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Offshoring

Offshoring

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Offshoring describes the relocation by a company of a business process
Business process
A business process or business method is a collection of related, structured activities or tasks that produce a specific service or product for a particular customer or customers...

 from one country to another—typically an operational process, such as manufacturing, or supporting processes, such as accounting. Even state governments employ offshoring. More recently, offshoring has been associated primarily with the sourcing
Sourcing
In business, the term word sourcing refers to a number of procurement practices, aimed at finding, evaluating and engaging suppliers of goods and services:*Global sourcing, a procurement strategy aimed at exploiting global efficiencies in production...

 of technical and administrative services supporting domestic and global operations from outside the home country, by means of internal (captive) or external (outsourcing) delivery models.

The term is in use in several distinct but closely related ways. It is sometimes used broadly to include substitution of a service from any foreign source for a service formerly produced internally to the firm. In other cases, only imported services from subsidiaries or other closely related suppliers are included. A further complication is that intermediate goods, such as partially completed computers, are not consistently included in the scope of the term.

Offshoring can be seen in the context of either production offshoring or services offshoring. After its accession to the World Trade Organization
World Trade Organization
The World Trade Organization is an organization that intends to supervise and liberalize international trade. The organization officially commenced on January 1, 1995 under the Marrakech Agreement, replacing the General Agreement on Tariffs and Trade , which commenced in 1948...

 (WTO) in 2001, the People's Republic of China
People's Republic of China
China , officially the People's Republic of China , is the most populous country in the world, with over 1.3 billion citizens. Located in East Asia, the country covers approximately 9.6 million square kilometres...

 emerged as a prominent destination for production offshoring. After technical progress in telecommunications improved the possibilities of trade in services
Trade in services
Trade in Services refers to the sale and delivery of an intangible product, called a service, between a producer and consumer. Trade in services takes place between a producer and consumer that are, in legal terms, based in different countries, or economies, this is called International Trade in...

, India
India
India , officially the Republic of India , is a country in South Asia. It is the seventh-largest country by geographical area, the second-most populous country with over 1.2 billion people, and the most populous democracy in the world...

 became a country leading in this domain though many parts of the world are now emerging as offshore destinations.

The economic logic is to reduce costs. If some people can use some of their skills more cheaply than others, those people have the comparative advantage
Comparative advantage
In economics, the law of comparative advantage says that two countries will both gain from trade if, in the absence of trade, they have different relative costs for producing the same goods...

. The idea is that countries should freely trade the items that cost the least for them to produce.

Frequently used terms


Offshoring is defined as the movement of a business process done at a company in one country to the same or another company in another, different country. Almost always work is moved because of a lower cost of operations in the new location. More recently, offshoring drivers also include access to qualified personnel abroad, in particular in technical professions, and increasing speed to market. Offshoring is sometimes contrasted with outsourcing
Outsourcing
Outsourcing is the process of contracting a business function to someone else.-Overview:The term outsourcing is used inconsistently but usually involves the contracting out of a business function - commonly one previously performed in-house - to an external provider...

 or offshore outsourcing
Offshore outsourcing
Offshore outsourcing is the practice of hiring an external organization to perform some business functions in a country other than the one where the products or services are actually developed or manufactured. It can be contrasted with offshoring, in which the functions are performed in a foreign...

. Outsourcing is the movement of internal business processes to an external company. Outsourcing refers to the process by which an organization gives part of its work to another firm and makes it responsible for most of the applications as well as the design of the enterprise business process. This process is done under restrictions and strategies in order to establish consistency with the offshore outsourcing organizations . Many companies nowadays outsource various professional areas in the company such as e-mail services, payroll and call center. These jobs are being handled by other organizations that specialize in each sector allowing the off-shoring company to focus more on other business concerns . However, subcontracting in the same country would be outsourcing, but not offshoring. A company moving an internal business unit from one country to another would be offshoring or physical restructuring
Physical restructuring
Manufacturing companies often refer to their manufacturing plant transfer, consolidation and closure activities as physical restructuring. This can be done by moving production or services overseas, a process known as offshoring. Such projects began in the United States during the 1960s and by 2009...

, but not outsourcing. A company subcontracting a business unit to a different company in another country would be both outsourcing and offshoring.

Related terms include nearshoring
Nearshoring
Nearshoring is "the transfer of business or IT processes to companies in a nearby country, often sharing a border with your own country", where both parties expect to benefit from one or more of the following dimensions of proximity: geographic, temporal , cultural, linguistic, economic, political,...

, which implies relocation of business processes to (typically) lower cost foreign locations, but in close geographical proximity (e.g., shifting United States
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...

-based business processes to Canada
Canada
Canada is a North American country consisting of ten provinces and three territories. Located in the northern part of the continent, it extends from the Atlantic Ocean in the east to the Pacific Ocean in the west, and northward into the Arctic Ocean...

/Latin America
Latin America
Latin America is a region of the Americas where Romance languages  – particularly Spanish and Portuguese, and variably French – are primarily spoken. Latin America has an area of approximately 21,069,500 km² , almost 3.9% of the Earth's surface or 14.1% of its land surface area...

); inshoring
Inshoring
Inshoring may be thought of as the 'opposite' of Offshoring. It is the business process outsourcing work domestically. This process typically applies to the US and the UK....

