International Journal of Business and Management Invention (IJBMI)
MBA 627
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ANALYSIS OF ECONOMIC, POLITICAL AND SOCIAL IMPACTS OF GLOBAL
OFFSHORING
Written by: Chimed Luvsan
Instructor: Dereje Tessema, PhD, PMP, CEA
Submitted in Partial Fulfillment of the Requirements
For the degree of Master in Business Administration
In the School of Business at
Virginia International University
FAIRFAX, VIRGINIA
DECEMBER, 2016
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Certification and Approval
This directed research project regarding An Analysis of the impact in the globe facing that
offshoring business development is submitted as my research/thesis for approval by the School
of Business for Virginia International University in candidacy for the degree of Master of
Business Administration with a concentration in International Management.
Submitted by: Chimed Luvsan Date
Approved by Dean School of Business, Date
Approved by Research/Thesis Director, Date
DerejeTessema, Ph.D., PMP., CEA.
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TABLE OF CONTENTS
Abstract ………………………………………………………………………………5
Chapter 1: Introduction ………………………………………………..6-9
Background Information ………………………………………………..6
Problem Statement ………………………………………………..6
Research Questions ………………………………………………..7
Hypothesis ………………………………………………..7
Theoretical Framework ………………………………………………..8
Expected Outcome ………………………………………………..9
Chapter 2: Literature Review ………………………………………………10-18
History and Evolution of Offshoring ……………………………………….10
Current Challenges ………………………………………………..11
Future Trend ………………………………………………..12
Annotated Bibliography ………………………………………………..13
Chapter 3: Researchdesign ………………………………………………..19
Qualitative Methods ………………………………………………..19
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Quantitative Methods ………………………………………………..19
Chapter 4: Data Collection and Analysis ……………………………………….20-30
Primary Source of Data ………………………………………………..20
Secondary Source of Data ………………………………………………..20
Chapter 5: Conclusion and Recommendations ………………………………31-33
Summary of the Findings ………………………………………………..31
Conclusion and Recommendations ………………………………………..32
Limitations of the study ………………………………………………..33
References List ………………………………………………..34
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Abstract
This research paper impacts of global offshoring political, social and economic from
developed country to developing countries. This work would show offshoring and outsourcing
business background and history through evolution of present and future trend will explained by
research methods of qualitative and quantitative to analyze of peer review journals, reports, case
study, websites and organization would provide this research paper.
Keyword: impact, offshoring, outsourcing, evolution, social, economy, political and business.
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Chapter 1
Introduction and Background Information
1. Brief History
What is Offshoring?
Offshoring business has started 1980s Taiwan, India, China and Mexico is to sending
service and work from developed country to developing country that make more advantages
government agreement which are social, political and economic development. On the other hand,
social and political situation of developed country had negative activities such as people lost
their jobs to developing country. (Blinder, 2006, p. 114). Also global labor arbitrage is
improving corporate profit as mentioned above (Paul, 2004). In addition offshore account are
getting very popular in the globe (Walton, 1996).
2. Problem Statement
Offshoring business in the Globe is one of the emerging strategies to reduce companies cost of
production and more opportunities for creating jobs and increase economy all around the world.
However, many companies in the developed World use this strategy to exploit the labor market
of developing countries such as, India, China, Mexico, Taiwan, Thailand, Eastern Europe
wherever offer lowest costs. According to (Friedman, April 5, 2005), many of these developing
countries loses their native companies as well as do not benefit from transaction. The purpose of
this study is to investigate the impact of offshoring has always win and lose situation works as
usual.
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3. Purpose of Study:
The aim of this study will show offshoring business are how impacting both countries.
4. ResearchQuestions
What is offshoring?
What are the impacts of offshoring?
How could it be win-win situation for economically, socially and politically?
How companies uses strategy of offshoring?
5. Hypothesis
HO: Offshoring business contributes to developing countries economy.
H1: Offshoring business will not contributes to developing countries economy.
H0: Offshoring business contributes to developed countries economy.
H1: Offshoring business will not contributes to developed countries economy.
