Why do some companies choose to outsource to other countries? What are the likely consequences of this course of action?
The companies always have a motive to earn higher profits and for the same purpose they actually focus on variety of elements and business practices. Outsourcing the services or products is one of the major element that encourage companies to went abroad and start their operations in other countries (Borensztein, Gregoria and Lee. 1998). Other than profit increment there are various reasons behind the outsourcing of services of products. The discussion of various causes and their effect is explained below:
The major reason is that the national or domestic market is actually available with limited growth opportunities. In domestic market the situation of saturation comes very earlier. It is clear that the growth opportunities in domestic market are high but after the certain period of time it becomes tough to concentrate on the same market and same customers. Thus major cause is that the other countries provide the opportunity to cover the large market and it helps in avoiding the saturation of the market. The major effect is that the companies can approach more number of customers and can definitely build their customer relationship at very large scale.
Market penetration is another cause which also encourages companies to outsource their products or services. It is clear that whenever company launches their product then they decide the target customers so in foreign market they can definitely penetrate the same target customers. Again the profitability could be increased rapidly and most importantly the stability of the company could be ensured (Branstetter and Lardy, 2006).
Compensation of the loss is another very significant motive which gains special consideration while taking the decision of going abroad. The companies can have actually dealt with their losses if they have their operations in various regions. The loss of one area could be compensated through the profit of another area. Thus again the profit maintenance is something which could be treated as effect of this particular aspect.
Competition handling is another cause behind the outsourcing of companies to other countries. In case of high level of competition in host country the companies try to take the advantage of monopoly or less competition in any other country. Thus it creates the effect of more opportunistic approach of an organization. It is clear that company has vision to run their operations for the longer period of time and they can definitely work smoothly if they have less amount of competition (Hezri and Dovers, 2006).
Sustainability is another cause which affects the decision making related to outsourcing the products or services to another country. It is very significant aspect that the companies always runs their business for two major objectives one is related to profitability increment on the regular basis (that has been discussed earlier) and second is related to the ensure the sustainability of the company. In foreign market the product could be placed in larger areas and company could ensure their reach to larger extent so it just creates their existence in so many countries. The major effect or consequence for the same is that it helps in building the brand image for the company. Further they can definitely attract more number of customers by ensuring high level of brand appealing. Thus it is significant consequence that could be arise if sustainability has been achieved by the companies.
The international presence has become the need of today’s business world and as it helps in growing the business at international level (Borensztein, Gregoria and Lee. 1998).. Outsourcing is one of the major activity or business practice that leads towards the success of companies and allow them to avoid the business problems in the era of globalization.
Thus on the basis of above discussion it could be stated clearly that there are various reasons that encourage companies to outsource their services and products to foreign countries. Their consequences are difference for the companies. The major causes are profit increment, gaining more growth opportunities, penetrating the market and developing the market, generating more number of customers, increasing the reach at world level, competition handling and most importantly ensuring the sustainability. The consequences for the same include the goodwill creation, more productivity and attainment of short term as well long term objectives.
Borensztein, E., J. De Gregoria and J. Lee. 1998. “How does foreign investment affect economic growth?” Journal of International Economics, 45(1): 115–35
Branstetter, L. and N. Lardy., 2006. "China's Embrace of Globalization," NBER Working Paper 12373.
Hezri, A. A. and Dovers, S. R., 2006, ‘Sustainability indicators, policy, governance: issues for ecological economics’, Ecological Economics 60 (2006) 86-99.