Outsourcing and offshoring are often confused when they are related to different processes. While outsourcing is the transfer of an organizational function, including manufacturing, to an entity (subcontractor) outside the firm, it takes place irrespective of the geographical context. Outsourcing can take place within the same country or on another continent. Offshoring relates to the geographical context of the relocation, which can take two main dimensions:
- Nearshoring. Involves moving activities to a neighboring country that usually has lower costs, such as labor, taxes, energy, or land. Being in proximity allows for the sharing of common cultural norms and being in similar time zones (easier to conduct telecommunications). A common example of nearshoring involves American corporations investing in Mexico or European corporations investing in Eastern Europe or North Africa. Nearshoring can lean on land transportation such as road or rail.
- Farshoring. Involves moving activities over long distances, such as another continent. Different time zones make coordination more complex. Farshoring increases the demand for long-distance transportation, such as maritime shipping and air cargo.
Therefore, outsourcing can take place without offshoring, and offshoring can occur without outsourcing. Still, outsourcing is usually associated with offshoring.