Jobs most would not work; pay too low to live upon; working conditions fraught with health concerns. Issues of negligence, exploitation, and child labor run rampant. Alike, the world economy depends on it. Third world hunger is battled through it; lives are saved. It is one of the most controversial issues in business: outsourcing. This issue has developed and evolved as a result of the need for cheap labor and the clear reality that such labor exists in developing countries. It seems quite obvious that a corporation able to develop a practice in order to maximize on this opportunity would also be able to increase its profits, thereby ensuring the satisfaction of its shareholders and the future success of the company. However, while there are positive aspects to the implementation of outsourcing, there are also negative aspects that may not have been foreseen by the founding fathers of this revolutionary business concept.
There are three specific types of outsourcing: on-shoring, on-site off-shoring, and off-shoring. Of these three, two of the types will be examined in relation to Nike and a variety of small Japanese companies in this analysis. The two specific types of outsourcing that command the majority of the attention surrounding this issue are on-site off-shoring and off-shoring because they both deal with the use of foreign labor. These most directly impact the home countries of the corporations because they decrease the amount of jobs available to the citizens in those countries. For this reason, they are deemed the most controversial of the three.
The controversy of these concepts lies not in the practice of outsourcing itself, but in the ethical issues that surround it. Many topics are addressed by those who are concerned about outsourcing such as the exploitation of foreign workers, the loss of domestic jobs, and the economic distribution of profits gleaned by the implementation of outsourcing. Further examination of offshore and on-site offshore outsourcing, in regards to how they developed and became known as offshore BPO, demonstrates how these two topics have become an extremely controversial issue regarding ethics in the business world.
Outsourcing Defined
Business Process Outsourcing, or BPO, also simply known as outsourcing, is considered to be one of the most controversial business practices today. The use of this process is complex and can vary in many ways. It is most easily defined as a, “work arrangement made by an employer who hires an outside contractor to perform work that could be done by company personnel” (Britannica.com). Each of the three different types of BPO relate specifically to a different business practice.
The Three Types
The idea of outsourcing began with the practice of onshore outsourcing. Companies started using outside businesses, or subcontractors, to perform services such as accounting, marketing, and other services that are important to the company, but that do not directly relate to the particular good or service being provided. These subcontractors are domestic, or onshore. Some businesses started to then realize the value of the on-site offshore model. This type of outsourcing is very similar to onshore, but rather than using already established domestic subcontractors, foreign labor is brought to the domestic location. An example of this is the green card employment system within the United States that allows foreign workers the right to work in the US for a certain amount of time. Some businesses saw a value of taking these two models one step further: offshore outsourcing. It is the most controversial of the outsourcing models; it is understood to be “sourcing any part of an organization’s activities to a location outside the company’s home country. Companies create captive centers offshore, where the employees work for them or a subcontracted entity” (Brown 350).
Offshore outsourcing is considered to be the most rewarding type of BPO, yet is the most complex as it is a relatively new way of conducting business (Click 23). It started when companies began moving factory jobs to other countries. Some criticized this practiced and others raved about it. Many times, the advantages outweighed the disadvantages. It is speculated that a U.S. business manager can cut their overall costs by 25-40 percent (Click 24). Some say that the practice of offshore outsourcing helps stimulate both the economies of developing countries and of companies that bring their businesses overseas. Criticisms of this model have led to many ethical dilemmas regarding outsourcing.
The Ethics of Off-shoring
While outsourcing has become a business standard in the United States and in other technologically advanced countries such as Japan, its implementation has brought forth many questions as to whether or not it is ethical with regards to its impacts on the jobs of United States and Japanese citizens. More specifically, off-shoring and on-site off-shoring have become ethical hot topics in recent years because of the many advantages and disadvantages to implementing these forms of outsourcing. The reconciliation of these positive and negative sentiments regarding off-shoring and on-site off-shoring will only be achieved as a result of increased education. In order to make an educated decision regarding whether or not off-shoring or on-site off-shoring are ethical, a thorough investigation of both sides is required.
