Reversing Offshoring in the Impact on Emerging Economies - Essay Example

Reversing Offshoring, the Impact on Emerging Economies and Multinational Companies Response to Criticism over Labour Conditions in the Factories of Their Local Suppliers Name: Course: Professor: Institution: Date: Introduction Reverse Offshoring denotes a situation whereby the multinationals that established their base in emerging economies such as India and China now engage in the prospect of hiring professionals from the client nations such as Japan, United States and United Kingdom. Initially, offshoring mainly targeted the service provider nations since the client nations now provides the opportunity of cutting costs in an effort to realise efficient delivery of services. Reverse offshoring at present is mainly influenced by the booming economy in the service provider nations where there is a trend of an increased demand for better wages. This leaves most companies with no choice, but to reverse offshoring to the client nations where at present, there is high unemployment rate and this gives most companies an avenue to take advantage of the cheap labour market resulting from the increase in unemployment rate in countries such as the United States (Deligio 2014, p.26). Currently, the trend in global economy appears to shift to the developed nations and the wage differential is not wide as once perceived. This has led to the developing countries engaging in a process to promote reverse offshoring. In the past two decades, offshoring has mainly been influenced by the cheap labour provided by the emerging economies. This led to most firms from the advanced economies to shift their company operations from home. This was mainly occurred as a result of the need to spend lesser manufacturing expenses or solicit white collar jobs that attract low wage demand. The emerging economies that were identified as the ideal location for offshoring included China as the manufacturing centre while India was regarded as the IT centre and service provider globally. However, as a result of constant debate with regard to free trade and fair trade, offshoring has become a controversial issue and the significant economic growth in the emerging economies means that the developed countries need to consider the prospect of relocating back home (Deligio 2014, p.29). Factors contributing to reverse offshoring The idea of moving company operations abroad to take advantage of cheap labour cost no longer make sense when considering other locations to conduct business. This is because the wages in these emerging economies continues to rise as a result of an increased demand and these countries are introducing new labour laws and workers seem to have a greater voice in the field of employment (Moore 2014, p.14). Further, the developed nations are at present, experiencing a decline in wages. For instance, as a result of a depressed economy in the United States, there has been a decline in wage and other benefits provided to workers and in particular workers in the lower level jobs. In addition, advancement in technology and higher productivity also contributes to cheap labour relative to the production or service costs. In essence, where differences related to labour cost are not significant, then other costs that include raw materials, transportation, tariffs and energy also tends to impact on the chosen location to conduct business (Ellram, Tate & Petersen 2013, p.14). On another note, multinational companies at present are engaged in an effort to change their supply chain globally where they are reversing their trend of offshoring in a selective manner. This involves engage in the production of the vital parts of their products or services instead of relying on third parties to do the job. These multinational companies are in the view that, designing products at home and then manufacturing these products overseas tend to slow down innovative prospects and dragging product change. Similarly, most multinational companies that were excited by the idea of offshoring important service functions that include IT to service provider nations such as India are now realising that such a trend should depend on innovativeness and thus, the need for these companies to develop the systems themselves and not buying from third parties. This means bringing such services back home through a re-verticalisation process (Ellram, Tate & Petersen 2013, p.18). Conversely, despite labour still considered to be an important aspect of the production cost, most of the multinational companies are now engaging in responsible offshoring. They achieve this by establishing standards that aim to provide decent wages, favourable working conditions and ensuring safety and health of the workers; in addition to carrying out thorough quality checks. However, it is important to note that problems still exists with regard to the supply chain related to low cost products. The need to improve quality and labour standards means that these companies will incur additional costs and this may influence the decision of most companies to relocate back home. The other factor is that most of these multinational companies choice of location depend on a number of complex issues that include government policies which are often contradictory. For instance, most multinational companies are invited to invest abroad while at the same time, facing discrimination. China for example, is recognised for engaging in a number of illegal activities that include piracy and hidden subsidies geared at promoting national companies (Osorno 2013, p.72). The rapid economic growth in emerging economies compared to developed markets means that these multinational companies are left with no alternative, but to reverse offshoring. At present, foreign investment in developed countries like the United States can be associated to some extent with reverse offshoring. For instance, traditional American companies that include Ford, GE and Apple are now adding plants and creating jobs back home. Their decision in this sense is influenced by the need to make their own product and not buy and also integrate corporate functions related to innovativeness closer to customers. Further, the idea of reverse offshoring also plays a role in countering critiques that target the old offshoring. Reverse offshoring to extent is also seen as a way to slow down the decline in manufacturing jobs in the developed nations (Templin 2013, p.22). On another note, most multinational companies are often sceptic about the need to offshore their IP (Intellectual Property). As a result, these companies are of the idea that the service providers should handle Intellectual Property and other data within the client’s nation other than handling these services abroad. In most instances, the multinational companies are worried about the confidentiality