The Ethics of Offshoring Research Paper

Outsourcing and offshoring are two means by which a business can reduce its costs, and these tactics can also have strategic advantages as well. However, they also typically come at a cost, in particular to workers in industrialized nations. Offshoring in particular has become a political issue as well, cited as a reason for the decline of the middle class. This paper will look at these related issues through a number of different ethical lenses.

Outsourcing is the process of hiring a third party firm to perform tasks that were once performed in-house. Offshoring is the moving of a business function to another country. The processes that are driving globalization — the regionalization of production, trade agreements, dramatically improved global communication networks — have also led to increase in offshoring in particular. Outsourcing’s growth is similarly related. Many business functions are so routine that there is no need for in-house specialization; outsourcing routine functions can allow for resources to be focused more on core business competencies where a firm can generate competitive advantage.

Most businesses treat outsourcing and offshoring as strictly strategic decisions, guided by either operating considerations or by financial ones. However, any change to a business has its costs, and there is a specific human cost when a firm sheds jobs, or moves jobs overseas. There are macro-level ethical considerations to offshoring in particular, because a company that built its business in its home country is ultimately harming that country by offshoring jobs elsewhere. That represents an outflow of capital, and that outflow has consequences, driving down worker wages, lowering living standards and lowering quality of life in the company’s home country. The globalization of business has only exacerbated the tensions that arise between the ethical obligations of managers to shareholders, workers and communities. This paper will explore the issues of outsourcing and offshoring from a variety of ethical perspectives, analyzing the different arguments for and against outsourcing and offshoring, to seek to determine what ethical obligations, if any, exist for corporate entities and the people who run them.

Ethical Dilemma

Any given business has multiple stakeholders, people who rely on that business for something. Shareholders are the most-discussed stakeholder, largely on the basis of Milton Friedman’s argument that the only duty a manager has is to the company’s shareholders (Friedman, 1970). Friedman’s argument rests on the idea of agency theory. The shareholders invest their money into a corporation seeking a financial return, based on the principle of perfect economic rationality of shareholders. The shareholders hire the board of directors to hire managers who can deploy organizational resources (initially, share capital) to the pursuit of returns. The manager, therefore, must focus all energy and effort to seeking superior economic returns.

Friedman’s argument has been both lauded and criticized, on a number of its tenets, including the viability of agency theory under law (Denning, 2013). Critics point out that shareholders are not the only people who add to the business — others have a stake, too. Workers are among the major stakeholder groups. On the surface, it can be argued that workers provide their labor, and that they are compensated for that labor. But the relationship between workers and their employers is more complex. Workers are asked to provide a certain amount of loyalty — few work for a new company every week. They also build lives around their employment. Mortgages, leases, schools and other aspects of life are not as easy to change as one’s employment, thus there is disparity in the stake an employee has to his/her employer compared with the stake an employer has to any one employee. Related to this is the idea that companies are also members of their communities, and that a community often has a stake in the company. A clear illustration of this can be found with the recent offshoring of work by Carrier illustrates this. Carrier had received tax credits to manufacture in Indiana, but after taking this money offshored thousands of jobs to Mexico (Tonelson, 2016). The investment in the company in this case was direct and financial, but the point of the tax credit was to keep jobs. There is a multiplier effect, especially with high-wage jobs, so communities make a specific point to entice and attract businesses. There are more people who will be affected by this particular offshoring that just the 2100 workers and their families –entire communities and the taxpayers of the United States all have stakes in companies and thus all suffer from the loss of that stake when a company moves offshore.

There are more than three main stakeholder groups, but even with just three it is clear that there are going to be instances where there is a conflict between the interests of the different stakeholder groups, and offshoring usually involves one or more conflict points. These conflicts therefore reflect an ethical dilemma, as company management must determine the degree to which the company will pursue the interests of one group over another. This fits with the definition of ethical dilemma because the agent in the case of offshoring — and to a lesser extent outsourcing — will offend their obligation to at least one party by virtue of either acting or not acting. There is no decision that fulfills the needs of all stakeholders, hence the ethical dilemma (McConnell, 2014).

Leadership Implications

The ethical dilemma exists in offshoring situations because of confusion about agency for corporate leadership. Some doubtless find it easy to argue away non-financial obligations, falling back on the Friedman argument. That argument, however, is not accepted by the mainstream. Indeed, many in our society feel that there is some degree of obligation to workers, because most people can see their own dependency on employment and understand the reality of losing one’s job. Globalization makes it easy for jobs to move around the world, but it is not particularly easy for people to do so. It is possible, though not without difficulty, to relocate within a country. But most people do not have the ability to move themselves to follow the work. People cannot re-train themselves for new professions easily, either. And few have the ability, upon losing their jobs, to simply retire and not worry about finding more work. Most within our society can recognize the disparity between the ease with which a company can offshore a job and the ease with which a worker can make that same transition.

For the leader, the decision to offshore cannot simply be one of math. As many moral standards as exist in this world, the pure pursuit of economic gain above all other obligations is not a commonly-held moral belief system. Milton Friedman’s view has its fans, but they are not the majority of any society. People typically hold a much broader set of values. Even when the pursuit of wealth is desirable, the pursuit of wealth is not the only moral virtue. The leader, therefore, has to bear that in mind. Agency theory is tenuous enough — anything predicated on the assumption that humans have perfectly pure economic rationality is mythological in nature — but in the real world there are few people who genuinely believe in economic rationality as a virtue. Where there are other values, there are going to be people for whom the costs of an offshoring decision are not acceptable.

Complicating matters for the leader as well is the reality that a lot of the costs associated with offshoring are impossible to quantify, and of course that the company does not have to pay those costs. Workers who lose their jobs suffer in many ways — their families suffer. Even if that suffering could be quantified, the leader who signs off on an offshoring plan is creating that suffering. That suffering is not going to be felt by the leader, and it is not necessary offset by gains made by other people. In a world with national boundaries, gains made in one country are not viewed as offsets to losses in another country. The leader can see one giant world, because the leader has the ability to move resources around that world. For people who lack such mobility, the world is not just one big place, and they are therefore not able to find remedy for their suffering. They have done nothing to deserve the suffering, either, as offshoring decisions are seldom about any given individual’s performance, but are rather about forces much bigger than the people who lose their jobs.

What this means is that, inherently, there will always be some sort of ethical dilemma in an offshoring system. The leader cannot alleviate all suffering — not offshoring has its own consequences, and can also lead to profit and job loss. The leader therefore needs to find the right balance, in particular regarding the ethics of the situation. Whether the leader takes a Kantian or utilitarian perspective, however, the conflict will still be impossible to resolve, and the leader will still need to create…

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