, which means picking services within a country; and bestshoring
Bestshoring
Bestshoring is the process of identifying the best location to move manufacturing, IT or business processes for a company. The decision is to be based on quantifiable criteria which are intended to take subjective and political input out of the decision cycle...

, or rightshoring, picking the "best shore" based on various criteria. Business process outsourcing
Business process outsourcing
Business process outsourcing is a subset of outsourcing that involves the contracting of the operations and responsibilities of specific business functions to a third-party service provider. Originally, this was associated with manufacturing firms, such as Coca Cola that outsourced large segments...

 (BPO) refers to outsourcing arrangements when entire business functions (such as Finance
Finance
"Finance" is often defined simply as the management of money or “funds” management Modern finance, however, is a family of business activity that includes the origination, marketing, and management of cash and money surrogates through a variety of capital accounts, instruments, and markets created...

 & Accounting, Customer Service, etc.) are outsourced.
More specific terms can be found in the field of software development - for example Global Information System
Global information system
- Definition :There is a variety of definitions and understandings of a Global Information System and tea , such as* A global information system is an information system which is developed and / or used in a global context....

 as a class of systems being developed for / by globally distributed teams.

A further term sometimes associated with offshoring is bodyshopping which is the practice of using offshored resources and personnel to do small disaggregated tasks within a business environment, without any broader intention to offshore an entire business function.

Production off-shoring


Production offshoring also known as physical restructuring
Physical restructuring
Manufacturing companies often refer to their manufacturing plant transfer, consolidation and closure activities as physical restructuring. This can be done by moving production or services overseas, a process known as offshoring. Such projects began in the United States during the 1960s and by 2009...

 of established products involves relocation of physical manufacturing processes to a lower-cost destination. Examples of production offshoring include the manufacture of electronic components in Costa Rica
Costa Rica
Costa Rica , officially the Republic of Costa Rica is a multilingual, multiethnic and multicultural country in Central America, bordered by Nicaragua to the north, Panama to the southeast, the Pacific Ocean to the west and the Caribbean Sea to the east....

, production of apparel, toys, and consumer goods in China, Vietnam
Vietnam
Vietnam – sometimes spelled Viet Nam , officially the Socialist Republic of Vietnam – is the easternmost country on the Indochina Peninsula in Southeast Asia. It is bordered by China to the north, Laos to the northwest, Cambodia to the southwest, and the South China Sea –...

 etc.

Product design, research and the development process that leads to new products, are relatively difficult to offshore. This is because research and development to improve products and create new reference designs requires a skill set that is harder to obtain in regions with cheap labor. For this reason, in many cases only the manufacturing will be offshored by a company wishing to reduce costs.

However, there is a relationship between offshoring and patent system strength. This is because companies under a strong patent system are not afraid to offshore work because their work will remain their property. Conversely, companies in countries with weak patent systems have an increased fear of intellectual property theft from foreign vendors or workers, and, therefore, have less offshoring.

Physical restructuring
Physical restructuring
Manufacturing companies often refer to their manufacturing plant transfer, consolidation and closure activities as physical restructuring. This can be done by moving production or services overseas, a process known as offshoring. Such projects began in the United States during the 1960s and by 2009...

 got its big push when the North American Free Trade Agreement
North American Free Trade Agreement
The North American Free Trade Agreement or NAFTA is an agreement signed by the governments of Canada, Mexico, and the United States, creating a trilateral trade bloc in North America. The agreement came into force on January 1, 1994. It superseded the Canada – United States Free Trade Agreement...

 (NAFTA) made it easier for manufacturers to shift production facilities from the US to Mexico
Mexico
The United Mexican States , commonly known as Mexico , is a federal constitutional republic in North America. It is bordered on the north by the United States; on the south and west by the Pacific Ocean; on the southeast by Guatemala, Belize, and the Caribbean Sea; and on the east by the Gulf of...

. This trend later shifted to China, which offered cheap prices through very low wage rates, few workers' rights laws, a fixed currency pegged to the US dollar, (currently fixed to a basket of economies) cheap loans, land, and factories for new companies, few environmental regulations, and huge economies of scale
Economies of scale
Economies of scale, in microeconomics, refers to the cost advantages that an enterprise obtains due to expansion. There are factors that cause a producer’s average cost per unit to fall as the scale of output is increased. "Economies of scale" is a long run concept and refers to reductions in unit...

 based on cities with populations over a million workers dedicated to producing a single kind of product. However, many companies are reluctant to move high value-added production of leading-edge products to China because of lax enforcement of intellectual property laws. CAFTA has increased the velocity at which physical restructuring
Physical restructuring
Manufacturing companies often refer to their manufacturing plant transfer, consolidation and closure activities as physical restructuring. This can be done by moving production or services overseas, a process known as offshoring. Such projects began in the United States during the 1960s and by 2009...

 is occurring.

IT-enabled Services offshoring


The growth of IT-enabled services offshoring is linked to the availability of large amounts of reliable and affordable communication infrastructure following the telecommunication and Internet expansion of the late 1990s. This was seen all the way up to the year 2000. Coupled with the digitization of many services, it was possible to shift the actual production location of services to low cost countries in a manner theoretically transparent to end-users. Services include administrative services, such as finance and accounting, HR, and legal; call centers; marketing and sales services; IT infrastructure; application development; and knowledge services, including engineering support, product design, research and development, and analytics.