of their IP being compromised by the service provider nations (Johnston 2012, p.28). The impact of reverse offshoring on emerging countries communities Offshoring has created employment opportunities for millions of professionals in the emerging economies like India and China. In addition, this has led to an increased population of the middle class who are considered to spend more; thus, driving economic growth in the emerging economies. However, the idea of reverse offshoring means that a large chunk of workers in the emerging economies will lose their jobs if multinational companies decide to move back home. On the other hand, because of the idea to move these companies back home, the emerging economies will suffer in terms of losing qualified professionals in the job market. This is because the lack of employment that will be created by reverse offshoring may force most professionals to move abroad in search of a better paying job (Johnston 2012, p.30). This trend will occur where by these companies will move their R&D back home. As such, the emerging economies will suffer in terms of skills and experienced that R&D initiated by these multinational companies used to provide in order to improve production and service delivery. This means that the emerging economies will have a pool of graduates entering the job market that lacks necessary resources to provide exposure and enable them improve their skills and experience. As a result, reverse offshoring will create a situation whereby the emerging economies revert to a situation where the labour market is saturated with professionals that lack skills and experience on the job. Because of the high wage created by offshoring, the population in the emerging economies has managed to increase their spending. This spending has enabled the government to earn more revenue in terms of taxation. As such, the surplus income has contributed significantly in the development of infrastructure in the emerging economies (Tate 2014, p.66). However, in the event that multinational companies decide to move back home, the population employed in the offshoring sector will be forced to cut on their spending and thus, this will have an effect on their government’s recurrent expenditure. The wages for workers will reduce and this means their living standards will also drop. Most of the industries relying on the offshoring business will be forced to close and this adds to the loss of jobs in the emerging economies and increases poverty levels. Further, moving back home will result in a reduced Foreign Direct Investment by developed countries in emerging economies. FDI has played an important role in improving economic development within the emerging markets. This involves introducing new technologies to the emerging markets that help to improve the quality of products coming from these emerging nations. The improved quality of products means that the products from emerging markets can compete at the same level with the products from the developed nations. However, the idea to move back home means that the companies that liaised with the firms from the developed nations will lack support to improve on their R&D capabilities (Tate 2014, p.67). The companies operating abroad are often engaged in corporate social responsibility meant to improve the lives of communities living around industries managed by multinational corporations. However, the idea of these companies moving back home means that the sustainability of projects implemented by foreign companies becomes doubtful. Other than operating abroad, most multinational companies have endeavoured to engage in community projects that include environment sustainability projects, establishment of SMEs, improving the education and the health sector. Their absence in this respect will mean the locals will struggle in terms of managing the projects left behind due to lack of funds and limited support from the government to ensure sustainability of such projects (Tate 2014, p.68). In terms of costs incurred in acquiring the latest equipment and technology from the advanced economies, the local based industries that cooperated with companies from abroad will suffer. This is because these local based industries in the emerging economies still lack the necessary funds to acquire latest machines meant to improve production. As such, the reliance on outdated machines will result in poor quality products and reduced production. This in turn will affect the competitiveness of local industries in the global market that has shifted to the use of new technologies to improve production and service delivery. The governments in emerging economies can only manage to support a few home-grown industries to improve their productivity, but this means that other small scale industries will remain stagnant and eventually shut down due to lack of necessary resources to improve their productivity. As a result, such companies may eventually collapse and the consequence will be an increased unemployment rate in the emerging economies (Ellram, Tate, Schoenherr & Petersen 2014, p.381). A number of the emerging economies have a greater portion of their citizens leaving beyond the poverty line. Most people in these economies often move from their rural homes to search of jobs in the industries located in urban areas. However, when multinational companies decide to move back home, this means there will be fewer chance for the population with low level skills to acquire employment in the urban centres. As such, the government will be forced to spend more on welfare so as to provide for the population subjected to abject poverty due to lack of employment opportunity. As a result of being desperate for any sort of work, the unemployed will be exposed to more exploitation from the local companies who are eager to cash in on cheap labour to offset the rise in prices in the global market. For instance, as a result of foreign companies leaving, workers will be exposed to poor working conditions since the companies that collaborated with foreign companies will be left with limited funds to provide various incentives to their works. This has been the case in some of the emerging economies where poor working conditions in the local based industries has led to numerous casualties due to lack of adequate resources to improve the working conditions of their employees (Ellram, Tate, Schoenherr & Petersen 2014, p.385). The communities supported by the existence of foreign based companies in the emerging economies have always benefited by using their modest pay to support their families. This includes taking their children to school, affording medical care and shelter. However, the departure of these companies will mean having to do away with the aforementioned privileges. As such, this will contribute to communities with more illiterate people due to lack