Introduction
The growth of globalization has led to a remarkable transformation in the international economy. One of the notable changes is an increase in the intensity of competition. Consequently, organizations are experiencing different challenges in the quest to achieve sustainability. An example of such challenges entails the increase in the cost of production. To overcome this challenge, most organizations are expanding some of their operations into the international markets.
The rationale of this approach is to expand its value chain activities. Trade, investment, and production are components of the global value chain. Due to globalization, production has become dispersed geographically as evidenced by the high rate at which companies are starting their production activities in different countries. The establishment of a comprehensive network of suppliers and their affiliates enhances the production activities (“Organization for Economic Co-operation and Development” 14).
One of the approaches that organizations are increasingly adopting in coping with the challenges associated with globalization is off-shoring. Bottini, Ernst, and Luebker affirm that the “ability of offshore depends on the presence of a pool of well-educated job candidates, a set of liberal trade rules, and robust distributed communication technology” (17). Thus, one of the issues that have led to growth in the rate of off-shoring entails the increase in the rate of liberalization.
Despite the benefits associated with off-shoring, the practice has become a subject of contention. The benefits of off-shoring do not flow automatically to the individuals that it affects. Off-shoring has led to a significant reduction in the role of the state with regard to international competition. States are under pressure to give multinational companies the necessary support to facilitate their operations in the host country. “For Ohmae and others, the role of the state is now severely restricted. Individual nations have no power to change the terms of competition. State power has been reduced – either eroded by the market or taken up by multinational companies and global financial institutions.
One of the few constructive strategies left to the state in his view, is to provide what companies and investors: investment in skills and infrastructure and freedom from burdensome regulation and ‘red tape” (“CLMS Module 1 Unit 1” 7). Therefore, one can argue that off-shoring presents an economic phenomenon that can lead to remarkable improvement in the global economy and result in strain within the societies in which it is applied. Bottini, Ernst, and Luebker affirm that off-shoring should be managed effectively to translate into net social gains (18). This paper entails a discussion on the meaning of off-shoring and the issues that it raises concerning the states’ attempt to protect the national industry and jobs. Moreover, the paper illustrates that states are not powerless in coping with the issues associated with off-shoring.
Definition of off-shoring
Off-shoring refers to a strategy through which an organization contracts another overseas company to undertake some of its activities. Off-shoring has contributed to remarkable implications by providing multinational corporations with an opportunity to offer a high value to consumers at a considerably low cost (Bottini, Ernst, and Luebker 18). One of the core drivers of off-shoring entails the existence of international differences with regard to factor prices. Thus, cost- advantage and efficiency are major determinants in organizations’ decision-making process on off-shoring. Off-shoring enables organizations to split their value chain and undertake some of the activities that they are less efficient in the foreign affiliate countries or contract foreign suppliers.
Different countries are eliminating trade barriers to promote off-shoring. China and India are amongst the countries that have adopted the open economic system to promote off-shoring. The concept of off-shoring has undergone remarkable growth over the past decades. Conventionally, the practice was mainly limited to tangible materials. However, the trend has changed as evidenced by the growth in the off-shoring of services. The growth in the off-shoring of services has largely been spurred by the revolution in the ICT sector. This practice can be undertaken through either a wholly-owned foreign subsidiary or subcontracting.
The concept of the wholly-owned offshore subsidiary is commonly referred to as captive off-shoring. The rationale of captive off-shoring is to gain greater control over the foreign subsidiary’s operation through direct ownership and ensure that a highly qualified workforce from the host country undertakes the operation of the subsidiary (Bottini, Ernst, and Luebker 19).
Issues raised by off-shoring concerning the state’s attempt to protect national industry and jobs
Governments have a responsibility to ensure that their countries achieve the macroeconomic goals that include the attainment of high economic growth, price, and interest rates’ stability and low rate of unemployment. To achieve these goals, states must implement effective strategies to protect the national industry and jobs. Well-intentioned policymakers should strive to protect domestic jobs (Pedersen 54).
However, to benefit from the global economy, countries are under pressure to undertake different reforms amongst them the adoption of an open economic regime to facilitate off-shoring. This phenomenon is well illustrated by the increased elimination of trade barriers amongst the member states of a particular trading bloc. The establishment of trading blocs has led to a considerable intensification of the rate at which countries interact with each other with reference to the trade and investment (Auer and Genevieve 30).
Despite the benefits associated with off-shoring, a number of issues have arisen. Economists argue that off-shoring has made it difficult for states to protect the national industries and jobs. Some of the issues that have arisen due to the increase in the rate of off-shoring are examined herein.
