International Business Strategy, Management

1
International BusinessStrategy, Management the
New RealitiesbyCavusgil, Knight Risenberger

• Chapter 16
• Global Sourcing

2
Learning Objectives

1. Trends toward outsourcing, global sourcing, and
   offshoring
2. Evolution of global sourcing
3. Benefits and challenges of global sourcing for
   the firm
4. Implementing global sourcing through supply-chain
   management
5. Risks in global sourcing
6. Strategies for minimizing risk in global sourcing
7. Implications of global sourcing for public policy
   and corporate citizenship

3
Global Sourcing Shopping the World

• Along with competitors Reebok and Adidas in the
  athletic shoes industry, Nike contracts out
  nearly all of its athletic shoe production to
  foreign suppliers. These firms are best
  described as brand owners and marketers, not as
  manufacturers.
• Apple Computer sources some 70 of its production
  abroad while focusing its internal resources on
  improving its operating system and other software
  platforms. This approach allows Apple to
  optimally utilize its limited capital resources
  and focus on its core competences.
• Dell Inc. is another firm that relies extensively
  on a global manufacturing network, composed
  largely of independent suppliers.

4
(No Transcript)
5
Global Sourcing

• Global sourcing is the procurement of products or
  services from suppliers or company-owned
  subsidiaries located abroad for consumption in
  the home country or a third country.
• Also called global procurement or global
  purchasing, global sourcing amounts to importing
  -- an inbound flow.
• It is an entry strategy that involves a
  contractual relationship between the buyer (the
  focal firm) and a foreign supplier. It involves
  subcontracting the performance of specific
  manufacturing or services tasks to the firm's own
  subsidiaries or independent suppliers.
• Global sourcing is classified as a low-control
  strategy to the extent that the firm is buying
  from independent suppliers through contractual
  agreements, as opposed to buying from its own
  subsidiaries.

6
Drivers of Global Sourcing

• Technological advances, including instant
  Internet connectivity and broadband availability
• Declining communication and transportation costs
• Widespread access to vast information including
  growing connectivity between suppliers and the
  customers that they serve and
• Entrepreneurship and rapid economic
  transformation in emerging markets.

7
Decision 1 Outsource or Not?

• Managers must decide between internalization and
  externalization -- whether each value-adding
  activity should be conducted in-house or by an
  independent supplier.
• This is known as the make or buy decision
  Should we make a product or conduct a particular
  value-chain activity ourselves, or should we
  source it from an outside contractor?
• Firms usually internalize those value-chain
  activities they consider a part of their core
  competence, or which involve the use of
  proprietary knowledge and trade secrets that they
  want to control.

8
Outsourcing

• Outsourcing refers to the procurement of selected
  value-adding activities, including production of
  intermediate goods or finished products, from
  independent suppliers.
• This practice of externalizing a particular
  value-adding activity to outside contractors is
  known as outsourcing.
• Firms outsource because they generally are not
  superior at performing all primary and support
  activities. Most value-adding activities -- from
  manufacturing to marketing to after-sales service
  -- are candidates for outsourcing.

9
An Example of Outsourcing

• Canon uses its core competencies in precision
  mechanics, fine optics, and micro electronics to
  produce some of the worlds best cameras,
  printers, and copiers.
• Canon usually owns the value-chain activities,
  such as RD, that yield improvements in these
  competences.
• By contrast, companies will usually source from
  external suppliers when the sourced products or
  services are peripheral to the firms main
  offerings, can be obtained at lower cost, or can
  be provided by specialized suppliers.

10
Business Process Outsourcing (BPO)

• Business Process Outsourcing (BPO). The
  outsourcing of business functions to independent
  suppliers such as accounting, payroll, and human
  resource functions, IT services, customer
  service, and technical support.
• BPO includes
• Back-office activities, which includes internal,
  upstream business functions such as payroll and
  billing, and
• Front-office activities, which includes
  downstream, customer-related services such as
  marketing or technical support.

