Pros and Cons for Outsourcing

The Pros and Cons of Outsourcing go in the US By Berend Schoute (1713035), student of the VU university Amsterdam. INTRODUCTION Hillary Clinton, I dont go to bed what reality the Bush administration is living in, but its certainly not the reality I represent, from whiz end of New York to the different. This response came on the statement of the head of U. S. President George W. Bushs Council of Economic Advisers, Gregory Mankiw. He make it tongue to outsourcing is just a newfound way of doing international trade, which makes it a good thing. In the last go just about economists are a proponents of offshoring services outside of the US.They say that the benefits of outsourcing exceed the disadvantages. The main discussion is more(prenominal) likely a political one. It shows that a lot of citizens are pursuing protectionism to encumber any problems for Ameri backside workers. THEORY Outsourcing occurs when a company fragmentizes a production dish up and sends this to s ome other outside company. When companies are outsourcing to other countries/continents, it is also known as offshoring. A survey held by Lewin and Peeters (2006) showed that 90 of the 650 companies that are listed on the US Forbes world(prenominal) 2000 are offshoring major business functions at that time.This outcome says that many major companies are elicit in outsourcing lineages. Further outcomes mentioned that over whole IT-functions (66% of the survey participants) are mostly shipped elsewhere, fol ruggeded by Finance/accounting functions (60%). The most attractive destination for offshoring is India, where 60% of the functions of companies participated in the survey is to be offshored to. (Lewin and Peeters,2006) There are multiple furrows for offshoring jobs to another country. Some of these reasons stomach be examined by only if looking ating at the verse, but most of them are abstract and difficult to catch.We speak of an omitted variable bias when a model that yo u create misses some strategic causal variables. The model groundwork give you some positive results, but it isnt reliable. This problem can occur in every survey, so the investigators affect to be careful with the outcomes. The main argument for outsourcing is all the way labor cost reduction. The differences in wages are very large between the developing countries and the US. For example, an IT-specialist is paying $ 60 per hour on average in the US, where India pays this worker only $ 6 per hour.Although these cost benefits roll labor are substantial, extra costs incur when setting up the new offshore location. later on taking all costs in account, in that location still is a cost reduction of 45 to 55 % (Mckinsey Global institute,2003). This cost reduction can cause a higher productivity because the domestic help firm can focus on other important operations. Drezner (2003) said Thanks to outsourcing, U. S. firms save specie and become more profitable, benefiting shareh olders and increasing returns on investment. Foreign facilities boost demand for U. S. roducts, such as computers and telecommunications equipment, required for their outsourced function. And U. S. labor can be reallocated to more competitive, better-paying jobs. This statement is fully supported by most economists. The commodification process allows the spread of the benefits of IT-outsourcing even further, making the growth and the competitive advantage even greater (Drezner, 2003). A dim-witted explanation of the advantage can be given by looking at the Heckscher-Ohlin model. This model simply suggests that countries that are capital abundant leave export capital intensive products vice versa.For example it explains the fact that India focuses on labor intensive products because this abundance causes a competitive advantage caused by relatively low wages. In reality its off course more difficult, because the underlying assumptions are hardly lifelike 1. factors of production are perfectly mobile and 2. no difference in level of technology across countries. Drezner(2003) explained this by the following statement The logic underlying an open economy is that if the economy sheds jobs in uncompetitive sectors, employment in competitive sectors will grow.If hitech industries are no longer competitive, where will new jobs be created? This previous theoretical introduction didnt made the discussion between the pros and cons yet clear. It simply business office some arguments of a proponent and a opponent. We still need hard evidence from both parties to give a good view on the truth. PROS VIEW Opponents of outsourcing are talking about the fact that American workers are losing their jobs cause of the labor movements. This is off course a fact, but what are the actual numbers game ? The Mckinsey Global institute (2003) notes that in the up coming 5 days , the growth was going to be approximately 30-40%.Forrester Research predicts that the total outsour ced jobs will be some 3,3 million in 2015. According to projections, the hardest hit sectors will be financial services and information technology (IT). In one May 2003 survey of nous information officers, 68 percent of IT executives said that their offshore contracts would grow in the subsequent year (Mckinsey Global institute,2003). Therefore, at first sight the perception of the opponents is