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International Business Strategy, Management & the New Realities by Cavusgil, Knight & Risenberger

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Title: International Business Strategy, Management & the New Realities by Cavusgil, Knight & Risenberger


1
International BusinessStrategy, Management the
New RealitiesbyCavusgil, Knight Risenberger
  • Chapter 16
  • Global Sourcing

2
Learning Objectives
  • Trends toward outsourcing, global sourcing, and
    offshoring
  • Evolution of global sourcing
  • Benefits and challenges of global sourcing for
    the firm
  • Implementing global sourcing through supply-chain
    management
  • Risks in global sourcing
  • Strategies for minimizing risk in global sourcing
  • Implications of global sourcing for public policy
    and corporate citizenship

3
Global Sourcing Shopping the World
  • Along with competitors Reebok and Adidas in the
    athletic shoes industry, Nike contracts out
    nearly all of its athletic shoe production to
    foreign suppliers. These firms are best
    described as brand owners and marketers, not as
    manufacturers.
  • Apple Computer sources some 70 of its production
    abroad while focusing its internal resources on
    improving its operating system and other software
    platforms. This approach allows Apple to
    optimally utilize its limited capital resources
    and focus on its core competences.
  • Dell Inc. is another firm that relies extensively
    on a global manufacturing network, composed
    largely of independent suppliers.

4
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5
Global Sourcing
  • Global sourcing is the procurement of products or
    services from suppliers or company-owned
    subsidiaries located abroad for consumption in
    the home country or a third country.
  • Also called global procurement or global
    purchasing, global sourcing amounts to importing
    -- an inbound flow.
  • It is an entry strategy that involves a
    contractual relationship between the buyer (the
    focal firm) and a foreign supplier. It involves
    subcontracting the performance of specific
    manufacturing or services tasks to the firm's own
    subsidiaries or independent suppliers.
  • Global sourcing is classified as a low-control
    strategy to the extent that the firm is buying
    from independent suppliers through contractual
    agreements, as opposed to buying from its own
    subsidiaries.

6
Drivers of Global Sourcing
  • Technological advances, including instant
    Internet connectivity and broadband availability
  • Declining communication and transportation costs
  • Widespread access to vast information including
    growing connectivity between suppliers and the
    customers that they serve and
  • Entrepreneurship and rapid economic
    transformation in emerging markets.

7
Decision 1 Outsource or Not?
  • Managers must decide between internalization and
    externalization -- whether each value-adding
    activity should be conducted in-house or by an
    independent supplier.
  • This is known as the make or buy decision
    Should we make a product or conduct a particular
    value-chain activity ourselves, or should we
    source it from an outside contractor?
  • Firms usually internalize those value-chain
    activities they consider a part of their core
    competence, or which involve the use of
    proprietary knowledge and trade secrets that they
    want to control.

8
Outsourcing
  • Outsourcing refers to the procurement of selected
    value-adding activities, including production of
    intermediate goods or finished products, from
    independent suppliers.
  • This practice of externalizing a particular
    value-adding activity to outside contractors is
    known as outsourcing.
  • Firms outsource because they generally are not
    superior at performing all primary and support
    activities. Most value-adding activities -- from
    manufacturing to marketing to after-sales service
    -- are candidates for outsourcing.

9
An Example of Outsourcing
  • Canon uses its core competencies in precision
    mechanics, fine optics, and micro electronics to
    produce some of the worlds best cameras,
    printers, and copiers.
  • Canon usually owns the value-chain activities,
    such as RD, that yield improvements in these
    competences.
  • By contrast, companies will usually source from
    external suppliers when the sourced products or
    services are peripheral to the firms main
    offerings, can be obtained at lower cost, or can
    be provided by specialized suppliers.

10
Business Process Outsourcing (BPO)
  • Business Process Outsourcing (BPO). The
    outsourcing of business functions to independent
    suppliers such as accounting, payroll, and human
    resource functions, IT services, customer
    service, and technical support.
  • BPO includes
  • Back-office activities, which includes internal,
    upstream business functions such as payroll and
    billing, and
  • Front-office activities, which includes
    downstream, customer-related services such as
    marketing or technical support.