11
Decision 2 Where in the World Should
Value-Adding Activities Be Located?

• Configuration of value-adding activity The
  pattern or geographic arrangement of locations
  where the firm carries out value-chain
  activities.
• Instead of concentrating value-adding activities
  in the home country, many firms configure these
  activities across the world to save money, reduce
  delivery time, access factors of production, and
  extract maximal advantages relative to
  competitors.
• This helps explain the migration of traditional
  industries from Europe, Japan, and the U.S. to
  emerging markets in Asia, Latin America, and
  Eastern Europe.

12
An Example of Worldwide Configuration of Value
Chain

• The German automaker BMW employs 70,000 factory
  personnel at 23 sites in 13 countries to
  manufacture its vehicles.
• Workers at the Munich plant build the BMW 3
  Series and supply engines and key body components
  to other BMW factories abroad.
• In the U.S., BMW has a plant in South Carolina,
  which makes over 500 vehicles daily for the world
  market.
• In Northeast China, BMW makes cars in a joint
  venture with Brilliance China Automotive Holdings
  Ltd.
• In India, BMW has a manufacturing presence to
  serve the needs of the rapidly growing South Asia
  market.
• BMW must configure sourcing at the best
  locations worldwide, in order to minimize costs
  (e.g., by producing in China), access skilled
  personnel (by producing in Germany), remain close
  to key markets (by producing in China, India and
  the U.S.).

13
A Framework for Global Sourcing and Outsourcing

• The two strategic choices we just discussed lead
  us to the framework in Exhibit 16.2.
• The focal firm can source from independent
  suppliers, company-owned subsidiaries and
  affiliates, or both.
• Cells C and D represent the global sourcing
  scenarios.
• While global sourcing implies procurement from
  foreign locations, in some cases the focal firm
  may purchase from a subsidiary or affiliate
  located in the foreign country (Cell C).
• This is known as captive sourcing, which refers
  to sourcing from the firm's own production
  facilities located abroad. Production is carried
  out at a foreign facility that results from the
  focal firm's FDI activities.

14
(No Transcript)
15
Contract Manufacturing Global Sourcing from
Independent Suppliers

• A more likely scenario is when the focal firm can
  procure from independent suppliers (Cell D).
• Contract manufacturing An arrangement in which
  the focal firm contracts with an independent
  supplier to manufacture products according to
  well-defined specifications.
• Global sourcing requires the firm to identify
  qualified suppliers, develop necessary
  organizational and technological capabilities to
  locate and relocate specific tasks, and
  coordinate a geographically dispersed activities.

16
Examples of Contract Manufacturing

• Patheon, one of the world's leading contract
  manufacturers in the pharmaceutical industry,
  provides drug development and manufacturing
  services to pharmaceutical and biotechnology
  firms worldwide.
• Patheon operates 11 factories in N. America and
  Europe, producing over-the-counter drugs and
  several of the world's top-selling prescription
  drugs for most of the world's 20 largest
  pharmaceutical firms.
• Benetton employs contract manufacturers to
  produce clothing.
• IKEA uses contract manufacturers to produce
  furniture.
• Contract manufacturing also offers firms the
  ability to enter target countries quickly,
  especially when the market is too small to
  justify significant local investment.

17
Offshoring

• Offshoring is a natural extension of global
  sourcing. It refers to the relocation of a
  business process or entire manufacturing facility
  to a foreign country.
• MNEs are particularly active in shifting
  production facilities or business processes to
  foreign countries to enhance their competitive
  advantages.
• Offshoring is especially common in the service
  sector, including banking, software code writing,
  legal services, and customer-service activities.
  
• E.g., large legal hubs have emerged in India that
  provide services such as drafting contracts and
  patent applications, conducting research and
  negotiations, as well as performing paralegal
  work on behalf of Western clients. With lawyers
  in N. America and Europe costing 300 an hour or
  more, Indian firms can cut legal bills by 75
  percent.

