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What Is Offshoring?

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  • Written By: Malcolm Tatum
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  • Last Modified Date: 16 November 2014
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"Offshoring" is a term used to describe the relocation of a business from one nation to another. Typically, the relocation occurs in order to take advantage of savings in operational costs, enjoy a more advantageous tax situation, or both. In some cases, the offshoring effort does not involve the relocation of an entire business, but the strategic placement of specific departments or functions at an international location, while retaining a presence in the country of origin.

In some quarters, offshoring does not refer to the relocation of a business per se, but to the relocation of selected functions within the company structure. For example, a textile firm based in the United States of the United Kingdom may choose to maintain a corporate headquarters in the country of origin while establishing manufacturing facilities in a nation that offers tax incentives and the promise of less expensive labor forces. Once the new facilities are established and producing goods for sale, domestic plants are slowly phased out and sold off. The business benefits from decreasing its manufacturing costs and possibly gaining some tax advantages while still maintaining a network of sales offices and a corporate headquarters at home, allowing it to also enjoy any tax benefits that may be available to a domestic based corporation.

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The range of benefits generated by offshoring will vary from one situation to another. The scope of the operation involved will often dictate the scope of benefits that the new host countries are willing to extend in return for the promise of more jobs for their citizens. Taking into consideration any labor laws that would impact the types of wages that can be offered will be essential when considering the offshoring solution. For many businesses, this approach is viable and will save money in the long run. Accurately projecting the savings and allowing for any new expenses that may be generated due to the arrangement, such as import and export taxes, will make it easier for a given company to determine if the move is in the best interests of the business over the long term.

The concept of offshoring is controversial in some circles. While there is general acknowledgement that the process does allow companies to take advantage of savings that could not be generated otherwise, detractors of this approach note that this process has the potential to weaken the infrastructure of some countries as more and more companies choose to produce goods outside the nation. As a result, employees displaced from plant closings that occur when production facilities are moved out of the country may or may not be able to secure new jobs, which in turn hurts the local economy. Proponents see offshoring as providing benefits that include lower costs for goods and services to the general public, which in turn helps to offset the financial issues created by the loss of jobs domestically.

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Markerrag
Post 2

That's not so simple a question to answer and that is probably why opinions are divided on this issue. It may well be that some companies avoid charging more for goods if they move their manufacturing processes to other countries. It may be that some others could make a profit if they kept using domestic labor but just want to squeeze as much cash out of their products as they can.

The answer to the question depends on each individual company, doesn't it?

Vincenzo
Post 1

One question that no one seems to be able to answer correctly is whether offshoring does, in fact, save consumers money. Let's say a shoe company sells a popular sneaker for $100. The company offshores its manufacturing operations in an attempt to save on labor costs, yet still charges $100 for the same pair of sneakers.

Would the company have been forced to raise the cost of that pair of sneakers if it was made domestically? Or, was the move made simply so that company could realize more profit on every pair of sneakers sold?

If the former is true, then there is a clear benefit to consumers. If the latter is true, no one benefits but the shareholders of the company. The correct answer seems to depend on who you ask.

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