The ABC's of Offshoring

Offshoring is in a sense an extreme form of outsourcing, applied in the context of globalization. Outsourcing refers to a decision by a company to have some activities conducted outside the company – activities that are necessary to its operations, but not considered strategic or related to its distinctive strengths.

The concept of offshoring can be understood more or less narrowly. In the narrow sense, offshoring refers to the transfer of production capacity from a site within a country to a site in another country, and then importing for national consumption the goods and services that had previously been produced locally. Offshoring must not be confused with the relocation of companies and the location of production and investments abroad. Companies are relocated when the production site is moved to another country in order to be closer to that market and sell the product there. As for the location of production abroad, this is a form of foreign investment. The present paper interprets offshoring in the narrow sense of the word only.

Offshoring is actually a very old practice, which economists refer to as the specialization of labour. However, improvements in the transport of merchandise, the development of free trade, access to qualified and cheap labour, and above all the huge growth in telecommunications have accelerated offshoring so much that it now includes trade in services and has become one of the cornerstones of the global economy. Some observers have even gone so far as to say that offshoring is simply a new form of international trade.

The specialization of labour is now increasingly becoming a kind of “vertical” specialization by country for each stage of production, and this trend will increase in the future. This specialization has already seen the emergence of companies devoted to a specific stage of production, and the existence of international companies that locate different stages of production in different countries.

Frédérique Sachwald(5) has noted that the fragmentation of production processes is characteristic of modern economies. Instead of specialization in a product within a given country, we now have specialization at each stage of production within a given industry. This fragmentation has grown since the 1980s, and emerging countries are now gradually increasing their ability to perform increasingly complex tasks, including design and some development work. In short, offshoring increasingly goes hand in hand with globalization.

source: http://www.parl.gc.ca/information/library/PRBpubs/prb0459-e.htm