18
Offshoring Destinations

• India receives the bulk of developed nations
  relocated business services. It has a huge pool
  of qualified labor that work for wages as little
  as 25 percent of comparable workers in the West.
• India is not the only destination of substantial
  outsourcing work. Firms in Eastern Europe
  perform support activities for architectural and
  engineering firms from the West.
• Accountants in the Philippines perform support
  work for major accounting firms. Accenture has
  back-office operations and call centers in Costa
  Rica. Germany sources IT support services from
  the Czech Republic and Romania. Boeing,
  Motorola, and Nortel do much of their RD in
  Russia. South Africa is the base for technical
  and user-support services for English, French,
  and German-speaking customers throughout Europe.
  

19
Jobs Most Conducive to Offshoring

• Large-scale manufacturing industries whose
  primary competitive advantage is efficiency and
  low cost
• Industries such as automobiles that have uniform
  customer needs and highly standardized processes
  in production and other value-chain activities
• Service industries that are highly labor
  intensive, e.g., call centers and legal
  transcription
• Information-based industries whose functions and
  activities can be easily transmitted via the
  Internet, e.g., accounting, billing, and payroll
  and
• Industries such as software preparation whose
  outputs are easy to codify and transmit over the
  Internet or by telephone, e.g., routine technical
  support and customer service activities.

20
Not All Services Can Be Offshored

• Many jobs in the services sector cannot be
  separated from their place of consumption. This
  limits the types of services jobs that firms can
  move abroad.
• Personal contact is vital at the downstream end
  of virtually all value chains. Other services are
  consumed locally.
• People normally do not travel abroad to see a
  doctor, dentist, lawyer, or accountant.
  Consequently, many service jobs will never be
  offshored.
• Through 2005, only about 3 percent of jobs in the
  U.S. that require substantial customer
  interaction (e.g.,, those in the retailing
  sector) have been transferred to low-wage
  economies.
• By 2008, less than 15 percent of all service jobs
  have moved from advanced economies to emerging
  markets.

21
Strategic Implications of Global Sourcing

• Exhibit 16.3 explains the two strategic
  implications of the two choices MNEs face
  whether to perform specific value-adding
  activities in-house or to outsource them, and
  whether to concentrate each activity at home or
  disperse it abroad.
• The 1st row indicates the degree to which
  management considers each value-adding activity a
  strategic asset to the firm.
• The 2nd row indicates whether the activity tends
  to be internalized inside the focal firm or
  outsourced to a foreign supplier.
• The 3rd row indicates where management typically
  locates an activity.

22
(No Transcript)
23
Outsourcing Decision is Activity Specific

• These decisions depend largely on the strategic
  importance of the particular activity to the
  firm.
• E.g., firms typically consider RD and design
  activities central to their competitive
  advantage. As a result, they are more likely to
  internalize these functions, and less likely to
  outsource them to outside contractors.
• In contrast, manufacturing, logistics, and
  customer service activities tend to be more
  readily outsourced and geographically dispersed.
• The decision is also a function of the firm's IB
  experience and availability of qualified
  suppliers.

24
Phases in the Evolution of Global Sourcing

• The first major wave emphasized the manufacturing
  of input products and began in the 1960s with the
  shift of European and U.S. manufacturing to
  low-cost countries as geographically diverse as
  Mexico and Spain.
• Early observers pointed to the emergence of the
  modular corporation and the virtual
  corporation.
• The next wave of global sourcing began in the
  1990s with offshoring. In addition to IT services
  and customer-support activities, other service
  sectors became part of the offshoring trend.
• Today, business-process outsourcing in product
  development, human resources, and
  finance/accounting services has become very
  common.