11
Decision 2 Where in the World Should
Value-Adding Activities Be Located?
  • Configuration of value-adding activity The
    pattern or geographic arrangement of locations
    where the firm carries out value-chain
    activities.
  • Instead of concentrating value-adding activities
    in the home country, many firms configure these
    activities across the world to save money, reduce
    delivery time, access factors of production, and
    extract maximal advantages relative to
    competitors.
  • This helps explain the migration of traditional
    industries from Europe, Japan, and the U.S. to
    emerging markets in Asia, Latin America, and
    Eastern Europe.

12
An Example of Worldwide Configuration of Value
Chain
  • The German automaker BMW employs 70,000 factory
    personnel at 23 sites in 13 countries to
    manufacture its vehicles.
  • Workers at the Munich plant build the BMW 3
    Series and supply engines and key body components
    to other BMW factories abroad.
  • In the U.S., BMW has a plant in South Carolina,
    which makes over 500 vehicles daily for the world
    market.
  • In Northeast China, BMW makes cars in a joint
    venture with Brilliance China Automotive Holdings
    Ltd.
  • In India, BMW has a manufacturing presence to
    serve the needs of the rapidly growing South Asia
    market.
  • BMW must configure sourcing at the best
    locations worldwide, in order to minimize costs
    (e.g., by producing in China), access skilled
    personnel (by producing in Germany), remain close
    to key markets (by producing in China, India and
    the U.S.).

13
A Framework for Global Sourcing and Outsourcing
  • The two strategic choices we just discussed lead
    us to the framework in Exhibit 16.2.
  • The focal firm can source from independent
    suppliers, company-owned subsidiaries and
    affiliates, or both.
  • Cells C and D represent the global sourcing
    scenarios.
  • While global sourcing implies procurement from
    foreign locations, in some cases the focal firm
    may purchase from a subsidiary or affiliate
    located in the foreign country (Cell C).
  • This is known as captive sourcing, which refers
    to sourcing from the firm's own production
    facilities located abroad. Production is carried
    out at a foreign facility that results from the
    focal firm's FDI activities.

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15
Contract Manufacturing Global Sourcing from
Independent Suppliers
  • A more likely scenario is when the focal firm can
    procure from independent suppliers (Cell D).
  • Contract manufacturing An arrangement in which
    the focal firm contracts with an independent
    supplier to manufacture products according to
    well-defined specifications.
  • Global sourcing requires the firm to identify
    qualified suppliers, develop necessary
    organizational and technological capabilities to
    locate and relocate specific tasks, and
    coordinate a geographically dispersed activities.

16
Examples of Contract Manufacturing
  • Patheon, one of the world's leading contract
    manufacturers in the pharmaceutical industry,
    provides drug development and manufacturing
    services to pharmaceutical and biotechnology
    firms worldwide.
  • Patheon operates 11 factories in N. America and
    Europe, producing over-the-counter drugs and
    several of the world's top-selling prescription
    drugs for most of the world's 20 largest
    pharmaceutical firms.
  • Benetton employs contract manufacturers to
    produce clothing.
  • IKEA uses contract manufacturers to produce
    furniture.
  • Contract manufacturing also offers firms the
    ability to enter target countries quickly,
    especially when the market is too small to
    justify significant local investment.

17
Offshoring
  • Offshoring is a natural extension of global
    sourcing. It refers to the relocation of a
    business process or entire manufacturing facility
    to a foreign country.
  • MNEs are particularly active in shifting
    production facilities or business processes to
    foreign countries to enhance their competitive
    advantages.
  • Offshoring is especially common in the service
    sector, including banking, software code writing,
    legal services, and customer-service activities.
  • E.g., large legal hubs have emerged in India that
    provide services such as drafting contracts and
    patent applications, conducting research and
    negotiations, as well as performing paralegal
    work on behalf of Western clients. With lawyers
    in N. America and Europe costing 300 an hour or
    more, Indian firms can cut legal bills by 75
    percent.

