Globalization Document – Outsourcing

Outsourcing is a business practice used by natural or legal persons in which a third party is contracted to carry out activities traditionally handled by internal personnel and resources (Handfield). Many companies outsource to save overhead and labor costs, improve efficiency/productivity, and in some cases avoid government regulations or mandates. Outsourcing did not become a formally identified business strategy until the early 1990s. During this time, companies began to focus more on cost-saving measures to increase revenue. Traditionally, cost reductions have been the main driver for outsourcing initiatives; however, today outsourcing allows companies to access world-class capabilities, better company focus, specific expertise, and shared risk with partners (Narayanan).

Many economists believe that outsourcing is a good business strategy that allows companies to cope with globalization: market competition between price and profit. It is one of the underlying factors that affect whether a business prospers or goes out of business. However, outsourcing does not provide a competitive advantage as it cannot be patented or prevent others from adapting to it (Mourdaoukoutas). For example, if a clothing company like GAP decides to outsource its clothing manufacturing to gain a competitive advantage, other competitors like Old Navy, American Apparel, and J. Crew will do the same. Today, many of the world’s largest companies use this strategy. Companies like Nike outsource all of their footwear, apparel, and sports equipment, while Apple outsources hardware manufacturing (Pearlstein).

Outsourcing has been a controversial topic due to a growing number of people who believe it is unintentionally creating long-term unemployment in the United States, although, according to Pearlstein, studies have been conducted since the 1990s to show that global outsourcing has led to more job creation in the United States. Due to the shifting of jobs overseas, the US has created more domestic jobs than it has lost, even though the jobs may not have been in the same sectors. These findings, which focused more on multinational corporations, are consistent with economic theory that trade and specialization increase productivity for all parties involved while driving economic growth. However, over the past decade, Commerce Department data has shown that US multinational corporations have been cutting 2.9 million jobs in the US while adding 2.4 million jobs abroad ( Pearlstein). Pearlstein believes that the size of the company partly affects this. Big companies like Apple, which focus on export markets for growth, can still create new jobs in the US in engineering, design, marketing and finance. However, small and medium-sized companies that focus solely on the US market are outsourcing US labor for foreign labor in order to save money and remain competitive in the market. In some cases, outsourcing has a negative impact on American businesses. For example, American companies found it cheaper to outsource the production of radios and televisions to Japan. However, Japan figured out how to redesign and produce their own brands of the same product. After learning this technique, Japan took over the world industry (Pearlstein).

Outsourcing affects multinational corporations in different sectors. The service sector, for example, continues to expand offshore and offshore employment, while the manufacturing sector has moved virtually all production abroad. Many companies are now pushing vendors to move jobs like IT services, software programming, and call centers closer to home. This would help increase US employment in these sectors (Pearlstein).

Although outsourcing has decreased the number of jobs in the US, it has helped increase profits for many investors and company shareholders. Consumers are also benefiting from this because cheap labor and manufacturing allow goods to be purchased at a lower price. These savings allow the creation of jobs in other sectors and companies. In the recent election, Donald Trump promised to bring jobs back to America by proposing tariffs on imports from other countries. Although this could be beneficial for US employment, the cost of goods would increase significantly. The imposition of such laws could potentially shut down many small American businesses that cannot afford to pay adequate wages to American employees. Another concern with outsourcing would be employee loyalty. If employees know that their jobs will eventually be given to third parties, many of them will be less willing to stay. Losing certain jobs in the US will also have long-term consequences. As mentioned above with outsourcing to Japan, if certain jobs can only be employed through outsourcing, that trade will be lost to the US. Ultimately, outsourcing is based on a respectable relationship between two countries. If the relations of any of the countries suffer, the international market will also suffer.

Handfield, Rob. “A Brief History of Outsourcing”. A brief history of outsourcing – SCM | Supply Chain Resource Cooperative (SCRC) | North Carolina State University. (SCRC) Supply Chain Resource Cooperative | Poole College of Management | North Carolina State University, June 1, 2006. Web. March 22, 2017.

Mourdoukoutas, Panos. “The Unintended Consequences of Outsourcing”. Forbes. Forbes magazine, December 23, 2011. Web. March 22, 2017.

Narayanan, Loral. “A Brief History of Outsourcing”. Credit bulletin today. np, Jan 06 2011. Internet. March 22, 2017.

Pearlstein, Steven. “Outsourcing: What’s the real impact? Counting jobs is only part of the answer.” Washington Post. WP Company, July 1, 2012. Web. March 22, 2017.