Offshoring is the relocation of a
business process
A business process, business method or business function is a collection of related, structured activities or tasks by people or equipment in which a specific sequence produces a service or product (serves a particular business goal) for a parti ...
from one country to another—typically an operational process, such as manufacturing, or supporting processes, such as accounting. Usually this refers to a
company
A company, abbreviated as co., is a Legal personality, legal entity representing an association of people, whether Natural person, natural, Legal person, legal or a mixture of both, with a specific objective. Company members share a common p ...
business, although state governments may also employ offshoring. More recently, technical and administrative services have been offshored.
Offshoring and
outsourcing
Outsourcing is an agreement in which one company hires another company to be responsible for a planned or existing activity which otherwise is or could be carried out internally, i.e. in-house, and sometimes involves transferring employees and ...
are not mutually inclusive: there can be one without the other. They can be intertwined (
offshore outsourcing
Outsourcing is an agreement in which one company hires another company to be responsible for a planned or existing activity which otherwise is or could be carried out internally, i.e. in-house, and sometimes involves transferring employees and ...
), and can be individually or jointly, partially or completely reversed, involving terms such as
reshoring
Offshoring is the relocation of a business process from one country to another—typically an operational process, such as manufacturing, or supporting processes, such as accounting. Usually this refers to a company business, although state gove ...
,
inshoring
Offshoring is the relocation of a business process from one country to another—typically an operational process, such as manufacturing, or supporting processes, such as accounting. Usually this refers to a company business, although state gover ...
, and
insourcing
Outsourcing is an agreement in which one company hires another company to be responsible for a planned or existing activity which otherwise is or could be carried out internally, i.e. in-house, and sometimes involves transferring employees and ...
.
Offshoring is when the offshored work is done by means of an internal (captive) delivery model,
sometimes referred to as ''in-house offshore.''
Imported services from subsidiaries or other closely related suppliers are included, whereas intermediate goods, such as partially completed
cars or computers, may not be.
Motivation
Lower cost and increased corporate profitability are often the motivation, economists call this
labor arbitrage
Global labor arbitrage is an economic phenomenon where, as a result of the removal of or disintegration of barriers to international trade, jobs move to nations where labor and the cost of doing business (such as environmental regulations) is inex ...
. More recently, offshoring incentives also include access to qualified personnel abroad, in particular in technical professions, and decreasing the time to market.
Jobs are added in the destination country providing the goods or services and are subtracted from 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 offshoring than the United States due to policies that applied more costs to corporations and cultural barriers.
Destinations
After its accession to the
World Trade Organization
The World Trade Organization (WTO) is an intergovernmental organization that regulates and facilitates international trade. With effective cooperation
in the United Nations System, governments use the organization to establish, revise, and e ...
(WTO) in 2001, the
People's Republic of China
China, officially the People's Republic of China (PRC), is a country in East Asia. It is the world's most populous country, with a population exceeding 1.4 billion, slightly ahead of India. China spans the equivalent of five time zones and ...
emerged as a prominent destination for production offshoring. Another focus area has been the
software industry
The software industry includes businesses for development, maintenance
Maintenance may refer to:
Biological science
* Maintenance of an organism
* Maintenance respiration
Non-technical maintenance
* Alimony, also called ''maintenance ...
as part of global
software development
Software development is the process of conceiving, specifying, designing, programming, documenting, testing, and bug fixing involved in creating and maintaining applications, frameworks, or other software components. Software development invol ...
and developing
global information system
Global information system is an information system which is developed and / or used in a global context. Some examples of GIS are SAP, The Global Learning Objects Brokered Exchange and other systems. Definition
There are a variety of definitions ...
s. After technical progress in telecommunications improved the possibilities of
trade in services Trade in Services refers to the sale and delivery of an intangible product, called a service, between a producer and consumer. Trade in services that takes place between a producer and consumer that are, in legal terms, based in different countrie ...
,
India
India, officially the Republic of India (Hindi: ), is a country in South Asia. It is the seventh-largest country by area, the second-most populous country, and the most populous democracy in the world. Bounded by the Indian Ocean on the so ...
became one prominent destination for such offshoring, though many parts of the world are now emerging as offshore destinations.
