Readers Question: Is outsourcing beneficial for multinationals and their home countries?
Outsourcing occurs when a firm delegates an aspect of a business to another firm. This may be to a firm in another country. For example, a large multinational may outsource cleaning to an outside cleaning firm. It may also ‘outsource’ its customer support call centre to another country where wages are cheaper.
The Benefits of Outsourcing for Multinationals include
- Lower wages for labour-intensive stages of production. A good example is the outsourcing of call centres from the UK to India. Wages in India are significantly lower than in the UK, enabling a reduction in costs. This is useful for labour-intensive aspects of the industry
- Comparative advantage. Production can be concentrated in the most efficient location.
- Can avoid having to spend time on worker management, e.g. if you’re cleaner goes on maternity leave, it’s not your responsibility to find an alternative worker.
- Improvements in Technology and Transport. Improvements in the internet and communications mean it is easier to outsource and keep control of what is happening.
Benefits to society of outsourcing
- Outsourcing means there is greater specialisation in the economy. This enables greater economies of scale. If you set up a law firm, you will probably have expertise in that area, but to also have to provide cleaning and catering would waste a lot of your time. There is no point managing cleaners when you could be concentrating on managing lawyers. Thus the law firm benefits from being able to concentrate on what it does and the cleaning firm can use its knowledge and experience to provide an efficient service. There is merely a transfer of employment from law to cleaning company, but with greater efficiency.
- If the British firm makes costs savings, this will lead to lower prices or higher profits for shareholders. With lower prices, consumers are able to purchase more goods which create additional demand in the economy. Thus, jobs elsewhere will be created.
- The law of comparative advantage states that net economic welfare can be increased if countries specialise in the areas where they have a lower opportunity cost. Thus, there is a net gain by outsourcing certain sections of the economy to other countries – if they have a comparative advantage in this area.The problem is that the job losses are very visible and the benefits very hard to see because they are spread thinly. Whereas the job losses are very concentrated.
Problems of Outsourcing
- Standards may be different. E.g. People have said that the English of Indian call centres is more difficult to understand.
- The firm may struggle if the outsourced firm is unreliable.
- Potentially higher costs as the firm will require a profit margin to make it more worthwhile. It may be cheaper to employ cleaners directly.
- Impact on reputation. Sometimes multinationals have been criticised for outsourcing production, such as call centres to countries outside the country where it does business.
Benefits of Outsourcing for developing economies.
Outsourcing is a growing phenomenon among developing countries. There is controversy about whether outsourcing actually benefits developing countries. But some benefits include
- Creates Direct Foreign Investment. This boosts the rate of economic growth and can lead to improvements in infrastructure and confidence in the economy.
- Creates Employment. Outsourcing has provided a new arena of employment, especially for developing economies with good standards of English and skills.
- A benefit to balance of payments. (inflows of investment. This enables a developing economy to run a larger current account deficit and have a better standard of living.
- Extra demand for workers may put upward pressure on wages in the long term.
Costs of Outsourcing for developing economies
- The exploitation of the local environment. Multinationals can move production to countries with weaker environmental standards.
- The exploitation of workers. This is a contentious issue. Workers may look to be exploited by western standards. But, conditions and wages may be the same or better than many domestic industries.