Multinational Enterprise Should Stop Outsourcing to Developing Countries - Coursework Example

MNE (Multinational Enterprise) Should Stop Outsourcing to Developing Countries INTRODUCTION The term “Multinational Enterprise (MNE)” de s a kind of firm, which has its headquarters in only one country but has operations in several other nations. In other words, organizations’ that have their own production and/or service accommodations in one or more than one nation apart from home country is known as a multinational enterprise (Dunning and Lundan 3-5). The amplification of the existence of multinational enterprises has been witnessed primarily due to the occurrence of globalization. Multinational enterprises have engaged in foreign direct investment (FDI) to ensure their existence in more than one country. In this regard, the term ‘outsourcing’ can be recognized as a process through which goods and/or services can be obtain from an external supplier. In the modern era, the causes and the effects of outsourcing are manifold that can create a profound impact of profitable operations of an MNE. It is also apparent that with the proliferation of widespread operations of MNEs, it has facilitated in an increased tendency of outsourcing in terms of product manufacturing and/or providing services. The study intends to explore whether MNEs should stop outsourcing to developing nations for both providing services and manufacturing products. The basis of the judgment will be formed after evaluating the positive sides and the negative sides associated with outsourcing to developing nations. DISCUSSION In the 21st century paradigm, the modern trend of international trade has changed significantly. Globalization allows organizations’ to perform boundless integration between several countries. At the same time, World Trade Organization (WTO) has also approved the concept and entity of multinational organizations. As a result of the fact, it has been observed that sharing of production or manufacturing activities in between several countries has augmented by a considerable extent. According to a survey on the developing countries, it has been found that the developing nations such as India and Bangladesh have been at the center of attention in relation outsourcing by MNEs from developed nations. In the consumer-centric business culture which is prevailing in the present day context, for MNEs that intend to continuously fulfill this low cost product demand of the consumers outsourcing has become a paramount aspect. It can be argued that countries such as India and Bangladesh do provide decisive edge to MNEs in terms of lower production and manufacturing costs. However, a recent incident wherein a garment factory collapsed in Bangladesh puts major question mark over the viability of sustained outsourcing by MNEs. The key reason behind this increasing notion is that behind the endeavor MNEs to garner greater profitability and ease of business, a number of people in these developing countries might be suffering in a grave manner. The longing of the companies emanating from textile to technology have desired to outsource mainly because of gaining the advantage of cheap labor. However, the working conditions of the places where the goods and services are outsourced in developing nations are at times significantly unfit. Subsequently, a number of critics have argued that the consumers’ instable desire to obtain products at low cost is primarily forcing MNEs to outsource majorly. Thus, from a humanitarian point of view keeping in view the need for alleviating the strain on deprived working people in developing nations, the aspect of outsourcing can be creased (Price, “US Must Stop Outsourcing in Developing Nations”). In this regard, it is observed that outsourcing has become a key strategy for the multinational enterprises. In accordance with Wladimir Andreff (2009), multinational enterprises strategies are actually influenced by certain theoretical models, among them John Dunning’s late 1980’s investment strategy has highly influenced global market. During the 1960s, Motorola had outsourced labor to Mexico, Malaysia and Korea, based on the motive to compete efficiently with the other firms of the United States and Japan. Typical outsourcing business denotes data entry, accounting and information technology support among others. Even tax returns are being processed by foreign computer operators. Conversely to the observed scenario related to deprived labor and working conditions in certain instances of outsourcing, it is also observed that these types of outsourcing have helped to generate thousands of jobs in developing countries as well. At the same time, however, fears and uncertainty have grown among workers in developed countries that their jobs could be outsourced (Houghton Mifflin Harcourt Publishing Company, “Is Job Outsourcing Good or Bad for Developing Countries?”). In the era of 21st century, outsourcing has become a business strategy for the developed countries. A number of articles and journals have suggested outsourcing as a potential risk factor for particularly MNEs of developed countries. ADVANTAGES OR POSITVE SIDE OF OUTSOURCING TO DEVELOPING NATIONS Outsourcing is a process which is helps an organization to grow rapidly and