International Outsourcing: Incentives, Benefits, and Risks - Assignment Example

1. What are the potential opportunities and costs for companies based in the UK in outsourcing their operations to countries in the enlarged EU? Companies are always in search of ways on how to do things at the least cost possible. Higher outputs at the lowest inputs possible are always a production objective. With the rising cost of production, UK companies are facing the challenge of finding ways to innovate production process to reduce production overhead. Offshore production has now become popular due to lower cost of labor and other inputs in some parts of the world, particularly in less developed countries in EU, compared to prevailing prices available domestically. Outsourcing is the process of finding an offshore company to do things that would normally be a costly undertaking if done domestically by the firm itself. An outsourcing website simply defined it as contracting out a non-core business to another company. (Sourcingmag.com, 2003) According to Prof. Alexandrova, (n.d.) the many opportunities that can be explored by companies when outsourcing, especially to transition economies in the expanded EU, include the following: Substantial financial economies Increased ability to focus on substantial issues Access to technology and specialized expertise Ability to demand measureable and improved service levels Countries especially in Eastern Europe are said to have well-developed human resources, and where wage costs are relatively lower. These are good conditions where one can get a vendor company to outsource business operations. (Alexandrova, n.d.) On the other hand, the same report of Prof. Alexandrova (n.d.) enumerated the risks that may occur when outsourcing certain functions of the business to these countries. Firstly, companies lose the ability to become more creative when encountering difficult business challenges. It was claimed that companies lose “competence to innovate through synergistic interactions”. (Alexandrova, n.d.) Risks are also observed when there is uneven level of technical and legal expertise between two parties in contract negotiations, as this may be possible among companies between developed and less-developed countries. There is also the risk related to the economy of the vendor country. Prof. Alexandrova (n.d.) mentioned that in transition economies in EU, these risks include those associated with exchange rates, policies related to profit repatriation, and those related to taxation. For UK companies, costs would still be the prime consideration when considering the option to outsource. There may be some social implications by resorting to outsourcing, the loss of jobs by British nationals being one. There are reports however, that claim that the benefits can outweigh the costs associated with it if outsourcing is managed well and supported by appropriate business policies. (Sourcingmag.com, 2003) 2. Define the role of the following and explain the impact that membership of the following may bring to the UK economy: a. The World Trade Organization The World Trade Organization (WTO) is an international body composed of 157 countries with headquarters located in Geneva, Switzerland. It was established in January 1, 1995 by the Uruguay Round negotiations of the now defunct General Agreements on Tariffs and Trade (GATT). According to its website, WTO functions as the main arbiter of trade rules among nations, ensuring international trade to flow “smoothly, predictably, and freely as possible”. (WTO, 2012) In general, the main functions of WTO as an arbiter of international trade, as enumerated on its website, are the following: i. Administer WTO trade agreements concluded and concurred by members ii. Serve as forum for trade negotiations iii. Handle trade disputes iv. Monitor national trade policies of member countries v. Provide technical assistance and training for developing countries vi. Facilitate cooperation with other international organizations UK has been a member of WTO since its inception in 1995. (WTO, 2012) As WTO promotes the principles of trade liberalism and globalization, UK stands to benefit in its membership with WTO. UK has participated in world trade both as an exporter and importer of goods and services to other countries, particularly with EU, the United States, China, India, and Japan. Besides, not being so would isolate UK from the rest of the world. As British products need to flow freely to world market, UK needs to be in WTO to ensure that British goods have the ability to penetrate markets and compete with other world producers. It gives UK the opportunity to contribute in shaping fair and even global trading policies as well through the various forums hosted by WTO to prevent disputes in international trade. B. The World Bank The World Band (WB) was established in 1944 with the original mission of facilitating post-war reconstruction and development. (World Bank, 2012) Currently, its mission has evolved to “worldwide poverty alleviation”, assisting poorer countries with the development of its public infrastructures such as roads, bridges, public schools, and hospitals. (World Bank, 2012) From a single entity formally known as the International Bank for Reconstruction and Development (IBRD), it is now composed of five agencies, and is collectively known as the World Bank Group. These agencies making up the group are IBRD, the International Development Association (IDA), the International Finance Corporation (IFC), the Multilateral Investment Guarantee Agency (MIGA), and the International Center for Settlement of Investment Disputes (ICSID). (World Bank, 2012) UK has been a member of the WB since its inception in 1944, and formally becoming a shareholder in the bank in December 1945. UK therefore is considered as one of its founding members. UK is a member of all the other groups making up the WB mentioned above. As a shareholder to IBRD, it contributes about four percent to its entire capital, with potential voting rights of the same percentage weight. (World Bank, 2012) UK’s participation and contribution to the WB capital has established its credibility to its commitment to development and poverty alleviation in less fortunate countries. The WB continues to borrow money