Outsourcing and Offshoring Flashcards
Consequence of globalisation?
○ “One important effect of the increasing integration of the world economy is the rising importance of possibilities to offshore and outsource value‐creating activities.” (Mudambi & Venzin, 2010)
Outsourcing
is “the business practice of hiring a party outside a company to perform services and create goods that traditionally were performed in-house by the company’s own employees and staff”
• Find another third-party to do financial services, human resources, production/manufacturing etc. on your behalf
Offshoring:
is the practice of relocating business processes or production from one country to another
Nearshoring
relocating to relative close locations
example of restoring
○ E.g. Donald Trump becoming promoting nationalism, telling companies not to leave the US
• Reshoring to the US from other countries such as Mexico
• Do not offshore production manufacturing or severe consequences, such has higher taxes at the border
• Hilary Clinton also made it an important topic during the 2016 presidential election- and agreed to prevent offshoring
Difference between outsourcing and offshoring
Produce-in-house & Domestically
- high internalisation advantages
- low relative foreign location advantages
Produce in-house & Offshore
- high internalisation advantages
- high relative foreign location advantages
Outsource & Domestically
- low internalisation advantages
- low relative foreign location advantages
Outsource and Offshore
- low internalisation advantages
- high relative foreign location advantages
What determines if you offshore or outsource?
□ Internalisation and location advantages will determine if you outsource or offshore
Example of outsourcing
- Accenture is one of the globally leading firms in business process outsourcing (BPO)
□ Global FMCG giant Unilever signed multiple deals to outsource key supporting processes to Accenture
® Saves labour costs, taxes (as cheaper locations)
□ Accenture uses its network to locate labour-intensive HR support activities in relatively low-cost locations
Why do firms outsource?
cost-cutting is not always the main motivator
- improve performance
- improve speed/time to market
- reduce errors
- streamline existing processes
- access to new technology
but depends on size
Why do different size firms outsource?
Small firms
- cost drivers are out important
- market start-up can be costly
Medium sized firms
- access to resources is especially important
- entrepreneurial drivers
Large firms
- cost drivers
- resource drivers
What are some of the reasons and/or international trends that influence the demand for and supply of offshoring / outsourcing?
○ may lack skills/ specialist knowledge so they off-sourcing/ offshore as another country is more specialised
○ May outsource some of their jobs e.g. HR, to focus and specialise in another area in their firm - maintain company focus and resources towards main activities
○ Share the risk of a project
Is offshoring of long term sustainable benefit to the host country?
○ Benefits for host countries § Increase export earnings § Job creation § Higher wages § Upgrading of skills
What are some implications for the labour market of the home country?
○ Benefits for home countries
§ Allows firms to reduce costs and improve quality and delivery- enhancing their competitiveness and improves home-country economy
§ Can shift to more productive and higher-value activities- depending on ability to adapt
§ Labour market expected to shift towards high-skilled activities within industries- raising skill premium for wages
§ Contributes to productivity gains, promoting skills upgrading and enhances the purchasing power of consumers via lower import prices and
§ reduce the exposure of exporters to exchange rate fluctuations - natural hedge
○ Cons for home country
§ Loss of jobs in the local community
□ Low morale and uncertainty about job security may negatively affect output of employees
§ Quality control of the product in manufacturing- language and cultural barriers may contribute to this
