Setting up business in another country is a centuries old practice as well. Acquisition of a business or company in another country (through purchase rather than invasion), on the other hand, is a relatively new observable fact within the past 150 years. And major cross-border acquisition activity didn't begin until after World War II, just a half century ago.
Assets owned by foreign companies have grown considerably in the past thirty years. Viewed from a chronological perspective, economic conquest as opposed to military invasion is relatively recent. Still, governments and their people don't like the idea of being taken over, even if the takeover is only economic. So the majority nations put certain crown jewels out of bounds to foreign investors. You can own a tire plant in my backyard, but you cannot own my oil field. You can buy a supermarket chain but not my banks. Though these restrictions are looser now than they were ten years ago, most limitations didn't even exist a century ago because no one was buying. Suffice to say that restrictions on trade and obtaining assets across borders are very real and a major block to the globalization freight train.
Nevertheless, the tidal waves of international trade and the Hollywood-Madison Avenue dream machine have formed huge demand in each corner of the world. Technology and communications are making it easier to do business worldwide. Corporations have been scuttling to capture a share of this demand.
As companies have extended, they have found that tastes around the globe are similar. Just about anywhere in the world, a teenager with a Walkman on her head, a Coke in her hand, and Levi's on her hips. U.S. movies and music persuade the cultures of all but those who prohibit their entry. Few countries have roadways free of Fiats or Fords or Toyotas (Bernard, A. B. and Jensen, J. B. 2003).
Countries that have open trade policies expose their industries to the toughest competition, which either makes local businesses extremely competitive or sinks them. As a result, countries are becoming very strong in industries in which they are capable to operate at the best international level and are outsourcing (to other countries) those industries or tasks in which they are not competitive. This creates a hard situation, particularly when the industries whose products or services are on the prospective outsourcing list are large employers. Textile workers in industrialized countries have fought hammer and tongs for protection against "unfair" low-cost foreign competition. They have been losing this battle for years, as labor rates and productivity cannot keep pace with those of Asian textile workers. Japan has worried about the hollowing of its manufacturing industries as companies move more and more labor-intensive tasks offshore. (Michael L. Dertouzos, 1997)
Over the past fifty years, another thoughtful change has taken place in international trade. For centuries, trade had been in goods natural resources (e.g., coal, timber, oil, minerals) and products made in one country that had markets in others. simply two centuries ago international trade was predominantly barter my glass beads for your tobacco.
Analysts said it makes sense that more banking companies and large thrifts would aggressively explore foreign outsourcing, despite having little or no foreign operations. Some analysts predicted that such companies would lead the next wave of offshoring as a way of containing expenses (Davis, Paul and Cole, Jim, 2006).
As Dani Rodrik noted in "Sense and Nonsense in the Globalization Debate," "If [the flight to low wages were the principal driver of outsourcing], the world's most formidable exporters would be Bangladesh and a smattering of African countries."
And as companies consider how to become (and remain) the best in every area of business, they must look globally for capabilities. Acquiring a low-cost plant in Mexico may be attractive in the short term, but unless that plant keeps up with, or exceeds, world standards in cost, quality, reliability, and customer service, the parent company's advantage will be short-lived. Owning assets can be attractive if the company has the will and resources to maintain world standards, as do Motorola. Majority of the companies have neither the will nor the resources and should be (and are) considering alternative ways of acquiring significant capabilities and knowledge, such as through strategic alliances.
Some of the biggest beneficiaries of the trend have been Indian companies that handle functions like information technology development, transaction processing, and call-center staffing.But experts say the focus of outsourcing is changing. Top outsourcers in India report that in addition to providing IT functions and back-office processing to banks, they now are adding management consulting services (Quittner, 2006).
