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World Economy: Will Globalization Polarization Change what we Thought we knew about Outsourcing?

Posted by Manish Agrawal on Wednesday, 10 September, 2008

Globalization is affecting businesses and workforces worldwide, both positively and negatively. Jobs move from the US, for example, to lower-wage countries like India. Manufacturing is being done, and has been done for decades, in developing countries. This is making it more cost-effective for companies in more expensive countries to produce their goods. It is also allowing these products to be sold at a lower price to consumers. However, it is taking away jobs from residents of those countries. This is the globalization we are all familiar with, and this will only continue.

The same forces that shift production overseas are also creating a boomerang effect: The work is coming back to the expensive countries due to higher transportation costs. As the price of oil rises, instability in the Middle East continues, and consumers become more energy-frugal, this globalization polarization will persist. The cost to ship steel once made in India back to the US has finally made it actually cheaper to produce it domestically – Pittsburgh should be happy.

Goods with extremely low value-to-weight ratios will feel the effects of transportation costs. Some of these goods are steel, coal, paint, and sand. This is much of the reason why many Japanese automobile manufacturers have set up plants in the US: They don’t have to ship them across the ocean (also, they can proudly claim to be made by good ol’ American workers but still have the Japanese quality). Furthermore, the relatively low value of these products makes them cheaper to keep in inventory, despite their massive sizes. This is because limited amounts of capital are tied up in them.

But some countries are not as lucky as the US to have access to products such as steel and sand domestically. Singapore, for example, imports sand for its beaches from Indonesia. While Indonesia is just next door, this is a very heavy yet very low-value product. Imagine the transportation costs vs. value!

Japan is another example. What would happen if Japan could not afford the shipping costs of coal, iron ore, or oil? Due to their limited domestic resources of these products, they do not have the luxury of opting to produce them at home like they US may.

Another factor contributing to globalization polarization is that many US companies are now investing in Indian firms. Many of these outsourcing companies are owned by Americans. This is the case with the 24/7 call center in Bangalore, which is 90% owned by American investors. And by the way, everything in their office is American, from the air-conditioning, to the phones, computers, and even bottled water, according to New York Times contributor Thomas Friedman. Between 1990 and 2002 US exports from to India have risen from $2.5 billion to $4.1 billion. So some jobs may be going there but their money is coming to the US.

Goods with high ratios such as semiconductors, mobile phones, and some electronics can be produced anywhere, in one central location, and distributed globally without feeling much in the way of increased transportation costs (compared to their value). Of course, they are very expensive to hold in inventory. The problem with this is that many of the developing countries lack the knowledge to produce things like semiconductors.

Yet the seemingly-unlimited pool of radiologists in Bangalore can do a better job than the tiny few in Singapore can, for lower fees. Their x-ray diagnoses can be done in a matter of minutes, online and remotely. This is the type of globalization that will not slow anytime soon.

Such a polarization is an interesting contradiction, and may appear to be evening things out. If transportation costs increase, we may see less of an outcry about globalization. But this comes with a cost – more and more expensive oil.

Charles Cole, EconomyWatch.com

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