the reasons for and impact of offshoring and reshoring

9.1 Location and Scale – Location

Objective

To understand the factors that influence where a business locates or relocates activities, to analyse the reasons for off‑shoring and reshoring, and to evaluate the wider impact of these decisions on a firm.

Key Definitions

• Off‑shoring: Relocating part of a production process or a service function to a country other than the one in which the firm is headquartered, usually to exploit lower costs or other strategic advantages.
• Reshoring (on‑shoring): Bringing previously off‑shored activities back to the home country (or to a nearer location) to achieve strategic, economic or social objectives.
• Location decision: The choice of where to locate a business activity – can be at local, national or international level.
• Agglomeration economies: Benefits that firms obtain by locating close to related industries, suppliers, skilled labour pools or research institutions (e.g., knowledge spill‑overs, shared services).
• Capacity utilisation: The extent to which the existing production capacity of a plant or factory is used; high utilisation can justify expanding output, while excess capacity may prompt relocation.

Factors that Determine Location (Syllabus 9.1.1)

The following nine factors must be considered when a firm decides where to locate, offshore or reshore. Each factor can be more or less important depending on the level of the decision (local, national, international).

Levels of Location Decisions

Impact of Globalisation on Location Decisions

• Reduced trade barriers – e.g., EU Single Market, CPTPP, WTO “most‑favoured‑nation” commitments – make it cheaper to move goods across borders.
• Advances in ICT and logistics (containerisation, air freight, digital supply‑chain platforms) lower the cost of managing long‑distance operations.
• Global talent pools enable firms to source specialised skills from anywhere.
• Multinational supply‑chain networks increase the strategic importance of location for risk‑management; firms often diversify sites to mitigate political or natural‑disaster risk.
• Political‑risk mitigation tools such as “dual‑sourcing” or “regional hubs” are explicitly encouraged in the syllabus.

Off‑shoring

Definition (re‑stated)

Relocating a part of the production process or a service function to a foreign country to achieve strategic or economic benefits.

Primary Drivers (syllabus‑aligned wording)

1. Cost reduction – cheaper labour, raw materials, energy and overheads.
2. Access to specialised skills or technology that are unavailable or scarce at home.
3. Proximity to emerging or large markets – reduces transport costs and shortens response time.
4. Regulatory advantages – lower corporate tax rates, fewer environmental or health‑and‑safety restrictions.
5. Capacity expansion – utilisation of excess capacity in overseas plants.
6. Strategic positioning – joining an industry cluster abroad to benefit from agglomeration economies.

Additional Risk Note

Off‑shoring can increase the risk of intellectual‑property (IP) loss, especially when operating in jurisdictions with weaker IP enforcement.

Impact of Off‑shoring

• Financial impact: Lower unit costs boost profit margins, but set‑up costs, currency fluctuations and possible tariffs may offset savings.
• Operational impact: Longer supply chains increase lead times, inventory holding and exposure to transport or political disruptions.
• Strategic impact: Enhances global market reach and access to new technologies, but may reduce direct control over quality and IP.
• Social impact: Job losses in the home country; possible criticism over labour standards abroad; community relations issues.
• Environmental impact: Higher carbon emissions from long‑distance freight; however, some offshore locations may have lower energy‑intensity production.

Reshoring (On‑shoring)

Definition (re‑stated)

Bringing back previously off‑shored activities to the home country (or to a nearer location) to achieve strategic, economic or social objectives.

Primary Drivers (syllabus‑aligned wording)

1. Rising overseas wages and other production costs.
2. Need for greater supply‑chain flexibility and faster response to market changes (shorter lead times).
3. Quality control and protection of intellectual property.
4. Consumer preference for “Made in‑home‑country” products and the associated brand premium.
5. Government incentives – tax breaks, subsidies, grants or “buy‑local” policies such as the UK “Made in Britain” campaign.
6. Sustainability and environmental pressures – reducing carbon footprint and complying with stricter domestic legislation.

Impact of Reshoring

• Cost implications: Higher labour costs are often offset by lower transport, inventory, tariff and customs expenses.
• Supply‑chain resilience: Shorter, more transparent chains lower the risk of disruption and improve agility.
• Brand perception: Positive PR, potential price premiums and stronger customer loyalty for locally made goods.
• Employment and skills development: Creation of domestic jobs and opportunities for up‑skilling the workforce.
• Environmental impact: Reduced carbon emissions from shorter freight distances and easier compliance with local environmental standards.
• Innovation potential: Closer proximity between R&D, design and production can accelerate product development.

