Rationale Behind Companies Moving Operations Into or Out Of the USA - Essay Example

Rationale Behind Companies Moving Operations Into or Out Of the USA It is a common occurrence for companies in the world to transfer and move their operations from one country to another. We have all witnessed this situation during our lifetime. These typically moved operations might involve operational process such as the manufacturing of goods. Such goods, in the case of USA, have their consumption market primarily in the United States of America. Conversely, companies may move their operations to other countries by transferring processes that supported their businesses such as accounting and customer care services. It is important to note that, even state run businesses may move operations from one country to another country. However, have we ever paused to ask ourselves the reasons behind these moves? In this case, there are a few reasons why companies move their business operations into the country or out of the country. Nevertheless, it is important to point out that the main objective of a business is to maximize profits. In this case, a business will only make profits in a favorable environment for business. For this reason, the fundamental need for this favorable environment makes companies move their operations from and into other countries. The United States is the world’s largest economy. Thus, The US does not operate in isolation and effectively companies from the country move operations out and into the country. Conversely, there are different reasons for companies to move their operations out and into the country. While the key reasons for companies moving jobs out of the USA range from taking advantage of cheap labor and avoidance of high taxes, companies moving jobs into the country allude to a steady rise on wages as the main reason of moving their plants and operations back to the country as this article explains. One of the reasons that companies move their operations out of the country, especially the manufacturing processes, is to take advantage of lower wages poor countries. This process is labor arbitrage, which is “taking advantage of lower wages abroad, especially in poor countries” (“Moving back to America”). China is amongst the countries that provide cheap labor. Essentially, companies from the USA move their manufacturing plants to the country to operate under lower production cost while improving their profit margins. A study by Judith Banister in 2002, to determine the manufacturing industry’s compensation of workers in China, found that, “The cost of Chinese factory labor is a paltry 64 cents an hour” (“Just How Cheap is Chinese Labor”). In contrast, the same study found that the “hourly factory compensation in the U.S. in 2002 was $21.11” (“Just How Cheap is Chinese Labor?”). In this regard, the prospect of paying lower factory wages in China was a factor that contributed towards moving manufacturing process to China by some companies. In the business sector, it is obvious that companies with manufacturing plants in the USA would want to take advantage of low wages in China and in other countries that offered cheap labor. It is crucial to note that companies expect to have high profits. In effect, one way to ensure that they achieved this objective is through a reducing the cost of their operations. Therefore, cheap labor ensured that such costs remained low. Effectively, companies achieved the objective of having high profits. However, the US job market does not offer cheap labor, as most companies would like. While the study by Judith in 2002 only covered the hourly-wages only, a further study with data available for only 30 million workers revealed a slight difference. In this case, “The 30 million on whom she found data earned an average $1.06 an hour.” (“Just How Cheap is Chinese Labor?”). In this regard, the additional information included other payments not related to wages and insurance. This figure is still relatively low in comparison to the US labor wages and explains companies’ inclination to the Chinese labor market. Taking advantage of low wages might be the main reason that American based companies cut their workforce in the country in order to expand abroad in the 2000s. In this regard, Wessel noted that American “firms added 683,000 workers in China, a 172% increase over the decade” between 1999 and 2009. Therefore, it is very important to point out that cheap labor might be the key reason that attracted these international companies to the Chinese job market. In this regard, Wessel noted that, “The companies cut 14,700 workers in Germany during the decade and added only 8,700 in France.” It is crucial to note that, the same study that showed the average labor wages for china as $1.06 showed that the same wages paid to a factory worker in these three countries averaged $14.22 (“Just How Cheap Is Chinese Labor Market?”). Therefore, these additional jobs are an indication that companies from the United States moving their operations to countries with cheap labor since Wessel found out that the multinationals “reduced their capital-investment spending in the U.S. at an annual rate of 0.2% in the 2000s.” The second reason that companies move operations out of the country is the strict regulations in the country in terms of laws and taxes. According to Liveris, in 1988 “the U.S. corporate tax was about 12 percent below the average rate of among G-7 nations.” However, it is common knowledge that the current situation is different from the scenario back in 1988. In this regard, the tax charged on businesses in the U.S. has gradually risen overtime and remains the highest in the world. In this regard, high taxes in the country may force companies to relocate their operations to other countries, which offered lower corporate taxes. Liveris notes “Ireland lowered its corporate tax to 12.5percent, by far the lowest in the world.” Liveris further pointed out that this rate of corporate tax was “almost 70percent less than the United States.” Therefore, lower corporate taxes attract companies to move their operations to countries with such lower taxes. On the other hand, Wessel noted that the issue of US-based multinationals moving business operations to other countries also puts the issue of the country’s laws into perspective. In this case, the government’s policy towards taxes that aimed at producing more jobs in the country appeared to slow down the growth of jobs. As a result, companies tend to move their business operations, and inevitably move operations, to countries whose regulations and tax systems do not restrain their business operations. While cheap labor abroad has been one of the main reasons why companies move business operations out of the USA, there is a growing concern on the stability of the cheap labor in markets that offered cheap labor. In this case, it is common knowledge that the economies of poor countries grow. In effect, a growth in the economy of a country results to a rise in the wages. Indeed, an excellent example relates to increase on the pay for factory workers in China by “69% between 2005 and 2010” (“Moving back to America”). In this case, the gains that companies obtain from cheap labor by moving their operations to countries like China are decreasing. According to Hal Sirkin of the Boston Consulting Group, “wage growth will continue at around 17% a year in China but remain relatively slow in America” (“Moving back to America”). In addition, it is common knowledge that the Yuan is continually appreciating against the dollar. In effect, Sirkin further points out those companies in the manufacturing industry will appear to be unresponsive when it comes to choosing the location of their production plants between these two nations by 2015 (“Moving back to America”). This case is not special to the Chinese economy only but goes further to other growing economies that offer companies cheap labor. It is common knowledge that the economies in some countries that provide cheap labor, like India, are also experiencing growth. Growth in the economy results to a growth in wages and demand for other benefits. To put this issue into perspective, companies, such as Caterpillar, have begun shifting some of their production based abroad to the country (“Moving back to America”). From the foregoing, it is evident that companies move jobs out and into the country for various reasons. While the cost of labor appears to be the major reason behind companies moving their business operations out of the country, the question is for how long will this cheap labor remain sustainable? In addition, what is the future of the American factory worker if the factory compensation remained higher and companies moved their operations elsewhere in search of cheap labor? On the other hand, will we experience a situation whereby companies will move back to the country due to growing economies and increasing demand for better wages and other benefits, which effectively make companies move operations back to the country? Conversely, strict regulations and high taxes on businesses in the country stifle economic growth by obstructing innovation, economic growth, and jobs. In this regard, will the government take action and legislate on these run-away taxes in order for the corporate to take advantage and move their operations back? Nevertheless, companies move jobs to countries whose regulations do not appear to be strict in comparison to the United States’ regulations. Works Cited Jiveris Andrew. Make it in America: The Case for Re-inventing the Economy. Hoboken: John Wiley & Sons, 2011. Print. “Just How Cheap is Chinese Labor?” Bloomberg Business Week. 13 Dec. 2004. Web. 19 Feb. 2012. < http://www.businessweek.com/magazine/content/04_50/b3912051_mz011.htm>. “Moving back to America.” The Economist. 12 May 2011. Web. 19 Feb. 2012. Wessel, David. “U.S. Firms Eager to Add Foreign Jobs.” The Wall Street Journal. 22 Nov. 2011: B1. Print. Read More