Bpo-Comparative Advantage V. Competitive Advantage

1.1 Comparative Advantage Theory

The comparative advantage theory was first put forward by David Ricardo in 1815. It actually supplanted Adam Smith's long standing theory of absolute advantage after nearly 50 years Smith put forward his idea in his path breaking book Ð''An Enquiry Into The Wealth Of Nations'. David Ricardo's theory of Ð''comparative advantage' provides an alternative perspective to the economics of international trade. It suggests that the governing principle of international trade is based on the comparative and not the absolute advantage of prices. If a certain good of a country fetches a better price in another than in the home country then that country is said to have a comparative advantage in producing that good. Thus according to the theory a country may actually gain by trading even those goods which its trading partner can produce cheaper. Thus if each country specializes in producing those goods in which it has a comparative advantage then more goods will be produced and consequently the wealth of both the buying and selling nation increases. In fact Ricardo explained the theory using the example of wool in Britain and wine in Portugal.

The basic principle behind Ð''comparative advantage theory' is that of specialization. Thus, even if a country is inefficient in producing both goods and its trading partner is more efficient in producing both the goods, still that particular country stands to gain by producing the good in which it has a comparative advantage.

Though, like we earlier said that Ricardo's theory has been the guiding principle for international trade for the last two centuries, it has come under scrutiny in modern times. Economists have started to question the applicability of Ricardo's theory to modern day economic trades that have started to take place. Foremost amongst them is outsourcing, a topic that has been a cause cÐ"©lÐ"Ёbre for the past few years. Here, we must remember that outsourcing is not a very recent phenomenon and but has gained much limelight attention due to the rampant shifts in jobs from developed to developing countries. This shift of jobs has led to much public outcry in the developed country.

With the word outsourcing, nowadays what we have mostly come to associate is Business Process Outsourcing or BPO and call centers in India. The veracity of such assumptions will be discussed later in this paper but nevertheless one must concede that BPO is one of the leading areas of outsourcing today.

Taking an economic approach to the phenomenon of BPO, one may try to explain it on the basis of the Ð''comparative advantage theory as put forward by Ricardo. Indeed, many economists of the classical school have explained the rise of BPO using this principle. Thus as we see in the explanation of the theory, according to the theory, if a particular thing is outsourced or traded away to some other country, it must be replaced by something better than it.

1.2 Flaws in the explanation of BPO using the Ð''comparative advantage theory'

There have been a few basic flaws which have been pointed out by modern economists to the explanation of BPO or for that matter any sort of outsourcing on the basis of the Ð''comparative advantage theory.' Some of these are as follows;

1. The theory of Ð''comparative advantage' rests on the basic presumption that capital, labor and technology cannot move offshore. The theory was propounded nearly two centuries ago, when this could be taken to be a very reasonable assumption and therefore there was no harm in actually developing the theory around the basis of this assumption, which is exactly what Ricardo did. However, in the context of modern day markets of services and modern globalized international trade, this assumption is no longer so infallible. Thus it becomes very clear that in that case one may never apply the theory of Ð''comparative advantage' to explain BPO or for that matter any other outsourcing process by this principle when such processes actually violate the most basic and fundamental assumptions of the theory.

2. Another criticism that has been lined up against the application of the theory of Ð''comparative advantage' to explain the rise of BPO is that unlike what the classical school economists applying in Ricardo's theory say about the job shift being temporary, the modern economists say that the job shift is indeed permanent as is seen from several statistical data.

3. The third criticism is basically an extension or rather an explanation of the second one. According to Ricardo's theory, once the jobs have moved out from the parent country they will be replaced by better jobs. However, what actually takes place is a chain reaction which is not very unlike to that of one taking place in a nuclear reactor. In a nuclear reactor, one nucleus of fissile material is split externally which releases a neutron which consequently splits the other nuclei and thereby maintains the reaction, making it self sustainable and as a result produces energy. Analogically, one can say that lower costs in the country to which the work is outsourced is the chain initiator in the process of outsourcing. What follows is a transfer of jobs from the parent country