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Why US Firsm Should Not Give Up On Outsourcing

Pre-1991 the Indian government implemented protectionist policies that considerably favored Indian companies over foreign firms, (not the case now hence the offshore outsourcing boom). As a result, offshore outsourcing to India was not possible for foreign companies.

Why did India implement such anti-offshore outsourcing strategies pre-1991? This approach was implemented to help promote, establish and grow domestic Indian companies following Indian independence. Had India permitted offshore outsourcing, foreign companies would have out competed any prospective start up Indian companies.

Pre Offshore Outsourcing Industry Example: TATA motors:

A good example of the above logic in practice is the case of TATA motors. TATA motors considerably benefited from foreign companies being denied the chance of offshore outsourcing to India. That offshore outsourcing was not an option for foreign companies, Indian companies subsequently faced little competition; in essence, TATA had the whole Indian market to “itself”.  Through such weak competition, TATA was able to establish itself as the dominant company in the Indian market.

Had offshore outsourcing been an option for Ford, BMW or Chrysler, TATA undoubtedly would have been out-competed on price and quality. It is highly likely TATA would have been unable to even “start up” let alone rise to the billion dollar company it now is.

The years of no competition have now enabled TATA to establish and grow to such an extent that it has now subsequently begun targeting foreign markets. For instance, in March 2008, TATA motors reached an agreement with Ford to purchase their Jaguar and Land Rover operations for US$2billion.

But what if India once more ‘closed its offshore outsourcing doors’ to the US?

The TATA motors example explains why India previously made offshore outsourcing so difficult for foreign companies. What would happen if India stopped the offshore outsourcing process again and reverted back to economic policies that favored domestic companies? What could hypothetically happen if India once more “closed its offshore outsourcing doors” to the US?:

  • Indian companies would be able to grow and establish themselves within the Indian domestic market. With offshore outsourcing an impossibility for foreign firms, Indian companies would have little competition and this would enable them to grow.
  • Once established, Indian companies could then begin targeting foreign markets and possibly start out-competing US companies in foreign markets. This is because US firms would be unable to engage offshore outsourcing practices and thus would not have access to the low costing but highly educated Indian professionals. Indian companies accordingly could sell their products considerably cheaper than US firms.For now however the likeliness of India reverting back to pre-1991 anti-offshore outsourcing economic policies is highly unlikely, thus US companies will continue offshore outsourcing and be the most competitive in the world. Indian companies will not be able to start up let alone even compete with US firms that are offshore outsourcing.

If however US companies stop the offshore outsourcing process, the advantage would firmly fall with Indian companies. If offshore outsourcing is not possible for US companies they could soon start being out-competed by Indian firms. Indian firms would have access to a highly skilled but low costing work force whilst US firms barred from offshore outsourcing would incur much higher costs.

As a side note, the reason as to why India will not revert back to pre-1991 protectionist policies is because protectionism ultimately leads to failure. Whilst protectionism would help domestic Indian companies grow and establish, (as in the case of TATA) there is more to gain from a liberalized economy than isolated one. With US companies offshore outsourcing comes considerable foreign investment in India and this is one of the factors driving the Indian economy. Only once India liberalized its economy did India begin to witness sustained 7-9% GDP growth. Hence, it is why free trade is often referred to as a “two way street”; and thus why America itself should too embrace free trade, (including offshore outsourcing) for it will lead to greater economic prosperity through improved competitiveness and access to the Indian market.

Offshore Outsourcing for effectiveness and dominance:

US companies which engage the offshore outsourcing process out compete any potential Indian companies in the Indian and foreign markets. If US companies were prevented from offshore outsourcing, it is very feasible to suggest that Indian companies would not only dominate the Indian market but also markets throughout the world; including the US market.

Offshore outsourcing practices should not be prohibited or even discouraged, for the offshore outsourcing industry helps maintain US dominance. In conclusion offshore outsourcing practices are a good “thing” it enables US firms to dominate throughout the worlds markets.

 


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