Updated on September 29, 2016
Offshoring Vs. Outsourcing
While they both have a similar theory in obtaining services from another source, in practice they are very different and have a significant difference in its impact on a country’s economy. Firstly, outsourcing is the process in which you obtain the services or goods from an external supplier. They may be within the same region or in a different region. In this process only a contract or delegation of goods or services is transferred. However, in the case of offshoring, it does not necessarily have to be a third party which is doing the function for you, but it may be a part of the parent company, albeit in a different region or geographical location.
Advantages of Offshoring
Offshoring allows one to maintain the functions within the jurisdiction and control of the parent company while still enjoying the reduced overhead costs of having it in the same region as the parent company. Large multinational corporations are moving their factories and manufacturing plants to the deserts of the Middle East or to remote corners of Asia to tap into the vast cheap labor base. These countries have also identified the benefits of having large corporations investing in infrastructure and the possibility of jobs and thus, are promoting their land through tax holidays, lax regulations and thus making it very attractive for companies to offshore. Just consider having call center consultants within the city limits of New York and having the same.
Or even lager consulting firm in the outskirts of India or China? This allows companies not only to tap into the large labor base, but also in to new markets through trade agreements with the governments. India, China and Brazil have a thriving market base which is very hard to tap into due to their local producers and regulations. Having an offshore factory in their shores makes this a lot easier to get around the tight regulations imposed on imports.
Disadvantages of Offshoring
While all those advantages persist for the company, the economy of the parent company suffers significantly. While outsourcing may be limited to the same region or even if it to a different region, no physical assets are transferred and no significant capital is thus removed from the country. With offshoring, significant capital is removed from the parent company, which usually tends to be from the USA and Europe and is moved to the Asia pacific region. While those nations develop through the foreign currency flowing in and jobs created, the parent country suffers. Managing both is in a form matter of principal as much as it is a financial decision and the government regulations are liable to control this.