Outsourcing Impact on U.S. Economy - Research Paper Example

 Outsourcing Impact on U.S. Economy Abstract The research paper focuses on the economic rational of outsourcing in the United States. The U.S. is considered as the strongest economically developed nation in the world. Despite such high reputation, the country is gradually losing competency in the international trading market. The current research paper will show that a prominent reason for this loss is the increased amount of outsourcing activities conducted by the U.S. companies. These companies have highly benefited from outsourcing. According to the theories of economics, this process has helped to lower the trading risks and operational costs of these firms. However, the research paper will prove that such activities have not been beneficial for the U.S. economy. The country is experiencing de-industrialization, where the growth in domestic productivity has declined. The aggregate employability of individuals residing in the nation has fallen and the extent of income inequality within its job market has increased. Furthermore, the research paper has also proved that investment propensity and growth rate of urbanization has slumped considerably in the U.S. due to increased outsourcing activities. The current paper has pointed out that outsourcing in rendering the U.S. economy weaker compared to nations that are conducting the outsourced activities. Contents Introduction 3 Theoretical Background 3 The U.S. Economy 4 Outsourcing and U.S. Economy 5 Industrialization 5 Growth and Income 6 Urbanization 6 Trade 6 Migration 7 Domestic Inequality 7 Business Operational Speed 8 Costs and Innovation 8 Level of Uncertainty 9 Critical Analysis 10 Conclusion 11 References 13 Introduction Commercial opportunities and threats experienced by the companies in the current era have considerably increased after the enactment of liberal trading policies in each nation. The profit making business organizations conduct business on the basis of transaction cost economies resource based view. Under this regime, firms expand in new marketplaces after saturation of the domestic one. However, the companies incur numerous additional costs and problems in the new markets. In order to eradicate costs and risks of internationalization, giant multinational companies often adopt the strategy of outsourcing in trade. This research paper tries to throw light on the impact created by outsourcing on economy of the United States (U.S.). It is rational to analyze this topic because outsourcing is extensively practiced in the present scenario, which had been initiated in the U.S. After analyzing the impact, the research paper will indirectly emphasize upon advantages and disadvantages of the process of outsourcing (Dornbusch, 2004). Theoretical Background The concept of outsourcing is often explained in terms of transaction cost theory and agency theory. According to the transaction cost theory, outsourcing is practiced by companies for lowering costs in business and gaining core competencies. This concept is linked with the rationality of specialization in the business world. On the other hand, the agency theory states that a company adopts the process of outsourcing in business to minimize operational problems and inefficiencies (Dornbusch, 2004). Outsourcing is the process through which a company contracts out its business to a third party. The process often involves relocation of assets and employees from one firm to another. Furthermore, when the ownership of public services provided by a firm is transferred to a profit making organization, the entire process is popularly known as outsourcing (Dornbusch, 2004). The outsourcing approach can be practiced by a firm so as to relocate one of its business branches in a new economy. The process involves foreign as well as domestic contracting. It is found that companies practice the process of outsourcing for reducing non-core or peripheral business costs (Dornbusch, 2004). The labour costs, taxes, government regulatory expenditures and costs of using energy resource are examples of non-core expenditures that a company desires to avoid through the process of outsourcing. Researchers have stated that outsourcing is primarily practiced by the U.S. companies (Dornbusch, 2004). The process of outsourcing is believed to be practiced because of inadequate resource availability in the domestic markets of certain companies. Theoretically, the reverse of the process of outsourcing is popularity known as in-sourcing. Figure 1: Types of Outsourcing (Source: Olsen, 2006) From the above matrix, it can be stated that if outsourcing is practiced between two firms of the same country, then the process is known as domestic outsourcing. On the contrary, if the same is practiced by two companies of different economies, then it is known as international outsourcing (Dornbusch, 2004). The U.S. Economy