Economic Effects of Global Sourcing

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Global sourcing is the movement of work and talent from a high-cost market to a low-cost market. The process allows organizations to compete most effectively in their chosen markets. The most commonly sourced sectors are the manufacturing and service industries. Nations and their businesses involved in global sourcing are seeing fast economic growth. “During the 1990s, income per person in “globalizing” developing countries grew more than three and a half times faster than it did in “nonglobalizing” countries” (Securing Growth and Jobs, 2004).

History

U.S. companies began shifting their labor-intensive processes to offshore locations back in the 1960s. In the late 1970s, IBM had set up shop in India. “The next major event that eventually led to the growth of offshoring was the Y2K phenomenon.” Along with the internet and growth in the telecommunications industry, the use of offshore locations for technological work became possible, and more efficient (Reingold, 2004).

Benefits

There are several benefits to global sourcing. “Many companies report improved productivity levels following the implementation of a global sourcing strategy.” Free time increases and workers can focus on growing the business (Hewitt Associates – Asia-Pacific, 2005).

With 24-hour operations in different time zones, there is increased flexibility and swiftness with getting projects done. Tasks get done more quickly and can be handled while shop is closed on the opposite side of the globe. Companies such as Dell and Microsoft utilize this benefit to their advantage.

Global sourcing also allows for closer proximity to promising markets such as the Pacific Rim and Eastern Europe. Facilities set up in these markets establish added dealings with neighboring clientele, competitors and government organizations. Companies can find their niche in new regions, and appeal to such.

Workers in Europe and Asia are extremely viable. Many students have specialized in the fields of science and technology. A plethora of qualified college graduates emerges into the workforce annually. They are eager to work for U.S.-owned service centers. These jobs are appealing because of the liberal pay and the respectability status in comparison to other jobs.

To remain competitive, many U.S. companies are finding that a sourcing strategy is necessary for the survival of the business. If the competitor is doing it for drastically lower cost, they are eventually going to have to follow suit. U.S. apparel manufacturers such as Levi and Wrangler have been sourcing for some time.

World Economics

The national non-profit public interest organization, Public Citizen, states, “The debate now raging over service-sector offshoring represents the foreseeable expansion of concerns first voiced in the early 1990’s over the effect of globalization on U.S. jobs.” At that time, NAFTA and GATT/WTO were being implemented (Offshoring, 2004).

Experts predict that by 2015, U.S. companies will source U.S. $135 billion in wages and 3.3 million professional jobs. Also, services exported to countries such as India, the Philippines and Russia grew significantly in 2003. The U.S. has dominated almost 75 percent of the sourcing market. With the increase in communication, sourcing has become easier and less expensive.

“The U.S. economy recently took an unprecedented path when it regained strength during 2003 and 2004 without creating growth in jobs” (Bonvillian, 2004). Manufacturing and production industries continue to see shrinkage. However, the service sector is seeing incredible growth. The U.S. economy has historically relied on a 1-percent annual population increase resulting in workers and increased output. We are now seeing a major demographic shift.

The U.S. faces structural economic difficulties. Hopefully the U.S. can find comparative advantage in the impending global economy. Our last economic war occurred in the late 1970s. Japan was on its way to becoming the largest economy in the world. The U.S. was able to salvage the automobile sector, but lost its dominance in the electronics division. “The U.S. industry’s light truck platform, which was protected by tariff from foreign competition, became the basis for the next several generations of U.S. vehicle innovations” (Bonvillian, 2004).

The U.S.’s biggest threat today is China. China provides low-wage, low-cost advanced technology. The country has adopted the technique originally modeled by Japan of manipulating currency to gain advantage. In undervaluing its own currency, the amount of exports increases. China has also been purchasing U.S. government bonds to create leverage when making policies with the U.S.

The country’s large population has created a surplus of workers. The location has become a favored global sourcing destination. China’s evolving legal system is still of concern to many. Intellectual property issues have left the country with a bad reputation.

Of interest is the fact that English-speaking individuals are hard to come by in China. This creates a lack of service workers who would have to deal with U.S. customers. The Chinese government has invested U.S. $4.5 billion in nine universities in attempts to promote English speakers. China’s main sourcing industry has seen success with manufacturing and production.

As the third largest world trader, China is responsible for recent growth in world trade and thus, the economy. Domestic demand in China has played a chief role on foreign trade balance. Foreign direct investment has also played an important role in the globalization of China. The country is also expected to engage in discussions on bilateral free trade areas this year.

India’s BPO (Business Process Outsourcing) sector currently employs 250,000 people. That number is expected to grow to 1.1 million by 2008. “It is estimated that today’s market revenues of U.S. $3.6 billion will reach US $22 billion by 2008.” India has had success in the following industries: auto, engineering, travel, hospitality, retail and banking (Hewitt, 2004).

The Philippines has achieved success with call centers, medical transcription, software, animation, and transactional processing, such as financial/banking processes. “The country boasts a robust infrastructure, good international connectivity, surplus power, strong cultural affinity with the U.S., and quality human resources” (Hewitt, 2004).

The emergence of China and India can provide benefits to our economy. As these two countries develop as markets, we will be able to sell goods and services to them. However, the number of U.S. exports is currently being squashed by the number of our imports.

The Future of Sourcing

The future of global marketing is not known at this stage of the game. There are many theories however. One such theory is that over the next 20 to 30 years, the rise of the four largest emerging markets, known as the BRICs – Brazil, Russia, India and China, could create a dramatic effect on the world economy. In turn, China and

India could surpass most of the major economics. Currency appreciation, in addition to growth could help BRICs rise.

Summary

In conclusion, global sourcing makes good sense. If work can be performed more efficiently and for less cost elsewhere, why not? Additionally, the benefits may be seen worldwide. Opportunities for growth and expansion in other areas here in the U.S. will open up as the more menial, labor-intensive positions move elsewhere. However, larger countries, such as the U.S., China and Japan, need to ensure that human rights laws are not violated when entering into contracts with other countries, and within their own employment sector.

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