Outsourcing has grown significantly in recent decades as companies seek to reduce costs. This document discusses the advantages and disadvantages of outsourcing for less developed countries (LDCs) based on case studies of India and Mexico. It finds that outsourcing can attract investment and access global markets, but LDCs must implement development strategies to ensure benefits are widely shared and economic dependence is avoided. Outsourcing alone is not sufficient for development and countries need comprehensive policies to connect outsourcing to other sectors and improve technology, education, legal and political systems.

1. Advantages and Disadvantages of Outsourcing
Prepared by: Shahnam Taheri
Sh_taheri@hotmail.com
August 2013

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Abstract
Globalization in recent two decades has been expanded by increasing the amount of trade of
goods, services, and investments cross borders. Multi-national companies (MNC’s) have been
trying to apply outsourcing for their different stages of their operations. The primary reason for
outsourcing is to minimize the cost of production and operations in order to become more
competitive.
Outsourcing debate has had conceptual, economical, political, and moral aspects. It is
conceptual because it creates trade liberalization discussion against protectionism. It is
economical because low prices in resources give signal where capital and investment goes. It is
political since trades happen between different types of governments. It is moral because many
people in developed countries, who lose their jobs, think outsourcing is the main reason of
their unemployment.
In this paper, first, we will discuss about the concept of outsourcing and off shoring.
Secondly, the trends and issues of outsourcing in LDC’s will be studied. Then, we will focus
on some of the reasons for Mexico and India’s success in attracting foreign investment and
new technology through outsourcing to their countries and promoting economies to growth.
Finally, the advantages and disadvantages of outsourcing in LDC’s in general will be
discussed. We will show LDC’s can learn from India and Mexico to encourage outsourcing to
their countries which helps their economies to grow if and only if this policy be implemented
in a systematic development strategy with the conditions of their countries, otherwise,
outsourcing will cause more dependency to developed countries and MNC’s.

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1-Introduction
Globalization, widely mentioned as the dominant international economic phenomenon
specifically after 1980’s, has been intensively debated between economists and politicians
about its effects on economical, political, and cultural situations in both developed and less
developed countries (LDC’s). “The main feature driving force of globalization has been fierce
competition among countries and multinational companies (MNC’s) at world stage and at the
same time inequality between developed and underdeveloped countries and within countries.
(1, 17)
Professor M.L. Nassaiah writes: “Globalization has also become a battle ground for two
radically opposed groups. There are the anti-globalists, who fear globalization and stress only
its downside, seeking therefore powerful interventions, aimed at taming, if not (unwittingly)
crippling it. Then, there are the globalists, who celebrate globalization instead, emphasis its
upside, while making only to ensure that it’s few rough edges be handled through appropriate
policies that serve to make globalization yet more attractive”. (4, 4)
For the past two decades, outsourcing and off shoring in international economy has
caused countries become more interrelated to each other. Globalization and outsourcing has
strongly interconnected financial and commodity markets in whole world together. Now, after
the recent world economic crisis, we can clearly see and understand how this interconnection
is strong. Globalization has affected not only economic situations in almost all countries in the
world but also their political and cultural aspects of the lives of their people. Classic
economists such as Adam smith and David Ricardo, pro free market economists such as
Milton Friedman, and international institutions such as WTO, WB, and IMF, believe free

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international trade among nations without tariffs or any other kind of trade barriers or
protectionism, makes the standard of life of people in all countries improve if each country
specializes in producing those products which have relative advantages and trade them without any
barriers.
Globalization not only affects economical, political, and cultural lives of LDC’s people
but also in developed countries’, too. Since 1980’s, we have seen many “blue collar jobs” have
been transferred from developed countries to overseas during these two decades. At the same
time some countries in Far East Asia, (also called four Tigers: Hong Kong, South Korea,
Singapore, Taiwan), China’s and India’s (in Indo-China Continent), and Mexico (in North
America) economies are growing very fast. Aside from economic development, the trade ties
between developed countries and LDC’s might transfer new technology and knowledge of
management to less developed countries if they plan and prepare the required infrastructures in
their countries.
2- What is “outsourcing”?
In two past decades, one of the important features in of globalization has been
“outsourcing”. Outsourcing has had tremendous effects on both developed countries and
LDC’s. During the past two decades, giant corporations in general and MNC’s in particular
have had much wider options for how and where to produce their goods and services.
Outsourcing can be defined as transferring over all or some parts of production process
to outside supplier. According to Wikipedia, the free encyclopedia, outsourcing is
“subcontracting a process, such as product design or manufacturing, to a third party company”.
(18) In other words, outsourcing refers to give the jobs of some departments to other people
outside of company. Off shoring is a specific aspect of outsourcing which has happened in
overseas. There are numerous reasons for outsourcing. The main reasons for outsourcing in