6. Theoretical Framework
"A capital-abundant country will export the capital-intensive good, while the labor-abundant
country will export the labor-intensive good." (Heckscher Ohlin, 1919)
Offshoring business advantages are “A” country have labor to produce cheap way to export.
On the other hand B country has capital send “A” country to produce.
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“The science and art of exploring, creating, and delivering value to satisfy the needs of a
target market at a profit. Marketing identifies unfulfilled needs and desires.” (Philip Kotler,
1986)
Most common case of marketing the value of product produces. That is not possible to
produce product and service to “fast, cheap and reliable” all of the cases that missed one of those
three. So offshoring can make this happen that’s why it is the best strategy of business.
“The law of supply and demand, there is a low supply and a high demand, the price will be
high. In contrast, the greater the supply and the lower the demand, the lower the price will be”.
(Alfred Marshall, 1890)
The companies supplies less and expensive way to produce it will work for offshoring
business in the globe. Which ways still hold price when its high demand.
“Social Exchange Theory: is a social psychological and sociological perspective that
explains social change and stability as a process of negotiated exchanges between parties”.
(George Homans, 1961)
Global offshoring has released almost 3 decades that exchanges between government and
companies to produce production which affordable price. The reason of exchange has socially
affecting country to country.
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7. Expected Outcome
This research is expected to impacts of global offshoring. Furthermore, it will analyze the
current issues, use theories, answer the research questions, and provide some possible solution
and recommendations to help solve the issues in global offshoring.
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Chapter 2
Literature Review
History and Evolution
Offshoring business has started 1980`s America and Europe opened factories that less
labor cost products and operating service 24/7 such as India, China, Taiwan, Mexico and
European countries, which offers affordable price. During the offshoring rich countries made
more profit yet employment has decreased by offshoring. (Swartz, 2013, p. 14). In 1930 act of
304 North American Free Trade agreement NAFTA about country of origin rules of production.
(NAFTA, 2016). Eventually offshoring business has many good advantages such as profit
increase section of corporation having business or manufactures abroad their own country. Yet it
has the main country has decreased by employment 86% mostly (WSJ 2010). The most cases
that developed country always lost jobs and less tax from corporation that made offshoring
business and developing countries as well known as undeveloped countries always had jobs
more opportunities yet money goes to the company (McCarthy et al. 2002, McCarthy 2004 and
Parker 2004). Offshoring business had opportunity that lower cost employment compare through
The U.S and India such as operator salary $16876 to $28440 per person in The U.S. (Prieser,
1985, pp. 44-46) yet in India operator salary Rs3128 per year which means $46.8 per year
(Labour Bureau , 2016) So from this two different countries salary made offshore business
success instead of hired in the U.S to India.
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Current Challenges
Current challenges of global offshoring is currently changed many different ways of
offshoring such as offshore accounts, offshore manufacture, offshore service, offshore can be
people who works abroad. On the other hand, offshoring technic harmful for domestic economy
reason why, employment decrease when employment decreasing there is less taxation. The U.S
and India such as operator salary $33000 to $42000 per person (Payscale I. , 2016) yet in India
operator salary Rs142372 per year which means $2125.7 per year (Payscale, 2016). So from this
two different countries salary made offshore business success instead of hired one person it could
20 person same salary as we see around 1980s salary differentiation was almost 360 times less
than the U.S. salary same position. Thus offshoring business best strategy of the 20th and 21st
century. Even though, offshoring business ideal more developed there are more impacts facing
the universe such as cultural change, employment expectation has higher than past period, trade
balance changing, taxation and most of the products has question that what is the country of
origin?. For example in Apple products it has made in China label yet, assembled in California.
(Apple Inc, 2016)
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Future Trend
Before start to the future trend of global offshoring have to mention about the past early
1980s corporations sent factories to another countries which has developing, low wage
employments impact was developed country lost tax and unemployment had spread because it
has cheap labor cost. In the present time of offshoring business some of them closed some of
them selling process, wealthy people has an offshore accounts for example if you want to have
and account Swiss Bank it you have to have $1M at least saving accounts yet its highly security
of property which means no one can know or see those accounts (Harbor Financial Service
Offshore LLC, 2016). So from the research of those information has becoming what is offshore
will be in the future? Is revolution of itself globalization, technology can replace people.
