OFFSHORING

Off Shoring

Off Shoring

Introduction

Offshoring refers to subcontracting a production process, or the provision of a service, to a third-party company. As a result of Offshoring, firms transfer entire business functions to external service providers. Geographers have contributed to the study of Offshoring by investigating the spatial aspects of Offshoring, the social and cultural effects of the trade flows generated by Offshoring, and the role of Offshoring in the globalization of the economy.

Geographical work on Offshoring originated in the 1980s, when the Fordist system of mass production entered a worldwide crisis. The geographers Allen Scott and Michael Storper, working on industrial change in California, described the emergence of tightly interconnected networks of small firms in place of the previously integrated large businesses. Without using the term Offshoring directly, they described a regional pattern of firms adopting Offshoring to spread risk and contain costs. These early works introduced a spatial component in the analysis of Offshoring: The concentration of providers of Offshoring services in certain regions allowed for an easier and more efficient coordination of the production processes.

Body: Discussion and Analysis

In recent years, geographers have analyzed the economic and sociocultural consequences of Offshoring while participating in interdisciplinary schools of thought, such as (a) the Global Value Chains (GVC) Initiative, (b) the work on Global Production Networks (GPN), and (c) within the discipline, the work of economic geographers analyzing global as well as regional change.

A development in trade theory reflects observed changes in the international location of production. Increasingly, trade facilitates a geographical dispersion not only of the production of finished goods on the basis of comparative advantage but also of the individual steps in a production process—what Grossman and Rossi-Hansberg (2006, 2008) describe as “trade in tasks.” Part of the rapid growth in trade flows relative to GDP is attributable to a finer international division of labor, in which intermediate products may cross national boundaries multiple times before the finished product reaches its market. This phenomenon is often called Offshoring. However, off shoring is a more accurate term for the location abroad of particular steps in the production process, whether this means moving a step to a firm's own foreign subsidiary or contracting with an unrelated foreign firm. (In the industrial organization literature, Offshoring refers to a situation in which a firm uses intermediate goods or services provided by other firms, either domestic or foreign, rather than carrying out a particular production step on its own.) (Overby, 2007)

The redistributive consequences of off shoring, and indeed of any trade involving intermediate as well as final goods, are more complex than when only final goods are traded. Consider first a situation in which intermediate as well as final goods are traded internationally. Liberalization of import restrictions on an intermediate good (say steel) has a negative impact on the factors used in its domestic production but benefits domestic producers of import-competing final goods using the intermediate in production (say autos); the effective-protection rate on domestic production of the final goods ...