Offshoring – Definition
When a business process is relocated between two countries, it is called ‘offshoring’. This is an operational process in fact, for example, the process of manufacturing or accounting, supporting, etc. Generally, this term is used for company business, though the government of the country can also use offshoring. Nowadays, it is mainly linked with the outsourcing of admin and technical services including national as well as international operations outside the homeland. This is named as ‘Offshore Outsourcing’ with the help of delivery model sources which can be captive means internal or outsourcing means external.
A Little More on What is Offshoring
Offshoring term can be used in many different but closely connected ways. It is widely used to include a service alternative from a foreign service source once generated internally to the company. Sometimes, it just includes imported services from closely linked suppliers or subsidiaries. Moreover, the problem is that the intermediate goods, like half completed PCs, do not include under the head of this term, consistently.
Most commonly, offshoring is used in the sectors of production and services. In 2001, after the accession of offshoring to the WTO (World Trade Organisation), China became an eminent destination for offshoring in the production sector. Other main areas include the software industry being a part of international software development and designing international information systems. The technical development in the telecommunication sector made the chances of trade in services better. So, India emerged as an eminent destination for this type of offshoring. Today, there are a number of regions of the world becoming an offshore destination.
The economic reason is to decrease costs, known as Labour Arbitrage sometimes and to make the corporate profitability better. In the destination country (normally a country of low-cost labour), jobs are added to ensure the provision of products or services, but in the country of high-cost labour, jobs are subtracted. The government / the taxpayers or the company involved in offshoring, in the country of high cost, may absorb the higher protective net costs of the jobless. Europe had less offshoring as compared to the United States because of strategies that implemented more costs to cultural barriers and corporations.
Classical Economics states that there are 3 factors of production, i.e. capital, land and labour. Offshoring highly depends on the mobility of 2 of these factors. This is how offshoring has an impact on economies is dependent on how conveniently labour and capital might be repurposed. The land is normally considered as a factor of production, having less or no potential of mobility.
The impacts of capital mobility related to offshoring have greatly brought under discussion. In microeconomics, a corporation has to use working capital for bearing the original offshoring costs. If the government highly regulates how a large company can utilize working capital, it cannot use its working capital. On the same lines, macroeconomy has to be free for offshoring to get success. Normally, people who support offshoring also favour capital mobility and people who are against offshoring call for more regulation.
Labour mobility has a great role, too and it is under hot discussion. With the emergence of PCs and the internet, electronic work became portable. In the services sector, the free market forces led to international mobility of the work. Most of the theories which argue offshoring are, ultimately, beneficial for domestic workers. They can get new jobs, no matter they have to down price themselves (accepting low wages) to the labour market in order to get a job or they can retrain themselves for a new field. Foreign employees get benefits from new employment and more wages when work is there.
Labour scholars criticise offshoring on the point that international labour arbitrage results in unethical activities related to employees’ exploitation with less job security and unfair working conditions.
In this developed era, shifting manufacturing jobs outside the country dates to a minimum the 60s whereas shifting knowledge service employments offshore dates to the 70s and still continues. It was basically featured by shifting factories to the developing countries from the developed ones. This offshoring is a reason of a structural switch in the developed countries from a society of the industrial sector to the post-industrial sector.
The diminishing costs of communication and transportation cut through huge disparities on wage rates evolved offshoring from richer countries to the ones less wealthy financially viable for several companies in the 20th century. Moreover, the development of the internet, especially fibre optic ILHC (Intercontinental Long Haul Capacity) and WWW (the World Wide Web) minimized Costa of transportation for various types of data work nearly zero.
With the emergence of the internet, several new types of work are being offshored, for example, computer programming, medical transcription, call centres, income tax records, X-Rays, title searching and the magnetic resource imaging, etc.
Before the 90s, Ireland was considered as the poorest country in the European Union. Due to comparatively less corporate taxes of Ireland, the United States campaign started offshoring of intellectual, electronic, software and pharmaceutical property for the purpose of export to Ireland. It caused a boom in high technology and Ireland became one of the richest European Union countries.
The NAFTA (North American Free Trade Agreement) got into effect in 1994. Since there is widespread of risks & benefits and unfair bargaining powers, negotiations are mostly hard. So, the policy to develop free trade regions (e.g. Free Trade Area of the Americas) is still not successful. The offshoring of professional work, also called knowledge work, sharply moved up from the United States in 2005. It lessened the growing problems of threat for unemployed persons.
References for Offshoring
Academic Research on Offshoring
• Offshoring: the next industrial revolution?, Blinder, A. S. (2006). Foreign affairs, 113-128. The economists who are of the view that offshore outsourcing is only a routine extension of global trade are neglecting how great transformation it can bring and how important the results can be. The societies and governments of the developed countries should begin preparing and quick.
