Outsourcing: A System of Tragedy and Triumph

Outsourcing. Everyone talks about it and we have all heard about it. Buy American they tell us. Don't send our jobs overseas. For many people this line of thinking is not necessarily in the fore of their minds. That is, until they are notified that they have lost their job because it can be done by intermediaries in a foreign land at a huge discount. Buy American? Sure if you can afford it. Let's just say there is a reason that China leads the world in exports.

From an economics standpoint, outsourcing makes perfect sense. It is in a particular firm's best interest to lower costs and efficiently employ capital and resources to improve the bottom line. More and more firms are outsourcing to places like India (Information Technology) and China (automobile parts). In the case of China, this has had a significant impact on places like Detroit and Flint, heavily dependent on the automobile industry.

Critics of outsourcing will point to reductions in quality control measures, language barriers, exploitation of workers, and damage to local labor markets to name a few. These are significant risks for a firm to undertake and outsourcings are not always successful. With that being said, more often than not, reward is not achieved without risk. For some firms, the promise of wage differentials and increased efficiency is too much to pass up. Often, they reap the spoils as a result.

While much can be said about the victors and the fallen, there are other things to consider when talking about outsourcing. What are the incentives for the firm to outsource and who should control what? This is a big question as multinational firms that engage in outsourcing need to establish ownership or dictate who should own or run a particular input. Some firms like to micromanage, while others put key business decisions and operations in the hands of local managers. As you can imagine, micromanagement comes with added costs to the firms, and delegating often can lead to detrimental results. Looking at another angle, country A and country B aside, what are the implications for international trade as a whole. For example, how does the outsourcing of U.S. jobs to China affect Japan or Europe or international trade as a whole? These are all things I would like to analyze in more detail in coming posts.