OFFSHORE OUTSOURCING: A POSITIVE PERSPECTIVE
Changes in world demographics and increased globalization poses economic challenges for U.S.A.In order to survive the rapidly changing and increasingly competitive world, U.S.A needs to offshore outsource, to maintain its competitive edge. In addition, improved education standards and low internet costs in most countries like China and India facilitates U.S companies to employ a global workforce and reap economic benefits of offshore outsourcing. Reduced labor costs ,increased productivity and new revenue streams are some of the economic gains of offshore outsourcing for U.S.A.
Positive Impact of Offshore Outsourcing for U.S.A
Offshore outsourcing of American jobs is a matter of great concern for U.S citizens but this paper will provide an insight as to why Americans must offshore outsource and how offshore outsourcing helps U.S.A job market.
To meet the challenges posed by highly competitive and globalized world economics, where countries like China and India have finally adapted trade liberalization policies, American companies must confront international economics successfully.
The (American Electronics Association [AeA] Report, 2004) states the following:
In an intense, international, competitive environment, many companies have no choice but to offshore outsource certain jobs if they are to remain world-class competitive. Failure to do so in certain instances will not only result in less competiveness, but in the elimination of many more jobs than would be lost to offshore outsourcing. (p 2)
Due to cheap internet facilities and its increased use, it allows companies to create a global workforce ,without having to be physically present .Increase in skilled labor and improved education in some countries as compared to U.S.A ,makes offshore outsourcing a more cost effective and competitive option for US.(AeA Report,2004) .
Offshore outsourcing has several economic benefits, reduced labor costs and enhanced revenues being the most important one. There is a substantial amount of difference between the labor costs in India, China or Philippines compared to a worker with exactly the same skills in USA.For example, a software developer who demands $60/hr in U.S.A, costs $6/hr in India.A data entry agent costs $20/hr in U.S.A, while in India they cost only $2/hr. (McKinsey Global Institute [MGI] Report, 2003)
Another economic benefit of offshore outsourcing is increased productivity. Low skilled jobs which are considered of low prestige in U.S.A are looked upon as a source of income for Indians. They perform these jobs with great zeal and excel in their assigned targets, producing outstanding results. (MGI Report, 2003)
The findings of (AeA Report, 2004) are that off shoring is in the long-term competitive interest of the United States. This statement is supported by the publication (MGI Report, 2003) that US offshoring boosts the United States economy, as compared to retaining the same jobs in U.S.A, hence giving U.S companies a competitive edge globally. The rest of this paper will provide information on how offshore outsourcing leads to reduced costs, increased revenue and repatriated earnings to U.S.A , in all ,offshore outsourcing contribute to national earnings of U.S.A.
Every $1 invested offshore, U.S companies save 58 cents. These savings add to profitability of U.S companies and allow investors to invest in new product and technology. Reduced costs eventually benefit the end consumers, increasing their purchasing power, which in return will help the US economy today and in the long run. (MGI Report, 2003)
Developing countries, offering cheap labor to U.S.A, buy extra 5 cents of service from U.S.A, for every $1 of service procured from their country. This generates a new source of revenue for U.S, as the developing countries require U.S computers, hardware, telecommunications etc. In 2003 , the US imports in India grew from less than $2.5 billion in 1990 to $3.8 billion. (MGI Report, 2003)
Most offshore service providers are headquarter in USA , so they send all their earnings back to U.S.A , hence adding to the US economy. The revenue earned is 4 cents for every $1 spent offshore. (MGI Report, 2003).
MGI Report, 2003 Contribution
Offshoring creates net additional value for the U.S economy that did not exist before, a full 12 cents-14 cents on every dollar offshored.Indeed, of the full $ 1.45-$1.47 of value created globally from offshoring $1.00 of U.S labor cost,the U.S captures $1.12 -$1.14 ,while the receiving country captures ,on average ,just 33 cents.(p 12)
According to the US census, America's population will continue to age and ratio of retired workers to employed will increase. This will further add to employment costs, as pension costs increase for US firms. In order to deal with this situation , U.S.A need to find ways to produce the required outputs by keeping a balanced ratio of working and dependent population .This can be achieved either by inviting highly skilled immigrants to U.S.A , which is a quiet difficult after 9/11 .The other and more likely alternative is what this paper discussed , to offshore outsource.
American Electronics Association.(2003).Offshore Outsourcing in an Increasingly Competitive
Highly and Rapidly Changing World. Retrieved March 14, 2010 from: http://www.aeanet.org/publications/id_offshoreoutsourcingmain.asp
McKinsey Global Institute (1990) .Offshoring:Is it a Win-Win Game? Retrieved March 14, 2010 from : http://hei.unige.ch/~baldwin/ComparativeAdvantageMyths/IsOffshoringWinWin_McKinsey.pdf