The Benefits of Outsourcing - Essay Example

Q. 2: The benefits of outsourcing to the host country with specific examples. The strategy behind any entrepreneurship to relocate his/her business in another country for the purpose of enjoying a comparative advantage is what is referred to as locational flexibility. This is made possible by the mobility characteristic of capital where a firm can move it to new location where labour is cheap and available. Most multinational companies especially from developed countries have in the recent time relocating to developing countries where labour is cheap in order to maximize on production and save on the cost of production. The act of locating a business in a region where there is availability of cheap labour so as to reduce the cost of production is what is called outsourcing. Outsourcing is viewed by some countries as labour exploitation but a closer look at the impact this practice have to the host country, it is beneficial to the host country in many ways. To start with, there is creation of employment to the host country's population who could otherwise be unemployed if the firm did not relocate to host country. This in turn means there is improved standard of living to the employed individuals as they can now afford a decent life and meet their basic and other needs such as education, health and food. Through employment, people can afford to support themselves and pay taxes to the government through income tax which would be used for social welfare and development purposes. This is the case with American textiles firms in China where they have been able to provide employment to thousands of unemployed Chinese in their factories thus, a source of livelihood. The same case applies to Bangladeshis in Korea who are happy to have found job in American textiles firms in Korea which they save and send some to their family back home. The firm's investment to the host country requires business registration, and meeting other legal requirements which are source of revenue to the host country's government. They also pay taxes in form of sales tax, V.A.T and other export tariffs. These taxes are used to improve the living conditions and running the host government. In Nigeria for example oil firms and other foreign firms investment account for over 20% of revenue collected by government. Other countries where firms have been outsourcing labour confirm the positive contributions of these multinational firms to government revenue collection. Multinationals have a tendency of contracting local firms to do for them a number of businesses such as supply of vital locally produced raw materials, transportation, insurance and other services. This in turn has increased the volume of trade in host nations which translate to increase GDP. Shell Oil Company in Nigeria apart from having its own trucks now and then it hires the services of local transporters for critical supplies. This way the firm saves on insurance cost and transport logistics which are the responsibility of the contracted transporters. This is just an oil drop in the sea, there is much more business partnering with local firms where foreign firms are located across the globe. In addition, outsourcing earns the host country foreign exchange through exports of products produced by these companies. The realisation of this venture is of great importance to the host country in improving its balance of trade than when these companies are out of the country. Countries like china, Korea among others, will tell of increased earnings from foreign exchange through exportation of foreign firms products to their home countries markets or elsewhere since most of the products are not meant for local markets. Furthermore, the multinational firms may direct some of their product to the local market thus providing the local consumers with a wider consumer basket to choose from. Variety of goods in the market is a positive business environment and the country may diversify in its consumption thus real socio-economic development. It is a clear phenomenon when we see local people change in taste and preferences due to introduced foreign diversified products which come with new consumption euphoria. This is very common in fashion industry as foreign firms engage in aggressive advertisement to promote their products in their own way. Outsourcing has made positive contribution to economic development of host nations. Multinationals engage in development initiatives such as building of roads in areas of their operation, infrastructures such as health facilities, environmental initiatives all of which benefit the host communities in improving their living conditions. A case in mind is Tiomin Inc. in Kenya , where it have constructed access roads, built hospitals and schools for local residents and planted trees in the mining fields of remote areas of Kenya which is inhabited by people living below the poverty line. Outsourcing companies have also been the source of technological transfer to the host country. Many multinational firms engage in research and development activities in order to improve their production competitiveness. They end up training the local manpower that is mainly drawn from the host country on these new techniques of doing things. The same individuals transfer this knowledge acquired to their country and act as catalyst of technological transfer and innovations. It can be concluded that, outsourcing is not a bad idea all together to the host country. It have myriad of benefits to the host nations. It provides employment opportunities to the local population, a source of economic development through revenue generated from exports and social development such as construction of road, railways, among others. Above all it reduces level of poverty in the host country especially if located in least developed countries. Q5. Implications of globalisation for businesses in the industrialised world. Globalisations have been facilitated by the proliferation of technology. Information technologies have made it possible for information, news, personal and company communication to flow easily across boundaries. Innovations in the transport sector have allowed movement of people, technology and goods across international borders thus facilitating integration of both developing and