unfeignedly sustainable. The total growth in the last devil years (2002-2003) was really good, the productivity growth was even greater.The overall job growth stick been really alarming. This indicates that the opponents are right in their perception. Controversially, if you unpack the numbers, you will find that 90% of all jobs in the US require geographic proximity. So these jobs were untouched anyway. The Forrester prediction of 3,3 million is spread over 15 years which means 220 thousand extra outsources jobs per year. Nowadays employment in the United States is about 130 million, an d with approximately 22 million new jobs to be added till 2010, means that the doing of offshoring is less than 0,2% of American workers (Drezner,2003).Another argument of the proponents is that the net change in the outflow of workers against the inflow is negative. So the difference between insourcing workers because of foreign companies coming to the US and outsourcing is getting smaller. An important argument pro outsourcing is the fact that it increases the productivity of a company. The question we need to ask ourselves is can we confirm this increase with empirical evidence. Amiti & Wei (2006) investigated this question and have found some beautiful figures. In their survey hey tried to analyze whether there are any benefits of outsourcing in the productivity of a company. To prevent an omitted variable bias, they needed to find a valid instrument for service offshoring. In their reversal model they used the number of internet hosts in the countries that supply the largest shares of services to the US. These outcomes reflect the changes in new technologies that would only affect US productivity through their effect on offshoring. Their empirical outcome was that there is a positive effect on productivity through outsourcing. CONSThe American citizens who are pursuing protectionism to prevent any problems for American workers. They say that they lose jobs because of outsourcing. This off course is true, but its important to look at the percentage that is reemployed. This number is provided by the Bureau of Labor Statistics, which tells us that 69% of the workers that lost their job due to offshoring, eventually is reemployed. In the previous, I only talked about low-skilled jobs outsourced to other countries. Nowadays a new trend is unfolding with the outsourcing of high value added jobs to developing countries.For example radiologists who can be replaced by cheaper Indian radiologists that constantly are able to screen material that was send to them by US hospitals. The exact numbers arent clear because this trend recently came up. The debate about the high skilled outsourcing should focus on consolidating strength of the US in higher value added familiarity services where investment in homo capital will be decisive. Until there is no empirical evidence of a negative effect of this kind of outsourcing, the US must focus on the quality of their higher value added knowledge services (Rudiger, K. 2007). There are also a couple of other disadvantages that come up when outsourcing services abroad. These disadvantages have been used by the opponents of outsourcing. A first struggle can be that a newcomer can find itself a unreliable supplier, which puts his work aside when finding a better paying attendant or a supplier loses the workers who finds better paying jobs. In reality a supplier loses around 15 to 20 % of its workers each year (Weidenbaum, 2003). Other hidden costs or disruptions can be for example bad infrastructure, a lot of power blackouts and extra transportation costs.Weidenbaum also states overseas managers often do not understand the American business environment our customers, lingo, traditions, and high-quality control and expectations for prompt slant of goods and performance of services. These disadvantages can be prevented by good outsourcing preparation. CONCLUSION In the beginning of this stress I discussed the US protectionism to offshoring jobs. When looking at all the studies it came clear that offshoring brings substantially benefits to the economy of the US (and the world).In this render we saw that firms can reduce costs up to 55 % of the particular department. Because of the cost reduction and productivity growth, the US can improve its output and competitive advantages against other countries. The disadvantages do not outweigh all the advantages of outsourcing discussed in this essay. When the politicians focus on the flexibility and quality of the economy they can create a win-win situation for the US. In the upcoming years next studies need to be about whether any skill throng (high value added services in particular) is relatively more affected. REFERENCES Amiti & Wei. 2006). Service Offshoring and Productivity Evidence from the United States. NBER working(a) Paper no. 11926. Drezner, D. (2004). The outsourcing bogeyman. Foreign Affairs. Mckinsey Global institute. (2003). Offshoring Is It a Win-Win Game? Weidenbaum. (2003). Outsourcing Pros and cons. Business Horizons (2005) 48, 311315 Lewin and Peeters (2006). Offshoring work Business sparking plug or the onset of fundamental transformation? Long Range Planning, 39(3) 221239. Rudiger, K. (2007). Offshoring, a threat for the UKs knowledge jobs? A working paper prepared for the Knowledge Economy Programme.