Offshoring and reshoring policies: an optimal control approach

By definition, offshoring is the practice of obtaining products or services from another country or relocating production to another country. Current study examines the general model for production; however, a great deal of attention will also be given to the offshoring of services as a lot of the characteristics of the model can be applied to describe the functioning of services as well. In principal, a company can move all or some of its activities to another country. When the costs of running a company are cheaper in another country, the company may choose to move their activities or offices abroad in order to reduce expenses. As opposite to outsourcing, offshoring requires that the third party being hired to complete a job, will be located in another country. In this study the model is constructed on the assumption that the company is already active in performing offshoring activities and we state the reasons for such a decision, analyze its advantages and disadvantages and elaborate on potential threats. The main reason why companies decide to go offshore is the possibility to receive a higher profit margin if they have an opportunity to access a lower cost labor market by relocating their business process from one country to another, in our case, partially relocating. In addition, companies can take advantage not only of the low labor cost, but also of cheaper raw materials, equipment, parts, and supplies available in offshore locations.