Ethical Defense of Job Migration Due to Offshoring

Solving Ethical Dilemma

Pertaining to

Migration of Jobs due to Offshoring

By

Vishal Verma

For

Prof. Atis Zakatistovs

Riga Business School, Riga LV

2012

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Executive summary

Objective

The objective of this report is to resolve the ethical dilemma associated with migration of jobs due to

offshoring. The cause of this dilemma is the conflicting interests of various stakeholders – governments

of two countries between which the job flow takes place, people in the two countries, the offshoring

company and also the outsourcing company in the host country.

Why is the issue important?

According to Hofstede’s Cultural Dimensions model [1], US the biggest exporter of jobs is really high on

individualism. In individualistic societies people are supposed to look after themselves and their direct

family. In addition, US society is also masculine, which means it values achievement and success.

Societies in India and China, the biggest destinations of outsourced jobs are also masculine.

When a society values individualism and masculinity highly, an issue pertaining to job migration is bound

to be of huge significance.

How is the analyses objective?

All the analyses have been made from an independent 3rd party observer standpoint and not from the

standpoint of any stakeholder. This approach has ensured minimal biases in thinking. The Utilitarian

analysis relies on well researched facts and logical reasoning. Every effort was made to avoid personal

consideration from becoming factors in Justice and Rights based analyses.

Summary

Liberalization that began in 80s led to culture homogenization (globalization). This made the

playing field bigger for businesses.

Bigger playing field has meant businesses now need to be more responsible toward return on

the Triple bottom line. They need to start looking at Creating Shared Value [2] which is about

integrating societal improvement into economic value creation itself.

Analysis of the job migration issue from Utilitarian, Justice and Rights standpoints leads to the

conclusion that offshoring is the right path to pursue.

Offshoring leads to greater efficiency, cheaper goods and services and greater prosperity in

developing countries.

Government regulation that discourages businesses from offshoring needs weakening.

Since small and medium enterprises do the bulk of job creation work and keep unemployment

low in the face of huge migration, regulation and bureaucracy needs to weaken for new venture

creation.

[1] - http://geert-hofstede.com/countries.html

[2] - http://en.wikipedia.org/wiki/Creating_Shared_Value

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CONTENTS

Introduction.................................................................................................................................

- Background…………………………………………………………………………………………………………………………… - Scope and assumptions………………………………………………………………………………………………………… - Methodology………………………………………………………………………………………………………………………… - Outline of the report……………………………………………………………………………………………………………..

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2 3 3 3

Discussion....................................................................................................................................

- Utility based examination (consequentialist)……………………………………………………………………….. - Justice based examination (deontological)…………………………………………………………………………… - Rights based examination (libertarian)………………………………………………………………………………….

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4 5 6

Conclusions..................................................................................................................................

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Recommendations....................................................................................................................... 8

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Introduction

Background

Scope and assumptions

Methodology

Outline of the report

Background

Role and Responsibilities of Business

Businesses have been seen as economic agents with the role of producing goods and services in society.

This role has traditionally been associated with some responsibilitie s. These include responsibility

toward society, stakeholders and environment – the Triple Bottom Line.

Responsibility toward society includes supplying useful goods and services, constantly improving them,

investing in innovation and technology to keep costs down and goods up to date. It also includes

ensuring workplace safety, worker growth and being in line with good and human practices.

Responsibility toward environment involves minimizing ecological footprint and following regulatory

guidelines.

Responsibility toward stakeholders involves maximizing the economic value.

Job generation not part of responsibility sphere

To be able to generate good return on all the 3 bottom lines, the focus on efficiency becomes

paramount. With such a high incentive placed on efficiency, it’s imperative for job generation to never

become a prime responsibility for businesses. Essentially the employees are seen as a cost to business –

the lesser the better. However, since businesses can’t run without the support of employees, job

generation can be considered a by-product of the need of businesses to serve society through goods and

services, rather than as concerted effort to create jobs.

Only one bottom line served

Cutting slack on environmental and social bottom lines isn’t a new happening on the business canvas. In

the late nineteenth century the emergence of large corporations and the era of the robber barons in the

US led to the development of the anti-trust movement. In response, corporations emphasized corporate

responsibility and philanthropy in order to prove that government regulation was unnecessary .

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In the 1930s the Great Depression produced a second wave of regulation and led to Roosevelt’s New

Deal in the US and nationalization and regulation by the postwar Labor government in the UK.

During the late 1960s and 1970s concern about the social and environmental impact of transnational

corporations (TNCs) in the postwar era led to a third period of increased efforts to regulate corporate

activity. More generally US corporations began to systematically exploit the economies of developing

countries throughout the world. For the first time regulation of corporate activity became an

international issue, with attempts within the UN to establish codes of conduct for the activity of TNCs.

Corporations and governments resisted attempts at mandatory regulation of TNC activities, proposing

self-regulation as an alternative. The International Chamber of Commerce, representing major TNCs,

launched its Guidelines for International Investment in 1972, and a number of large US companies

adopted codes of conduct. A number of other multilateral agreements also emerged in the 1970s

sponsored by the ILO, the UN, the OECD and other international organizations.