save money. In terms of advantageous factors related to outsourcing to developing nations, a number of positive aspects are determined. These facets are illustrated below: 1# Focus On Core Activities. In order to grow rapidly, an organization should have focus on the core activities. At the same time, the back office operations are also essential for the organization. In order to perform those activities, organizations need human and financial strengths. Thus, it can be asserted that outsourcing is the only solution in this kind of scenario where a firm can maintain the quality of the manufacturing products or services of the back office activity. Besides, it can also concentrate directly on the core activity. In developing nations it is found that human resources are often highly skilled in terms of technical aspects which can aid the MNEs to have quality outputs regarding these important facets (Bucki, “Top 7 Outsourcing Advantages”). 2# Cost and Efficiency Savings. Back office tasks are difficult in nature, but the process involves high cost. On the other hand, efficiency is also needed to perform those back office tasks. Thus, it can be determined that outsourcing those activities to developing nations will definitely save cost and efficiency as the monetary exchange value differs amid a developing and a developed nation noticeably (Bucki, “Top 7 Outsourcing Advantages”). 3# Reduce Overhead. During a particular internal office function of MNE, it is observed that the overhead expenses also became very high. In order to reduce that cost, it will be better to consider outsourcing as a compulsory option as MNEs often require a large set of activities to perform on a continuous basis where increased overhead expenses can be quite taxing business profitability (Bucki, “Top 7 Outsourcing Advantages”). 4# Operational Control. In order to perform a task in a MNE, it requires various departments to control the operations. During this phase, it has been observed that an indiscipline driven atmospheres might emerge towing to the several operational departments. In addition, it is also found that departments of the MNEs have evolved with over time duty. Thus, it can be ascertained that operational control is one of the key advantages of outsourcing. It helps to bring quality management skills in a MNE (Bucki, “Top 7 Outsourcing Advantages”). 5# Staffing Flexibility. Outsourcing to developing nations allows operations of a MNE to meet the requirements of seasonal or cyclical demands. Besides, in case of outsourcing, MNEs have the flexibility to hire staff and release staff as per their own requirement. This facet can be conveniently obtained in a developing nation due to the nonexistence of any inhibition to reduce staff which might affect in its home nation (Bucki, “Top 7 Outsourcing Advantages”). 6# Continuity & Risk Management. Due to high employee turnover risk arises. Thus, outsourcing is useful for large scale organizations to mitigate this risk (Bucki, “Top 7 Outsourcing Advantages”). 7# Development of Internal Staff. A large scale organization or MNE needs a variety of skills to fulfill its own requirement. However, in most of the cases, many organizations do not have that much diversely skilled staff to fulfill the entire set of requirements. At that point of time, on site outsourcing process to a developing nation may bring the advantage of required skilled people or staff that can perform the desired activities. Consequently, it can be affirmed that outsourcing to a developing nation may facilitate in the development of internal staff (Bucki, “Top 7 Outsourcing Advantages”). 8# Reduced Capital Investment and Increased Cash Inflow. Outsourcing of product manufacturing and logistics always facilitates to reduce the capital investment. This is because when a MNE tries to establish the entire business process at own responsibility and investment, first of all it requires large amount of capital and resources. Apart from this, this kind of business strategy needs more working capital for cash inflow. Thus, actual cash inflow becomes low and investment of capital including interest on capital turns out to be higher than expected. In this regard, outsourcing to a developing nation can help the MNE to establish its business gradually (Simonon, “Uncover the Hidden Benefits of Outsourcing”). 9# Increase in Service and Quality. Outsourcing also facilitates in terms of increasing the quality and services for a MNE. During the product manufacturing process, if a MNE focuses on the entire business module including quality control as well as services then it would be quite a tough task for the organization to ensure the success of entire set of operations. On the other hand, if that organization divides its responsibility according to segment of entity then it can significantly be able to perform its desired responsibilities within the specified time frame (Simonon, “Uncover the Hidden Benefits of Outsourcing”). 