Frequently used terms
Offshoring is defined as the movement of a business process done at a company in one country to the same company in another country.
It is not the same as
outsourcing
Outsourcing is an agreement in which one company hires another company to be responsible for a planned or existing activity which otherwise is or could be carried out internally, i.e. in-house, and sometimes involves transferring employees and ...
, which is the movement of internal business processes to an external organizational unit. This 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
A call centre ( Commonwealth spelling) or call center (American spelling; see spelling differences) is a managed capability that can be centralised or remote that is used for receiving or transmitting a large volume of enquiries by telephone. ...
. These jobs are being handled by other organizations that specialize in each sector allowing the offshoring company to focus more on other business concerns.
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
Manufacturing companies often refer to their manufacturing plant transfer, consolidation and closure activities as physical restructuring. This can be done by moving production or services overseas, a process known as offshoring. Such projects beg ...
, but not outsourcing. A company subcontracting a business unit to a different company in another country would be both outsourcing and offshoring: Offshore outsourcing.
Related terms include
*
nearshoring
Outsourcing is an agreement in which one company hires another company to be responsible for a planned or existing activity which otherwise is or could be carried out internally, i.e. in-house, and sometimes involves transferring employees and ...
, - 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, Mexico or
Latin America
Latin America or
* french: Amérique Latine, link=no
* ht, Amerik Latin, link=no
* pt, América Latina, link=no, name=a, sometimes referred to as LatAm is a large cultural region in the Americas where Romance languages — languages derived f ...
)
* inshoring, - picking services within a country
*
bestshoring {{Unreferenced, date=January 2009
Bestshoring, also known as rightshoring, is the process of identifying the best location to move manufacturing, IT or business processes for a company. The decision is to be based on quantifiable criteria which are ...
or rightshoring, picking the "best shore" based on various criteria
*
Business process outsourcing
Outsourcing is an agreement in which one company hires another company to be responsible for a planned or existing activity which otherwise is or could be carried out internally, i.e. in-house, and sometimes involves transferring employees and ...
(BPO) refers to outsourcing arrangements when entire business functions (such as
finance
Finance is the study and discipline of money, currency and capital assets. It is related to, but not synonymous with economics, the study of production, distribution, and consumption of money, assets, goods and services (the discipline of fina ...
,
accounting
Accounting, also known as accountancy, is the measurement, processing, and communication of financial and non financial information about economic entities such as businesses and corporations. Accounting, which has been called the "languag ...
, and customer service) are outsourced. More specific terms can be found in the field of software development - for example
Global Information System
Global information system is an information system which is developed and / or used in a global context. Some examples of GIS are SAP, The Global Learning Objects Brokered Exchange and other systems. Definition
There are a variety of definitions ...
as a class of systems being developed for / by globally distributed teams.
*
Bodyshopping
Body shopping is the practice of consultancy firms recruiting workers (generally in the information technology sector) in order to contract their services out on a tactical short- to mid-term basis. IT services companies that practice body shopp ...
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.
Offshoring can be seen in the context of either production offshoring or services offshoring, and refers to substitution of a service from any company-owned foreign source for one formerly produced in the company's home country, whether or not outsourcing is involved.
Production offshoring
Production offshoring, also known as
physical restructuring
Manufacturing companies often refer to their manufacturing plant transfer, consolidation and closure activities as physical restructuring. This can be done by moving production or services overseas, a process known as offshoring. Such projects beg ...
, of established products involves relocation of physical manufacturing processes overseas, usually to a lower-cost destination or one with fewer regulatory restrictions.
Physical restructuring
Manufacturing companies often refer to their manufacturing plant transfer, consolidation and closure activities as physical restructuring. This can be done by moving production or services overseas, a process known as offshoring. Such projects beg ...
arrived when the
North American Free Trade Agreement
The North American Free Trade Agreement (NAFTA ; es, Tratado de Libre Comercio de América del Norte, TLCAN; french: Accord de libre-échange nord-américain, ALÉNA) was an agreement signed by Canada, Mexico, and the United States that crea ...
(NAFTA) made it easier for manufacturers to shift production facilities from the US to
Mexico
Mexico (Spanish: México), officially the United Mexican States, is a country in the southern portion of North America. It is bordered to the north by the United States; to the south and west by the Pacific Ocean; to the southeast by Guatema ...