25
Magnitude of Global Sourcing

• The magnitude of global sourcing is considerable.
  In 2005, India alone booked 22 billion worth of
  business in answering customer phone calls,
  managing far-flung computer networks, processing
  invoices, and writing custom software for MNEs
  from all over the world.
• Global sourcing has created more than 1.3 million
  jobs during the past decade for India.
• Meanwhile, between 2000 and 2004, some 100,000
  service jobs were outsourced each year from the
  U.S. to other countries.
• In 2006, IT and business-process outsourcing
  exceeded 150 billion worldwide.

26
Leading Provider Countries

• China and India are major players in global
  sourcing.
• Numerous other countries are active players as
  well.
• Exhibit 16.4 identifies key players by four
  geographic regions.
• E.g., Cairo-based Exceed Contact Center handles
  calls in Arabic and European languages for
  Microsoft, General Motors, Oracle, and Carrefour.
  
• Russia is aiming at high-end programming jobs.
  With its strong engineering culture, Russia has
  an abundant pool of underemployed talent
  available at wages about one-fifth those of the
  U.S.

27
(No Transcript)
28
The 2005 Offshore Location Attractiveness Index
by A.T. Kearney

• Identifies 9 emerging markets in its list of the
  10 most attractive offshoring suppliers India,
  China, Malaysia, Philippines, Singapore,
  Thailand, Czech Republic, Chile, Canada, and
  Brazil.
• In addition to Canada, the other advanced economy
  in the top 20 destinations is the U.S. (11th).
• The index emphasizes various criteria
• Countrys financial structure (compensation
  costs, infrastructure costs, tax and regulatory
  costs)
• Availability and skills of people (cumulative
  business-process experience and skills, labor
  force availability, education and language, and
  worker attrition) and
• Nature of the business environment (the countrys
  political and economic environment, physical
  infrastructure, cultural adaptability, and
  security of intellectual property).

29
(No Transcript)
30
Benefits of Global Sourcing

• Cost efficiency is the traditional rationale for
  sourcing abroad. The firm takes advantage of
  labor arbitrage - the large wage gap between
  advanced economies and emerging markets.
• One study found that firms expect to save an
  average of more than 40 off baseline costs as a
  result of offshoring.
• These savings tend to occur particularly in RD,
  product design activities, and back-office
  operations such as accounting and data
  processing.

31
(No Transcript)
32
Strategic Benefits of Global Sourcing

• Faster corporate growth.
• Access to qualified personnel abroad.
• Improved productivity and service.
• Business process redesign.
• Increased speed to market.
• Access to new markets.
• Technological flexibility.
• Improved agility by shedding unnecessary
  overhead.

33
Challenges in Global Sourcing

• Vulnerability to exchange rate fluctuations
• Partner selection, qualification, and monitoring
  costs
• Increased complexity of managing a worldwide
  network of production locations and partners
• Complexity of managing global supply chain
• Limited influence over the manufacturing
  processes of the supplier
• Potential vulnerability to opportunistic behavior
  or actions in bad faith by suppliers
• Constrained ability to safeguard intellectual
  assets

34
Global Supply Chain Management Capabilities
Greatly Enhance Global Sourcing

• Global supply chain refers to the firms
  integrated network of sourcing, production, and
  distribution, organized on a world scale, and
  located in countries where competitive advantage
  can be maximized.
• Sourcing from numerous suppliers scattered around
  the world would be neither economical nor
  feasible without an efficient supply-chain
  system.
• Boeings 787 Dreamliner jet provides a striking
  example of how global supply-chain management is
  making global sourcing feasible and, at the same
  time, contributing to firm competitiveness.

35
(No Transcript)
36

37
Facilitating Firms are also Responsible for
Global Sourcing

• Networks of supply-chain hubs and providers of
  global delivery service are an integral part of
  global supply chains.
• Many focal firms delegate supply-chain activities
  to such independent logistics service providers
  as DHL, FedEx, TNT, and UPS.
• Consulting firms that manage the logistics of
  other firms are called third party logistics
  providers (3PLs). Using a 3PL is often the best
  solution for international logistics, especially
  for firms that produce at low volumes or lack the
  resources and the expertise to create their own
  logistics network.

