Diving into Offshoring: Understanding the Practice Reshaping Global Business
What is offshoring?
Offshoring refers to the process of relocating company activities to another company abroad. A business entity thus moves its production to another country, usually for the purpose of tax optimization (lower taxation), reducing production costs, or increasing productivity.
Under the definition of offshoring, we can imagine the delegation of work or even entire company processes to countries that offer more favorable economic conditions and cheaper labor. Preferred destinations are usually Asian countries (such as China and India).
This step allows companies to optimize their resources and maintain competitiveness in the market. Companies often combine offshoring with outsourcing, all with the aim of being cost-effective and retaining control over key processes.
Types of offshoring
Offshoring can be approached from various perspectives:
- Ownership
You relocate the headquarters of the company to an area where you provide capital and assets to another company for business. Alternatively, you may outsource the business; for example, you enter into a contract with a company for the development of a service, and the associated tasks are subsequently carried out by an external company.
- Distance
You move the business to very distant countries or nearby. The first option achieves lower production costs but may face challenges with greater cultural differences. If you move your business just a short distance, it is called nearshoring (most commonly found, for example, in the USA).
- Processes
In this perspective of offshoring, it depends on the type of business. You relocate manufacturing processes to factories abroad and begin operating services (such as freight transport or customer service) abroad. To create new sales networks, you start using contractual external sales services abroad. However, you can also move product development beyond borders—some companies establish research centers in more developed countries.
(Dis)advantages of offshoring
Before deciding on offshoring, you should be aware of its advantages and disadvantages.
The benefits of offshoring are:
- tax optimization (lower taxation),
- cost savings (for example, lower costs for employees, technology, etc.),
- higher productivity and streamlining of processes,
- access to a qualified workforce and specialized skills in the country,
- the possibility to penetrate markets in developing countries,
- cultural diversity.
Additionally, relocating a company to a country where you want to expand your products or services can be a significant advantage.
Among the disadvantages of offshoring, we include:
- cultural and language barriers,
- concerns about intellectual property and corporate data,
- risk of losing control over the company,
- loss of employees,
- lower product quality.
How does offshoring contribute to the economy?
Offshoring not only affects your business, but in some countries, it can also contribute to improving quality of life and reducing poverty. By relocating corporate processes to developing countries, you also contribute to the economic growth of these places. For example, new jobs are created thanks to you. Another positive effect of offshoring is the opportunity to use saved financial resources for innovations, expansion, etc.