Can you apply comparative advantage theory to business outsourcing?

Yes.

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Yes, comparative advantage theory can be applied to business outsourcing. Comparative advantage is a principle in economics that states that countries (or businesses) should specialize in producing goods or services for which they have a lower opportunity cost and trade with other countries (or businesses) for goods or services they have a higher opportunity cost in producing.

In the context of business outsourcing, companies can utilize comparative advantage by outsourcing certain tasks or functions to external providers or offshore locations where they have a comparative advantage. Here's how you can apply comparative advantage theory to business outsourcing:

1. Identify the tasks or functions: Start by identifying the specific tasks or functions within your business that can be outsourced. This could include IT support, customer service, payroll processing, or manufacturing, among others.

2. Evaluate internal capabilities: Assess your company's internal capabilities and resources for each task or function. Consider factors such as expertise, cost of production, available technology, and efficiency.

3. Research external options: Investigate potential outsourcing partners or offshore locations. Look for countries or service providers that have a comparative advantage in the specific tasks or functions you want to outsource. Factors to consider include cost, quality, infrastructure, language proficiency, and cultural compatibility.

4. Analyze cost and benefits: Compare the costs and benefits of outsourcing each task or function. Calculate the savings from outsourcing against the potential risks and drawbacks. Consider aspects such as labor costs, logistics, communication, and potential loss of control.

5. Make strategic decisions: Based on the analysis, make strategic decisions regarding which tasks or functions to outsource and to whom. You may consider outsourcing tasks where the external provider or offshore location has a clear comparative advantage, leading to cost savings or improved quality.

6. Manage the outsourcing relationship: Establish clear contracts, performance metrics, and communication channels with your outsourcing partner. Regularly monitor and evaluate the outsourcing arrangement to ensure it continues to align with your business goals and objectives.

Applying comparative advantage theory to business outsourcing can help companies focus on their core competencies while leveraging external expertise and cost advantages. However, it is essential to carefully evaluate the potential benefits and risks before entering into any outsourcing arrangement.