Should Government impose stiff penalties on companies that offshore and outsource?

Should Government impose stiff penalties on companies that offshore and outsource?

Over the recent past, there has been a growing debate about the role of the government in the problem of offshoring and outsourcing of production and manufacturing among many corporations in the US. What drives the debate is the sheer concern about the security of the employment opportunities available for the locals. Driven by emerging trends in the global arena and the fight to adjust to the realm of globalization, many US firms have shipped their production operations overseas. The effect of this development has been the realization of much more profits on the part of the companies and ostensibly the loss of jobs among the locals.

The debate has been so entrenched in the country that it formed part of the 1992 presidential debate between Bill Clinton and George Bush. The former had commented that offshoring would lead to more gains for the country in the long run. Recently, the debate has shifted focus into suggesting and proposing harsh penalties for companies that ship their operations overseas in a bid to slowing the practice (Marthinsen, 2014). Many workers and trade unions have demonstrated against the perceived injustice and decried the lack of compensation for the same. It is understandable when such groups press such grievances forth but implementing what they suggest is totally impractical. While in truth locals do lose their jobs when companies move their operations elsewhere, it is not factual to assume that this loss surpasses the gains achieved.

When analyzing a debate of such magnitude, it is only prudent that one looks at it from both the company’s viewpoint and that of the larger population. To start with, offshoring is ideally a responsive strategy in dealing with the challenges that companies face in trying to make profits. Treating offshoring as an evil would be to miss an important factor that helps us understand the rationale behind it. According to Bardhan, Jaffee & Kroll, (2013) companies have embraced offshoring not as a punitive action for its employees but purely for its ability to reduce labor costs. In the wake of competitive international trade, most companies have resorted to outsourcing and offshoring to cut labor costs. For instance, companies are able to realize up to 70% cuts on labor costs when they ship their production to India. These labor savings are attributable to the large profits realized by these companies. The profit incentive is a primary allure for companies to outsource and offshore their operations.

The process of offshoring is also important in improving the international presence of companies that have an international market. Offshoring the production process to a country such as Kenya could in turn build the confidence of the locals on the company and help in its sales. Research has shown that companies that outsource part of their operations end up having a better international presence both in terms of sales and reputation. This improved presence is in turn beneficial in penetrating markets that the company would otherwise have not. For instance, countries such as Arabic countries that are very conservative are hard to penetrate and setting operations in these countries can work towards achieving this.

The whole idea of offshoring is primarily driven by the desire to cut costs including importation costs and the cost of importing raw materials which are bulky (Winkler, 2009). Companies realize that manufacturing in countries where the raw materials are sourced is better than importing bulky raw materials and then having to deal with the waste. Offshoring also increase the company’s production and helps in meeting the price requirements of the customers. Another advantage of offshoring is the evasion of the tax regime which is more rewarding for corporations that transfer their operations overseas.

Despite all these advantages, the companies still have to put up with some disadvantages when they offshore their operations. One such problem is the dented image among the locals because they see the companies as cons that are out to suppress them. The dented image might translate into lower sales locally and lead to boycott of the companies’ products. There is also the danger of strikes and absconding of duty as locals demonstrate against the practices. The fear of retrenchment among the local employees may also work against the company’s local productivity as they jobs satisfaction is lowered in such cases. The company also has to grapple with the fact that it has little or no control over the quality of the finished products because supervision and regulation becomes more difficult (Milberg & Winkler, 2013).

Although offshoring is packaged and presented as a straightforward road to profits, the opposite is also true. Companies do not usually envisage the hidden costs of shipping their operations abroad such as higher travel costs and communication costs. These costs coupled with unforeseen expenses may stall the operations of a company when the reality dawns on the management. Another problem is that the company may have to pay higher taxes to the different countries that it has off shored its operations making the process very expensive.

The concept of offshoring is not a reserve for companies in terms of both advantages and disadvantages. Depending on how one looks at it, the economy and the government at large stands to either benefit or suffer when offshoring is in operation. To start off, offshoring may just be the only option for companies to survive the competitive international market. It is therefore rather they offshore their operations than be ‘loyal’ and end up collapsing. The former has much more benefits over the latter both to the company and the economy at large. The arguments for either side are immense and wide such that one cannot easily side with any.

One disadvantage of, and the main argument against, offshoring is the loss of jobs that the locals have to grapple with. For example, in 2013, IBM planned to lay off more than 1200 workers at three different sites that were involved in computer design and manufacturing. The reason for this layoff at IBM was attributed to the company’s plan of training Chinese laborers that were essentially cheaper and thus offshoring the operations to China. Bertho, Crawford & Fogarty, (2008) estimate that the volume of US jobs outsourced to India alone will double from the current 80,000 in the next three years. By the year 2014, analysts predicted the shifting of as many as two million white collar jobs from the US to low cost centers.

The economy further suffers from offshoring in that the tax received from these companies is lower than that of those that remain in operation locally. The tax regime in the US is such that it favors companies that ship their investments and operations abroad and sort of punitive towards those that stay put. Another reason for this discrepancy is the lack of regulation on international trade and foreign investments in the US. It is estimated that companies that offshore their operations pay tax on average of 15.7% compared to their counterparts that pay about 26% in taxes (Winkler, 2009). The ineffective tax policy is therefore encouraging more companies to shift their operations abroad to cash in on the loose taxation policy. The economy thus ends up losing huge amounts of money in lower revenue collection when offshoring is encouraged.

Another negative effect of offshoring is the importation of lower wages from the low cost centers to the US. Companies have adopted a policy of having wage cuts for their local emp0loyees in a bid to match those of employees in low cost centers. This does not, however, go down well with the locals who insist on having their labor rights respected and harmonized. The companies that do not offshore are also forced to lower their wages in order to match the competition from companies that offshore their operations and sell their products at much lower costs. The effect of offshoring is therefore a wage cut among the local workers leading to decreased job satisfactions.