Reduction in the rate of employment
Economic policymakers have a duty to ensure that the formulated economic policies contribute to the creation of employment. On the contrary, off-shoring presents a challenge with reference to the creation of employment. Despite the fact that off-shoring is motivated by the need to benefit from the prevailing cost-advantage, the developed countries experience a challenge in maintaining a low rate of unemployment.
This phenomenon arises from the fact that most of the multinational companies relocate a significant proportion of their production activities to foreign countries. To exploit the inherent cost-advantage successfully, the multinational companies outsource labor from the host country’s labor market. The increase in the rate of unemployment in the parent country is not only direct but also indirect. This assertion arises due to the existence of inter-sector and intra-sector linkages with a particular multinational corporation. Therefore, the parent country might experience a remarkable increment in the rate of unemployment.
In addition to the above aspect, off-shoring has adverse effects on the developing countries where the multinational companies establish their operations. Economists argue that off-shoring culminates in the crowding-out of domestic investment in developing countries. One of the core requirements in the operation trading blocs entails the establishment of an effective environment for the promotion of foreign direct investment. Consequently, most states are concerned with attracting foreign direct investment at the expense of stimulating domestic investment. Therefore, the increased relocation of production activities to foreign countries hampers domestic investment in the host country. Moreover, this practice hinders entrepreneurship hence limiting the growth of firms in the small and mediums sized sector, which are critical in stimulating employment in the developing economies.
Wage inequality
One of the fundamental aspects that states are concerned with relates to the equitable distribution of wealth and income. The concept of off-shoring is based on the precepts of free trade (Swanson 290). However, off-shoring contravenes the democratic theory, which hypothesizes the existence of a society comprised of equal, autonomous, and free individuals. One of the issues that the theory emphasizes relates to equality with regard to income and wealth distribution (Levin-Waldman 34). Swanson further affirms that free trade increases the rate of income inequality especially in developed countries (290).
The multinational corporations tend to offshore the labor-intensive production activities to the foreign countries. Thus, their probability of benefiting from the abundant cheap and low-skilled labor available in the developing countries is increased remarkably. The off-shoring of the low-skilled labor components translates into increased competition amongst the low-skilled employees domiciled in the domestic market from the host country.
This aspect means that the bargaining power of the low-skilled employees in the developed country is reduced significantly. The outcome of this occurrence holds that the low-skilled employees experience an increase in downward pressure with regard to their wage level hence reducing their income. Conversely, the highly skilled labor components experience a significant increase in their bargaining power and hence their wage and salary level. Therefore, off-shoring leads to an increase in the income gap between the high and low-skilled labor components. One of the countries that have experienced significant growth in the rate of job polarization over the past decade in the United States. This occurrence is associated with the high rate at which the country is adopting new technology and off-shoring amongst the local companies (Card and Daschle 91).
Job quality
In addition to the above aspects, off-shoring raises a fundamental concern due to its impact on the quality of jobs in developing countries. One of the strategies that multinational corporations adopt in their off-shoring process entails entering a contract with a foreign company. The foreign company contracted may further sub-contract the off-shored activities to local companies within the informal sector.
This phenomenon might emanate from the growth in the intensity of competition amongst suppliers in a foreign country. This aspect leads to downward pressure on profitability and prices hence stimulating the contracted companies to subcontract in the quest to minimize labor costs. The outcome of further subcontracting of the off-shored activities entails a reduction in the labor standards. Bottini, Ernst, and Luebker posit, “If production relocation induces the local firm to specialize in the production of intermediate goods and discourages the development of production stages, it could undermine the future development and growth of the receiving country” (18).
Some economists argue that if production relocation leads to the creation of new jobs in the formal sector, the developing countries would experience a considerable increment in the rate of labor turnover. Furthermore, the need to exploit the available cheap labor means that the low-skilled employees in the developing countries are forced to work for long hours to produce a similar volume of output compared to what would be produced in the home country.
The growth in the rate of off-shoring has been associated with an increase in unfair and unethical labor practices over the past decades. One of the most notable cases entails an increase in incidences of child labor amongst the subcontracted companies in the developing countries. Some of the multinational corporations are not concerned with the working conditions in the factories of the contracted suppliers. This situation is well illustrated by the collapse of Apparel in Bangladesh, which was contracted by a multinational corporation. This aspect illustrates the existence of gaps in the states’ commitment to promoting the workers’ rights such as working hours, worker safety, and living conditions in accordance with the International Labor Organization standards
Critique of the assertion that globalization has made states powerless in protecting national industries and jobs
Irrespective of the above issues that have become a major concern in states’ quest to protect the national industry and jobs, the view that states have become powerless because of the high rate of globalization is subject to debate. According to Weiss, “the problem with the ‘powerlessness’ argument is not that it is wrong about the new constraints on government capacity to make and implement the policy” (13).
