Outsourcing and Economic Growth 1

ECO 2013 Research Writing Assignment

“Outsourcing and Economic Growth”

Dale R. Porter III

St. Petersburg College

Outsourcing and Economic Growth 2

5. The automaker BMW, whose corporate headquarters is in Germany, makes its X-series

sport utility vehicle in South Carolina, and sells many of them in China. Who

is outsourcing what to whom? Explain.

Before I am able to answer the question, I would like to go over the

terminology of Outsourcing, as without a understanding of this terminology, it could be difficult

to understand the answer. Outsourcing itself is given a definition in the article “Outsourcing:

definitions and analysis”. The definition giving by the article states that “Outsourcing is defined

as the act of obtaining semi-finished products,finished products or services from an outside

company if these activities were traditionally performed internally” (Dolgui, Proth, 2013,

p.6770). In other words, outsourcing is getting something from an outside source else that

someone would normally make themselves. However, it is also considered outsourcing if a

company opens its own foreign plant or office, and only hires foreign workers to perform a job,

instead of a whole foreign firm. A last aspect of outsourcing is outsourcing within a nation's

borders. This can happen between states, providences, and even companies within that same

nation. The rules of outsourcing are the same, where Entity I hires Entity II to do a job Entity I

could have done itself. In the U.S. Municipalities have begun to contract out, or outsource, many

government jobs to private companies. This is discussed in more detail in the article “Insourcing

and Outsourcing The Dynamics of Privatization Among U.S. Municipalities 2002–2007” by

Mildred E. Warner and Amir Hefetz, in which it says, “Some argue that renaming such

contracting privatization was part of a broader agenda to shrink government and shift the social

contract (Feigenbaum & Henig, 1994). For local officials, however, the approach to privatization

has been a pragmatic one focused on experimenting with new forms of service delivery in search

of cost efficiencies and greater service quality…” (Warner, Hefetz, 2012, p.313). After this

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explanation of how domestic outsourcing is often used, the article goes on to explain the

intricacies and effects of domestic outsourcing.

The next bit of terminology to be defined is Insourcing. Insourcing “can be

defined as internal sourcing of business activities. So, insourcing can be viewed as the allocation

of reallocation of resources internally within the same organization, even if the allocation is in

differing geographic locations” (Schniederjans, Schniederjans, Schniederjans, 2015, p.3). To say

it in plain English, insourcing is to make something independently that could be or was already

being made by someone else. In addition to this, insourcing can also be defined as when a

foreign firm or workers are paid to do a job by a foreign firm that the foreign firm would

normally perform itself. When a company makes the decision as to whether they should insource

or outsource, there are many factors involved. Some of these factors are whether it costs less to

produce the product by outsourcing or insourcing, which method will bring forth the best quality

product, and whether the transportation requirements of outsourcing are too high for the firm to

accept. To put it simply, “Companies seeking to know whether to insource or outsource will find

that there is no easy answer; the decision-matrix is too complex to yield an easy ‘yes’ or ‘no’ ”

(Nodushani, McKnight, 2012, p.165).

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Now for the question at hand. In the question given, it is the firm BMW that is

outsourcing, as it is outsourcing the labor of building its cars to workers in the United States, at

BMW’s South Carolina plant, to be precise. When this outsourcing happens, the jobs that would

normally be given to german workers are given to Americans instead. BMW is also likely

outsourcing at least part the labor of selling that car to Chinese advertising and sales firms. I say

part of that sales and adverting labor because Chinese people could still order and import the cars

themselves, but if most of the cars are sold in China, than there is most likely advertisements and

sales places within China, as Chinese companies would likely be very effective within their own

country, compared with sales and advertising firms based outside China. As I have shown, there

is probably at least 1 firm besides BMW involved in the production and selling of the X-series,

and likely 2 or more. From the group of American production workers’ point of view, insourcing

is going on, as the American workers are producing a product for a foreign firm that the foreign

firm could produce itself. In addition, Chinese firms that would be providing the services of sales

and advertising to BMW would also be insourcing, as they would be providing a service that

BMW could get in-house, meaning it could get the service from its own employees. Other firms

that could be involved are transportation firms hired by BMW or the Chinese firms to move the

vehicles from the manufacturing center in America to the consumers in China. This

transportation could be provided in-house by any of the firms mentioned, but it is somewhat

likely that a single transportation firm, or many different firms of that kind, would be contracted

to transport both the final good to China, and even the intermediate goods, such as steel, finished

parts, and designs, to America to have them turned into the final good, an X-series BMW. In this

case, and many others, outsourcing led to more money for everyone involved, as the Germans at

BMW gained money from the sales of the X-Series, the American workers gained money in

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wages from BMW, and the possible, yet probable transportation and sales firms gained wages

from providing their service. Without outsourcing, it is doubtful that that much money would

have been spread around, and still, even with all of this money going around, BMW gains more

money by outsourcing than it would by insourcing, due to the simple economic assumption that

human beings behave rationally, and it would be irrational for BMW to choose to pay more for

the same product, but rational for BMW to pay less, which the most do by outsourcing, or they

would not be outsourcing in the first place.