from more prosperous countries and lends at favorable rates to less developed countries. As a shareholder and capital contributor, UK has lent itself to the mission of the bank, which is simply summed up in three words: helping reduce poverty. (World Bank, 2012) Aside from the altruistic impact of UK’s participation in WB activities, the UK’s economy stands to benefit with the participation of UK companies through private investments in public infrastructures in less-developed countries. It has been reported that from the period 1990 to 2010, about 139 infrastructure projects in developing countries have been participated in by private companies from the UK, with investments totaling to about US$85 billion. (Zlaoui, 2011) Peaking between the periods 2006 – 2010, these UK investments have been participated in by more than 70 companies, according to Zlaoui (2011). Most of the projects undertaken were in the telecommunications and energy sectors. Among the major British companies who took part included Vodafone, International Power, Globeleq, Biwater, and British Gas. (Zlaoui, 2011) c. The International Monetary Fund The International Monetary Fund (IMF) was established just about the same time that the WB was organized after the Second World War. It began operations in March 1947, with France being the first country borrower. (IMF, n.d.) Its mission was to “ensure exchange rate stability and to encourage its member countries to eliminate exchange restrictions that hinder trade”. (IMF, n.d.) While the function of IMF looks a bit similar to that of the WB, it has specific focus on the exchange rate stability to help international trade conduct. Accordingly, its main purpose has been summed up as: Promote exchange stability Maintain orderly exchange arrangements Avoid competitive currency depreciation Establish a multilateral system of payments Eliminate exchange restrictions Create standby reserves (IMF, n.d.) Just like in the WB, UK has potential voting rights of about 4.8 percent, making it the fourth largest shareholder in the IMF. (Department of International Development, 2012) Being an international player in world trade, the UK has a lot of stake in IMF activities. In order to secure the safety of its international investments in offshore destinations, the UK must be able to participate actively in IMF policy formulation in order to strengthen the stability of world currencies being used in international trade. Foremost to mind is the Asian financial crisis that struck in the late 90’s, where currency instability has set a financial contagion throughout the world. 3. Explain the currency risks facing UK companies with relation to global exchange rate if they were A) major exporter and B) a major importer. Currency risks, or exchange rate risks, have been defined by Pietersz (2005) as “simply the risks to which investors are exposed because changes in exchange rates may have an effect on investments that they have made”. UK exporters and importer therefore face currency risks on almost a daily basis as exchange rates fluctuate across international markets where UK goods and services are traded. A volatile financial market, or any sudden extra-ordinary condition that affects exchange rate prevailing in the country UK is doing business with, exposes UK exporters and importer to currency risks. As explained by Pietersz (2005), an exporter faces falling sales or shrinking gross margin when its domestic currency appreciates. Falling sales is due to the fact that the export contract is denominated in its customer currency. Shrinking gross margin is caused by the lower value of the customer currency against the domestic currency. If the exporter fails to hedge against these risks, then the exporter would surely lose out in the event of a sharp currency appreciation happening all too suddenly. Generally, a regime of high value British pounds would make importers happy because more foreign-produced commodities can be purchased per unit of the British currency. It makes foreign-produced goods cheaper because it takes only a few British pounds to purchase them. However, British-produced goods and services would become more expensive to foreigners, making exporters less competitive in the world market. Because of the high value of the British pounds, it would take a lot more for the foreign buyers to buy commodities coming from the UK. On the other hand, a regime of lower value for the British pounds would make export products cheaper in the world market, thus making export companies more competitive. Imported goods, however, would become more expensive and would affect the flow of imported goods into the country. Imported materials used as components for the manufacture of local products would also affect domestic prices, as it would have to be increased due to the more expensive imported component that went into its production. Works Cited Alexandrova, M., n.d. International Outsourcing: Incentives, Benefits, and Risks. [Online] Available at: http://www.asecu.gr/files/RomaniaProceedings/02.pdf [Accessed 27 November 2012]. Department of International Development, 2012. The UKs role in the World Bank and the IMF. [Online] Available at: http://www.brettonwoodsproject.org/art.shtml?x=537382 [Accessed 25 November 2012]. IMF, n.d. About the IMF. [Online] Available at: http://www.imf.org/external/about/histcoop.htm [Accessed 25 November 2012]. Pietersz, G., 2005. Exchange Rate Risk. [Online] Available at: http://moneyterms.co.uk/exchange-rate-risk/ [Accessed 25 November 2012]. Sourcingmag.com, 2003. What is outsourcing?. [Online] Available at: http://www.sourcingmag.com/content/what_is_outsourcing.asp [Accessed 25 November 2012]. World Bank, 2012. About Us. [Online] Available at: http://go.worldbank.org/65Y36GNQB0 [Accessed 25 November 2012]. World Bank, 2012. United Kingdom Shares and Voting Power. [Online] Available at: http://go.worldbank.org/TC7V6Y44R0 [Accessed 25 November 2012]. WTO, 2012. What is the WTO?. [Online] Available at: www.wto.org [Accessed 25 November 2012]. Zlaoui, K., 2011. Private Participation in Infrastructure Database. [Online] Available at: http://ppi.worldbank.org/features/December-2011/Private-participation-in-infrastructure-Investments-by-the-UK-1990-2010-final.pdf [Accessed 25 November 2012]. Read More