Offshoring (Research Paper Sample)

Offshoring
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Table of Contents
 TOC \o "1-3" \h \z \u HYPERLINK \l "_Toc323822567"Introduction 3
HYPERLINK \l "_Toc323822570"Offshoring overview 3
HYPERLINK \l "_Toc323822571"Advantages of offshoring  PAGEREF _Toc323822571 \h
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HYPERLINK \l "_Toc323822572"Disadvanatges of offshoring 6
HYPERLINK \l "_Toc323822573"Apple and General Electric……………………………………………………………………….. PAGEREF _Toc323822573 \h
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HYPERLINK \l "_Toc323822575"Reshoring 8
HYPERLINK \l "_Toc323822576"Factros affecting offshoring/reshoring 8
Conclusion…...................................................................................................................................9
HYPERLINK \l "_Toc323822583"References 10


Introduction
Offshoring entails outsources operations from outside world’s countries. Industrialized countries’ companies mostly practice offshoring, whereby they source cheap labor from less developed countries with the key aim of enhancing their competitive advantage, by reducing the cost of doing business. Other factors that lead to offshoring besides cheap labor include taking tax advantage, proximity to raw materials as well as, lenient regulations. In mid 20th century, companies focused on outsourcing unskilled labor but in the 21st century companies outsource skilled labor.
Offshoring has been fueled by globalization over the past a couple of decades. The increased connectivity has spread technology to the developing countries whereby their population has accessed information technology skills. Improved education in developing countries as well has been boosted by globalization. Therefore, many citizens in these countries now have acquired skills being sought by global organizations since they ask for competitive wages. For example, in India, many students have been graduating with degrees in computer science over the last a couple of decades. Therefore, many global organizations have been hiring them to work as software developers.
In developed countries, for example, United States, people with programming skills ask for extremely high wages. Feenstra (2012) states, “this is despite the fact that their counterparts in the emerging countries like China and India are offering the same programming services with low wages (100)”.
Offshoring overview
According to the Economist, the key reason behind offshoring is for global companies to take advantage of cheap labor in some emerging countries, for example, in china. Many global companies shifted their operations to China to take advantage of less expensive labor and, therefore, enhance their competitiveness in the global markets. Western firms were more concerned about high cost of labor in their home countries. Offshoring not only involve moving jobs outside the home country, but as well outsourcing, which involves sending employees to outside contractors.
According to the theory of comparative advantage, in international trade, countries should produce those goods in which they have the least opportunity cost in their production. In other words, countries should produce those goods that they produce cheaply. Offshoring, therefore, obeys this theory in that it entails shifting operations or outsourcing labor from those places where it is cheapest.
In the past, the idea of offshoring was working well for the global organizations in terms of enhancing savings. Delaney (2012) states, “in the last one decade, the organizations are rethinking about the idea (89)”. This is because many emerging countries that were promising cheap labor are now experiencing increasing wages day after day. In China, for example, the cost of labor has increased by more than 10 percent. Although there are still differences in terms of labor cost amongst world countries, other factors are as well coming into play, for example, the cost of transport. For example, a western company may shift operations to China take advantage of cheap labor, but transporting the produced goods back to US for sale becomes extremely expensive (Yesudian, 2010).
An example is Lenovo, which had shifted some of its operations to the emerging markets. For example, the company’s operations in North Carolina pay workers higher wages than its branches in China pay. However, according to the company’s leadership, the gap has reduced and cheap labor is no longer a reason to have operations in China. The company’s president says that the company now focuses on automation to enhance efficiency in its operations.
Advantages of offshoring
One of the key benefits of offshoring is the fact that many global organizations are able to access new markets in their new places of operation. Not only do they benefit from cheap labor, but as well benefit from expanded market for their goods and services. This has enabled these organizations to finances their expansion strategies through increased revenues and profitability. After shifting operations to the emerging markets, these organizations as well focus of enhancing efficiency thus cutting down the cost of doing business. Therefore, their products are competitive in the local markets, which are the new markets.
Another key advantage of offshoring is taking advantage of new pool of talents. Competent employees in terms of talent attract global organizations that resort to offshoring. By investing in training employees from emerging markets who are talented, they end up becoming innovators, which is to the best interest of the global organization. These employees ask for extremely low wages compared to their counterparts in developing countries who offer the same services.
Additionally, offshoring has assisted many global organizations in cost cutting. Because of cheap labor in emerging markets, these global organizations acquire a competitive advantage because their products trade with competitive prices in the global markets. This contributes substantially to increased revenue, as well as, profitability.
The global organizations as well do not incur high cost in training. If a company does not outsource workers, it is forced to recruit new employees. This is a way too costly to the company because there are many costs associated with recruiting new staff. For example, offshoring assists in saving recruitment time. In normal recruitment, much time is spent in advertisement for the jobs, conducting interviews, orientation as well as training. On the other hand, offshoring is free of these costs.
Disadvantages of offshoring
One of the key shortcomings of offshoring is loss of jobs in the developed countries. Unemployment is a threat to economic stability in any developed country. According to Abramovsky (2012), “by offshoring, many people who would have been doing the outsourced jobs end up being jobless (59)”. This has been contributing to decreased consumption in developed countries thus slowing down economic growth.
Another key shortcoming is that companies may be aiming at cutting down cost and saving, but end up incurring higher costs than they expected. This is because, for example, productivity of outsourced employees did not match the expectation of the global companies. The companies, therefore, end up incurring high costs in their operations. Brinkkemper (2012) states, “the quality as well may be compromised (66)". For example, after Dell shifted some of its operations to India, there were many reported cases of poor quality by customers. Compromised quality in many cases offset the cheap cost of labor and, therefore, the companies end up losing.
Global organizations as well have discovered that the high cost of shipping goods from low wage countries to the home country is extremely high. Therefore, goods cannot be sold at competitive prices in the home market. Additionally, it is true that setting operations in a place different from where the company conducts its research is a threat to innovation. This is because, the company mostly researches on how to enhance efficiency in operations as well coming up with new products. Therefore, setting operations away from research may frustrate innovation.
In today’s world, firms no longer shift operations to emerging markets to take advantage of cheap labor. One of the key reasons behind this is the fact that even in emerging markets the costs of labor has gone up. Additionally, the high shipping costs offsets the cost cutting benefits. According to Ajami (2006), “one of the he key reasons why companies are shifting their operations to emerging countries is to take advantage of new markets (250)”. In the emerging countries, for example, India and China, there is increased demand for goods and services as their middle classes grow significantly. This is not offshoring per see, but onshore.
Many global organizations now want to set operations close to the market. This is to help them in ensuring that they respond to customer demand on good time. Additionally, they would be able to tailor-make their goods and services in such a way that meet their customers needs.
Apple and General Electric
By 2010, apple had over 700,000 factory workers in China. According to the company’s top management at that time, the company needed more than 30,000 employees with engineering skills to support the factory workers. The top management claimed that the 30,000, needed to have only basic skills in engineering, but not high qualifications like masters and doctorate degrees. Compared to US workers, they were a...