Offshoring

By Author: Henry Ford
Total Articles: 189
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Towards the end of the 20th century, growth in information and communication technology has led to emergence of new forms of businesses. One of the emerging models of businesses is offshoring. Offshoring has structured international and domestic businesses in different ways. It has led to emergence of new labor economy where the domestic labor market is no longer a limitation for successful operation of a firm. Most companies which were previously forced to conform to strict domestic regulations are now finding new labor frontiers beyond their domestic market. Firms are no longer limited by the domestic labor conditions (Bliner, 2006). Most firms in developed countries have found new labor market in developing countries which charge low wages for similar quality work. Therefore, offshoring has revolutionized international labor market in different ways. However, offshoring is not a bedrock success for most firms. It comes with various challenges, especially in human resource management. Management of the domestic labor is very different from management of the international labor and this has become a major challenge for most ...
... firms (Mark, 2007). While some firms are moving their production units to low waged markets and their management, others have taken a different route and are off shoring their services to international firms with negligible interference with their management. For most firms which set operation overseas, people management becomes difficult due to cultural differences. This means that there is need to understand local business culture for firms which are establishing operations in a foreign country.
In order to understand the issue of people management for firms engaging in offoshring, this paper will look into five areas that firms must take into consideration in the outsourcing process, but first it will seek to understand what entails offshoring.
Offshoring
In broader definition, offshoring refers to the process of relocating the business process of a company to another country from its domestic market. This may be relocation of one or whole of the business process like manufacturing or other supporting processes like accounting. Offshoring is not limited to business alone since even state governments have shown a trend towards offshoring. Offshoring can be defined in terms of having work done in foreign countries (Mark, 2007). There are many reasons for offshoring but the most important reason that has been given is due to the need to have the work at a relatively lower price than in the domestic market. However, offshoring has also been done for other purposes like the need to enter into a foreign market and to tap talents which are not available in the domestic market. It may also be done with an aim of overcoming the regulations that prevent some activities from being accomplished in the domestic market.
Offshoring is a term that is used to refer to different distinct but closely related processes. It can be used broadly to refer to the substitution a service from foreign source for another service that is formally produced internally in the business. In other cases, it may refer only to important services or subsidiaries (Mark, 2007). Offshoring can be perceived in two lenses. It can be perceived in lens of product offshoring or service offshoring. Product offshoring refers to situation where the firm outsources productions from a foreign country. On the other hand, service offshoring refers to a situation where firms outsource services from a foreign market. The economic logic behind offshoring is due to cost involved. People who can sue their skills cheaply than others are cutting a competitive edge in the international labor market that is becoming ever competitive.
According to recent statistics from World Trade organization, there are countries in the world which have emerged as centers for offshoring (Bliner, 2006). In particular, India and China have emerged as two countries that have developed as strong offshoring base. China is prominently involved in offshoring of productions while India has emerged as a center in offshoring of service. The rise of these countries as world center for offshoring has been constructed alongside their large population, which enable them to provide low wages, and business environment which does not come with strict labor regulations. However, other parts of the world are also emerging as centers for offshoring services.
Offshoring has along history starting in the 20th century. In the early 20th century, John Maynard and Freidrich von Hayek came up with an economic theory which has dominated economic policy in capitalist economies. The Keynesian became central to world economy throughout the central until 1980s (Mark, 2007). During 1970s, the world was filled with economic turmoil which was due to unpredictable economic prices. These economic crisis pushed most companies out of business as uncertainty about business environment. In addition the capitalism economic brought about more labor power and the cost of labor continued to rise despite the changing environment. Most companies were forced to seek alternative cheap labor.
At the same time, there was advance in technologies which revolutionized the business environment. From 1960s, the internet has been rising as modern method of communication that had broken the distance barriers. The earlier form of offshoring was practiced in the 1960s and it mainly involved transfer of factories from developed to the developing world where factors of production were more favorable. This caused opening and closing of industries in the world leading to structural change in developed world economies. Towards 1980s, the internet became a public means of communication and it started to be applied in business. This led to rise of e-commerce which was central to development of offshoring (Mark, 2007). Successful development of IT industry was the precursor for growth of offshoring. The growth of countries like India to become center of outsourcing the world can be traced to governemtn polices undertaken in 1970s which put in place clause requiring majority ownership of all foreign ventures. Due to fear of nationalization some companies like IBM pulled out and the country was left with a small technical infrastructure which forced the government to build an industry to maintain it. The government forced the education system to produce IT experts who build India IT infrastructure. Since the turn of the millennium, most countries have found it cheap to outsource their service to these emerging markets. Most companies have since then looked forward to the international market for production and services. Offshoring has transformed most economic in a a period of few years. Taking and example of Ireland, it was one of the poorest countries in EU before U.S companies recognized its low corporate tax and most companies moved therefore (Bliner, 2006). There was a high-tech boom which transformed Ireland to become one of the richest countries in the EU in a span of few years.
Advantages and disadvantages of offshoring
Offshoring comes with a number of advantages and disadvantages. The following are advantages of offshoring:
It is a core activity that gives people access to professional, expert and high quality services. Most businesses have been offshoring in order to tap into the new talents in the international market which are not likely to be found in the domestic market.

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