18
Offshoring Destinations
  • India receives the bulk of developed nations
    relocated business services. It has a huge pool
    of qualified labor that work for wages as little
    as 25 percent of comparable workers in the West.
  • India is not the only destination of substantial
    outsourcing work. Firms in Eastern Europe
    perform support activities for architectural and
    engineering firms from the West.
  • Accountants in the Philippines perform support
    work for major accounting firms. Accenture has
    back-office operations and call centers in Costa
    Rica. Germany sources IT support services from
    the Czech Republic and Romania. Boeing,
    Motorola, and Nortel do much of their RD in
    Russia. South Africa is the base for technical
    and user-support services for English, French,
    and German-speaking customers throughout Europe.

19
Jobs Most Conducive to Offshoring
  • Large-scale manufacturing industries whose
    primary competitive advantage is efficiency and
    low cost
  • Industries such as automobiles that have uniform
    customer needs and highly standardized processes
    in production and other value-chain activities
  • Service industries that are highly labor
    intensive, e.g., call centers and legal
    transcription
  • Information-based industries whose functions and
    activities can be easily transmitted via the
    Internet, e.g., accounting, billing, and payroll
    and
  • Industries such as software preparation whose
    outputs are easy to codify and transmit over the
    Internet or by telephone, e.g., routine technical
    support and customer service activities.

20
Not All Services Can Be Offshored
  • Many jobs in the services sector cannot be
    separated from their place of consumption. This
    limits the types of services jobs that firms can
    move abroad.
  • Personal contact is vital at the downstream end
    of virtually all value chains. Other services are
    consumed locally.
  • People normally do not travel abroad to see a
    doctor, dentist, lawyer, or accountant.
    Consequently, many service jobs will never be
    offshored.
  • Through 2005, only about 3 percent of jobs in the
    U.S. that require substantial customer
    interaction (e.g.,, those in the retailing
    sector) have been transferred to low-wage
    economies.
  • By 2008, less than 15 percent of all service jobs
    have moved from advanced economies to emerging
    markets.

21
Strategic Implications of Global Sourcing
  • Exhibit 16.3 explains the two strategic
    implications of the two choices MNEs face
    whether to perform specific value-adding
    activities in-house or to outsource them, and
    whether to concentrate each activity at home or
    disperse it abroad.
  • The 1st row indicates the degree to which
    management considers each value-adding activity a
    strategic asset to the firm.
  • The 2nd row indicates whether the activity tends
    to be internalized inside the focal firm or
    outsourced to a foreign supplier.
  • The 3rd row indicates where management typically
    locates an activity.

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23
Outsourcing Decision is Activity Specific
  • These decisions depend largely on the strategic
    importance of the particular activity to the
    firm.
  • E.g., firms typically consider RD and design
    activities central to their competitive
    advantage. As a result, they are more likely to
    internalize these functions, and less likely to
    outsource them to outside contractors.
  • In contrast, manufacturing, logistics, and
    customer service activities tend to be more
    readily outsourced and geographically dispersed.
  • The decision is also a function of the firm's IB
    experience and availability of qualified
    suppliers.

24
Phases in the Evolution of Global Sourcing
  • The first major wave emphasized the manufacturing
    of input products and began in the 1960s with the
    shift of European and U.S. manufacturing to
    low-cost countries as geographically diverse as
    Mexico and Spain.
  • Early observers pointed to the emergence of the
    modular corporation and the virtual
    corporation.
  • The next wave of global sourcing began in the
    1990s with offshoring. In addition to IT services
    and customer-support activities, other service
    sectors became part of the offshoring trend.
  • Today, business-process outsourcing in product
    development, human resources, and
    finance/accounting services has become very
    common.

