International Business

Economic & Political Environment for International Business



Economic & Political Environment for International Business

Discuss how the changing technological environment present threats and opportunities to the outsourcing of production from any single country of your choice?

Globalization and advances in technology have expanded the volume and importance of the trade in services since the early 1990s. With the services sector comprising two-thirds of GDP in many industrialized economies, this has greatly enlarged the potential for labor market impacts from changes in the international trade. At the core of this need lies the fact that many of these studies rely on different definitions of outsourcing, with equally varying theoretical foundations. The effects of outsourcing as trade in services have often been obfuscated by confusing the effects attributable to it with the effects attributable to other economic activities, such as Foreign Direct Investment (FDI) or non-Mode 1 trade in services.

An example of the confusion that can arise from an inconsistent understanding of outsourcing would be the public outcry in the USA in the wake of claims that tens of thousands of American jobs are being moved overseas because of firms outsourcing their back office operations, and other lower wage services, to countries like India and China. Most of the estimates provided in the media and in consulting reports are based on critical mischaracterizations of outsourcing, or have systematic errors, such as not distinguishing between job destruction from companies relocating physical plants and losses that may have been attributable to those jobs being outsourced to another country.

One study claims that 3.3 million US jobs will be outsourced by 2015, thereby accounting for $136 billion in lost wages. This high estimate considers neither job creation arising as a result of outsourcing nor does it restrict its focus to just trade in services. Among others not all services can be traded, and thus not all jobs are at risk of being adversely affected by outsourcing. Services that require personal contact, such as hairdressing and waiting tables can never be traded. However, workers employed in activities that do not require in-person interaction and that can be carried out electronically are more likely to be affected by outsourcing.

However, despite the apparently boundless potential for services imports to replace labor, there is an upper bound on how much US labor can be displaced by services imports. The empirical estimate from that paper puts the upper bound at 28 percent of all US employment, and is very similar to the more subjective estimate of 22 to 29 percent. The greater outsourcing will have far reaching effects on US labor such as reduced employment and wages, affecting many occupational groups that are currently untouched by outsourcing, but that may be affected as technology increases the range of service activities that can be traded.

Many of these concerns strike a powerful chord with US labor due to the characterization of services outsourcing with other uses of outsourcing, such as FDI, intermediate inputs imports, plant relocation two other economic phenomena ...