Organizations have to make two separate decisions, one concerning the boundary of the business and the other concerning the location of their activities. They may opt to ‘buy’ rather than ‘make’ inputs and services in-house. Outsourcing involves greater specialization as companies switch from performing inputs internally to sourcing them from an external supplier; whereas, offshoring occurs when companies move production abroad.
The figure below illustrates the different trajectories towards outsourcing and offshoring (Sako, 2005):
Figure 1 : Outsourcing and Offshoring trajectories source: (Sako, 2005)
As shown in this figure, there are four different trajectories towards offshoring (Sako, 2005):
Firms may already be outsourcing, but decide to switch from a domestic supplier to a foreign supplier. (Arrow 2)
Firms may make the decision to outsource and to offshore to a foreign supplier simultaneously. (Arrow 3)
Firms may source from overseas locations by establishing a foreign affiliate; this is sometimes called captive offshoring. (Arrow 4)
Firms may switch the source from an overseas affiliate to a foreign-owned supplier, often involving the sale of foreign affiliates to local firms. (Arrow 5) In this process of switching from captive offshoring to offshore outsourcing, host economies are likely to benefit from greater beneficial spillovers in terms of technology and higher skilled jobs.
In addition, the figure below (GAO, 2004) summarizes the different means through which offshore outsourcing happens from an American point of view:
Figure 2 : Dimensions of Offshoring Source: (GAO, 2004)
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