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Economics involves the manufacturing, exchanging and distributing of goods and services (Hubbard et al. 2016, p. 1). Microeconomics refers to the economics around companies, industries, and workers (Hubbard et al. 2016, p. 5). While macroeconomies focuses on things such as the country’s population, unemployment, and inflation (Hubbard et al. 2016, p. 5). In microeconomics there are 4 types of resources that go into manufacturing/ producing things. Those being natural, capital, labour, and entrepreneurial (Hubbard et al. p. 1). Naturals are resources such as fish, oil, and water (Hubbard et al. 2016, p. 1). Capital resources refer to things such as tools, machinery, and factory buildings (Hubbard et al. 2016, p. 1). Labour resources refers to all human work, jobs such as plumbing, corporation management, and pizza delivery (Hubbard et al. 2016, p. 1). Entrepreneurial means the ability to join all other factors of production and to market them properly, most times requiring innovation (Hubbard et al. 2016, p. 1). When relating to offshoring, it is usually in reference to capital and labour jobs such as IT or car manufacturing factories. Offshoring refers to a company employing individuals overseas to do work that was once done by local persons (Grant 2005, p. 5). Offshoring is often times confused with outsourcing which is when a company gets a third-party company to do work on behalf of them. Australian companies benefit greatly from offshoring, for reasons such as cheaper labour. The essay will discuss economical terms relating to offshoring and supported by examples of Australian companies offshoring jobs in the past.
Resources help engage and develop the economy, there being 3 types of economies. The first of which is a market economy, occurring when buyers and sellers come together to exchange goods or services (Hubbard et al. 2016 p. 4). Such as a local farmers market, or more macro examples such as eBay or stocks exchange. In a free market the trades between persons is not being intervened upon from the government (Hubbard et al. 2016, p. 4). A Planned economy is not common anymore except for countries like China or North Korea, where the government overseas and controls the production so it limits people on what they can buy or make (Hubbard et al. 2016, p. 4). Most countries are the mixed economy type, in which the government is involved with decisions made for production is some areas and the market influences other areas, with countries such as the USA, and Australia being primarily driven by the market (Hubbard et al. 2016, p. 5).
Countries have been offshoring jobs for decades, so it is not a new concept, and it has proved to be good for companies. Evident from the continued utilization of the possibilities such as ANZ implementing an IT hub in Bangalore compromised of 400 software programmers, 530 by 2005 (Grant 2005, p. 23). Offshoring has changed over the years, enough to warrant the coining of three different types. During British colonisation, the British East India Company gained massive political acclaim through exploitation of labour resources, which is known as political offshoring (Grant 2005, p. 6). Production offshoring is another type, which was especially prominent in the 1970s and refers to the free movement of capital resources to those that would take lower wages offshore (Grant 2005, p. 6). This caused many factories in the US, and Western Europe to shut down as there was a high productivity of newer industrializing countries such as China, Korea, and Singapore (Grant 2005, p. 6). The third type of offshoring is services offshoring and is the most recent. Referring to services that were considered white collar jobs such as those in the field of information communications technologies, to be transferred to providers offshore that take lower wages (Grant 2005, p. 6). Countries providing low wage alternatives for companies based in countries such as the US and Australia is a primary reason that companies offshore jobs, as it is good for them.
Companies that offshore jobs have been planning to do so, it is not an impulsive, uneducated decision, it is something being done to best reflect the incentives of the individuals in the company. A major aspect that needs to be considered when discussing why a company offshore jobs, the answer being the theory of firm. The theory explains that the sole goal of a company is to maximize profits and as great a gap between revenue and costs as possible (Chen, Murphy 2019). Developing countries are a great place to offshore jobs to because the business transaction between the companies often have a contract benefitting both parties (Lanz, Miroudot & Nordas 2013, p. 195). What a party brings to the table as well as takes away is all discussed after negotiating. The firms are then confined to a space where they need to compromise between keeping the transaction costs down and keeping individual incentives the same with the firm’s (Lanz, Miroudot & Nordas 2013, p. 196). Companies have to weigh the productivity of the firm on one hand, and wage, trade on the other, which is why companies often times pick and choose which jobs to offshore and which to keep.
Digitization has been great for both developing countries and those that are developed. Creating software engineering advancements, transforming existing industries such as finance (Grant 2005, p. 10). Offshoring a manufacturing plant might take several years as there are employee qualification considerations, parameters to keep within home company guidelines, finding an appropriate site (Grant 2005, p. 10). Whereas, a smaller business process such as offshoring IT technicians may only take a couple of hours to days, therefore the processes in the business are divided and the lowest costs to get the same job done are found around the world.
If a company is productive, it means that there is a higher chance that it will offshore jobs as it can more easily cover the transaction costs that are involved in the contracts. Information and communication technology jobs have been one, if not the most offshored job in the world, this is because ICT brings the transaction costs of companies by a massive amount (Lanz, Miroudot & Nordas 2013, p. 196). In 2007, it was reported by the Australian Research Council (2007, p. 1) that ‘IT offshoring enabled companies to expand, creating twice the number of jobs that it displaced’ and also for every US $1 that was invested, $1.14 was created in economic benefit, meaning that Australian companies have reduced costs leading to better service, which is ultimately good for both the company and consumers of their product.