The U.S. economy is considered to be the largest economy in the world. The state of technology in the U.S. is relatively superior, which has greatly helped in stimulating commercial growth therein (CIA, 2014). The country has large foreign exchange reserves, along with a high current value in the market. It is a developed economy and owns a favourable exchange rate on the international forum. High current value makes imports of the U.S. cheaper, thereby facilitating the act of outsourcing for the native firms. Since the rate of literacy is high in the U.S. and the legal authorities have implemented strict human rights protection norms, the native companies therein incur high domestic labour costs. In order to avoid such expensive peripheral costs, these companies often outsource skilled, unskilled and semiskilled labour resource from certain developing nations such as, China and India (CIA, 2014). These countries house large proportions of workforce and low currency values compared to that of U.S. Hence, many U.S. companies employ cheap labour resource from the developing and emerging markets through outsourcing, thereby reducing the operational costs in business (CIA, 2014). Even so, there are several positive and negative impacts of outsourcing experienced by the U.S. economy. The current paper in the following section will analyze the impact of outsourcing on the U.S. economy. Outsourcing and U.S. Economy In-shore and off-shore outsourcing process in the U.S. has created considerable impacts on its economy in terms of industrialization, income growth, urbanization, trade, migration and domestic inequality. Industrialization With the help of outsourcing, domestic companies of the U.S. have considerably lowered their operational cost in business, given the fact that these firms have been able to subcontract labour resource at cheaper costs from developing economies. Lower costs have helped to increase the profit margins, which in turn provided them with a scope for newer innovations in form of labour-saving techniques. However, it is found that such innovation has not directly lowered the employments generated by these organizations, but has helped to improve their output productivity. So, it can be stated that outsourcing has contributed towards enhancing domestic productivity of the U.S. Then again, labour outsourcing practiced by the U.S. companies has begun to de-industrialize its economy (Bragg, 2006).Through the process of outsourcing, the U.S. economy is shifting from a manufacturing to service generating sector. The production activities in the U.S. are outsourced to countries where operational costs of the U.S. companies are estimated to be lower. From this analysis, it can be stated that increased practiced of business outsourcing has started to de-industrialize the U.S. economy. As a result of de-industrialization, business costs and output productivity of the U.S. companies has declined, but the aggregate extent of industrialization has increased (Bragg, 2006). Growth and Income Although the average output yield of every U.S. firm has increased with the act of off-shore outsourcing, the country’s overall level of industrialization and growth rate has declined. This is because majority of the manufacturing activities conducted in the U.S. are presently done by foreign countries. Economic productivity, measured in terms of gross domestic product, can increase in a country only with the help of greater consumption, production and investment expenditures (Bragg, 2006). Nonetheless, investment, production and consumption expenses incurred in context of the U.S. have fallen considerably after extensive adoption of outsourcing. From the above analysis, it can be stated that domestic income and productivity growth rate of the U.S. has declined over time due to increased outsourcing activities practiced by the companies operating therein. Urbanization Urbanization in the U.S. and few other western European countries had considerably gained pace after emergence of the Industrial Revolution. It is observed that greater amount of outsourcing activities has adversely affected the rate of urbanization in the U.S. Some research studies have stated that degree of urbanization and industrialization in a country is directly proportional to each other (Bragg, 2006). Hence, growth in de-industrialization process of the U.S. has begun to cease that of urbanization therein. Trade Researchers have argued that outsourcing positively influences trade growth in a country. Increased outsourcing process in the U.S. has stimulated the level of its international trade with other world countries. Then again, since currency value of the U.S. is more than that of most developing economies in the Global South, increased international trade is heightening trade deficit faced by the former (Bragg, 2006). The value of the U.S. exports is primarily more than that of