10# Access to Global Networks and Superior Technology. During the business activities a multinational enterprise tries to utilize the superior technology and global network to establish its brand image in the entire globe. In order to achieve that kind of success, the organization cannot be only relying on its own technology. It should experience and imbibe in its operations something new and unique from its own perspective. Thus, it can be mentioned that outsourcing to developing nations such as India and China that are demonstrating greater technical know-how can facilitate the MNE to attain significant market leverage (Simonon, “Uncover the Hidden Benefits of Outsourcing”). From the analysis, it has been determined that in terms of factors such as increasing the efficiency, development of quality and focus on the core activity outsourcing to developing nations is highly profitable for MNEs. Besides, outsourcing is quite essential and also can benefit with regard to reducing cost, overhead expenses and risk factor for a MNE. DISADVANTAGES OR NEGATIVE SIDE OF OUTSOURCING TO DEVELOPING NATIONS From the analysis of advantageous factors related to outsourcing, it is found that MNEs must outsource product manufacturing and services to save the cost of production. But unfortunately, the actual fact is different at times. It is determined that outsourcing in certain instances to developing nations can be quite costly and high amount of risk can also evolve for MNEs due to varied factors. The varied factors of outsourcing to a developing nation that can be disadvantageous for a MNE are evaluated below: 1# Quality. During the outsourcing of manufacturing product, a MNE could lose command over the quality of the product. At the time of processing, the outsourced vendor might possess the intention to cut down the cost of product by using undesirable components which unfortunately can ruin the actual quality of the product. It might adversely affect the inventory, sales volume and the brand image among other factors of the MNE (Kraft, “Disadvantages of Outsourcing Manufacturing Jobs”). 2# Delivery. In case of outsourcing to a developing nation, demand planning and delivery timing are highly essential. This is because through strict command on the process it can be done efficiently to meet forecasted demands. If due to outsourcing these processes fail to meet the desire requirements then it can hamper the production unit of the MNE. Due to inefficiency in delivery, the entire supply and distribution chain will be affected. Thus, it can be ascertained as a one of the crucial disadvantages of outsourcing to developing nations for a MNE which can inversely affect delivery (Kraft, “Disadvantages of Outsourcing Manufacturing Jobs”). 3# Logistics. From multinational enterprises product manufacturing and services providing point of view, depending entirely upon outsourcing might not be a good option for logistics management. In case of transportation, it can create more difficulties for the MNE (Kraft, “Disadvantages of Outsourcing Manufacturing Jobs”). 4# Labour. In case of outsourcing to a developing nation, the cost of labor is one of the crucial factors. During the process of outsourcing, the sudden rise of labor cost, insufficiency of labor and availability of un-skilled labor can create major complexities for MNEs to meet up with the high quality product requirements. At that point of time, it is not possible for a MNE to pack up the entire schedule and move forward for another labor market. Thus, it can also create a long-term negative impact on the organization (Kraft, “Disadvantages of Outsourcing Manufacturing Jobs”). 5# Political Instability. Political instability, civil war, change of government and unavoidable circumstances among others can also halt manufacturing process for an uncertain period. At that point of time, due to a lack of communication huge problem can arise for upcoming period. In the absence of communication, outsourced vendor would not be able to know the requirement of the situation which can raise harder problems (Kraft, “Disadvantages of Outsourcing Manufacturing Jobs”). 6# Creating Own Competitor. In case of product manufacture, if any a MNE has outsourced most of the parts from the outsource vender and then it may create a competitive product in the same market. As it was observed earlier, an outsourced vendor uses the strategy of its depended organization to create a competitive product in the same market (Anderson, Anderson and Parker, “The Disadvantages of Outsourcing in an Operations Management Project”). 7# Getting Taken Hostage by the Supplier. On the other hand, it has also been observed there at times emerges the situation of dependency on the outsourced vendor. If the MNE relies on its outsourced vendor for a unique skill or unique item then it could create major difficulties for the firm. In fact, the leverage will shift to outsourced vendors’ favor (Anderson, Anderson, and Parker, “The Disadvantages of Outsourcing in an Operations Management Project”). 8# Disconnection with the Customer. This is more related with the service issue. It has been observed primarily in the information technological (IT) sector. Many IT companies use a number of outsourced vendors for providing services. In this kind of scenario, entire goodwill of the organization depends on the outsourced vendors’ reaction. In this circumstance, the MNE can lose its own goodwill due to the misrepresentation of outsourced vendor of the developing nation (Anderson, Anderson, and Parker, “The Disadvantages of Outsourcing in an Operations Management Project”). 