India first benefited from the offshoring trend as it has a large pool of English
English language
English is a West Germanic language that arose in the Anglo-Saxon kingdoms of England and spread into what was to become south-east Scotland under the influence of the Anglian medieval kingdom of Northumbria...

 speaking people and technically proficient manpower. India's offshoring industry took root in low-end IT functions in the early 1990s and has since moved to back-office processes such as call centers and transaction processing. In the late 1990s, India's abundant and well qualified software engineering talent combined with massive demand from the Y2K problem helped to move India up the value chain to attract large-scale software development projects for US based customers. This spawned the neologism Bangalored, used to indicate a layoff
Layoff
Layoff , also called redundancy in the UK, is the temporary suspension or permanent termination of employment of an employee or a group of employees for business reasons, such as when certain positions are no longer necessary or when a business slow-down occurs...

, often systemic, and usually resulting from corporate outsourcing
Outsourcing
Outsourcing is the process of contracting a business function to someone else.-Overview:The term outsourcing is used inconsistently but usually involves the contracting out of a business function - commonly one previously performed in-house - to an external provider...

 to lower wage economies – derived from Bangalore
Bangalore
Bengaluru , formerly called Bengaluru is the capital of the Indian state of Karnataka. Bangalore is nicknamed the Garden City and was once called a pensioner's paradise. Located on the Deccan Plateau in the south-eastern part of Karnataka, Bangalore is India's third most populous city and...

 in India
India
India , officially the Republic of India , is a country in South Asia. It is the seventh-largest country by geographical area, the second-most populous country with over 1.2 billion people, and the most populous democracy in the world...

, where some of the first outsource centers were located.

Currently, India's engineering talent has made India the offshoring destination of global firms like HP
Hewlett-Packard
Hewlett-Packard Company or HP is an American multinational information technology corporation headquartered in Palo Alto, California, USA that provides products, technologies, softwares, solutions and services to consumers, small- and medium-sized businesses and large enterprises, including...

, IBM
IBM
International Business Machines Corporation or IBM is an American multinational technology and consulting corporation headquartered in Armonk, New York, United States. IBM manufactures and sells computer hardware and software, and it offers infrastructure, hosting and consulting services in areas...

, Intel, AMD, Microsoft
Microsoft
Microsoft Corporation is an American public multinational corporation headquartered in Redmond, Washington, USA that develops, manufactures, licenses, and supports a wide range of products and services predominantly related to computing through its various product divisions...

, Oracle Corporation
Oracle Corporation
Oracle Corporation is an American multinational computer technology corporation that specializes in developing and marketing hardware systems and enterprise software products – particularly database management systems...

, Cisco
Cisco
Cisco may refer to:Companies:*Cisco Systems, a computer networking company* Certis CISCO, corporatised entity of the former Commercial and Industrial Security Corporation in Singapore...

, SAP
SAP AG
SAP AG is a German software corporation that makes enterprise software to manage business operations and customer relations. Headquartered in Walldorf, Baden-Württemberg, with regional offices around the world, SAP is the market leader in enterprise application software...

, and BEA
Bea
- Aviation :*British European Airways*Bureau d'Enquêtes et d'Analyses pour la Sécurité de l'Aviation Civile, the French agency responsible for investigating aviation accidents- People :* Augustin Bea , a cardinal of the Roman Catholic Church...

.

Because of inflation, high domestic interest rates, robust economic growth and increased IT offshoring, Indian IT sector has witnessed 10 - 15% wage growth in the 21st century. Consequently, Indian's operations and firms are concerned that they are becoming too expensive in comparison with competition from the other offshoring destinations. To maintain high growth rates, attempts have been made to grow up the value chain and diversify to other high-end work in addition to software and hardware engineering. These jobs include research and development, equity analysis, tax-return processing, radiological analysis, medical transcription
Medical transcription
Medical transcription, also known as MT, is an allied health profession, which deals in the process of transcription, or converting voice-recorded reports as dictated by physicians and/or other healthcare professionals, into text format.-History:...

, and more.

The choice of offshoring destination is often made according to cultural concerns. Japanese companies are starting to outsource to China, where large numbers of Japanese speakers can be found — particularly in the city of Dalian
Dalian
Dalian is a major city and seaport in the south of Liaoning province, Northeast China. It faces Shandong to the south, the Yellow Sea to the east and the Bohai Sea to the west and south. Holding sub-provincial administrative status, Dalian is the southernmost city of Northeast China and China's...

, which was Japanese-occupied Chinese territory for decades (this is discussed in the book The World is Flat
The World Is Flat
The World Is Flat: A Brief History of the Twenty-First Century is an international bestselling book by Thomas Friedman that analyzes globalization, primarily in the early 21st century. The title is a metaphor for viewing the world as a level playing field in terms of commerce, where all competitors...

). German companies tend to outsource to Poland
Poland
Poland , officially the Republic of Poland , is a country in Central Europe bordered by Germany to the west; the Czech Republic and Slovakia to the south; Ukraine, Belarus and Lithuania to the east; and the Baltic Sea and Kaliningrad Oblast, a Russian exclave, to the north...

 and Romania
Romania
Romania is a country located at the crossroads of Central and Southeastern Europe, on the Lower Danube, within and outside the Carpathian arch, bordering on the Black Sea...

