Unit One Globalization
Lead-in
A. Read the following passage for information about offshoring, outsourcing and OEM, paying attention to the words and expressions in bold.
The global coordination of production activities has been broadly characterized by three components: offshoring, outsourcing and original equipment manufacturer (OEM). Offshoring occurs when firms move production facilities to foreign countries in order to reduce production costs while maintaining direct control. Vernon’s (1966) product lifecycle theory explained why manufacturing locations for particular products shift from industrial economies to developing countries. The need for lower production costs drives multinational corporations to develop mass production systems and seek out new factories in developing countries where wage rates are lower. Outsourcing is often used interchangeably with subcontracting. Outsourcing refers to firms externalizing production or services that used to be conducted in-house, whereas subcontracting takes place in a hierarchical organization, in which certain tasks are conducted by outside firms. While outsourcing is typically conducted so that a firm can focus on its “core field”, subcontracting can be complex and is driven by the need for specialty parts or services, a desire to achieve cost savings through economies of scope in the subcontracted firms, and/or an intermittent or seasonal need to boost the principal firm’s production capacity. In contrast to offshoring, which requires more direct capital, managerial investment, international outsourcing/
subcontracting can increase the flexibility of multinational corporations by externalizing some of the costs and risks associated with factory management. OEM refers to manufacturers with agreements to produce goods to be marketed by other branded distributors or retailers. OEM provides relatively unknown manufacturers access to new markets and may even offer opportunities for technological upgrad