Comparative Advantage of Outsourcing and the Legal Risks

January 23, 2012

The theory of law of comparative advantage as proposed by David Ricardo postulates that law of economics supports production of goods in a country which produces goods in a more efficient way by using lesser amount of resources.

The Ricardinan theory in this regard can be said to be founding pillar of the ongoing globalization and outsourcing business which is based on cost effectiveness and efficiency.
It would be useful to know the comparative advantages of outsourcing and whether the countries engaged in outsourcing are acquainted with the legal risk involved in outsourcing.

Advantages of Outsourcing
According to A. R. Samson. author of Fence Sitter, law of comparative advantage is an either-or proposition. If a coffee shop decides to offer cakes and pastries to go with their brew, it decides on the basis if it is cheaper to bake the pastry themselves or outsource it to a bakeshop and carry out only quality control, consistency, and a negotiated price? The theory of greater efficiency is either due to lower labor cost (as in China) or economies of scale.

The basic idea behind outsourcing is if you can get a service at a cheaper rate, avail that to maximize efficiency, for instance, its beneficial for US where the cost of recycling is $20 per computer to send its recyclable good to India where the cost is as low as $2 per computer.

If we look at the service sector, developed countries with their high tax rate cannot provide services at a cheaper rate, while the same kind of work is done at a cheaper rate in a developing country with its usually vast unemployed resources.

Legal Risks involved in outsourcing
While from an economic point of view outsourcing opens up economically advantageous avenues for the employers and producers, outsourcing brings with it a considerable amount of legal risk. What can be those legal risks?

Compliance requirement in manufacturing sector
This caveat goes specially for the producers outsourcing the manufacturing job. Though its true that cheap labor is easily available in developing nations but its important to ensure that an outsourcer is not paying the wage which is below the minimum wage rate.

Most of the countries these days have stringent labor law, for instance, Indian Minimum Wages Act, 1948 provides for the minimum wages for workers employed in factory, shops or establishment which an employer needs to follow.

There are other laws as well, with regard to work condition, recently there was a fiasco regarding the work condition of workers working in India for GAP, a cloth manufacturing company based in abroad.

An outsourcer should ideally get an idea about the local laws of the service providing country so as to avoid any legal complication.

Compliance requirement in service sector
Service sector deals basically with data provided by the outsourcers which range from personal information to legal and health care information, depending on the type of outsourcing, whether it is business process outsourcing, knowledge process outsourcing.

For protection of such personal data, most of the countries have provided for data protection law. Among all the countries, EU is known to have the most comprehensive and one of the oldest stringent data protection law, joining the league are developing countries such as Malaysia, India who recently enacted such law.

Again, an outsourcer needs to know the laws its business and the data related to it would be subject to before indulging in the act of outsourcing.

Outsourcing though has its own commercial advantage, it brings with itself a new set of legal risk, knowing the law with respect to outsourcing is the best solution to counter those risks.
Keep an eye on this space to know more about the legal issues related to outsourcing.


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