Offshoring

Offshoring refers to the practice of relocating business functions and practices to foreign locations in order to benefit from differential costs. Usually, offshoring entails the switching of jobs to locations where labor costs are lower. While firms are attracted to offshoring as a means of increasing productivity and competitiveness, the practice has proven to be politically sensitive as jobs in advanced economies are outsourced abroad.

This form of outsourcing has been taking place in manufacturing sectors since the 1960s, when a number of American firms switched more routine assembly operations to low-cost labor locations. By the end of the 1960s, for example, many American firms had switched production to the maquiladora plants along the U.S.-Mexican border. These processes have since intensified with agreements such as the North American Free Trade Agreement (NAFTA). The impetus behind offshoring in the United States was created by the need to remain competitive as new firms entered the market.

More recently, offshoring has involved moving service–sector, white-collar jobs in advanced economies overseas to locations predominantly in India and Asia. The current trend in offshoring computer-programming and call-center jobs, for example, has been facilitated by developments in information technology and communications. It is now possible to shift the location of service providers to low-cost locations without the end user being aware.

Advocates of offshoring argue that it benefits the firm by reducing costs, improving employee productivity, and allowing firms to focus on core research and development activities. This allows for increased competitiveness and benefits the firm by producing higher profits. Some of this can be reinvested in higher value-added activities. This contributes to the higher average productivity of the domestic economy, raises incomes, and benefits the consumers, who can enjoy lower-cost, reimported goods and services.

However, critics of offshoring argue that the longer-term gains enjoyed by firms and the economy as a whole are countered by the effects upon those domestic workers whose jobs are outsourced. Offshoring is accused of creating job insecurity and downward pressures upon wages. The recent trend in outsourcing white-collar jobs has made offshoring a significant political issue in the United States. During the 2004 presidential elections, offshoring was an issue of frequent debate and was blamed in some quarters for the phenomenon of “jobless recovery.” Advocates of offshoring have dismissed such claims as stemming from a “protectionist” political agenda and have argued that only a small percentage of white-collar jobs are [Page 632]affected by offshoring. They have also argued that the reverse practice of “insourcing”—foreign firms switching high-end jobs to advanced countries like the United States—is compensating the economy as a whole.