.
This trend later shifted to China, which offered cheap prices through very low wage rates, few
workers' rights
Labor rights or workers' rights are both legal rights and human rights relating to labor relations between workers and employers. These rights are codified in national and international labor and employment law. In general, these rights influen ...
laws, a
fixed currency
A fixed exchange rate, often called a pegged exchange rate, is a type of exchange rate regime in which a currency's value is fixed or pegged by a monetary authority against the value of another currency, a basket of other currencies, or another m ...
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
In microeconomics, economies of scale are the cost advantages that enterprises obtain due to their scale of operation, and are typically measured by the amount of output produced per unit of time. A decrease in cost per unit of output enables ...
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.
IT-enabled services offshoring
Growth of offshoring of IT-enabled services, both to subsidiaries and to outside companies (offshore outsourcing) is linked to the availability of large amounts of reliable and affordable communication infrastructure following the telecommunication and Internet expansion of the late 1990s.
Much of the job movement, however, was to outside companies -
offshore outsourcing
Outsourcing is an agreement in which one company hires another company to be responsible for a planned or existing activity which otherwise is or could be carried out internally, i.e. in-house, and sometimes involves transferring employees and ...
.
Re-shoring
"Re-shoring", also known as "backshoring" or "inshoring" is offshoring that has been brought back onshore.
John Urry (distinguished professor of sociology at
Lancaster University
Lancaster University (legally The University of Lancaster) is a public university, public research university in Lancaster, Lancashire, Lancaster, Lancashire, England. The university was established in 1964 by royal charter, as one of several pla ...
) 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
3D printing or additive manufacturing is the construction of a three-dimensional object from a CAD model or a digital 3D model. It can be done in a variety of processes in which material is deposited, joined or solidified under computer co ...
mature.
Reshoring terminology
Reshoring (also known as onshoring, inshoring and backshoring) is the act of reintroducing domestic manufacturing to a country. It is the reverse process of offshoring, where manufacturing is moved to another country where labor is cheaper.
The
World Bank
The World Bank is an international financial institution that provides loans and grants to the governments of low- and middle-income countries for the purpose of pursuing capital projects. The World Bank is the collective name for the Interna ...
's 2019
World Development Report
The World Development Report (WDR) is an annual report published since 1978 by the International Bank for Reconstruction and Development (IBRD) or World Bank. Each WDR provides in-depth analysis of a specific aspect of economic development. Past ...
on the future of work
considers the potential for automation to drive companies to reshore production, reducing the role of labor in the process, and offers suggestions as to how governments can respond. A similar movement can be seen related to
Robotic Process Automation
Robotic process automation (RPA) is a form of business process automation technology based on metaphorical software robots (bots) or on artificial intelligence (AI)/digital workers. It is sometimes referred to as ''software robotics'' (not to be ...
, called RPA or RPAAI for self-guided RPA 2.0 based on
artificial intelligence
Artificial intelligence (AI) is intelligence—perceiving, synthesizing, and inferring information—demonstrated by machines, as opposed to intelligence displayed by animals and humans. Example tasks in which this is done include speech re ...
, where the incentive to move repetitive shared services work to lower cost countries is partially taken away by the progression of technology.
United States
Since the 1980s American companies have been "offshoring" and outsourcing manufacturing to low cost countries such as
India
India, officially the Republic of India (Hindi: ), is a country in South Asia. It is the seventh-largest country by area, the second-most populous country, and the most populous democracy in the world. Bounded by the Indian Ocean on the so ...
,
China
China, officially the People's Republic of China (PRC), is a country in East Asia. It is the world's most populous country, with a population exceeding 1.4 billion, slightly ahead of India. China spans the equivalent of five time zones and ...
,
Malaysia
Malaysia ( ; ) is a country in Southeast Asia. The federation, federal constitutional monarchy consists of States and federal territories of Malaysia, thirteen states and three federal territories, separated by the South China Sea into two r ...
,
Pakistan
Pakistan ( ur, ), officially the Islamic Republic of Pakistan ( ur, , label=none), is a country in South Asia. It is the world's List of countries and dependencies by population, fifth-most populous country, with a population of almost 24 ...
and
Vietnam
Vietnam or Viet Nam ( vi, Việt Nam, ), officially the Socialist Republic of Vietnam,., group="n" is a country in Southeast Asia, at the eastern edge of mainland Southeast Asia, with an area of and population of 96 million, making i ...
