Globalization And Outsourcing

Introduction

"Its been said that arguing against globalization (and many of the issues related to globalization) is like arguing against the laws of gravity." This statement comes from Kofi Annan, who won the Nobel Peace Prize in 2001 and also became the seventh secretary general of the United States (The Nobel Foundation, 2001). The quote introduces, in its broadest sense, the issue discussed in this paper. While the general idea of globalization is not our primary focus in this report, one of the most controversial subjects to arise out of the globalization phenomenon, offshore outsourcing, is of particular interest to us. Offshore outsourcing (hereafter used interchangeable with offshoring) has been around for some time now. The pressure to transfer business processes over-seas first came from Japan in the 1960's, then from Mexico in the 1990's, and today the pressures are coming from China and India for goods and services, respectively. Offshore outsourcing is the same as any other form of international trade; in fact, it is an extension of international trade. Thus, economic theories such as comparative advantage and absolute advantage apply to the basic idea of offshore outsourcing.

Currently, there are still conflicting points of view over the issue, despite the many economic principles and theories which evidently prove the Ð''net worth or net gain' of offshore outsourcing to every economy that participates in it. Many people are in fact proponents of offshoring. There are others, however, who continue to vigorously oppose the entire idea for a number of reasons (discussed later), even as offshoring continues to play an increasingly important role in both the Canadian and the global economy.

"Based on the following evidence, which we shall discuss in greater detail throughout the report (as well as other evidence), we feel that Canada is in a position to benefit greatly from offshore outsourcing."

First, offshore outsourcing will continue to allow Canada to liberalize its economic factors of production; this will result in an opportunity to concentrate on producing higher-value goods and services. Freeing-up these vital factors of production is only possible when Canada allows certain goods and services to be provided by lower cost countries such as China and India. Secondly, as offshore outsourcing begins to allow third-world countries to economically develop and raise their standard of living, the higher per capita net income of the consumers in these countries will create larger international markets for Canadian goods and services abroad. Finally, Canada is favourably positioned, on many fronts (geographic proximity, language, legal system, infrastructure, time-zones, education standards, property rights, cultures, long-standing trading partners) to supply a wide range of services (low to high end skill levels) to the United States, which constitutes one of the largest nations in the world in terms of imported services required.

Justification Through Rationale

Before we begin to discuss the rationale used to justify our point of view, we should briefly define what exactly we mean when we talk about offshore outsourcing and the trading and outsourcing of goods and services.

Offshore outsourcing is the transfer of product processes (more commonly referred to as manufacturing) and services to other countries over-seas (Bitpipe.com. 2004). Therefore, by definition alone, the transfer of services from Canada to the United States would not be considered offshore outsourcing; rather, it could be called near-shore outsourcing. The two terms are very close related, however, and both will be discussed.

The available technology that is currently present limits what goods and services can be traded or outsourced between countries. It used to be that only products that could be boxed and shipped could be traded, and only processes related to these types of products could be outsourced (Trefler, 2005). In recent years, the definition of a tradable good has expanded to include many types of low-to-medium level services. Why has the definition evolved? Quite simply, technology is the driving force behind this definition. With the rapid growth of the Internet and profound advancements in telecommunications (including connectivity), information has become digitalized. This digitalization process has transformed services into Ð''product like' items, allowing companies all over the world to divide their business processes into smaller, more defined components, many of which can now be performed by independent companies located all over the world (Trefler, 2005).

There is much economic rationale to support our view that Canada will indeed benefit from offshore outsourcing. A well-known economic principle is that trade benefits everyone (Buonocore, 2007). Adam Smith's idea of absolute advantage, explained thoroughly in his book, The Wealth of Nations, is the first economic theory that sheds favourable light on offshoring by indicating that nations should produce and export goods (and services) for which they possess an absolute advantage and import goods (and services) for which other nations have the absolute advantage. This theory indicates that all countries involved in offshoring will benefit so long as there is one industry product or service that a country can produce better than any other country involved in the trade (Suranovic, 2007).

What if there is no such good or service for a country? What if one country can produce every good or service better than another country? Does trading and offshoring still make sense between these countries? The answer is yes, according to David Ricardo and the theory of comparative advantage. This theory evokes the idea of specialization as well as the idea of opportunity costs, and says that countries who are inferior producers of all goods and services can still benefit other countries by producing goods that these other countries spend the largest amount of opportunity cost on (Suranovic, 2007). Based on these two theories alone, we can predict quite certainly that the benefits of offshore outsourcing will indeed outweigh the negative effects for Canada over the long term.

How else does Canada stand to gain from offshore outsourcing? As mentioned in the introduction, trade / outsourcing leads to the liberalization of factors of production. As these factors of production are freed (most often from economic exit of inefficient industries and companies), they can be allocated more efficiently to industries that can give Canada a competitive advantage heading into the future, such as the development of high-value goods and services (Atkinson, 2004). What is efficient