Factor proportions theory and the choices that firms make about offshoring

Image of the Tycoon Center Condominium buildin...

Image of the Tycoon Center Condominium building, Offshoring Inc.’s headquarters (Photo credit: Wikipedia)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The Factor Proportions Theory (FPT) as espoused by Heckscher and Ohlin suggests that countries or regions export goods that intensively use their endowed factors of production and import those goods which incorporate the factors of production which they are scarce in.

The reasons behind offshoring (which basically means the subcontracting of particular activities to foreign locations or suppliers; not necessarily independent firms) can be found in the FPT since it refers to the endowment of factors.

Companies basically offshore their activities to enjoy cost savings through lower labour and material costs. These activities are typically found in countries where the labour and material costs are lower. for e.g., Blackberry offshored its IT support desk in January 2013 to NCR Corp in India to slash $1bill from its cost structure. India is known for its high quality and low cost labour in IT support and also call centres.

Quality and capability – typically companies do not have the in-house expertise for certain functions and doing it in-house would incur internal costs like bureaucracy costs and agency costs. Offshoring to companies in countries that have specialisations in this field (factor endowed) creates the advantage of capitalising on their need to remain efficient as the market and their factors surrounding their business circumstance disciplines them into it. E.g. NCR Corp is among the many companies in India which is a country known for IT support. It has to remain more cost efficient and effective than the competition in order to remain competitive.

Offshoring helps companies to focus on core competencies and areas which they are endowed for. Blackberry’s decision to offshore its IT support helps it to now focus on raising the quality of its new Blackberry OS 10.

Labour capacity flexibility – it allows for the ramping up and down of capacity where needed. It would be unfeasible to hire people for a short term in short notice. By offshoring its IT support function to India’s NCR Corp, Blackberry can decide how much capacity is needed as its customer base increases with time. NCR which has access to the low cost high quality labour which is readily available due to high competition for such jobs, is able to employ more people.

J.CJ (c)

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