Offshoring vs Outsourcing Overview

Moving production facilities to a foreign country to make goods for sale in the home country.

Offshoring facilities are NOT for production in the host country, unlike Foreign Direct Investment (FDI).

Offshoring involves a company setting up and managing its own foreign facilities, while outsourcing uses an external supplier.

Offshoring and outsourcing can happen together in a company or industry.

The decrease or decline in industrial activity in an economy.

Competitive pressures from globalization and manufacturing offshoring applied to services.

Company purchases goods or services from a foreign supplier, which could have been sourced domestically.

Offshoring can be used in conjunction with setting up tax havens.

Moving production facilities to a foreign country to make goods for sale in the home country.

Offshoring took off after World War II due to factors like reduced trade barriers, currency stability, economic development support, and advancements in transportation and communication.

The Bretton Woods System was a set of international agreements that helped facilitate global trade and economic stability after World War II.

Improvements in shipping, air travel, and telecommunications made managing overseas operations easier and more efficient.

Offshoring started in the electronics industry around 1960 with Japanese companies moving production to East Asia to take advantage of lower labor costs.

Japanese electronics companies moved production to East Asia to avoid trade restrictions and take advantage of lower labor costs.

By the late 1970s, a global production structure emerged in electronics with high-tech tasks remaining in developed countries and labor-intensive tasks outsourced to low-wage countries in East Asia.

Companies embraced global production, spreading different production stages across multiple countries based on market conditions, politics, stability, and available technology.

While globalized production can be efficient, it can also be fragile, prone to inefficiencies, and difficult to coordinate.

Offshoring research and development is particularly challenging, often done to capitalize on specific skills or technology.

Companies consider factors like labor costs, specific skills or technology availability, customer proximity, and product customization when making offshoring decisions.

It is difficult to predict if the entire world will move towards fully globalized production due to the challenges and decisions faced by companies.

Companies must decide whether to run one big global production system or keep separate factories for different markets, considering factors like efficiency and risk.

Offshoring can lower costs but also create inefficiencies and risks. Companies must weigh these factors carefully.

Offshoring can lead to higher wages in some developing countries, but often at the cost of poor working conditions. In developed countries, it can lead to job losses and increased inequality.

Offshoring can make it harder to use the same technology across different factories, leading to inconsistencies in production.

Critics argue that companies use offshoring to exploit workers by paying lower wages, weakening unions, and evading regulations.

A landmark legal case in 1906 that established the principle that a company's residence for tax purposes is determined by where its real control is exercised, not just its legal registration.

Moving banking and financial services out of a country's control and regulation, often to minimize taxes and avoid regulations.

A country or jurisdiction that doesn't levy corporate taxes, duties, or withholding taxes on money entering and leaving its borders.

A country or jurisdiction that provides financial services to non-residents on a scale disproportionate to its domestic economy.

Offshoring finance has led to lost tax revenue for governments around the world, increased secrecy in financial dealings, and potential for tax evasion and money laundering.

Leaked documents in 2016 that revealed how wealthy individuals and corporations used offshore entities to hide assets, evade taxes, and launder money.

The process of former colonies gaining independence from their colonial powers.

The end of the Bretton Woods system, globalization, multinational corporations, and technology all contributed to the acceleration of offshoring practices.

Offshoring has had both positive and negative consequences, including job creation, lower costs, but also job losses, increased inequality, and potential for worker exploitation.