Offshoring

Offshoring is the relocation, by a company, of a business process from one country to anothertypically
an operational process, such as manufacturing, or supporting processes, such as accounting. Even state
governments employ offshoring.[1] More recently, offshoring has been associated primarily with
the outsourcing of technical and administrative services supporting domestic and global operations from
outside the home country ("offshore outsourcing"), by means of internal (captive) or external (outsourcing)
delivery models.[2]
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.[3]
Offshoring can be seen in the context of either production offshoring or services offshoring. After its
accession to the World Trade Organization (WTO) in 2001, the People's Republic of China emerged as a
prominent destination for production offshoring. Another focus area has been the software industry as
part of global software development and developing global information systems. After technical progress
in telecommunications improved the possibilities of trade in services, India 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, sometimes called labor arbitrage, to improve corporate profitability.
Jobs are added in the destination country providing the goods or services (generally a lower-cost labor
country), but are subtracted in the higher-cost labor country. The increased safety net costs of the
unemployed may be absorbed by the government (taxpayers) in the high-cost country or by the company
doing the offshoring. Europe experienced less off-shoring than the United States due to policies that
applied more costs to corporations and cultural barriers.[4]
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. [2] Offshoring is sometimes
contrasted with outsourcing or offshore outsourcing. Outsourcing is the movement of internal business
processes to an external organizational unit. Outsourcing refers to the process by which an organization
gives part of its work to another firm / organization 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 offshoring 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, 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, which implies relocation of business processes to (typically) lower cost
foreign locations, but in close geographical proximity (e.g., shifting United States-based business processes
to Canada/Latin America); inshoring, which means picking services within a country; and bestshoring or
rightshoring, picking the "best shore" based on various criteria. Business process outsourcing(BPO) refers
to outsourcing arrangements when entire business functions (such as Finance & Accounting, Customer
Service, etc.) are outsourced. More specific terms can be found in the field of software development - for
example Global Information System 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 offshoring
Production offshoring, also known as physical restructuring, 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, production of apparel, toys, and consumer goods
in China, Vietnam etc.
Product design, research and the development process that leads to new products, are relatively difficult
to offshore. This is because research and development, in order to improve products and create new
reference designs, require 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 move work offshore 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.
A major incentive for physical restructuring arrived when the North American Free Trade
Agreement (NAFTA) made it easier for manufacturers to shift production facilities from the US to Mexico.
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,
cheap 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. 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.[5] CAFTA has increased the
velocity at which physical restructuring 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 speaking people and
technically proficient manpower.[6] 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. This
spawned the neologism Bangalored, used to indicate a layoff, often systemic, and usually resulting from
corporate outsourcing to lower wage economies derived from Bangalore in India, where some of the first
outsource centers were located.[7]
Currently, India's low-cost labor has made it an offshoring destination for global firms
like HP, IBM, Accenture, Intel, AMD, Microsoft, Oracle Corporation, Cisco, SAP, and BEA.
Because of inflation, high domestic interest rates, robust economic growth and increased IT offshoring, the
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, 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, which was Japanese-occupied Chinese territory for decades (this is discussed in the
book The World is Flat). German companies tend to outsource to Eastern European countries, such
asPoland and Romania, where proficiency in German is common.[8] French companies outsource to North
Africa for similar reasons. For Australian IT companies, Indonesia is one of the major choice of offshoring
destination. Near-shore location, common time zone and adequate IT work force are the reasons for
offshoring IT services to Indonesia.
Other offshoring destinations include Mexico, Central and South America, the Philippines, South
Africa and Eastern European countries.
The Central America Free Trade Agreement (CAFTA) made nearshoring more attractive between the
Central American countries of Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua, and theDominican
Republic and the US.
