Economic and social impact of outsourcing and off-shoring work

October 5, 2017 Accounting

Outsourcing production and off-shoring service work offers cost advantages to a transnational Company, but can take to unfavorable judgment in its place state. Discourse the statements for and against this scheme, paying peculiar attending to its economic and societal impact.

The assignment should be submitted by Friday 21st May 2010.

ABSTRACT. The United States has experienced an addition in the offshore outsourcing in both the fabrication and in the service industry. This recent addition has raised a argument about the socio- economic impacts it has on the American economic system. Those who oppose off shoring believe it takes off American occupations, lowers rewards, causes a diminution in America ‘s criterion of life and that any benefits from off- shore are unevenly distributed. While those in support of off-shoring believe it has a long-run positive economic consequence on the American economic system. And that off shoring in the service industry has non negatively affected the United States. Their claim is that off-shoring in the service industry has a net benefit to the American society.

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INTRODUCTION — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — -4

Tendencies IN OUTSOURCING — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 4

THE Argument ABOUT OFFSHORE OUTSOURCING — — — — — — — — — — — — — — — — — — — — — — — — — — — — -8

ECONOMIC IMPACT OF OFFSHORE PRODUCTION — — — — — — — — — — — — — — — — — — — — — — — — — -8

POSITIVE IMPACT ( HOME AND HOST COUNTRY ) — — — — — — — — — — — — — — — — — — — — — — — — — 8

Negative IMPACT ( HOME AND HOST COUNTRY ) — — — — — — — — — — — — — — — — — — — — — — — -10

SOCIAL IMPACT OF OUTSOURCING PRODUCTION — — — — — — — — — — — — — — — — — — — — — — — — -11

POSITIVE IMPACT ( HOME AND HOST COUNTRY ) — — — — — — — — — — — — — — — — — — — — — — — — -11

Negative IMPACT ( HOME AND HOST COUNTRY ) — — — — — — — — — — — — — — — — — — — — — — — 12

ECONOMIC IMPACT OF SERVICES OFFSHORING WORK — — — — — — — — — — — — — — — — — — — — — 13

POSITIVE IMPACT — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 13

Negative IMPACT — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 14

SOCIAL IMPACT OF SERVICES OFFSHORING — — — — — — — — — — — — — — — — — — — — — — — — — — — — 15

POSTIVE IMPACT — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 15

Negative IMPACT — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 15

CONCLUSION — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 15

REFERENCES — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — -16


This essay examines the socio-economic impact of offshore outsourcing production and off-shoring service work in both the place and host states, with peculiar attending to the two major sectors of the American economic system ; the goods bring forthing sector and the service bring forthing sector.

The survey concentrates on offshore outsourcing production and off-shoring service work utilizing the United States of America as a instance survey ; while China and India will be used as outsourcing centres ( host states ) . However, this survey does non try to decide the differences in positions of those for and against offshore outsourcing.

Tendencies in outsourcing:

The ever- growth force per unit area for increased productiveness and profitableness of the American Companies coupled with the handiness of possible low cost labor of developing states such as China and India have drove many companies towards offshore outsourcing. This is because these companies found the chance of a significantly lower cost labour pool an resistless temptation to travel towards offshore outsourcing. Therefore, the force per unit areas to cut down costs and better productiveness are the chief factors that influenced the beginning of seaward outsourcing. For illustration, the chief advantages to travel production to China are the low labor costs, inexpensive natural stuffs, and comparatively low cost of transit. Hence, today outsourcing has become an attractive and powerful scheme for companies to cut down cost and better public presentation.

The term “ Outsourcing ” is by and large used when Companies contract out certain concern maps to an external provider, extinguishing the demand to keep internal staff necessary to execute that map. Outsourcing does non needfully connote that occupations and production are relocated to another state ( Vander, 2006 )

However, offshore outsourcing is the catching of these concern maps to companies in lower cost, chiefly developing states such as India, China, Malaysia, Singapore and Philippines. Offshore outsourcing refers to merchandise with an unaffiliated party, while off- shoring refers to merchandise with an attached party ( Houseman, 2008 ) .