38
Global Supply-Chain Networks

• A global supply-chain network consolidates a
  firms sourcing, manufacturing, and distribution
  in a few strategic locations worldwide so the
  firm can concentrate these activities in
  countries where it can maximize its competitive
  advantages.
• Exhibit 16.7 illustrates the stages, functions,
  and activities in the supply chain.
• It reveals how suppliers interact with the focal
  firm and how these, in turn, interact with
  distributors and retailers.
• Each stage in the global supply chain encompasses
  functions and activities that involve the focal
  firm in sourcing and distribution.

39
(No Transcript)
40
Supply Chain Management has Become Sophisticated

• Costs associated with physically delivering a
  product to an export market may account for as
  much as 40 of total cost.
• Experienced firms make optimal use of information
  and communications technology (ICT), which
  streamlines supply chains, reducing costs and
  increasing distribution efficiency.
• Managers use Electronic Data Interchange (EDI),
  which passes orders directly from customers to
  suppliers automatically through a sophisticated
  ICT platform.
• The UK supermarket chain Tesco greatly reduced
  inventory costs by using an EDI system to link
  point-of-sale data to logistics managers.
  Technology allows Tesco to track product
  purchases down to the minute.

41
Logistics and Transportation

• Logistics involves physically moving goods
  through the supply chain.
• It incorporates information, transportation,
  inventory, warehousing, materials handling and
  similar activities associated with the delivery
  of raw materials, parts, components, and finished
  products.
• Internationally, logistics is complex due to
  greater geographical distances multiple legal
  and political environments and the often
  inadequate and costly nature of distribution
  infrastructure in individual countries.

42
Transportation modes

• International logistics typically involves
  multiple transportation modes.
• Land transportation is conducted via highways and
  railroads.
• Ocean transportation is handled through large
  container ships.
• Air transportation involves commercial or cargo
  aircraft.
• Ocean and air transport are common in IB because
  of long shipping distances. Ships are the most
  common transportation mode.
• Sea transport was revolutionized by the
  development of 20- and 40-foot shipping
  containers, the big boxes that sit atop
  ocean-going vessels.
• Sea transportation is very cost-effective because
  one ship can carry thousands of these containers
  at a time.

43
Risks in Global Sourcing

• 1. Less-than-expected cost savings. Conflicts and
  misunderstandings arise because of differences in
  the national and organizational cultures between
  the focal firm and foreign supplier. Such
  factors give rise to cost-savings that are less
  than originally anticipated.
• 2. Environmental factors. Numerous environmental
  challenges confront focal firms including
  exchange rate fluctuations, labor strikes,
  adverse macro-economic events, high tariffs and
  other trade barriers, and high energy and
  transportation costs.
• 3. Weak legal environment. Many popular
  locations for global outsourcing have weak laws
  and enforcement regarding intellectual property,
  which can lead to erosion of key strategic
  assets.

44
Risks in Global Sourcing (cont.)

• 4. Risk of creating competitors. As the focal
  firm shares its intellectual property and
  business-process knowledge with foreign
  suppliers, it also runs the risk of creating
  future rivals (e.g., Schwinn).
• 5. Inadequate or low-skilled workers. Some
  foreign suppliers may be staffed by employees who
  lack appropriate knowledge about the tasks with
  which they are charged. Other suppliers suffer
  rapid turnover of skilled employees.

45
Risks in Global Sourcing (cont.)

• 6. Over-reliance on suppliers. Unreliable
  suppliers may put earlier work aside when they
  gain a more important client. Suppliers
  occasionally encounter financial difficulties or
  are acquired by other firms with different
  priorities and procedures. Over-reliance can
  shift control of key activities too much in favor
  of the supplier.
• 7. Erosion of morale and commitment among
  home-country employees. Global sourcing can
  create a situation in which employees are caught
  in the middle between their employer and their
  employers clients. At the extreme, workers find
  themselves in a psychological limbo, unclear
  about who their employer really is.