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LDC’s are saving costs in labor, material, also taxes payments, and less restrictive
regulations about environment and work conditions.
Professor Ruth Taplin writes: “Outsourcing is a growing phenomenon and it needs to
be assessed from a broad standpoint as it constitutes a new historical phase in global
production and the global division of tasks. The countries of the world are increasingly
becoming less national and more focused on being centers of excellence.”(3, 2)
After signing NAFTA (North American Free Trade Agreement) thousands of jobs from US
went to Mexico because the average hourly wage in Mexico is 1/25 of average wage of
workers in US. So MNC’s in developed countries started outsourcing in Mexico, and later to
China and India. On the other hand the hosted countries restructured their economy to market
economy, creating free zones with no tax obligations or legal restrictions, in order to get
benefits from outsourcing and attracting foreign direct investment in their countries. We can
see many industrial products such as textile, shoe and leather, toys, automobiles, and services
such as call centers, and IT were transferred to LDC’s.
Ashish Oza writes: “As outsourcing become more widespread, more and more
functions were capable of being outsourced. The biggest boom in outsourcing was observed
when service activities were outsourced. Outsourcing worldwide has now topped US$1 trillion
per annum”. (15, 12)
3- Outsourcing in LDC’s
Fierce competition at worldwide and widening gap of wages between the developed
countries has forced MNC’s to do outsourcing and in particular off shoring. “ In 2003,labor
costs in the major auto-producing manufacturers were$33.0 per hour in Germany,$22.5 in the
US, but only $2.7 in Mexico and around 90 cents or less in China” .(2,5)

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David Bigman writes: “Local producers and suppliers in the developed countries are
forced to outsource a larger share of their own production or transfer their entire operation
overseas under a growing pressure to match the prices that producers overseas are offering. US
suppliers to the car industry, for example, are increasingly pressured by the parent companies
to close a cost gap between the US and china, leading to an increase in the imports of
automobile parts to US from China from less than $200 million in 1971 to over a $1 billion in
2003” (10, 9)
Foreign direct investment in LDC’s has created many jobs in those countries. China
and India have had 8% annual growth in average for the past two decades. China, India, and
Mexico are looking to outsourcing as a strategic factor for expanding employment, absorbing
new technology, and learning new management knowledge in their countries.
4-Outsourcing to India
International trade can affect all the countries involved. According To David Ricardo,
the prominent economist in 19th
century, if countries specialize in producing the products
which they have relative advantage in producing them (lower comparative costs) then by
specializing in producing those commodities and services and trading those with each other
their economic situation of countries will be better than before. “India, the largest democratic
republic in the world, possesses 2.4% of the world’s land area and supports 16% of the world
population. With 1.5 billion, India is the second most populous country after China. Every year
it adds about 16 million people to its large base of population.”(6, 13)
In India which has almost one fourth of the world population, there is a good evidence the
socialist policies during Nehru era and after that has negatively affected the growth of GDP per

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capita in that country during over 25 years after its independence. But after openness to
trade, foreign direct investment and using free market economic policies, India has had a
considerable economic growth (in average 8% annually growth rate in GDP) in recent two
decades. The World Bank in its “World Development Report” announced India’s GNI (gross
national income) is around $3,100 trillion and its per capita income is $2,800. “As a result of
liberalization of the economy, the share of private investment to GDP grew from less than 9.0 per
cent in 1981 to more than 15 per cent in 2000. GDP growth rate increased from an average 2.9 per
cent a year in the 1970s to 5.8 per cent in the 1980s and 6.7 per cent in mid 1990s," (World Bank,
World Development Report, 2007),Table 1, shows GDP per capita in purchasing parity price
became about 7 times in 2008 ($2887) in compare to 1980($402.998).
The movement of IT and some other clerical jobs such as call centers from developed
countries to India have had economical, political, and cultural effects on both sides. Huck
Gutman writes:”…For while the massive job loss to China, mostly in low-skill manufacturing,
has had major consequences for both nations, it has not created as much political tension in the
USA as the loss of professional service jobs to India. What is happening in the interaction of
the Indian and US economies seems one of the most publicized issues in US politics today.”(4,
Huck Gutman, Outsourcing in Developing and Developed World, Part One: from Outsourcing
to off shoring, The Statesman/Kolkata, India, March 2004) Ashish Ozma writes:” India is back
office to the world. A large number of companies are going offshore to develop and maintain
their own software: GE, Bank of America, Target, and American Express.
A recent survey by the Indian national Association of software and service companies
found that almost two out of five fortune 500 companies currently outsource some of their
software requirement to India. The reason for this phenomenon according to most research is

