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Offshoring

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Definition Edit

Offshoring (a portmandeau of OFFSHORE outsourcING) is

a U.S. company's locating some or all of its manufacturing operations in one or more other countries for purposes of reducing costs.[1]

Overview Edit

However, sending abroad the jobs of workers in blue-collar occupations employed on textile and auto assembly lines, for example, has been taking place for decades. The extension of offshoring from U.S. manufacturers to service providers that became apparent in the past decade has heightened public policy concerns about the extent of job loss and foregone employment opportunities among U.S. workers.

For example, a U.S.-based company might stop some or all of its accounting and payroll services in-house and instead outsource them to a foreign-based company. A U.S.-based multinational company might also offshore by moving some or all of its accounting and payroll services from its domestic operations to its foreign affiliate, thus keeping the services in-house. Importing services that had previously been acquired domestically or relocating services to foreign affiliates both can result in the displacement of U.S. service production and employment, and possibly other economic effects, such as on consumer prices and productivity.

Key factors Edit

Offshoring has expanded into services due to three key factors:

First, technological advances, such as advances in telecommunications and the emergence of the Internet, have enabled workers in different locations in the world to communicate and be connected electronically and has also facilitated the digitization and standardization of activities needed to complete business processes. These changes in turn have allowed business processes to be divided into smaller components, some of which could be done in different locations. For example, standardized software has made it possible for firms to outsource financial or human resources activities to a separate overseas company that performs them for many clients, rather than handling the functions internally. Thus, in many cases, the offshoring of services constitutes an outgrowth of outsourcing business functions.

Second, countries such as India, China, Russia, and much of Eastern Europe have increasingly opened their borders to the global economy.

Third, other countries have highly educated populations with the technical skills for performing services and technology-related work.

Types of services Edit

Types of services associated with offshoring tend to be those that are capable of being performed at a distance and whose product can be delivered through relatively new forms of advanced telecommunications. Examples of these business functions include software programming and design, call center operations, accounting and payroll operations, medical records transcription, paralegal services, and software research and testing.

However, other business activities that do not directly result in the displacement of U.S. workers are sometimes included in broader definitions of offshoring. Offshoring could include other business activities that may result in foregone job creation domestically but would not result in job losses. For example, a U.S.-based company might expand its accounting and payroll services through a foreign company or affiliate, but do so without affecting its U.S. workforce.

Broader definitions of offshoring sometimes include the movement of production offshore. This definition of offshoring focuses on U.S. companies’ investing in overseas affiliates. Offshoring defined in this way could but would not necessarily result in the displacement of U.S. service production or employment. For example, a U.S.-based company investing in its overseas affiliate to produce accounting and payroll services to sell to other companies abroad might do so without affecting its production and employment levels in the United States.

Incentives for offshoring Edit

a primary reason that organizations engage in offshoring is to reduce costs. The cost savings from offshoring are primarily the result of differences between the U.S. and developing countries in the unit cost of labor, the worker compensation (wages and benefits) that must be paid to produce one unit of goods or services. Unit labor costs are lower for certain services in developing countries primarily because workers’ wages in those countries are lower than in the United States.

However, unit labor costs also depend upon the productivity levels of workers. Although labor costs in a developing country may be lower than in the U.S., it may still be possible for the unit cost of labor to be lower in the U.S. than the other country if U.S. workers’ productivity is much higher, meaning than the U.S. worker can produce many more or higher quality products within a certain time frame than a worker in the other country.

Differences in unit labor costs can also result from differences in costs of employee benefits, such as health care and pension benefits. In addition, cost savings can be affected by currency exchange rates, countries’ tax policies, and government-provided incentives such as tax rebates.

Aside from cost savings, firms may have other incentives to offshore. Access to a workforce in different time zones across the globe may enable companies to conduct work around the clock and consequently meet worldwide customer needs. Establishing a presence in foreign countries can provide companies access to overseas markets. In addition, offshoring non-core services can enable companies to focus their resources on their core functions. By outsourcing non-core functions to overseas firms that specialize in them, businesses may also experience improvements in the quality of these functions.

Disincentives for outsourcing Edit

Although firms may have many incentives to offshore, they may also face disincentives to offshore. Offshoring has several costs associated with it, including costs to start up an offshore operation and to manage and train an offshore workforce. In addition, some experts have noted that wages of workers in developing countries are rising more rapidly than U.S. wages, therefore shrinking the cost savings of offshoring over time.

Furthermore, offshoring carries potential risks, such as possible political instability in overseas locations, less reliable civil infrastructure, exchange rate volatility, less developed legal and regulatory systems, and risks to intellectual property.

Issues raised by offshoring Edit

Offshoring services raises issues on a wide array of topics, including the economy, workforce, consumer privacy, and national security. Various pieces of federal and state legislation have been introduced, such as bills to restrict the offshoring of some government services or to provide more assistance for displaced workers.

References Edit

  1. Nanomanufacturing: Emergence and Implications for U.S. Competitiveness, the Environment, and Human Health, at 17 n.16 (citation omitted).

Source Edit

See also Edit

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