Offshoring Activities And Key Determinants Of Partner Selection
Types of Offshoring Activities
1.Through practicing the offshoring activities an organization can transfer some its business activities overseas. This can either be in the form of an operational process such as manufacturing or a supporting process for instance accounting or both. The offshoring activities can be divided into two types which are namely the production operation related offshoring or service related offshoring (Bandick, 2016). In relation to this a few processes that helps in evaluating the business can be taken into account. Those factors ranges from business size, cultural environment, infrastructural framework. Availability of skilled workers an standard of the industry. Evaluating these factors and observing them closely will in turn help to determine why the Asian countries are evolving as the most efficient offshoring partner in comparison to the countries of South America or Africa (Kvedaraviciene and Boguslauskas, 2015).
Since the past few years the infrastructural framework of China and India have depicted significant growth and development. These two countries taken together have acquired the lion’s share of the total market share of the world which as a result contributed effectively in the economic development of these two countries (Clampit et al., 2015). The governments of both the countries have invested enormously in developing the communication and transportation systems. Moreover, the businesses within the countries have also marked significant growth during this period. There are mainly five key determinants which should be considered by an organization while selecting the offshoring countries. These five key factors can be stated as follows,
Infrastructure
It is needless to mention that the geographical location should be considered first while selecting the country of outsourcing, however, the most critical factor in this case is the infrastructure of the service provider which can be considered as the main determining factor of offshoring choice. Now in relation to India it can certainly be stated that the country has projected significant growth in terms of infrastructural facilities since the past few years (Rodríguez and Nieto, 2016). Various countries have already selected India as their offshoring partner. However, it has been projected that by the end of 2040 the Indian economy will be needing $4.5 trillion of investment for developing its infrastructure furthermore. As a result the country is thrusting on development and betterment of its existing infrastructure so that the foreign investors become willing to invest in the country (Gylling et al., 2015). The Chinese infrastructure on the other hand, has also projected significant development. Specifically the transport infrastructure of China is being developed at a rapid pace.
Key Determinants of Offshoring Partner Selection
Business Size
The businesses which is offshoring should certainly consider whether the service provider have experience of working with organizations of their size or not. In India and China there are numerous service providers and hence this factor is in favor of any foreign business willing to offshore in these countries (Musteen, 2016).
Cultural Alignment
The theorists suggest that businesses should focus on offshoring to only those locations with which they will found certain similarities in culture. Language barriers and cultural gap may affect the productivity. In this context it can be stated that India and China are two huge countries which possess multicultural environment and cultural amalgamation is quite normal in these countries (Oshri et al., 2015).
Local Talent Pool
Due to the higher number of educated population no organizations will ever face difficulties in finding educated and skilled workforce at lower cost at least in these two countries.
Industry Standards
The industry standard is also quite high in India and China. As both of the countries are already hosting several foreign business, these countries are experienced in maintaining higher industry standards.
These are the underlying reasons for which the businesses are choosing India and China as their offshoring partner compared to Africa and South America.
2 aIn an economic perspective, often the offshoring activities are considered as non-viable activities from the part of the business. Mainly the companies offshore the different segments of their entire production process in different countries in order to save cost. However, this concept is not always correct, as in order to conduct business in the foreign countries the business entities are required to follow certain administrative legal framework which can in turn offset the reduction in cost (Moe et al., 2014). On the other hand, the outputs of the production abroad may not mitigate the quality standards set by the company. Furthermore, the transportation cost, tariff may also make the entire production process unprofitable. On the other hand, properly trained labor force is required in the foreign country which is essential for effective production. Therefore, it can be stated that offshoring abroad is not always a profitable activity it may pose certain shortcomings as well.
b.If increasing returns to scale prevails in a market then the level of output can be increased more in comparison to the increase in the level of inputs. This means that increasing the inputs by smaller amounts will increase the level of output largely. This situation can be explained with the help of the following diagram
Figure 1: Increasing Returns to Scale
(Source: Mihalache and Mihalache, 2016)
For the sake of simplicity it is assumed that price of capital is same in both the foreign and domestic country while labor is cheaper in the foreign country. If the business is experiencing increasing returns to scale it should certainly produce a part of its business in the foreign country as with cheaper labor it will be able to continue the production process more profitably (Mihalache and Mihalache, 2016).
