Topic 01
Offshoring and outsourcing: how they differ and where they come from
Offshoring is often confused with outsourcing, although the two words describe different business decisions. How do you tell them apart, and why do companies choose one or the other? This article explains the differences, looks at what shapes the choice of location and points to research on American manufacturing.
What is offshoring, and what is outsourcing?
Offshoring means moving a company's activity to another country. Outsourcing means handing that activity to an outside contractor. Offshoring is therefore about where the work happens, while outsourcing is about who does it. The two can occur together or separately.
A company can move its own factory abroad and keep employing its own workers there. That is offshoring without outsourcing. It can also hand some of its tasks to a contractor in the same country, which is outsourcing without offshoring. When the tasks go to an outside firm abroad, both happen at once.
In practice, moving production abroad is among the most discussed examples of offshoring. It touches the whole supply chain, because a new production site changes transport, sourcing and the distribution of finished goods.
What shapes the choice of location?
Several factors influence the decision about where to produce: labor costs, transport costs, risk, quality and proximity to markets. None of these factors acts in isolation. Low labor costs can lose their appeal if shipping is expensive or quality falls short of what buyers expect.
On one hand, firms look for places where making things is cheaper. On the other, they have to weigh risk and distance from customers. Every offshoring decision is therefore a compromise, and its outcome depends on the industry and the kind of product. That is why offshoring has no single pattern.
China, the WTO and manufacturing data
A frequent reference point in the debate is 2001. China joined the WTO on 11 December 2001. The study by Autor, Dorn and Hanson, titled The China Syndrome and published in the American Economic Review in 2013, links imports from China to regional drops in manufacturing employment. In the journal version the authors estimate that imports from China explain about one quarter of the decline in American manufacturing employment between 1990 and 2007.
It is worth remembering that this is only part of the picture. According to the Bureau of Labor Statistics (BLS), manufacturing employment in the United States fell from an average of 17.3 million in 2000 to 11.5 million in 2010. Automation, the recession of 2007 to 2009 and rising productivity also played a part in that fall. Putting the whole decline down to a single cause would be a simplification.
How to read data about offshoring
The distinction between offshoring and outsourcing helps organize the debate. Data on imports from China describe trade and the location of production, while employment statistics show the combined effect of many processes at once. The same process can look different in trade statistics and in employment statistics. We read such figures cautiously, because offshoring is only one of many factors. For every number, it is worth checking what exactly it measures and which period it covers.
To see how these distinctions apply to actual figures, look at the BLS data in our article on manufacturing employment.