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that outsourcing saves time, money, and better work ethics. Other reasons for companies to
outsource to India are:
 Labor pool-graduating 75000 English speaking IT professionals annually
 Cost advantage- US- $25000 a month versus India- 4400
 Time difference- 10 hour time difference allows 24-hour service
 Higher Quality-30% of the programmers in major US companies such as Microsoft are
Indian
 Government Support- India has a National Minister of IT”(17,Allied Academies
International Conference
5- Outsourcing to Mexico
After signing NAFTA, hundreds of thousands of job transferred from US to Mexico.
The average wage in Auto industry in US is $19 to $31 per hour but in Mexico is $1/hour.
Therefore, US Corporations has laid off hundred thousands of US workers and sent
their jobs to Mexico.
Lower cost in factors of production in compare to developed countries is an important
factor behind outsourcing to LDC’S but Mexico has some additional advantages. “Location is
one reason why Mexico Express outsourced to Mexico. Having programmers who know the
geography and cities –and who understands the regional business culture is a “huge
advantage”. In addition, Mexico has three technology parks.”(The Outsourcing Institute,
Mexico: It’s Close; it’s Cheap, 2008).
According to the World Bank and IMF report, Mexico with $1,086 billion is the
second-largest economy in Latin America. After signing NAFTA, Mexico’s GDP grew in
average 7% in 1980 to 2004 but the growth rate after that declined to 3.8 percent annually
between 2004 and 2007.

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Outsourcing to Mexico specifically in auto sectors hasn’t caused the economic growth
spread out to all sectors and regions of the country. Therefore, we see after recent economic
crisis in industrialized countries Mexico, and drop in oil prices economic growth decelerated in
the first three quarters of 2008 and turned negative during the last quarter, thereby bringing
GDP growth for the year at a modest 1.3 percent. At the moment, economic activity continues
to contract as external demand drops and domestic and external credit conditions remain tight.
The March consensus forecast project a contraction of GDP for 2009 by 2.8 percent (WB,
Country partnership Strategy World Bank’s, World Development Indicators, 2008.
“Trends in the mauila (offshore assembly for re-export) industry have been mixed.
Comparing the first quarter of 2005 with the same quarter of 2004, total output of the maquila
industry grew by 6.3%. This performance was reflected in a moderate increase in employment.
Total maquila employment rose to 1.15 m at the end –March2004 level. The strongest growth of
jobs (excluding the chemical products subsector) was in the manufacture of electric and
electronic machinery and goods, where the number of jobs rose to 17.3% to 115,961. These are
the subsectors that are in the strongest position to maintain their competitiveness in the US
market, owing to the advantages the advantage of geographical proximity. Light manufactures,
by contrast, are most exposed to cheaper Asian competition. In the manufacture of toys and
sports articles, and in the shoes and leather industry, employment decreased by 22.4% and 8.5%
respectively.”(34, 14)
6-Conclusion
Outsourcing in India and Mexico shows there are some benfits for LDC’S to be host of
outsourcing. Firstly outsourcing causes to attract capital and investment from developed
countries. Secondly since the products and services made in LDC’s through outsourcing will

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export to mostly developed countries, therefore, the host country will have access to world
market. Thirdly host country can get the new knowledge , technology, and modern
management technique to run a successful business at world high quality level.
It is recommended that ousouricng should be done according to the strucure and
economic framework of the host countries other wise it could bring some problems such as:
first, the host countries economy is locked and dependent only in low value added activities
without gaining any improvement in technology and economic development. Second, if
MNC’s keep their core knowledge and their competencies in their countries then disseminating
knowlede and technology won’t happen in LDC’S. And third, if the outsourcing activities
inside LDC’S won’t coonected to the other economic sectors, then inequality between regions
of those countries will happen wnd they won’t have any consistent developement policy.
While the effects of outsourcing may craete a win–win situation for both developed
countriesand LDC’s, it must be remebered the benefits of outsourcing may not reach to all
people and regions inside the host countries and the benefits may not redistrirbute to lower
income groups .Our cases in India and Mexico showed at the time being over 500 million
people in India live with less than $1 per day and about 43% of population in Mexixo are poor.
Population below US$2 a day in Mexico is 20.4 percent.
Based on the evidences presented in this paper, one could conclude that just making free
market economic policy alone is not sufficient to get the maximum benefits from out sourcing
but also making a systematic economic development as a comprehensive policy which
includes all economic sectors, regions, educational, legal and political systems could, in long
run, help their economy to develop othervise outsourcing will not necessarily cause to
economic development but more dependency of LDC’s to MNC’s.

