Considering Labor Costs in Foreign Expansion

by Guest Blogger Nick Rojas

Ever since the National Science Foundation ended its sponsorship of the “NSFNET Backbone Service” on April 30, 1995 any remaining restrictions on using the Internet for commercial purposes were lifted. This resulted in a revolution for many industries, especially those focused on information and communication.
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All of a sudden, you did not have to go to the local library to look up information on subjects you were researching. You also no longer had to contact newspapers and magazines to issue job postings.

What was happening on a local level would soon cross international borders and connect entire workforces, industries, and populations. Outsourcing labor and expanding export and import infrastructures soon became a trending topic for an increasingly connected, global society of the 21st century.

Why Outsource?

The U.S. and large parts of Europe underwent massive economic growth in the second half of the 20th century. With all the growth, however, came the increase in local labor and energy costs.

This was one of the main reasons why many Western corporations began to invest into production facilities in foreign markets, where labor costs were comparatively low and where they could give local economies a boost.

Made in China

One of the nation’s becoming most popular during this era was China, which made a name for itself by offering high productivity at low wages – as low as 100$ a month for non-skilled labor in Chinese factories. The “Made in China” label, to this day, is synonymous with cheap manufacturing labor, as opposed to, for example, the equally famous “Made in Germany” (representing high quality engineering).

Even though China is a Communist country, it was able to build a capitalist economy integrated into the World market. This, however, combined with the increased exposure to Western standards and philosophies among the Chinese population – due to the Internet – has in recent years led to many demonstrations and a generally more pressing uprising of the Chinese labor force against corporations and the government, echoing what Europe went through during its Industrial Revolution in the 19th century.

So while China is still a cheap manufacturing market, investments into the nation’s cheap labor force are becoming increasingly risky considering the latest political developments, which are only now gaining momentum and will continue to raise awareness as the rest of the world learns more about the situation.

India – a Valuable Tech AllyNick2

If China is known for cheap manufacturing labor and Germany for first class engineering, then India is the nation that offers the highest density in talented software developers and other computer-based services.

There are two main reasons for this, the first one being that not only colleges, but Indian companies also invest into technology-related education of young adults. Secondly, since India’s industrial infrastructure is still catching up to Western standards, the chances of landing a job in the mechanical, electrical, or chemical fields are low. In addition to that, many American and European companies are increasingly outsourcing software-related labor to the Indian market, so this trend is not going to change anytime soon.

While China is struggling with an increasingly difficult political situation, an interesting synergy is starting to develop between Western and Indian people. The latest generation of entrepreneurs of companies like Facebook, Uber, and WhatsApp consists largely of Millennials, the first generation that grew up with access to the Internet.

Their exposure to global information and cultures has turned them into a tolerant, curious, and cosmopolitan generation. For Millennials, globalization is not a new development, but status quo.

As a result, they don’t see their Indian counterparts as just another source for cheap labor, but as potential partners who share the same passion and interest – technology. So while wages in India are still much lower – an experienced programmer in the U.S. makes up to $200 an hour, whereas Indian developers charge closer to $20-30 an hour – this growing “partnership” between generations and nations will have an impact on Indian labor costs, especially in the area of software development.

Other Markets

China and India have certainly become very popular for their outsource-friendly workforce, but South America and Africa are going to be interesting to watch over the next few decades as the United States is making significant investments into their local infrastructure, renewable energy, and banking system.

Conclusion

It might seem like commercial Internet has been around forever, but it has really only been around for two decades. Considering the massive impact on the global marketplace it has already had, it is clear that we will see dynamics shifting between foreign markets over the course of the next century, and labor costs will be one of the most important factors to watch.

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Nick Rojas is a business consultant and writer who lives in Los Angeles and Chicago. He has consulted small and medium-sized enterprises for over twenty years. He has contributed articles to Visual.ly, Entrepreneur, and TechCrunch. You can follow him on Twitter @NickARojas,. or you can reach him at NickAndrewRojas@gmail.com.

Tell the truth about free trade

By Jerry Haar

Two of the leading contenders in the presidential race, Donald Trump and Bernie Sanders, disagree on almost every policy issue except one — trade. Both regard NAFTA and the proposed Trans-Pacific Partnership (TPP) as “disastrous.” Trump excoriates American companies for investing in Mexico and threatens hugely punitive taxes on their exports to the United States. Sanders claims TPP will benefit only big corporations and Wall Street.

South Floridians should be especially concerned about the candidates’ positions since trade is so vitally important to our economy. Any honest discussion of the impact of free-trade agreements will conclude that these accords produce mutual benefits.