46
Strategies for Minimizing Risk in Global Sourcing

1. Firms ought to go offshore for the right reasons.
   The best rationale is strategic. Cost-cutting is
   often a distraction from more beneficial,
   long-term goals such as enhancing the quality of
   offerings, improving overall productivity, and
   freeing up knowledge workers and other core
   resources that can be redeployed to improve
   long-term performance.
2. Need to get employees on board. Global sourcing
   tends to invite opposition from employees and
   other organizational stakeholders. Disaffected
   middle managers can undermine projects. Poorly
   planned sourcing projects can create unnecessary
   tension and harm employee morale.

47
Strategies for Minimizing Risk in Global
Sourcing (cont.)

• 3. Choose between a captive operation and a
  contract with outside specialists carefully.
  They should be vigilant about striking the right
  balance between the organizational activities
  that it retains inside the firm, and those that
  are sourced from outside.
• 4. Choose countries and suppliers carefully. A
  common reason for global sourcing failure is that
  both buyers and suppliers tend not to spend
  enough time upfront to get to know each other
  well. They rush into a deal before clarifying
  partner expectations, which can give rise to
  misunderstandings and inferior results.

48
Strategies for Minimizing Risk in Global
Sourcing (cont.)

• 5. The focal firm needs to invest in supplier
  development and collaboration. The parties need
  to exchange information, transfer knowledge,
  troubleshoot, coordinate, and monitor.
• Management should collaborate closely with
  suppliers in co-development and co-design
  activities. This also enables the focal firm to
  tap into a stream of ideas for new products,
  processes, technologies, and improvements.
• Efforts to build strong relationships help create
  a moral contract between the focal firm and the
  supplier, which is often more effective than a
  formal legal contract.

49
Strategies for Minimizing Risk in Global
Sourcing (cont.)

• Managers need to proactively safeguard interests
  
• Encourage the supplier to refrain from engaging
  in potentially destructive acts that jeopardize
  the firms reputation.
• Escalate commitments by making partner-specific
  investments (such as sharing knowledge with the
  supplier), allowing for ongoing review, learning,
  and adjustment.
• Share costs and revenues by building a stake for
  the supplier so that, in case of failure to
  conform to expectations, the supplier also
  suffers costs or foregoes revenues.
• Maintain flexibility in selecting partners by
  keeping options open to find alternative
  partners.
• Hold the partner at bay by withholding access to
  IP and key assets, in order to safeguard the
  firms interests for the long term. If conflicts
  with the supplier become an ongoing problem, one
  option for the firm is to acquire full or partial
  ownership of the supplier.

50
Potential Harm to Economies from Global Sourcing

• Critics of global sourcing point to three major
  problems Global sourcing can result in
• Job losses in the home country,
• Reduced national competitiveness, and
• Declining standards of living.
• As more tasks are performed at lower cost with
  comparable quality in other countries, high-wage
  countries will eventually lose their national
  competitiveness.
• Critics fear that long-held knowledge and skills
  will eventually drain away to other countries,
  and the lower wages paid abroad to perform jobs
  that were previously done in high-wage countries
  will eventually pull down wages in the latter
  countries, leading to lower living standards.

51
Effects on Local Community A Case Study

• Electrolux, one of the worlds largest appliance
  makers, closed its factory in Michigan and moved
  production to Mexico. The company had been
  producing refrigerators in Greenville, Michigan,
  for nearly 40 years, providing 2,700 jobs.
• From the company's viewpoint, closing the plant
  made economic sense. It had weak financial
  performance and costly labor. By establishing a
  Maquiladora plant in Juarez, Mexico, Electrolux
  sought to profit from low wages and take
  advantage of the El Paso Foreign Trade Zone.
• From the local community's standpoint, however,
  the decision was devastating. How could so many
  jobs be replaced in such a small community? What
  would happen to the towns social and economic
  landscape?
• Assistance from labor unions and the State of
  Michigan were to no avail. Concessions from the
  labor union, and over 100 million from Michigan
  to Electrolux in tax breaks and grants were
  insufficient. It did not help that Electrolux --
  a Swedish company -- was perceived as having
  little loyalty to the community.