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BIBILOGRAPHY
 Books:
1--Boris Pleskovic and Nicholas Stern , Annual World Bank Conference on Development
Economics 2001/2002, World Bank and Oxford University Press ,Washington , 2002.
2-Narasaiah M. L., Globalization and Economic Development, Discovery Publishing House
PVT. LTD. India, 2008.
3-Taplin Ruth, Outsourcing and Human Resource Management: An international Survey,
Routledge, Abingdon, Oxon, 2008.
 Journal and Reports:
4-Ashish Oza & Kathy L. Hill, Outsourcing to India: Advantage or Disadvantage? ,
Proceeding of the Academy of Information and Management Sciences, Volume 11, No. 1, Sam
Houston State University, Jacksonville, 2007.
5-Bigman David, Global Outsourcing and FDI: Can the Least Developed Countries Participate
in the Process? , Stanford Center For International Development, Working Paper No. 229,
Stanford University, Stanford, CA, October 2004.
6-Justin Thody & Robert Wood, Country Report: Mexico, The Economist Intelligence Unit
Limited 2005, Mexico, July 2005.
7-Shadlen Ken , Globalization, Power and Integration: The Political Economy Of Regional
and Bilateral Trade Agreements in the Americas, Journal of Development Studies, Volume
44, No. 1, Routledge Taylor & Francis Group , UK, January 2008.
8-The United Nations Initiative Permanent Observer, Country Report: India, Partners in
Population and Development (PPD), India, 2003

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Appendix

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Table 1: GDP per capita, WORLD BANK, 2009
Year
GDP PER
Capita(PPP) Percent Change
1980 402.998
1981 465.094 15.41%
1982 505.026 8.59%
1983 545.183 7.95%
1984 580.64 6.50%
1985 616.167 6.12%
1986 647.392 5.07%
1987 679.967 5.03%
1988 746.514 9.79%
1989 813.28 8.94%
1990 871.628 7.17%
1991 909.836 4.38%
1992 955.891 5.06%
1993 1007.052 5.35%
1994 1068.813 6.13%
1995 1146.938 7.31%
1996 1232.534 7.46%
1997 1286.304 4.36%
1998 1352.3 5.13%
1999 1441.633 6.61%
2000 1508.972 4.67%
2001 1576.257 4.46%
2002 1650.667 4.72%
2003 1773.707 7.45%
2004 1950.405 9.96%
2005 2156.582 10.57%
2006 2405.683 11.55%
2007 2659.214 10.54%
2008 2886.07 8.53%
Source: IMF, World Economic Outlook, 2008

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Figure 1: GDP Per Capita in India (1980-2008)
GDP PER CAPITA
0
500
1000
1500
2000
2500
3000
3500
1
9
8
0
1
9
8
2
1
9
8
4
1
9
8
6
1
9
8
8
1
9
9
0
1
9
9
2
1
9
9
4
1
9
9
6
1
9
9
8
2
0
0
0
2
0
0
2
2
0
0
4
2
0
0
6
2
0
0
8
$
Source: Table 1
Table 2
Occupation
US
Wage
India
Wage
Telephone op 12.57 1
Health-record
Technologist/MT 15.17 2
Payroll Clerk 15.17 2
legal
assistant/Paralegal 17.86 8
Accountant 23.35 15
Financial Researcher /
Analyst 35 15
Source:" The Political Economy of Global Outsourcing" Chanchal Kumar Sharma,
Maharaja Agrasen College Jagadhri, 2004.

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Figure 2: Comparative Hourly Wage in India and USA ($) in 2004
0
5
10
15
20
25
30
35
($)
Telephone op accountant
Occupations
comparitve Hourly Wage: US and India
US Wage
India Wage
Source: Table 2
Table 3- Trend of Mexico GDP Per Capita
Mexico: GDP Per
Capita
Year
GDP -
per
capita
(PPP)
(US$)
2000 8500
2001 9100
2002 9000
2003 9000
2004 9000
2005 9600
2006 10000
2007 10700
2008 12500
Source: http://www.indexmundi.com/g/g.aspx

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Table 4
Year Export of goods fob(US $bn)
2000 166.1
2001 158.8
2002 161
2003 164.8
2004 188
Source: Country Report: Mexico, July 2005, P.34
Figure 4: Mexico Export in F.O.B. (2000 to 2004)
Year
140
145
150
155
160
165
170
175
180
185
190
195
2000 2001 2002 2003 2004
Year
US
$
bn
Year
Source: Table 4