Every nonpartisan assessment of NAFTA demonstrates convincingly that marginal benefits (output, employment) exceed marginal costs. The trilateral agreement (United States, Canada, Mexico) links a market of 450 million people and a collective GDP of $21 trillion.

Both Trump and Sanders cite negative employment effects, runaway plants and trade imbalances as proof of the evils of trade agreements. They’re wrong. To begin with, trade agreements are not intended as job creators or job destroyers.

They are merely liberalizing accords that strip away the barriers to cross-border commerce, finance and investment so that companies and entrepreneurs can do business efficiently and allow consumer choice at affordable prices.

Technology, not trade agreements, is the principal source of labor reduction. While it is true that this country runs a $53-billion deficit with Mexico in its $534-billion trade relationship, this pertains to merchandise trade only (which includes oil). In services and agriculture, the United States produces surpluses with Mexico.

NAFTA-bashers should also note that 80 percent of Mexico’s imports come from the United States versus 20 percent of China’s, and that those imports are overwhelmingly high value-added manufactures, often produced by AFL-CIO members.

As for lower-value goods such as apparel, shoes and produce, poor people and those on fixed incomes are grateful beneficiaries of Mexican imports.

About jobs and factories moving to Mexico: Donald Trump constantly harangues Ford Motor Co., a firm with a long history of investment in that nation, but seems unaware that global automobile companies, including Nissan, Mazda, Kia, Mercedes-Benz and BMW, are serving the fast-growing Mexican market and European markets — not just the United States — given that Mexico has 40 free-trade agreements versus 20 for the United States.

Most important, Mexican auto plants are mainly involved in assembly operations, with most inputs imported from the United States.

Let us not forget that inward bound foreign investment supports more than 6 million U.S. jobs, one-third in manufacturing; and average salaries are 33-percent higher than the national average.

Mexico’s investment of over $30 billion is led by manufacturing, banking and wholesale trade. Elektra, Alfa, Cemex, Bimbo, Gruma, Herdez, Bochoco, Mexichem and Cinépolis are among the leading Mexican multinational firms invested in the United States.

Messrs. Trump and Sanders need to be reminded that their states (New York and Vermont, respectively) continue to benefit from NAFTA. New York, the No. 4 exporter of U.S. goods to Mexico, sold nearly $3 billion of manufactured products into that market last year — a 235-percent increase since the accord was implemented.

Vermont’s exports have grown 454 percent since NAFTA, 63 percent of which consist of sophisticated manufactured goods. Florida has seen a 194-percent jump in exports to Mexico since 1994, the majority consisting of high-value manufactures.

As the tragicomedy of the 2015-2016 election season plays out, falsehoods, hyperbole and mean-spirited attacks among contenders will proliferate. The issue of trade (along with illegal immigration) will be the proverbial whipping boy in this contest.

While the contenders choose not to be fully informed of the facts, there is no excuse for individual citizens not to be.

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Jerry Haar is a business professor at Florida International University and a Global Fellow of the Woodrow Wilson International Center for Scholars in Washington, D.C. He is also a research affiliate at Harvard University’s David Rockefeller Center for Latin American Studies.

Licensing in India – Should it be restricted or promoted?

I am teaching a course on International Business here at Georgetown University. This Spring, we have concentrated on writing editorials on international business and trade issues. All my students have written and handed in one editorial dealing with an issue of their concern. I was very impressed by their work, particularly since these young tigers, as we call them here, are the ones ascending in their societal position. They will be the ones running their family’s firm, electing the next government, and deciding what their aging parents should do. So to my mind, their opinions matter.
Take a look:

By Nicole Colarusso

The two words “royalty restrictions” are not as attention-grabbing as “terrorism” or “nuclear war.” Yet they have sparked a royal debate in India. For many years, the country’s licensing rules constrained international companies. According to The Economic Times, India’s outgoing royalty payments for technology transfers were limited to 5% of domestic sales and 8% of exports. These restrictions were lifted in 2009. India’s Department of Industrial Policy and Promotion wants to re-impose the constraints. This attempt is blocked by India’s Ministry of Finance. Doing so is a prudent decision. Indian government officials should endeavor to preserve and promote free licensing in the future.

The opposition argues that an absence of royalty limits would cause a great increase in financial outflows from India. As a result, local businesses would lose money. The Indian current account deficit would grow. Tax revenue would decrease, and Indian licensees would become dependent on foreigners.