Positive Aspects of Off-shoring
Those who argue for the implementation of this business practice use approaches such as the opinion that “when a product or service can be produced more cheaply overseas, it makes more sense to import it than to produce it domestically” (Reh, 2006, Arguments For section). This argument relies solely on a commonsense reality. Oftentimes it is less costly for a corporation to manufacture its products in countries where labor is cheaper. Therefore, it appears to be the best thing for the corporations to do in order to maximize profits and to keep shareholders happy. Also, the increasing demand for corporate social responsibility is a large argument for off-shoring in that corporations are providing jobs and salaries for people in developing countries (Reh, 2006, Arguments For section). According to Sweta Patel, “off-shoring is opening the doors for employment and transforming people into professionals” (Patel, 2004, Worried Unions section). This argument appeals to a more emotional aspect of off-shoring. The act of providing jobs to developing countries coincides with this outcry, thus advocating for corporate off-shoring.
Negative Aspects of Off-shoring
While off-shoring has many positive ethical aspects, there are few corporations who are willing to publicly admit their implementation of off-shoring because of its negative connotations (Patel, 2004, para. 3). Ethically speaking, there are many arguments against this business strategy. Many argue that “the considerable profits to be made from off-shoring are retained by the rich, while the middle class pays higher taxes and loses purchasing power” (Reh, 2006, Arguments Against section). Because of the many negative sentiments regarding the government’s economic distribution of wealth, any business practice by corporations that is seen as contributing to this discrepancy will be negatively regarded by the public. In addition, John F. Reh states that “foreign workers do not contribute to US Social Security or other taxes. The increased tax revenue from corporate profits does not equal the amount lost on US workers’ income taxes” (Reh, 2006, Arguments Against section). The negativity United States citizens feel regarding the loss of many job opportunities and the additional wound exacted as a result of the discrepancy as far as income taxes are concerned contribute a great deal to the opposition toward the principle of off-shoring. Another ethical issue is that of CEO compensation. With regards to off-shoring, an opinion held by those who are opposed to it is that “companies could save more costs by off-shoring the CEO Job. The average US computer engineer earns six to seven times his Indian counterpart, but the US CEO gets paid 400 times as much as his average worker” (Reh, 2006, Arguments Against section). This is a further blow to workers who are losing their jobs to off-shoring in order to save the company money.
Negative Aspects of On-site Off-shoring
The negative aspects of on-site off-shoring are similar to those of off-shoring. While jobs are closer to home with this model, they are still being held by workers who are not citizens of the company’s home country and the model is still contributing to the home country’s citizens’ loss of jobs.
Because these two specific types of outsourcing focus on sending the jobs of a company overseas from the country in which it originated, the ethics of decreasing job opportunities in the company’s home country comes into question. The labor in the countries to which companies send their jobs is cheaper and more abundant, but whether this business strategy does more harm than good needs to be evaluated. On one hand, many people are of the opinion that off-shoring not only benefits the company by maximizing revenue and increasing shareholder profits, but that it also helps those in impoverished countries by providing jobs for those who would otherwise be out of work (Echolist, Feb. 28, 2000, para. 1). On the other hand, citizens of a company’s host country become frustrated with the prospective of off-shoring because it threatens the availability of jobs and its only marginal benefits are not enough to validate its implementation (Reh, 2006, Arguments Against section). While there are positive and negative aspects of outsourcing, it is important to reconcile these discrepancies in order to make an educated decision as to whether or not it is ethical. Nike has dealt heavily with these positive and negative aspects of outsourcing throughout their years of global business.