developed economies around the world. (Khalil & Ezzat: 2002:88). Globalisation has affected the international business environment in many ways especially to the industrialised world. First, globalisation has promoted mutual economic dependency among nations as the world is transformed into a global village where everyone uncomfortably rubs shoulders with people from other nations. This has resulted in nations becoming more conscious of other nations economic advantage hence economic dependency. Products produced in other nations have been made available to local markets through globalisation. These means the consumer country become dependent on other nations products. At the same time gaining revenue on taxes charged on imported goods. This also applies to the exporting nations where the consumption of its product in the receiving nation earns it revenue that is used for national development. Secondly, globalisation has led to the establishment and promotion of worldwide capital markets. There is international investments portfolio in areas of shares, mergers and acquisitions of multinational firms. This has contributed to establishment and growth of capital markets as countries feel much integrated both economically and business wise and free to invest anywhere in the world. This is due to favourable environment fronted by the essence of globalisation. In addition, Globalisation has accelerated international business activities in industrialised world by use of e-business where information technology has become a major concept in business development. Other multimedia systems such as television, movies have become strategic tools to expand and means by which to develop business in the international arena especially the industrialised nations. Globalisation has created new markets for industrialised world as developing nations open up their local markets. The industrialised world have benefited in this, since their products are produced by use of high and cheap technology thus cheap and affordable. Culturally, globalisations means platitude of tastes and preferences in demand and supplies thus homogenous market. Moreover, Globalisations increases competition thus the firms and organisations have to device ways of survival by improving their competitiveness which has become a matter of survival in order to remain in business. Competitiveness is the degree to which a nation can, under free and fair market conditions, produce goods and services that will meet the test of international markets, while simultaneously maintaining or expanding the real income. Globalisation has made competing nations more productive especially the industrialised ones. It had fostered efficiency of utilization of resources, the level of technology used and investment in capital equipment. This in return has led to cost effective way of production thus cheap and affordable products to the world community. The affordability of high quality products in the international market, have contributed to improved living standard among the poor nations. Accordingly, globalisations have come with a new trade concept of free trade and liberalised markets where participating nations are required to remove trade barriers to allow free flow of good and services across nations. This has improved and rapidly increased level of export to other nations. Growth rate and level of export are now indicators of the level of nations' competitiveness more so, if it can sustain this competitiveness. The level of competitiveness has been the measuring yard stick of developing nations from the developing nations. Another issue worth noting is that, as we move to the 21st century, international business has not only being making and accumulating wealth but also have been keen on how to deal with issues of social justice. The issue have been how to equitably distribute wealth across nations including the developing nations. Since governments cannot do this alone multinational seems much involved in endeavour to promote economic growth in small economies. The multinationals are now becoming more sensitive to local conditions and culture. Without these concerns the global economy is doomed to collapse. Interestingly, globalisation has changed the international business from competition to cooperation. Globalisation has led to the rise of international cooperation and emergence of trading blocks in industrialised world. These blocks seek a common market and a collective bargain of their product and some element of protecting their market. Countries come together to forge unity in the name of doing business. This trend is witnessed in the formation of EU and G8 nations. The world community have realized these trade partnerships to foster common business values and sharing of technologies. Moreover, they have agreed on common tariffs and market quotas. These have drastically lowered the market competition as each member is assigned particular market quota. It had also promoted fair play ground for international business to flourish. The global market has also expanded the role of 21st century business managers due to emergence of multiple stakeholders. Apart from shareholders and employees of the company, there have been entries of the environmentalists, the global community, customers, and suppliers. This reality demands a manager with array of skills to deal with multifaceted issues in and outside the business normal operations. In conclusion, globalisation has been a major turn around of the industrialised world in many ways particularly in business arena. There have been increased trade activities as countries open up their markets thus increased competition as well as cooperation among nations. Above all, it has provided market diversification in term of products thus emergence of homogenous consumer tastes and preferences. It has also been the force behind establishment of worldwide capital markets in the industrialised nations. References Khalil, M, T, and Ezzat, H, (2002) 'Emerging New Economy-responsive Policies', in UNIDO, Management of Technology, Vienna Austria. Barnett A, & Hilder P, (2001) 'Is globalisation good for the world' Opendemocracy network. Q6. Ways in which political risks influences international business Business investments are not conducted in a vacuum. Decision to invest in international