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Discussing Production and Offshoring Essay

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Updated: May 18th, 2019

Business must be one of the most fast-changing spheres; what used to be the key principle of running a business might prove completely inefficient in several years, and the recent innovations date within a millisecond. Taking a closer look at such parts of business process as production and offshoring will help understand what has changed over the past few years and what new tendencies have appeared.

Before going any further, one must define the key terms offered in the UNCTAD report. The first issue to deal with will be core business. According to the UNCTAD report, a core business is a set of activities that involve such stages as establishing a more effective internal division of labour, freeing scarce resources to be used in other segments of its value chain (Non-equity modes of international production and development, 2011, 125).

Interpreting the given definition, one can assume that core business is the kind of business that focuses on the key issues, i.e., labor, resources and losses/benefits that the owner of the business can possibly take on the way to conquering the existing market and attracting target customers. Moreover, the concept of a value chain should also be integrated into the given definition; therefore, promotion should be included in the basic set of activities.

Another important issue to be defined is global value chains. According to the definition provided by the UNCTAD report, global value chains are the mechanisms that offer an opportunity to “increasingly control and coordinate the operations of independent or, rather, loosely dependent partner firms, through various mechanisms” (Non-equity modes of international production and development, 2011, 124).

Therefore, it can be concluded that global value chains are the methods that allow to promote a certain facility or product not only within the boundaries of a specific country, but also in other states (Van Dijk & Trienekens, 2012).

Before defining non-equity modes of entry, one should find out what a mode of entry actually means. According to the explanations provided by the UNISTAD report, a mode of entry is a method for a specific state to start trading relationships within the realm of global market (Non-equity modes of international production and development, 2011, 157).

According to the evidence offered in the above-mentioned source, one of the most widespread modes of entry is a franchise: “international franchising can be an avenue for brands from developing countries to grow internationally” (Non-equity modes of international production and development, 2011, 157). Therefore, a non-equity mode of entry means entering a certain market with considerably fewer rights than the rest of the companies.

Finally, such an issue as countervailing power of partners should be mentioned as a great chunk of international business relationships. As the UNCTAD report says, establishing the countervailing power of partners means that the partners in question are considered completely equal in a specified market.

The report mentions, naturally, that the case of fully matching powers is extremely rare; however, “partner companies in host countries possess or can develop ‘countervailing power’, often with the support of their government” (Non-equity modes of international production and development, 2011, 129). Hence, it can be assumed that having a countervailing power in a specific market means having similar assets and equal opportunities for two or more companies.

At present, four basic types of Non-Equity Models, or NOMs, and each of these models has its own determinants that need to be described in order to get a full picture of the current business opportunities for overseas partners.

Contract manufacturing is, as the UNCTAD report claims, “Contractual relationships whereby an international firm contracts out to a host-country firm production, service or processing elements of its GVC (extending even to aspects of product development). All go under the general rubric of ‘outsourcing’” (Non-equity modes of international production and development, 2011, 128). Therefore, it can be assumed that contract manufacturing is focused on outsourcing issues.

Another type of NOMs, franchising, in its turn, is defined as a “contractual relationship in which an international firm (franchisor) permits a host country firm (franchisee) to run a business modelled on the system developed by the franchisor in exchange for a fee or a mark-up on goods or services supplied by the franchisor” (Non-equity modes of international production and development, 2011, 128). As for licensing, the given type of NOMs presupposes that the control over the enterprise is vested to a contractor (Newlands et al., 2012).

Finally, the contract farming model involves “contractual relationship between an international buyer and (associations of) host-country farmers (including through intermediaries), which establishes conditions for the farming and marketing of agricultural products” (Non-equity modes of international production and development, 2011, 128).

Even though each of the above-mentioned models seems quite important for business relationships and provides quite adequate approaches towards building these relationships with foreign partners, it is still important to remember that these models have their pros and cons. In terms of local value, the model that generates the highest one is the contract manufacturing, since it is based on the policy of outsourcing and, therefore, presupposes that the company has a flexible knowledge system that becomes stronger every day.

Though offshoring is generally admitted to have positive effects on business relationships in general and on the U.S. economy in particular, it is necessary to mention that the success in offshoring came at a price. As Bivens explains, negative trade effects occur in the companies with high-skilled professionals producing export goods, e.g., software.

Thus, the USA loses to the export states. Another side effect of offshoring, the costs for distribution consequences, means that the employees will obtain considerably lower revenues than expected, as opposed to the company owners: “If the redistribution goes strictly to capital-owners, then workers are unambiguously worse off” (Bivens, n. d., 4).

In addition, according to Bivens, the assumption that offshoring will help reduce prices and unemployment rates is downright wrong, because it does not consider the downsides of price reduction, thinking of the benefits for the U.S. economy, instead: “The GI study is not actually measuring the effect of offshoring; rather, it is a prediction about how much rapid cost declines in IT services provision would benefit the U.S. economy” (Bivens, n. d., 7).

Therefore, it can be considered that the phenomenon of offshoring is much more complicated than it seems. However, to reduce its negative effects, it will be reasonable to use its positive aspects to benefit the U.S. economy and at the same time incorporate a different approach that will level off the negative aspects of offshoring.

Therefore, it can be concluded that there has been a great change in the process of production and development; one of the recent innovations, non-equity modes, can be considered a major breakthrough, yet the new ideas require testing.

Meanwhile, the process of offshoring, which comes as one of the benefits of globalization, might seem the solution to most problems of the companies that face financial issues, yet it is important to keep in mind that the work should be distributed equally among the departments and affiliates of a specific company.

Reference List

Bivens, L. J. (n. d.) Truth and consequences of offshoring. Washington, DC: Economic Policy Institute.

Newlands et al. (2012). The political economy of the European social model. New York, NY: Routledge.

Non-equity modes of international production and development (2011). Web.

Van Dijk, M. P. & Trienekens, J. H. (2012). Global value chains: Linking local producers from developing countries to international markets. Amsterdam: Amsterdam University Press.

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