Offshoring

From Academic Kids

Offshore may refer to oil and natural gas production at sea, see oil platform.


Offshoring can be defined as relocation of business processes (including production/manufacturing) to a lower cost location, usually overseas.

Offshoring can be seen in the context of either production offshoring or services offshoring. After its accession to the WTO, China emerged as a prominent destination for production offshoring. After technical progress in telecomunnications improved the possibilities of trade in services, India is a country that tries to focus on this domain.

Contents

Frequently used terms

Offshoring is sometimes contrasted with outsourcing and offshore outsourcing which may impliy that a third party service provider takes over the business process and runs them based on service level agreements. Definitions of these terms are not clear and vary over time.

Other related terms are nearshoring which also implies relocation of business processes to (typically) lower cost locations, but in close geographical proximity (e.g. shifting US bases business processes to Canada/Mexico); inshoring, which means picking services within a country; and bestshoring, picking the "best shore" based on various criteria. Business Process Outsourcing (BPO) refers to outsourcing arrangements when entire business functions (such as IT, Customer Service, etc) are outsourced.

Production offshoring

Production offshoring involved relocation of physical manufacturing processes to a lower cost destination. Examples of production offshoring included manufacture of electronic components in Taiwan, production of apparels, toys, consumer goods in China, etc.

Production Offshoring got its big push when the NAFTA made it easier for manufacturers to shift production facilities out of USA. The trend later shifted to China which offered cheap prices through very low wage rates and economics of scale.

Services offshoring

The growth of Services Offshoring is linked to availability of large amounts of reliable and affordable communication infrastructure following the telecom bust of late 90s. Coupled with digitization of many services, it was possible to shift the actual delivery location of services to low cost locations in a manner theoretically transparent to end-users.

India benefited from the trend as it has a large pool of English speaking and technically qualified manpower. India's offshoring industry took root in IT functions in 1990s, and has since moved to back-office processes such as call centers and transaction processing, as well as high end jobs such as research & development, equity analysis, etc.

Other offshoring destinations are Philippines, Ireland, Argentine and Eastern European countries.

Transfer of Intellectual Property

Offshoring is often enabled by the transfer of valuable information to the offshore site. Such information and training enables the remote workers to produce results of comparable value previously produced by internal employees. When such transfer includes protected materials, as confidential documents and trade secrets, protected by non-disclosure agreements, then intellectual property has been transferred or exported. The documentation and valuation of such exports is quite difficult, but should be considered since it comprises items that may be regulated or taxable.

Debate

Offshoring has been a controversial issue with heated debates. On one hand it is seen as benefiting both the origin and destination country through free trade. On the other hand, job losses in developed countries has sparked opposition to offshoring. Some critics agree that both sides will beneifit in terms of GDP and numbers of jobs created, but argue that the subjective quality of the new jobs will be less than the previous ones, or that a small percentage of careers are greatly upset in exchange for wider-spread benefits to others whose careers are not directly impacted.

The topic of free trade contains related debates.

Effects of Factor of Production Mobility

According to classical economics, the three factors of production are land, labor, and capital. Offshoring relies heavily on the mobility of two of these factors. That is, how offshoring effects economies depends on how easily capital and labor can be repurposed.

The effects of capital mobility on offshoring have been widely discussed. In microeconomics, a corporation must be able to spend working capital to afford the initial costs of offshoring. If the state heavily regulates how a corporation can spend its working capital, it will not be able to offshore its operations. For the same reason the macroeconomy must be free for offshoring to succeed. Generally, those who favor offshoring support capital mobility, and those who oppose offshoring call for greater regulation.

Labor mobility also plays a major role, and it is hotly debated. Most theories that argue that offshoring eventually benefits workers assume that workers will be able to obtain new jobs, even if they have to obtain employment by downpricing themselves back into the labor market (by accepting lower salaries).

The last factor of production, land, is generally believed to have little or no mobility potential.

History

In the United States, moving jobs out of the country began in the 1970s and continued throughout the eighties. It was characterized primarily by the closing of factories, frequently with the corporations opening new factories in Mexico. Many of these new factories were called Maquiladoras.

In 1994 NAFTA went into effect. As concerns are widespread about uneven bargaining powers, and risks and benefits, negotiations are often difficult, such that the plan to create a Free Trade Area of the Americas has not yet been successful.

With the development of the internet, many new categories of work such as call centres, computer programming, reading medical data such as X-rays and MRI's, medical transcription, and income tax preparation can be offshored.

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