52
Can Jobs Offshored be Replaced?

• Proponents of global sourcing argue that workers
  who lose their jobs due to offshoring can find
  new work.
• Redeployment assumption may be overly optimistic.
  It takes considerable time for laid-off workers
  to find new jobs.
• According to one estimate, as much as 1/3 of U.S.
  workers who have been laid off cannot find
  suitable employment within a year.
• Even workers who do find new jobs may be unable
  to achieve wages and work levels that equal those
  of their former positions.

53
Ethical and Social Implications of Global
Sourcing

• The prevalence of global sourcing has also raised
  public debate about the role of MNEs in
  protecting the environment, promoting human
  rights, and improving labor practices and working
  conditions.
• The bar for global corporate citizenship has been
  raised.
• Consider the case of foreign suppliers that
  operate sweatshops -- factories in which people
  may work long hours for very low wages, often in
  harsh conditions.
• Sweatshops may employ child labor, a practice
  that has been outlawed in much of the world.

54
The Case for and against Sweatshops

• Those who defend moving production to low-wage
  facilities abroad point to a lower standard of
  living as an explanation for the low wages, and
  argue that their operations benefit the community
  by providing needed jobs. The choice for local
  workers is often between low-paid work or no work
  at all.
• They argue that the alternatives available to
  such workers are even less desirable, such as
  poverty, prostitution, and social problems.
• Opponents also argue that corporations that sell
  their products in wealthy countries have a
  responsibility to pay their workers according to
  basic Western standards, especially when their
  products command high prices in advanced-economy
  markets.
• Foreign companies that establish factories
  destroy the pre-existing agricultural market that
  may have provided a better life for laborers.

55
Potential Benefits to National Economy

• First, by reconfiguring value chains to the most
  cost-efficient locations, companies reduce their
  production costs and enhance their performance.
• Second, cost reductions and enhanced
  competitiveness allow firms to reduce the prices
  that they charge their customers.
• Third, by leveraging a flexible labor market and
  strong economic growth, countries that outsource
  may be able to shift their labor force to
  higher-value activities. This transformation has
  the effect of boosting the nations productivity
  and industrial efficiency.
• Finally, declining wages may be offset by lower
  prices secured for outsourced products or
  services. Hence global sourcing tends to
  indirectly increase consumers purchasing power
  and lift their living standards.

56
Public Policy Towards Global Sourcing

• From a public-policy standpoint, it is
  impractical for a nation to adopt a unilateral
  policy against global sourcing.
• Instead of seeking to restrict global sourcing, a
  more appropriate role for public policy may be to
  mitigate the harm that it can cause.
• Offshoring is a process of creative destruction.
  It creates new advantages and opportunities,
  while eliminating certain types of jobs and
  adversely impacting particular economic sectors
  and segments of the population.

57
Public Policy Towards Global Sourcing (cont.)

• If the loss of certain jobs is inevitable as a
  result of offshoring, public-policy makers are
  better off taken some proactive actions.
  Examples
• Guiding employment towards higher value-added
  jobs by stimulating innovation, for example.
• Keeping the cost of doing business relatively
  low. Through economic and fiscal policies,
  development of new technologies can be
  facilitated.
• Keeping the cost of capital needed to finance RD
  relatively low.
• Ensuring that the nation has a strong educational
  system, including technical schools and
  well-funded universities that supply engineers,
  scientists, and knowledge workers.
• Increasing worker flexibility so that those who
  lose jobs can be redeployed in other positions.