Outsourcing is used to describe the situation where a firm decides to subcontract assembly and/or service functions to an external supplier, either locally or abroad. When activities are subcontracted abroad, the term offshore outsourcing often applies. While offshore assembling activities have taken place for some time, the phenomenon of outsourcing services abroad is quite new. Several factors have contributed to these altered circumstances. First, the development of information and communication technologies (ICT) implies that services can, to a great degree, also be located at arm’s length or elsewhere in the flat world (Friedman, 2005). Second, institutional changes have opened access to new markets for goods and services as well as skilled labor, for instance in Eastern Europe and China. Third, the increased competition through globalization pushes firms to adapt quickly to new contexts and to achieve efficiency in order to maintain competitiveness.
Key Terms in this Chapter
Theory of the Firm: The theory of the firm (represented, for example, by Coase, 1937; Williamson, 1975) suggests that transactions take place within an enterprise because of market imperfections. Imperfections may be because of a lack of appropriate markets, asymmetric information between supplier and customer, tariffs, and costs connected with coordination, communication and control. In accordance with this theory, activities being outsourced should be easy to define, and the enforcement of contracts should be straightforward. Furthermore, the outsourcing enterprise must have the specific competences needed to subcontract specific parts of the production process (including services).
Tacit Knowledge: Gertler (2004, p. 133)—with references to Polanyi (1958, 1966) and Nelson and Winther (1982) among others—offers the following description of tacit knowledge.“[T]he tacit component of the knowledge required for successful performance of a skill is that which defies codification or articulation—either because the performer herself is not fully conscious of all the ‘secrets’ of successful performance or because the codes of language are not well enough developed to permit clear explication.”
Information Technology Revolution: The expression “information technology revolution” is commonly used to refer to a far-reaching phenomenon related to innovations that are occurring at a phenomenal rate in the information and communication technologies (ICTs). A convergence is happening in technical aspects between computing and telecommunication, in contents between text, images, voice and sound, and in the ways in which information is delivered as PCs, TVs and mobile phones become multifunctional. Technical innovations associated with the ongoing process of liberalization and deregulation of markets and world backbone networks are resulting in cheaper, faster and easier internet access. These innovations are substantially transforming the ways in which goods and services are produced, distributed and consumed, and are improving our mobility and increasing the diffusion of ideas and innovations.
Free Trade: Trade between nations unrestricted by government interference or regulations, including tariffs or quotas.
Relocation: The movement of production of goods or services partly or entirety to locations abroad while importing the goods or services back home or serving the foreign market through local production rather than through exports from the home country. The term is wider than offshoring as it may embrace a situation where former production is closed down and the firms import goods from abroad without specific contracts with the foreign producers or without own production in a foreign country.
Tradability of Services: Because of service specificities, a face-to-face interaction between the consumer and the provider was required. However, the use of new information technologies eliminates the location constrain. Information can be standardized and stored through digitalization, and ICTs turn them into transportable services, thereby opening up the possibility of trade in some business and computing services. The fragmentation of services is a trend similar to that which happened in manufacturing, but it is proceeding much further and faster by affecting a wide range of service activities.
International Competition: Because of globalization and technological innovations, firms are confronted with increasing competition pressures that are affecting all sectors of an economy. Competition arriving from newly industrializing countries with lower wage costs has had a significant impact on the manufacturing restructuring process in more developed countries. Unable to compete with costs, they have turned to more technology-intensive industries and to more innovative and sophisticated products. Services, until the present, have not been involved in international competition as they have been produced and consumed locally. ICTs have changed this situation, and less-developed countries, notably India and China, have emerged as global suppliers offering standardized and increasingly also more sophisticated services.
Foreign Direct Investment (FDI): According to UNCTAD (2005, p. 297), foreign direct investment is “an investment involving a long-term relationship and reflecting a lasting interest and control by a resident entity in one economy (foreign direct investor or parent enterprise) in an enterprise resident in an economy other than that of the foreign direct investor (FDI enterprise or affiliate enterprise or foreign affiliate).” The long-run relationship, the lasting interest and the control aspect are assumed to create distinctive consequences (positive as well as negative) for the host economy.
Firm’s Competitiveness: Competitiveness is the ability of a firm to produce goods and services that successfully match the market’s needs. Firms compete with one another over their share of domestic and global markets. A firm’s competitiveness depends on its ability to innovate and upgrade, to adapt quickly to market changes and to improve quality by expanding its market share at the expense of less-efficient firms. To improve efficiency, firms focus on core competencies and reduce costs by frequently reducing employment and outsourcing noncore functions to less-developed countries. Although less precise and more difficult to define, competitiveness is also used to evaluate the economic performance of cities, regions and countries.
Transnational Company (TNC): A company that operates in more than one country.