The explanation of IT jobs being offshored to countries such as India is that the job can be fulfilled online. Many economists state that jobs, no matter the skill level, that can be delivered electronically, will be done so, Bhagwati and Blinder (2009, p. 24) stating that:
Most physicians need not fear that their jobs will be moved offshore, but perhaps radiologists should. The work of policemen will not be replaced by electronic delivery, but the work of security guards who monitor sites by television might be.
Supporting the statement made by Bhagwati and Blinder, it is important to consider than highly populated countries such as India have millions of highly motivated young graduate students, Dr Grant from the Parliament of Australia (2005, p. 9) referring to them as people ‘who are as capable as the most highly educated workers in the developed world but available to work at a tiny fraction of the cost’.
So, if a company’s main goal is to maximize net profits, then determining the pricing of their products and demand within the market would be a priority, and a solution to creating fair priced goods is to offshore the manufacturing processes to lower production costs, and lower wage overseas businesses. In most cases this results in lower prices for goods for consumers, when compared to the price of the same product being manufactured in Australia. The manufacturing labour costs per hour for a country such as India is $2.5 (Statista 2019), this compared to an economic powerhouse such as the United States which is $42.6 (Statista 2019). India’s was even lower back in 2010, sitting at $0.91 US, which was 3% of the compensation that US manufacturing workers got (Sincavage, Haub & Sharma 2010, p. 1). This further supporting the that decision of countries in developed nations such as Australia offshoring jobs is good for them, especially when the theory of firm is applied.
Another example of an Australia Company offshoring manufacturing jobs is the Bosch company. In 2011, the company informed its employees that there would be a plan implemented to transfer operations overseas over the next two years, thus cutting 720 jobs just in Victoria, and 1480 jobs nationally (AsiaPulse News 2011, p. 1). This was widely regarded to be a bad move morally, but logically speaking, Bosch most likely reduced labour costs by a considerable margin and continue to be a leading engineering company in 2019, therefore indicating that offshoring jobs was a good move to make when regarding the company.
All of the contracts of offshoring jobs between companies ultimately help all countries and companies involved. As offshoring adds to the national output of a country and keep the company scene competitive as those companies that voluntarily choose to skip cheaper services will lose market and therefore production of goods. University of Columbia professor, Bhagwati (2004 cited in Grant 2005, p. 11) stating that:
Individuals do lose jobs when production or services are sent to low-wage countries. But the economy benefits by acquiring those products and services more cheaply; people and firms previously unable to afford them can now do so; and the savings are spent or invested in more jobs and production.
It is clear that offshoring has been portrayed to be much more harmful to a developed nation’s labour force than it actually is. When in fact it is companies reflecting on the market much like the law of demand. There is a lot of demand for jobs in developing nations and there are companies willing to offshore to them, thus making the retail, and manufacturing prices decrease, from which the demand increases, from which more people are employed to create more product.
In this essay, the fundamentals of economics were discussed, explaining the differences in resources, leading to microeconomics which is business focused. It was stated that a company would offshore IT jobs a lot of the time as the job can be done the same, overseas and for cheaper. It was then discussed that companies at most, if not all times, have the sole goal of maximizing profits, and developing countries have low wages per hour thus leading to Australian companies offshoring to countries like India. All companies that have offshored jobs have done so for their company benefit, in doing so, the companies create a more competitive business scene for themselves. While the consumers of products get goods and services for cheaper as the companies are constantly projecting a positive revenue stream, thus stimulating the country’s economy, leading to more jobs in other areas as there is more money in the system. Offshoring jobs is not only good for Australian companies, it helps the global economy, filling the demand for jobs overseas, as well as, helping towards making products cheaper for consumers in Australia.
- Parliament of Australia 2005, Offshoring jobs: US and Australian debates. No. 12, PoA, Canberra.
- Hubbard, RG, Garnett, AM, Lewis, P & O’Brien, AP 2016, Essentials of Economics, 3rd edn. Pearson Australia, Sydney.
- Bhagwati, JN, Blinder, AS, Friedman, BM 2009, Offshoring of American jobs what response from U.S. economic policy? MIT Press, Cambridge.
- Australian Research Council 2007, Analysis of effective offshoring processes for Australian organisations, no. 1, ARC, Canberra.
- Lanz, R, Miroudot, S & Nordas, HK, 2013, ‘Offshoring of tasks: taylorism versus toyotism’, World Economy, vol. 36, pp.194 – 212.
- Chen, J & Murphy, CB 2019, ‘Theory of the firm’, Investopedia, viewed 14 June 2019, <www.investopedia.com>
- Sincavage, J.R, Haub, C & Sharma, O.P 2010, ‘Labor costs in India’s organized manufacturing sector: compensation costs in India’s organized manufacturing sector were 91 cents per hour for all employees in 2005; this amounted to about 3 percent of hourly labor costs in the U.S. manufacturing sector but was above BLS estimates of labor costs in China. Bureau of Labor Statistics, vol. 133, no. 5, p. 3.
- AsiaPulse News 2011, ROBERT BOSCH AUSTRALIA TO TRANSFER 380 JOBS OFFSHORE, viewed 14 June 2019, <http://www.asiapulse.com>
- Statista 2019, Manufacturing labor costs per hour for select countries from 2002 to 2019 (in U.S. dollars), viewed 14 June 2019, <https://www.statista.com>
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