Product delocalization, also known as outsourcing, is an essential business tool and concept that has been existent for the past 75 years. Most multinational companies (MNCs) prefer outsourcing on a small to large scale level due to a variety of reasons. However, the most common ones include the availability of raw materials and cheaper labor (Musteen, 2016; Ketokivi et al., 2017). Overall, the general impact of outsourcing can be of three types, and they revolve around social, economic and political spheres (Dinkar & Sarikwal, 2018). It can be described as a double-edge sword as it has both positive and negative effects. The purpose of this paper is to analyse the factors that motivate or stop companies from outsourcing their production in developing countries. The regions with low labour might be attractive for businesses to more the manufacturing process there. However, it is critical to consider all of the aspects of the issue.
The political impact of outsourcing refers to changes in business processes and functions due to the implementation of outsourcing strategies by a firm. Product delocalization enables MNCs not to be adherent to some labor laws; thus, they can freely manipulate wages (Dinkar & Sarikwal, 2018). In some economies, such as China, this freedom has been hampered by the creation and implementation of new laws that protects their citizens working for American businesses (Street & Matelski, 2019). Nevertheless, its disadvantage is that it possesses a risk to the security and confidentiality of MNCs, which occurs less often (Dinu, 2015).
The economic impact of outsourcing denotes the changes in the economic conditions of labor, corporation, and the nation based on the product delocalization practices of the organization (Zamfir et al., 2017). One of its positive consequences is that it reduces production costs and encourage competitiveness; hence, leading to decreased product prices, and increased demand and profit margins (Bertram & Svensson, 2004). Furthermore, job creation in host countries holds substantial economic benefits as it creates a more robust financial base, which increases the domestic consumption of manufactured goods (Clark et al., 2018). Nevertheless, it leads to a concurrent loss of jobs in developed countries, and this forces the people in such regions to reduce their average minimum wage yet the cost of living is comparatively higher than the host countries. In the U.S. this has been mitigated by establishing a minimum wage rate (Zamfir et al., 2017). Also, there are hidden costs that might negate the cost-savings (Somjai, 2017).
The social impact of outsourcing implies to its consequences with regards to the social and cultural aspects of society. Its main advantage is that it has led to the creation of employment opportunities for people living in developing economies. However, product delocalization has been associated with depletion of culture and customs (Dinkar & Sarikwal, 2018). Most of the employees working for MNCs are usually expected to be familiar with a particular county’s time zone, culture, holiday schedule, therefore, employees may unconsciously begin to lose their social norms. However, with the continuance of globalization and the inclusion of other major factors, outsourcing plays a minimal role in culture erosion.
The outsourcing market is expected to increase in the near future due to technological improvements and the numerous advantages that is provides. Product delocalization has a dual effect on the political, economic and social conditions of developing countries. This paper aims to outline the potential consequences that either the MNCs or developing states might face in the context of outsourcing. Therefore, both parties, that is before a company chose to outsource it business processes and a country decides to host an MNC, they need to carefully examine all factors to avoid any losses. Product delocalization is affected by a myriad of factors, such as, the type of business and country that were not considered in this scenario. Therefore, a PEST analysis is recommended to clearly identify these factors and relate them to outsourcing.
The relocation of a company’s production has numerous social, economic, and political implications, which makes decision-making a challenging process. The businesses need to examine all the sides of a specific area of choice. The opinions on whether to move the production to the developing countries differ and the findings show that the presence of American Business in China is growing and imposes the issue of local employment.
Different factors, such as knowledge about economic relationships, personal beliefs and experiences can influence decision-making concerning outsourcing production.
References
Bertram, S., & Svensson, H. (2004). Factors to consider before moving production to a developing country. Web.
Clark, G., Gertler, M., Feldman, M., & Wojcik, D. (Eds.). (2018). The new Oxford handbook of economic geography. Oxford University Press.
Dinkar, S., & Sarikwal, L. (2018). Social impact of outsourcing in India. International Journal of Advanced Scientific Research and Management, 3(9), 154-159. Web.
Dinu, A. (2015). The risks and benefits of outsourcing. Knowledge Horizons – Economics, 7(2), 103-104. Web.
Ketokivi, M., Turkulainen, V., Seppälä, T., Rouvinen, P., & Ali-Yrkkö, J. (2017). Why locate manufacturing in a high-cost country? A case study of 35 production location decisions. Journal of Operations Management, 49, 20-30.
Musteen, M. (2016). Behavioral factors in offshoring decisions: A qualitative analysis. Journal of Business Research, 69(9), 3439-3446.
Somjai, S. (2017). Advantages and disadvantages of outsourcing. The Business and Management Review, 9(1), 157-160. Web.
Street, N. L., & Matelski, M. J. (2019). American businesses in China: Balancing culture and communication. McFarland.
Zamfir, A., Sorin, I., & Andrei, N. (2017). Outsourcing in the business process. FAIMA Business and Management Journal, 5(2), 73-79. Web.