• Trading tasks: A simple theory of offshoring, Grossman, G. M., & Rossi-Hansberg, E. (2008). American Economic Review, 98(5), 1978-97. Most of the global trade was done as an exchange of complete products for centuries. But with the latest developments in technology, communication and transportation, it highly implies various countries enhancing value to the international supply chain. The authors present a new concept of the international production process that stresses on tradable tasks. Its cost reduction can create shard gains.
Getting offshoring right., Aron, R., & Singh, J. V. (2005). Harvard business review, 83(12), 135-43. Half of the companies that have transferred processes offshore are not successful in getting the expected financial gains. 3 part methodology is helpful, i.e. (1) companies should rank their processes (2) the companies should keep in sight the operational risks of offshoring. (3) companies need to determine their offshore locations. This paper helps the companies in selecting the right processes considering these 3 points.
Offshoring in a knowledge economy, Antràs, P., Garicano, L., & Rossi-Hansberg, E. (2006). The Quarterly Journal of Economics, 121(1), 31-77. The authors propose a theory in which the heterogeneous agents are assigned, hierarchical groups. The less professional agents have specialisation in production. More professional agents have specialisation in problem-solving. The globalisation develops wage inequality in the Southern countries, but not essentially in the northern ones. It affects the global economy.
Offshoring without guilt, Venkatraman, N. V. (2004). MIT Sloan Management Review, 45(3), 14. Minutes. In this research, the author explains with examples and diagrams the concept of offshoring without quilt.
Productivity impacts of offshoring and outsourcing, Olsen, K. B. (2006). This paper is a survey of the statistical analysis of the offshore outsourcing, skill upgrading and the productivity impacts therein. There are no clear patterns of the ways offshore outsourcing influences productivity. However, some indications show the impacts of positive productivity. In the manufacturing concerns, increasing effects of productivity are smaller than in the services sector.
Offshoring: Value creation through economic change, Farrell, D. (2005). Journal of Management Studies, 42(3), 675-683. Companies should take offshoring not being an economic threat but being an important chance for their traders and consumers. Instead of controlling offshoring, businesses should devise effective labour policies. Optimizing international production will definitely lead to fewer costs. It will lower the prices and increase purchasing power as well as new job opportunities.
Explaining job polarization: Routine-biased technological change and offshoring, Goos, M., Manning, A., & Salomons, A. (2014). American Economic Review, 104(8), 2509-26. This study addresses the spread of job polarisation in sixteen Western European states for the year 1993 to 2010. It then presents a structure to elaborate job polarisation with the help of a routine biased change in technology and offshoring. This paper splits it into within and between the industry elements.
Why are companies offshoring innovation? The emerging global race for talent, Lewin, A. Y., Massini, S., & Peeters, C. (2009). Journal of International Business Studies, 40(6), 901-925. This research statistically examines the determinants of business decisions regarding the activities of offshore innovation. The authors make a survey to check the effect of past experience, managerial intentions and environmental factors on its probability. The results depict the shortage of professional engineers and scientists in the United States. So, the addition of qualified employees is a significant factor for innovation decisions of offshoring. Businesses are in a worldwide talent race.
Offshoring in the new global political economy, Levy, D. L. (2005). Journal of Management Studies, 42(3), 685-693. This paper is a challenge to the claims of the economists that offshoring is a form of trade with shared benefits. The author says that the reduction in salaries by offshoring can create wealth for the traders but not, essentially, for employees and the countries. There should be an international commodity market of specific skill set and transfer of workers, firms and countries in balanced market power.
Smarter offshoring., Farrell, D. (2006). Harvard business review, 84(6), 84-92. In selecting a location for offshoring, the businesses should focus less on wage rates and more on other things that the candidate states are able to accomplish their business needs. They should evaluate their needs on different dimensions and try to understand how substitute areas can fulfil those requirements for an expected future.
Beyond offshoring: assess your company’s global potential., Farrell, D. (2004). Harvard business review, 82(12), 82-90. Now, the businesses know very well that they can cut down the costs with offshoring and shifting employment to areas of low wages. In this paper, the authors present a step by step methodology to check where the industry lies in the globalisation spectrum. This is because, at the same time, all sectors of the economy do not have the same issues and opportunities.
Offshoring work: business hype or the onset of fundamental transformation?, Lewin, A. Y., & Peeters, C. (2006). Long Range Planning, 39(3), 221-239. This study contains the findings of the ORN (Offshoring Research Network) that brings into consideration the offshoring of technical as well as admin work to countries of the lower cost. The offshoring grows fast. However, as soon as becomes widespread, it changes the way of organizing the industrialized economies of higher cost to compete internationally. Offshoring can be a sign of more basic transformation including many developing forces.