How Does Outsourcing Affect the Economy?

Outsourcing has become a fairly common practice for numerous industries. Its numerous benefits have intrigued various business owners looking for ways to reduce their costs and optimize their workforce. Since many businesses opt for offshore outsourcing services, you may be wondering about the effect it has on your local economy. So, how does outsourcing affect the economy, and why is it so influential?

In this article we’ll elaborate on the reasons why developed economies tend to outsource jobs and the impact it has on economic growth. Furthermore, we’ll give you an insight into the economic development in low-cost countries while also shining a light on the unemployment rates and demand for skilled workers. Continue reading to discover all there is to know about the effects outsourcing has on the economy and its outcomes.

How Does Outsourcing Affect the Economy?

Outsourcing specific operations by subcontracting with third-world countries is a common theme in many developed economies. Even though each business has its own unique goals, the main reasons why these economies tend to outsource jobs is due to the following advantages:

• Cost savings – many businesses turn to outsourcing as an effective saving method by partnering with countries with lower labor and operating costs
• Improved efficiency – by partnering with outsourcing services that offer expertise in your field and make use of advanced resources, processes, and technology, you’ll create higher-quality products and complete tasks more efficiently
• Access to global talent pool – offshore outsourcing offers easy access to a larger talent pool with highly skilled and experienced experts in diverse fields
• Focus on core competencies – outsourcing allows you to focus your resources and efforts on crucial matters for your business to fully optimize your products and make the most of your time
• Flexibility – when operating in a fast-paced industry, adjusting the skill mix and workforce size will enhance the crucial rapid adaptation to change
• Competitive advantage – having all the previous advantages in mind, optimizing your workflow through outsourcing will also give you a competitive edge over other industry players

Economic Growth and Outsourcing

Since the main topic of this article is the way outsourcing affects the economy, you should take a look at both economic growth and outsourcing side by side. To ensure you fully understand the influence this practice has, it’s important to know both the positive and negative aspects. Thus, the next sections will take into account the positive impacts, unemployment rates, and demand for skilled workers.

Outsourcing Positive Impact on Economic Growth

So, is outsourcing good for the economy? While many have diverse outlooks on this practice, several factors indicate the positive impact on economic growth. The ones that have the biggest importance are the following:

• Globalization
• Innovation
• Support for smaller businesses
• Career opportunities

Globalization

First, outsourcing is believed to accelerate globalization by increasing interdependence and integration among different countries. Since many businesses use such services as a primary cost saving method, it gives you access to cheaper labor, resources, and various markets worldwide. Not only does it help transcend national boundaries and regulations, but it also creates a global network of production.

Innovation

Next, outsourcing is believed to play a vital role in innovations by implementing new ideas regarding products, processes, and services. Since you’ll be introduced to new perspectives and technologies that require immense adaptation, it often brings more value for the customers.

From a business perspective, this may lead to an increase in profitability, user satisfaction, and brand reputation. As for society, this may lead to improved living conditions, human welfare, and problem-solving capabilities. By driving economic growth, environmental sustainability, and social development, the innovation from outsourcing can lead to global progress. 

Support for smaller businesses

Another positive effect outsourcing has for many smaller local businesses is that they can use an experienced workforce to get their product or service off the ground. Since many startups struggle to get things done with their primary capital, this practice allows them to create the same quality products as bigger players at a lower cost. Focusing their attention on core business objectives gives them better chances for their project to succeed. 

Career opportunities

Lastly, the outsourcing practice is thought to open up various career opportunities for local and foreign workers. Since it creates new job options for both outsourcing destinations and origins, it also leads to better working conditions, higher wages, and advanced skill development. 

By enabling steady income for workers to support both themselves and their families, it allows society to reduce its poverty and inequality. Furthermore, outsourcing is believed to enhance productivity by providing employees with the opportunity to pursue their goals and aspirations. This, in turn, is expected to contribute to increased social stability and security.

Job losses and unemployment rates

Even though outsourcing is generally considered to affect the economy positively, there are a few inevitable downsides. So, why is outsourcing bad for the economy? This service’s main negative effect is the rise of unemployment rates and job losses. 

Research shows that the most affected group of employees at risk of losing their jobs are those under temporary contracts. Firing an employee with a permanent position in the company and multiple years of experience may be very costly for businesses. Furthermore, the unemployment rates may rise amongst younger workers, especially those in low-income countries. 

Another vital factor in job losses is whether the company is interested in onshore or offshore outsourcing. It’s believed that employees who work under businesses that invest in international outsourcing are 32% less likely to lose their jobs. On the contrary, those working for companies that tend to outsource domestically are 52% more likely to get laid off. 

The most probable cause for this is the ability to manage resources more efficiently and expand the workforce size when it comes to offshore outsourcing. However, the downside of international outsourcing is that the position will be given to a foreign team instead of local workers. The inability to seek the same local position may negatively affect company loyalty, employee satisfaction, and productivity.

Source: freepik.com

Impact on demand for skilled workers

Lastly, the outsourcing practice is also known to affect the need for skilled workers. The labor demand varies depending on factors like technological advancements, economic conditions, and changes in consumer preferences. Even though outsourcing can lead to a short-term increase in unemployment rates, it opens up numerous opportunities in the long run. Thus, this increase in labor demand not only leads to potentially higher wages, but also to better working conditions. 

Since more businesses are adopting this practice, many companies have to seek more experienced workers to get on top of the competition. As mentioned, even startups now have access to a highly skilled global talent pool and are capable of producing the same quality products and services as bigger players.

This leads to a more competitive business climate, where the demand for skilled workers is constantly on the rise. Many people believe that the primary competitive advantage businesses experience from outsourcing services will even out as more companies start to rely on this practice. 

Furthermore, since many outsourcing services, such as call centers and manufacturing, often require a lower skill set, it may negatively affect the local workforce and job opportunities because many entry-level positions will be appointed to foreign teams.

Foreign Countries and Outsourcing

Even though the US is one of the leading countries when it comes to outsourcing, many foreign countries use this practice to their advantage. While some wonder if outsourcing is ethical, it still provides various benefits for low-cost countries. 

First, outsourcing services open up various work opportunities while also ensuring competitive wages. In regions where the wages are on the lower end of the scale, these opportunities can highly impact the worker’s quality of life. For example, a foreign country like the Philippines has used outsourcing to improve both the local economy and employee advantages. 

Since the livelihood of around 1.2 million people in this region relies on outsourcing, it’s considered to be the biggest source of employment. Furthermore, many of the workers in this industry are given benefits from health maintenance organizations (HMOs), while their rights are protected by strict country labor laws.

Another example can be seen in India. With a highly skilled pool of talents, these workers excel in the fields of engineering and IT. Moreover, due to its strong legal system, it’s one of the main countries that outsources software development services.

Other common options praised for their efficiency include Vietnam, Mexico, and China.

Source: freepik.com / Photo Contributor: katemangostar

Conclusion

So, how does outsourcing affect the economy? Even though this practice has both positive and negative aspects, the advantages are believed to be far greater than the downsides. The main reasons why many developed countries turn to this option are due to its flexibility, cost-savings, innovation, and competitive advantage. Furthermore, it provides numerous employment opportunities for those living in countries with low wages and support to smaller businesses with limited capital. 

While some people blame outsourcing for the high unemployment rates and demand for skilled workers, it’s thought to be beneficial for local economies in foreign countries. Thus, if you’re looking to invest in a professional outsourcing service, check out what our team at CLICKVISION BPO has to offer. Our customizable services allow you to find the best solutions for your business needs while ensuring outstanding results!