Question

6. How are the trade-offs between in-house production and outsourcing affected by the business environment of emerging economies such as China?

Answer 1

Many of the advantages and disadvantages of outsourcing are magnified by the business environment of emerging economies such as China. While the cost-savings advantages of outsourcing are enhanced because of the low cost of labor in developing nations, disadvantages are also exacerbated because these countries often lack the legal and ethical structure found in the more-developed countries. There may be little concern for the rights of worker’s, the environment, and the quality of the final product. As illustrated by Pulitzer Prize-winning journalist Loretta Tofani, in China, the low labor costs so enticing to manufacturers come at the expense of the rights and safety of workers and the environment.[i]   A company concerned with its image may not be willing to make this trade-off just to obtain low cost production capabilities.

Other disadvantages of outsourcing may also be enhanced by the local business environment. Lax intellectual property rights in emerging economies make it more difficult for a firm to safeguard proprietary information when producing goods out-of-house. Governments in developing countries may be less accommodating to foreign corporations and, in China, government bureaucracy can challenge flexibility and managerial control. A company must consider how the local environment will affect operations when deciding where or whether to outsource.