Is it ethical or economical that the

US. Companies are moving their

factories to underdeveloped
countries for cheaper labor cost?

Prepared By :
Name : Mohammad Tareq Aziz
Id : 103 0472 030
Course : ENG 105

Prepared For:
Ms. Nasreen Rahman [NnR]
Senior Lecturer
North South University
Date : 26-07-2015
Abstract
This paper is designed to assess the empirical evidence regarding the effects of
multinational production on wages and working conditions in developing countries. It is
motivated by the controversies that have emerged, especially in the past decade or so,
concerning whether or not multinational firms in developing countries are exploiting
their workers by paying low wages and subjecting them to coercive, abusive, unhealthy,
and unsafe conditions in the workplace. Most of the people believe in the entrance of
foreign companies are so appreciable for the host country. But it’s right when they pay
the labor wages in a fair amount. Unless and until this fair wage payment system, it’s
unethical. But economy supports this movement of factories as it’s an efficient
allocation of resources. So, the U.S. companies who pay fair wages to the laborers are
truly helping the host country by creating a mutual benefit relationship.

Introduction
Low-cost country sourcing (LCCS) is procurement strategy in which a company sources
materials from countries with lower labor and production costs in order to cut operating
expenses. LCCS falls under a broad category of procurement efforts called global
sourcing. (Wikipedia, LCCS) The process of low cost sourcing consists of two parties. The
customer and the supplier countries like US, UK, Canada, Australia, and West European
nations are considered as high cost countries (HCC) whereas resource rich and regulated
wage labor locations like China, India, Indonesia, Bolivia, Brazil, Russia, Mexico, and East
European nations are considered low cost countries (LCC). In low cost country sourcing
the material (products) flows from LCC to HCC while the technology flows from HCC to
LCC. Not necessarily all "low cost countries" are destinations for LCCS. Only those
countries with relatively stable politic and economic environment, modern
infrastructure and acceptably compatible legal system are considered to be ideal for
sourcing. Examples and most popular regions are China, Indonesia, Thailand, Vietnam,
Malaysia, Ethiopia, India, Ukraine, Romania, Bulgaria, Mexico, Bolivia, Cambodia,
Hungary and Czech Republic. (25 January, International Business Times).

A 2011 report from the U.S. Commerce Department says that “about a 33% of the 31
million U.S. employees of multinational firms work abroad to support their factories and
manufacturing administration”.(Wall Street Journal) U.S. diversified her operations into
developing countries of Asia, Africa, Latin America and Caribbean because of grabbing
less paying options compared to home employees. Now, ethics is something that really
doesn’t work with the economics. To economics this issue is more concerned about an
efficient allocation of resources rather than ethics. But it’s become rigidly unethical if
the employees are being paid under the fair wages.

Objective of the Study

Here, we are going to find out the real scenario of the U.S. companies who apply world-
wide hiring employees to cut down their labor cost by moving or relocating the factory.
The objective of this research paper will tell us about the debate between the ethical or
economical practices. Moreover, this movement helps the host country when it involves
fair wages for all employees.

Participant Profile
There are 30 male and 15 female participants participated. They were employees and
managers of U.S. companies, economists and lawyers. All of them were questioned face
to face, using e-mails, calling them in telephone. There are some public questionnaire
too who are well known about this issue. But, some employees and managers may be
didn’t answered all the questions honestly and hiding some data which were recovered
in mu data analysis part.

Research Methodology
I will take public opinion, especially of employees and managers with a questionnaire of
ten questions. I will collect sources from different economists and lawyers from the
internet and the library. I will take interviews of those employees and managers. The
data collected will be presented in graphs, charts, tables and diagrams.

Questionaire
1. Which types of U.S. companies are moving their factories to underdeveloped
countries?
2. Is the tendency level of the movement of U.S. companies to underdeveloped
countries is higher or moderate or low?
3. What benefits are conveyed to the host country from accepting this movement?
4. What are the costs generated from such movements of foreign factories?
5. How efficiently the movements of factories work positively for their companies?
6. Is there are any cultural or social influences for both the country and company?
7. How does it influence on the job market of host country?
8. Are the employees getting the right wages?
9. Who are affected more by this low wage?
10. Is there any legal action the host country can take against the home country
factories?

Data Analysis
Question Number 1
Which types of U.S. companies are moving their factories to underdeveloped countries?

The report examines the different types of companies for recent times based on Foreign
Direct Investment (FDI).

Here the service sector is the highest by taking 30% of total FDI. Then telecom,
computer and real estate sector is 12%. After these, construction, automobile, power
and metallurgical sectors stand with respectively 10%, 7 %, 6% and 5%. Finally,
petroleum and chemical sectors cover the same by 3%.

The total 100% is mostly covered by service sectors.

Question Number 2

Is the tendency level of the movement of U.S. companies to underdeveloped countries

is higher or moderate or low?
This graph shows the tendency level of the movement of foreign companies based on
the increasing rate of FDI over 1990 to 2008 between Africa and Developing Economies.

