Case Analysis Paper – Off-shoring by U.S. Multinational Corporations

Thesis Statement

This essay explains and provides an overview of the concept of off-shoring by the multinational corporations in the United States. It provides a clear discussion of the impact of value added measures, capital expenditures and employment and how they affect the multinational corporations in the United States. The paper will also demystifies the factors that motivates multinational firms to relocate off-shore or move their production and manufacturing to foreign countries and what are the influences to this drastic move.

Overview of paper

With the advancement of information technology, communication has been made easy. It made it easy for firms to communicate and promote business worldwide from the United States. This has allowed existence of numerous multinational companies and thus allowing more economies to be more open to foreign investments. This has led to shifting of operations and production overseas. This concept is called offshoring. The off-shoring concept is based basically on completely shifting a multinational firms’ operations like production and manufacturing from its parent country to another country. Varied multinational firms have value addition by shifting the operations to different countries. Offshoring is an important issue for multinational organizations in that the growing need for growing businesses and market competition is making these firms to gain more competitive advantage over other domestic companies. According to Frederking (2013), U. S. multinational organizations use outsourcing as a strategy to gain competitive advantage, cut on production cost increase their performance. The growing trend of off-shoring has raised a combative argument over its effect on the U. S. economy, especially in the manufacturing sector. This sector has recorded very high employment declines yet having a strong growth in output, which is evidenced by the remarkable improvements in productivity of manufacturing industry.

For a very long time, it has been a challenge to measure the extent to which services and production in the United States have been off-shored. According to national statistics agencies, there is little data in relation to this subject but new efforts in data collection have made it possible to see the trend or how much manufacturing has moved overseas and thus  allowed better understanding of the intentions of off-shoring. The three measures utilised to better understand this motive are First, value added, which is basically a degree of the sum  of production value less the value of bought intermediate inputs (Freeman & Mirilovic, 2016). Basically, this is the measure of a multinational firms’ input to production. Second is capital expenditure, which entails spending on things that include fixed assets and machinery. And finally is employment which is basically the human resource or the number of workers.

Value added

According to the study, there was a very negligible rise on multinational value added that was created abroad in the period of intense globalization. On the other hand the employment showed the biggest increase. It indicated that multinationals produce nearly the same share of output value added in the U. S. with a share of its full employment. This is ultimately due to productivity increase and decrease in cost of production (Freeman & Mirilovic, 2016). Most multinationals have set up their manufacturing in low income foreign countries where cost of labour is significantly lower, the environmental and labour regulations are not too stringent and the sourcing of raw materials is much cheaper, thus leading to low costs of production.

Capital expenditure

The other trigger or factor that has motivated U. S. firms to locate off-shore is in order to acquire entrance to markets and also to manufacture commodities that are specialized or fit for the needs of a specific market at the lowest production cost possible. However economists have a different opinion on the above reasoning for multinationals shifting their businesses to foreign countries. This is because majority of off-shoring by multinational firms are in high income economies like Australia, Europe and France. Therefore, off-shoring is not based on the fact that the other countries are cheaper in economies or production, or relocating abroad will lead to finding weak environmental regulations or lower wages. The other reason for multinationals in the U.S. to have interest in foreign countries is to venture into new markets. Due to rise in population and advancement in technology, there is a lot of ease in doing business off-shore, thus allowing rapid expansion and growth. A decline in U. S. jobs especially in the manufacturing sector over the last several years has hastened the sport light on the objectives of off-shoring and international trade in determining employment. Despite an increasing interest on the matter, the impact of off-shoring on employment, especially the manufacturing and production sector, is not clear. However, according to Contractor (2011), off-shoring to countries with high income is complementary to United States employment, that is, employment especially in manufacturing and production is higher when affiliate employment in countries of high income is high.

Employment

There is a very big correlation between employment and migration in the concept off-shoring in the United States multinational corporations (Freeman & Mirilovic, 2016). This is simply because of the foreign aspect of the sector and the understanding that a multinational mostly utilizes the local workforce. It is argued that international migration affects the labour endowments since workers are mostly allowed to move within sectors and not between countries. The basic economic view or understanding of migration and international trade relates to the individual migrant and the underlying incentives to migrating. Economic incentives like jobs and high wages play a major role in determining the push to migrate to a particular destination by any migrant. Major international migrations is from developing countries to developed economies basically to search for employment and better lives.

The other issue is the impact of trade on employment. It is argued that trade has a adverse effect on the quantity of jobs that are available to workforces in high wage economies. The impact of trade on wages and jobs according to U. S. public opinion is distributed along education and skill sets thus, workforces that are highly educated and skilled favoured reduced barriers of trade while lower skilled and less educated work force did not favour trade. Trade may have a short run effect, especially in firms that are not able to compete against imports. This effects are prevail over by economic guidelines that affect the entire domestic economy in the long run (Contractor, 2011). Therefore trade will impact the composition of employment but it is not likely that it will affect the overall number of jobs. In areas where competition from imports is intense, multinational companies at domestic level may go under as a result of competition from emerging economies.

Factors that motivate off-shore location

From the above discussion, it is clear that the primary factors that motivate firms to locate off-shore is for search of new markets for their products and services. With the growth in technology and communication factors, most U.S. multinationals interests is to expand their market share. The other factor is to diversify into other fields of production and manufacturing. Most multinationals delve into off-shore investments due to availability of vast raw materials and untapped potential, especially in developing economies. Another factor is to gain competitive advantage over related firms in the U. S. This majorly works for multinationals competing on related platforms or playing fields.  Other secondary factors are like cheap source of labour and raw materials. Though economist differ in this case scenario since most multinational corporations have set office in high income economies where the cost of labour and coat of production is still high (Frederking, 2013). Finally multinational corporations locate off-shore for specialization purposes. This is basically to respond to a specific market need and thus produce specialised products at the immediate point of uptake or consumption. Most of these corporations’ foreign branches are specialised or tailor-made for specific immediate market needs.

Conclusion

In conclusion, off-shoring plays a big role in the United States multinational corporations in that it allows movement of some or majority of its activities or businesses to a foreign country with the intention of making meaningful gain. Off-shoring basically has been triggered by the emergence of technology and telecommunication revolution and is a relatively welcomed phenomenon in the advancement of U.S. economy. This has allowed existence of numerous multinational companies and thus encouraging more economies to be more open to foreign investments. This has entirely led to firms shifting of operations and production overseas. The three measures- value added, employment and capital expenditure play a big role in the overall explanation of the effectiveness of off-shoring by any multinational firm. Finally, it is vital for multinational companies to have a shared vision for their off-shore corporations to inculcate culture the parent countries operations to those of the foreign economy they are operating in so as to enhance the economic advancement of both entities. This may be through meaningful employment, value addition and capital investments.

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