Does outsourcing work for all economies?

The concept of outsourcing is not new to many businesses. In the 1880s, the first New England textile mills moved its production to the Carolinas. It might not have been called outsourcing then, but whatever name it carried at that time, companies have already tapped on contracting out some of the functions of their businesses to third party service providers. Other companies have been using external accounting firms to handle the financial operations of their businesses. Manufacturing companies have sub-contracted production of some components to another company to reduce their operational costs.

In today’s scenario, such practice is called outsourcing and for the past decade or so, it has created a niche for itself in global business practices. Outsourcing is a welcome concept especially for third world countries since they are at the receiving end of this process. With outsourcing, the unemployment rate in third world countries that have developed the potential labor force for this specific industry had been positively addressed.

The Essence of Outsourcing

Outsourcing is simple and pretty straightforward to understand. Functions at work that are dematerialized in nature are passed on to economies with low-rate labor market. Functions such as receiving distress calls from consumers, promoting and advertising functions, human resource recruitment, bookkeeping and accounting services, etc., are some of the usual business components that have been contracted out to third party providers.

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Effects on Economy: Receiving End

In general, Asian third world countries like the Philippines, India and China are benefitted by outsourcing. By responding to the outsourcing demands and requirements of progressive countries like the US and other western countries such as Australia, the UK, Canada, etc., they are able contribute to their country’s economy. Instead of having a high rate of unemployment, opportunities are provided in different fields for people to earn income and help stabilize the country’s economy. A workload of four million jobs from various industries and businesses all over the world, has been transferred and shifted to the economies of the Philippines, India and China.

Effects on Economy of Progressive Countries

Some economists have made pronouncements and predictions that by 2015, more US jobs are bound to be transferred to developing Asian and African economies. And this will be driven by cheaper labor markets. What this means for the US economy, and similarly for the economies of other countries that are deep into outsourcing, is that more local workers will be stripped off with the opportunity for employment as most functions would eventually be sub-contracted to offshore outsourcing countries.

Outsourcing is now seen as a potential cause of long-term structural unemployment in the US, hollowing out most industries. Surveys and studies made by many researchers have pointed to outsourcing of jobs or services by US companies to developing countries in Asia as one of the causes of economic recession in the US.

With no jobs to offer to local workers since most of the job functions are taken by offshore outsourcing providers, the US economy could not provide the required number of alternative jobs against workers that were laid off. And if the rate of outsourcing is not controlled by the government finance and labor departments, it will be difficult to maintain a regional economic balance.

With some of the world’s largest companies and biggest employers turning to outsourcing – Sodexo in food service, Foxconn and Lenovo in computer manufacturing, Nike in clothing and sports equipment, and Apple in communication gadgets – in order to competitively sustain their operations, the economic impact will be felt by the outsourcing business and the 3rd party provider for outsourced services.

In simpler terms, a job outsourced to a worker in the outsourcing countries will have an equivalent job lost in the progressive countries’ labor market.