Introduction
International migration is used to generally refer to movement of people from their country go live in other countries. There are several reasons associated with this form of migration such as civil war in the country of origin, search for employment, economic hardships in a person’s country, epidemics, and a search for bigger career opportunities. In most cases, international migration involves people moving from developing countries to go and live in developed countries which in turn impacts negatively on the developing countries. This is because such countries end up losing their skilled human resource as most of those people that migrate to other countries are trained professionals in different fields. It is for this reason and others to be discussed that international migration affects the global economy.
Migration is as old as human civilization though it has been recently on the rise due to factors associated with globalization, demographic change in developed countries, and the resultant demand for replacement migration. According to statistics released by the United Nations (UN), it is projected that within the next half a century the populations of European countries and fast growing economies in East Asia will be face with decline and aging (Adam 10). This will result in an acute shortage of labor in these countries which will consequently increase demand of labor from developing countries which is a process referred to as ‘replacement migration’. A link has been noted between international migration and the ICT revolution experienced in the 1900. It is approximated that about 0.9 million highly skilled workers from Russia, China, the OECD countries, and India have moved to the US since the beginning of the 20th century under the temporary H1B visa program offered by the US government. Foreign students are another causative factor of international migration. Statistics show that about 25% of foreign nationals in the US that had H1B visas came to the US on student visas; after which the local firms offered them employment opportunity hence facilitating their migration to the country (Enderwick, Tung and Chung 12).
The usage of the term outsourcing is rather inconsistent but it generally involves contracting an external provider to do a business function that is commonly done within an organization. So outsourcing involves a contractual agreement between two businesses that involves exchanging of payments and services. A recent trend is outsourcing of services to businesses in another country which is normally referred to as offshore outsourcing (Incognito 8). Due to the growing nature of the outsourcing industry, a complex relationship is notable between the economic aspect of organizations and their strategic outsourcing.
It is evident that this is an age of outsourcing as can be seen in among others the vertical integration experienced at an increased rate in global trade. A good example just how much outsourcing is becoming an integral part of the global economy are results showing that at average when a car is manufactured in the states, 30% of the car’s value is outsourced from Korea for assembly, 17.5% from Japan for advanced technology and other components, 7.5% from Germany for the design, 4% for the minor parts from Singapore and Taiwan, 2.5% from the United Kingdom for marketing services, and 1.5% for data processing from Barbados and Ireland (Incognito 8). This therefore shows that for such a car only 37% of its production value comes from the country it is manufactured in, the United States.
Economists argue that the impacts of outsourcing and international migration have a balancing effect on the global economy (Agrawal and Farrell 37). This is because whereas international migration drains the human resource of a country, outsourcing generates revenue for developing countries from developed countries.
Body
A. Outsourcing
It should be understood that outsourcing goes beyond the purchase of services, standardized immediate products, and raw materials. It incorporates finding a partner that an organization can start a bilateral relationship with so that the contracted business can manage to produce services and goods that meet the organization’s requirements. Due to the complexity that stems from outsourcing, it is difficult to measure outsourcing and its level of growth.
Outsourcing became a leading trend in global business and management from the 20th Century and has received a lot of emphasis by politicians and policy makers. Supporters of outsourcing argue that it reduces production costs in a manner similar to how technology improves productivity which is a good thing for a country’s economy. Economists arguing against outsourcing believe that it denies employment opportunities to the citizens of a country as these chances are now offered to people in other countries (Incognito 9). Outsourcing has been facilitated more by increasing globalization as many organizations are opting for offshore outsourcing which has resulted in a great redistribution of work internationally. Rapid steps made in development of transport and communication technologies has also facilitated the process of outsourcing by allowing the process of production to be broken down into various stages that can be done at various locations. Due to this fragmentation of production, firms are more likely to outsource production parts that require less skilled workers.
One notable effect of outsourcing on the global economy is the way it has transformed China into a global factory due to its low labor costs and favorable production conditions; this has led to many multinational companies transferring certain steps of their production to China. This outsourcing to China and other East Asia countries is referred to as the first wave of outsourcing. A similar wave is bound to happen with outsourcing of services to countries such as China, India, and other developing countries; this wave is referred to as the second wave of outsourcing and constitutes a significant portion of global trade in services (Waltz 506). Outsourcing of global service has evolved to two distinct forms that include; Information Technology Outsourcing (ITO) and Business Process Outsourcing (BPO) (Agrawal and Farrell 38). ITO involves provision of part or all information systems by a single or more service provider. The main functions outsourced in this form of outsourcing include database administration, content development, data conversion, application development, network management, help desk, and website development. BPO on its part involves a company contracting a third party to do its management and optimization functions. The third party in BPO is normally a specialist in the field that it is sub-contracted for; for example, a company may contract a third party that deals with strategy formulation to specifically develop its strategic plan. Conventional examples of BPO include accounting and finance functions, human resource administration, and call centers.
The revolution in the ICT sector has in a large way transformed the tradability of services based related to information. The reduction of data transfer costs is a notable factor for the increase in offshoring. Statistics show that the cost of sending a trillion data bits fell drastically from $ 0.15 million in 1970 to about 10 cents in 1999. It is estimated that the whole US Congress library can be sent via the internet for only $40; and from the trends in innovation, this information may soon be storable on a single computer chip (Incognito 12). The same decline in charges has also been noted in calling rates which results in reduced costs for outsourcing.
Other than the sharp decline in ICT costs, the large variation in per unit labor costs in various countries has also fostered outsourcing. As can be noted in the table below, there is a high disparity between wages paid to similar professions across different countries. For example a computer programmer in East Asia is paid ten times less than one in the United States (Endewick, Tung and Chung 12).
