Free trade over the years has significantly impacted employment in several global economies. Whether it is raw materials or labour, firms often make factors of production redundant in hopes of sourcing cheaper sources of these materials. Offshore outsourcing is when firms transfer their production processes from their base country to other developing economies.
Offshoring is when a firm outsources goods or services from another country in order to reduce costs or to avail resources that are presently unavailable in their country. Relocating production to locations where factors of production are less expensive helps firms maximise their profits. Countries such as India, China, and Mexico offer cheaper labour, lower land rents, and even lower levels of competition, making it a wise decision to outsource production to these regions.
There are several different forms of outsourcing that a company may select for their production. Firms can outsource not just for raw materials but also for services, such as manual labour. Some common forms of offshore outsourcing are ‘complete outsourcing’, ‘selective outsourcing’, and ‘departmental outsourcing’. As the name suggests, complete outsourcing is when a firm delegates over 75% of raw materials and production to outside the economy. Selective outsourcing is the outsourcing of raw materials for select stages of production. Departmental outsourcing is when parts of a product are outsourced and brought back to the primary firm – where it is later assembled into the main product – thus making it a unique form of specialisation.
Offshore outsourcing may be a vital source of cost reduction for a firm. Both the importing and exporting economies experience impacts, and in most cases, firms only engage in outsourcing if they are confident they will benefit from significant cost advantages. The firm can outsource raw materials, labour, or production capital from a different economy; the reduced cost creates a market advantage for their product and the firm.
However, offshoring can be equally risky for a firm as transportation of resources could render them damaged or undesirable due to several negative external factors. Trade barriers like tariffs, quotas, or embargos can also hamper a firm’s prospects of engaging in offshore outsourcing. Before committing to offshoring production, a firm must conduct a cost-benefit analysis to gauge whether it is worth outsourcing its resources.
This article is sourced and highlights ideas from the research paper “To What Extent Does Offshoring Impact a Private Firm, the Labour Market, and the Economy?” by Sparsh Dak, published in IOSR-JEF; DOI: 10.9790/5933-1201040108.
