What will happen if Western companies stop sending jobs to developing countries?
The following comment was made by a YouTube viewer in response to one of our clients’ video testimonials:
How do you feel contributing to the enormous problem of unemployment we have today? The bottom line is the dollar. These virtual employees work for practically nothing. Remember, in the long run you get what you paid for. FYI, as soon as I realize that a company I deal with outsources, I move on to another.
Our response to this comment is as follows:
Some people think shipping jobs to other countries is contributing to the problem of unemployment. However, is this really the case? Perhaps it would be more justifiable to place the blame of the high rate of unemployment on the housing crisis and bankers? Let’s not forget that US companies have been sending work to India for the past 25 years, times of strong positive economic growth. Leading economists and even statistics simply don’t support this view either. The economic analysis and conclusion is that for every $1 sent the US economy gains $1.14.
Incorrect to presume all small US firms have a choice to hire locally or ship jobs
Let’s consider small- to medium-sized US firms. Many make the presumption that SMEs have a choice: they can either hire in the US or send work to a developing country. Is this really the case? Are all small firms really that profitable? If a small company in the US can hire 5 software developers in India and in return offers a fantastic service to their clients, does this mean that 5 software developers have lost a job in the USA? Well, what would be the cost of hiring 5 senior software developers in the US? I would approximate that just their salaries alone (no insurance, office overheads etc.) would be US$0.5 million per year. How many small firms can afford this? A simple question is this, “How much profit is the small company making? Is it making more than US$0.5 million dollars a year?” If, in this hypothetical scenario, a US company was not making more than US$0.5 million dollars profit a year how could they afford to hire locally? What a lot of people often ignore is that many small firms simply cannot afford to hire locally and so no job was lost to job shipping business in the first place. Rather, it is job shipping that is driving and sustaining American business by subsidizing the cost of running a business. If all these companies stopped sending work, would it even create jobs in the US? I doubt it. I think it would result in even greater unemployment because these businesses simply would not survive and the owners of these small firms themselves would be looking for jobs.
Trade is a two-way street; don’t forget the millions of jobs India creates
What about the millions of US jobs created as a result of trade with India? US companies dominate the Indian domestic market, from food, clothes, cars, software, construction and the list really does go on. Does this not create jobs in the US, or should it not count as job creation? Should we simply ignore all the revenue US firms take back to America that they generate in India? Conversely, how many Indian firms have a presence in the US automobile, food, clothing, and construction industries? Before blaming India for their country’s job loss, Americans need to keep in mind the number of jobs India creates for them. Let us also not forget that until the early 1990s the Indian government had stopped US companies from entering the Indian market. The US government can stop US firms from shipping jobs and the Indian government can stop US companies from entering India. But this is something Western economies would never want.
Greater trade with India is the key to job creation not protectionist policies against job shipping
Both President Barack Obama and British Prime Minister David Cameron recently made trips to India encouraging the Indian government to open up domestic markets even more. Why? Because it creates a lot more jobs back home. Access to India creates more jobs than what are lost when US firms send jobs and work. If America simply wants to export to India and import nothing in return, well, then that simply is not trade. And so the American government can either trade with India or not trade. If job shipping is so bad, then why does not the US stop trading with India all together? Because, this would be nothing short of economic suicide. Anti-outsourcing advocates must be careful. It was only recently that the Indian government stopped Wal-Mart from entering the Indian market. This would have created a lot of US jobs. Access to the Indian market, (all set to be one of the biggest and most lucrative economies in the world in the next decade) and greater trade is the answer to US job creation, not the prevention of job shipping to India.
When it comes to brain drain Indians are a valuable addition to our society. When it comes to outsourcing Indians lack ability because they are cheaper. Hypocrisy and contradiction at its finest?
That the salaries of Indians are cheaper neither means they are less qualified nor less able. Why are there so many Indian-born, educated and raised doctors, engineers and professors working in the USA? Why did the US not stop brain drain from India, if Indians are not as capable? When there is a shortage of local doctors, then the immigration of Indian doctors is perfectly acceptable because it does after all cost a huge amount of money to train a doctor, so why not kill two birds with one stone and let talented Indian doctors into the country? But when US companies want to send jobs, then all of a sudden Indians somehow become inferior and less capable because they are cheaper and you “get what you pay for”. The salaries of Indians are lower because of the economic climate in India not because they are any less talented than Americans.