9# Lack of Experience. Due to a lack of product knowledge, experiences and skills of outsourced vendors the MNE could be affected regarding the product manufacturing aspect. Thus, it can be asserted that a lack of experience is one of prior disadvantages of outsourcing to a developing nation (Anderson, Anderson, and Parker, “The Disadvantages of Outsourcing in an Operations Management Project”). 10# Safety and Security. Outsourcing in politically unbalanced countries may create a massive problem for the employees’ of the MNE. Employees’ safety and security is determined as one of the paramount factors for an organization. Therefore, with regard to determining the negative aspects of outsourcing to developing nations, safety and security is one of the crucial factors (Kraft, “Disadvantages of Outsourcing Manufacturing Jobs”). From the analysis, it has been also observed that multinational enterprises during the product manufacturing and services providing period have found several difficulties in developing countries. Most of these factors are internal and a few of them are external, which can easily create complications in case of international trade. Besides, it can be affirmed that the main objective of outsourcing is to increase the competitive advantages in the market. Unfortunately, above statement is not true for eternity. It has been observed that many multinational enterprises have become trapped through outsourcing activities of their business functions. These are the key factors which have directly and indirectly played a negative role from a multinational enterprise’s perspective (Gupta, “Looking at the Advantages and Disadvantages of Outsourcing”). Evaluation. From the discussion of the benefits and disadvantages of outsourcing to developing nations for a multinational enterprise’s stand point in product manufacturing and service providing, it has been found that there is quite a quandary to determine whether multinational organizations’ should stop outsourcing to developing nations or not. In this regard, it can be stated that when a multinational enterprise outsources to developing nations then several factors can help the enterprise directly and indirectly. Besides, it is also identified that due to outsourcing the developing country also gets benefited economically. On the contrary, in case of outsourcing from developing countries, a multinational enterprise at times gets affected due to some unavoidable occurrences and at the same time it may lose its brand image and market share due to various factors such as deficit in quality, labor, logistics and delivery problem, political instability, safety and security among others. According to the observation of the prevailing situation, practically it can be asserted that multinational enterprises are involved in outsourcing to reduce the workload and cost of manufacturing. Moreover, its secondary objective is to focus on the core activities. It also wants to arrange manpower with skills to increase the product and/or service efficiency in the competitive market. In order to satisfy all these factors, multinationals are used to involve in outsourcing to developing countries. Furthermore, it can be also affirmed that pertinent opportunities have been seen highly in developing countries since last couple of decades. At the same time, it has been also found that several issues have at times stalled the manufacturing process of multinational enterprises in case of outsourcing to a developing country. Thus, there is a requirement to ensure precaution regarding the lingering issues. Accordingly, it can be asserted that, multinational enterprises should not stop outsourcing to developing countries. Otherwise, it will affect the economy and the gross domestic product (GDP) of the developing countries as well. In addition, it can also raise difficulties in international trade from multinational enterprises standpoint. CONCLUSION Outsourcing has played a valuable role in the prevailing structure of global competition in the labor market. It has also provided the opportunities to the multinationals to reduce the cost and overhead expenses. On the other hand, it has also created a set of opportunities for the developing countries to generate employment. During the discussion, it has been determined that outsourcing to developing nations has a few key positive and negative impacts on the multinational enterprises. The initial motive of outsourcing is cost savings and multinational enterprises are also utilizing outsourcing as a strategy to reduce the workload, increase the efficiency and to focus on their core activities, in order to achieve the organizational goals. Through outsourcing, competitive advantages can be maintained. In addition, it can be stated that developing countries are amid the best options for outsourcing because they have the potential in terms of resources, labor market and skilled manpower among others. Consequently, more multinational enterprises have engaged in outsourcing to developing countries which needs to be upheld by being careful about certain undesirable aspects. 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Simonon, Steve. Uncover the Hidden Benefits of Outsourcing. 2014. Web. 15 Apr. 2014. Read More