An illustration of offshore outsourcing production is the Intel A® and Apple A® in the United States of America. Intel and apple two of the universe ‘s prima makers of computing machine, networking and communicating merchandises based in the United provinces resorted to “ Turnkey contract fabrication ” with their full fabrication procedure being outsourced to oversea makers such as India and China. This has given these bit fabricating engineering giants the purchase to apportion their assets on future selling runs and branding schemes.

“ Off-shoring ” is used to depict transnational corporations relocating work from their domestic sites to foreign locations. It means relocating of occupations and production to a foreign state. The resettled occupations and production could be at a foreign office of the same transnational company or a separate company located abroad ( Garner, 2004 ) . Off-shoring could besides be either fabricating or services off shoring ( Norwood, 2006 ) .

On the other manus, off-shoring services work refers to exporting of services that provide knowledge-intensive inputs to the concern procedures of other organisations. Lower production costs in foreign states are the major cause of service-sector off shoring. The KIBS sector consists of houses who have emerged exactly to assist other administrations deal with jobs for which external beginnings of cognition are required ( Miles, 2005 ) . They provide basic information, advice, and intermediation services. They besides help in developing client staff.

A company may offshore services either by buying services from another company based overseas or by obtaining services in-house through an affiliate located overseas. For illustration, a U.S transnational company puting in its abroad affiliate to render accounting and paysheet services to other companies abroad might make so without impacting its production and employment degree in the U.S. An illustration of off-shoring service work is the IBM consulting services, from a different sector traveling in to offer more KIBS- type services. In 2003, IBM signed a ten-year $ 400 million trade with the Proctor and Gamble Company to pull off P & A ; G ‘s employee service, supplying services that include paysheet processing, benefit disposal, compensation planning, exile and resettlement services, travel and expense direction and human resources data direction. Therefore, IBM concern services support 98,000 P & A ; G ‘s employees in about 80 states. Some KIBS houses operate as lead providers and service planimeters or coordinators, farm outing others to supply specific inputs to their clients ( Toivonen, 2004 )

Importance of outsourcing

Outsourcing today has become an indispensable gross and growing scheme for about every bing corporation. It creates flexibleness in the company, guaranting the maximal use of available resources within the company. It besides offers corporations cost advantages and aid liberate up their direction resources.

More significantly, outsourcing helps houses to be focused. Since the most valuable resource within direction is clip, one time a procedure is successfully outsourced, the direction gets more and effectual clip to research new gross watercourses, clip to speed up other undertakings and clip to concentrate on clients. Traditionally executives spend 80 per centum of their clip pull offing inside informations, and merely 20 per centum on planning and client dealingss, in other words, a successful offshore outsourcing procedure can assist change by reversal this ratio.

Outsourcing can besides assist companies to hold entree to new engineerings that might non be used in their company. This is chiefly because the offshore outsourcing finishs use the latest state-of-the art engineerings to function their international clients. And this might besides increase the opportunities of rapid migration of these companies to new engineering. Offshore outsourcing besides helps transnational companies to work the clip zone advantage, by harvesting the benefit of 24-hour development rhythm. Receiving round the clock service benefits every bit good as supplying it to their clients when needed.

Figure 1: demonstrates the difference between outsourcing and off shoring.

( Figure 1, from GAO, 2004 )

The argument about seaward outsourcing:

Despite the fact that offshore outsourcing production offers cost advantages to a transnational Company in the signifier of handiness of possible low cost labor pool, it is still being criticized in its place state. The contention is that many people see offshore outsourcing every bit unsafe to the American economic system and have expressed concern over the figure of high paying occupations that are filled by non-Americans workers in other states. Whereas others see this type of outsourcing as a signifier of trade and strongly believe that trade by and large benefits society, and that any signifier of limitations against it harms the economic system. Both sides of the argument have valid points, but approach the subject from different points of position.