, where proficiency in German is common. French companies outsource to North Africa for similar reasons. For Australian IT companies, Indonesia
Indonesia
Indonesia , officially the Republic of Indonesia , is a country in Southeast Asia and Oceania. Indonesia is an archipelago comprising approximately 13,000 islands. It has 33 provinces with over 238 million people, and is the world's fourth most populous country. Indonesia is a republic, with an...

 is one of the major choice of offshoring destination. Near shore location, common time zone and adequate IT work force are the reasons of offshoring IT services to Indonesia.

Other offshoring destinations include Mexico
Mexico
The United Mexican States , commonly known as Mexico , is a federal constitutional republic in North America. It is bordered on the north by the United States; on the south and west by the Pacific Ocean; on the southeast by Guatemala, Belize, and the Caribbean Sea; and on the east by the Gulf of...

, Central
Central America
Central America is the central geographic region of the Americas. It is the southernmost, isthmian portion of the North American continent, which connects with South America on the southeast. When considered part of the unified continental model, it is considered a subcontinent...

 and South America
South America
South America is a continent situated in the Western Hemisphere, mostly in the Southern Hemisphere, with a relatively small portion in the Northern Hemisphere. The continent is also considered a subcontinent of the Americas. It is bordered on the west by the Pacific Ocean and on the north and east...

, the Philippines
Philippines
The Philippines , officially known as the Republic of the Philippines , is a country in Southeast Asia in the western Pacific Ocean. To its north across the Luzon Strait lies Taiwan. West across the South China Sea sits Vietnam...

, South Africa
South Africa
The Republic of South Africa is a country in southern Africa. Located at the southern tip of Africa, it is divided into nine provinces, with of coastline on the Atlantic and Indian oceans...

 and Eastern Europe
Eastern Europe
Eastern Europe is the eastern part of Europe. The term has widely disparate geopolitical, geographical, cultural and socioeconomic readings, which makes it highly context-dependent and even volatile, and there are "almost as many definitions of Eastern Europe as there are scholars of the region"...

an countries.

The Central America Free Trade Agreement (CAFTA) made nearshoring
Nearshoring
Nearshoring is "the transfer of business or IT processes to companies in a nearby country, often sharing a border with your own country", where both parties expect to benefit from one or more of the following dimensions of proximity: geographic, temporal , cultural, linguistic, economic, political,...

 more attractive between the Central American countries of Costa Rica
Costa Rica
Costa Rica , officially the Republic of Costa Rica is a multilingual, multiethnic and multicultural country in Central America, bordered by Nicaragua to the north, Panama to the southeast, the Pacific Ocean to the west and the Caribbean Sea to the east....

, El Salvador
El Salvador
El Salvador or simply Salvador is the smallest and the most densely populated country in Central America. The country's capital city and largest city is San Salvador; Santa Ana and San Miguel are also important cultural and commercial centers in the country and in all of Central America...

, Guatemala
Guatemala
Guatemala is a country in Central America bordered by Mexico to the north and west, the Pacific Ocean to the southwest, Belize to the northeast, the Caribbean to the east, and Honduras and El Salvador to the southeast...

, Honduras
Honduras
Honduras is a republic in Central America. It was previously known as Spanish Honduras to differentiate it from British Honduras, which became the modern-day state of Belize...

, Nicaragua
Nicaragua
Nicaragua is the largest country in the Central American American isthmus, bordered by Honduras to the north and Costa Rica to the south. The country is situated between 11 and 14 degrees north of the Equator in the Northern Hemisphere, which places it entirely within the tropics. The Pacific Ocean...

, and the Dominican Republic
Dominican Republic
The Dominican Republic is a nation on the island of La Hispaniola, part of the Greater Antilles archipelago in the Caribbean region. The western third of the island is occupied by the nation of Haiti, making Hispaniola one of two Caribbean islands that are shared by two countries...

 and the US.

Innovation offshoring


Once companies are comfortable with services offerings and started realizing the cost savings, many high-tech product companies, including some in Silicon Valley
Silicon Valley
Silicon Valley is a term which refers to the southern part of the San Francisco Bay Area in Northern California in the United States. The region is home to many of the world's largest technology corporations...

, started offshoring innovation work to countries like South Africa, India, China, Mexico, and Russia. Accessing the talent pools in these countries has the potential to cut costs or even shorten product lifecycles. Less-developed countries like India are usually involved in this practice.

When offshoring knowledge work, firms heavily rely on the availability of technical personnel at offshore locations. In order to secure access to talent, Western firms often establish collaborative relationships with technical universities abroad and thereby customize university programs to serve their particular needs. Examples include universities in Shanghai, such as Tong-Ji University, where German firms and scholars co-sponsor labs, courses, and provide internships. Similar examples of collaborative arrangements can be found in Eastern Europe, e.g. Romania.

Re-shoring


"Re-shoring" (sometimes "Backshoring") is offshoring that has been brought back onshore.