25
Magnitude of Global Sourcing
  • The magnitude of global sourcing is considerable.
    In 2005, India alone booked 22 billion worth of
    business in answering customer phone calls,
    managing far-flung computer networks, processing
    invoices, and writing custom software for MNEs
    from all over the world.
  • Global sourcing has created more than 1.3 million
    jobs during the past decade for India.
  • Meanwhile, between 2000 and 2004, some 100,000
    service jobs were outsourced each year from the
    U.S. to other countries.
  • In 2006, IT and business-process outsourcing
    exceeded 150 billion worldwide.

26
Leading Provider Countries
  • China and India are major players in global
    sourcing.
  • Numerous other countries are active players as
    well.
  • Exhibit 16.4 identifies key players by four
    geographic regions.
  • E.g., Cairo-based Exceed Contact Center handles
    calls in Arabic and European languages for
    Microsoft, General Motors, Oracle, and Carrefour.
  • Russia is aiming at high-end programming jobs.
    With its strong engineering culture, Russia has
    an abundant pool of underemployed talent
    available at wages about one-fifth those of the
    U.S.

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28
The 2005 Offshore Location Attractiveness Index
by A.T. Kearney
  • Identifies 9 emerging markets in its list of the
    10 most attractive offshoring suppliers India,
    China, Malaysia, Philippines, Singapore,
    Thailand, Czech Republic, Chile, Canada, and
    Brazil.
  • In addition to Canada, the other advanced economy
    in the top 20 destinations is the U.S. (11th).
  • The index emphasizes various criteria
  • Countrys financial structure (compensation
    costs, infrastructure costs, tax and regulatory
    costs)
  • Availability and skills of people (cumulative
    business-process experience and skills, labor
    force availability, education and language, and
    worker attrition) and
  • Nature of the business environment (the countrys
    political and economic environment, physical
    infrastructure, cultural adaptability, and
    security of intellectual property).

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30
Benefits of Global Sourcing
  • Cost efficiency is the traditional rationale for
    sourcing abroad. The firm takes advantage of
    labor arbitrage - the large wage gap between
    advanced economies and emerging markets.
  • One study found that firms expect to save an
    average of more than 40 off baseline costs as a
    result of offshoring.
  • These savings tend to occur particularly in RD,
    product design activities, and back-office
    operations such as accounting and data
    processing.

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32
Strategic Benefits of Global Sourcing
  • Faster corporate growth.
  • Access to qualified personnel abroad.
  • Improved productivity and service.
  • Business process redesign.
  • Increased speed to market.
  • Access to new markets.
  • Technological flexibility.
  • Improved agility by shedding unnecessary
    overhead.

33
Challenges in Global Sourcing
  • Vulnerability to exchange rate fluctuations
  • Partner selection, qualification, and monitoring
    costs
  • Increased complexity of managing a worldwide
    network of production locations and partners
  • Complexity of managing global supply chain
  • Limited influence over the manufacturing
    processes of the supplier
  • Potential vulnerability to opportunistic behavior
    or actions in bad faith by suppliers
  • Constrained ability to safeguard intellectual
    assets

34
Global Supply Chain Management Capabilities
Greatly Enhance Global Sourcing
  • Global supply chain refers to the firms
    integrated network of sourcing, production, and
    distribution, organized on a world scale, and
    located in countries where competitive advantage
    can be maximized.
  • Sourcing from numerous suppliers scattered around
    the world would be neither economical nor
    feasible without an efficient supply-chain
    system.
  • Boeings 787 Dreamliner jet provides a striking
    example of how global supply-chain management is
    making global sourcing feasible and, at the same
    time, contributing to firm competitiveness.

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36

37
Facilitating Firms are also Responsible for
Global Sourcing
  • Networks of supply-chain hubs and providers of
    global delivery service are an integral part of
    global supply chains.
  • Many focal firms delegate supply-chain activities
    to such independent logistics service providers
    as DHL, FedEx, TNT, and UPS.
  • Consulting firms that manage the logistics of
    other firms are called third party logistics
    providers (3PLs). Using a 3PL is often the best
    solution for international logistics, especially
    for firms that produce at low volumes or lack the
    resources and the expertise to create their own
    logistics network.