Economic impact of outsourcing production:


Advocates of offshore outsourcing are those in support of free trade. They are frequently economic experts who approach the subject by looking at long-run economic consequence. Their basic claim is that international outsourcing has possible long-run economic benefits. They believe that offshore outsourcing lowers costs and encourages competiveness ( Rajan and Wei, 2004 ) . Harmonizing to them, the cost decreases stemming from this procedure will finally take down merchandise monetary values, and the increased demand and net income derived from this procedure could be used for employee benefits as workers may now bring forth more per hr, thereby driving up existent rewards. Furthermore, a survey by McKinsey found that two tierces of the economic benefits from off-shoring spills back into the United States economic system ( Schroedder and Aepeal, 2003 ) . The economic benefit is seen in lower monetary values of goods and services, spread outing markets for American goods and increasing net incomes for American houses.

Furthermore, the big sum of comparatively high quality occupations created in the host states, chiefly less developed states through off shoring may supply these states with significant economic benefits. They can construct a stronger economic base, increase domestic ingestion and hence surrogate imports from developed states like the United States.

Garner ( 2004 ) emphasized that offshore outsourcing benefits the economic system as a whole. He stated that outsourcing has helped to drive down costs of hi-tech goods and sped up the acceptance of new engineerings. This in bend has a knock on consequence of making secondary demand for package, which in bend helps make more occupations in the package programming sector. The same clasp true for nomadic engineering devices. An industry study, Global penetration stated that the cost nest eggs and usage of seaward resources lowers rising prices, increases productiveness and lower involvement rate, thereby hiking concern and consumer disbursement and increases economic activities (, 2004 ) . With an addition in production, houses are able to bring forth more goods and services at a lower cost which increases the net incomes. Furthermore, outsourcing aid companies to concentrate on their nucleus concern countries, entree universe category engineering at lower rates ; skilled work force at low-cost monetary values, and competitory advantages.

Consequently, most of the developing Asiatic States such as India has vastly gained from the dining off shoring concern. Apart from bring forthing paid employment for 1000000s of its extremely qualified proficient forces, offshore outsourcing has catapulted India to the head of the IT universe doing India the hub of package development services industry. Developed states like the USA, Germany, Australia and England are looking to India for their outsourcing occupations because of the geographical location, ideal Time Zone and the low cost of operations. India is fast transfiguring to be the concluding finish for off shore and other such IT-enabled services, owing to the manifold off shoring benefits of India.

Negative impact

One of the major concerns about offshore outsourcing is the loss of American occupations. Some fear that if occupations continue to be transferred to foreign states, there will non be any occupations left at place. Jobs lost to outsourcing are likely to be lasting ( Garner, 2004 ) people are disquieted about the unemployment rate and believe that the rate is lifting because of the addition in seaward outsourcing. For case, American high-tech houses shed 560,000 occupations between 2001 and 2003, and expect to lose another 234,000 in 2004. ” ( IEEE-USA March 2004 )

ELA Survey June 2004 stated that 58 % of American workers believe that companies outsourcing work that could be done by Americans to offshore contractors should be penalized by the US authorities. A canvass taken in July, 2004 found that 72 per centum of respondents believed that offshore outsourcing was a bad tendency because off-shoring took occupations away from American workers ( Program on International Policy heights )

Lower rewards is another concern people have about off-shore outsourcing. Peoples feel they now have to vie with workers in other states who are willing to work for lower rewards than Americans. American workers believe they will hold to settle for lower rewards or hazard losing their occupations to foreign workers. Some believe being forced to accept lower rewards is unjust to American workers because the cost of life is much higher in the United States compared to developing states.

