Offshoring Overview and Relations

Offshoring

• Offshoring is locating productive facilities outside a firm's home market to produce goods sold in that market. It differs from foreign direct investment as offshore facilities don't produce goods for sale in the location.
• It's also different from outsourcing, which involves purchasing goods/services from an independent supplier, rather than a company establishing its own facilities.

Relation to Outsourcing and FDI

• Offshoring and outsourcing often overlap; one can lead to the other.
• Offshoring may involve the same industry or area as outsourcing. It's distinct from offshoring of banking and finance, which involves tax havens.
• Offshoring of production and banking are related in that service sector jobs shifted towards finance, healthcare, and education as manufacturing jobs moved offshore to lower labor costs.
• Offshoring of services, like customer service and payroll processing, arose due to competitive pressures from globalized manufacturing offshoring.

History of Offshoring

• Offshoring has a long history, with European countries sending commodities like sugar, cotton, and oil from the Americas and Middle East, where they couldn't be domestically produced due to climates or soil.
• The practice significantly increased after World War II due to factors like:
  • The General Agreement on Tariffs and Trade (GATT) reducing trade barriers
  • The International Monetary Fund (IMF) promotion of currency stability and international capital flow
  • The World Bank supporting economic development in developing countries
  • Improvements in shipping (better designs, logistics, air travel), and communications (cables, telecommunications, satellite technology).
• Improved transport and communication technology facilitated cost-effective global production.

Electronics Industry

• The electronics industry began offshoring around 1960, primarily to East Asia, with Japan leading the way, focusing on consumer electronics (radios, semiconductors).
• Japanese companies set up factories in places like Hong Kong and Taiwan due to lower wages and access to export markets.
• This trend spread to other countries in the 1970s and 1980s, moving from simple assembly to more complex tasks like design & testing.
• Global production structures emerged, with tasks like design remaining in developed nations, and labor-intensive assembly going abroad.

Offshoring Strategies

• Firms may spread production in various global locations based on varying market conditions and technologies.
• Offshoring may be done for specific skills and technology not available in the home country.
• Choosing global production strategies depends on things like costs, quality, and flexibility.
• Coordination and control of a global production network can be complex.

Offshore Finance

• Offshore finance involves minimizing or avoiding tax and regulations through relocating banking operations to jurisdictions with lower/no taxes.
• A 1906 British legal case on de Beers set a precedent for companies moving general meetings offshore and impacting international taxation.
• The rise of cross-border banking assets, reaching $30 trillion by 2020, signifies the growth and effects of offshore finance.
• Offshore finance has been criticized for potentially weakening tax revenue for states.

Impact of Offshoring

• Some countries have benefited from increased wages, while others have experienced job losses and widening income gaps.
• Offshoring creates new industry and trade relationships, but sometimes at the expense of worker protections in less developed countries.
• Increased globalization, multinational companies, and improving technology are key factors in contemporary offshoring strategies.

This quiz explores the concept of offshoring, its definitions, and how it relates to outsourcing and foreign direct investment (FDI). You'll learn the distinctions between offshoring, outsourcing, and direct investment strategies as well as their impacts on global trade and labor economics.