Free royalty flows are important. India already has a difficult business environment. The nation’s bureaucracy has burdened businesses with immense paperwork and petty inspections. A World Bank press release bemoans the country’s “inefficient transportation, notably roads, maritime services, and ports.” Licensing, by allowing citizens to take advantage of technology and processes that have already succeeded, provides a way for local entrepreneurs to bypass inefficient business activities. Restrictions would decrease foreign direct investment and stunt local economic growth.

Foreign businesses and entrepreneurs would benefit from free licensing as well. It enables companies to speed up market penetration, test out business environments, and become familiar with other cultures.

A decrease in investment could also negatively affect India’s trade balance. The Wall Street Journal acknowledges that annual outgoing royalty payments have almost tripled from $1.7 billion in 2009. But, the deregulation will have long-run positive effects on the balance of payments. Gains from international licensors will enable foreigners to purchase more Indian goods, thereby creating a larger demand for Indian exports.

Royalty limits could also hurt the people of India. Licensing provides Indians with the skills and knowledge to use advanced products, services, and processes. Technology transfer can substantially increase the competitiveness of local companies, particularly in industries such as pharmaceuticals where licenses can be more valuable than capital. Consumers’ exposure to high-tech, revolutionary items can substantially improve their lives. For instance, Microsoft’s presence in India has significantly increased local access to computers. If licensing becomes less attractive to investors due to restrictions, Indians would have fewer opportunities to learn about new products.

Finally, there is the matter of unemployment. According to a 2013 International Labour Organisation report, only 21.1% of Indian working men had steady, salaried jobs. Decreased licensing could intensify an already pressing issue. Also, multinationals that currently license heavily in India, such as IBM, Nestlé, and Unilever, could decide to focus their energy on other countries. Corporations looking to begin licensing abroad may be deterred from starting future large-scale projects on the subcontinent.

Free licensing is an engine for growth. Limits on outgoing royalty payments could have long-term negative consequences for India. There can be a time and a place for restrictions, but Indian officials should show that it is neither here nor now.

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Nicole Colarusso HeadshotNicole Colarusso is a sophomore studying international business and finance at Georgetown University.

This editorial was published in Ovi Magazine on 24 April 2015.
Congratulations! Outside validation is always good.

A Philippine perspective of YOLO

Ireene Leoncio studied at Georgetown University and for two years served as my research and teaching assistant. Ireene worked in the advertising and media industry in New York City but is now back home in the Philippines. She is currently a Professor at De La Salle University Manila.

In this TEDx talk, Ireene explains her version of YOLO and FOMO. She goes on to talk about how her experience as a fish feeder and teaching assistant in this University inspired her to go back home and feed young minds.

Watch it here:

 

Lift the Ban on U.S. Oil Exports

I am teaching a course on International Business here at Georgetown University. This Spring, we have concentrated on writing editorials on international business and trade issues. All my students have written and handed in one editorial dealing with an issue of their concern. I was very impressed by their work, particularly since these young tigers, as we call them here, are the ones ascending in their societal position. They will be the ones running their family’s firm, electing the next government, and deciding what their aging parents should do. So to my mind, their opinions matter.

Take a look:

This editorial was published in the Sri Lankan Guardian on 27 March 2015.
Congratulations! Outside validation is always good.

 

By Nels Guloien

The 1970s ban on the export of US crude oil is a policy issue that must be reexamined and repealed by Congress. This ban, created through the Export Administration Act of 1979, which prevents the export of US-pumped crude oil, is outdated, uneconomical, and inhibits growth of the US economy. The US government should allow firms to export US crude oil because the act no longer serves its intended purpose, and exports would be beneficial to businesses and consumers alike.

The ban on crude oil exports was a major step towards American energy independence. In the 1970s, the US had been hit by the oil embargo of 1973, caused by the Organization of Oil Exporting Countries (OPEC). As Blake Clayton of the Council on Foreign Relations argues, this supply-shock was exacerbated by the fact that the US had decreased domestic oil production in 1970 and consequently drove up the price of gasoline, so Congress enacted the ban to ensure that domestic oil would be available for American consumers. While this was a vital step in securing energy independence at the time, the threats that led to a reliance on imports have since diminished, as illustrated using data from the US Energy Information Administration. First, as of December 2014, monthly domestic crude oil production was 286,003 thousand barrels, compared to the 223,494 thousand barrels imported during the same period. This means that the US can satisfy much of its oil demand using domestic sources, which reduces the risk of international shocks similar to the 1973 crisis. Second, Canada and Mexico, two close trading partners and members of the North American Free Trade Agreement, are the source of 56% of the US’s total crude oil imports; whereas the OPEC countries are the source of only 35%. This distribution shows that the risks of trade with OPEC are much less than in the 1970s, because even if an embargo occurs or trade barriers are enacted, then the US still has secure relationships with its North American allies who will continue to import oil, in addition to the high levels of domestic production. Finally, the US now has the Strategic Petroleum Reserve maintained by the Department of Energy, which holds enough crude oil to sustain approximately 154 days of total imports: if the US is unable to import oil, then these reserves will be used to sufficiently alleviate the reduced supply. Moreover, while crude oil reserves one important part of energy security, they may become less relevant as alternative sources of energy are developed such as solar and wind energy technologies. Therefore, the ban on crude oil exports is no longer needed to protect US energy independence because other factors are now at work.

