Offshoring
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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 telecommunications improved the possibilities of trade in services, India is a country leading in this domain.
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Frequently used terms
Offshoring is defined as the movement of a business process done at a local company to a foreign country, regardless of whether the work done in the foreign country is still performed by the local company or a third-party. Typically, work is moved due to a lower cost of operations in the foreign location. Offshoring is sometimes contrasted with outsourcing or offshore outsourcing.
Related terms include nearshoring, which implies relocation of business processes to (typically) lower cost foreign 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 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 Taiwan, production of apparel, toys, and consumer goods in China, etc.
Product design, and the research and development process that leads to new products, may or may not be associated with production offshoring. Generally, 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.
As such, policies that affect research and development, such how strong a country's patent system is, may affect offshoring. Strong patent systems mitigate the danger of domestic companies sending patentable work offshore, thereby increasing the offshoring of high-wage jobs. Conversely, weak patent systems threaten domestic companies performing patentable work overseas since foreign vendors or workers could steal their ideas without any legal recourse, thereby decreasing offshoring for fear of theft.
Production offshoring got its big push when the NAFTA made it easier for manufacturers to shift production facilities out of the USA to Mexico. The trend later shifted to China, which offered cheap prices through very low wage rates, few workers' rights laws, a fixed currency pegged to the dollar, cheap loans, land, and factories for new companies, few environmental regulations, and huge economies of scale based on cities with populations over a million workers dedicated to producing a single kind of product.
Services Offshoring
The growth of services offshoring is linked to the availability of large amounts of reliable and affordable communication infrastructure following the telecom and internet expansion of the late 1990s. 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.
India first benefited from the offshoring trend as it had a large pool of English speaking and technically proficient manpower. India's offshoring industry took root in low-end IT functions in the 1990s and has since moved to back-office processes such as call centers and transaction processing. In recent years, India has seen double-digit wage growth as a result of the huge popularity of offshoring work there. Due to this, India's leaders are currently concerned that they are becoming too expensive in comparison with other countries and are attempting to branch out to performing high-end jobs. These jobs include research and development, software engineering, equity analysis, tax-return processing, radiological analysis, medical transcription, and more.
Other offshoring destinations are Philippines, Ireland, Argentina, and Eastern European countries.
CAFTA made nearshoring destinations out of Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua, and the Dominican Republic.
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. It is seen as benefiting both the origin and destination country through free trade, providing jobs to the destination country and lower cost of goods and services to the origin country. This makes both sides see increased 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.
On the other hand, job losses in developed countries have sparked opposition to offshoring. They argue that the quality of the new jobs are less than the previous ones and offer lower pay. Further, they argue with economists' assertions that more education is the key to producing higher-value jobs since a great deal of highly-educated workers such as software engineers, accountants, radiologists, and journalists have been displaced and places like India and China also have highly-educated workers.
The topic of free trade contains related debates.
Level-of-Service Concerns
With the offshoring 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. Call centers have sprung up in India, Pakistan, Canada and even the Caribbean. Many companies, most notably Dell and AT&T Wireless, have caught much public ire for their decisions to use Indian and Pakistani labor for customer service and technical support; mostly because of the apparent language barrier that it creates. While India, for example, has a high level of younger skilled workers who are capable of speaking English as well as their native language, their English skills have caused debate in North America.
Criticisms of outsourcing from much of the American public have been a response to what they view as lackluster customer service and technical support being provided by overseas workers attempting to communicate with Americans in broken or incompehensible English.
Security Concerns
In April of 2005, Indian Citibank workers in Pune employed by Mphasis BFL Group were arrested on charges of defrauding four Citibank account holders living in New York, USA, for the amount of $350,000. Citibank had no prior knowledge of the theft until the customers noticed suspicious transactions in their accounts and notified the bank.
Other concerns are the theft of intellectual property given the lax enforcement of intellectual property laws in overseas locations such as China. Domestic companies doing business overseas may have no legal recourse if problems arise.
Competitive Concerns
When a company moves the production of goods and services overseas, the investment that companies would otherwise make in the domestic market is transferred to the foreign market. As production increases in the foreign market, qualified and experienced domestic workers 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.
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.
External links
- [1] Offshore outsourcing companies, consultants and service providers directory
- [2] EuroITX.com - funded by the Dutch government to promote offshore ITO and BPO service providers within the EU
- [3] - Pentalog - French Offshore - Romania, Republic of Moldova
- [4] Offshore News - Covers offshore finance, offshore banking and tax issues
- [5] - NASSCOM - India's Software Industry Association - Contains data about Offshoring to India
- [6] TechUnite - IT Workers Group
- [7] Offshoring Digest - Covering Offshore Outsourcing
- [8] GoneWithTheWorld - Criticism article and blogs on offshoring and globalization
- [9] The Future of IT Jobs in America
- [10] Outsourcing 101 - A Beginner's Guide to Offshoring
- [11] Outsourcing Management Framework -- New Book on Offshoring
- [12] Offshore Outsourcing Blog - Brings together article and news about offshore outsourcing
- [13] OffshoringForum - forum for all Offshoring and Outsourcing discussions
- [14] Making offshore outsourcing sustainable - EU funded project run by UNI Europa
- [15] The Outsourcing Portal - information on offshore outsourcing by the Globalization institute
- [16] Outsourcing Weblog - Best Practices and Industry News
- [17] Informed Choices - Website devoted to detailing and commenting on offshoring and outsourcing, particularly from the UK.
- [18] IPIndia - Website of an India-based Intellectual Property Services Company offering offshoring/outsourcing of IP services.
Criticism
News
- [21] Offshore Outsource Savings Can Be Elusive, Survey Shows
Research
- [22] Analyst Views report summarizing views of various research firms on offshoring
- [23] McKinsey document on offshoring in Germany]
- [24] McKinsey document of offshoring in the United States]
- [25] Report from the BCS on offshoring and outsourcing with regard to IT.
- [26] Contents of book on offshoring by Prof. Erran Carmel and Paul Tjia (Cambridge University Press)]
