What are the economic reasons why businesses use offshoring?
The main economic benefit of offshoring is reduced production costs, but other benefits include new markets.
Offshoring is the act of moving business processes overseas. The benefits are usually that land and labor are cheaper in the new location. If your land is cheaper, your product can be cheaper. If your labor is also cheaper, your product just got much, much cheaper. Now you can charge less for it and still make more money. This seems like a win-win.
There are disadvantages to offshoring. First of all, you have to ship everything much further. That costs more. You also take longer to ship things, which means your company cannot be as versatile.
Despite [the costs] and loss of supply chain speed, firms found that a 30 to 50 percent reduction in labor costs more than compensated for these increases.(enotes)
In addition to the economic benefit to the company, offshoring also benefits the consumer. First of all, goods are cheaper. If the production and labor costs are less for a company, the product will be priced lower.
Offshoring can result in new markets for a company’s goods. Even though the countries may be developing, the company is actually making their economy stronger. This happened in China. Soon, there were more and more Chinese consumers who were able to buy the goods they used to only make. China became a welcoming new market for many businesses, all as a direct result of offshoring.
Although offshoring can be controversial, it is not going away. Companies simply face costs that are too high to make them competitive in the United States. As a result, they move their operations overseas. American investors still benefit from this, because the company is more profitable. That investment theoretically returns to the US economy.