Global restructuring during the 1980s and the rise of neoliberalism led to a significant shift away from

state intervention in both developed and developing countries. This trend was reflected in national

policies towards TNCs through a dramatic shift away from regulation of their activities to ‘intense

competition to attract foreign direct investment’. The increased mobility of capital enabled TNCs to

‘exploit regulatory differences between states by (re)locating (or threatening to relocate) their

production facilities in countries with more favorable regimes’.

Globalization and convergence to one culture

Liberalization of the 1980s meant offshoring (3rd party and captive) and businesses going global (foreign

direct investment). Global brands (Coca Cola, Starbucks, Facebook and so forth) offered roughly

consistent services around the globe. Culture began moving toward homogenization. According to Mark

Pagel in his book Wired for Culture[3], primary forces behind the convergence to one culture is human

attributes like ‘capacity for culture’ (ability of a generation to build on the work of past one without

reinventing the wheel) and ‘tribal psychology’ (benefit of working in group or community). This same

tribal psychology and cultural nepotism led to trade over centuries, states combining to form nation

states and even big entities like the EU. Travel, internet and social networking have further accelerated

the pace of this culture homogenization.

Bigger playing field means more responsibility for businesses

Homogenization of culture has resulted in playing field for the businesses to become bigger. This has

essentially led to their responsibility toward the triple bottom line to increase. In fact, in the future,

return on the 3 bottom lines will not remain just peripheral aim of businesses but will have to become

deeply embedded in the overall business strategy.

[3] - http://www.bbc.com/future/story/20120522-one-world-order

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Scope and Assumptions

The argument in this report will focus only on job transfer issue in the context of offshoring. Other issues

like worker conditions and environmental problems will not play any role in the analysis and ethical

judgment.

Also the judgment and analysis will be performed from an independent 3rd party perspective and not

from the perspective of any stakeholder - government (home or host) official, former or current

employee or business decision maker.

Lastly the analysis will make use of the concept of expanded playfield which was discussed in the last

section.

Methodology

Utility based examination (consequentialist)

The issue will be first examined from the utilitarian/consequentialist perspective. It will be shown how

on the bigger playfield (concept discussed earlier), movement of jobs leads to benefits to people being

maximized. A point will also be made regarding the Pareto efficient distributional justice that results due

to this movement.

Justice based examination (deontological)

The issue will also be judged from Rawl’s Maximin distributional justice standpoint. It will be shown how

on a bigger playfield, movement of jobs ought to be a justified choice and should be pursued.

Rights based examination (libertarian)

Finally the issue will be judged from Locke’s Natural Rights and Nozick’s Entitlement theory standpoints.

It will be shown movement of jobs has been a result of voluntary exchanges and governments should do

their very best to protect rights of companies to do this.

Outline of the Report

The remainder of the report is going to discuss the application of various methods listed above, the

conclusions drawn as a result of analysis and recommendation.

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Discussion





Utilitarianism essentially states the proper course of action is one that maximizes utility – greatest

amount of good for greatest number of people. Mathematically, it can be stated as below –

Utility U = ∑ Benefit / ∑ Harm = max. for best course of action

In our case, Benefit and Harm is measured in terms of opportunity to work (job), Benefit representing

getting a job and Harm representing foregoing a job.

Since our analysis involves bigger playfield (discussed earlier), the ‘people’ here for us will include

people from both the home country (one from which jobs moves out) and host countries (where jobs

move in).

Since economic disparity between home and host countries is one of the key reasons for movement

jobs, the companies have the advantage of being able to hire more employees in the host countries with

the same budget in which only one employee was affordable in the home country. This allows

companies to really scale up the operations.

Lets say at the expense of 1 job in home country, the company can employ N employees in host

country/countries, where N > 1.

So X jobs moving out of the home country leads to N.X jobs being created in the host countries. If X jobs

are lost, the ∑ Harms = X and if N.X jobs are created, the ∑ Benefits = N.X. However, for the sake of

pragmatism, let’s say N.X is only the maximum number of jobs created and the number of jobs created

is somewhere between X and N.X. In this case,

1 ≤ U ≤ N

Umax = N

Now let us consider the case where no jobs move out of the home country. In this case 1 job staying in

the country will come at the expense of potentially N jobs in the other country (opportunity cost).

Therefore X jobs staying in the home country prevent N.X new jobs from being created in other

country/countries, i.e., ∑ Benefits = X and ∑ Harms = N.X. If U’ is the utility in this case,

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1/N ≤ U’ ≤ 1

U’max = 1

An important point to note in this case is that the maximum utility is attained for the least opportunity

cost, i.e X jobs being retained at home at the expense of X potential jobs in the other country. However,

we know from the discussion earlier economic disparity actually creates room for more jobs to be

created in other countries which allows businesses to scale up operations, a factor that makes job

migration such a lucrative option for businesses.

Umax / U’max = N

Clearly, outflow of jobs takes the utility up. Since a lot of host countries are also some of the most

populated ones, there is big room to amplify the utility. High supply of potential employees far

exceeding the demand allows businesses to have a handle on salaries and therefore hire in big numbers

with the same budget (i.e. control N). Another factor working in the favor of utility maximization is high

number of countries with low cost of living (85% of the world population lives in developing countries [4]).