.
Government response
President Obama's 2011
SelectUSA
SelectUSA is a summit held by the U.S. Department of Commerce's International Trade Administration
:
The International Trade Administration (ITA) is an agency in the United States Department of Commerce that promotes United States exports o ...
program was the first federal program to promote and facilitate U.S. investment in partnership with the states. This program and website helps companies connect with resources available on a Federal, State and local level. In January 2012, President Obama issued a call to action to "invest in America" at the White House "Insourcing American Jobs" Forum.
Success stories
Advances in
3D printing
3D printing or additive manufacturing is the Manufacturing, construction of a three-dimensional object from a computer-aided design, CAD model or a digital 3D modeling, 3D model. It can be done in a variety of processes in which material is ...
technologies brought manufacturers closer to their customers.
There have been several very successful stories of companies. In most cases hundreds if not thousands of jobs were created or reinstated. In the case of
Starbucks
Starbucks Corporation is an American multinational chain of coffeehouses and roastery reserves headquartered in Seattle, Washington. It is the world's largest coffeehouse chain.
As of November 2021, the company had 33,833 stores in 80 c ...
, in 2012 it saved American Mug and Stein Company in East Liverpool, Ohio from bankruptcy.
Avoiding failure
Some cases of reshoring have not been successful. Otis Elevators' reshoring effort did not go well.
Otis says it failed to consider the consequences of the new location and tried to do too much at once, including a supply-chain software implementation. This is not an uncommon reshoring scenario. Bringing manufacturing back to the United States isn't so simple, and there are a lot of considerations and analyses that companies must do to determine the costs and feasibility of reshoring. Some companies pursue reshoring with their own internal staff. But reshoring projects are complicated and involve engineering, marketing, production, finance, and procurement. In addition, there are real estate concerns, government incentives and training requirements that require outreach to the community. To help with these projects, companies often turn to consultants that specialize in reshoring.
United Kingdom
In the
United Kingdom
The United Kingdom of Great Britain and Northern Ireland, commonly known as the United Kingdom (UK) or Britain, is a country in Europe, off the north-western coast of the continental mainland. It comprises England, Scotland, Wales and North ...
, companies have used the reintroduction of domestic
call centres
A call centre ( Commonwealth spelling) or call center (American spelling; see spelling differences) is a managed capability that can be centralised or remote that is used for receiving or transmitting a large volume of enquiries by telephone. ...
as a
unique selling point
In marketing, the unique selling proposition (USP), also called the unique selling point, or the unique value proposition (UVP) in the business model canvas, is the marketing strategy of informing customers about how one's own brand or product is ...
. In 2014, the
RSA Insurance Group
RSA Insurance Group Limited (doing business as, trading as RSA, formerly RSA Insurance Group plc and Royal and Sun Alliance) is a British Multinational corporation, multinational general insurance company headquartered in London, England. RSA has ...
completed a move of call centres back to Britain. The call centre industry in
India
India, officially the Republic of India (Hindi: ), is a country in South Asia. It is the seventh-largest country by area, the second-most populous country, and the most populous democracy in the world. Bounded by the Indian Ocean on the so ...
has been hit by reshoring, as businesses including
British Telecom
BT Group plc (trade name, trading as BT and formerly British Telecom) is a British Multinational corporation, multinational telecommunications holding company headquartered in London, England. It has operations in around 180 countries and is th ...
,
Santander UK
Santander UK plc (, ) is a British bank, wholly owned by the Spanish Santander Group. Santander UK plc manages its affairs autonomously, with its own local management team, responsible solely for its performance.
Santander UK is one of the le ...
and
Aviva
Aviva plc is a British multinational insurance company headquartered in London, England. It has about 18 million customers across its core markets of the United Kingdom, Ireland and Canada. In the United Kingdom, Aviva is the largest general ...
all announced they would move operations back to Britain in order to boost the economy and regain customer satisfaction.
R&D offshoring
Product design, research and the development (R&D) process is relatively difficult to offshore because R&D, to improve products and create new reference designs, requires a higher skill set not associated with cheap labor.