Innovation offshoring
Once companies are comfortable with services offerings and started realizing the cost savings, many hightech product companies, including some in Silicon Valley, started offshoring innovation work to countries
like Belarus, South Africa, India, China, Mexico, Russia and Ukraine. Accessing the talent pools in these
countries has the potential to cut costs or even shorten product lifecycles. Developing countries like India
are also 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 cosponsor labs, courses, and provide internships. Similar examples of collaborative arrangements can be
found in Eastern Europe, e.g. Romania.[8] Additionally, EU companies looking for IT innovation often setup
collaboration with universities in countries such as Belarus and Ukraine, which have a high percentage of
ICT graduates and overall a very skilled IT labor.[9]
Re-shoring
"Re-shoring", also known as "backshoring"[10] or "inshoring"[11] is offshoring that has been brought back
onshore.[12]
John Urry (distinguished professor of sociology at Lancaster University) argues that the concealment of
income, the avoidance of taxation and eluding legislation relating to work, finance, pleasure, waste, energy
and security may be becoming a serious concern for democratic governments and ordinary citizens who
may be adversely affected by unregulated, offshore activities. Further, the rising costs of transportation
could lead to production nearer the point of consumption becoming more economically viable, particularly
as new technologies such as additive manufacturing mature [13]
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. [14] 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.[15]
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 spurring heated debates among economists, some of which
overlap those related to the topic of free trade. 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 gross domestic product (GDP). And the total
number of jobs increases 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 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 Articles of Agreement which state that no nation shall manipulate its
currency to gain a market advantage.[16] Traditionally "safe" developed world jobs in R&D and the Science,
Technology, Engineering, and Mathematics (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 claim that those economists who promote offshoring misunderstand the
difference between comparative advantage and absolute advantage.
Impact on jobs in western countries
The Economist reported in January 2013 that: "High levels of unemployment in Western countries after the
2007-2008 financial crisis have made the public in many countries so hostile towards off-shoring that many
companies are now reluctant to engage in it."[17] Economist Paul Krugman wrote in 2007 that while free
trade among high-wage countries is viewed as win-win, free trade with low-wage countries is win-lose for
many employees who find their jobs off-shored or with stagnating wages.[18] Two estimates of the impact
of off-shoring on U.S. jobs were between 150,000 and 300,000 per year from 2004-2015. This represents
10-15% of U.S. job creation.[19] U.S. opinion polls indicate that between 76-95% of Americans surveyed
agreed that "outsourcing of production and manufacturing work to foreign countries is a reason the U.S.
economy is struggling and more people aren't being hired."[20][21]
The increased safety net costs of the unemployed may be absorbed by the government (taxpayers) in the
high-cost country or by the company doing the offshoring. Europe experienced less off-shoring than the
U.S. due to policies that applied more costs to corporations and cultural barriers.[4]
Legal implications in Japan
Japanese companies often exploits the foreign labors, particularly Chinese and Vietnamese, by violating the
Employment Security Act, and Labor Standard Act set by ministry of health and labors in Japan using the
name of offshoring.
Article 44 of Employment Security Act in Japan implicitly bans the domestic/foreign workers being supplied
by unauthorized companies regardless of their operating locations. Law will apply if at least one party of
suppliers, clients, labors reside in Japan, and if the labors are the integral part of the chain of command by
the client company, or the supplier.

No person shall carry out a labor supply business or have workers supplied by a person who carries out a
labor supply business work under his/her own directions or orders, except in cases provided for in the
following Article.
Employment Security Act
Those deemed to violate will be punished with
A person who falls under any of the following items shall be punished by imprisonment with work for not
more than one year or a fine of not more than one million yen
Employment Security Act states, Article 64
as well as the punishment defined by the article 6 of Labor Standards Act in Japan,
Unless permitted by act, no person shall obtain profit by intervening, as a business, in the employment of
other
Labor Standards Act [22]
Victims can lodge a criminal complaint against the CEO of the suppliers and clients in the Labor Standards
Inspection Office (only applicable to Labor Standards Act) or Public Prosecutor's Office of the respective
company location. Due to the risk of the CEO's arrest, Japanese company accustoms to the private
settlement with financial package in the range between 20 and 100 million JPY (200,000 - million USD).
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 experienceddomestic
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.
However, employment data has cast doubt on this claim. For example, IT employment in the United States
has recently reached pre-2001 levels[23][24] and has been rising since. The number of jobs lost to offshoring
is less than 1 percent of the total US labor market.[25] 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.[26] Some economists and
commentators claim that the offshoring phenomenon is way overblown.[26]
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.
Anecdotal evidence also suggests they would be rejected for being overqualified.
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 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, 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. Also see offshore rig
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 [27] 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, particularly fiber-optic
intercontinental long haul capacity, and the World Wide Web reduced "transportation" costs for many
kinds of information work to near zero.[28]
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, 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.[28]
In 1994 the North American 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) 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.[28]
Source: Wikipedia