Off-Shoring Practice in Multinational Corporations

Introduction

Counter to the conventional wisdom, the practice of off-shoring is not driven primarily by the possibility to avoid regulations and offers a range of advantages for the multinational corporations and the involved communities. The recent data available from the Bureau of Economic Analysis points to the fact that while there is a considerable increase in revenues associated with off-shoring, it is explained by the variety of factors including the economies of scale, access to new markets, and diversification of labor force. The following analysis illustrates the benefits of off-shoring and provides several recommendations regarding the preferred course of actions for the involved stakeholders.

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Case Study

Counter to the conventional wisdom, the practice of off-shoring is not driven primarily by the possibility to avoid regulations and offers a range of advantages for the multinational corporations and the involved communities. The purpose of this paper is to analyze the relevant data, gain a better understanding of the phenomenon, and formulate conclusions that could be used as recommendations by the involved parties. This is achieved by reviewing three measures characterizing firms’ performance (value added, employment, and capital expenditures), determining the trends, and analyzing the factors which stimulate off-shoring practices among the U.S.-based companies.

Case Analysis

Overview

The case study explores the phenomenon of off-shoring in the context of the modern economic and technological developments on the global scale and the main reasons for the tendency to move away from the domestic markets. The U.S. multinationals are chosen as an example due to the availability of the data that can illustrate the effects of off-shoring and provide the basis for the analysis of the outcomes. According to the case study, the main driving forces behind the tendency to off-shore are the evolution of communication technologies and the effort by the national governments to make their economic conditions more acceptable for foreign investments. As a result, there is a considerable shift among the U.S.-based companies towards seeking opportunities of locating subsidiaries abroad and hiring staff from local population (Gerber, 2011). The data provided in the case study points to the fact that the percentage of employees hired by foreign affiliates increases by about a quarter in the last two decades, which corresponds to the roughly comparable rise in value added and a somewhat smaller increase in capital expenditures (Gerber, 2011). Another important point that is highlighted in the case study is the priority of outcomes pursued by the firms which use off-shoring. According to the authors, contrary to popular belief, the main benefit of the practice is not the access to cheap labor. According to the data, 67 percent of the off-shoring is aimed at the high-income countries, which minimizes such opportunity (Gerber, 2011). The access to a more diverse market, on the other hand, is a much more feasible option and is attained in the majority of instances. In addition, the principle of economies of scale render off-shoring ineffective for domestic market due to transportation costs, which is again supported by the statistics – only a small percentage (less than 9%) of off-shore produce returns to the U.S. (Gerber, 2011). Therefore, the key points are as follows: Off-shoring is an essential part of the modern economic reality; it grants several attractive opportunities, primarily the expansion of the existing market, the possibility to create products oriented at specific audiences, and the optimization of the cost-efficiency due to economies of scale; cheap labor remains one of the advantages, but its weight is relatively negligible.

The Impact of Three Measures on Multinational Corporations

Value added is a measurement that represents the improvement the company provides to a product that registers either as a difference between production costs and value of intermediate inputs or between the gross revenue and the sum of the expenses undertaken to deliver the product to the customer (Investopedia, n.d.). Its increase can be reflected in the growth of product’s price, but such condition depends entirely on the marketing strategy chosen by the firm. More importantly, it is directly related to the customer satisfaction (Investopedia, n.d.).

On most occasions, value added can be used to determine the efficiency of the firm. Therefore, the observed increase of this measure provided in the case study confirms the fact that multinational corporations (MNCs) benefit from off-shoring. It is also worth pointing out that value added is especially relevant in the modern economic setting, where the consumers are more informed thanks to the onset of the ubiquity of the Internet and independent of the traditional marketing in their decision-making (Simonson & Rosen, 2014). It can be said that they are more interested in the capabilities of the product than characteristics derived from its branding – in other words, they focus on the product’s value. Under such conditions, gaining a competitive advantage becomes a more challenging task and necessitates the discovery of the ways to increase value added. Thus, the observed improvement related to the off-shoring is of pivotal importance to the multinational corporations which seek competitive advantage.