In the competitive environment of the global market, companies have found it less pricey to purchase many commodities than to produce them internally. As international commerce becomes easier and the barriers to global trading fall, the use of outsourcing continues to rise. In 1995, companies outsourced more than $75 billion in goods and services, with major corporations leading the way. General Motors, for instance, is purchasing over $10 billion a year in components from external sources, and BellSouth is outsourcing $60 million in goods and services. In fact, about 90 percent of major corporations are now outsourcing. (Bernard, A. B. and Jensen, J. B. 2003)
Downsizing, which refers to reducing the number of employees to further cut operating expenses, is fueling the increased use of outsourcing. AT&T and IBM each reduced their staffs by more than 40,000 over a recent three-year period. With fewer employees to hold greater workloads, the need to outsource is further increased. Indications are that the use of outsourcing will continue to increase. Globally, the outsourcing market is probable to exceed $120 billion by the year 2010. (Bernard, A. B. and Jensen, J. B. 2003)
Numerous companies, however, have not reduced costs to the extent that they hoped when they first turned to outsourcing. As an effect, the anticipated increase to profit levels has not been realized. A recent study has shown that, although gains in productivity of up to 40 percent had been projected by corporations, improvement in various cases has been less than 10 percent. This is because the decisions to outsource are being based primarily on lower direct costs. Not enough deliberation is being given to the source’s performance in other criteria that can cause indirect costs to increase. Although goods and services might be provided by external sources at lower prices, their performance in the criteria of quality, delivery, customer service, and product advancements might be weak. Poor performance by sources in any or all of these criterions will result in the company incurring indirect costs that will more than counteract the reduced direct costs.
By applying the concept of the Strategic Business Unit, or SBU, to each source of key corporate functions, and viewing each as a Strategic Business Source, the overall performance of internal and external sources can be simply determined and compared. With the overall performance measured for the many available sources of corporate functions, the decision to select the optimal source can be easily made. Under the SBU concept, related product lines are organized into separate profit centers. With this organizational approach, the company’s ability to produce profitable product lines is better. This is because, within the focused SBU structure, all five of the performance criteria that fuel competitiveness are more easily monitored and improved. By similarly viewing the sources for goods and services as Strategic Business Sources, and evaluating their overall performance in all of the important criteria beyond just costs, the most favorable source (whether an internal department or an external supplier) can be easily selected.
However, if a company chooses to outsource the manufacturing of a part used in its products based solely on an external supplier’s price being lower than internal production costs. The supplier’s performance in other criterion can result in the true cost being greater. For example, if the supplier of the outsourced parts delivers poor-quality products, the outsourcing company will incur expense by either having to rework the items to correct the troubles or delay production until the supplier offers acceptable replacement parts. Also, if the supplier delivers the parts late, the company may have to setback completion and delivery of the end products to the customer base, impacting cash flow and sales revenues. In addition to the financial impact, the company’s customers will be disgruntled because of the delays in receiving the products they purchased. If the external supplier is not preceding the manufacturing processes used to produce the parts, production methods in use could become outdated and not competitive. Furthermore, if the supplier provides the company with poor customer service (for example, not being receptive to the company’s request for scheduling information needed to support its internal operations), again delivery of its products to the customers could be delayed. For these reasons, sourcing decisions require to be made considering the overall performance of each available source, whether an internal department or an external supplier, in all five performance criterion that determine the company’s competitiveness: quality, delivery, customer service, and product advancements, as well as cost.
References:
Alfaro, L. and Rodriguez-Clare, A. (2004) 'Multinationals and Linkages: An Empirical Investigation', Economia, 4: 2, 113-69.
Ando, K. (2004) Japanese Multinationals in Europe. Cheltenham: Edward Elgar.
Bernard, A. B. and Jensen, J. B. (2003) 'Foreign Owners and Plant Survival', National Bureau of Economc Research Working Paper No. 10039, 1-24.
Bonache, J. and Brewster, C. (2001) 'Knowledge Transfer and the Management of Expatriation', Thunderbird International Business Review. 43: 1, 145-68.
Dani Rodrik , "Has Globalization Gone Too Far"? Institute for International Economics, Washington, D.C., March 1997.
Dani Rodrik, "Sense and Nonsense in the Globalization Debate", Foreign Affairs, July/August 1997.
Davis, Paul and Cole, Jim, 2006. BB&T Mulls Sending Extra IT Jobs Overseas: Business Source Complete.
Michael L. Dertouzos, What Will Be (San Francisco: HarperEdge, 1997).
OECD Employment Outlook (2005) for EU-15 (excl SE) on the basis of ECHP data and Kletzer 2001, “Job Loss from Imports: Measuring the Loss”, Institute for International Economics, Washington, DC) for USA on the basis of bi-annual Displaced Worker Surveys.
OECD Employment Outlook (2005) on the basis of the ECHP for the EU-15 countries excl. SE; and Kletzer (2001) for the USA.
Quittner, Jeremy (2006). Beyond IT: Outsourcers Expand Services: Business Source Complete.
