What Are Some of the Advantages and Disadvantages of Producing Goods Overseas Using Inexpensive Labor?

One of the most compelling reasons U.S. companies outsource production labor overseas is to save money. While the cost reduction can affect profitability, this strategy does have several tangible and intangible drawbacks. Among them are the obstacles to importing the finished goods and the potential public backlash over working conditions and labor laws in other countries.

The cost of labor in less developed countries, such as India and China, is much lower than minimum wages in the U.S. By taking advantage of this disparity, An American company can boost its gross profits and its bottom line.

When an American business outsources labor in this way, it has less control over the operations taking place, which can potentially lead to lower product quality and delays. American companies also face potential backlash when the working conditions in foreign manufacturing facilities are poor. So-called "sweat shops" employ workers at low wages and force them to work long days in miserable conditions. In some cases, they even employ young children. The negative publicity from a connection to such a facility is hard to overcome. There are additional costs related to overseas production that somewhat offset lower labor rates. For example, the business must transport the finished goods back home, which involves shipping costs and tariffs.