The increased competition from developing countries of Asia and Eastern Europe caused firms to implement offshoring strategies – moving the production abroad. Relocation has been an ongoing trend in the business area to achieve better results on global marketplaces (Lin et al., 2017). Such methods aid obtains these businesses several cost advantages; however, many drawbacks are not vocalized; therefore, two sides of moving to manufacture overseas are to be discussed in the essay. The study is relevant because, at any time, companies must know all benefits and downsides of offshoring to be assured of the risks that occur in the global market. The primary purpose of the study is to outline the main advantages and disadvantages of moving production to developing countries and discover the main reasons for such decisions. This essay focuses on the political social and economic sphere that is of most influence on such businesses.
Many factors cause companies to move their production overseas, most of them being financial and competitive benefits. The choice to move production specifically to the developing countries is supported by the cost advantages like cheaper labor and technology costs. However, according to Musteen (2016), other strategies include offshoring as a way for enterprises to broaden foreign partnerships and resources, consequently gaining more power and capabilities.
In general, the best financial outcomes from cost savings were obtained by groups with low location diversity. Location diversity negatively influences the financial gaining of a company. Further findings confirm that higher economic outcomes are directly connected with low location diversity. (Lin et al., 2017 p. 131). The most popular countries for offshoring a firm have been India, eastern Europe, and Russia. Firms from developing countries that engage in offshoring have a higher likelihood of surviving in globalized industries. Developed countries, which move their production to other places, have a higher chance of competing in the global marketplace. (Lin et al., 2017 p. 115). It is explained by many economic benefits of offshoring that help keep the companies in profit and simultaneously maintain the competition.
There is often a vital time lag before the commercial benefits of offshoring are observed. The effect of offshoring is not apparent for a period. The firm’s investigation must be conducted on a long-term basis to note the first beneficial financial profit. (Lin et al., 2017 p. 131). Moreover, to decide rationally on whether to offshore or not, the company must evaluate the cost of the production movement. It involves estimating the price of such factors as labor price, connectivity, the state of the business environment, etc. Understanding the benefits and drawbacks of every location is also an essential aspect of assessing the risks and their impact on the production cost. Nevertheless, Grabow states that if a company decides to relocate a factory overseas, it is because its task can be accomplished cheaper or more efficiently elsewhere.
Extant literature reports on increased labor and logistics costs, quality problems, lead-time issues, increased supply chain risks. Economic challenges are higher costs for logistics and labor, a more complicated process of checking the quality, as well as increased risks of dealing with new supply chains. (Stentoft et al., 2016 p. 191). Facing fierce competition, companies have turned towards strategies such as outsourcing and offshoring. One of the main reasoning for offshoring is high competition. Such a strategy helps corporations maintain their level in the global marketplace. (Stentoft et al., 2016 p. 192). However, enterprises must carefully choose the placing of their productions, as many cases of overheating labor markets have happened due to the fast-emerging offshoring companies’ appearance. A rapid establishment of factories in one city can also hurt its infrastructure, where the demand exceeds the growth abilities of the city.
The reduction in the cost of the resources is also evident if a business chooses to move its production to a developing country. According to Stentoft et al. (2016), companies that pursue offshoring manufacturing strategies invest fewer resources in manufacturing technologies (p. 197) One of the driving factors for business offshoring is, the need for investments in resources and technological development is much lower. (Stentoft et al., 2016 p. 197). It attracts foreign investors to these cities because the reduction in spending on the main resources means a significant rise in profits in the future.
A study found that increases in productivity explain almost 88 percent of job losses connected with manufacturing automation. Due to increased automation and technological advancements in factory productions, people’s labor is no longer needed. Eighty-eight percent of such jobs are lost while offshoring. (Grabow, 2018). Therefore, not only people from the country of origin lose their workplaces, but in the future, fewer job openings will be available in the production after moving to the developing country.
Another reasoning for offshoring is lower prices on labor, technology, and other significant factors. Offshoring becomes a more efficient strategy to increase the growth of the enterprise’s profit (Grabow,2018). Developing countries are famous for their low labor price compared to those in the well-developed ones, thousands of young people are willing to work the minimum wage only to support their family, which surely is beneficial to the offshoring businesses. The cost savings will allow for either new investments by the firm, cost savings to consumers in the form of lower prices (Grabow, 2018). In many cases, offshoring results in not only a decrease in money losses for the firms but also lower prices of products for the customers (Grabow, 2018). The decrease in spending often leads to the cheaper cost of the finished products, which not only attracts new customers but also can expand the market of the operating company.
Competition occurs to be a common factor for offshoring; moving the production keeps the company on the higher level in the global marketplace. Lastly, relocating to developing countries boosts the efficiency of the enterprise; in the long run, the profits rise exponentially, while the spendings decrease. Therefore, companies, which decide to move their production to the developing countries see many opportunities, as well as seek to increase the manufacturing profits.
Moving the production overseas provides companies with numerous benefits. Firstly, developing countries have lower prices, especially on labor costs. China is a great example, which covers 19% of the job market and becomes an opportunity for western companies to save on human labor (O’Brien, 2020). The decrease in financial costs causes the lowering of prices for the consumers, therefore benefiting both parties. Less amount of spendings on technologies, labor, and other manufacturing factors cut downs the pricing for the products comparing if the product was made in the domestic country.
By moving production to the developing countries, companies give many new employment opportunities for foreign citizens, which majorly benefits the countries. It is known that in such places as India, Southeast Asia, China, the demand for workplaces is enormous, and new outsourcing enterprises give the citizens a stable job, which also benefits the firms themselves. The advantage of such a workforce is that their living standards are much lower; therefore, they are ready to work for less (O’Brien, 2020). Consequently, payroll taxes become smaller, which only contributes to corporations’ success.
Logically to every advantage, there are several drawbacks. Offshoring to the developing countries primarily faces political risks, s the governmental systems drastically differ from Canadian or European regulations. Therefore, when deciding on the country to relocate the business to, one must identify all the political risks it may bring. Corruption is one of the most typical concerns in developing countries like Turkey, Thailand, Iraq; hence starting the manufacturing in places with a high level of corruption may jeopardize both the business and the reputation (Hansen, Et.al, 2016). Choosing a place for relocation is as important as assessing all the potential risks, due to the frequent involvement of business with the political parties, especially in developing countries. An enterprise must evaluate each city for the offshoring and make sure it meets the crucial needs of the market and the company itself.
Contrary to the increased workforce in the country, the company is moving; it also causes the loss of employment places in the domestic country. Relocating production means terminating ongoing processes locally and cutting off all the workers, which increases unemployment (Hansen, Et.al, 2016). Companies like Nike and Caterpillar were frequently accused of taking away job opportunities in favor of other nationalities. Therefore, there are significant drawbacks that must be considered before moving the production to a developing country.
Relocation of production to developing countries is a long-term process that poses many risks and comes with various benefits and drawbacks. It can investigate in three categories; financial, political and social. The main reason for moving production to the developing countries is to decrease financial spendings. Political risks in developing countries like corruption may cause major problems for the company. Offshoring creates many new job opportunities for citizens of developing countries. Many reasons motivate companies to move their production overseas, the primary one being increasing competition. Most of the advantages include financial upsides, while the downsides are connected with insufficiency and the labor market.
Reference List
Grabow, C. (2018). Sometimes Factories Move Abroad. That’s OK.: Colin Grabow.
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O’Brien, B. (2020). Pros and cons of outsourcing your manufacturing in the international business environment.
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