its imports, which has augmented its import propensity compared to that of exports, thereby creating eternal trade deficit. Figure 2: Trade Deficit of U.S. (Source: Jackson, 2013) The above graph indicates that since emergence of globalization in 1990, the volume of aggregate imports (red bars) in the U.S. is more than that of its imports (white bars), which proves the persisting trade deficit therein. The loss of foreign exchange reserves and increasing dependence on foreign countries are the primary problems associated with the U.S. trade deficit. Migration During the period of Industrial Revolution, the extent of migration in the U.S. was considerably low. Then again, trade liberalism and increased off-shore outsourcing have aggravated in-migration in the U.S. The U.S. companies acquire labour resource at relatively lower costs from less developed countries such as, China, Brazil, India, Russia and Pakistan (Flatworld, 2014). These labourers desire to settle down in the U.S. to earn in terms of higher currency value. However, it is believed that increased in-migration in the U.S. have heightened the population pressure. Domestic Inequality It is noted that the extent of domestic employment and income inequality in the U.S. have considerably increased with growing outsourcing practices. This is because aggregate employment or income earning opportunities available to the U.S. individuals are diminishing gradually as the U.S. companies are increasing their labour outsourcing activities (Burkholder, 2006). Such discrepancies in terms of employability are also found to increase the extent of income inequality. The giant U.S. multinational companies desire to outsource human capital from other countries because the cost associated with recruiting skilled and semi-skilled labour resources from the country are relatively higher. Such high costs can be attributed to excessive labour protection norms and higher living standards of the U.S. individuals. Figure 3: Employability in the U.S. (Source: Jackson, 2013) The above graph shows that over time the growth of outsoared employments generated by U.S. (blue line) is more than the level of its domestic employability rise (red dotted line). Business Operational Speed The overall business operational speed experienced by the commercial companies of U.S. has increased with the help of outsourcing approaches of business. The firms outsource several semi-finished product parts or resources from different economies and only trades on its final product in the U.S. market. It is perceived by the companies that outsourcing process have considerably helped to lower the time required for business manufacturing and operational processes (Flatworld, 2014). Costs and Innovation Companies operating in the U.S. economy experience lower costs in business with the approach of outsourcing. The amount saved is channelized for future business internationalization and innovation purposes (Flatworld, 2014). Thus, it can be said that outsourcing has greatly helped to improve the level of technological innovation in the U.S. Nonetheless, it is noted that these innovation mostly take place in the form of establishing new means of capital intensive production. Level of Uncertainty The extent of uncertainty experienced in the U.S. business world has declined with greater degree of outsourcing. Through this approach, the giant U.S. companies have shifted trading risks to the third party vendors in the foreign countries (Flatworld, 2014). However, by shifting such risks, the U.S. companies indirectly enhance the level of investments made in the developing nations. Many capitalists of the U.S. are found to make major investments in the emerging economies of China, India and Brazil, instead of doing the same in the U.S. As a result, the volume of outward stock of investments in the U.S. is increasing compared to its inward stock. Figure 4: U.S. Investment Situation (Source: Jackson, 2013) The above graph shows that for achieving increased certainty in domestic business, the U.S. capitalists are making more outward investments than inward investments. Critical Analysis It is empirically found that the outsourcing activities practiced in different industrial segments of the U.S. have considerably increased over time. The most common outsource streams found in the country are related to the industrial field of Information Technology (IT), law, content development, web maintenance and designing, recruitment, logistics, manufacturing and customers support. Theories of economics, such as, agency theory and transaction cost theory, advocate that outcomes of outsourcing are always positive for organisational growth. It should be observed that the benefits from outsourcing can be experienced primarily at the micro level. The U.S. companies, such as, Apple Inc. and WalMart, outsource most of the productive resources required as the process is