Outsourcing, offshoring and the global factory

Outsourcing and offshoring are terms that are often used interchangeably, yet they refer to different firm strategies and have different motivations. Outsourcing1 refers to the procurement by lead firms2 of goods and/or services from independent outside suppliers, when those goods and services had previously been provided internally within the firm. Outsourcing does not refer to one-off purchases, but involves the strategic decision to reject the vertical integration of an activity (Gilley & Rasheed, 2000; Grossman & Helpman, 2005). It is a process which involves the lead firm externalizing elements of its value chain,3 i.e. there is an organizational fragmentation of production. For instance, an electronics goods manufacturer such as Sony might outsource the production of certain parts and components to local Japanese suppliers. Outsourcing thus involves a decision about ownership. In contrast, offshoring4 refers to the relocation of the production of goods and/or services overseas and thus involves an international fragmentation of production and the creation of global value chains (GVCs). For instance, Sony has, through the establishment of factories overseas, offshored the manufacture of many of its electronic products to North America, Europe, and elsewhere. Offshoring thus involves a location decision. Outsourcing and offshoring are different processes, but they can be combined.5 Outsourced activities may be undertaken by suppliers located in the same country as the lead firm (domestic outsourcing), or may involve suppliers in foreign countries (offshore outsourcing). Thus when Apple contracts Foxconn to manufacture its iPads and iPhones in Asia, it is engaging in offshore outsourcing (Denicolai, Strange & Zucchella, 2015). Meanwhile, offshoring may be effected through offshore outsourcing, or when multinational enterprises (MNE) undertake foreign direct investment (FDI) and retain ownership of the offshored activities. As regards the temporal sequencing of the outsourcing and offshoring decisions, Mudambi and Venzin (2010) aver that there is no universal recommendation.