Thus, offshoring of jobs is a correct course of action.

A note on Pareto efficiency

Let’s further assume 1 job is definitely created in host countries at the expense of 1 job lost from the

home country. This leaves a possibility of further (N-1 ) jobs being added to host countries without the

loss of any extra jobs from the home country. This is due to previously discussed economic disparity.

This makes the whole distribution Pareto efficient – making one party better off without making anyone

else worse off.


Rawls’ Theory of Justice says that in case of social and economic inequality resource distribution should

be performed so that the least advantaged of the society receive maximum benefit. This is also called

Maximin principle.

Clearly the people in host countries are at an economic and social disadvantage when compared to

those in home countries. For instance, minimum wage in China varies between 80-208 USD/month[5]

while the federal minimum wage for US is 7.25 USD/hour which would amount to 1160 USD/month for

a 160 hour month[6].

[4] - http://www.worldbank.org/depweb/english/beyond/global/glossary.html

[5] - http://en.wikipedia.org/wiki/List_of_minimum_wages_in_People's_Republic_of_China

[6] - http://en.wikipedia.org/wiki/Minimum_wage_in_the_United_States

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It can be argued based purely on justice as a virtue that migration of jobs from developed countries to

developing countries is justified. This justice attains more meaning when expanded playfield is

concerned and therefore nationalism doesn’t stand in the way of justice.


John Locke’s Theory of Natural Rights states that everyone is entitled to create or gain through gift or

trade as long as it does not interfere with someone’s life and liberty. Robert Nozick expanded this idea in

his Theory on Entitlement by stating that existing distribution of resources is j ustified if everyone is

entitled to the holdings they possess under the distribution. He also added that state shouldn’t try to

alter the distribution produced by free and voluntary exchanges and should rather try to protect rights

of people to exchange goods.

For our analysis we shall consider a job to be same as a house on rent. Employer in this case is the

owner of the house and employee, the tenant. Just like the owner of the house has right to pick his

tenant, in the same way employer has the right employ anyone in the job. If the owner is not satisfied

with the tenant, he can always look for another tenant and ask the existing one to move out; same for

the employer-employee engagement. This change, however, has to happen in a legitimate way

according to terms prescribed in the contract agreed between the two parties. Therefore, in the case of

expanded playfield, migration of jobs can be considered nothing more than mere changing of tenants.

Since all the exchanges are taking place legitimately, the new distribution is justified. In other words,

migration of jobs is justified. Also, the government should do everything possible to make the process

smoother and also protect the rights of employers to undertake this migration act.

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Conclusions

Offshoring has certainly led to businesses becoming more efficient. It has led to big shrinkage of costs

which has ultimately led to goods and services becoming cheaper for everyone around the world.

Computer hardware is one prime example.

Offshoring has also led to increased prosperity of the people in developing countries. For instance, China

is currently placed second on the list of countries with highest GDP, US being the first [7]. Big chunk of this

growth is a result of consumer spending and strong export. In 2000, 36% of the population was earning

less than 6000 USD/year. By 2020 this number is expected to shrink to 7% (Mckinsey & Co)[8].

It may be argued offshoring creates unemployment. However, numbers show that despite large scale

migration of jobs the unemployment rate in US actually dipped a bit and stayed around 5.5% for 2

decades (1983-9.6%, 1988-5.5%, 1993-6.9%, 1998-4.5%, 2003-6%, 2008-5.8%)[9]. This trend is attributed

to the role of small and medium enterprises. In US the companies that offshore jobs aren’t the biggest

job creators back home (only 2% from 1990-2008). Despite this they made up for the layoffs. In the

period from 2000-07, offshorers hired more than they laid off in this period, according to a study

conducted by Nobel-winning economist Michael Spence [10].

Based on all the facts above in conjunction with the ethical analysis in the previous sections, it can be

stated that offshoring is the right strategy for businesses to pursue.

[7] - http://en.wikipedia.org/wiki/List_of_countries_by_GDP_(nominal)

[8] – http://goo.gl/4nvYX (McKinsey report)

[9] - http://www.bls.gov/cps/prev_yrs.htm

[10] - http://money.cnn.com/2012/09/14/news/economy/outsourcing-jobs/index.html

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Recommendations

Bigger playfield has meant businesses now need to be more responsible toward return on all 3

bottom lines. To ensure this, stronger government regulation is needed.

Businesses around the world should start looking at Creating Shared Value which is about

integrating societal improvement into economic value creation itself. This will ensure return on

the 3 bottom lines will not remain just peripheral aim of businesses but will have to become

deeply embedded in the overall business strategy.

Government regulation that discourages companies from setting up offshore units or

outsourcing jobs need to weaken. Offshoring leads to more efficiency, cheaper goods and

services and prosperity in developing countries.

Since small and medium enterprises are key to keeping unemployment levels low, government

regulation on setting up small and medium enterprises need to lessen. Venture creation needs

to be incentivized using favorable tax schemes and lower bureaucracy.

Ethical Defense of Job Migration Due to Offshoring

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