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From 1990, offshore outsourcing market has been growing at an extraordinary pace (Chapman, 2009) and affecting the pattern of international trade. Manning, S et al. (2008) define offshore outsourcing as a process of transferring non-core commercial practice or function supporting domestic and global operations to abroad. Due to the labour cost differences, outsourcer who usually are from the United States, Europe and Japan tend to outsource the labour-intensive process of capital-intensive production to emerging economies such as India, Philippines and China. This paper will discuss the benefits and risks of firm-level offshoring on western outsourcing corporations and emerging market establishments undertaking outsourcing, along with influences on both parties of workforce.
Offshore outsourcing can provide three levels of value. The primary incentive for contractors is to achieve a relatively transparent, identifiable and calculable benefit in monetary terms-cost savings (McFarlan & Nolan, 1995; Ramingwong &Sajeev, 2007). The difference between offshore and domestic labour cost provides a way to reduce cost structure. A report from Deloitte Consulting in 2003 points out that by 2008 offshoring can convert into a bottom-line annual cost savings of $138 billion for the world's top 100 financial institutions. Savings of high magnitude contribute to the long-term profitability significantly, thus facilitate offshoring extremely compelling. The second level mainly lies in the domain knowledge of suppliers. If suppliers are professional on specific operations, they can exceed processing ability of outsourcer and deliver higher value to the audiences. Third level value is from the business Process Improvement. After an empirical analysis of "outsourcing" data for UK manufacturing industries from 1980-1992, Girma and Görg (2004) argue that offshore outsourcing has a positive correlation with labor productivity and total factor productivity. These firms can allocate more key resources to core competence development. In addition, international outsourcing boosts demands for highly skilled workers, and then enhances highly skilled share in labor market. The phenomena will accelerate the speed that labour structure moves in the direction of skilled labor. Ultimately, the increasing skill intensity of an industry will promote the total productivity growth
These arguments are supported by General Motors (GM) case. GM outsourced all IT operations to EDS in 1996. After that, GM started engaging in large-scale BPO for other business processes. In 1999, GM engaged SITEL to implement customer service, marketing, and dealer support for all GM brands. GM signed up a 10â€‘year $250 million contract with Arthur Andersen on its financial and accounting BPO. In R&D outsourcing, GM is a leader to open a laboratory in India that employed about 400 professionals in 2006. Take R&D as an example, in automobile industry, to design a new car the enterprise need cost up to $1 billion and leaves a lucrative manufacturing business opportunity to local rivals. On the other hand, outsourcing can shorten the development cycle through allocating different stages of technical research process, and offset shortage of talents in local market.
Even though global outsourcing has great benefits, potential risks still exist. Grover et al. (1996) suggest that the acquisition of outside resources cannot guarantee competitive advantage because outsourcing may incur insufficiency product or service control. This increases uncertainties of enterprise's normal production and affects the entire business development or product quality. The relationship between outsourcing service receiver and provider must be managed as a partnership rather than that of customer and vendor (Giuri et al 2008). Otherwise, delay on customer demands due to overly dependent on third party with poor responsibility will affect the product improvement and reduce customer satisfaction. Besides, long-term outsourcing activity may bring in company profit damaged because of strong bargaining power of the specific third-party providers. Hofestede's (1997) survey of IBM employees in over 50 countries indicates cross-cultural factors between Asia and West produce greater communication gap. It further introduces higher risk of mum effect when suppliers tacitly approve projects with unfavorable information. Another potential risk is data and knowledge security problems. If the level of knowledge spillover is out of outsourcer's control, there will be a strong relationship with financial and strategic effects.
From a viewpoint of supplier, India outsourcing industry developed rapidly, as one of the highlights of India's economy. As reported by the BBC (Ahmed, 2004), India high-tech sector now expanded at an annual rate of 30%. In 2003, India's software outsourcing industry output is about $12 billion dollars. According to Indian software and service companies association, in 2003-2004 period, India BPO export increased 54% based on 2002-2003 annual $2.3 billion. By 2008, service outsourcing will be worth $15 billion industry.