arena is dictated by a number of factors. Most important of all: the countries's political environment. Political environment refers to the type of government, the government relationship with business and the political risk in a country. Government-business relationship differs from country to country. Business may be viewed positively as an engine of socio-economic growth of a country or negatively as the exploiter of the workers. This relationship can extend to the relationship of people of firms' home country with that of people of host country and the nature of firms operations. Critical to this, for a firm to be effective in foreign location it relies on the goodwill of the foreign government. Political risks on the other hand are the likelihood of government activity that has unfavourable outcome to the firm's operations and objectives. These consequences may include among other things; forced divestment, where by a government orders the firm to give up its assets or unwelcome regulations or interference of its operations. All in all, the risk occurs because of the uncertainty about the likelihood of government activity occurring. In most cases political risks is associated with foreign country being unstable. Thus it is more risky if the foreign government is likely to change unexpectedly, presence of social unrest, civil war, frequent riots, revolutions, terrorism among others. A foreign firm will naturally prefer a foreign location with stable government and less political risks. However, it has been witnessed that firms may go ahead and invests in countries with high political risks. This is due to the high value of returns as compared with the risk involved. Consequently what one firm may consider as risky location may be safer for another firm. It should be noted that, in situations where political risk is high, firms may engage in business but they have to engage on various business risk management strategies such as insurance covers, ownership strategy and management choices, financial arrangements and so on. Therefore, perceived political risks in foreign location by a firm will definitely raise the cost of running and doing business. This is because the firm must take some addition precautions against these perceived risks. One of the main strategies is to insure the business property and its operations. This requires financial input that would cost the firm additional capital thus increases in operational cost. This in turn will translate to reduction in revenue and profit margin. Another aspect is where the firm takes management strategy where it hires locals who might require additional training so as to be in good terms with the local political environment. This scenario has been witnessed in many countries where the foreign firms are required to have a local expert as one of its top officer through the policy of indigenisation. In most cases these indigenous experts have little knowledge of how the firm operates and have result in great loses to firms in retraining and sometimes firms have gone down due to lack of effective management from the indigenous CEOs. In addition a foreign firm may sell part of its shares to the local stakeholders to ensure it remain in business in a foreign location. This reduces the overall revenue the foreign firm gets in its venture in this foreign country. This in most case is not a free choice but sometimes government intervene and force the firm to sell part of it to the local shareholders. This becomes even worse when the firm is forced to sell over fifty percent of its ownership to local shareholders. This means it cannot make decisions as pertains to firms operations and future investment. It has to solely rely on the decision of local shareholders who in most cases will make decision on their favour. It has been critical especially when the shareholders decide to appoint board of directors in various critical positions who end up bringing down the firm due to mismanagement and corruption. Moreover, firm may make certain financial arrangements that will be an additional cost to the firm due to uncertainty of the risk involved in investment. This may include among other things, the strategy to borrow from local financial institutions to set up their operations rather than using their accumulated capital at home country. This is to make sure that in case of any uncertain risk occurring the firm still will not lose much but rather the locally acquired fund is the one at risk. The aspect of borrowing from financial institutions comes with interests and other conditions attached to them which will eventually be an added cost to the firm. This again reduces revenue and profit margin of the firm. Some past experiences of firm in a country may impact negatively on future investments decision of other firm in that country. A situation where a firm was ordered to surrender its asset by government may make future potential firms to shy away from investing in that country. Also if the government and people of a given country have unwelcome attitude towards foreign investments this may lock out future potential foreign investors. This means political risks play a major role in distribution and location of business in the international arena. In nut shell, political environment is very crucial in foreign investment of firms. A stable political environment will attract firms to do business in a country while unstable government will repel firms away from investing in a country. Political risk is an added cost to business operations if the firm decide to go ahead and invest in a politically risky country. Q8. Does the world need W.T.O World Trade Organisation (W.T.O) was formed in 1st January 1995. Approximately 45 years after the WWII to succeed General Agreement on Tariffs and Trade (GATT); an organisations that was formed immediately after WWII to negotiate the reduction of tariffs and economic wars that led to rise of fascism and the great economic depression.