In this paper we will consider and explore the question of Outsourcing. Primarily what is outsourcing? Based on a simple breakdown we have: out and sourcing (implying putting the source out). But more accurately outsourcing “is the delegation of tasks or jobs from internal production to an external identity along with the elimination of native staff to staff overseas, where salaries are markedly lower”(the tech-encyclopedia).This research will be divided into four parts, primary our focus will be on measuring the importance of outsourcing and the types of jobs outsourced from the USA. Subsequently will take a closer look to insourcing, to what extent is this phenomenon occurring in United States.
As a third part, based on economic theory we will analyze the different benefit and cost of outsourcing. Ultimately we will examine what is the stance of the Bush administration toward outsourcing?From the us point of view, how large is the outsourcing phenomenon and what types of jobs are being outsourced:The outsourcing phenomenon is pretty recent in the United States and its quantitative importance is significant. Why did this phenomenon become so popular in so many sectors? Esssentially, technology improvement was the main engine of this new process.
Four main sources contribute to the outsourcing trend:The first one is communication technology, an improvement because it offers services from remote locations. Next there is the development of the internet which enables people to work from different locations and to constantly be in contact with their original working location. In addition the falling in transportation and telecomunication cost thas been a significant driver to outsourcing. But probably the biggest driver is the enormous difference in labor costs.
For example, an employee who costs $15,000 per year in America might cost one sixth of that in India1. Some sectors such as the services industry, are essentially targeted by the outsourcing, international companies such as GE Capital and American Express have pioneered the outsourcing. Along with the services industry, there is also manufacturing, wich has mainly participated in the growing significance of outsourcing. Some major company carry out much of their production.
For example Ford now outsources 30 percent of its overall production.The table above shows that most of the sectors in the United States are involved in the outsourcing process. On average all of those sectors increased their information technology spending by 52% in 4 years. Some sectors, such as manufacturing, increased their spending by 62% showing their high capital involvement into outsourcing.
The unemployment rate reached an all time of 6.2% in 2003 versus 4.2% in 2002, and within five years India’s contract industrial engineering revenue is expected to 2″grow from around $500 million now to $10 billion”(Engardio, Pete, Business week) it suggests that American jobs are massively being exported to India.
People may be surprised to see that their computer or cellular phone were designed by an unknown Asian electronics contractors, but the current trend is to outsource more and more engineered product. For example, the company Microsoft has a good part of their software designed by engineers from India. The jobs which are being outsourced are, for the most part related to the services industry. The Forrester research reports that by 2015 3.3 million United States service jobs and $136.4 billion in wages will move abroad as a result of outsourcing3. This report provides a categorized breakdown of the different types of jobs which are and are going to be outsourced. We can distinguish 9 categories:; Management occupation; Business and financial operation occupations; Computer and mathematical occupation; Architecture and engineering occupations; Life, physical and social science occupation; Art, design, entertainment, sports and media; Sales and related occupations; Office and administrative support occupations.
According to the different statistics and examples above we can assume that the outsourcing phenomenon is very large in the United States, Furthermore the jobs being outsourced are, essentially, related to two sectors or two industries: the services and manufacturing industries. This trend is just flourishing-we expect a considerable expansion in some new sectors, such as engineering, which would require more high qualified jobs. A definite precursor in this domain is Microsoft, which planned to double its workforce by next March in Hyderabad and Bangladore. In Hyderabad, “Microsoft currently employs 600 software developers and another 500 at a second facility”4(Mike Bucken, computer world).To what extent is ‘INSOURCING” being done in the USA rather than in their previous location occurring?Insourcing is what some economist calls the “boomerang effect”(Kharif Olga)5. Many foreign companies insource to the US for example the Japanese automobile industry is highly involved in the insourcing trend in the United States. The companies such as Honda and Toyota are creating lots of jobs and investing a lot of capital.
Toyota is planning to open an assembly plant in San Antonio in 20066. The investment for this new production line should be about $800 million, and the facility is expected to initially bring about 2000 new jobs to Texas. By 2006 Toyota is expected to employ about 35,000 people throughout the continent, and Toyota’s direct investment in North America will top $14 billion. The second example is Honda, a company whose involvement in the American market is considerable, and who is planning to invest in various locations in America. In Georgia Honda will invest $100 million to construct its 13th major plant in North America by 20067. This plant will employ 400 workers.
