Offshoring

Offshoring is the relocation of business processes, operations, or production to another country, typically to reduce costs by accessing lower wages, favorable regulations, or specialized capabilities not available domestically (Blinder A.S. 2006, p.113)^[1]. The American company manufactures its products in China. The British bank runs its call center in India. The German automaker sources components from Mexico. Each has moved activities offshore—pursuing labor arbitrage, operational efficiency, or market access through geographic relocation.

Offshoring accelerated dramatically from the 1980s through 2010s, enabled by falling trade barriers, cheaper transportation, and telecommunications advances. China became the "world's factory," absorbing manufacturing from developed economies. India emerged as a services hub, handling everything from software development to financial processing. By the 2010s, however, the trend showed signs of reversal—"reshoring" became a countervailing force as automation reduced labor cost advantages and supply chain vulnerabilities became apparent.

Types

Offshoring takes different forms:

Manufacturing offshoring

Production relocation. Moving factories and assembly operations to lower-cost countries. Electronics in China, apparel in Bangladesh, automotive parts in Mexico^[2].

Historical pattern. Manufacturing offshoring began in the 1970s, accelerated through the 1990s, and peaked in the 2000s before partial reversal.

Services offshoring

Knowledge work. Moving service activities—customer support, software development, accounting, legal research—to countries with educated workforces and lower wages.

Technology enablement. Telecommunications and internet made services offshoring possible. Work that once required physical presence can now happen anywhere^[3].

Captive versus outsourced

Captive offshoring. The company establishes its own operations abroad, maintaining ownership and control.

Offshore outsourcing. The company contracts with foreign providers to deliver services or produce goods. This combines offshoring with outsourcing.

Drivers

Companies offshore for various reasons:

Cost reduction. Labor cost differences remain primary. A software developer in India might cost 20-40% of a comparable American developer^[4].

Skills access. Some countries have specialized capabilities—engineering talent in Eastern Europe, pharmaceutical manufacturing expertise in Ireland.

Market access. Manufacturing near target markets reduces shipping costs and tariffs, and demonstrates local commitment.

Scale flexibility. Offshore operations can scale up or down more easily than domestic facilities.

Challenges

Offshoring creates difficulties:

Operational

Quality control. Distance makes oversight difficult. Quality problems may emerge after products ship or services are delivered^[5].

Communication. Time zone differences, language barriers, and cultural misunderstandings complicate coordination.

Intellectual property. Moving production or processes abroad exposes proprietary knowledge to leakage or theft.

Strategic

Capability erosion. Companies may lose competencies they once possessed. Boeing's 787 Dreamliner problems illustrated risks of over-reliance on offshore suppliers.

Supply chain risk. Long supply chains are vulnerable to disruption. The COVID-19 pandemic and Suez Canal blockage revealed these vulnerabilities^[6].

Social

Domestic job loss. Offshoring eliminates jobs in home countries, creating political backlash and social costs.

Working conditions. Some offshore facilities have faced criticism for labor practices.

Recent trends

The offshoring landscape has shifted:

Automation. Robots and AI reduce labor cost advantages, making domestic production more competitive^[7].

Reshoring. Companies are bringing production back home for quality, speed, and risk reduction.

Nearshoring. Moving production to nearby countries (Mexico rather than China for U.S. companies) balances cost savings against distance challenges.

Diversification. Rather than concentrating in one country, companies spread operations across multiple locations.

Decision factors

Effective offshoring decisions consider:

Total cost. Including hidden costs—travel, management overhead, quality problems—not just labor rates.

Strategic importance. Core competencies may not be candidates for offshoring^[8].

Risk tolerance. Supply chain disruption, quality failures, and intellectual property theft carry different risks for different organizations.

Long-term trends. Labor arbitrage diminishes as developing country wages rise.

Offshoring — recommended articles

Outsourcing — Globalization — Supply chain management — Operations management

References

• Blinder A.S. (2006), Offshoring: The Next Industrial Revolution?, Foreign Affairs, 85(2), pp.113-128.
• Lewin A.Y., Peeters C. (2006), Offshoring Work: Business Hype or the Onset of Fundamental Transformation?, Long Range Planning, 39(3), pp.221-239.
• UNCTAD (2004), World Investment Report: The Shift Towards Services.
• McKinsey Global Institute (2019), Globalization in Transition.

Footnotes

1. ↑ Blinder A.S. (2006), Offshoring, p.113
2. ↑ UNCTAD (2004), World Investment Report, pp.89-104
3. ↑ Lewin A.Y., Peeters C. (2006), Offshoring Work, pp.224-228
4. ↑ McKinsey Global Institute (2019), Globalization in Transition
5. ↑ Blinder A.S. (2006), Offshoring, pp.118-122
6. ↑ UNCTAD (2004), World Investment Report, pp.134-148
7. ↑ McKinsey Global Institute (2019), Automation and Reshoring
8. ↑ Lewin A.Y., Peeters C. (2006), Offshoring Work, pp.234-236

Author: Sławomir Wawak