Nike
Nike financially contributed to the films Malcolm X and Hoop Dreams. Though the films are certainly provocative and worthwhile, does Nike truly support people who struggle against discrimination and inequality or is the company only trying to “win votes” with consumers who identify with such problems, like African-Americans and women? An actual Nike advertisement reads “We let our fears stand in the way of our hopes. We sit quietly when we want to scream. Why?” Is this ad also trying to recruit the population of people who are routinely mistreated within society to stand up and fight back? If so, then why does Nike discredit its own advertisement by supporting abusive labor practices that operate using fear and intimidation? And how can Nike justify giving Michael Jordan $20 million dollars in endorsement fees while their own employees are living below the poverty line” (Christensen, 2003, International Outsourcing and Nike)
Many major US firms have realized the value of outsourcing. The multinational US Corporation, Nike, has realized this value through the specific use of offshore outsourcing. Nike designs their products within the US, and then subcontracts to low cost production facilities overseas (Smit, 1994). These facilities can be found in many Asian countries such as: South Korea, Japan, Pakistan, China, Vietnam, Indonesia, and India (Haq, 1996, Collaboration section). The use of these subcontracting firms has lead to discrimination of the firm’s practices. Many organizations are scrutinizing Nike for their employment of severely underage children, their lack of health regulations, and their unlivable wages. While, by law, Nike is responsible for the fair treatment of all of their employees, the use of subcontractors often veils the misconduct that is occurring in their overseas workshops. While Nike’s use of off-shoring has attracted negative media, it can also be said that their presence in these third world countries has dramatically increased the standard of living for their underprivileged workers (Harsono, 1996).
Claims Against Nike: Exploitation of Workers
Nike has denied claims that the company knowingly employs children in their workshops. However, in Pakistan, it is clearly documented that while child labor is illegal, the Pakistani government is reluctant to enforce these policies. Seeing the favorable opportunity, Nike capitalized in Pakistan and failed to take any precautions to prevent the use of child labor in the production of their products (Joseph, 1996). This child labor crisis is further increased by the countries low per-capita income. The average middle-class person in Pakistan earns about five dollars a day, which is typically stretched to feed a family of ten. Along with their low income, Pakistani families also face extremely high inflation rates. These financial hardships often cause families to reluctantly give their children into child labor. As a result, about half of the world’s soccer balls are produced in Pakistan by children as young as six years old (Boggan, 2001). Companies like Nike make use of repressive regimes like Indonesia’s and China’s to suppress worker efforts for better wages and working conditions. No savings are passed on to consumers despite the low wages paid workers abroad.” (Haq, 1996, Collaboration section)
It is Nike’s responsibility to monitor their subcontracted companies to ensure that they are abiding by international rules and regulations. In turn, it is expected that the contracted firm act according to these rules and regulations. However, because both companies are aiming to minimize their manufacturing costs and earn the highest amount of profits, this system of checks and balances is not sufficient. In addition, illegal practices such as child labor and unhealthy working conditions often go overlooked. Frontlash, a youth organization of the American Federation of Labor-Congress of Industrial Organizations (AFL-CIO) claims, “Companies like Nike make use of repressive regimes like Indonesia’s and China’s to suppress worker efforts for better wages and working conditions. No savings are passed on to consumers despite the low wages paid workers abroad.” (Haq, 1996, Collaboration section)
Claims against Nike: Right to Basic Freedoms and Health
Claims against Nike have not only sprung from illegal child labor, but also from hazardous working conditions and negligence. In an inspection report filed for the company’s private use, Ernst and Young concluded that workers in a factory near Ho Chi Minh City were exposed to toluene, a harmful carcinogen. This carcinogen is known to cause damage to the liver, kidneys and central nervous system, and was found in amounts that exceeded standards by 177 times the legal limit. It was also documented that over 77 percent of the workers suffered from respiratory problems. The leaked report further concluded that the company’s subcontractor was forcing its workers to work over 65 hours a week, well over what Vietnamese law allows. (Greenhouse, 1997, second para).
