What is outsourcing? What are the factors which induce the development of outsourcing? How the developing countries take advantage of outsourcing?

1. Subject: International Trade
Submitted By
Mohammad Tawhidur Rahman
Bangladesh
Date of Submission:
22 December, 2015

2. Mohammad Tawhidur Rahman P-2
Question # 3 : What is outsourcing? What are the factors which induce
the development of outsourcing? How the developing
countries take advantage of outsourcing?
Answer # 3 :
OUTSOURCING:
Outsourcing is an effective cost-saving strategy when used properly. It is
sometimes more affordable to purchase a good from companies with comparative
advantages than it is to produce the good internally. An example of a manufacturing
company outsourcing would be Dell buying some of its computer components from
another manufacturer in order to save on production costs. Alternatively, businesses may
decide to outsource book-keeping duties to independent accounting firms, as it may be
cheaper than retaining an in-house accountant.
In business, outsourcing involves the contracting out of a business process to
another party. Outsourcing sometimes involves transferring employees and assets from
one firm to another, but not always. Outsourcing is also the practice of handing over
control of public services to for-profit corporations. Outsourcing includes both foreign
and domestic contracting, and sometimes includes offshoring. Financial savings from
lower international labor rates can provide a major motivation for outsourcing or
offshoring.
FACTORS:
Given below, as reflected by companies, are the factors which induce the
development of outsourcing:
The Pros and Cons of outsourcing-
 Lower Wages: As the old saying goes, it’s all about the money. The fact of the
matter is that most companies wouldn’t be sending jobs overseas if they weren’t
saving money. According to a 2010 study, India’s per capita income is $1,371, good
for 133rd in the world. By comparison, the United States placed tenth, with a per
capita income of $46,860. Lower wages are a huge factor when outsourcing, and
the top reason companies choose to send parts of their operation overseas.
 Focusing on Core Business: The second biggest reason companies choose to
outsource is to free up time to focus on core business processes. Without having to
run an accounting department or an IT operation, companies are able to direct their
scope to work on what really matters inside their business, increasing work flow
and allowing managers to finish projects faster.
The Benefits of outsourcing-
 Freeing Up Internal Resources: Capital and people are becoming higher
commodities in a difficult financial environment, and companies need as many
good people as possible to focus on what really matters with a business. By
outsourcing lesser services, companies free up time and capital to move their
business forward.

3. Mohammad Tawhidur Rahman P-3
 Risk Management: Risk management is another top reason why companies choose
to outsource. If a business is launching a new product or offering something new,
having employees in developed nation’s offers little in terms of risk management
should the product not do well on the open market. With offshore workers,
operations can quickly be fine-tuned to meet a skyrocketing demand or a demand
that never comes into fruition.
 Improved Service: Outsourcing can actually help improve service. Why waste time
and valuable resources training an in-house customer service team when there are
professionals to be hired that can usually do the same task for less money? IT
performance, HR functions and financial services are some of the most commonly
outsourced jobs, and companies all over the world have been working in those
specific fields for years. Having an offshore company handle non-core business
activities usually leads to better service.
 Tax Breaks: Check out our piece on the Top 5 Tax Efficient Outsourcing Locations,
and you’ll get a clearer picture on why companies choose to outsource some of their
operations. By handling business overseas, businesses are able to take advantage of
lower corporate tax rates.
 Lower Regulatory Costs: Not only can companies pay offshore workers less, but
significantly lowering regulatory costs also drive down the outsourcing price tag.
Programs like Social Security, Medicare and unemployment insurance don’t exist
in many developing countries, which drive down outsourcing costs further. Even if
an outsourced worker makes the same as his/her American or European counterpart,
lower regulatory costs mean that it’s usually much cheaper for the business to go
with the overseas employee.
 Flexibility: With uncertainty surrounding today’s global economy, companies need
the ability to expand or downsize quickly. Unfortunately, that’s not always possible
with today’s labor laws, as employee lawsuits are at an all-time high. By
outsourcing, companies take that risk away, allowing businesses to adapt more
quickly to rising or slowing demand.
 Efficiency: Odds are, your company isn’t an expert in IT management, HR services
or accounting functions. Companies can spend weeks, sometimes months, just
finding people for a particular in-house department. From there, you’re forced to
train people and really adjust on the fly. At the end of the day, businesses can be
left with a hefty bill with little to show for their money. By simply outsourcing basic
business services, companies are able to jump right to the finish line when building
a department.
 Peace of Mind: While the uncertainty surrounding outsourcing contract
negotiations can be unsettling, companies often feel a sense of relief once people
start signing on the dotted line. Contractual agreements offer protection for both
parties, and remove any nasty human interactions that can take place when in-house
workers are dismissed. Outsourcing companies can also be held responsible for
negligence and poor performance in legally binding contracts, further aiding the
outsourcing drive.

4. Mohammad Tawhidur Rahman P-4
OUTSOURCING IN DEVELOPING COUNTRIES:
Outsourcing is greatly beneficial to developing countries. It is bad for workers in
developed countries who lose their jobs to lower paid foreign workers. Outsourcing creates
jobs to unskilled laborers and provides white-color jobs to professionals in developing
countries. Unskilled workers in developed countries are left with no job opportunities.
A cheap labor force is the most important factor in international outsourcing. If
there is an increase in population, manufacturing prices directly decrease. North American
and European countries employ outsourcing in populous countries. When we look at top
outsourcing countries we find India, Indonesia, Bangladesh, Singapore and China. Beyond
the borders of those countries that receive outsourced enterprises, we can see that the
outsourcing countries are experiencing a decline in employment rates in the labor market.
However, for receiving countries such as India, Malaysia, Bangladesh, China etc. the
demand for cheap labor in the labor market shows an upward trend. In general, outsourcing
creates new employment opportunities.
For years, people have talked about the U.S. and China's economies. Multinational
corporations represent the dominant providers in China's high-end market and U.S.
multinational companies often choose China as the location of their manufacturing
operations. There are several reasons for this. First of all, labor costs are cheaper in China
when compared to the U.S. Secondly, when manufacturing is undergone in a certain
country, it is much easier to gain access to that domestic market. In addition, upon gaining
access to the Chinese market, Asian markets also become more accessible. Third, raw
materials in China are cheaper and its supply chain and logistical are easier than in the
U.S., all of which drive down operating expenses.
Furthermore, its high population has become a problem for China. This is because
when the population increases wages will decrease. Conversely, Apple is an American
brand that does not produce many of its products in the U.S.; they use outsourcing and
Foxconn to manufacture in China. Apple globally outsources its manufacturing activities
because they want to decrease labor costs. Another reason is that Apple uses a large
amount of glass for device displays which is much cheaper and easier to manufacture in
China.
Outsourcing benefits corporations by cutting costs, increasing their profits and
product quality. On the other hand, workers have shown displeasure at the deteriorating
standard of working conditions. Often, they work many hours and receive low wages,
especially in the manufacturing sector. Many factories in China do not provide good
working conditions and they do not abide by standards like the U.S. and others. Also, the
methods and principles of regulation regarding workers' health and safety are not the same
in China, due to different land and labor laws. Apple originates in Cupertino, California in
the U.S., where they employ strict rules for workers and working conditions. Outsourcing
their employee base abroad means employment for the same company but these employees
do not have same rights.
-THANK YOU-