Capital expenditures represent expenses the company undertakes to update, expand, repair, or acquire equipment required for its functioning. The amount of capital expenditures can be used to determine the efficiency of the business and is necessary to correctly calculate the revenues. However, since it varies depending on the industry, it is only applicable within a given market segment. In our case, capital expenditures related to the production by MNCs outside the United States are visibly higher in 2009 in comparison to the 1989 result (Gerber, 2011). However, it can be considered acceptable under the condition that the company is expanding its scope of operations. Thus, we need to look at the value added to determine the relative impact of this measure. Specifically, while capital expenditures rose by 6.9 percent, the corresponding value added increased by 8.6 percent. By comparing these results, we can conclude that the off-shoring expenses are a valuable investment and result in improved efficiency. Therefore, off-shoring can be considered a step towards economic sustainability for the company. This is especially important for the multinational corporations which, according to the conventional wisdom, are engaging in unfair business practices and obtain an advantage by leveraging conditions in their favor (Crane & Matten, 2016). Since on some occasions such criticisms are not unfounded, MNCs can look into the opportunities implied by this analysis.

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Employment represents the number of workers hired locally by the company. Unlike two previous measures, it does not serve as a direct indicator of the firm’s performance. Nevertheless, it can be considered important for off-shoring multinational corporations for several reasons. Most evidently, providing new workplaces creates an overall positive effect on the local community. While, as explained above, in some instances the conditions of employment may be considered inferior by the established U.S. standards, such instances are not representative of the typical situation. According to the Bureau of Economic Analysis, 67 percent of the off-shoring activities are located in the high-income countries (Gerber, 2011). Therefore, we can assume that the corporations which operate there provide fair employment opportunities. Such setting is known to increase employee satisfaction and, by extension, further enhance the level of life in the region, thereby improving the mental health of the population (Wright, 2014). By extension, it benefits the organization directly (by boosting employee engagement, commitment, and loyalty) and in the long run (via strengthening the reputation of the company among the population and creating a more robust community) (Wright, 2014). Marginally related to this factor is the opportunity to improve the integrity of the company’s social responsibility (CSR) program. Currently, it is considered an essential element of proper corporate culture impacting both its internal structure (the employees) and the environment (e.g. public image and brand name reputation). Finally, we must acknowledge the orientation of off-shored firms at the foreign markets. Creating a product that would satisfy an unfamiliar audience requires knowledge of cultural, social, and psychological details that may be unavailable to the U.S. employees. Thus, employing a greater number of local specialists raises the chances of creating a competitive product. In addition, a more diversified team usually results in a more creative approach and, by extension, greater value added. Thus, while the case study does not contain information that would allow us to conclusively tie the increase in the percentage of off-shore employment to the boost of value added, we can extrapolate at least a partial relation based on the facts above.

Significant Influence on Off-Shoring

According to the case study, two of the most significant factors that influence off-shoring are the market expansion opportunities and the economies of scale. The latter can be broken down into several smaller factors: the proximity of the production to the resource location and the opportunity to supply the produced goods directly onto the foreign markets. Both factors offer a huge advantage of eliminating transportation costs of the resources and the final products. The difference is significant enough to cover the expenses associated with opening a subsidiary overseas without the need to seek a cheaper labor market. The former creates a competitive advantage by opening an untapped lucrative market segment that further increases revenues. In addition, such approach diversifies the business thereby increasing its robustness and allows a corporation to endure in the case of global-scale financial crises.

Conclusion

The analysis reveals several important characteristics of off-shoring, namely: the advantages granted by the proximity to the resource bases and new markets, the relative insignificance of cheap labor commonly associated with the practice, and the benefits provided with the economies of scale.

Lessons Learned and Recommendations

The insights granted by the analysis provide us with a better understanding of the overall impact of off-shoring on the functioning of multinational corporations. First, the data illustrates a definite advantage associated with the practice, which supports the current understanding of the issue. Second, it creates a more encompassing overview than can be extrapolated from the common wisdom associated with the phenomenon. In other words, it suggests that off-shoring is not focused either on the avoidance of labor or environmental regulations or a search for lower wages – instead, it allows for a more sustainable production cycle. It is, therefore, both expected of and recommended to companies to seek off-shoring opportunities in order to optimize production chain, reinforce their corporate social responsibility programs, tap into the new markets, and increase revenues. It would also be beneficial for the policymakers on both sides to create a business environment more attractive for the MNCs.

References

Crane, A., & Matten, D. (2016). Business ethics: Managing corporate citizenship and sustainability in the age of globalization. Oxford, England: Oxford University Press.

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Gerber, J. (2011). International economics. Upper Saddle River, NJ: Prentice Hall.

Investopedia. (n.d.). Value added. Web.

Simonson, I., & Rosen, E. (2014). Absolute value: What really influences customers in the age of (nearly) perfect information. New York, NY: Harper Collins.

Wright, G. C. (2014). Revisiting the employment impact of offshoring. European Economic Review, 66, 63-83.

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