In a separate report taken at the Tae Kwang Vina factory, Ernst and Young again found cases of negligence. The report painted a dismal picture of young women working well over 65 hours a week in unsuitable conditions. The report found that, “dust in mixing room exceeded the standard 11 times,” and, it added, “There’s a high rate of labor accidents caused by carelessness of employees.” Later, the report pointed to two other problems: “workers’ inadequate understanding of the harmful effect of chemicals” and “increasing number of employees” with health problems continue to work with chemicals (Hammond, 1997, para 2). It is evident that Nike has failed to ensure the well-being of their offshore employees as well as maintain their system of checks and balances with their offshore companies.
“The rights to freedom of association, the right to strike and freedom from forced labor are not guaranteed in Indonesia,” said the Asia Watch petition. “In fact, when workers have attempted to form independent unions or to carry out strikes, they have been hindered by excessively restrictive government regulations and by harassment, intimidation, intervention and beatings by members of the Indonesian security forces” (Etantor, 1992, Labor Practices Criticized).
Controversy of Developing Nations
From Thailand to South Korea and in many different businesses, industries depend on low-cost labor to help those countries industrialize, raise the minimum wages, and drive them into more successful manufacturing nations. Each day many new third world countries attempt to lure large corporations to their country through low minimum wages, lack of labor laws, and the clear ability to provide cheap production of their products. Indonesia, for example, has a minimum wage that US officials have stated to be just 65% of realistic livable wages to cover just food and shelter expenses. “‘The situation here is similar to the end of the last century in America and Europe — half work and half slavery,’ said Jakarta labor activist Indera Nabadan, who closely monitors the shoe industry” (Staff Journalist, Nike and Labor). In reality the workers are the driving force of their growing economies, but they are being highly exploited to realize this growth. The average shoe costs about $14 for Nike to manufacture including the wages, overhead, and materials. Nike sells their shoes for an average of $75. This difference of $60 goes directly back to corporate profits and is what equated last fiscal year (2006) to 6 billion dollars in revenue (Van Dusen, 2004, The Manufacturing Practices of the Footwear Industry). This controversy of developing nations is a continuing debate that has seen sanctions from the US government amongst many others around the world. While these government regulations do have power and have made changes, they have not impacted these problems as much as consumer power.
US Consumer Power
US consumer power can be a swift hand to change when truly realized. An individual can affect the bottom line of a multinational corporation through his or her buying habits. Consumers are those who give these companies, such as Nike, huge profits and bottom lines in their financial documents. Though Nike has serious issues of negligence, child labor violations, and harassment, Americans continue to purchase material objects such as fancy shoes and brand names. How much importance is in what we walk around in? The reality is that we are spending upwards of $100 on a company’s product that treats its workers extremely poorly (Christensen, 2004, International Outsourcing and Nike). A shoe was historically created to protect the foot, why do consumers spend so much for this? For mark or style? Can we give up such things and use consumer power to show Nike their practices are wrong? The United States is not the only country that is implementing the business tactic of off-shoring. Many small companies in Japan have been participating in it as well.
Outsourcing in Japan
Japanese companies, like so many others, have been outsourcing foreign labor. The most popular method of outsourcing (especially for IT-related companies) is offshore outsourcing. This involves the exportation of a product from a developed countryy to areas of the world where there is political stability, lower labor costs, and/or tax savings. These companies then sell precision products that have been programmed by companies, for example, in India. Again, this is due to the lower expense(s) of domestic companies, which still offer the same quality as other competitive IT-related companies. Offshore outsourcing has proved to be a win-win situation to both the entrusting, and the entrusted companies. Since the IT-bubble of 2001 in the US, the economy in India has been growing rapidly. The annual inflation rate has maintained approximately 10% over the last several years in India. (Bradsher, 2007) Despite the negative implications of such a high inflation rate, the Indian rupee, the local currency, against the US dollar has decreased from 48 to 41 rupees between 2002 and 2007 due to the gain in the value of India rupee. Although the economic growth in India proves to be a positive attribute to the country, not all offshore outsourcing companies have such intentions in mind.