An abstract of a study published 2019, which did not include either India or China, and did not specify whether the offshoring was also outsourcing, said "that R&D offshoring contributes positively to productivity in the home country.".
Transfer of intellectual property
There is a relationship between offshoring and patent-system strength. 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.
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 agreement
A non-disclosure agreement (NDA) is a legal contract or part of a contract between at least two parties that outlines confidential material, knowledge, or information that the parties wish to share with one another for certain purposes, but wish ...
s, then
intellectual property
Intellectual property (IP) is a category of property that includes intangible creations of the human intellect. There are many types of intellectual property, and some countries recognize more than others. The best-known types are patents, cop ...
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 to foreign subsidiaries has been a controversial issue spurring heated debates among economists. Jobs go to the destination country and lower cost of goods and services to the origin country.
On the other hand, job losses and wage erosion in developed countries have sparked opposition. Free trade with low-wage countries is win-lose for many employees who find their jobs offshored or with stagnating wages.
Currency manipulation by governments and their central banks cause differences in labor cost. On May 1, 2002, Economist and former Ambassador
Ernest H. Preeg
Ernest Henry Preeg (5 July 1934 – 5 April 2017) was an American economist from Virginia. He holds a B.S. in Marine Transportation from State University of New York Maritime College, an Master of Arts, M.A. and Ph.D. in Economics from The New Sc ...
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
The International Monetary Fund (IMF) is a major financial agency of the United Nations, and an international financial institution, headquartered in Washington, D.C., consisting of 190 countries. Its stated mission is "working to foster globa ...
Articles of Agreement which state that no nation shall manipulate its currency to gain a market advantage.
Competitive concerns
In 2015, IT employment in the United States has recently reached pre-2001 levels and has been rising since.
The number of jobs lost to offshoring is less than 1 percent of the total US labor market. 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.
Some economists and commentators claim that the offshoring phenomenon is way overblown.
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 offshoring that many companies are now reluctant to engage in it." Economist
Paul Krugman
Paul Robin Krugman ( ; born February 28, 1953) is an American economist, who is Distinguished Professor of Economics at the Graduate Center of the City University of New York, and a columnist for ''The New York Times''. In 2008, Krugman was th ...
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 offshored or with stagnating wages.
Two estimates of the impact of offshoring 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.
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 offshoring than the U.S. due to policies that applied more costs to corporations and cultural barriers.
In the area of service research has found that offshoring has mixed effects on wages and employment.
The
World Bank
The World Bank is an international financial institution that provides loans and grants to the governments of low- and middle-income countries for the purpose of pursuing capital projects. The World Bank is the collective name for the Interna ...
's 2019
World Development Report
The World Development Report (WDR) is an annual report published since 1978 by the International Bank for Reconstruction and Development (IBRD) or World Bank. Each WDR provides in-depth analysis of a specific aspect of economic development. Past ...
on the future of work
highlights how offshoring can shape the demand for skills in receiving countries and explores how increasing automation can lead to
reshoring
Offshoring is the relocation of a business process from one country to another—typically an operational process, such as manufacturing, or supporting processes, such as accounting. Usually this refers to a company business, although state gove ...
of production in some cases.
Public opinion
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."
Effects of factor of production mobility
According to
classical economics
Classical economics, classical political economy, or Smithian economics is a school of thought in political economy that flourished, primarily in Britain, in the late 18th and early-to-mid 19th century. Its main thinkers are held to be Adam Smith ...
, the three
factors of production
In economics, factors of production, resources, or inputs are what is used in the production process to produce output—that is, goods and services. The utilized amounts of the various inputs determine the quantity of output according to the relat ...
are
land
Land, also known as dry land, ground, or earth, is the solid terrestrial surface of the planet Earth that is not submerged by the ocean or other bodies of water. It makes up 29% of Earth's surface and includes the continents and various islan ...
,
labor
Labour or labor may refer to:
* Childbirth, the delivery of a baby
* Labour (human activity), or work
** Manual labour, physical work
** Wage labour, a socioeconomic relationship between a worker and an employer
** Organized labour and the labour ...
, and
capital
Capital may refer to:
Common uses
* Capital city, a municipality of primary status
** List of national capital cities
* Capital letter, an upper-case letter Economics and social sciences
* Capital (economics), the durable produced goods used f ...