Another concern about off shore outsourcing is the unequal distributional effects of trade ( Poole, 2004 ) . Many Americans believe free trade chiefly benefits the concerns making the off shore and the wealthy. In a canvass taken in January 2004,

51 per centum of respondents

believed that international trade had a positive consequence on concerns

45 per centum of respondents

believed it had a negative consequence on workers

59 per centum of respondents

believed that international trade was good for American concern

64 per centum of respondents

said it was bad for the occupation security of the American workers

In another canvass taken in July 2004,

Beginning: Plan on International Policy Altitudes.

The common belief is that the rich get richer, while many domestic consumers feel they are non seeing the benefits of outsourcing reflected in the monetary values they pay.

Another important concern is the worsening criterion of life. This issue is connected to the concern about lower rewards. If American workers have to accept lower rewards in order to maintain their occupations, their criterion of life is traveling to fall. They are no longer traveling to be able to afford the ingestion they had at the higher rewards. Therefore, to avoid fiscal problems, people will hold to cut their ingestion thereby take downing their criterion of life.

The turning trade shortage in goods and services is besides a major concern of off shore outsourcing in the United States. Peoples are concerned that the American economic system will endure if it increases its imports in the services industry. Peoples are dying about the trade shortage increasing. Again the path record for the reemployment of displaced American workers who lost their occupations due to outsourcing is highly bad. Many who have lost their occupations frequently learn that the creative activity of higher paying occupations to replace 1s that are lost has non occurred. And many of those who are lucky plenty to happen occupations take major wage cuts. And supplying farther preparation and unemployment benefits to workers until they find other employment is expensive.

Furthermore, outsourcing weakens the American economic system as it contributes to merchandise shortage and the loss of American consumers who buy these merchandises and services. This is because employees displaced by aliens and left unemployed or in lower paid occupation have a reduced presence in the consumer market.

Social impact:


Amiti and Wei ( 2005B ) found that outsourcing has a positive consequence on productiveness in the United States. By relocating some occupations to other less expensive parts of the universe can easy salvage costs, save the company, save most people ‘s occupations, maintain monetary values down and offer great services. On the host states, any occupation created in these developing states can make many others as new money flows into the national economic system, and is spent on local goods and service.


The laying-off of employees as a consequence of offshore contracts can present large jobs for companies. Layoff causes major moral jobs among in-house subsisters, and may take to dissatisfaction and work slow down. Furthermore, offshore outsourcing causes work force to hold less chance for larning because of cognition transportation. Again unemployment has negative consequence on poorness, felicity, household life, offense ; drug and intoxicant usage and the chances of kids of unemployed people. Unemployment is besides a strong forecaster of relationship break-up. Unemployment predicts partnership disintegration. And the lives of kids are severely affected by unemployment. Children with unemployed parents are far more likely to populate in poorness and to lose school.

The utmost impact of parental unemployment for kids are illustrated by a comprehensive survey of nose count informations which concluded that the decease rate for kids of parents classified as ne’er worked or long-run unemployed was approximately 13 times higher for kids whose parents worked in higher managerial or professional businesss. Furthermore, missing a occupation frequently means missing societal contact with fellow employees, missing a intent for many hours of the twenty-four hours, deficiency of self- regard, mental emphasis and unwellness, and of class the deficiency of ability to pay measures and to buy both necessities and luxuries. This last point is particularly serious for those with household duties, debts and/ or medical costs particularly in the U.S where the handiness of wellness insurance is frequently linked to keeping a occupation.

Furthermore, with the increasing rise of offshore outsourcing houses will go hollow, mere practical administrations with small duty to the place state in which they operate and unexplainable to the society, Thereby disregarding their corporate societal duty.

Again, as workers attempt to keep their criterion of life on lower pay rates in lesser position occupations due to off shoring outsourcing, they may be forced to work longer hours to gain the same entire rewards. This may hold the unfortunate direct consequence of workers passing less clip with their household and loved 1s, thereby doing inauspicious sexual consequence, divorce, and domestic force.