The “3 Ks”
Some, but not all, Japanese companies (especially small or private companies) greedily take more advantage of outsourcing. This avarice comes in the form of jobs that are called the “3 Ks”. (Khan, 2003) “3 Ks”is a coined phrase originating in Japan. The 3 Ks respectively stand for “Kiken” (Dangerous), “Kitanai” (Dirty), and Kitui (Stressful) Jobs that are considered to be dangerous, dirty, or stressful are in the least demand by people in Japan. To maintain an efficient workflow for those undesirable jobs, companies outsource to foreign laborers via on-site offshore outsourcing. Typically, these foreign laborers come from rural areas in China.
Despite present-day economic growth in China, the gap between the rich and the poor is still tremendous. In most rural areas of China, jobs are scarce, as are the dollars being paid for such employment. (Lim, 2004) Nikkei Journal (2006, May 10) reported that the minimum monthly salary established by the Chinese Labor Law is $70 USD. However, in actuality, approximately 300 million out of the entire Chinese population of 1.3 billion people receive $70 USD or more. The other 1 billion people receive less than $70 USD a month. Another restriction of the Chinese labor law is the limit on the weekly labor hours. The greatest number of hours that can be worked over the course of a week is 40. Sadly, the reality is that most laborers usually work a 70 hour week. This indicates that the majority of Chinese laborers work for less than 23 cent an hour. Vis-à-vis, the lowest hourly wage in Japan is about 650 yen, which approximately is $5.50 USD (according to the Japanese Minister of Health, Laborer and Welfare, Oct. 10, 2006).
The Minimum Wage Controversy
Due to this vast difference in minimum wage, Japanese companies will willingly hire Chinese laborers at the minimum wage. These low salaries usually accompany a job belonging to the 3 Ks. Even so, those indigent Chinese laborers signed the contract because the pay being offered is higher than their previous salaries. Some companies will even offer cheaper wages than minimum (which, needless to say, is illegal by the Japanese Labor Laws). Notwithstanding, the Mainichi Journal (2007, may 13) reported an incident involving three Chinese laborers who escaped from a Japanese sewing company in Aomori. Their “untimely resignation” was because of the extremely hard work they were being forced to do for less than minimum wage. According to Mainichi, the Chinese laborers worked more than 13 hours a day. Although the city of Aomori has a minimum wage rate of 605 yen, the overtime pay offered to them was only 350 yen (about three dollars) per hour.
Conclusion
In a final analysis, it is evident that the evolution and development of outsourcing into three different types known as on-shoring, on-site off-shoring, and off-shoring have both positive and negative aspects about each of them. The use of outsourcing surrounds a handful of ethical issues. Off-shoring and on-site off-shoring were examined in this analysis and sparked questions as to whether these practices are ethical or not. This is because they involve the use of foreign labor that takes away jobs from corporations’ countries of origin; in this case, the job markets of the United States and Japan.
Benefits of outsourcing can come at the expense of the worker and instead benefit consumers, shareholders, and the privileged. However, developed countries are able to provide employment, strengthen the economies of developing nations, and provide opportunities for foreign employees in those countries to gain new skills and advance their education. In addition, there are reports that corporations such as Nike and smaller companies in Japan subcontract with other companies to hide their unethical manufacturing or technological factories overseas. Questionable practices include hiring underage employees, overworking them, placing them in dangerous and unhealthy work conditions, barring them from forming unions and paying them poor wages stimulate further ethical controversy.
Consumers have the power to strengthen factory conditions in offshore outsourced operations. If consumers refuse to buy products manufactured by a company that does not comply with acceptable working conditions and standards, those organizations can face extinction. Without consumer support, the most influential corporations cannot exist. It is important for consumers to recognize what kind of companies they are purchasing their goods from and why.