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6. What is the difference between outsourcing and international trade?

What is the difference between outsourcing and international trade? To answer this we

must recap on outsourcing and define international trade. Outsourcing is simply when a firm

contracts out a task to another firm that the first firm could do itself, whether this task is the

production of a product, the production of the components of a product, or a service, such as

advertising, transport, security, or construction. International trade is trade between at least two

different nations, whether that trade is by sea, land or air. If trade occurs across any national

border, it is considered international trade. International trade is partly the result of globalization

and the emergence of the global economy. International trade has increased wealth for many, but

it has been an unequal increase. “Conducting international trade requires routine access to

external capital. Well-functioning financial institutions are thus necessary to support the global

exchange of goods and services. Indeed, countries with strong financial institutions have

been shown to enjoy a comparative advantage and export relatively more in financially

vulnerable sectors” (Manova, 2012, p.1). In other words, countries that already have financial

success tend to gain relatively larger increases in wealth from trade than countries who do not

start off with the same financial success. A likely reason for this is that countries that begin with

more finances can buy and sell larger amounts, and therefore encounter bigger returns from

trade. International trade also very heavily affects any industry involved, and the article

“Globalization and the Service Workplace” (2011) by Danielle D. van Jaarsveld and Daniyal M.

Zuberi shows the effect on the service industry. “legal institutions throughout the developed

world are encountering difficulties trying to protect employees of the multinationals that are now

capable of transferring work abroad. While these difficulties affect the service workforce

directly, they also have an indirect effect on the broader workforce because firms can use the

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threat of domestic or international outsourcing as leverage with which to erode employee

rights” (p.820).

An interesting aspect of international trade is its relation to birth rates. According to

Doces, “the level of international trade is inversely associated with the crude birth rate…An

increased level of trade provides people an incentive to have fewer children,and as births fall

people are able to devote more time to acquiring human capital and pursuing other productive

activities” (Doces, 2011, p.142). This is so interesting because, as mentioned in the quotation,

when a person does not have children, they can perform more economically productive tasks,

such as job training, college, or working hard for a promotion. However, this is also worrying.

When birth rates fall too low, the labor force will start to shrink, leading to less production.

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Now that it has been sufficiently explained what international trade is and what some of

its far-reaching effects are, it can be effectively compared to outsourcing. The main difference

between international trade and outsourcing is that international trade involves the trade of goods

and services for goods and services, or money, while outsourcing involves payment from firm I

to firm II as a result of firm II completing a task for firm I. An example of international trade

would be Ford Motors in the U.S. buying car door handles from a Swedish company for $10 a

piece. An example of outsourcing would be Ford Motors paying a Mexican company to

assemble Ford’s F150 pickups, a task that Ford could do itself, but instead outsources the job to

Mexican workers. Each of these examples could be applied to any company or country.

Outsourcing, whether between nations internationally or between the florist and cleaning service

on Main Street, as well as international trade, are both large parts of the world economy. If these

to aspects of our economy are grown correctly, it can lead to nothing but prosperity in the long-

term, even if it seemingly creates problems in the short-term.

Works Cited

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Doces, J. (2011). Globalization and Population: International Trade and the Demographic

Transition. International Interactions, 127-146.

doi:10.1080/03050629.2011.568838

Dolgui, A., & Proth, J. (2013). Outsourcing: Definitions and analysis. International Journal of

Production Research, 51(23/24), 6769-6777. doi:10.1080/00207543.2013.855338

Jaarsveld, D., & Zuberi, D. (2011). Globalization and the Service Workplace. American

Behavioral Scientist, 55(7), 815-822. Retrieved June 21, 2015, from

http://discover.linccweb.org/primo_library/libweb/action/search.do?vid=FLCC2400

Manova, K. (2013). Credit Constraints, Heterogeneous Firms, and International Trade. The

Review of Economic Studies, 80(2), 711-744.

Nodoushani, O., & Mcknight, J. (2012). Insourcing Strategy: A Response to Outsourcing and

Off-Shoring on the United States. Competition Forum, 10(1), 164-169. Retrieved

June 21, 2015, from

http://discover.linccweb.org/primo_library/libweb/action/search.do?vid=FLCC2400

Schniederjans, M., & Schniederjans, A. (2015). Outsourcing and insourcing in an international

context. New York, NY: Routelege.

Warner, M., & Hefetz, A. (2012). Insourcing and Outsourcing. Journal of the American Planning

Association, 78(3), 313-327. doi:10.1080/01944363.2012.715552