Focus and strategy in offshoring


To survive in the outsourcing world, strength in multiple terms is necessary. On one hand, while it is important to have robust processes and structures in place, with manpower to execute projects, on the other hand it is necessary for firms to have their strategy firmly in place. While the Vision and Mission define the ethos of any enterprise, irrespective of the field in it, yet this is necessary to drive the wheel of a company forward.
It is undoubted that strategy varies as an offshoring enterprise evolves and goes through its various phases of growth. While nascent players may look at opportunities to grab and work upon, established players have a well set and defined plan of action. Players in the growth phase are the ones who have strategy targeted at achieving the ulterior goal and demonstrate perseverance and drive to achieve the same.
These trends are truly reflective of the path that some of the established players today have had in mind. Being a business model, which has a unique driving force behind is, the fact that the industry as a whole has coped rather well with the economic downturn. For those who have grown and escalated in this scenario, it is their strategy in view of their ultimate vision and mission to which credit must be attributed.

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 agreement
Non-disclosure agreement
A non-disclosure agreement , also known as a confidentiality agreement , confidential disclosure agreement , proprietary information agreement , or secrecy agreement, is a legal contract between at least two parties that outlines confidential material, knowledge, or information that the parties...

s, then intellectual property
Intellectual property
Intellectual property is a term referring to a number of distinct types of creations of the mind for which a set of exclusive rights are recognized—and the corresponding fields of law...

 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 spurring heated debates among economists, some of which overlap those related to the topic of free trade
Free trade
Under a free trade policy, prices emerge from supply and demand, and are the sole determinant of resource allocation. 'Free' trade differs from other forms of trade policy where the allocation of goods and services among trading countries are determined by price strategies that may differ from...

. It is seen as benefiting both the origin and destination country through free trade
Free trade
Under a free trade policy, prices emerge from supply and demand, and are the sole determinant of resource allocation. 'Free' trade differs from other forms of trade policy where the allocation of goods and services among trading countries are determined by price strategies that may differ from...

, providing jobs to the destination country and lower cost of goods and services to the origin country. This makes both sides see increased gross domestic product
Gross domestic product
Gross domestic product refers to the market value of all final goods and services produced within a country in a given period. GDP per capita is often considered an indicator of a country's standard of living....

 (GDP). And the total number of jobs increase in both countries since those workers in the origin country that lost their job can move to higher-value jobs in which their country has a comparative advantage
Comparative advantage
In economics, the law of comparative advantage says that two countries will both gain from trade if, in the absence of trade, they have different relative costs for producing the same goods...

.

On the other hand, job losses and wage erosion in developed countries have sparked opposition to offshoring. Experts argue that the quality of any new jobs in developed countries are less than the jobs lost and offer lower pay. Economists against offshoring charge that currency manipulation by governments and their central banks causes the difference in labor cost creating an illusion of comparative advantage. Further, they point out that even more educated highly trained workers with higher-value jobs such as software engineers, accountants, radiologists, and journalists in the developed world have been displaced by highly educated and cheaper workers from India and China. On May 1, 2002, Economist and former Ambassador Ernest H. Preeg testified before the Senate committee on Banking, Housing, and Urban Affairs that China, for instance, pegs its currency to the dollar at a sub-par value in violation of Article IV of the International Monetary Fund
International Monetary Fund
The International Monetary Fund is an organization of 187 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world...

 Articles of Agreement which state that no nation shall manipulate its currency to gain a market advantage. Traditionally "safe" developed world jobs in R&D and the Science, Technology, Engineering, and Mathematics (STEM) fields
STEM fields
STEM fields is a US Government acronym for the fields of study in the categories of science, technology, engineering, and mathematics. The acronym is in use regarding access to work visas for immigrants who are skilled in these fields. Maintaining a citizenry that is well versed in the STEM fields...

 are now perceived to be endangered in these countries as higher proportions of workers are trained for these fields in developing nations. Economists such as Paul Craig Roberts
Paul Craig Roberts
Paul Craig Roberts is an American economist and a columnist for Creators Syndicate. He served as an Assistant Secretary of the Treasury in the Reagan Administration earning fame as a co-founder of Reaganomics. He is a former editor and columnist for the Wall Street Journal, Business Week, and...

 claim that those economists who promote offshoring misunderstand the difference between comparative advantage
Comparative advantage
In economics, the law of comparative advantage says that two countries will both gain from trade if, in the absence of trade, they have different relative costs for producing the same goods...

 and absolute advantage
Absolute advantage
In economics, principle of absolute advantage refers to the ability of a party to produce more of a good or service than competitors, using the same amount of resources...

.

Level-of-service concerns


With the off-shoring of call-center type applications, debate has also surfaced that this practice does serious damage to the quality of customer service and technical support that customers receive from companies who do it. Many companies have caught much public ire for their decisions to use foreign labor for customer service and technical support, mostly because of the apparent language barrier that it creates. While some nations have a high level of younger, skilled workers who are capable of speaking English as one of their native languages, their English skills have caused debate in North America and Europe.

Criticisms of outsourcing from much of the American public have been a response to what they view as very poor customer service and technical support being provided by overseas workers attempting to communicate with Americans.