able to lower operational cost and business risk as well as increase aggregate productivity. However, from the above analysis, it is evident that the problems associated with outsourcing outweigh its costs in regards to the U.S. This is because outsourcing has resulted in the U.S. economic deindustrialization as well as restricted growth in income and domestic productivity. The process has truly lowered the extent of business uncertainty and increased the level of technological innovation in the country, but it has also aggravated income inequality. Due to such factors, the aggregate social and economic welfare has considerably declined in the U.S. economy. The scope of employment available to the U.S. individuals is low. Due to low employability, the aggregate per person discretionary spending of each individual in the U.S. has declined. Consequently, the aggregate consumption and living standards of the U.S. individuals is gradually falling. In order to eradicate such issues, the Federal government has begun increasing the minimum wage rates for the domestic labour force (Burkholder, 2006). Figure 5: Increasing Minimum Wages (Source: Borsand, 2008) The above table presents the increasing minimum wage rates in the U.S. It should be noted that The U.S. government has established higher wage rates for more urbanized locations. In addition, the U.S. government has introduced the Creating American Jobs and Ending Outsourcing Act for ensuring greater employability for the domestic workforce (HG Org, 2014). Due to inherent advantages generated by the process of outsourcing, several U.S. companies desire to make investments in the developing markets of China or India. As a result, aggregate investments made in the U.S. economy are gradually falling. Figure 6 (Source: Jackson, 2013) The above figure shows that the level of direct investments made abroad by the U.S. companies is higher than that made within the country. Lower investments signify reduced productivity, employability, income and living standards in the long run (Burkholder, 2006). Conclusion Since globalization, the U.S. companies have been exposed to increased threats of market rivalry. In order to augment core competencies and lower operational costs, certain giant corporations of the U.S. have started to outsource factor services and semi-finished products to third parties of the foreign countries. These processes have supported the firms to minimize risks in trading as well as to reduce the operational costs. Even so, from the current research, it would be correct to conclude that increased outsourcing activities of the U.S. firms have proved less beneficial for the U.S. economy as a whole. This is because the process has started to de-industrialize the U.S. economy, thereby bringing down its aggregate market growth rate. Increased amount of labour outsourcing has aggravated income inequality in the U.S., which in turn had lessened the aggregate employability (Burkholder, 2006). In addition, the level of domestic investments in the U.S. has also reduced over time, which has been responsible for restricting the economy’s growth rate. The rate of trade deficit in the U.S. is increasing with time accompanied with such growing contracting activities (Blofield, 2012). Therefore, it can be inferred that the negative impacts of outsourcing have outsourced its positivism in context of the U.S. As a result, the U.S. government is actively trying to lower such practices in the near future. References Blofield, M. (2012). Domestic Workers’ Struggle for Equal Rights in Latin America. Retrieved from http://www.psupress.org/books/SampleChapters/978-0-271-05327-1sc.html. Borsand, S. L. (2008). Favorability of Domestic Labor Laws for Outsourcing Arrangements in Mexico. Retrieved from https://next.eller.arizona.edu/courses/outsourcing/Fall2007/student_papers/final_papers/SBorsand_SashaBorsand_ENTR589_Final,FinalDraft.pdf. Bragg, S. M. (2006). Outsourcing. New Jersey: John Wiley & Sons. Burkholder, N. C. (2006). Outsourcing: The Definitive View, Applications, and Implications. New Jersey: John Wiley & Sons. CIA. (2014). The World Fact Book. Retrieved from https://www.cia.gov/library/publications/the-world-factbook/geos/us.html. Dornbusch, F. (2004). Macroeconomics. New Delhi: Tata McGraw-Hill Education. Flatworld. (2014). The Advantages and Disadvantages of Outsourcing. Retrieved from http://www.flatworldsolutions.com/articles/advantages-disadvantages-outsourcing.php. HG Org. (2014). Outsourcing Law - Offshoring Services Law. Retrieved from http://www.hg.org/outsourcing-law.html. Jackson, J. K. (2013). Outsourcing and Insourcing Jobs in the U.S. Economy: Evidence Based on Foreign Investment Data. Retrieved from http://fas.org/sgp/crs/misc/RL32461.pdf. Olsen, K. B. (2006). Productivity Impacts of Offshoring and Outsourcing: A Review. Retrieved from http://www.oecd.org/science/sci-tech/36231337.pdf. Read More