38
Global Supply-Chain Networks
  • A global supply-chain network consolidates a
    firms sourcing, manufacturing, and distribution
    in a few strategic locations worldwide so the
    firm can concentrate these activities in
    countries where it can maximize its competitive
    advantages.
  • Exhibit 16.7 illustrates the stages, functions,
    and activities in the supply chain.
  • It reveals how suppliers interact with the focal
    firm and how these, in turn, interact with
    distributors and retailers.
  • Each stage in the global supply chain encompasses
    functions and activities that involve the focal
    firm in sourcing and distribution.

39
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40
Supply Chain Management has Become Sophisticated
  • Costs associated with physically delivering a
    product to an export market may account for as
    much as 40 of total cost.
  • Experienced firms make optimal use of information
    and communications technology (ICT), which
    streamlines supply chains, reducing costs and
    increasing distribution efficiency.
  • Managers use Electronic Data Interchange (EDI),
    which passes orders directly from customers to
    suppliers automatically through a sophisticated
    ICT platform.
  • The UK supermarket chain Tesco greatly reduced
    inventory costs by using an EDI system to link
    point-of-sale data to logistics managers.
    Technology allows Tesco to track product
    purchases down to the minute.

41
Logistics and Transportation
  • Logistics involves physically moving goods
    through the supply chain.
  • It incorporates information, transportation,
    inventory, warehousing, materials handling and
    similar activities associated with the delivery
    of raw materials, parts, components, and finished
    products.
  • Internationally, logistics is complex due to
    greater geographical distances multiple legal
    and political environments and the often
    inadequate and costly nature of distribution
    infrastructure in individual countries.

42
Transportation modes
  • International logistics typically involves
    multiple transportation modes.
  • Land transportation is conducted via highways and
    railroads.
  • Ocean transportation is handled through large
    container ships.
  • Air transportation involves commercial or cargo
    aircraft.
  • Ocean and air transport are common in IB because
    of long shipping distances. Ships are the most
    common transportation mode.
  • Sea transport was revolutionized by the
    development of 20- and 40-foot shipping
    containers, the big boxes that sit atop
    ocean-going vessels.
  • Sea transportation is very cost-effective because
    one ship can carry thousands of these containers
    at a time.

43
Risks in Global Sourcing
  • 1. Less-than-expected cost savings. Conflicts and
    misunderstandings arise because of differences in
    the national and organizational cultures between
    the focal firm and foreign supplier. Such
    factors give rise to cost-savings that are less
    than originally anticipated.
  • 2. Environmental factors. Numerous environmental
    challenges confront focal firms including
    exchange rate fluctuations, labor strikes,
    adverse macro-economic events, high tariffs and
    other trade barriers, and high energy and
    transportation costs.
  • 3. Weak legal environment. Many popular
    locations for global outsourcing have weak laws
    and enforcement regarding intellectual property,
    which can lead to erosion of key strategic
    assets.

44
Risks in Global Sourcing (cont.)
  • 4. Risk of creating competitors. As the focal
    firm shares its intellectual property and
    business-process knowledge with foreign
    suppliers, it also runs the risk of creating
    future rivals (e.g., Schwinn).
  • 5. Inadequate or low-skilled workers. Some
    foreign suppliers may be staffed by employees who
    lack appropriate knowledge about the tasks with
    which they are charged. Other suppliers suffer
    rapid turnover of skilled employees.

45
Risks in Global Sourcing (cont.)
  • 6. Over-reliance on suppliers. Unreliable
    suppliers may put earlier work aside when they
    gain a more important client. Suppliers
    occasionally encounter financial difficulties or
    are acquired by other firms with different
    priorities and procedures. Over-reliance can
    shift control of key activities too much in favor
    of the supplier.
  • 7. Erosion of morale and commitment among
    home-country employees. Global sourcing can
    create a situation in which employees are caught
    in the middle between their employer and their
    employers clients. At the extreme, workers find
    themselves in a psychological limbo, unclear
    about who their employer really is.

