Essay Offshoring and Outsourcing

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Offshoring and Outsourcing,
Is offshoring beneficial to the US economy, discuss the views of Farrell and Levy.

International trade has constantly increased over the 20th and 21st century, and this trend looks set to continue over many more years. The practise of international trade has evolved from simply import and export of goods from different countries of origin, to production and customisation of inputs for firms in foreign countries. This is where offshore outsourcing comes in. Offshoring refers to the practise of basing a company’s processes or services overseas in countries where average labour costs are lower. Companies aim to gain competitive advantages by outsourcing tasks to foreign countries, tasks which were previously performed domestically. There has been great debate as to whether offshoring is beneficial for offshoring countries. Farrell claims offshoring leads to mutual value creation between offshoring countries and destination countries, however Levy opposes this view, stating that offshoring leads to huge job losses which causes further economic consequences.
Farrell and Agrawal argue that offshoring creates enormous value for companies and the economy as a whole. With the dramatic fall in international telecommunication costs, there is increased opportunity for businesses to take advantage of high skilled, low wage workers in emerging markets. This means that offshoring companies can communicate easily with destination countries, however most communication is likely to be done by email. Levy Argues that email communication is not always an efficient way of substituting face to face communication. Furthermore, with the time zone it is hard for telephone communication to work, thus companies are worried about the quality of work being done.
Mckinsey global institute published analysis of the economic benefits between the USA and India which showed that every dollar transferred to India, 1.46 dollars is created in new wealth with India receiving 33 cents through wages to local workers, whilst the US captured the remaining 1.13 dollars mainly through cost savings for businesses. Furthermore, they claim the US benefits as workers are reemployed for other jobs. However studies from Kletzer found that 86 per cent of those workers who lose their jobs to offshoring are worse off, with 56 per cent of those workers being severely worse off due to job displacement. Despite this the Bureau of Labour Statistics show that offshoring only accounts to 1 per cent of US job losses, thus although some workers may be worse off, offshoring is not affecting the whole economy as must as might be thought.
Farrell and Agrawal claim that offshoring contributes to export growth. Outsourcing companies buy many goods and services from abroad. For instance call centres in India may have many American goods and technology. Farrell and Agrawal estimate that every dollar invested in India, Us exports to India increase by an additional 5 cents. This demonstrates that outsourcing can increase exports and reduce the budget deficit. However as pointed out by Levy, if unemployment increases the US government is likely to receive less taxes, thus government revenue streams will be decreasing. Furthermore, this can have a huge economic consequences as higher paid jobs are starting to be outsources. Governments may need to help fund education and retraining schemes in order to make sure workers have required skills to work and increase the Gross domestic product of the economy.
Farrell goes on to say that offshore outsourcing can be more beneficial than originally thought, as there are many benefits that are not being realised by organisations. For example they claim one airline is capturing 75 million dollars in previously lost receivables on top of the 50 million dollars it saves in operating its accounts receivable department in India. However Levy also claims that there are many hidden costs that get unnoticed. For instance it