Nearshoring and Silicon Border Based on your reading and current events on the t
ID: 423043 • Letter: N
Question
Nearshoring and Silicon Border
Based on your reading and current events on the topic, research and debate with your fellow peers your opinions of the subject.
Discuss the developments of the Silicon Border and the merits of nearshoring as compared to offshore and outsourcing.
What do you think about the debate in the text that addresses, “Offshoring Verses Not Offshoring” (pg. 110)?
on whether international business (1B) is different from domestie argument that IB is diflerent is precisely the argument for having stand a eourses in business schools. II the two are essentially the same, then it is pon argue that IB fundamentally is about "business," which is well covered by u finance, and other courses, (Most texthooks in these areas have at least one chape on "international topics.") This question is olwiously very important for companian and business schools. However, there is no right or wrong answer 2 4-5b Offshoring versus Not Offshoring As noted earlier, offshoring-or, more specifically, international (offshore) sourcing-has emerged as a leading corporate movement in the 21st century outsourcing low-end manufacturing to countries such as China and Mexico is no% widely practiced. But increased outsourcing of high-end services, particularhy T and other business process outsourcing (BPO) services, to countries such as Ind is controversial. Because digitization and commoditization of service work are enabled only by the recent rise of the Internet and the reduction of internation al communication costs, it is debatable whether such offshoring proves to be a l term bencfit or hindrance to Western firms and economies. roponents argue that offshoring creates enormous value for firms and econ mies, Western firms are able to tap into low-cost yet high-quality labor, translating into significant cost savings. Firms can also focus on their core capabilities, whi may add more value than noncore (and often uncompetitive) activities. In turn, o ing service providers, such as Infosys and Wipro, develop their core compete ts that for every dollar spent by US firn offshoring in India, the US firms save 58 cents (sec Table 4.3). Overall, USSI. of new wealth is created, of which the US economy captures US$1.13, throug cost savings and increased exports to India, which buys Made-in-USA equipment cies in IT, BPO, A McKinsey study repor Business process outsourcing (BPO Outsourcing business processes softwarc, and services. India captures the othe to third-party providers 33 cents through profits, wages and taxes. While acknowledging that some US employees may regrettably lose Table 4.3 Benefit of US$1 US Spending on Offshoring to India Benefit to the United States USS Benefit to India USS Savings accruing to US investors/ 0.58 Labor customers 0.10 Exports of US goods/services to 0.09 Profits rotained in India oroviders in India 0.10 Profit transfer by US-owned 0.04 Suppliers Central government taxes State government taxes 0.09 operations in india back to the US Net direct benefit retained in 0.67 0.03 the United States Value from US labor reemployed Net benefit to the United States urce: Based on text in D Farreil, 2005, Otfshoring: Val ue creation through econonic charge, Joumal of Management Shudies, 42: 675-683, arte 0.46 0.01 1.13 Net benefit to India 0.33 director of the McKinsey Global Institute , and she refers to a McKinsey study.Explanation / Answer
Offshoring versus not offshoring
The offshoring industry has globalization to thank for a rapid growth. During the early 50s and 60s all the major corporations wanted to expand their market and continue growing at a rapid pace. As a result of this, they started diversifying into other non-core areas of their business to appease shareholders and bring in more revenue and profits.
By late 70s and early 80s corporations started realizing that to sustain the profit levels they had to further widen their net and started building manufacturing and other down-stream capabilities offshore. This went for another decade before offshoring became a critical business strategy for MNC’s. But it was different this time, corporations started offshoring non-core downstream activities to countries with adequate resources and cheaper wages to support organization wide cost saving measures.
The initial offshoring activities resolved around supporting core-business activities (company owned IT support / call centers), which I believe is the right way to run a business as you don’t want to waste your resources to support activities which do not contribute to your organizations bottom line. But this is a slippery slope and as we have seen the direction that American and European corporations took – i.e. offshoring activities which add value to their business and are profit centers. Offshoring core business functions may bring in more profits in short-term but it is detrimental to internal long-term growth.
As companies start offshoring their core business services they start ignoring in-house talent development and after a while their workforce will neither have the knowledge, nor the skillset necessary to render those services. The best example of this is the IT Hardware industry in
America, they started with being the innovators and leaders of the industry but ended up offshoring everything from production to design and to finally R&D. Now, companies even if they want to manufacture and design in America, they can’t – simply because they don’t have the necessary talent anymore.
To summarize this discussion, I would say that offshoring is a critical part of today’s business strategy and it cannot be avoided but at the same time we have be cautious about what functions we offshore and how will it impact the organization in long-term. A company’s downstream manufacturers and support OEM’s can become their competitors if offshoring is not done judiciously. To this regards, the text book mentions an important concept of how companies become OBM from ODM /OEM and how a company like HTC evolved from a partner of telecom carriers to an industry big shot in smartphone arena.
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