(Green: 2006:1) W.T.O was formed on the platform of negotiation for settlement of trade dispute across nations. This mandate gave the organisation the power to allow countries to impose sanctions on others if found guilty of trade malpractice. However, this provision does not favour the poor nations. For instance a small country like Uganda cannot impose sanctions to UK or USA. This will have no impact at all to the developed economies and might even hurt the small economies even more. Big economies such as UK, USA and other developed countries may take the sanctions issued against them as non-consequential. It may retaliate by totally withdrawing any subsidy or preferential trade agreement it have with that small country. This makes the small economies view the W.T.O as a spent force that have outlived its usefulness or an organisations for the developed countries. Another function of W.T.O was to promote the establishment of free markets and trade liberalisation. The organisation has been accused of been obsessed with the notion of free market without proper reviewing of its impact on developing nations especially the least developed. The W.T.O has failed to move on with the globalisation that have brought to our attention the reality of the magnitude of social-economic inequality our world is and the widening gap between the rich and the poor. It is commonsense that an organisation of this calibre should undertake as its main priority to improve livelihood of the world inhabitants by improving and providing fair and levelled ground to do business. However, this is not the case, the WTO has in the contrary increased poverty rather than fighting it due to is dogmatic attachment to trade liberalisation. Cheap products especially food products reduce the income of poor farmers in developing countries thus increase the level of poverty. Furthermore, trade liberalisation, is even causing more havoc to third world countries than anticipated, when they are forced to open their market for free trade. Giant multinationals with comparative advantage in terms of economies of scales bring their high quality and cheap products to these countries to compete with infant industries which lack these advantages and are easily pushed out of business in the name of free market. Despite this reality, W.T.O continue to advocate for liberalised markets and when these small countries fail to adhere to these directives, sanctions are imposed on them that cause more harm than good. In the light of this, many developing countries feel cheated and betrayed by W.T.O as it punish them and make them comply with trade practice that kill national business development. Moreover, the idea of trade liberalisation is more misplaced when the W.T.O continue to advocate for it while the pioneers of free trade such as USA, UK and now EU continue to subsidize their agricultural produce so as to increase their global market share. This is made even worse by the fact that these countries have resorted to aggressive protectionism policies which cost the poor nations an export revenue of up to 2bn per day (Green:2006:4). W.T.O seems to be toothless bulldog to counter this phenomenon or force these nations to comply and open their markets. This is because these nations who were party to the trade agreements exploit the existing loopholes in the W.T.O rule and agreements. To make the matter worse, the W.T.O agreements advised its members to reduce the amount of subsidy but went ahead to allow the developed countries to increase the support it gives to the farmers. These subsidies have created unfair competition in the global arena as the poor farmers in the developed country find it hard to compete with low priced products from developed countries. Consequently poverty has increased instead of reducing in the least and developing countries as the farmers fail to get any gain out of their produce. Therefore W.T.O is seen by developing nations as a pawn for the developing nations to advance their interest and make more wealth at the expense of developing nations. W.T.O introduction of market deregulations to governments of poor nations without giving them a choice to accept or reject it is go against the principles of democratic society the developed countries purport to promote. They have gone even further to be partners with IMF/WB policies of structural adjustment programmes in poor nations that have contributed to the increase of poverty incidences in the developing nations. Government are forced to comply for piecemeal financial aid that ends up being used to non-impactious IMF/WB projects in this nations. That being not enough, the aids in form of loans adds to the debt burden of these nations. Nations in this state of affairs lose their sovereignty and power to decide for themselves. W.T.O meetings where trade negotiations takes place have been the centre for multinational corporate lobbying. This has turned the W.T.O to be an entity with corporate agendas where patents laws are past protecting the technologies even those involving life forms. This on the other hand, has hindered technological transfer and access to pharmaceutical products to poor nations to cater for their health needs. What is the use of an organisations that even does not bother to promote health for all but very eager to issues protective patents even where life is involved This is some of the questions in the mind people in the third world countries especially in the wake of HIV/AIDS and other killer diseases. In nutshell W.T.O have failed to move on with the world and embrace the tenets of the changing world that require a multifaceted approach to issues affecting our society. W.T.O in contrary prioritises trade above all other issues such as environment, labour standards, inequality among others. It seems to be promoting the welfare of the developed nations by advancing their trade agenda of free market at the expense of third world countries' economy and development. It is a toothless bulldog in implementing its rules and functions. It had failed to tame and contain the developed nations to stop protectionism policies and remove subsidies in their agricultural products. The developing and least developed nations feel cheated and betrayed by the organisations as it fail to promote trade agenda that would help them reduce the level of poverty and achieve equitable wealth distribution through trade. Therefore the W.T.O in this perspective, have outlived its usefulness among the majority of world population and it is no longer needed; the world can even do better without it. Reference Green, D. (2006), 'The rough guide to W.T.O', CAFOD, Romero close, London. Read More