THE DEFINITION OF OFFSHORING AND OUTSOURCING
There is no commonly accepted definition of "off shoring" in the public debate nor in the economic literature. However, the term "off shoring" is widely used as a particular subcategory of "outsourcing". The latter has been defined as "the act of transferring some of a company's recurring interval activities and decision rights to outside providers, as set in a contract". The typical consequence of such a decision is a decline of employment in the plant/firm that is doing the "outsourcing" and a rise in employment in the plant/firm from which the supplies are sourced thereafter. The vagueness of the term is often related to the fact that it is not made clear if the change in sourcing of supplies refers to the plant level, the firm level or to the national level. The term "recurring interval activities" might include a given level of in-house supplies in a stagnant business environment, but the meaning is less clear in an expanding environment in which additional supplies from the outside do not necessarily result in an absolute reduction of employment but tend to limit its expansion. It is also useful to distinguish between a replacement of the supplies which takes place between plants of the same firm or from a non-affiliated firm (control-ownership), and whether the new sourcing is from plants in the home country or abroad (location). In certain cases, the sourcing decision goes hand-in-hand with new investment abroad, which leads some observers to focus the outsourcing debate on outright plant closures, with output being replaced by new greenfield investment abroad.
Four types of "outsourcing" are reported, using location and control/ownership as distinguishing criteria:
ØCaptive onshore outsourcing implies a shift in intra-firm supplies to an affiliated firm in the home economy.
ØIf the shift in sourcing of supplies benefits a non-affiliated firm in the home economy, one can describe it as non-captive onshore outsourcing. The term "onshore" could be replaced in both cases by "local" or "domestic".
ØCaptive offshoring describes a situation in which future supplies are sourced from an affiliated firm abroad.
ØThe fourth variant of outsourcing may be labeled non-captive offshoring and refers to the case when the new supplier is a non-affiliated firm and located abroad.
A major problem with the definitions above is that they do not concord easily with officially collected economic data. Outsourcing decisions are made at the micro level of plants or firms, while the official data are generally collected at the sectoral and national level. In the case of "offshoring", current statistical concepts do not allow a link to be made between import statistics and a management decision to substitute a product / service produced in-house by an imported product. Moreover, in contrast to merchandise trade, services trade flows recorded in balance of payments (BOP) statistics are generally not broken down by region and country, which hampers analysis of the geographic aspects of services offshoring. A further difficulty in services trade statistics is due to the importance of the large internal services transactions of multinational firms. Many of these internal across-border transactions might not be reported.
Another obstacle arises if one attempts to look at the sectoral breakdown of offshoring. The sectoral affiliation of a firm might not match the product or service, which is offshored. An automobile company might offshore its accounting services and a bank might offshore its IT services. Employment and the net value-added Produced in the home country in the automobile (banking) sector might fall as a consequence of offshoring without a corresponding increase in the imports of automobiles (financial services). These difficulties in the sectoral allocation of offshored activities also affect the estimate on the offshore potential of an economy....