Globalisation and Offshoring

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I) Introduction

Globalisation is bringing the world economies toward a system where goods, services, capital and ideas are free to move without boundaries. Many salutes this trend as beneficial for the global economies while others perceive it like a threat to their own welfare. Especially the theme of off-shoring, which cause the replacement of many works to less development countries, is developing a debate on whether free trade should be limited in order to preserve domestic labour. This report aims to show how the fears over off-shoring jobs are generally overestimated. First an overview on how globalisation is developing will be provided. Then the report briefly analyses the reasons why companies approach off-shoring. Finally the effects o off-shoring for the domestic and foreign economy are analyzed.

II) Globalisation and Free-Trade

According to Worthington and Britton (2006) globalisation is the process of integration on a worldwide scale of markets and production. The world is moving away from a structure of national market divided by barriers, distance and cultures. Evidences of this shifting to a completely free trade market can be seen in the last decades history. Starting from the 1950’s the world economy has faced an important increase of the international trade. According to Bottini, Erns and Lubecker (2005), the fall of transportation costs has pushed the trade in finished goods and the different countries have specialized in the production of those goods in which they have comparative advantage. However the changes that took places in the last years, which include the lowering of trade and investment barriers, along with radical technological improvements in transportation and communication, have accelerated the globalization processes. Nowadays the word economy is facing a new phase of the free trade, where components and intermediate goods can be transferred quickly from a country to another, information system permit to reduce geographical limits and capital can circulate without boundaries. As a results companies can exploit cheaper production factors in another country by relocating their production facilities. This resulted in a shifting from trade in finished goods to trade in tasks (Grossman and Hansberg 2006). Initially this phenomenon interested especially the manufacturing sector, where some companies with a labour intense business began to move their production to cheaper labour country. However recently also the service sector has been involved in this trend because with the communication costs declined nearly to zero, activities that first were regarded as non tradable are now tradable. (Baldwin, D. 2006) A sounding examples to this trend is the growing amount of Indian call centres which serve the American and European market. According to Wall, S. And Rees, B. (2004) the literature has generally referred to this phenomenon as off-shoring or offshore sourcing.

III) Why Do Company Off-shore Outsource?

The activity of offshoring is defined by Rugman, A.(1999) as the relocation of service operations to a foreign country to benefit of more effectiveness. This term is often used interchangeably with the term outsource however the two are different. Outsource refers to the activity to contract a task to an external supplier rather than do it internally. Since this supplier might be in the same country or abroad it is possible to distinguish between domestic and international outsource. Offshore instead refers to all the activities that allow a task that was made at home to be relocated abroad. In this sense offshoring includes international outsource, Foreign Direct Investments and Franchising. The basic purpose which drive companies to off-shore outsource is cost reduction. Moving the production in a developing country may result in relevant savings on the workforce salaries. While this has been long the case on manufacturing, recently, thanks to technologic improvements,...
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