46
Strategies for Minimizing Risk in Global Sourcing
  • Firms ought to go offshore for the right reasons.
    The best rationale is strategic. Cost-cutting is
    often a distraction from more beneficial,
    long-term goals such as enhancing the quality of
    offerings, improving overall productivity, and
    freeing up knowledge workers and other core
    resources that can be redeployed to improve
    long-term performance.
  • Need to get employees on board. Global sourcing
    tends to invite opposition from employees and
    other organizational stakeholders. Disaffected
    middle managers can undermine projects. Poorly
    planned sourcing projects can create unnecessary
    tension and harm employee morale.

47
Strategies for Minimizing Risk in Global
Sourcing (cont.)
  • 3. Choose between a captive operation and a
    contract with outside specialists carefully.
    They should be vigilant about striking the right
    balance between the organizational activities
    that it retains inside the firm, and those that
    are sourced from outside.
  • 4. Choose countries and suppliers carefully. A
    common reason for global sourcing failure is that
    both buyers and suppliers tend not to spend
    enough time upfront to get to know each other
    well. They rush into a deal before clarifying
    partner expectations, which can give rise to
    misunderstandings and inferior results.

48
Strategies for Minimizing Risk in Global
Sourcing (cont.)
  • 5. The focal firm needs to invest in supplier
    development and collaboration. The parties need
    to exchange information, transfer knowledge,
    troubleshoot, coordinate, and monitor.
  • Management should collaborate closely with
    suppliers in co-development and co-design
    activities. This also enables the focal firm to
    tap into a stream of ideas for new products,
    processes, technologies, and improvements.
  • Efforts to build strong relationships help create
    a moral contract between the focal firm and the
    supplier, which is often more effective than a
    formal legal contract.

49
Strategies for Minimizing Risk in Global
Sourcing (cont.)
  • Managers need to proactively safeguard interests
  • Encourage the supplier to refrain from engaging
    in potentially destructive acts that jeopardize
    the firms reputation.
  • Escalate commitments by making partner-specific
    investments (such as sharing knowledge with the
    supplier), allowing for ongoing review, learning,
    and adjustment.
  • Share costs and revenues by building a stake for
    the supplier so that, in case of failure to
    conform to expectations, the supplier also
    suffers costs or foregoes revenues.
  • Maintain flexibility in selecting partners by
    keeping options open to find alternative
    partners.
  • Hold the partner at bay by withholding access to
    IP and key assets, in order to safeguard the
    firms interests for the long term. If conflicts
    with the supplier become an ongoing problem, one
    option for the firm is to acquire full or partial
    ownership of the supplier.

50
Potential Harm to Economies from Global Sourcing
  • Critics of global sourcing point to three major
    problems Global sourcing can result in
  • Job losses in the home country,
  • Reduced national competitiveness, and
  • Declining standards of living.
  • As more tasks are performed at lower cost with
    comparable quality in other countries, high-wage
    countries will eventually lose their national
    competitiveness.
  • Critics fear that long-held knowledge and skills
    will eventually drain away to other countries,
    and the lower wages paid abroad to perform jobs
    that were previously done in high-wage countries
    will eventually pull down wages in the latter
    countries, leading to lower living standards.

51
Effects on Local Community A Case Study
  • Electrolux, one of the worlds largest appliance
    makers, closed its factory in Michigan and moved
    production to Mexico. The company had been
    producing refrigerators in Greenville, Michigan,
    for nearly 40 years, providing 2,700 jobs.
  • From the company's viewpoint, closing the plant
    made economic sense. It had weak financial
    performance and costly labor. By establishing a
    Maquiladora plant in Juarez, Mexico, Electrolux
    sought to profit from low wages and take
    advantage of the El Paso Foreign Trade Zone.
  • From the local community's standpoint, however,
    the decision was devastating. How could so many
    jobs be replaced in such a small community? What
    would happen to the towns social and economic
    landscape?
  • Assistance from labor unions and the State of
    Michigan were to no avail. Concessions from the
    labor union, and over 100 million from Michigan
    to Electrolux in tax breaks and grants were
    insufficient. It did not help that Electrolux --
    a Swedish company -- was perceived as having
    little loyalty to the community.