of funds to acquire education, the development of slums and an increase in mortality rate because they cannot afford medical care. In essence, foreign companies in developing economies have played a significant role in improving the living standards of the locals. Their absence will have a significant effect on the lives of people that relied on the companies for their daily support (Ellram, Tate, Schoenherr & Petersen 2014, p.388). The response of multinationals to criticism of labour conditions at the factories of their local suppliers Most multinational companies move abroad with the intention to take advantage of the cheap labour cost. This ensures that they incur lesser expenses with regard to their production cost. As such, they are able to realise maximum profits when the final product is sold back home. However, the labour conditions at factories of their local suppliers are worrying. Workers in this factory are subjected to poor working conditions that include lower wages and sometimes being overworked without any form of benefits for extra effort at work. This has led to these factories being branded as “sweat shops” where there is more input will lesser gains for workers. The existence of sweat shops is mainly influenced by lack of a proper regulatory framework with regard to labour standards in both the developed and developing nations. This provides multinational companies with an opportunity to exploit their workers in factories located abroad. The lack of labour standards, have provided multinational companies with greater power to influence labour conditions in particularly, the developing economies. According to the WTO agreement reached in 1995 states that the trade relations between countries needs to be conducted with the intention of improving the conditions of living and providing employment opportunities. However, this agreement is yet to be realised globally due to constant conflict that exist between developed and developing nations with regard to fair trade (Garver, Buketov, Hyewon & Martinez 2007, p.248). Conversely, multinational companies are responding to the criticism with regard labour conditions in the factories of their local suppliers in a number of ways. In this sense, MNCs have endeavoured to allocate funds meant to improve the quality of work in the factories. These funds are meant to replace outdated machines and provide workers with amenities. Improving working conditions is today viewed by MNCs as part of their business expense. Since multinational companies are sensitive to the idea of their name being associated with violations of labor standards, most of these companies respond by establishing policies meant to protect the local worker. This is mainly influenced by the fear of the reaction from customers who may abscond products from multinational companies branded by human rights activists as violators of labor laws (Garver, Buketov, Hyewon & Martinez 2007, p.251). Other than the fear of a backlash from consumers, the past decade has seen many multinational corporations responding to criticism related to labour conditions in the factories of their local suppliers. This includes, the establishment of a detailed ethical codes and on-site monitoring of the working conditions for the labourers. However, to counter criticism and maintain status quo, there are certain factories particularly in the Far East Asia that have developed sophisticated techniques meant to conceal labour law violations, this involves the use of institutional approaches to create deceit. On the other hand, there are companies that are dealing with the labour issues by embracing a code of conduct that is uniform across the board. This is important in terms of coming up with national labour laws and acceptable codes of conduct. In addition, such an initiative provides MNCs with a positive recognition from various interested parties with regard to addressing the issue of poor working conditions in the factories of their local suppliers. Further, multinationals are engaging in promoting community programs meant to improve the living standards of the factory worker’s families. However, while MNCs are trying to improve the labour conditions in the factories of their local supplies, this cannot be sustained in the long run. As such, there is need for a constant pressure from the consumers and other organisations such as NGOs and international organizations to ensure that the conditions of workers are improved in factories worldwide. Conclusion While offshoring offered a better business prospect for foreign companies, the current shift in global market no longer sustains a venture in offshoring. This result from an increase in wage demand in the offshore countries. This means that sustaining an offshore business will force the foreign companies to spend more and this will cut on their profits. As such, this forces foreign companies to move back home and take advantage of the high unemployment rate to realise more profit by accessing cheap labour. On the other hand, when these companies move back home, this leaves the emerging economies in turmoil in terms of reducing employment opportunities and lowering the living standards of the middle class citizens. However, while offshoring still provide most companies with better business prospects, there is need to improve the labor conditions in the global market. This can be realised by establishing a codes of conduct that is uniform and applied by all MNCs. . References Deligio, T 2014, ‘The Truth About Reshoring’, Plastics Technology, Vol. 60, no. 3, pp. 26-29. Ellram, L. M., Tate, W.L., & Petersen, K. J 2013, ‘Offshoring and Reshoring: An Update on the Manufacturing Location Decision’, Journal of Supply Chain Management, Vol. 49, no. 2, pp.14-22. Ellram, L.M., Tate, W.L., Schoenherr, T., & Petersen, K.J 2014, ‘Global competitive conditions driving the manufacturing location decision’, Business Horizons, Vol. 57, no. 3, pp. 381-390. Garver, P., Buketov, K., Hyewon C., & Martinez, B. S 2007, ‘Global Labor Organizing in Theory and Practice’, Labor Studies Journal, Vol. 32, no. 3, pp. 237-256. Johnston, D 2012, ‘The Shift to Reshoring’, Supply & Demand Chain Executive, Vol. 13, no. 3, pp.28-30. Moore, M 2014, ‘Reshoring Initiative aids in evaluating offshoring’, Rubber & Plastics News, Vol. 43, no. 18, p. 14. Osorno, K 2013, ‘Why Reshore?, SMT: Surface Mount Technology, Vol. 28, no. 5, pp. 70-73. Sethi, S.P 2006, ‘A search for standards to monitor labor conditions worldwide’, Business Ethics Quarterly, Vol. 16, no. 2, pp. 271-287. Tate, W. L 2014, ‘Offshoring and reshoring: U.S. insights and research challenges’, Journal of Purchasing & Supply Management, Vol. 20, no. 1, pp.66-68. Templin, P 2013, ‘Bringing it home’, Industrial Engineer: IE, Vol. 45, no. 11, p. 22. Read More

 

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