Offshore outsourcing is one of many ways to contribute towards globalization in today's evolving world economy and also improve the value chain in many possible ways. The Process of outsourcing is brought into consideration when some of its non-core activities of manufacturing/services are given other corporate to fulfill (Siems, 2003). This process has effects on both countries, having its pros and cons. There was an estimate spending of $6 trillion done by world economy worldwide by the end of 2005 (Corbett, 2002).
Trade and services among world traders between 1986 and 2004 have increased by 20%. In 2004, the total stock of foreign direct investments was 60% from the service sector, as only a decade earlier it was 50% and close to 25% in 1970. Inflow is even better; in 2004 it is close to 67% of total (UNCTAD 2005: 97-98).
It cannot be neglected that majorly outsourcing is done for cost reduction and improving profits. During this process there is a high risk of corporate loosing brand image and reputation, so the companies take full precaution to maintain the goodwill, trust and loyalty if their customers.
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American Banker conducted a survey in which only 71% where aware of the offshore outsourcing to low cost countries. 78% did not have a favorable opinion and close to 80% said that "it would be better if this did not take away their jobs opportunities". 51% felt better if American companies become more competent and 46% if profits are improved of American companies (Gallup, 2004). This survey reflects the concern and gains that can be achieved and lost in the process of outsourcing.
A trend is set by the world. If you want to outsource a manufacturing process, Chins come first in mind. About call centers, countries like India andÂ Philippines are appreciated. For IT and software expertise including India and Japan other countries like Czechoslovakia, Russia, Ireland and Poland are also considered.
From corporate point of view
To understand better, take the example of Apple. Apple is one if the leading brands of UK. The following are out soured by apple computer Inc. the LCD for iMac is made by Hon Hai Precision Industry (Taiwan) and Samsung supplies. Laptop batter is purchased from LG Chem.(South Korean), DynaPack International Technology (Taiwan) and Simplo Technology (Taiwan). Samsung supplies NAND to Apple's iPod nano.
As stated earlier the main reason for this outsourcing is to reduce time, effort, manpower, operating costs, training costs and other overhead cost to achieve high profits. Other than this Apple can now concentrate more on the core business. They have also hired professional, expert and high-quality services in that part of the business where they have no expertise in, by the means of outsourcing. Apple can experience increased efficiency and productivity in non-core business processes. Outsourcing can help you streamline your business operations. Flexible to change and improve its production quality is another added advantage for apple. Apple does not need to worry about the latest technology, software and infrastructure in the non-core production process as the suppliers would more concern. Through outsourcing customer's new and challenging demands can be catered. Competitive advantage is also a way to look at it, as apple can increase productivity in many areas of business. Apple is also provides employment opportunities in the host countries. Advantages like these allow the corporate firms to pay more attention on their core business and improve customer relationship management.
At the same time there are few problems which have to be faced by apple for outsourcing their activities. Most importantly, it is reducing job opportunities and contributing unemployment. Quality control is at risk and In case, the suppliers become bankrupt or go out of business, apple will have to immediately find an alternative by move the business processes in-house or find another supplier. Â Hon Hai Precision Industry commonly known as FOXCONN is also the supplier to HP and DEL, so apple always have a risk of sharing the same technology. They may not completely devote their services to apple which may lead to quality control issues. There may be hidden costs which the supplier may have. Other issue like misunderstanding of the contract, renewing contracts, poor quality, lack of communication and delayed services amongst others, cannot be neglected.
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If we take this on a macro level, for the host companies they employ more than 400000 people, reducing unemployment. Companies at both sides also contribute towards international trade. It improves the competition in the domestic market allowing the customer to but the product at a cheap price. It allows them to share and introduce their culture and technology.
Seeing the above benefits, American company McDonald's well-known for its burgers is another better example. Russia provides the burger. This keeps the agribusiness in Russia busy as the burgers are produced from beef and wheat. As we all know that McDonald's has franchise around the globe giving opportunity of employment to the teen labor community. The competition given by McDonald's forces its competitors to improve the quality of their produces with improved prices, allowing the customer better taste with reasonable money in there respective countries.
From Country point of view
The workers in the origin country or workforce of western countries don't support the concept of offshore outsource. If we talk about call center in India, in 2004 more than 85% population of U.K. was not in favor with offshoring of call centers (Alster, 2005). The view of the public in these countries is even more negative when it comes to international trade and investments (Kuttner, 1997). University of Maryland conducted a survey selecting samples who had an income over $1,00,000 which stated that there was a decline of 20-30% among people who favored free international trade between 1999-2004 (Amiti and Wei, 2004). In 2005 a survey based on increasing pessimism among technology workers in U.K. based companies showed a negative feedback due to layoffs because of offshore outsourcing in the companies (Koprowski, 2005). U.S. based corporate are very sensitive about discussing there offshore outsourcing plans in public. They are also concern that this may lead to loss of morale and increase the concern of job satisfaction in the company.
There are also negative impacts on the Host counties. In some cases when origin country has more influence over host countries they enforce professional and activity trade which has an adverse effect on weak legislative. An opportunity to engage in deceptive or unethical practices is given to firms in foreign or host countries. They have a disbelieve or doubt in the ethics, honesty and quality of business provided by the host country. The origin country destroys the opportunity for small business if they are new and are not strong in the market.
Offshore outsourcing also has it benefit. It has been decades since outsourcing began. If we talk about US, it is benefited on a long run scale of trade. Corporate in the US can provide a cut-troth competition by reducing the cost of information technology services thorough outsourcing it into places like India. On the other hand, companies also get the advantages of working around the clock, like the offshore call centers I India give an advantage to corporate to work around the clock, improving their productivity. Even the economy of the western country is improved thorough foreign outsourcing because it can create better opportunities to increase productivity.
If offshore outsourcing is properly implemented, then it creates more job compares to overseas. Employment has been presented as a gift towards emerging market countries provided by western countries. Not only this, emerging market countries like India and China also take advantage of foreign direct investment. In some cases new technology in also introduced by the origin country to facilitate production and sometimes production. In the table below we can see the contribution of imports and exports of Merchandise and Commercial services towards goods and services. One if the major factors contributing to exports is offshore outsourcing.
Trade Profiles 2009:
Shair is world export
Source: WTO Trade Profiles 2010
Offshore outsourcing is a controversial topic for politicians and business circles (Human Resource Management International Digest, 2005). It is very hard to conclude this topic. Form a business man and customer's prospective, offshore outsourcing is one of the best method where we can reduce cost at the same time improve the efficiency of production and quality of the product for the people to buy at a competitive price.
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From a worker's point of view, offshore outsourcing is a major reason for unemployment in the host country. Other then this there are also risk of information being used unethically, which may have an adverse effect in the company.