At first, in 1990 both were nearly 5%. After 2 years, it increased to 5% exactly for both of
them. Then in 1994 both the African and Developing economies were raised slightly to
7%. Long after six years in 2000 the developing economies increased to 15% while the
African economies increased slightly to 10%. In 2006the African economy reached 26%
increase in FDI and Developing economies stays at 13%. At the final year 2008
Developing economies remain same and African economies at 23%.

So, in 2008 they both reached at their highest growing tendency.

Question Number 3

What benefits are conveyed to the host country from accepting this movement?
This bar charts examines the gross fixed capital formation for developing nations and
developed nations between 1992 to 2005.

From 1992 to 1997 the growth of developing nations are 8% while developed nations
are 4%. The next year both increased slightly but still the developed nations are below
developing nations by 3%. But the second next year the developed nations growth
increased to 17% when developing nations growth is 14%.Then from 2003 again the
growth of developing nations increased by 4%. Moreover it leads by 5% in 2004 and
2005 than the developed nation growth.

Except in 2000, the growth of developing nation is more than the developed nation
growth. And the growth is highly visible in recent years of 2003, 2004,2005 and so on.

Question Number 4

What are the costs generated from such movements of foreign factories?
In this pie chart, the percentage of job losing sectors because of the movement of
foreign companies.

The highest job losing sector is manufacturing and it’s 27% of all job losers. Then, in
construction sector slightly less than the highest. It’s 26%. The retail business service
sectors loss 9% both. Finance & Insurance sector losses 7%. After that, wholesale trade
and information sectors loss 6 % both. Finally,

government, transport and real estate sectors loss respectively 4%, 3% and 3%.

However, FDI costs the host country’s manufacture and construction job by half of the
whole job losers.

Question Number 5

How efficiently the movements of factories work positively for their companies?
This report examines the FDI and it’s growth from the previous year for United States,
China, Hong Kong, France, Belgium, Britain, Russia, Singapore, Brazil, India, Mexico,
Turkey, Thailand and Japan.

United States earned nearly 200 billion from FDI and it increased 43% from previous
year.Then China earned 100 billion. Hong Kong and France are slightly over 50 billion
where Belgium earned exactly 50 billion. But all the rest of the countries earned below
50 billion. Japan earned lowest by 2 billion.

Here we see that United States and china and other more countries earned successfully
from reshoring factories to underdeveloped country.

Question Number 6

Is there are any cultural or social influences for both the country and company?
Country code Country FDI Inward Index Uncertainty Trust
Avoidance
SWE Sweden 8.50 29.00 62.89
BRA Brazil 2.0 76.00 4.63
BAN Bangladesh .10 60.00 20.91
IND India .20 40.00 36.65
USA United States 2.30 46.00 43.50

This table shows the social and cultural influences by the foreign companies of
Bangladesh, Sweden, Brazil, India and United States.

Swedish companies got the lower chance of uncertainty of 29.0 and got the highest
trust of 62.89 points. Here, Brazilians got lowest trust (4.63) and highest uncertainty
(76.00). For United States both the components are near e.g. uncertainty 46.00 and
trust 43.50. Then India has 40 points of being uncertain and gained the trust of 36.65
points. Bangladesh got trust of 20.91 points and 60.00 points in uncertainty.

So, Brazilian company would influence negatively and Swedish company would
influence positively on the host country.

Question Number 7

How does it influence on the job market of host country?

This report shows the number of FDI projects and number of jobs created from them in
between 2003 and 2010.

In 2003, number of new FDI projects are 300 and those created 130 new jobs. Then the
number of projects increased to 350 for total created job of 200. But in 2006 new 984
FDI projects were taken which created the highest job amount of 450. After that again
971 new FDI taken but it created only 320 new jobs. In 2009 and 2010, near 750 new
projects were taken but created only 200 in both years.

So, as the FDI projects increase the number of job increase too.

Question Number 8

Are the employees getting the right wages?

This report examines the percentage of workers receiving an offer for the number of
employees between the majority of earning high wage and majority of earning low
wage.

Among 2-9 employees 54% is earning high wage and 19% is earning low wage.Again,
when the number of employees are 10-24 37% of them is earning low wage while 79% is
earning high wage. Among,50-99 employees 27 million earn low wage and 53 million
earn high wage. But for 100+ employee 51.6 million earns high wage while only 19.0
million earn low wage.

So, receiving an offer gets more lucky as the range increase.

Question Number 9

Who are affected more by this low wage?

This report tells us the difference between male wage and female wage in different
provinces of India.

Here, In Himachal Pradesh the difference between the male and female wage is the
lowest and which is 5.7 units. But, in Sikkim the difference get bigger slightly so the male
are paid 14 units more than a female. Again, in Meghalaya and Chhattisgarh the
difference is near 17.5 units. But, in Bihar the difference is the highest and a female is
paid 42.5 units less than a male worker. Besides, medium high differences are seen in
Delhi (43.7 unit), Assam (43.9units), Haryana (38.8 units) and Uttar Pradesh (34.1 units).