Comparative Overview – Off‑shoring vs. Reshoring

Case‑Study Illustrations

Case Study 1 – UK Electronics Manufacturer (Company X)

• 2010 – Off‑shoring decision: Moved PCB assembly to Vietnam to cut labour costs by 30 % and to benefit from a 10 % corporate‑tax incentive. Initial investment: £12 m.
  Result: Unit cost fell from £8 to £5; lead time increased from 4 weeks to 9 weeks; exposure to currency risk (VND/GBP) and new customs procedures.
• 2022 – Drivers for reshoring:
  • Vietnamese wages rose 45 % since 2015.
  • Brexit introduced customs delays and a 5 % tariff on electronic components.
  • UK consumers showed a strong “Made in Britain” preference, allowing a 10 % price premium.
  • UK government offered a £5 m grant for advanced manufacturing in the Midlands.
• 2023 – Reshoring action: Re‑established 40 % of assembly capacity in a new Midlands plant. Investment: £8 m.
  Outcomes (Total Cost of Ownership analysis):
  • Unit cost rose to £6 (15 % increase) but logistics cost fell by £0.60 per unit, saving £1.2 m annually.
  • Lead time reduced to 3 weeks, improving order‑fill rate to 96 %.
  • Created 500 skilled jobs; earned “British Made” certification, boosting brand perception and enabling a 5 % price premium.
  • Carbon emissions from freight fell by 22 % (≈1 500 t CO₂ per year).

Case Study 2 – UK Fast‑Fashion Retailer (Company Y)

• 2015 – Off‑shoring decision: Contracted garment production to factories in Bangladesh to achieve a 40 % reduction in unit cost.
  Result: Rapid expansion into EU markets, but supply‑chain became vulnerable to political unrest and seasonal floods.
• 2021 – Assessment: Rising wages in Bangladesh (+30 % since 2015) and increasing consumer activism over fast‑fashion ethics.
  Decision: Management chose *not* to reshore because UK manufacturing costs were three times higher and there were no comparable government incentives. Instead, they invested in a “near‑shoring” hub in Poland to reduce lead times while keeping low‑cost production.
• Key learning: Reshoring is not inevitable; firms may adopt hybrid or near‑shoring strategies based on total cost of ownership, brand positioning and risk considerations.

Decision‑Making Flowchart (description for teachers)

Off‑shoring branch: Identify cost pressures → Analyse global labour & tax differentials → Assess supply‑chain risk (political, currency, logistics) → Evaluate strategic fit (market access, agglomeration) → Decision: Off‑shore.

Reshoring branch: Identify rising overseas costs / supply‑chain disruptions → Assess domestic incentives, brand benefits and sustainability pressures → Calculate total cost of ownership (labour + logistics + tariffs + inventory) → Evaluate strategic fit (resilience, quality, IP) → Decision: Reshore.

Summary of Key Points

• Location decisions are influenced by nine inter‑related factors; the weighting of each factor varies with the level of decision (local, national, international).
• Off‑shoring is primarily driven by cost reduction and access to resources, but brings longer supply chains, reduced control, IP risk and possible social criticism.
• Reshoring seeks to improve supply‑chain resilience, protect quality/IP, meet consumer expectations and benefit from government incentives, often at a higher direct labour cost.
• Globalisation provides both opportunities (market access, talent) and risks (political, currency, environmental); firms must balance these when choosing to offshore, reshore or adopt hybrid strategies.
• Managers should use a total‑cost‑of‑ownership approach and consider strategic fit, brand impact and sustainability before deciding.

Potential Exam Questions (Cambridge style)

1. Explain three reasons why a firm might choose to offshore production. (6 marks)
2. Discuss the impact of off‑shoring on a company’s supply‑chain resilience. (8 marks)
3. Using a table, compare the advantages and disadvantages of off‑shoring and reshoring. (10 marks)
4. Evaluate the factors that could lead a firm to reshore its operations in the next five years. (12 marks)
5. Analyse how globalisation influences location decisions for multinational firms. (8 marks)