Country
Salary Range (USD)
Hungary and Poland
4800-8000
Philippines
6564
China
8952
USA
60000-80000
Canada
28174
Malaysia
7200
Israel
15000-38000
India
5880-11000
Ireland
23000-34000
Russian Federation
5000-7500
Advantages of Outsourcing
It is estimated that each dollar spent by companies on outsourcing, there is a 58 cents cost reduction than if the services were bought within the country (Agrawal and Farrell 39). It is even more advantageous that the quality of service does not change. This therefore means that it is profitable for companies in the United States to outsource some of their business functions to companies in the Far East such as India and China.
Global outsourcing, a construct of multinational companies in America which is being adopted at a rapid rate by developed economies, has facilitated the creation of employment opportunities in developing economies. Among the main beneficiaries of global outsourcing include countries in Asia that are fast emerging as key outsourcing destinations (Waltz 506). Hence in the services industry, thousands of job opportunities have been transferred from Japan, US and other OECD countries to Singapore, China, India, Malaysia, and other developing economies that are outsourcing destinations.
As noted earlier outsourcing increases the profit margins by reducing operational costs. This increase in profits consequently increases the bonuses paid to the management in a company. The increase in profit margins is also advantageous in that it increases dividends and stock prices when outsourcing is integrated into business operations. This results to a major revaluation of the stock market based on large profit margins.
Another advantage of outsourcing is that it increases revenue for developing countries as the taxes collected by their governments increase with the increase in investment by developed countries in their countries. These taxes are then used by the developing countries to develop transport and communication infrastructure in their own countries.
Disadvantages of Outsourcing
Despite the benefits experienced in developed countries due to cost reduction brought about by outsourcing, the process also has its disadvantages. The major drawback associated with outsourcing in developed countries is loss of employment in these economies. Estimates given by the World Bank show that 1-5% of the overall employment in G-7 Countries will be affected by growing outsourcing levels. Independent statistics also show that the United States lost about 0.4 million jobs to Mexico, India, and China in the year 2004. This loss of jobs came about due to a shift in production and restructuring of business operations as multinationals shift their production to foreign countries. It is estimated that the number of these jobs may grow to about 3.5 million by the year 2015 (Adam 15).
B. International Migration
Though the international migration is not a new drift, it demands has changed remarkably due to demographic change in the developed countries. High rate of ageing and low fertility rates in the Organization for Economic Co-operation and Development countries in the world has created a higher demand of worker in the developing countries. This trend is likely to strengthen in the coming days. Recent studies show that around eighty five percent of the universal inhabitants will be living in the either developing or least develops countries. If progress continues it shows that the developing and the least develop countries will enjoy relative work advantage with comparatively young labor power. For example, India is expected to have a population increase of forty seven million people in 2020 while the Organization for Economic Co-operation and Development (OECD) countries will face harsh job scarcity (Cuyvers, De Lombaerde and Rayp 254). The UN outcrops shows that the European countries and Japan are likely to face population decline in the fifty years to come. For instance, the current population of Italy is 57 million and it’s predicted to decrease by 16 million in 2050 while that of Japan which is currently at one hundred and twenty seven million is projected to decline up to 105 million (Adam 12).
Besides the decline of population in the European countries and Japan, they are also facing a higher ageing development and hence contributing to the global migration. For instance, the middle age is projected to increase by 8 years in the next ½ century from forty one years to forty nine years while the population of people from the age of sixty five and above is likely increase by 15% from 17%. Likewise in Italy, people on age of 65years and above will also increase at the same rate of 17% up to 35% while the median age has increased by 12 years up to fifty three years (Enderwick, Tung and Chung 15).
Even though the advancement in technology and efficiency measures moderately creates job opportunity, the country has to depend on the migrant employees and offshore outsourcing so as to be aggressive in the market. For example, a country like Japan continues to rely on automations for it to remain competitive in the market it has to employ over six hundred immigrants yearly to maintain the working force (Cuyvers, De Lombaerde and Rayp 254). Conversely, Countries like United States, Italy and France would require a greater replacement of the employment.
Companies from rich countries are likely to increase offshore outsource in future due to their cost advantage hence contributing to a mutual gain in the developing countries through employment gain and developed countries by yield increase. Provision of skilled personnel by the developing countries is likely to rise due to increased ageing and the dynamic change in the technology. Increase in remittance earning and the job gained through outsourcing will cancel the negative impact from the brain drain.
Outsourcing is mostly been channeled to countries such as Indian, China, Southern Asian and the least developed countries are still divested the advantage of job creation though they are still facing the problem of brain drainage. To broaden from the international redeployment and the unhelpful effects of brain drain, developed countries should aim mainly at the moderately poorer countries in it outsourcing. Through this it helps in the reduction of poverty and assists in fulfillment of the UN Millennium goals through developing by halving poverty by ½ by 2015. For poor countries to increase it productivity it must create a favorable atmosphere and increasing the infrastructure of the country to encourage innovation and creativity to as to achieve the global economical growth.
CONCLUSION
There are varying explanations by economists on the implications of outsourcing but one thing that is agreed upon is that outsourcing will intensify in future; this will be mainly influenced by the associated cost advantages. This intensification will be both advantageous to developing and developed countries. As the latter benefits from productivity gains and the former from job gains. Increased globalization will consequently lead to increased international migration as demand for ‘replacement migration’ increases in developed countries. This increase in international migration will impact negatively on developing countries. However, some economists argue that the gains from job creation and taxes in these countries cancel out the negative effect of brain drain experienced. Though the counteracting impacts of outsourcing and international migration are perceived to form a win-win situation in the affected economies, it should be noted that the benefits of outsourcing are not evenly distributed in all developing countries. This means that there is more of international migration in many third world countries than there is of outsourcing which consequently impacts negatively on their economy.
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