52
Can Jobs Offshored be Replaced?
  • Proponents of global sourcing argue that workers
    who lose their jobs due to offshoring can find
    new work.
  • Redeployment assumption may be overly optimistic.
    It takes considerable time for laid-off workers
    to find new jobs.
  • According to one estimate, as much as 1/3 of U.S.
    workers who have been laid off cannot find
    suitable employment within a year.
  • Even workers who do find new jobs may be unable
    to achieve wages and work levels that equal those
    of their former positions.

53
Ethical and Social Implications of Global
Sourcing
  • The prevalence of global sourcing has also raised
    public debate about the role of MNEs in
    protecting the environment, promoting human
    rights, and improving labor practices and working
    conditions.
  • The bar for global corporate citizenship has been
    raised.
  • Consider the case of foreign suppliers that
    operate sweatshops -- factories in which people
    may work long hours for very low wages, often in
    harsh conditions.
  • Sweatshops may employ child labor, a practice
    that has been outlawed in much of the world.

54
The Case for and against Sweatshops
  • Those who defend moving production to low-wage
    facilities abroad point to a lower standard of
    living as an explanation for the low wages, and
    argue that their operations benefit the community
    by providing needed jobs. The choice for local
    workers is often between low-paid work or no work
    at all.
  • They argue that the alternatives available to
    such workers are even less desirable, such as
    poverty, prostitution, and social problems.
  • Opponents also argue that corporations that sell
    their products in wealthy countries have a
    responsibility to pay their workers according to
    basic Western standards, especially when their
    products command high prices in advanced-economy
    markets.
  • Foreign companies that establish factories
    destroy the pre-existing agricultural market that
    may have provided a better life for laborers.

55
Potential Benefits to National Economy
  • First, by reconfiguring value chains to the most
    cost-efficient locations, companies reduce their
    production costs and enhance their performance.
  • Second, cost reductions and enhanced
    competitiveness allow firms to reduce the prices
    that they charge their customers.
  • Third, by leveraging a flexible labor market and
    strong economic growth, countries that outsource
    may be able to shift their labor force to
    higher-value activities. This transformation has
    the effect of boosting the nations productivity
    and industrial efficiency.
  • Finally, declining wages may be offset by lower
    prices secured for outsourced products or
    services. Hence global sourcing tends to
    indirectly increase consumers purchasing power
    and lift their living standards.

56
Public Policy Towards Global Sourcing
  • From a public-policy standpoint, it is
    impractical for a nation to adopt a unilateral
    policy against global sourcing.
  • Instead of seeking to restrict global sourcing, a
    more appropriate role for public policy may be to
    mitigate the harm that it can cause.
  • Offshoring is a process of creative destruction.
    It creates new advantages and opportunities,
    while eliminating certain types of jobs and
    adversely impacting particular economic sectors
    and segments of the population.

57
Public Policy Towards Global Sourcing (cont.)
  • If the loss of certain jobs is inevitable as a
    result of offshoring, public-policy makers are
    better off taken some proactive actions.
    Examples
  • Guiding employment towards higher value-added
    jobs by stimulating innovation, for example.
  • Keeping the cost of doing business relatively
    low. Through economic and fiscal policies,
    development of new technologies can be
    facilitated.
  • Keeping the cost of capital needed to finance RD
    relatively low.
  • Ensuring that the nation has a strong educational
    system, including technical schools and
    well-funded universities that supply engineers,
    scientists, and knowledge workers.
  • Increasing worker flexibility so that those who
    lose jobs can be redeployed in other positions.
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