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Fragmentation
In economics, fragmentation means organization of production into different stages, which are divided
among different suppliers often are located in different countries. Products traded between firms in
different countries are often components rather than final products. Final products may be sold to outside
the region in which fragmentation happens: for example, East Asian countries often sell their final products
to Europe and the USA. Producers in less developed countries operate in positions within a production chain
which add less value to final product. Their challenge is to "climb upwards" on the transnational production
chain. Production chains are often vertical hierarchies in which big multinational companies may be those
who sell final products and set production standards for "lesser" producers. This kind of fragmentation is an
important part of contemporary globalisation.
Suppliers do not have to be in the same geographical region. Often, less-developed nations (e.g., some Asian and
Latin American countries), where labour is plentiful and inexpensive, and produce components. The offshoring
production typically occurs with affiliates or independent suppliers and manufacturers.
Companies fragment to produce goods in a more cost-effective manner. Globalisation and improved technology
have paved the way for fragmentation, as it becomes increasingly cheaper and easier to source, ship, and track
goods as they travel from place to place.
Fragmentation is often associated with globalization as companies seek to use suppliers who are the most cost-
effective, even if those companies are located abroad. Firms research the components needed to finish a good and
the potential suppliers available; then, the cheapest places to source and assemble parts of the finished item are used.
Fragmentation is common in the electronics, transportation (e.g., automotive and airplane manufacturing), and
apparel industries. In 2016, the largest suppliers of intermediate goods to the US were Canada, China, Mexico, and
Ireland. Logistically, Mexico and Canada are favourable choices as transportation costs are lower. In addition, their
participation in the NAFTA grants them duty-free access.
Example of Fragmentation: For example, an airplane has parts that are sourced and assembled across many parts of
the world. Not only does the metal have to be acquired, but larger items, such as electronic systems, also must be
assembled.
An airplane may have its wings manufactured in Germany with metals from Africa, its electronics created in Japan with
chips made in China, glass in China, and seats assembled in Mexico with textiles and thread from India. Suppliers and
manufacturers ship the components to the United States, put together, and sold as the final product.

Outsourcing and Trade

Outsourcing: The practice of having certain job functions done outside a company instead of having an in-
house department or employee handle them; functions can be outsourced to either a company or an
individual. Outsourcing has become a major trend in human resources over the past decade.
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Outsourcing has always been an option for companies, since it is simply the decision to obtain services from
outside a company. In 1989 it was formally identified as a business tactic and linked with international trade
as it became synonymous with the practice of sending work overseas.

In the 1990s, companies began to take a more serious look at cost saving initiatives to improve their
financial performance and thus the outsourcing boom began. Organizations realized functions that were
important but not central to business operations, in such areas as accounting, human resources, data
processing and software development, could be contracted to companies located in geographies with lower
employee overhead. By sending this non-core work overseas, organizations could reduce the amount of
money spent on these tasks and reinvest it into other areas of the business.

This model has driven the growth of the outsourcing industry and the recognition of its benefits for
international trade and global economic growth. In 2019, outsourcing contracts are expected to generate
US$ 600 billion in revenue globally. That would represent roughly 13 % of global trade in services, which was
estimated at US$ 6.5 trillion in 2019. The information technology outsourcing industry is expected to
continue growing at a 5.84 % during 2019.
In the beginning, outsourcing was dominated by Indian-based companies, such as HCL, Infosys and Tata
Consultancy Services, that leveraged a highly educated, local and inexpensive workforce. These firms
ramped up into multimillion dollar (and eventually multibillion dollar) operations in a relatively short period,
prompting multinational companies like Accenture, Capgemini and IBM to invest and create centers to
support outsourcing contracts as well. These contracts grew in size and scope to support clients across
multiple geographies and myriad services.

Additionally, as the outsourcing industry has grown to support multinational clients, the outsourcing vendors
and new market entrants have created centers and jobs in other low-cost geographies like the Philippines,
Eastern Europe and Latin America. Local centers provide additional language capabilities, technology
capabilities or time zone support often required by clients to meet service level agreements (SLAs) that
dictate the support an outsourcing company will deliver.

Outsourcing is significant not only for international trade and the global economy but for national
economies, as well. As outsourcing companies build centers in more diverse locations around the world to
better serve their multinational clients, those operations require local investments in infrastructure and
facilities. From sourcing materials to employing skilled professionals to building facilities, the upfront spend
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can be sizeable, with an impact on local economies. Once operations are in full swing, employees generate
salaries in local currency, paid by an international parent company, which provides an influx of disposable
income into the local economy.

For their part, governments in developing and emerging economies around the world have for several years
been encouraging the development of local outsourcing start-ups, as well as competing with other nations
to be chosen as hubs by multinational vendors. They look to the success of India, where the local information
technology sector born of outsourcing now employs some 3.5 million and has helped grow the middle class.