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Day 9 – Q 3.What is outsourcing? Why do businesses outsource their functions? How does it affect the economy of a region? Analyse with the help of suitable examples.

3. What is outsourcing? Why do businesses outsource their functions? How does it affect the economy of a region? Analyse with the help of suitable examples.

आउटसोर्सिंग क्या है? व्यवसाय अपने कार्यों को आउटसोर्स क्यों करते हैं? यह एक क्षेत्र की अर्थव्यवस्था को कैसे प्रभावित करता है? उपयुक्त उदाहरणों की मदद से विश्लेषण करें।


  • Introduction shall contain the meaning of outsourcing
  • Body has two parts. One, the reasons as to why businesses outsource their functions and two, analysis of how outsourcing affect economy using examples
  • A suitable and relevant conclusion


Outsourcing is the business practice of hiring a party outside a company to perform services and create goods that traditionally were performed in-house by the company’s own employees and staff.

Business activities that are outsourced include information technology (IT), human resources, customer support and call centre services and at times also manufacturing and engineering.


Businesses outsource their functions in order to:

    • Cost reduction: To reduce labour costs significantly. Businesses can also avoid expenses associated with overhead, equipment, and technology.
    • companies can employ an outsourcing strategy to better focus on core aspects of the business
    • Outsourcing non-core activities can improve efficiency and productivity because another entity performs these smaller tasks better than the firm itself.

  • Gaining access to world-class capabilities.

  • Gives flexibility in staffing, manpower and management.
  • Availability of skills like skilled staff with good English in India.

Outsourcing has resulted in the opening of large number of business activities in developing nations like India, China, Eastern Europe, Philippines etc. Thus, it has affected both the countries which have been outsourcing like developed countries and the countries which accept outsourcing.

    • Employment: The countries which outsource like the US and Europe experience loss of employment while the countries like India, China etc gain employment opportunities. For instance, opening up of large number of call centres in developing countries has created large employment opportunities.

  • An international convergence of incomes: Outsourcing has been characterized by rapid rates of growth and industrialization in the Global South. Conversely, the Global North has experienced a moderate slowdown in growth.

    • Urbanisation: Rates of urbanisation has been higher in developing countries. For instance, expansion cities like Bengaluru, Pune, Hyderabad etc. in India.
    • Trade: Outsourcing emerged with a new wave of globalization marked by high volumes of trade and capital flows.
    • Levelling of inequality: Outsourcing has contributed to further levelling of global inequalities as it has led to general trends of industrialization in the Global South and deindustrialization in the Global North.
    • Multiplier effect: it promotes other related industries and services to grow. As IT sector grows cities expand due to an increase in population in turn gives rise to new form of employment opportunities due to opening up of restaurants, entertainment businesses etc.
    • Technology transfer: new age and modern technologies like Artificial Intelligence, Cloud computing etc are getting developed in countries like India because of blooming IT industry.

  • Skill development: skills of people residing in developing countries get upgraded. Especially for people involved in Knowledge Processing Outsourcing (KPO).

At the same time, outsourcing has certain negative impacts on the overall economy.

  • Exploitation of labour in certain cases like use of child labour in use of Pakistani children for stitching footballs in Sweatshops.
  • Environmental pollution: poor environmental laws in developing countries gives rise to increased levels of pollution due to industries defying laws.
  • Uncontrolled urban growth causing problems like increase in slum populations etc.

The rise of Bengaluru on the global map is largely due to presence of companies who have utilised the opportunities out of outsourcing, this has led to increased levels of employment, enhanced skill development, technology transfer etc.. At the same time has created problems like environment population, increased traffic mess, slums etc.


Outsourcing brings opportunities to the developing countries like India along with that it brings out its own set of challenges which needs to be tackled by the policy makers.

Best answer: P29

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