research on Subcontracting in Production

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In our contemporary competitive business world, with a number of economic changes as well as uncertainties, has prompted national and international companies to employ any strategy to ensure their survival.  Global companies have in the recent years decided to offshore much of their jobs to where cost of labour is low so as to ensure desirable profit margins. Others have been subcontracting other companies from which they can complete their production operations at a low cost. Given that every company objective is either to optimize wealth of shareholders or maximize profits, then this has been employed by many multinational companies.

Workers especially in developed countries feel threatened since companies are subcontracting with many of companies located in developing countries where labour is affordable and allows for making desirable profits. Subcontracting has also become a marketing strategy since many societies feel good when associating with commodities which are partially or wholly made in their territory. They are patriotic to some extend. Others feel that this network of sub contracting has a great role in developing mutual relationship among various countries. This, in one way or another has lead to decrease in level of armed conflicts. Take a case, Japan was formerly an enemy to USA (Nagasaki attack) but today is one of US trading partner and a friend; Germany was also an enemy to USA (World War II) but today network of these global companies has lead to good relationships between these countries.

This practice has raised some issues which need to be discussed. There are those who feel that this will lead to loss of domestic jobs. The social responsibility of the global companies’ network of subcontracts to other countries in terms of reducing level of armed conflict between trading countries also needs to be discussed. Other argues that, this will lead to increase in unemployment levels. (Bhagwati & Blinder 2009 p 20; Andreas 2007 p 2)

The issue is if this is a good model to follow. I feel that this is a good model to follow. Fostering network of subcontracts to other companies by global companies is a good model. The discussion for this topic will include social responsibility of global companies in reducing armed conflict, argument against loss of domestic jobs owing to global companies practice, and finally offer a critic to those who refute that employment is a temporary state which can be offset by other industries if barrier to trade are kept low.

1. Social responsibility

Increase in international trade and liberalization of many economies has lead to substantial reduction in armed conflicts among world countries. International companies have played a big role to ensure good social welfare in the world. They have promoted international relations, cultural exchange and movement of labour from one country to another. They have been the anchor to international trade. As asserted by theories of international trade, trading economies depend on one another and both will gain from international trade. When a global company subcontracts production of its goods to another company in other country ie offshore jobs, it creates employment to the population of where the subcontracted company is located. This will increase employment levels in such an economy.  Additionally this will increase level of income among the households and the government since it levies income taxes on both households and companies. Increase in income increase demand given the relationship between increase in income and consumption level.  Since no any country is self sufficient, it will have to export some commodities from the country from where jobs to its households were offshored from.  Import by such a country will be an income to the exporting country. This will increase employment opportunities to the exporting country. Such a relationship will result from global company network of subcontracts. In case of any conflict between such countries, they will opt for diplomatic negotiation to solve there differences and continue to enjoy the mutual relationship owing to global companies and international trade. Take a case where Microsoft Company subcontracts Infosys in Bangalore in India to provide software lab services. This will have an expansionary impact on India national income through increase in households’ employment, income, consumption and at the same time increase in government tax revenue. Part of this income will be directed to paying for imports from U.S.A such as machinery, air craft and aeronautical equipments. Increase in exports to India will eventually lead to increase in employment opportunities in U.S.A. Any conflict between these countries will be solved through negotiations since both countries will like to continue enjoying the relationship which may be harmed by armed conflict. (Bhagwati & Blinder 2009 p 20)

2. Argument against Loss of Domestic Job

Investment of global companies in a network of subcontracted companies in the production of their goods cannot be argued to have lead to loss of domestic job. Those against offshoring of jobs have claimed that this has lead to loss of domestic job. I feel that this is not the case.  Global companies are able to expand their production unit without reducing domestic workforce. Take an example,  a case where Citibank out source its back office operations of its USA credit card business to a company in South Korea, as a  way to expanding  its operations, it means that the work force in USA employed by Citibank will not be reduced.  Global companies are also associated with expatriation of profits to country of origin. The main reason of offshoring jobs is to obtain a cheap supply of labour so as to cut off production costs and increase profits level. Much of these profits are repatriated back to the country of origin. This forms part of net income from abroad in calculation of national income. Increase in inflow of income from abroad increases availability of funds for more investments. Money from abroad will be deposited in home country banks. This will increase available funds for investors and also reduce cost of borrowings. This occurrence is likely to increase level of investments. Increase in investment increases demand for labour force. This will increase level of employment and income to the households. Increase in level of employment to the households increases their income and demand for goods in the economy. Eventually, increase in demand, will increase investment levels since high demand is an incentive to the investors and firms in the market. This will consequently increase demand for labour force and the trend will continue. The results will be increase in level of employment and economic growth. In this case, companies’ action of subcontracting production of its goods to another company in another country will have led to increase in employment levels. (OECD 2007 p 46)

It is clear from the discussion above, it is clear that global companies subcontracting of production of their goods to other companies has not led to loss of domestic jobs. Instead it is probably that, this has lead to increase in domestic employment level. (ILO 2005 p 87)

3. Unemployment just a temporary state, it could be offset by other industries if the barrier

of trade are kept low

Unemployment just a temporary state, it could be offset by other industries if barriers of

trade are kept low. Also, Bhagwati and Blinder (2009), argues that this subcontracting by global companies may result to substantive changes in labour markets, loss of employment and long term effects on employment. This also amount to refutation that, employment is a temporary state which can be offset by other industries. This refutation is based on insufficient evidence. I feel that unemployment is a state that can be changed if barriers to trade are kept low.  Those who refute these claims that by keeping barriers to trade low leads to foreign investments which lead to high competition to domestic industries and eventually they exit from operation leading to chronic unemployment. Free trade encourages trade among countries and specialization. An economy allowing free trade creates an opportunity to specialize in production activities in industries where comparative or absolute advantage exists. Theory of international trade asserts that gains from international trade owes to specialization. Thus a country which has liberalized its economy will focus on industries where a comparative advantage exists. In this sense, success of such industries, will lead to increase in demand for labour, increase employment level which will consequently increase level of income among the household. Increase in income will increase demand in the economy which consequently increases level of investments. This will increase demand for labour and level of employment Thus refuting that unemployment just a temporary state and that it can be offset by other industries if barriers of trade are kept low is based on unreliable evidence. It also fails to consider the facts about keeping barriers to trade low. It is misleading to say unemployment is not a temporary state as it has been proved by above discussion.