Off shoring

Off shoring, an increasingly relevant issue in the United States business world has come with both great praise and sharp disapproval. It involves the movement or relocation of production, mainly manufacturing, to cheaper locations in other countries. Companies do this to save money on the manufacturing costs and then import the products to the U.S. for retail. There are many complications along the way, some including: loss of jobs in the U.S., the driving down of wage rates in the foreign countries being off shored to, and both the positive and negative sides to how off shoring effects the economies of the countries involved.

“The term “globalization” describes the increased mobility of goods, services, labor, technology and capital throughout the world” (Canadian Economy).  The previous is a fairly accurate definition of what globalization is.  It is a move towards all of the economies of the world becoming one.  This has been happening at an increasing pace for some time now and is only going to continue.  One major engine for this change was the invention and growing popularity of the internet.  Through the internet everyone in the world can communicate at the click of a button, whether it be just to talk or to ship or order goods or services.  According to the World Bank there are three different ways that globalization or cross border activity occurs.  These include, but are not limited to, international trade, foreign direct investment (FDI), and capital market flows. 

International trade would be the most well known of the three.  It includes any importing or exporting between two countries.  For the United States and many other large and mature economies this has been something that is seeing a change.  The export side of this equation has been decreasing and the import side increasing.  For the smaller underdeveloped countries it is totally vice versa.  This is also what is discussed when we hear about the US trade deficit which is at an all time high.  In the previous month the US imported 63% more goods than they exported, which is pretty terrible in my humble opinion (Financial Times).

Foreign Direct Investment (FDI) refers to when one country invests money to start a business in another country.  This is an increasing trend for many US companies.  The principal recipient of these investments has been China with surrounding Asian countries benefiting as well.  One major reason for this Chinese investment is the growth potential of their economy and the extremely devalued currency which is kept artificially low by their government.

Capital Market Flows is simply investing in other countries through bonds, equities, or loans.  This doesn’t have as big of an effect as the first two but is an alternative.  This has also seen major growth as of late.  Investors that put their money in foreign equities have seen a nice return due to the growth of new companies.  Also the governments of these countries, such as China, have bonds with higher yields than offered here in the US due to the risk factor.  The problem with investing in these countries, other than the risk, is that it is very hard to do research on the companies financials.  Many of the third world countries that are developing don’t have the reporting standards of the US and many other developed countries, therefore there aren’t any financial documents and the ones that can be located often have a large amount of missing information.

Off shoring and outsourcing can go hand in hand but should not be confused. Outsourcing involves hiring of another company to manufacture or perform tasks that used to be done in house or are new additions to the company’s product line. Although if a company decides to hire an outsourcer from another country than it can be considered off shoring outsourcing. Increased outsourcing has become extremely important in developing nations because a lot of the job orders are going to off shored manufacturing companies.

Outsourcing and globalization are also two closely related topics.  The outsourcing discussed will be mainly aimed at how it affects the United States.  Outsourcing is defined as “work done for a company by people other than the company's full-time employees (Investor Words).”  This can include things inside our own borders or outside, which is what we will focus on.  Outsourcing can be used for a huge variety of things that include anything from technical support to materials.  One trend that has developed is outsourcing technical help centers to India.  India is known for its large amount of educated workforce.  This is not to say that their entire workforce is educated, which is a common misconception, because they do have an extreme poverty rate.  Another example of outsourcing is shoe companies moving their production facilities to countries having lower labor costs, such as Mexico and China.  The two can be correlated by understanding that outsourcing acts as an engine or catalyst for globalization.

The magnitude of off shoring is ever increasing and companies are finding out the benefits and incentives of moving their manufacturing overseas. With the increase in technology, being able to communicate much quicker and more effectively, and better logistics processes the off shoring issue is going to continue to surge. Other incentives are the lower wage rates in other countries and there is less tax liability on manufacturing. Less insurance programs that the employer has to pay out on the employees is rather tempting. With the companies saving costs they are able to redistribute the savings to the stockholders, or to different branches of the company such as research and development or a new marketing scheme. Environmental factors come into play also; in the United States there are much heavier regulations on environmental issues and pollution involved with manufacturing. This all changes when you off shore to a country with little to no environmental regulations. Off shoring continues to move into poorer nations and will help these nations start to become more globalized and more technology will be introduced in to their culture. Economically they will move forward and eventually become prosperous enough to start buying from other countries, therefore causing our exports to go up and a more unified global market. The more on the same page we can all get the better off the global economy will be in the long run.

The off shoring of services and manufacturing jobs is inevitable and is going to happen on a larger scale than white collar job off shoring. But the white collar jobs are the ones most in line with what most of my peers and I are concerned with.

Workers producing computer software, in particular, saw their rates of unemployment surge toward the national average after years of being well below it.

Unemployment among programmers has soared much higher than the national average (see Figure 1). While the manufacturing sector lost 15% of its jobs from March 2001 to March 2004, the software-producing industries have lost an even-higher 16% share of their jobs. Moreover, jobs in software occupations within the manufacturing sector shrank even faster than overall manufacturing jobs. Between 2000 and 2002 (the last available year of data), total manufacturing jobs fell by 12%, while software jobs within manufacturing dropped by 19%, affecting workers who were told for the past 20 years that they had precisely the skills needed to thrive in the global economy. These labor market developments, combined with an avalanche of media reports of U.S. firms sending technical work overseas, have undermined the job security traditionally expected by white-collar workers with advanced technical skills.