c.The production function of the firm is given by,
Q=K2L2
The MPL=2K2L and MPK=2L2K
The efficient production point is where MRTSLK= MPL/ MPK = K/L
K/L= 20/40=1/2
L=2K
Substituting this value of L in the production function, K= 2.23 as L=2K=4.46
Hence the total cost of producing 100 units at home will be 20*2.23+40*4.46= 223
Infrastructure of India and China
The total cost of producing the entire output in the home country is $223
Similarly, the cost of labor that is the wage is $10 in the foreign country and hence the cost of production could be determined following the same process,
K/L=10/40=1/4
L=4K
Substituting this value of L in the production function yield K=1.5, L= 6
Therefore the cost of production will be,
10*1.5+40*6= 255
Hence the total cost of producing the entire amount abroad is higher and hence the seller should produce in the home country only.
If the organization is willing to produce half of the total output in domestic country,
The MRTS will be same and hence K/L=1/2 and L=2K
Substituting the value in the production function 50=K2L2
The value of K=1.8 L=3.6
The value of total cost is 180
If the company produced half of the output in the foreign country then following the same procedure the value of K=1.32, L= 5.28 as K=4L as previous
Then the total cost would be 237.6
Hence this would certainly not be a wise decision as manufacturing dividedly is becoming more expensive.
d.In order to maintain the competitive advantage the company should produce in the home country only. On an added notion it could add some unique feature to its product as well.
3.In order to deal with the current employment situation in the United States the president Donald Trump has implemented three trade policies. Primarily the United States exports a large number of automobile spare parts to Mexico. This new policy has mentioned that the car which will be sold either in United States or Mexico or Canada will be needing 62.5% of the spare parts from those three countries. This policy has been regarded as the rules of origin. Secondly inn order to bring back the workers from Mexico the environmental and labor standard in the country will be increased (Schniederjans et al., 2015). Several organizations are operating in Mexico because of the limited restrictions. Increasing these standards will affect these companies. Finally the VAT or value added tax in Mexico has been maintained at the same level as the other countries of America and the policy will abolish this tax because the policy makers find this unfair.
Reference List
Bandick, R., 2016. Offshoring, plant survival and employment growth. The World Economy, 39(5), pp.597-620.
Clampit, J., Kedia, B., Fabian, F. and Gaffney, N., 2015. Offshoring satisfaction: The role of partnership credibility and cultural complementarity. Journal of World Business, 50(1), pp.79-93.
Gylling, M., Heikkilä, J., Jussila, K. and Saarinen, M., 2015. Making decisions on offshore outsourcing and backshoring: A case study in the bicycle industry. International Journal of Production Economics, 162, pp.92-100.
Kvedaraviciene, G. and Boguslauskas, V., 2015. Underestimated importance of cultural differences in outsourcing arrangements. Engineering Economics, 21(2).
Mihalache, M. and Mihalache, O.R., 2016. A decisional framework of offshoring: integrating insights from 25 years of research to provide direction for future. Decision Sciences, 47(6), pp.1103-1149.
Moe, N.B., Šmite, D., Hanssen, G.K. and Barney, H., 2014. From offshore outsourcing to insourcing and partnerships: four failed outsourcing attempts. Empirical Software Engineering, 19(5), pp.1225-1258.
Musteen, M., 2016. Behavioral factors in offshoring decisions: A qualitative analysis. Journal of Business Research, 69(9), pp.3439-3446.
Oshri, I., Kotlarsky, J. and Willcocks, L.P., 2015. Sourcing Models: What and When to Outsource or Offshore. In The Handbook of Global Outsourcing and Offshoring (pp. 31-75). Palgrave Macmillan, London.
Rodríguez, A. and Nieto, M.J., 2016. Does R&D offshoring lead to SME growth? Different governance modes and the mediating role of innovation. Strategic Management Journal, 37(8), pp.1734-1753.
Schniederjans, M.J., Schniederjans, A.M. and Schniederjans, D.G., 2015. Outsourcing and insourcing in an international context. Routledge.