. Offshoring relies heavily on the mobility of labor and
capital
Capital may refer to:
Common uses
* Capital city, a municipality of primary status
** List of national capital cities
* Capital letter, an upper-case letter Economics and social sciences
* Capital (economics), the durable produced goods used f ...
; land has little or no mobility potential.
In
microeconomics
Microeconomics is a branch of mainstream economics that studies the behavior of individuals and firms in making decisions regarding the allocation of scarce resources and the interactions among these individuals and firms. Microeconomics fo ...
,
working capital
Working capital (WC) is a financial metric which represents operating liquidity available to a business, organisation, or other entity, including governmental entities. Along with fixed assets such as plant and equipment, working capital is consi ...
funds 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
Macroeconomics (from the Greek prefix ''makro-'' meaning "large" + ''economics'') is a branch of economics dealing with performance, structure, behavior, and decision-making of an economy as a whole.
For example, using interest rates, taxes, and ...
must be free for offshoring to succeed.
Computers and the Internet made work in the services industry electronically portable. Most theories that argue offshoring eventually benefits domestic workers assume that those workers will be able to obtain new jobs, even if 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.
Labor scholars argue that
global labor arbitrage
Global labor arbitrage is an economic phenomenon where, as a result of the removal of or disintegration of barriers to international trade, jobs move to nations where labor and the cost of doing business (such as environmental regulations) is inex ...
leads to unethical practices, connected to exploitation of workers, eroding work conditions and decreasing job security.
History
In the developed world, moving manufacturing jobs out of the country dates to at least the 1960s while moving knowledge service jobs offshore dates to the 1970s 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 combined 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
The Internet (or internet) is the global system of interconnected computer networks that uses the Internet protocol suite (TCP/IP) to communicate between networks and devices. It is a '' network of networks'' that consists of private, pub ...
, particularly fiber-optic intercontinental long haul capacity, and the
World Wide Web
The World Wide Web (WWW), commonly known as the Web, is an information system enabling documents and other web resources to be accessed over the Internet.
Documents and downloadable media are made available to the network through web se ...
reduced "transportation" costs for many kinds of information work to near zero.
Impact of the Internet
Regardless of size, companies benefit from accessibility to labor resources across the world. This gave rise to business models such as
Remote In-Sourcing
Outsourcing is an agreement in which one company hires another company to be responsible for a planned or existing activity which otherwise is or could be carried out internally, i.e. in-house, and sometimes involves transferring employees and ...
that allow companies to tap into resources found abroad, without losing control over security of product quality.
New categories of work such as call centres, computer programming, reading medical data such as X-rays and
magnetic resonance imaging
Magnetic resonance imaging (MRI) is a medical imaging technique used in radiology to form pictures of the anatomy and the physiological processes of the body. MRI scanners use strong magnetic fields, magnetic field gradients, and radio wave ...
, medical transcription, income tax preparation, and title searching are being offshored.
Ireland
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" which led to Ireland becoming one of the richest EU countries.
[
]
NAFTA
In 1994 the North American Free Trade Agreement
The North American Free Trade Agreement (NAFTA ; es, Tratado de Libre Comercio de América del Norte, TLCAN; french: Accord de libre-échange nord-américain, ALÉNA) was an agreement signed by Canada, Mexico, and the United States that crea ...
(NAFTA) went into effect, and it increased the velocity of physical restructuring
Manufacturing companies often refer to their manufacturing plant transfer, consolidation and closure activities as physical restructuring. This can be done by moving production or services overseas, a process known as offshoring. Such projects beg ...
.
The plan to create free trade areas (such as Free Trade Area of the Americas
The Free Trade Area of the Americas (FTAA) was a proposed agreement to eliminate or reduce the trade barriers among all countries in the Americas, excluding Cuba. Negotiations to establish the FTAA ended in failure, however, with all parties unab ...
) 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.
Offshore outsourcing
There are four basic types of offshore outsourcing:
* Information technology outsourcing
Outsourcing is an agreement in which one company hires another company to be responsible for a planned or existing activity which otherwise is or could be carried out internally, i.e. in-house, and sometimes involves transferring employees and ...