What would happen if US companies stopped shipping jobs?
If US companies stopped shipping jobs, this would give rival companies from Europe and elsewhere a clear advantage. US companies simply would not be able to compete and sell their products and services on a global level, which in turn would have negative repercussions for the US economy. Sending jobs to other countries enables US companies to gain or at least attain the same advantage as any other company in the world. This is why US firms are able to remain competitive and dominate the domestic and foreign economies.
What if all Western companies stopped sending jobs to other countries?
The job shipping boom of recent years has significantly contributed to hike in the salaries of Indian professionals. If all Western companies put an end to job shipping, the salaries of Indians would drop and this would give Indian firms an even bigger competitive advantage over Western firms.
Consumers want cheaper services and products
Ultimately, it is the US consumer that wants job shipping. When it comes to the crunch, most people are not going to pay twice as much for the same service if they can get it at a cheaper price. Most consumers keep two things in mind, quality and cost. When you find the quality is just as good and the price cheaper, most US consumers are going to opt for the cheaper option. If this were not the case then US businesses simply would stop shipping jobs out of fear that their businesses would be boycotted. And so if anyone is to blame for sending jobs it is the US consumer not US businesses, because it is the consumer that will always seek the cheapest option. US businesses are simply reacting to the demand for ever cheaper prices. US consumers can vote with their feet and always go with a company that does not ship jobs, but this has not happened nor will it, because to do so is to make a decision based upon emotional feeling as opposed to pure logical or financially sound thinking.
Outsourcing is key to global dominance and global dominance is key to US job creation
There is a perception that jobs drive an economy and thus sending jobs to other countries could have a negative impact on the economy. But from where does job creation come? Aside from the public sector, it is private businesses that create jobs. And so what truly drives an economy is not jobs but successful private enterprises for they create the jobs in the first place. US multinational corporations are able to dominate world markets. In turn, while it is true they create jobs abroad, they also nevertheless create jobs in the US. The key to US job creation is global domination and job shipping is key to global domination.
The biggest outsourcers in the world, companies like IBM and Microsoft, are also among the biggest employers domestically. If these companies did not send jobs many simply presume that such companies would create even more jobs in the US. But what many fail to appreciate is that if these companies did not ship their ability to dominate world markets could come under serious threat from rival companies that would have a huge competitive advantage. If this were to occur, foreign firms could knock US firms from their pedestal. If US firms did not then dominate, how could US companies like IBM and Microsoft hire domestically? By not shipping job, let alone more job creation domestically in the US, the result would actually be the opposite.
Lower prices increase consumer spending which in turn stimulates the economy
Consumer spending is another key component to a strong economy. Job shipping enables US firms to encourage more consumers spending by lowering their rates. The margins of a lot of small US firms that ship jobs are too small for them to hire locally. A curb on sending of jobs would not only decrease consumer spending because of higher rates but it would also force many small companies out of business. US firms “piggy bank” and survive as a result of low Indian salaries. In this respect, job shipping is helping to sustain small US enterprise.
An increase in living standards
Offshoring enables US firms to lower the price of their goods and services. Take for instance, web development. The cost of creating a website ten or fifteen years ago would have been much higher than it is now. Today, literally any one can create a website whether for private or personal use. What most people don’t acknowledge is that this is because the vast majority of small US web development firms sends jobs and work to India and so has been able to bring down the cost of web development.
It may appear that there is a clear link between job shipping and a negative impact on the US economy; job creation abroad equals job losses at home. This, however, is simply not the case. If it were so, the US government would have stopped US firms from outsourcing a long time ago. Economics is never straightforward and many factors have to be taken into consideration before making a judgment. Most outsourcing critics do not take into consideration the positive impact of job shipping when making their assessment and fail to see that the belief that job creation abroad equates to job losses at home is simply logical perception and a false reality.