Perceived Effects of Outsourcing in America - Case Study Example

Perceived Effects of Outsourcing in America I. Introduction The fourth quarter of the 20th century heralded the new trends in business which is outsourcing. The rapid advancement in technology, transportation and communication systems coupled with the evolution of different government policies across the globe contributes to the integration of world economy. As more countries open its doors to investment by providing tax moratorium and of other incentives, giant multi-national and transnational companies in the United States begun the explore opportunities for reducing cost of production and manpower. Initially, US companies outsource manufacturing jobs. This strategy was promoted during the 1980’s and rationalized by experts that United States in evolving from manufacturing to a service-based economy (Hira & Hira. 2005) According to experts, the phasing out of manufacturing jobs through outsourcing is part of economic progress. Labor intensive jobs such as manufacturing will now be relegated to developing countries so that the U.S. can focus on high-wage, high-skill service and other jobs. According to them, the shipping of these labor intensive low-paying manufacturing jobs will not hurt the economy as the country will then move to a higher level. For developing countries and its people across the globe, this is a welcome opportunity since the presence of multi-national companies in their territories would mean more jobs, more manpower development and more taxes. Thus, most of these countries give incentives to multi-national companies. In the Philippines, Singapore, Malaysia, China and other Asian countries, the government offers tax exemptions for export oriented companies. For instance, the Mactan Export Processing Zone in the island of Cebu, Philippines, host a number of US companies. Not only does the Philippines offer high conversion rate of dollar, where one dollar is equivalent to approximately 50 pesos, the materials and equipment imported by these companies for business purposes are also tax exempt. The dawn of the new millennium disputed the most experts’ opinion that outsourcing would bring the US economy to new level. As hundreds of companies based in the U.S. migrated to developing countries all over the globe in search of cheap labor and better tax incentives, the effects of outsourcing is beginning to take its toll on the US economy. II. Current Reality Check Contrary to the theory that high-paying and high skilled jobs will be given to Americans, companies found a way to minimize cost further by hiring local experts in countries where have set their plants and offices. A number of Fortune 500 companies have set up shop in places such as India, and their growth expansion plans are in those areas using highly skilled foreign workers rather than in the United States using similarly highly skilled U.S. workers (Hira and Hira 2005). Another acid rub on this scenario is that since these off-shore manufacturing companies are using labels and names of US companies, it is imperative that they use company’s technology. In order to do this, employees of these companies are brought to the U.S. for training and technology transfers in order for them to be able to perform the job required by the multi-national companies. In effect, we are blatantly consenting to piracy of technology. By bringing our technology off-shore, we begin to expose ourselves to product piracy, where our technologies and products will be mass produced by pseudo companies at a much lower cost and sold at a ridiculously low price. In effect, we give our competitors and easy free ride on our technology while the true owner and inventor of these products loss hundreds of dollars in research and technology development. 2.1 Government Policies and the Advancement in Technology In the new information-based economy, the bulk of the firm’s assets are often intangible, including the creativity, knowledge, brain power, motivation of its employees being at the center. It is human capital and knowledge that creates worth for the firm( Raynor, 2002). However, as companies made use of the advancement of communication technologies and have established call centers and other telecommuting abroad where labor is cheaper, the problem of displaced workers in the US presents a problem. In the 1990’s, telecommuting and outsourcing worked very well. The government was very bullish about its predictions of a economic evolution where the US will only retain high-paying and highly skilled jobs for its people. The government encourages the migration of processing plants to other countries where labor and overhead cost are relatively cheaper than in the United States. A good example of this form of encourage in the signing of the North American Free Trade Agreement (NAFTA) between the U.S., Canada and Mexico. When NAFTA took effect in January 1, 1994, it called for the immediate elimination of duties on half of all goods shipped to Mexico and gradually phased out other tariffs over a period of about 14 years. As th NAFTA was signed at the hegiht of the outsourcing mania there wasn’t much resistance from the public. Everyone was excited with the prospects and economic projection being harped among the business communities. A decade after, we begin to feel the sting of economic repercussions. For some reasons, our people begin to find themselves out of jobs. Why? If we take a closer look into these jobs we are exporting, some of these jobs are highly technical ranging from computer programming, software development, investment consulting, accounting, finance, architecture and the likes. As the new wave of high-tech outsourcing escalates, where will our displaced workers go? Take the case of a computer programmer or CPA or architect who is already at the top of their respective corporate levels, what will they do next? Will jobs be readily available for them when we already exported these positions? As more and more US workers are losing their jobs to workers abroad, we face a bleak employment prospect. According to the Department of labor reemployment statistics, more than one three displaced workers remains unemployed and among those finding jobs, more than half take pay cuts in their new jobs. Competition but domestics jobs are already stiff given the number of fresh graduates our Colleges and Universities produce every year and outsourcing contributes to the shortage of jobs available for our workforce. More and more we losing valuable jobs, which would have gone to our local workforce, had not there been a trend of massive outsourcing. 