(ITO) is where outsourcing related to technology or internet such as computer programming.
* Business process outsourcing
Outsourcing is an agreement in which one company hires another company to be responsible for a planned or existing activity which otherwise is or could be carried out internally, i.e. in-house, and sometimes involves transferring employees and ...
(BPO) involves contracting out of operational functions to a third party service provider.
* Offshore software development
* Knowledge process outsourcing (KPO) is a type of outsourcing which involves or requires a more advanced technical skill and a higher level of expertise.
Criteria
The general criteria for a job to be offshore-able are:
* There is a significant wage difference between the original and offshore countries;
* Remote work
Remote work, also called work from home (WFH), work from anywhere, telework, remote job, mobile work, and distance work is an employment arrangement in which employees do not commute to a central place of work, such as an office building, ware ...
is possible in the job;
* The work can be transmitted over the Internet
The Internet (or internet) is the global system of interconnected computer networks that uses the Internet protocol suite (TCP/IP) to communicate between networks and devices. It is a '' network of networks'' that consists of private, pub ...
;
* The work is repeatable.
Source of conflict
The opposing sides regarding offshoring, outsourcing, and offshore outsourcing are those seeking government intervention and Protectionism
Protectionism, sometimes referred to as trade protectionism, is the economic policy of restricting imports from other countries through methods such as tariffs on imported goods, import quotas, and a variety of other government regulations. ...
versus the side advocating Free Trade
Free trade is a trade policy that does not restrict imports or exports. It can also be understood as the free market idea applied to international trade. In government, free trade is predominantly advocated by political parties that hold econo ...
.
Jobs formerly held by U.S. workers have been lost, even as underdeveloped countries such as Brazil and Turkey flourish. Free-trade advocates suggest economies as a whole will obtain a net benefit from labor offshoring, but it is unclear if the displaced receive a net benefit.
Some wages overseas are rising. A study by the U.S. Bureau of Labor Statistics found that Chinese wages were almost tripled in the seven years following 2002. Research suggests that these wage increases could redirect some offshoring elsewhere.
Increased training and education has been advocated to offset trade-related displacements, but it is no longer a comparative advantage
In an economic model, agents have a comparative advantage over others in producing a particular good if they can produce that good at a lower relative opportunity cost or autarky price, i.e. at a lower relative marginal cost prior to trade. Comp ...
of high-wage nations because education costs are lower in low-wage countries.
See also
*Anti-globalization movement
The anti-globalization movement or counter-globalization movement, is a social movement critical of economic globalization. The movement is also commonly referred to as the global justice movement, alter-globalization movement, anti-globalis ...
*Borderless selling
Borderless selling is the process of selling services to clients outside the country of origin of services through modern methods which eliminate the actions specifically designed to hinder international trade. International trade through "bor ...
* Call center security
*''Decline and Fall of the American Programmer
''Decline and Fall of the American Programmer'' is a book written by Edward Yourdon in 1992. It was addressed to American programmers and software organizations of the 1990s, warning that they were about to be driven out of business by programmer ...
''
*Domestic sourcing
Domestic sourcing is the activity of contracting for goods or services that are delivered or manufactured within the buyer's home country borders. Domestic sourcing is becoming central to the discussion of "Buy American" or the protectionist debat ...
*Follow-the-sun
Follow the Sun (FTS), a sub-field of globally distributed software engineering (GDSE), is a type of global knowledge workflow designed in order to reduce the time to market, in which the knowledge product is owned and advanced by a production si ...
* Free trade controversy
*Global delivery model
{{Notability, date=November 2016
The term global delivery model is typically associated with companies engaged in IT consulting and services delivery business and using a model of executing a technology project using a team that is distributed glob ...
*Global labor arbitrage
Global labor arbitrage is an economic phenomenon where, as a result of the removal of or disintegration of barriers to international trade, jobs move to nations where labor and the cost of doing business (such as environmental regulations) is inex ...
*Global sourcing Global sourcing is the practice of sourcing from the global market for goods and services across geopolitical boundaries. Global sourcing often aims to exploit global efficiencies in the delivery of a product or service. These efficiencies include ...
*Globality
Globality is the consciousness of the world as a single place. The concept of globality was introduced in the social sciences by British sociologist Roland Robertson. It signifies the spreading and deepening consciousness of the world-as-a-whole an ...
