International Business Offshoring Introduction Offshoring also known as offshore outsourcing, “is defined by firm activities being geographically relocated from the firm’s domestic country to a lower-cost foreign country’ (WTO, 2013). Frequently, the operations are offshored from industrialized countries to less-developed countries in order to reduce labor expenses and to leverage the cost advantage. The aim of this report is to explore on the aspect of the offshoring and answer the question is it beneficial to the society.
In the further part this report will evaluate on the aspect of “reshoring” as the process of companies eturning back to home country that is currently taking place. The aim will be to answer the question whether it is as a result of the correction to offshoring or a reaction to a change in circumstances and a rethinking of strategy by companies. Offshoring – concept and potential benefits and drawbacks to the society The concept of the offshoring in the increasingly dynamic global market has been introduced as an answer to Multi National Enterprises (here and after MNE) how to stay competitive growing.
In the era of globalization and economic turmoil, the idea f gaining competitive advantage has become as a priority. However, shifting production has raised the arguments against the exportation of the Jobs from the home country. This can cause higher unemployment and the exclusion particular jobs from the market. Table 1. 1 presents the percentage of lost Jobs due to offshoring. In some cases, such as Portugal, offshoring accounts for more than 50% (Figure 1) as a reason of lost Jobs (WTO, 2011). Figure 1: Total Job losses due to offshoring announced in the ERM, by country, in 2005.
Daniels and Sullivan (2013) pointed that reason for MNE to move low-skilled Jobs to hird part country is to lower the price for their products and services. The price competitiveness determinates competitive advantage and growth of the company. As a result growing company can create new Jobs, higher-skilled and better paid. Recent trends, however, show that in order to stay competitive, MNE are ready to shift more Research of 2,700 US and European companies showed that 700,000 higher-skilled jobs were outsourced in 2009 and another 250,000 will be through 2014 (Daniels, Sullivan, 2013).
As Roberts pointed out (2013), to stay balanced with the population rowth between 2002 and 2011 US economy needed around 14 million new Jobs. However, at the end of 2011 there were only 1 million more Jobs than in 2002. Within this period 3,5 million of middle class manufacturing Jobs were lost. 1,188,000 new waitresses and bartenders Jobs were created, lowly paid service Jobs that cannot be offshored. MNE seek for offshoring not only to gain production cost efficiency but also to reach other resources hardly or not available internally.
Study of Oshri and Kotlarsky (2009) on strategic drivers and risks of offshoring (Figure 2), based on nterview with Chief Information Officers (CIOs) and Chief Financial Officers (CFOs) of 263 European leading companies unveiled the priority drivers for offshoring. In contrast to common belief, Clos and CFOs pointed that access to skills not available internally is more important (64%) that cost reduction factor (41 (Oshri and Kotlarsky, 2011). This can be observed in the example of India. Today India’s higher education institutions produce 4. million skilled workforces annually (Business Standard, 2013), many of them specialized in software engineering, computer chip design, and code writing. This of course affects employees from other well developed countries as Indians specialists and engineers are lower paid. Figure 2: Key drivers of offshoring, source: Oshri and Kotlarsky (2009) Another issue that needs to be considered is the requalification and ability to adapt to Job market by redundant workers. High unemployment causes increasing costs for the government, either to retrain or provide with the benefits for the unemployed.
People provided with benefits might struggle to raise money for their children education. They, without sufficient funds to gain higher qualification, may feel excluded from the society. Such situation certainly can affect productivity of whole generation. Furthermore, it was rightly noted by Roberts (2013) that short term strategy of American’s companies to reach profits cause them not only losing their best employees but also the consumers who buy their products. Employees being unemployed or doing lower paid Jobs are less presence in the consumer market.
They also provide fewer retirement savings for future investments. Reshoring – concept and drivers for MNE Due to increasing costs of offshoring number of businesses are turning to new trend of reshoring, coming back with the production to home country. In the last decade wages in China has gone up by 10-20% a year, faster than the labor productivity. The Chinese government has set a target for annual increases in the minimum wage of 13% until 2015. Moreover, a stronger Chinese currency has made the costs even higher (The Economist, 2013). On the other hand, the costs in the US are falling.
It has been caused by lowering wages in some states due to high unemployment and agreements between businesses and unions (The Economist, 2013). This along with the increasing productivity, falling energy prices and come back with their operations. Additionally, oil price (Figure 3) that has been increasing in the last few years. As a result, cost of transportation from China or India has risen significantly. Figure 3: Figure 1. US crude oil prices (based on average prices paid by US refiners for all grades of oil based on EIA data) converted to 2012$ using CPI-Urban data from the US Bureau of Labor Statistics.
Due to high costs, in 2012, 37% of American companies with annual sales above $1 billion were planning or actively considering moving production back to US. Further 48% of companies with sales above $10 billion came out as reshorers. Besides the increasing costs of offshoring, many companies faced the dilemma of dislocation of R&D hubs from manufacturing sites. In many cases this causes negative effects. Many companies are reluctant to shift their innovation sites to other countries in order to not lose the valuable known-how and intellectual property.
Some of the companies, looking for cost cut, moved production to other locations, most often closer to their borders. This new trend, called nearshoring, relates to the shifting the production and service activity to geographically closer locations. Figure 4 shows three clusters where the companies, called clients, located their facilities in distance- limited locations (Carmel, Abbott, 2007). Number of US companies shifted their operations to Mexico and South America. The average wage in Mexico is slightly higher than that in China.
The costs of transporting products to US are far lower that from China, and the time of shipping from Mexico is counted in days, not weeks (The Economist, 2013). Figure 4: Global distribution of nearshore destinations and their division into three clusters. Conclusions and Recommendations As a conclusion, number of MNE from developed countries moved production sites and services to lower cost countries. This has been done in order to gain and keep competitive advantage over other competitors. However, over the past few years, businesses have faced increasing costs of operating in offshored countries.
Despite that production costs in US might still be higher than in China, the gap has narrowed substantially, and it seems no longer to be a clinching reason for manufacturing in the emerging markets. Separate locations for innovation centers manufacture sites appeared to be a challenge for some companies as well. Problem their face is that host countries such as China, do not provide sufficient regulations to protect the intellectual property. Some firms are concerned about moving to China because of their fear to lose their technology and know-how.
Some MNE decided to come back to home country, others relocated their sites to lower production cost countries closer to their borders. However, the aim of the nearshoring is the same as offshoring, cost efficiency, and is good alternative to many companies, not to the society in the home country. Offshoring is trend that will be playing important role ircumstances, the strategy of the MNE will change too. The countries perceived today as a source of low cost labor, have become more and more often seen as a consumer markets.
China, after India most popular offshoring destination, is also 2nd the biggest economy in the world, with fast growing middle class and forecast to reach 630 million consumers by the 2022 (The Diplomat, 2013). Population of BRIC countries accounts for around 2. 6 billion, which is around 27% of world population and is still growing (worldometers, 2013). This means MNE will be still going offshore in order to gain their share in those markets. Producing and sending products from one place will not be rational in the few years.
Globalisation and developing markets will force MNE to set up nearshoring instead of offshoring in order to be able to recognize and respond to local conditions quick. Increasing pressure for the local responsiveness will lead to multi-domestic strategy where MNE will have to deal with the consumer divergence and host-government policies (Daniels, Sullivan, 2013). The size of the reshoring will depend on the strength of the government and law-makers in the developing countries. Win the businesses over and make them come back to ome country will be one of the greatest challenges for the policy-makers in the coming years.
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