Describe the economic reasons why businesses use offshoring.
There are two main reasons why businesses engage in offshoring.
The first of these reasons has to do with the costs that the businesses incur. In some industries, labor accounts for an important portion of the cost of a good or service. If that labor does not need to be skilled, it makes sense to offshore to a place with cheaper labor. The cheaper labor will reduce the firm’s costs without harming the quality of its product to any significant degree. Thus, offshoring allows the firm to reduce its costs and to remain competitive in the global market.
The second of the reasons has to do with the firms’ ability to sell their products. In many emerging economies, domestic markets are becoming important. This is particularly true in China, where the size of the population means that even a relatively small middle class is huge in absolute numbers. Firms want to gain access to this market. Therefore, they offshore some of their production to China so that they can have an easier time selling to the Chinese domestic market.
In these ways, offshoring is caused both by the need to cut production costs and the desire to penetrate new markets.