Offshoring

           Offshoring (also known as international fragmentation and vertical specialization) can be defined as the relocation of business processes to a different country in order to reduce the average cost curve of a business. Offshoring can be seen in different stages of the production process, either in production of a good or decision making. As a result of advancement in Information technology, previously non tradable services have now become tradable or are expected to do so. The business practice of offshoring focuses on the relocation of labor-intensive service industry functions to locations remote to the business center, such as India, Ireland or the Philippines. This situation has raised many concerns amongst the general public about the future of jobs and workers' income, especially in the US and the UK. Many Americans are particularly concerned about the loss of skilled, well-paid jobs in fields such as computer programming and accounting. Reflecting this growing concern, some members of Congress and state legislators in the US have focused attention on the offshoring of service jobs and production, even introducing legislation to limit the outsourcing of jobs to other countries. Offshoring raises many questions for policymakers and the general public. Therefore it is important to recognize which service sector jobs will be affected most by import competition. The home country has to analyze the effects of service-sector offshoring on its output, employment, and, most importantly the living standard. To answer these questions we have to analyze the opportunities and threats a country experiences by off shoring. 
 
             Cheap factors of production in developing economies are the major reason for offshoring of service sector jobs. There is a large gap between wages in developed and developing economies. For example, a computer programmer in India would be paid a very low wage compared to a computer programmer in the US.  “Take the U.S.-India example: We estimate that as much as $1.46 in new economic value is created for every dollar American companies spend offshore. Both countries win. Counting the advantages such new business brings Indian workers, firms and governments, the McKinsey Global Institute estimates that India gains a net benefit of at least 33 cents from every dollar the United States sends offshore. America, meanwhile, earns a benefit of at least $1.13 for every dollar spent “.In addition to that the workers in developed economies are also more expensive as they are usually provided with fringe benefits. Keeping this in mind we do know that labour productivity in countries such as the US offsets the low average cost in developing economies. Another explanation can be drawn from the Ricardian model of international trade which discusses comparative advantage. This theory states that a country should specialize in the production of a good, which it can produce at a lower opportunity cost relative to other goods.  
 