Supply chain concerns


Some claim that companies lose control and visibility across their extended supply chain under outsourcing, creating increased risks. A 2005 quantitative survey of 121 electronics industry participants by Industry Directions Inc and the Electronics Supply Chain Association (ESCA) found that 69% of respondents said they had less control over at least 5 of their key supply chain processes since the outsourced model took hold, while 66% of providers felt their aggregate risk with customers was high or very high. 36% of providers responded that they felt an increased risk of uncertainty compared to their uncertainty risk before the rise to prominence of the outsourced model. 62% of respondents described as "problematic" at least two core trading partner management practices, which included performance management and simple agreement on results. 40% of all respondents encountered resistance to sharing risk in outsourced partnership agreements, according to the research.

Competitive concerns


The transfer of knowledge outside a country may create competitors to the original companies themselves. Chinese manufacturers are already selling their goods directly to their overseas customers, without going through their previous domestic intermediaries that originally contracted their services. In the 1990s and 2000s, American automakers increasingly turned to China to create parts for their vehicles. By 2006, China leveraged this know-how and announced that they will begin competition with American automakers in their home market by selling fully Chinese automobiles directly to Americans. When a company moves the production of goods and services to another country, the investment that companies would otherwise make in the domestic market is transferred to the foreign market. Corporate money spent on factories, training, and taxes, which would otherwise be spent in the market of the company is then spent in the foreign market. As production increases in the foreign market, qualified and experienced domestic worker
Domestic worker
A domestic worker is a man, woman or child who works within the employer's household. Domestic workers perform a variety of household services for an individual or a family, from providing care for children and elderly dependents to cleaning and household maintenance, known as housekeeping...

s leave or are forced out of their jobs, often permanently leaving the industry. At some point, dramatically fewer domestic workers are left who are qualified to perform the work. This makes the domestic market dependent on the foreign market for those goods and services, thereby strategically weakening the "hollowed-out" domestic country. In effect, offshoring creates and strengthens the competitive industries of the foreign country while strategically weakening the domestic country.

However, employment data has cast doubt on this claim. For example, IT employment in the United States has recently reached pre-2001 levels and has been rising since. The number of jobs lost to offshoring is less than 1 percent of the total US labor market. According to a study by the Heritage foundation, outsourcing represents a very small proportion of jobs lost in the US. The total number of jobs lost to offshoring, both manufacturing and technical represent only 4 percent of the total jobs lost in the US. Major reasons for cutting jobs are from contract completion and downsizing. Some economists and commentators claim that the offshoring phenomenon is way overblown.

Retraining concerns


One solution often offered for domestic workers displaced by offshoring is retraining to new jobs. Some displaced workers are highly educated and possess graduate qualifications. Retraining to their current level in another field may not be an option because of the years of study and cost of education involved.

Effects of factor of production mobility


According to classical economics
Classical economics
Classical economics is widely regarded as the first modern school of economic thought. Its major developers include Adam Smith, Jean-Baptiste Say, David Ricardo, Thomas Malthus and John Stuart Mill....

, the three factors of production
Factors of production
In economics, factors of production means inputs and finished goods means output. Input determines the quantity of output i.e. output depends upon input. Input is the starting point and output is the end point of production process and such input-output relationship is called a production function...

 are land
Land (economics)
In economics, land comprises all naturally occurring resources whose supply is inherently fixed. Examples are any and all particular geographical locations, mineral deposits, and even geostationary orbit locations and portions of the electromagnetic spectrum. Natural resources are fundamental to...

, labor, and capital
Capital (economics)
In economics, capital, capital goods, or real capital refers to already-produced durable goods used in production of goods or services. The capital goods are not significantly consumed, though they may depreciate in the production process...

. Offshoring relies heavily on the mobility of two of these factors. That is, how offshoring affects economies depends on how easily capital and labor can be repurposed. Land, as a factor of production, is generally seen to have little or no mobility potential.

The effects of capital mobility on offshoring have been widely discussed. In microeconomics
Microeconomics
Microeconomics is a branch of economics that studies the behavior of how the individual modern household and firms make decisions to allocate limited resources. Typically, it applies to markets where goods or services are being bought and sold...

, a corporation must be able to spend working capital
Working capital
Working capital is a financial metric which represents operating liquidity available to a business, organization or other entity, including governmental entity. Along with fixed assets such as plant and equipment, working capital is considered a part of operating capital. Net working capital is...

 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
Macroeconomics
Macroeconomics is a branch of economics dealing with the performance, structure, behavior, and decision-making of the whole economy. This includes a national, regional, or global economy...

 must be free for offshoring to succeed. Generally, those who favor offshoring support capital mobility, and those who oppose offshoring call for greater regulation
Regulation
Regulation is administrative legislation that constitutes or constrains rights and allocates responsibilities. It can be distinguished from primary legislation on the one hand and judge-made law on the other...

.

Labor mobility also plays a major role, and it is hotly debated. When computers and the Internet made work electronically portable, the forces of free market resulted in a global mobility of work in the services industry. Most theories that argue offshoring eventually benefits domestic workers assume that those 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) or by retraining themselves in a new field. Foreign workers benefit from new jobs and higher wages when the work moves to them.

History


In the developed world, moving jobs out of the country dates to at least the 1960s and has continued since then. It was characterized primarily by the transferring of factories from the developed to the developing world. This offshoring and closing of factories has caused a structural change in the developed world from an industrial to a post-industrial service society.