2.2 Demographic Shifts As the baby-boomer generation in the US start retiring in larger numbers, many anticipate a surge of demand for workers. Most expects that these workers will be coming from the U.S. labor force. Unfortunately, this assumption may not be warranted as domestic labor replacement may not be the best options for companies who are after for larger profits and smaller expenses. Workers from India or the Philippines having the same level of education and skills but would only cost a fraction of the salaries paid to U.S. workers would be more attractive to the employers (Raynor. 2003). Throughout history, people have been overcome by trends and forces that they were unable to recognize. Eventually, as China and India become fully-employed first world economies, wages will bid up and labor will be paid according to its productivity. By then, the U.S. might be a third world country (Roberts, August 7, 2003). If you come to think of it seriously, China is fast becoming a superpower and is flooding our market with very cheap goods which sells like hotcakes. Eventually, if this trend continues, our own manufacturers may fine that their share of the market have been eaten away by competitors from abroad. 2.3 Trade Reciprocity A great concern in outsourcing must be placed on trade reciprocity. Research and writer, Dr. Paul Craig Roberts1 the implications of trade reciprocity. According to him, “it is a two-way street. There is no reciprocity in outsourcing, only the export of domestic jobs…. If there are no given endowments because business know-how, capital and technology are globally mobile, the advantage lies with countries with untapped pools of educated and skilled low-wage labor. The advantage increases with the absence of Internal Revenue System (IRS), Environmental Protection Agency (EPA) , Department of Labor Occupational Safety and Health Administration (OSHA), Equal Employment Opportunity Commission (EEOC) and other regulatory bureaucracies.” (Roberts. March 7, 2003). In some countries where we outsource of products, there are no clear regulations for occupational safety and health. Sweatshops which gives very low wages to their workers are common. Production overhead cost is reduced to the lowest term and profit is therefore maximized. However, the lack of regulations not only results in unfair labor practice but often results to substandard production outputs which often hurts the brand name of the company. Often times we find ourselves confronted with substandard and defective products with trusted brand names. As the name of that company is printed in the label of the product, it is but logical that we attribute the substandard manufacturing thereof to such company, thereby damaging the goodwill of that company. This is very unfortunate since these products may not be actually produced by the US company as what is stated by the label but rather came from an outsource off-shore. II. Conclusion At first glance, outsourcing may appear as the right option to take by companies trying to reduce cost. However, outsourcing does not always equate to cost reduction. A close look at the outcomes of outsourcing may yield of economic savings which are less than anticipated. Take the loss of goodwill for example. Although the company is able to reduce production cost by using offshore plants, the end products may not be as desired. Therefore, instead of increasing the volume of sales, it will cause the dwindling thereof, eliminating the margin of gain anticipated. In other words, the reduction of sales offset the impact of lesser production cost. In the long run, this scenario may not prove to be profitable at all. If the aim of the company in outsourcing is simply to reduce cost, there are other cost reduction strategies available other than outsourcing. In terms of human resource, the continuing trend of outsourcing decreased morale among U.S. employees. Furthermore, companies relying on outsourcing loss of control over primary organization assets such as data and innovative technology and techniques. You simply cannot keep your trade secrets within the territories of the United States if you want to have your products manufacture offshore. Thus, for companies who are currently outsourcing and those who are contemplating on outsourcing, a clear and in-depth examination of the costs and benefits should be made. Bibliography 1. George S. Day (Editor), David J. Reibstein (Editor). 2004 Wharton on Dynamic Competitive Strategy 2. Hira Ron & Hira Anil. Outsourcing America: What’s Behind Our National Crisis and How We can Reclaim American Jobs. American Management Association. New York 2005 3. Mark Weisbrot. 2005 Think Globally, Act Nationally: the Case for National Economic Sovereignty. Preamble Center, Washington, D.C. 4. Raynor William. Outsourcing Jobs Off-shore: Short and Long-term Consequences . The State University New York. 2003 5. Raynor, William. Intangible Assets & Employee Value; An Accouting Paradox. BraveNew World & New Work News. April 15, 2002. 6. Roberts, Paul Craig Jobless in the USA. NewsMax.com March 15, 2003 7. Roberts, Paul Craig. Notes for Free Traders. NewsMax.com march 15, 2003 Read More