The lack of demand for these workers grows directly out of the lack of job creation in fields that disproportionately employ them. A salient example is the information technology sector, where many young college graduates found employment over the last decade. This sector is now relevant to the off shoring debate (as shown in Figure 5),

with net job losses being particularly steep since 2001, and with employment still stagnant even as software investment has recovered.

One widely reported study (Mann 2003) predicts that off shoring of white-collar work will have enormous benefits for the U.S. economy. The study estimates that rapid globalization of software would have effects comparable to those from globalization of IT hardware that it estimates led to a 0.3% gain in annual productivity growth from 1995-2003, yielding a $230 billion increase in GDP in 2002. The MGI study asserts that every $1.00 off shored yields $1.14 on average in benefits for the U.S. economy, a net gain of $0.14. These estimates are derived from proprietary information on firms collected by MGI, so it is hard to know whether it is appropriate to make generalizations based on this finding. What can be seen, however, is that the same calculation that yields $0.14 in benefits for the U.S. economy shows a $0.26 loss for U.S. workers resulting from every $1.00 off shored, emphasizing again that the distribution of benefits from off shoring need to be closely tracked. (http://www.epinet.org/issueguides/offshoring/epi_issue_guide_on_ offshoring.pdf)

There are several corporations that have pioneered major off-shoring operations and several that are the major players now. One of the main pioneers of offshore outsourcing is General Electric. In the 1990’s, Jack Welch (CEO) introduced the 70:70:70 plan. His plan for this was that 70% of their work would be outsourced. Out of this, another 70% of that work would be fulfilled in off shore development centers. And out of that, another 70% would be completed in India (EBS). This operation falls under the name General Electric Capital International Services (GECIS) and covers many of GE’s operations. They include: “ERP and Oracle database consulting, IT help desks, knowledge services, software solutions, analytics, data mining and modeling, remote network monitoring, e-learning, and customer contact centers” (EBS). Now GE has locations all over India, Europe, Japan, and Australia.

GE started a trend that is rapidly spreading across many companies in America and other developed nations. Next are a few examples of the different industries that have begun outsourcing. The first is Delta Airlines, they have started sending many of the reservation sales contact centers to other countries. They reported savings of $26 million in 2003 by using these call centers and also claim that this will not cost any American jobs. The next industry that will be talked about is Information Technology. This is not a very hard one to find an example of because it seems to be the major trend for every company. The example that it will talk about is IBM, because they have went from being mainly a computer and software manufacturer to basically a consulting firm. Their newest idea is that they plan to send as many as 4,730 programming positions to India and China. The financial sector, one in which I plan to get a job in, makes this kind of scary for me. Lehman Brothers, one of the biggest investment banks, intends to send $400-$500 million worth of IT jobs to India next year.

            Some outsourcing examples that should be kind of scary for everyone, government outsourcing. There are two examples of this government outsourcing which include: The Greater London Authority and Utah and New Jersey State Governments. London awarded a $10 million contract to Mastek, a global IT company, “to develop the software and run the back end of the radical new program in London that charges tolls for driving within the city during rush hours” (EBS). Next the governments of Utah and New Jersey have given the okay to send the calls concerning questions about food stamps and unemployment benefits to a call center in India. That’s kind of a funny situation, sending unemployed Americans calls to India, which is where there jobs may have been sent, to ask questions about when they will get their unemployment benefits. These are only a few of the examples of offshore outsourcing found.

As much as off shoring seems like it is taking jobs away, the percentages on that are to minor to really affect the economy as a whole. And with research showing that we actually benefit as a whole from off shoring, we suggest the United States should continue doing it.  One big problem is that it’s going to be extremely difficult to convince the common working American that offshore outsourcing is actually beneficial to them because in a way it’s not.  It is beneficial to “America” economically, but it’s going to stir up a lot of turmoil in the process with a percentage of the population. Mainly because they will never see the benefits and will basically be expendable to repositioning or lay offs. The United States does need to keep an eye on how much is being off shored and imported so that it can be regulated and not spiral out of control. We can only wait and see what this prevalent issue will bring for the United States and world economies.

 Works Cited

Engardio, Pete. "Outsourcing Innovation." Business Week Online. 21 Mar. 2005. Business Week. 16 Nov. 2005 <http://www.businessweek.com/magazine/content/05_12/b3925601.htm>. 

"Globalization." Globalization: definition and related links. 16 Nov. 2005. 15 Nov. 2005 <1) http://canadianeconomy.gc.ca/english/economy/globalization.html>. 

"Offshore Outsourcing Basics." EBS. 16 Nov. 2005 <http://www.ebstrategy.com/outsourcing/basics/examples.htm>. 

"Off shoring." Economic Policy Institute. 16 Nov. 2005 <http://www.epinet.org/issueguides/offshoring/epi_issue_guide_on_offshoring.pdf>. 

"Outsourcing Definition." Investor Words. 16 Nov. 2005. Web Finance. 16 Nov. 2005 <http://www.investorwords.com/3534/outsourcing.html>. 

Swamm, Christopher. "Hurricanes and oil push US deficit to $66bn." Financial Times. 11 Nov. 2005. Financial Times. <http://news.ft.com/cms/s/7d3e67fc-5257-11da-9ca0-0000779e2340.html>.