          In a stiffly set labour market e.g. Belgium, the main argument about offshoring and its relation to employment is that on the one hand the relocation of production abroad will cause layoffs to those who previously performed the tasks locally – this will create a short-run unemployment surge; while, on the other side of the coin, it will result in increased levels of efficiency to the host and recipient countries. The productivity of workers in certain stages of the production process will be raised through cheaper inputs or a higher quality of inputs at the same price, these inputs would be imported now as the domestic labour is now jobless. Thus, in the long-run one would expect to observe an expansion of production and in turn see higher rates of employment as offshoring improves the efficiency and competitiveness of the production process. Nonetheless, the rise in productivity will inevitably incur a negative impact such as the concentration of labour into downstream production which would lessen the demand for workers. This then begs the question of absoluteness regarding the impacts of offshoring. Furthermore, the hort-relative factors that govern demand have an effect on the outcome and they may be influenced by the flexibility to the extent that offshoring may alter the terms of trade of a country. Essentially, the fundamental benefit of offshoring posits the advanced economies an opportunity to expand their base. Take the U.S.-India example: An estimate suggests that as much as $1.46 in new economic value is created for every dollar American companies spend offshore.    Obviously, this is a win-win situation. Looking at the advantages, new companies bring Indian labourers and firms into the equation. The McKinsey Global Institute estimates that India earns about 33 cents for each dollar that is spent in its country while the U.S earns $1.13 per dollar spent giving it a profit of over 100%. In addition, the element of cost savings allows multinational companies to save 30-50% compared to the U.S. based, for the average employee for the exact level of output. More importantly, the work ethic of offshore employees underlines the fundamental benefit of offshoring. The rationale behind this is to not only eliminate any potential recruiting costs but also to build a greater base of employment. Developing economies are given a growth platform to effectively specialize and deliver solution to clients. The example of Accenture in India is the epitome of this advantage of offshoring. The company’s solutions include management consulting, technology and business output outsourcing; these fundamental pillars of the entity outline areas that substantiate the relationship of developed economies to the lowcostworkers.  
Economists believe that offshoring in the long run will have no negative effect on the output or the unemployment level in the economy in fact it will most likely have positive impacts to it if anything. Real GDP in the long run consists of technology and the level of physical capital. The price mechanism would automatically return the economy back to its equilibrium and redirect labour to its optimal use. Another factor that affects employment in the long run is the exchange rate, for example if offshoring causes developed economy to run a trade deficit, where imports exceeds exports, the exchange rate would depreciate causing domestic goods to become more competitive. 
A rudimentary analysis of the advantages and disadvantages of offshoring to suggests a balanced outcome to the employment levels in the advanced economies. The advantages of indulging in offshoring go beyond the simple fact of cost savings; employees can be replaced with more speed, that is, open positions will be filled more quickly as the labour forces in offshore destinations are generally more favourable and the availability of a suitable candidate is more likely; further on the lines of recruitment, offshoring also cuts recruiting costs as many companies pay a fee for recruiting employees while in the offshore setting, these fees are forgone as the offshore vendor is responsible for this task as per the agreement.   Also, by using an outsourced employee, the time spent on searching job boards, recruiting, interviewing and training is saved as the offshore vendor is responsible for coaching, maintaining employee morale and performing such administrative tasks. On the legal front, the costs of maintaining lawyers can be slashes while employee issues that turn into legal battles can be eliminated – this is because the employees are the liability of the offshore company’s vendor. With offshoring, companies are more distant in their relationship with employees and this allows them to save time and expand quickly with accordance to the needs of the business. Offshoring also provides job opportunities to the developing countries which in return increases the purchasing power for the locals and more goods will later be imported by these countries as they become better off - comparative advantage will make both countries better off. Offshoring gives the developing country an opportunity to develop thus creating more consumers for the developed country's business.” An example would be textile job that was once in NY, moved to North Carolina in the 1960s growing that economy, and now to Thailand growing that economy. As the developing country develops they begin to see a new consumer base develop (i.e. the middle class in China) they need the new products and services developed countries are producing, while giving us the developed country an alternative to their old industrial economy.” Competition for countries such as China is beneficial; it leads to economic growth, especially in terms of technology as it promotes Research and Development (R&D). If an American firm wants to maintain its superiority in the technology field, it must be innovative and make cutting edge equipment. Assuming ceteris paribus in terms of trade regulation, the company with the better good should embrace China's growth as a potential oyster of over a billion more customers.  
Keeping all these positive factors in mind, we must weigh the disadvantages of offshoring against them. Firstly, the expected level of cost savings is generally exaggerated, as the offshore workforce will not be as productive as the local workforce – the simple reason being that advanced economies such as the U.S can devoted a higher level of capital per worker while developing economies such as China are labour intensive, leaving the U.S with a higher average productivity level. Additionally, sizeable cost inflation has been seen in some recipient countries, namely India where the wage rate has hiked and overhead inflation of rent and other utilities has increased, affects the U.S offshorers. Another disadvantage is that offshoring destinations generally do not possess the same capabilities to prove the same level of service that they would receive when the company was based at home, a simple example of this can be seen in the form of call centres which are based in India, many UK customers would have difficulty in understanding accents creating a slight language barrier resulting in a lower level of customer satisfaction. Lastly, there is the grave issue of data protection, advanced economies guarantee data to be protected and have the resources to do so while in countries such as India, this same information would be more vulnerable to fraud and theft as the backup and protection systems are not as advanced.  
           

            In conclusion the rapid increase in offshoring of service sector jobs has impacts on employment in developed economies. Certain factors have facilitated the rise in offshoring such as enhancements in technology and availability of low cost labour in developing countries. In addition the theory of comparative advantage states that labour intensive countries such as India should specialize in labour intensive jobs and capital intensive countries should specialize in capital intensive jobs, which explains the reason for the increase in offshoring. In relation to the effect on employment, it is important to consider the long term and short term effects of offshoring. In the short run, workers will be laid off, however, this may be offset by the increase in productivity and employment in the long run, as economic theory suggests that displaced workers can be reallocated into jobs where their abilities will be utilized to their best. Furthermore if policy makers regulate the trade in services, they would prevent firms from taking advantage of low cost labour in developing countries. This may be a disadvantage for all parties as it would lead to higher prices than if firms were able to relocate in low cost economies and produce at a lower cost.