FDI affected less the female manufacture wage in Himachal Pradesh but highest at
Bihar.
Question Number 10

Is there any legal action the host country can take against the home country factories?

This scatter diagram examines the ratified labor standards based on four regulation
systems with their own index under national values or fitted values.

For Civil Rights Regulations, national values and fitted values match more closely. But
for National Employment Regulations the national values differ from the fitted values.
By the Collective Relation Regulations and Social Security Laws, the national values and
fitted values averagely scatter from one another.

Civil Rights Regulations are the proper law or legal actions that the host country can
follow.
Secondary Data Analysis and Presentation

FDI TECHNOLOGY SPILLOVER AND ECONOMIC GROWTH

In the past two decades, FDI flows have increased to unprecedented levels and have
become one of the major sources of financing for many countries in the world. The
world Bank definition of foreign direct investment is the acquisition of “a lasting
management interest (10 percent or more of the voting stock) in an enterprise
operating in an economy other than that of the investor.” Due to the relative
stability and long-run commitment to the firm, FDI is perceived as the type of capital
that entails the greatest amount of direct and indirect benefits (spillovers) for the host
economy.

FDI AND INEQUALITY

While the evidence for the impact of FDI on economic growth is mixed, there are also
other channels through which FDI could have an impact on the host country. Specifically
there is a strong potential for FDI to impact income patterns within the domestic
economy. According to neo-classical economic theory the addition of new capital and
the increases in knowledge brought about by the presence of foreign producers should
lead to higher productivity of labor. This in turn should lead to higher wages since wages
reflect the productivity of labor. Moreover with labor mobility, as workers move from
foreign to domestic firms, they carry with them the knowledge they acquired and that is
now embodied in them. Therefore labor productivity can increase in the entire
economy. Thus there is a potential for wage increases to spillover to other sectors of the
economy. Even if the technology is not directly embodied in the workers, the spread of
disembodied ideas regarding new organizational and production methods and the
higher levels of capital in the economy should increase the productivity of labor and
therefore wages throughout the economy.

Recommendations/Suggestions
The finding of a significant negative association between wages and the flow of FDI
emphasizes the importance of questioning the distributional consequences of FDI. The
link between FDI and wages cannot be assumed to be positive or at worse, neutral, as
the productivity-based analysis in economic theory would indicate. So, the U.S.
companies who move their factories to underdeveloped country for cheap labor cost
isn’t unethical but economical. To me, maintaining the pay scale or even without
maintaining the scale properly the underdeveloped countries should let the U.S.
companies perform their procurement. Without just wage there are some more issues
that a host country should take care while there is FDI. Such issue is maintaining good
health of BOP (Balance of Payments), Resources and technologies etc.

Conclusion
This paper has argued that multinationals and FDI into emerging markets generally have
a number of important effects on host countries, with some of these effects specific to
FDI in financial services. Some effects are associated with changes in
allocative efficiency, technology transfer and diffusion, wage spillovers, institution
building, macroeconomic cycles, and overall economic stability. In brief, research
concludes that FDI is typically associated with improved allocative efficiency. This
improvement can occur when foreign investors enter into industries with high entry
barriers and then reduce local monopolistic distortions. The presence of foreign
producers may also induce higher technical efficiency: the increased competitive
pressure or some demonstration effect may spur local firms to more efficient use of
existing resources. FDI also is associated with higher rates of technology transfer and
diffusion, and higher wages. While there is evidence of technological improvements
from FDI, and a presumption that FDI will consequently stimulate economic growth, the
strength of these effects is disputed. Higher wages also are induced by FDI into host
countries, although sometimes these wage effects are limited to the foreign-owned
production facilities and do not spillover more broadly. Institutional change is another
potential implication of FDI. At least in the context of FDI in financial services, the
outcome is in the direction of improved regulation and supervision. Sometimes these
improvements occur with a lag, as supervisors in host countries may be initially
unprepared for evaluating the new products and processes introduced by foreign
entrants. FDI can also play a role in non-crisis and crisis macroeconomic conditions.
Foreign banks are pro-cyclical lenders in emerging markets. Domestic privately-owned
banks also are pro-cyclical lenders, so the presence of foreign banks does not aggravate
the boom-bust cycle in lending and international capital flows. Foreign entrants may
introduce a more diversified supply of funds, in principle leading loan supply to be less
procyclical but also more sensitive to foreign fluctuations. Foreign bank entry into
emerging markets reduces the incidence of crises, but enhances the potential for
greater 18 contagion through common lender effects. The contagion issue is reduced
when foreign banks have a stronger subsidiary presence, as opposed to supporting local
markets through cross-border flows.

References

Appendix