* Globally integrated enterprise
*Guest worker
Foreign workers or guest workers are people who work in a country other than one of which they are a citizen. Some foreign workers use a guest worker program in a country with more preferred job prospects than in their home country. Guest worke ...
*Labor shortage
In economics, a shortage or excess demand is a situation in which the demand for a product or service exceeds its supply in a market. It is the opposite of an excess supply ( surplus).
Definitions
In a perfect market (one that matches a sim ...
*List of international trade topics
This is a list of international trade topics.
* Absolute advantage
* Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS)
* Asia-Pacific Economic Cooperation (APEC)
* Autarky
* Balance of trade
* Barter
* Bilateral Investm ...
*Low-cost country sourcing
Low-cost country sourcing (LCCS) is procurement strategy in which a company sources materials from countries with lower labour and production costs in order to cut operating expenses. LCCS falls under a broad category of procurement efforts called ...
*Offshore company
The term "offshore company" or “offshore corporation” is used in at least two distinct and different ways. An offshore company may be a reference to:
* a company, group or sometimes a division thereof, which engages in offshoring business pro ...
*Offshoring Research Network
The Offshoring Research Network is an international network of researchers and practitioners studying organizations in their transition to globalizing their business functions, processes and administrative services. The ORN conducts annual survey ...
*Programmers Guild
''Programmers Guild'' is the name of an attorney-founded group intended to protect legal hi-tech immigrants to the United States and help them in obtaining Green cards. ''The New York Times'' called them a trade group and, in 2016, a "tech work ...
*Restructuring
Restructuring is the corporate management term for the act of reorganizing the legal, ownership, operational, or other structures of a company for the purpose of making it more profitable, or better organized for its present needs. Other reasons ...
*Runaway production
Runaway production is a term used by the American Hollywood industry to describe filmmaking and television productions that are intended for initial release/exhibition or television broadcast in the U.S., but are actually filmed outside of the ...
*Tax haven
A tax is a compulsory financial charge or some other type of levy imposed on a taxpayer (an individual or legal entity) by a governmental organization in order to fund government spending and various public expenditures (regional, local, or n ...
By sector:
*Information technology consulting
In management, information technology consulting (also called IT consulting, computer consultancy, business and technology services, computing consultancy, technology consulting, and IT advisory) is a field of activity which focuses on advising or ...
*Offshore custom software development
In software engineering, offshore custom software development consists in offshoring the software development process in a country where production costs are lower, thus decreasing budget spending.
Background Early days
Since the 1960s and t ...
References
External links
An Atlas of Offshore Outsourcing by David E. Gumpert (''BusinessWeek'' online)
Further reading
* Consulate General of the Kingdom of The Netherlands Guangzhou (2011).
Outsourcing Comparison Study South-East Asia: China, India, Vietnam 2011-2012
'.
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* Alan S. Blinder
Alan Stuart Blinder (, born October 14, 1945) is an American economics professor at Princeton University and is listed among the most influential economists in the world according to IDEAS/RePEc. He is a leading macroeconomist, politically liber ...
,
Offshoring: The Next Industrial Revolution?
in ''Foreign Affairs'', Vol. 85, No. 2 (March/April 2006), pp. 113–128.
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* Thomas L. Friedman, '' The World is Flat: A Brief History of the Twenty-first Century'' (2005).
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* Catherine L. Mann & Jacob Funk Kirkegaard, ''Accelerating the Globalization of America: The Role for Information Technology'', Institute for International Economics, Washington D.C., Peterson Institute for International Economics
The Peterson Institute for International Economics (PIIE), known until 2006 as the Institute for International Economics (IIE), is an American think tank based in Washington, D.C. It was founded by C. Fred Bergsten in 1981 and has been led by ...
(June 2006).
* Stephan Manning, Silvia Massini & Arie Y. Lewin, A Dynamic Perspective on Next-Generation Offshoring: The Global Sourcing of Science and Engineering Talent, ''Academy of Management Perspectives'', Vol. 22, No. 3 (October 2008), pp. 35–54.
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{{Authority control
Business terms
Economic globalization
International business
International trade
Offshore finance
Outsourcing