This aspect is well illustrated by the fact that most countries, especially the emerging economies, are successfully implementing laws and policies aimed at stimulating off-shoring from foreign countries or in-shoring while at the same time ensuring that national industries and jobs are adequately protected. This trend has arisen from the realization of the view that in-shoring is a major driver of economic growth and employment creation. Card and Daschlef relate off-shoring with the increase in the level of productivity and employment (96). Despite the fact that off-shoring may stimulate organizations to implement the downsizing decision in the short run, the long-term effect entails an increase in the number of firms hence leading to the creation of new jobs. Therefore, off-shoring can contribute to the attainment of macroeconomic goals.
During the 21st century, no country can achieve sustainable economic growth through a closed economic regime. On the contrary, countries have to interact with each other through cross-border trade to benefit from the prevailing cost and resource differentials. However, to avert the negative concerns associated with off-shoring, countries implement effective policies, regulations, and laws to protect the national industry and jobs. The policies and laws formulated should contribute to long-term benefits. In line with this assertion, there are diverse options that states can pursue in protecting national industries and jobs. This assertion emphasizes that states are not powerless in terms of influencing and controlling the forces of globalization. Some of the proactive avenues that states can pursue in protecting national industries and jobs are expounded herein.
Promoting domestic investment
States have a responsibility to promote entrepreneurship by establishing an environment that fosters innovation. One of the strategies that governments can integrate entails establishing an effective education system. Additionally, governments should ensure that the education system is not skewed towards the development of the white-collar job labor market. Nevertheless, the education system should also focus on blue-collar jobs. To achieve this goal, states should ensure that the development of skilled labor in the blue-collar job segment is not hindered by underinvestment in equipment and machinery.
This approach will contribute to the establishment of a highly qualified labor force. Some of the countries that are currently being considered as cost-efficient with regard to off-shoring are characterized by a low-quality labor force such as graduate engineers. Examples of such countries include China and India. Overreliance on such a workforce in the production stage might present a health and safety hazard to consumers. The outcome of such incidence entails the destruction of the reputation of the national companies both in domestic and international markets. However, governments can overcome this off-shoring challenge by improving the quality of the domestic education system. Therefore, states are not powerless in the face of globalization as they have the capacity to counter the negative outcomes that might arise from increased globalization.
Investing in the development of innovative capacity will play an essential role in promoting the growth of small and medium-sized companies. Subsequently, states have the ability to minimize the threat associated with the exploitation of low-skilled labor by multinational companies. Furthermore, growth in the level of entrepreneurship will culminate in the creation of new jobs. To promote domestic investment, governments have the capacity to improve the investment environment, for example by offering investment incentives. One of the ways to operationalize this aspect entails implementing effective tax policies such as capital taxes and sales taxes.
Another strategy that governments can adopt to minimize the adverse effects of off-shoring entails giving subsidies to investors for their innovation. This strategy will contribute to a remarkable improvement in the rate of research and development. Investment in research and development is critical in limiting offshore outsourcing. Providing local companies with subsidies on research and development is essential in limiting the incidents of off-shoring amongst them. Furthermore, it is essential for states to implement effective legal structures aimed at protecting domestic investment and innovation. Examples of such laws include the Intellectual Property Rights (IPRs). The implementation of such laws will play a fundamental role in fostering local innovation hence promoting the growth of entrepreneurship.
Scenario illustrating that states are not powerless
Over the past few years, one of the most notable countries that have become an attractive destination for multinational companies intending to undertake off-shoring includes the United Arab Emirates. Working as an expatriate in the UAE has led to an extensive understanding of the view that states have sufficient capability to protect national industries and jobs. Thus, states have the capacity to establish a balance between the pros and cons associated with off-shoring.
The attractiveness of the country has arisen from the adoption of the open economic system. Currently, the UAE is a member of the Gulf Cooperation Council (GCC), which is a major trading bloc in the Middle East. The country’s rationale in implementing the system is to stimulate the rate of economic growth through Foreign Direct Investment [FDI]. One of the approaches that the country has integrated into stimulating in-shoring entails offering off-shore investors’ tax relief.