There is also an increased brain drain in the economy as many companies continue shipping their employees overseas either to supervise or work alongside other employees in these low cost centers. According to Milberg & Winkler, (2013) most of the employees shipped to these countries may end up permanently residing in these oversea countries and starting their companies there. The effect of this is a reduced labor industry in the US and a decrease in the skills that are available in the country. It turns out that the skills and knowledge levels end up reducing in value in the US due to offshoring of workers.

Due to offshoring of operations by majority of the leading companies in the US, the focus on innovation has decreased. Most companies do not focus on innovativeness but on execution of tasks by their employees both overseas and at home locally. This has led to loss of jobs among the skilled and most innovative people for example in the IT sector and a bulge in the low end employees. Most of the available workers are therefore forced to either learn new skills or modify their skills in order to keep up with the job requirements.

Offshoring has also led to lower incomes on intellectual properties and especially in the field of medicine. Most of the companies that offshore their operations have focused on making medicine that is generic thereby capping the level of income that companies focusing on research earn. In India, for example, many drug manufacturing companies have continued to focus on making generic medicines encouraged by the trend of offshoring. The result is that the inventors of these drug making formulas end up getting less in terms of revenue and sales. This shortage also means that the US government gets less revenue from these sources.

Moreover, offshoring and outsourcing, as practiced by US companies, is detrimental and works towards worsening the living standards of the local population. The reason given for this argument is that the concept is exploitative in both its design and application. Not only do these companies contribute to a loss of jobs for the locals but they also cause more problems at home. It has been argued, and rightly so, that US companies are paying Chinese wages while selling their products at US prices. This assertion is driven by the companies’ greed for profits and their bid to satisfy the shareholders’ expectations.

On the other hand is a brighter side for the concept of offshoring as evidenced by the many benefits it brings across. While it is true that job losses do occur when companies offshore their operations, it is not entirely true that these jobs are substitutes in nature. Some of the jobs created are complimentary and go hand in hand with the ones that are being created. Moreover, the benefits of offshoring to the economy are much more but are usually not easily visible because of their longevity and indirectness. For instance, it would be hard to prove that offshoring brings much more to the economy than it brings out. While this might seem absurd at face value, it is true and is backed by empirical evidence from many studies done in the past. Bill Clinton was actually right in stating that offshoring had much more benefits to the US economy that the losses it was perceived to bring.

Many of the arguments against the concept are anchored on speculation and a fear of risk among the local workers. For instance, the government still gets tax from the companies even though much of the production has not been done within the territories. This is contradictory to the assertion that the government gets less tax revenue from these companies. Yes, it is true lower taxes are sourced, but it is also true that much production is not done within the country when companies outsource their operations. Moreover, offshoring is the only way that these companies will survive in a dynamic and competitive international trade environment. The companies do not have much of an option when it comes to this issue. In addition, the US alone cannot meet the labor demands of all the US based international companies (Marthinsen, 2014).

From a global perspective, offshoring, whether from the US or any other country, is beneficial in building a large pool of knowledge and skills. Companies that offshore some of their operations play an important role in the transfer of knowledge and skills to people that had no prior experience. Moreover, the knowledge transfer is not one sided and the opposite is also true that US companies get other skills from the countries they have off shored their operations to. The transfer of knowledge is important in standardizing the quality of the products that are manufactured and thus ensuring better standards for all the products.

Offshoring of operations by companies such as the production processes have the advantage of reducing the amount of waste that the US has to deal with. This is because the companies only bring finished products to the US and not the bulky raw materials. From an environmental perspective, this reduction is a positive development because management of wastes is such a costly process. The energy requirement of the country is also lowered as less energy is used in the process of production (Bertho, Crawford & Fogarty, 2008).

Another, usually overlooked, advantage of offshoring is the lowering of business costs and reduction of prices for businesses. The concept also increases the ability of the US business to expand thus providing new jobs both at home and overseas. In addition, the extra revenue generated in other countries due to the higher demand for goods benefit US exporters and leads to higher job creation in the US. The circulation of the US currency in all the offshore countries is also beneficial in stabilizing the US currency and works to balance the country’s trade offs.

Most of the jobs in The US labor market are computerized or mechanized and work to support the idea of offshoring. In fact, Winkler, (2009) argues that most of the US employees are not in the direct production of products and are not in labor-intensive positions. Furthermore, the offshoring of low-skilled activities can be compensated through the creation of new jobs that are availed from cost saving. In truth, the US labor market is very flexible and creation of new jobs that never existed before is the order of the day. In addition, the shipping of low skill jobs to other lower cost countries can be offset by shifting towards high-skilled activities in the home country.

While the offshoring of company operations may appear like an impediment to job creation in the US, it is still a viable option for expanding US business globally. The focus should therefore not be purely on punishing companies that offshore but in adapting to the reality of offshore concept. The government should therefore design policies that encourage flexibility in the job market and creation of new jobs altogether.



Bardhan, A. D., Jaffee, D. M., & Kroll, C. A. (2013). The Oxford handbook of offshoring and global employment. New York: Oxford University Press.

Bertho, M., Crawford, B., & Fogarty, E. A. (2008). The impact of globalization on the United States. Westport, Conn: Praeger.

Marthinsen, J. E. (2014). Managing in a global economy: Demystifying international macroeconomics.

Milberg, W. S., & Winkler, D. (2013). Outsourcing economics: Global value chains in capitalist development. Cambridge: Cambridge University Press.

Winkler, D. (2009). Services offshoring and its impact on the labor market: Theoretical insights, empirical evidence, and economic policy recommendations for Germany. Heidelberg: Physica.


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