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Running Head: OUTSOURCING
Outsourcing in the Global Economy: Sourcing for Efficiencies
Outsourcing in the Global Economy: Sourcing for Efficiencies
In economics, the term outsourcing refers to the practice of contracting services from
outside firms by a business, outside its ordinary business process. The motivation behind
outsourcing by firms and countries is debatable. On one hand, it has been argued that
outsourcing constitutes a race to the bottom. That is, firms and countries engage in
outsourcing with the aim of lowering their cost of doing business, particularly labor costs, by
moving production in areas characterized by low labor costs. Given this argument,
outsourcing is seen as exploitive since the wages and standards of living of wage earners are
considerably lowered (Santoro, 2009). In support of this view, Hilary (2013) argues that the
rise in wage inequalities has been highest in countries that act as major outsourcing
destinations. In this respect, the high development of the emerging economies in recent times
has been accompanied by declining wages as a share of GDP (Hilary, 2013). On the other
hand, outsourcing has been argued to be a mode of sourcing for efficiencies by the firms
involved. In this respect, it has been argued that outsourcing attracts firms given the
efficiencies they gain by applying it. The reduction in costs and the improvement of
performance have been cited as some of these efficiencies (Kolmogorovs, 2006). Outsourcing
constitutes a race to the bottom when it is done by governments in their efforts to save labor
costs but a source of efficiencies when it is done by the multinational companies across
borders. As such, given the reality of global competition, firms engage in outsourcing to
source for efficiencies.
Global sourcing, more or less, shares the concept of outsourcing. This is where a
business finds the most economical location for its production, regardless of whether this
location is a foreign country. Searching for economical production mainly entails getting
labor and raw materials from areas across political boundaries. Sourcing efficiencies is a term
that refers to the benefits that a business entity enjoys as a result of obtaining products or
services using low-cost raw materials, low-cost skilled labor, enjoying low trade tariffs, and
tax breaks, as well as other economic advantages (Sparke, 2013). Given this definition, the
move by businesses to outsource across political borders is not only informed by the
exploitation of labor but a wide range of factors.
Even in cases where outsourcing is specifically driven by low labor costs, it is a
question of efficiency, as opposed to the exploitation of labor. In this case, multinational
companies outsourcing their operations in foreign countries do so based on the factors of
demand and supply. As explained by Wolf (2004), the increased outsourcing from developed
countries in emerging economies such as India and China is a dynamic phenomenon. In this
regard, countries such as Britain and the US are almost attaining record levels in
employment. In these countries, labor is a rare commodity. For higher efficiency, companies
from these countries are forced to source for labor in countries where production is low and
labor is abundant. The intention of these companies is to lower their costs of production, not
by lowering the cost of labor in their host countries but by demanding labor at the prevailing
rates in these countries. In fact, argues the author, this is a temporary position as the cost of
labor in the emerging countries will increase as their level of production increases (Wolf,
2014). In this case, outsourcing is not aimed at exploiting labor, but sourcing for efficiencies
in countries with low productivity. Unlike in the case of a race to the bottom where the low
cost of labor arises from the poor protection of workers, outsourcing is targeted in regions
where the market conditions dictate low labor costs.
The argument that outsourcing results in the depreciation of the quality of lives of the
workers involved is not necessarily true. In fact, efficiencies are realized in both ways.
Contrary to the commonly held notion that cheap labor constitutes oppression, in most cases
it does not. In fact, the quality of lives of the laborers is improved. Outsourcing creates a
symbiotic relationship between employers and employees. Employers gain efficiencies by
obtaining relatively cheap labor across borders. On the other hand, the quality of lives of the
laborers is likely to improve given the resulting competition in the labor market. That is, as
global firms compete for labor with local firms, the effective wage rises. As such, the
multinational companies do not seek to exploit the workers. Rather, they seek to purchase
labor and other factors of production where they are relatively cheap. This is consistent with
seeking efficiency, as it entails operating at the lowest cost possible. As shown by Easton
(2013), multinational companies help improve the incomes of locals. In this case, the
increased competition in the labor market leads to an increase in the wage level.
Multinational companies pay better wages than local companies, thus disputing the argument
that they exploit laborers (Easton, 2013). The labor market is thus favored by outsourcing.