The pattern of outsourcing makes emerging market enterprises achieve considerable economic benefit, improve employment rate and accelerate its internationalization pace in short run. However, low-technology process has great limitations for sustainability. The two compared cases of China mobile phone companies illustrate the benefits and risks. Multinational mobile phone enterprises mostly cooperate with Chinese corporations in terms of pure production outsourcing. For example, KeJian Ltd was originally is the first Shenzhen Stock exchange high-tech company. After cooperation with Samsung, KeJian play a complete OEM role within a quite long time. Since Samsung got domestic permission licenses and established independent sales system. KeJian proclaimed delisting after three times reorganization. In contrast, Bird Mobile Phone Company received OEM production order owing to initially limited available resources. However, Bird Ltd recognizes R&D importance on occupying relatively high profits link and does not satisfy the OEM short-term profits. It accumulated funds and technology and reaped economies of scales and then committed to the value chain upstream and eventually grabbed large market share.
Because international outsourcing has a great impact on employment, the paper will discuss the influence on workforce of both parties.
The pattern of offshore outsourcing makes many jobs overseas naturally and generate downsizing in domestic employment. Harrison (2006) states offshoring trigger lost$135 billion U.S. wages and 3.3 million lost jobs from 1982 to 1999. Especially apparent in ITO, offshoring-related IT workers displacement has been at a rate of 8%, more than twice other workers¼ˆPrasanna &Lorin, 2010.¼‰The situation concerns Americans about the missing job opportunities and fears of free international trade. However, confronted with globalization and fiercer competition, restrictions of outsourcing will only sharpen problems and possible bankruptcy only results in serious unemployment. In fact, Brainard and Litan (2004) point out that the decline in employment and compensation is the process of Low-income employment replaced by high-income employment. It not only does not permanently decrease employment level, but also enhance living standards in long term because savings from outsourcing enable companies invest new processes, more training and offer higher paying work. As a whole, offshoring has a positive impact on U.S. economy and employment.
As to emerging market, for example, India Early influence on undertaking offshore outsourcing service is high-growth employment and other consequences display in four aspects: employment expansion effect, higher wages effect, skills spillover effect and education effect. According to estimates by NASSCOM, only in the country's IT and ITES industries the number of workers has increased approximately 1 million jobs from 2000 to 20006. The evolution in IT and ITES industries has created an additional 3 million indirect job opportunities such as telecom, construction, power, facility management. Furthermore, the rapid development effectively promotes India's level of industrial structure and helps create more high quality jobs because outsourcing service industry has characteristics of high added-value intensity, low consumption of resources, and little environmental pollution. According to Olsen and Metha (2006), India labor force participation rate only account for 34% in 1991 and existed a plurality of causal mechanisms. Indian outsourcing service enterprises are almost resisted company and its nature determines its taller young employee proportion. Accordingly the industry development can provide more formal youth employment opportunity, raise working environment quality, remuneration level and labor employment participation rate, thereby improve India employment structure.
Nonetheless, employment opportunities brought about by offshoring are extremely temporary because MNCs offshore services to India is as part of their strategies t preserve high margins by excavating global cheap labour .For the sake of low costs, MNCs shift their operations between countries that provide the lowest costs. On the other hand, the behaviour is unequal treatment for Indian labour. The government invests a lot to foster the advanced intellect but outsourcing brings in local technology spillover.
In conclusion, offshore outsourcing facilitates more appropriate international division of labor to current global economy. Western developed countries can benefit from cheap labour market in emerging economies. In turn, these countries can speed up manufacturing and service development and improve employment structure. However, in order to achieve sustainable economic growth, these governments need to address other issues such as balance between manufacturing and independent technology development and political protection with local labor and technology.