Offshoring Vs Outsourcing Labor: How To Differentiate

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Globalization has turned international trade upside-down, dislocating and redefining the various aspects of production, distribution, and most catastrophically, labor. Through globalization, businesses like E-bay and Amazon realize huge sales across the world, from Africa to Asia, and Europe, while the parent company remains domiciled in the USA. 

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One child of globalization is offshoring, which is defined as the relocation of fragments of a business’s functions to foreign lands with a myriad of objectives, chiefly, cheap labor and production costs in the foreign countries.

Before going further, one major seismic shift that takes the shape of offshoring is happening in the US, whereby companies that are primarily based in the US are relocating some of their functions, mostly manufacturing, to other parts of the world. Asia has been a widely preferred offshore destination for US businesses and others in Europe, while India and Philippines are worthy mentions.

In the US and several other European countries, offshoring has reportedly been catapulted by too stringent rules and institutionalization of labor. 

In the US, for instance, governments and labor unions have constantly been pushing for significant rises in the minimum wage. Furthermore, large companies have often been jeopardized by exorbitant tax obligations.

The persistent politicization of production and labor has culminated in massive layoffs and offshoring by US companies to other countries that have less strict regulations. 

Offshoring vs Outsourcing

These two are significant dynamics of labor. Outsourcing refers to the delegation of labor to an external entity on a contract basis. Outsourcing differs from offshoring in that while offshoring mandates the physical relocation of some functions of the business to foreign countries, outsourcing does not necessitate any geographical relocation of labor. Well, outsourcing may also take the form of offshoring when labor is outsourced from a different country but it does not always have to be the case. 

Moreover, while outsourcing seeks to contract the services of another company in any location, offshoring retains all functions of the business within the precincts of the parent company. It is only that more branches are created but the company remains one.

Furthermore, even if offshoring entails physical relocation, the business may as well relocate together with its workforce, such that there is no outsourcing of labor from the foreign country.

Mostly, companies offshoring to other countries usually shift functions with top officials in the management to oversee the functions even as they relocate geographically, while less essential and manual duties are done by laborers hired from the offshore country.

Offshoring may also happen hand in hand with outsourcing, as the latter is part of a business strategy devoid of any geographical barriers. 

The objectives of outsourcing are always to delegate peripheral tasks to other firms while  the business in question focuses on its primary functions. For instance, a media house may delegate printing to an external company such that the media company remains focused on its primary aim of sourcing and preparing news while other peripheral functions like printing are handled by companies that are actually specialized in those functions.

Microeconomics of Offshoring Labor

• Reduced labor costs 

One of the main reasons for offshoring is to evade high labor costs in, mostly, developed countries. Economies like the USA have always been keen to protect laborers, with collective bargaining groups continuously advocating for more to the employed. These demands are no good news to the employers, who will have to shift camp to less-developed areas with lower wage standards.

For instance, the minimum wage in the United States currently stands at $7.25 per hour. In a developing country like the Philippines, this amount is tantamount to a day’s wage. Philipinos will be delighted by a $4 minimum wage, and the company offshoring to the Philippines will have significantly reduced labor costs.

• Lower costs of raw materials 

Some companies will offshore to zones that are near sources of raw materials for production. Oil companies will take production near oil rigs, and will now not have to transport oil in its crude form but rather have refined oil piped to final distributors. Production costs are largely saved and other logistics costs as well.

Mining and agriculture companies are the most common to practice offshoring to reduce raw materials. Thus, offshoring is not exclusively aimed at seeking cheaper labor but may target other objectives such as reducing transport costs and the cost of tariff-charged imported raw materials.

• New opportunities

Offshoring business functions is more of a business adventure to register new business opportunities. New markets may open up, partners may come by, and the business may be empowered by new talent hired. 

Now let’s look at some of the disadvantages of offshoring on a microeconomics level:

• Impaired coordination: A Tower of Babel

Time zone differences, distanced geographical locations, language and cultural differences – all these surmount to a disjointed business, one that suffers the syndrome of confusion and imminent failure like the Tower of Babel. Even in the most advanced technologies, a business that is not physically together will suffer major inconveniences, as the old adage goes – out of sight out of mind.

• Quality Control Conundrum

Businesses operating through different branches, even within the same country, are encumbered by the conundrum of quality control. It becomes costly to monitor the different inputs and production procedures undertaken by branches overseas as compared to the procedure laid out by the parent business. 

• Elongated Supply Chain

Logistics is a treadmill that freaks out companies with overseas branches. As much as the production happens overseas, most of the products’ markets are domiciled in the parent country and elsewhere, and the produced commodities have to be re-imported into the parent state. Moreover, some companies will have to export raw materials from the parent country to foreign lands and then re-import the finished goods back. This is the treadmill that’s a nightmare in offshoring.

Macroeconomics of Offshoring

• Lost Jobs

By driving production to a foreign land, the company is simply protesting the employment conditions of the current state. People that’ll benefit more from offshoring are those in the offshored country, as they receive jobs formerly held by those in parent countries.

Check this article on types of unemployment for more insight on the consequences of offhsoring on the labor market.

• Savings on Production

Reduced costs of labor, reduced cost of raw materials and logistics, all of these result in less production and overhead costs. Companies make a lot of savings and realize increased profits.

• Low-cost Commodities

As the business spends more on production, the final product will cost less in the parent country. This is a delight for the consumers, who will also save more and invest in other areas.

The debate as to whether or not off-shoring is better for the economy is well polarized. However, it is settled that offshoring is advantageous to production, and firms will always seek refuge where they are set to benefit rather than where they are forced to act in the welfare of employees.

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