In Ohio Honda will invest $100 million and add 100 new jobs to expand their original plant.And finally in Alabama Honda will invest 70 million dollar and add 100 new jobs to begin manufacturing additional engine components at its existing engine plants operations. The automobile sector is not the only one being outsourced in the US. Some high tech companies such as Samsung are implanting into the US.
Samsung will pour about $500 million into improving his facilities in Texas and will create 300 jobs through 2006. We can definitely assume that the implantation of foreign companies in the us rather than in their previous location is very important. However to what extent can we say that it compensates for the jobs outsourced by US companies. Foreign investment for setting up US subsidiaries doubled to 82 billion between 2002 and 2003 according to the Commerce dept. Based on the trade association 400 000 jobs were created most of them tech related over this period. In contrast, the forester Research shows that on the same period of time 300 000 us jobs were taken away by outsourcing.
So, doing simple math, 100 000 jobs were created between 2002 2003 in the US due to foreign investment and implants8.Why does in sourcing is so valuable in US?Based on my reading and basic knowledge I would say that there are two main reasons, first of all the market. Foreign companies will outsource their facilities to the USA because the potential market is very big, and the consumer purchasing power is one of the biggest in the world. Secondly, it is a good way for the companies to escape from different kind of tariff barriers and protectionism policies. Finally, they strive to take advantage of the American workforce and the advanced technology infrastructure available.
What does economic theory have to say about the benefit sand cost of outsourcing?In order to answer this question in the most accurate way possible, I will first look at the gain and loss based on economic theory in the USA, and then I will contrast it with that of underdeveloped country or third world countries. Based on the Hecker-Ohlin model, the country will export the good that uses its abundant factor intensively, and will import the good that uses its scarce factor intensively. The United States is a capital intensive country. However, it is scarce in land and labor in comparison to the third world. Based on the theory the US will gain by outsourcing the products that require a lot of labor or land and produce the ones which are capital intensive. Some people might argue that outsourcing has a negative effect because workers will loose their jobs; this issue is true but only in the short run. The country will balance its loss on the long run. Alfred Sauvy, a French economist famous for defining the expression “third world,” explains why country will lose jobs.
The “pouring” theory states that disqualified jobs will be outsourced; jobs will be lost, but more high skilled jobs will be created, balancing the original loss.However, this theory doesn’t take into account the highly negative effect of structural unemployment on the workers and on the economy. Disqualified people will lose their jobs and high skilled jobs will be created, so we talk here about structural unemployment because disqualified workers will have a hard time finding a job-they will not be qualified for the new demand. For example, a worker who worked for fifteen years in the same manufacturing company and is being fired due to outsourcing is going to find it almost impossible to reenter the workforce. This structural unemployment might have a negative effect on the economy because many workers will not have the skills necessary to fulfill the new demand on the market. Therefore, the unemployment will increase, generating some important loss.
From the producer point of view it is definitely a gain. First of all, they will be able to lower there cost of production and therefore be more competitive by lowering their prices, and they will as well increase their capital because producing a good will be less expensive. The company with a bigger capital might want to invest, and according to Schumpeter investment will create a net gain in the economy. In addition the producer will gain because by outsourcing he will be able to penetrate new market, and benefit from some fiscal advantages. The consumer will gain as well because the price will be lower, and therefore the consumer surplus will be bigger. We need to consider that in the sectors which will be concerned by outsourcing, the working demand will drop along with the wages.Now let’s examine what are the underdeveloped countries’ benefit and loss.
First of all these implants will have a direct effect on wages, wages of workers will increase, and necessarily the quality of life will increase along with the consumption having a positive effect on the economy. Some structural change will also affect the population; first of all, in the long term we will notice a growing middle class.Maybe some changes in politics will appear in the long run. Some demographic changes will also appear, as the population will massively go to the city looking up for the new jobs. This could have a negative effect on the welfare of the country. We can also conceive of certain technology transfers. The company that will outsource will bring some technologies with them and a certain “know how,” which might inspire some of the workers to use those for producing their own goods.
Generally, the benefits for those countries will be effective on the long run. Those countries might face some difficulty due to outsourcing: originally, those countries are agriculturally orientated and most of their products are exported to make benefit. What if there are even fewer workers working in these areas because they will receive higher wages working in manufacture. The population will not take advantage of their land intensive goods and might even have to import what they were producing before.