During the 20th century, the decreasing costs of transportation and communication crossed with great disparities on pay rates made increased offshoring from wealthier countries to less wealthy countries financially feasible for many companies. Further, the growth of the Internet
Internet
The Internet is a global system of interconnected computer networks that use the standard Internet protocol suite to serve billions of users worldwide...

, particularly fiber-optic intercontinental long haul capacity, and the World Wide Web
World Wide Web
The World Wide Web is a system of interlinked hypertext documents accessed via the Internet...

 reduced "transportation" costs for many kinds of information work to near zero.

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 magnetic resonance imaging
Magnetic resonance imaging
Magnetic resonance imaging , nuclear magnetic resonance imaging , or magnetic resonance tomography is a medical imaging technique used in radiology to visualize detailed internal structures...

, medical transcription, income tax preparation, and title searching are being offshored.

Before the 1990s, Ireland was one of the poorest countries in the EU. Because of Ireland's relatively low corporate tax rates, US companies began offshoring of software, electronic, and pharmaceutical intellectual property to Ireland for export. This helped create a high-tech "boom" and which led to Ireland becoming one of the richest EU countries.

In 1994 the North American Free Trade Agreement
North American Free Trade Agreement
The North American Free Trade Agreement or NAFTA is an agreement signed by the governments of Canada, Mexico, and the United States, creating a trilateral trade bloc in North America. The agreement came into force on January 1, 1994. It superseded the Canada – United States Free Trade Agreement...

 (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 free trade areas (such as Free Trade Area of the Americas
Free Trade Area of the Americas
The Free Trade Area of the Americas , , ) was a proposed agreement to eliminate or reduce the trade barriers among all countries in the Americas but Cuba. In the last round of negotiations, trade ministers from 34 countries met in Miami, United States, in November 2003 to discuss the proposal...

) has not yet been successful. In 2005, offshoring of skilled work, also referred to as knowledge work, dramatically increased from the US, which fed the growing worries about threats of job loss.

See also

  • Anti-Globalism
  • Call center security
  • Globally Integrated Enterprise
    Globally Integrated Enterprise
    The globally integrated enterprise is a term coined in 2006 by Sam Palmisano, CEO of IBM Corp, used to denote a company that fashions its strategy, its management, and its operations in pursuit of a new goal: the integration of production and value delivery worldwide...

  • Globality
    Globality
    Globality is the end-state of globalization – a hypothetical condition in which the process of globalization is complete or nearly so, barriers have fallen, and "a new global reality" is emerging....

  • Homeshoring
  • Inshoring
    Inshoring
    Inshoring may be thought of as the 'opposite' of Offshoring. It is the business process outsourcing work domestically. This process typically applies to the US and the UK....

  • Offshoring Research Network
    Offshoring Research Network
    The Offshoring Research Network is an international network of researchers and practitioners studying organizations in their transition to globalizing their business functions, processes and administrative services...

  • Outsourcing
    Outsourcing
    Outsourcing is the process of contracting a business function to someone else.-Overview:The term outsourcing is used inconsistently but usually involves the contracting out of a business function - commonly one previously performed in-house - to an external provider...

  • Personal offshoring
    Personal offshoring
    Personal Offshoring or Smallsourcing is a business model where individual consumers or small businesses directly outsource their work. It is a form of Offshoring. According to the Wall Street Journal "[t]he approach relies on the same model that drives corporate outsourcing: labor arbitrage, or...

  • Restructuring
    Restructuring
    Restructuring is the corporate management term for the act of reorganizing the legal, ownership, operational, or other structures of a company for the purpose of making it more profitable, or better organized for its present needs...

  • Runaway production
    Runaway production
    Runaway production is a term used by the American film industry to describe filmmaking and television productions that are "intended for initial release/exhibition or television broadcast in the U.S., but are actually filmed in another country."...

  • Programmers Guild
    Programmers Guild
    The Programmers Guild is an American non-profit corporation that advocates against corporate outsourcing, the H1-B visa program and related topics. The Guild was founded in 1998 by John Miano, a New Jersey programmer. The current president is Kim Berry, a Sacramento based activist on outsourcing...

  • Follow-the-sun
    Follow-the-sun
    Follow-the-sun is a type of global workflow in which tasks are passed around daily between work sites that are many time zones apart. Such a workflow is set up in order to reduce project duration and increase responsiveness...

  • Decline and Fall of the American Programmer
    Decline and Fall of the American Programmer
    Decline and Fall of the American Programmer is a book written by Edward Yourdon in 1992. It was addressed to American programmers and software organizations of the 1990s, warning that they were about to be driven out of business by programmers in other countries who could produce software more...

  • Job migration
    Job migration
    Job migration is a term that has gained widespread use in the recent years and although it means relocation of jobs from one geographical area to another, it has come to symbolize the migration or relocation of jobs to other countries....

  • Hybridshoring


By sector:
  • Business process outsourcing
    Business process outsourcing
    Business process outsourcing is a subset of outsourcing that involves the contracting of the operations and responsibilities of specific business functions to a third-party service provider. Originally, this was associated with manufacturing firms, such as Coca Cola that outsourced large segments...

  • Information technology consulting
    Information technology consulting
    Information technology consulting is a field that focuses on advising businesses on how best to use information technology to meet their business objectives...