Repealing the ban would also be beneficial to American firms involved in the exploration, extraction, refining, and transportation of crude oil. There has already been significant investment in oil production across the US, especially recently in the Eagle Ford and Bakken shale deposits. If firms were able to export crude oil, long-run production would rise to meet the increased demand from foreign consumers, such as China, India, Japan, and the European Union, who currently import oil from more volatile OPEC nations. As Jason Bordoff of Columbia University writes in the Wall Street Journal, American oil producers have a proactive interest to seek higher profits through export because crude oil fetches a higher price abroad than in the US. This can be shown through the spread between the West Texas Intermediate (WTI) and the Brent crude oil benchmarks. The WTI benchmark is calculated using prices of crude oil refined near the Gulf Coast of the US and represents the domestic price of crude oil, while the Brent benchmark is calculated using prices from offshore oilfields in the North Sea and represents the international price of crude oil: both are similar, but because WTI crude oil has less sulfur content, it has historically traded at a premium to Brent. However, due to the oversupply of oil in the US, Brent now trades at a premium to WTI, thus creating an opportunity for domestic firms to capture pricing inequalities through exports. If firms are allowed to export crude oil, more workers will be needed in the oil industry and in supporting industries as well, thus providing new job opportunities for many Americans. In fact, the American Petroleum Institute estimates that oil exports would create 72,000-220,000 new jobs per year. Firms will need to become more efficient in order to compete with foreign companies, especially the refineries that are only prepared to processes lower-quality imports, according to Bordoff. This will be beneficial because it will support comparative advantage and will encourage the American firms to invest domestically in order to improve production technology. This will be particularly beneficial for refiners, because the increased investment and technology will allow them to refine the crude oil in the US and export higher-value petroleum products. Therefore, repealing the ban will increase production, promote job growth, and encourage investment and competitiveness.

Exporting crude oil would also be beneficial for both American and international consumers. Higher export volumes of US crude oil will decrease the international prices and raise domestic prices, as the surplus of American oil floods onto the international market. However, as the US Energy Information Administration showed in a report, US consumer gasoline prices are highly correlated to Brent crude oil prices, so the increasing international supply due to exports would lower Brent prices and allowing American gasoline users would save at the pump. Lower gasoline prices would also allow US consumers to have more disposable income, with which they could purchase other products that would otherwise be unavailable. Not only would oil exports help consumers, but intermediaries as well: the logistics, airline, and freight industries would benefit from lower gasoline prices. Therefore, lifting the ban on crude oil exports would help consumers and other oil users, which would increase spending and improve economic growth across the world.

Why should we care? If the export of crude oil continues to be prohibited by the US government, then it will continue to burden the economy through higher fuel prices and consistent unemployment. The US must seize this opportunity to take advantage of its energy security, size of the domestic oil extraction and production industries, and the meaningful training and education in the men and women exploring, extracting, shipping, and refining US crude oil. It takes time to repeal important legislation through Congress, such as this ban on oil exports, so it needs to start now. The risks of failing to act are severe; in failing to repeal this bill, we fail the 2.6 million Americans directly employed by the oil and natural gas industry, as estimated by PwC, in addition to the countless others who benefit from its continued prosperity and job creation. It is not just in our interests, but in our duty to ensure that this legislation is repealed.

In short, the ban on American crude oil exports must be repealed for the sake of the nation and its citizens. Export controls are no longer a major factor in America’s securing energy independence, nor does the geopolitical environment need such extreme nationalist measures. Exporting oil would increase production and revenue for domestic firms, in almost every aspect of the oil industry, and would thus create new jobs. Finally, oil exports would decrease international prices, reduce costs for consumers and businesses, and enable increased spending in the global economy. In the interests of the American and international consumers, businesses, and economies, Congress should allow the export of US-pumped crude oil.

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Nels Guloien is a sophomore at Georgetown University’s McDonough School of Business, majoring in Finance and International Business.

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