Offshore outsourcing farther raises the inquiry of quality. This is because most merchandises are outsourced to states with obvious history of substandard or inferior goods, thereby raising inquiries about quality. For illustration, when an car trader company, Ateco Group in Australia foremost looked at establishing Great Wall Motors ( GWM ) Pick-up trucks in Australia last twelvemonth, the GM, Ric Hull considered rebranding them, worried that their obvious Chinese beginning would raise inquiries about their quality ( Malayan insider, May 2010 )

Economic impact of service off shore:


Off shoring in the services sector has a positive economic impact on the United States economic system. Given the strength of U.S services, increased trade in services is really more likely to enter trade excess for the state. By exporting services to China, India and the remainder of the universe, occupations are created for U.S immature college alumnuss and skilled white collar workers. Second, the United States runs a trade excess in the services sector more than any other state. This means that the U.S exports more services than it imports ( Little, 2004 ) . For illustration, in 2003, the USA ran a excess of close to $ 60 billion in services entirely ( Garner, 2004 ) . It has the universes most developed and productive service sector and continues to keep comparative advantage in these cognitions based industries, unlike fabrication sector. For illustration, U.S Bankss, jurisprudence houses, accounting houses, IT integrators, and advisers are planetary rivals.

Off shoring service work attracts foreign direct investing ( FDI ) in the host states. A long-run position of off shoring services promote a healthy and stable universe economic system peculiarly in emerging markets through foreign direct investing. Foreign direct investing by transnational companies is one of the best ways to advance private sector growing, which harmonizing to a survey by the McKinsey planetary Institute is the best manner to relieve poorness.


Off shoring in the services sector has been criticized in the U.S as being responsible for the weak rate of occupation creative activity during the current economic recovery. These critics are concerned that exporting the American cognition base to other states could weaken the Americans leading in engineering and invention, a menace that has a serious deduction for the national security every bit good as the economic competiveness of America. Harmonizing to Michael Porter ‘s Diamond Model ( 1990 ) , competitory advantage theory suggests that states and concerns should prosecute policies that create high quality goods to sell at high monetary values. The theoretical account states that productiveness growing is the chief focal point of national scheme. In other words, the exportation of cognition outside the state that would hold been engaged in a meaningful productiveness in American economic system compromises the scheme and may take to the loss of fight.

Social impact of off shoring services


Service off shoring is a comparatively recent development in international trade and its impact on the American economic system is non yet to the full known. However, services off-shoring has caused a important occupation bend over. This is because of the creative activity and devastation of occupations in the American economic system. U.S workers particularly college alumnuss and skilled white collar workers are more likely to exchange industries as their industry exposure to off shoring services to developing states rises. While off-shoring of white-collar work may supply benefits to single houses, if it becomes widespread plenty to take to rapid productiveness additions in sectors in which the United States is a premier exporter, the U.S. footings of trade could deteriorate plenty to do existent income losingss for the state. Even if this does non happen, the footings of trade consequence could still tilt against any efficiency addition from off shoring, taking to a smaller economic system broad consequence than suggested by the firm-level analysis of MGI


The scrutiny of the argument on the pros and cons of outsourcing for both the place and host state in footings of economic and societal impact can non be generalized. The benefit and draw dorsums for either must be seen on a state to state footing ( the outsourcer and outsourcee ) as every finish state has different PESTEL factors to be considered. In decision hence, one must be careful when speaking about this subject because benefits for outsourcing are for the populace as a whole. Those who have lost their occupations overseas may hold problem seeing the benefits and they may hold a justified ground to be concerned about outsourcing. On the other manus, many good things have occurred because of outsourcing. Although the media enjoys concentrating on the bad and speaking about how many occupations are lost and forgets to inquire how many occupations are created. Offshore outsourcing may non be the lone cause of unemployment in America, since the economic system has suffered recession in recent old ages. In other words, the unemployment may besides be the consequence of recession. However, an ideal solution would be to deduce economic additions but non at the disbursal of negative societal impacts. It must non be a zero amount game.


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