The increased scope of outsourcing by countries in recent years is informed by the
need for increased efficiency. In this respect, globalization has enabled countries to acquire
products that they would have produced inefficiently at a more favorable cost and
convenience. On this note, the increase in import demand for some commodities is informed
by the need to acquire them more efficiently. It has been shown that competitive outsourcing
enables firms in a country to operate efficiently, thus ensuring efficiency in the operation of
an economy. At the same time, these countries can direct their resources to the production of
commodities that they produce more efficiently. Overall, these economies become more
efficient and competitive in the global market (Seshadri, 2005). Outsourcing provides
countries with an opportunity to source efficiencies, particularly in items that they produce
inefficiently. For instance, a country that is not advanced technologically may outsource the
production of electronics to other countries. This would facilitate the country focus in the
production of other commodities, say agricultural commodities, with which it possesses a
comparative advantage over other countries.
Outsourcing has also been shown to lower fixed costs associated with non-core
activities, thus achieving higher efficiency. In this respect, most firms outsource non-core
activities. This allows a company to focus on its core activities and to avoid all costs
associated with the non-core activities. In particular, firms avoid huge fixed costs by
outsourcing services that they rarely require (Kolmogorovs, 2006). An owner of a toy store,
for example, could contract an IT firm to install security cameras in his business premises and
maintain them every once in a while for functionality purposes. Doing this, would be
outsourcing on the part of the toy store because the core business process of the toy store is to
sell toys to its customers, and not provide IT services. Since the toy store would only require
IT services during installation and for occasional maintenance visits, it would not make sense
for the store to have an IT department, making outsourcing come in handy. As such, the toy
store can operate efficiently by avoiding the fixed costs involved in establishing an IT
Outsourcing is also important to ensuring that companies compete effectively in the
global economy. With globalization, companies have become more competitive. This
necessitates investment in activities that will boost efficiency. Outsourcing provides a good
avenue for sourcing these efficiencies, as firms can leverage globalization to outdo the
competition. In this case, outsourcing enables firms and countries to overcome sources of
inefficiencies. Being entirely self-reliant prevents specialization and leads to inefficiencies.
The burden of being self-reliant can be eased by outsourcing some activities to other entities.
This allows for specialization. It is the view of Solli-Saether & Gottschalk (2010) that
outsourcing enables a company to strengthen and focus on its core competencies. With this,
higher efficiency is achieved as tasks that would otherwise be carried inefficiently are
outsourced to more efficient firms (Solli-Saether & Gottschalk, 2010).
However, government’s outsourcing and privatization of public services constitute a
race to the bottom. Polachek & Tatsiramos (2012) argue that outsourcing of public services is
mainly informed by the government’s need to lower its costs of production, especially labor
costs. In this case, the private entities that are contracted to provide the services tend to
exploit workers by offering low wages. Low-end workers are disadvantaged since they are
paid lowest relative to high-end professional workers and managers. This, in turn, leads to
increased income inequalities. In fact, outsourcing of public services has been shown to spark
advocacy efforts seeking the adoption of a minimum wage to regulate wage setting by the
private contractors (Polachek & Tatsiramos, 2012). However, even with all indications that
this constitutes a race to the bottom, it could also be a way of sourcing efficiencies. The fact
that the government is forced to set minimum wages points to a source of inefficiency. In this
case, minimum wages are not determined by market forces. This creates inefficiencies in the
labor market as firms are forced to pay more than they would if wages were determined by
market forces. As such, although this move by governments can be argued as being aimed to
oppress laborers, it is also a strategy to eliminate inefficiencies.
In conclusion, it has been shown that outsourcing is used by firms and nations to source for
efficiencies, as opposed to being a component of the race to the bottom, in the globalization
context. In this respect, outsourcing allows firms only to specialize in activities that they are
more efficient in. Even in cases where outsourcing is driven by the existence of cheap labor,
the intention is to acquire labor, as a factor of production, at the lowest cost in the global
market. Since multinationals have been shown to offer higher wages than local firms, their
intention is not to exploit workers. In the long-run, workers end up benefiting from increased
employment and wages. However when governments outsource public services, through
privatization, it constitutes a race to the bottom as theirs is the reduction in costs at the
expense of low-income workers. Even then, outsourcing can be viewed as sourcing for
efficiencies as governments eliminate their sources of inefficiencies by doing engaging in it.
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