Moreover, this strategy has been operationalized through the establishment of free zones. Thus, companies intending to offshore their production activities must base their areas of operation in the free zones. The UAE government has further implemented strict regulations to protect national industries and jobs. For example, all foreign companies operating in the designated free zones are solely required to produce goods and services for export. Subsequently, their products are not supposed to be sold in the local market in the UAE.
Additionally, foreign companies are restricted from importing goods and services into the UAE for resale purposes. Through this approach, the UAE government has been in a position to protect national industries and jobs. The protection of the domestic market from the offshore companies operating in the free zones has played a remarkable role in stimulating entrepreneurship amongst the Emiratis. Another approach that the UAE government has taken into account in ensuring that off-shoring is beneficial to the country’s economic growth entails imposing a 5% export duty on all products leaving some of the free zones such as the Jebel Ali Free Zone.
In addition to the above aspects, the UAE implemented comprehensive employment laws that guide the offshore companies operating in the designated free zone. The laws are stipulated under Federal Law No. 8 of the UAE Labor Laws. The law stipulates a number of issues relating to employment issues. First, the law stipulates that all foreign companies operating in the UAE must adhere to the employment standards such as desisting from employing juveniles and implementing acceptable working hours and safety standards. Furthermore, the companies have a duty to give employees other benefits such as annual leave, maternity leave, sick leave, and ensure that workers get gratuity payments at the end of their service.
In January 2011, through the Ministry of Labor and Social Affairs, the government enacted a law stipulating the minimum wage for the respective job categories. This aspect indicates the government’s commitment to ensuring that the local employees working in the offshore foreign companies operating in the UAE are not exploited with regard to wages. Thus, the government has been in a position to counter the occurrence of wage inequality. To protect their jobs from the local employees working in foreign companies, the UAE government requires foreign companies to file a contract with the Ministry of Labor illustrating the details of the employment. Through this approach, the UAE government has succeeded in protecting the rights of the employees.
Conclusion
The concept of off-shoring has undergone remarkable growth over the past decades. Most multinational companies are integrating the strategy in the quest to achieve sustainable operations. The attractiveness of this practice arises from the fact that it enhances companies’ capacity to operate cost-efficiently by relocating some of the production activities that are less cost-effective in the domestic market into foreign countries.
Therefore, a firm must undertake extensive research before venturing into off-shoring. The study should be aimed at identifying the most attractive country to off-shore some of the activities. The growth in off-shoring has further been stimulated by the adoption of free trade and trade liberalization. The purpose of this study was to discuss the assertion that globalization has made states powerless in protecting national industries and jobs. The assertion that the states’ only role is to promote off-shoring through the establishment of the requisite infrastructure and elimination of bureaucracies is wrong.
Off-shoring can lead to negative effects on both the domestic and the host country. Some of these negative effects relate to an increase in wage inequality, skills gap, and an increase in the rate of unemployment. However, if well managed, off-shoring can contribute to economic growth in developing countries. To achieve this outcome, governments should undertake a number of measures aimed at promoting domestic investment. Examples of such measures include improving the education sector to deal with the skills gap and to promote innovation. Additionally, governments have the capacity to implement regulatory standards aimed at controlling the operations of offshore companies. Some of the areas that the standards should focus on relating to employment, import, and export activities. These aspects are well illustrated by the approach used by the UAE in protecting the national industries and jobs from the negative outcome associated with off-shoring.
Works Cited
Auer, Peter, and Besse Genevieve. Off-shoring and Internationalization of Employment; a Challenge for a Fair Globalization, Sydney: Institute for Labor Studies, 2005. Print.
Bottini, Novella, Christoph Earnst, and Malte Luebker. Economic and Labor Market: Off-Shoring and the Labor Market; What are the Issues? Geneva: International Labor Organization, 2007. Print.
Card, Andrew, and Thomas Daschle. US Trade and Investment Policy, New York: Council on Foreign Relations, 2011. Print.
Levin-Waldman, Oren. Wage Policy, Income Distribution, and Democratic Theory, New York: Routledge, 2010. Print.
Organization for Economic Co-operation and Development. Interconnected Economies; Benefiting from Global Value Chains, Paris: OECD Publishing, 2013. Print.
Pedersen, Torben. The Off-shoring Challenge: A Strategic Design and Innovation for Tomorrow’s Organization, London: Springer, 2013. Print.
Swanson, Paul. An Introduction to Capitalism, New York: Routledge, 2012. Print.
Weiss, Linda. “Globalization and the Myth of the Powerless State.” New Left Review 1.125 (1997): 3 -27. Print.