectionist approach in dealing with outsourcing (The Economist, 11/13/2004). The American Federation of labour says employment in U.S. software-producing industries fell by 128,000 jobs from 2000 to early 2004 (American Federation of Labor, 2004). This is not taking into account the ecomic downturn after 9/11 and other hardships the software industry has faced. There have been other points made about protecting American jobs and it was a major issue after the 9/11 attacks and the economic downturn. The truth is that outsourcing represents less than 1 percent of gross job loss per quarter, an estimated 55,000 jobs (Kane, Schaefer & Fraser, 2004). There is very little impact on the employment rate in America. The unemployment rate during the month of October was steady at 5.5 percent where it has been for much of the year (Lim, 2004). This is no cause for concern for people who think that jobs are being shipped overseas and their job too will be lost if something isnt done. Two million jobs have been added to the American economy since the end of the recession and there are more Americans employed than ever before (Kane et al., 2004).
In countries such as Germany, France and Japan there are stronger trade unions that limit outsourcing. These countries have even passed socail legislation and made corporate governance arrangements to protect their industries. This drives up wages and makes their industries less competitve on a global scale (The Economist, 11/13/2004). These practices could be the reasons behind why these countries have higher unemployment rates than the more open economies.
There are variety of ways at which we can look at the job market situation when speaking of outsourcing. The main objective of outsourcing is to make the company more efficen, which will lead to growth and result in more emplpyment. The idea of a job lost is a job lost is a very short term view of the business process.
Companies have been outsourcing a great deal over the past few years and it has had negligible effect on American employment number. The effect has been hyped by unions and others who prefer a protectionist ecnomy. The real numbers indicate that the American labour market is in great shape and outsourcing is just a hot button political issue of the day. There are better ways to improve the American labour market and economy than protectionism. Policies that create jobs, lowering the burden of regulation, stopping frivlous lawsuits through tort reform and implementing pro-growth tax policies (Fraser, 2004).
When a company outsources some of its work there one country is losing and the other is gaining. Insourcing recieves little coverage but economically is just as important. The United States is the worlds largest absolute insourcer of business services at 58,794 with the United Kingdom in second place with 36,740 (Amiti,2004). In dollar terms the U.S insources 59 billion dollars and India which receives a lot of press is at 18.6 billion dollars (Amiti,2004). The U.S. is the largest benefactor in outsourcing in the world. The U.S. and the U.K. have the largest surplus for outsourcing (Amiti, 2004). This goes against the common assumption that the Asian economies are stealing our jobs and ruining our economies. With India sitting in sixth place for insourcing most of the benefits seem to be going to the developed economies and the developing economies receiving secondary benefits. The table below shows the largest insourcing countries for business services and computer & information services.
GDP and Outsourcing
If everyone got all their information from media they would think that the United States was the largest outsourcer in the world. Outsourcing accounts for 0.5% of the American GDP and the U.K outsources 1% of its GDP (Amiti, 2004). Outsourcing is not very significant to these economies and has a much larger effect on developing countries.
The effects from outsourcing are enormous for developing economies. The small size of the developing economies could make change in the outsourcing sector devastating to the national economy. The larger economies are reaping a larger benefit from outsourcing but are not dependant on it. If outsourcing was limited by legislation it would make the American economy less efficient and life would go on but if the effect on a country like Angola would be devastated because outsourcing is over 35% of its national economy.
Globalization and Standards
The United Stated as the largest economy in the world has always encouraged free economies with little government intervention on economic matters. With globalization is full force the U.S. must encourage freedom in global economic matters. Countries such as India have made changes in legislation to accommodate U.S. companies on security concerns. There were concerns about the information that Indian companies had access to and how well the information was protected. The Indian government addressed these concerns by passing the Information and Technology Act of 2000 which cover unauthorized access and data theft from computers with a maximum penalty of $220,000. They are going to amend it soon to conform to European Unions Data Protection Directive as well as U.S. Safe Harbour privacy principles (Carafano and Rosenzweig, 2004).
Outsourcing has also been viewed as and exploitation of Asian workers. The assumption by a majority of westerners is that they have poor working conditions and are paid very little. The left of centre Labour Party of Britain made a filed trip to EXL services, an ousourcing firm based in Delhi. They found that the services offered by the companies exceeded those offered by companies in Britain. They included a health clinic, a gym and a good staff canteen (The Economist, 11/13/2004). There are instances where work is outsourced to Asian countires where workers are exploited and in some cases child labour is used. This is not the white collar jobs that have been in the media recently. The making of Nike shoes in Asia is an example of this but this is work that would never be done by Americans and they are comfortable with this idea because they get cheap shoes.
Developed nations get to buy cheap products because these products are made by using cheap labour in developing economies. If companies were to shut down factories in Asia for Nike shoes and produce them domestically the cost for the shoes would increase. That would not sit well with most consumers. We can apply that same philosophy to the IT sector; the developing economies can provide the service at a cheaper price so they are the economical choice. Outsourcing makes businesses more efficient and countries are able to specialize in fewer sectors and they become more efficient. Labour unions who want a protectionist approach will see more job losses because they are forcing businesses to choose an option that is uneconomical in the long run. The effects on social matters are difficult to measure but it is hard to find a correlation between what the effects of outsourcing has had. There needs to be better data on how much work is being outsourced and where it is going. There isn't enough data collected and it would be interesting to see. Outsourcing is going to grow because it is the most efficient way of doing business. The U.S. has led the way for globalization and companies will continue to find ways to cut costs in the global market place. Technology has made the world a smaller place and if the same job can be done half way around the world at a cheaper rate corporations will go there.
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