  • Legal outsourcing
    Legal outsourcing
    Legal Process Outsourcing refers to the practice of a law firm or corporation obtaining legal support services from an outside law firm or legal support services company...

  • Offshore software outsourcing
  • Offshoring IT Services

Literature

  • Ashok Deo Bardhan and Cynthia Kroll, "The New Wave of Outsourcing" (November 2, 2003). Fisher Center for Real Estate & Urban Economics. Fisher Center Research Reports: Report #1103. http://repositories.cdlib.org/iber/fcreue/reports/1103
  • Alan E. Blinder, Offshoring: The Next Industrial Revolution?, in: Foreign Affairs, Vol. 85, No.2, March/April 2006, 113-128.
  • Vinaj Couto, Mahadeva Mani, Vikas Sehgal, Arie Y. Lewin, Stephan Manning, Jeff W. Russell, Offshoring 2.0: Contracting Knowledge and Innovation to Expand Global Capabilities Offshoring Research Network 2007 Service Provider Report.
  • Georg Erber, Aida Sayed-Ahmed, Offshore Outsourcing - A Global Shift in the Present IT Industry , in: Intereconomics, Volume 40, Number 2, March 2005, 100 - 112
  • Thomas L. Friedman, The World is Flat
    The World Is Flat
    The World Is Flat: A Brief History of the Twenty-First Century is an international bestselling book by Thomas Friedman that analyzes globalization, primarily in the early 21st century. The title is a metaphor for viewing the world as a level playing field in terms of commerce, where all competitors...

    : A Brief History of the Twenty-First Century 2005 ISBN 0-374-29288-4
  • Gary Gereffi and Vivek Wadhwa, "Framing the Engineering Outsourcing Debate: Placing the United States on a Level Playing Field with India and China" (2006) http://memp.pratt.duke.edu/outsourcing
  • Ron Hira and Anil Hira, with forward by Lou Dobbs
    Lou Dobbs
    Louis Carl "Lou" Dobbs is an American journalist, radio host, television host on the Fox Business Network, and author. He anchored CNN's Lou Dobbs Tonight until November 2009 when he announced on the air that he would leave the 24-hour cable news television network.He was born in Texas and lived...

    , Outsourcing America: What's behind Our National Crisis and how we can reclaim American Jobs. (May 2005). ISBN 0-8144-0868-0.
  • Bradford Jensen and Lori Kletzer (September 2005), "Tradable Services: Understanding the Scope and Impact of Services Outsourcing", Institute for International Economics Working Paper No. 05-9
  • Mark Kobayashi-Hillary
    Mark Kobayashi-Hillary
    Mark Kobayashi-Hillary is a British journalist, blogger, and editor based in São Paulo, Brazil - he is the chief executive officer of research company IT Decisions...

    , 'Who Moved My Job?' (2008). ISBN 978-1409271079.
  • Mark Kobayashi-Hillary
    Mark Kobayashi-Hillary
    Mark Kobayashi-Hillary is a British journalist, blogger, and editor based in São Paulo, Brazil - he is the chief executive officer of research company IT Decisions...

    , 'Building a Future with BRICs: The Next Decade for Offshoring' (Nov 2007). ISBN 978-3-540-46453-2.
  • Mark Kobayashi-Hillary
    Mark Kobayashi-Hillary
    Mark Kobayashi-Hillary is a British journalist, blogger, and editor based in São Paulo, Brazil - he is the chief executive officer of research company IT Decisions...

     & Dr Richard Sykes, 'Global Services: Moving to a Level Playing Field' (May 2007). ISBN 978-1-902505-83-1.
  • William Lazonick, Globalization of the ICT Labor Force, in: The Oxford Handbook on ICTs, eds. Claudio Ciborra, Robin Mansell, Danny Quah, Roger Solverstone, Oxford University Press, (forthcoming)
  • Arie Y. Lewin and Vinaj Couto, Next Generation Offshoring: The Globalization of Innovation Offshoring Research Network 2006 Survey Report.
  • Mario Lewis, IT Application Service Offshoring: An Insider's Guide, Sage Publications, ISBN 0-7619-3525-8, ISBN 978-0-7619-3525-4
  • Catherine Mann, Accelerating the Globalization of America: The Role for Information Technology, Institute for International Economics, Washington D.C., June 2006, ISBN paper 0-88132-390-X
  • Stephan Manning, Silvia Massini and Arie Y. Lewin, "A Dynamic Perspective on Next-Generation Offshoring: The Global Sourcing of Science and Engineering Talent", in: Academy of Management Perspectives, Vol. 22, No.3, October 2008, 35-54.
  • Stephan Manning, Joerg Sydow and Arnold Windeler, "Securing Access to Lower-Cost Talent Globally: The Dynamics of Active Embedding and Field Structuration”, in: Regional Studies, Forthcoming (2011).
  • McKinsey Global Institute; “Offshoring: Is It a Win-Win Game?”, August 2003
  • Bharat Vagadia, "Outsourcing to India: A Legal Handbook", August 2007, Springer, ISBN 978-3-540-72219-9
  • Atul Vashistha and Avinash Vashistha, The Offshore Nation, ISBN 0-07-146812-9

News


Research


Internet articles