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Annotated Bibliography
Assessing the impact of domestic outsourcing and offshoring on productivity at the firm
level (José C. Fariñasa, Alberto Lópezb and Ana Martín-Marcosc, 2014)
According to the article explaining outsourcing and offshoring in firm-level productivity
such as labor demand and ability intensity. It also impacting outsourcing and offshoring firm
performance and economic to the external suppliers in domestic outsourcing and offshoring
based on the statistical fact to convert empirical model.
Offshoring has positive effect to the accounting and productivities 10% since 1992-2000
it has improve productivity growth. Offshoring sample of statistic shown that Spanish 2411 small
companies included.
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The model of empirical has develop simple framework outsourcing and offshoring
production function to impacting activity at the firm-level. There are two level of that model first
one has to number of inputs components to external suppliers and the second level rest of the
inputs to produce final goods. The strategy of the model result has shown 30% of Spanish firm
section depend of offshoring and 40% of the subcontracted in domestic market.
A Comparison of U.S. and Offshore Indian Tax Professionals’ Client Advocacy Attitudes
and Client Recommendations (Brian C. Spilker Bryan W. Stewart, 2016)
According to the article compares that U.S tax professionals and Indian tax professionals
are client advocacy attitudes offshoring. Accounting firms are offshoring global such as the
article shown us U.S tax professionals do tax in U.S yet Indian tax professionals are do tax in
India and U.S at the same time. Somehow, according to that article research shows both country
professionals do same thing as tax but advocacy attitudes are stronger than Indian professionals
do.
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Accounting firms are started offshoring since 1990s there are different depending on firm
affiliations. In 2011 Deloitte has 1800 Indian tax professionals performing U.S tax.
Conclusion, according to article review global offshoring U.S to India tax professionals
are doing same task but experienced tax professionals mostly do U.S tax from India. Which is
impacting Indian Accounting firms are losing their best employment to the offshore firms from
the U.S.
The Client–Vendor Offshore Relationship: Success Factors (Jeremy St. John , Carl
Stephen Guynes , Richard Vedder, 2014)
According to the article, It global offshoring is an best solution to advance more money
from cheap vendor such as India and China to the client country as The U.S. there are many
companies has offshoring through those countries in IT. In fortune 500 CEO are responsible to
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offshore another country that making decision to enter the partnership between companies and
the government to reduce cost of production.
The Article has 5 different subjects that offshoring business. First of all, trust which has
negotiation between vendors and clients. Second, shared values is most important task in
offshoring which related to partnership between companies through the culture. Third,
dependence which both clients and vendor has achieve the goals in social exchange. Fourth,
partnership choosing the right client or vendor to produce more profit of the companies to
achieve either goals. And last, offshoring success all of those subjects to combine to get succeed
in offshoring business.
Conclusion, the author has good view of Social Exchange Theory in global offshoring
sector to succeed in IT section explaining by vendor and clients.
Knowledge transfer planning and execution in offshore outsourcing: An applied approach
(Sabine Madsen, Keld Bødker, Thomas Tøth, 2014)
According to the Article, transfer knowledge challenges to the country to country such as
Denmark and India to resolve the company`s culture and the performance of the outsourcing
setup through global offshoring that training and the supporting vendor side. Transferring
between two companies or transfer between 2 different employees has different sections. First
transfer between two companies that assume training employee to re-locating outsourcing yet it`s
also possibility to offshore in that case of company that Indian IT works for Denmark Bank to
develop itself from affordable labor from India.
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The case of those study has using knowledge transfer mechanism it`s from client to
vendor to producing more production or more tasks to done by time and money saving. There are
three mechanism to transferring knowledge. First, Interaction Oriented Mechanism that vendor
learn from clients after experiencing work for the client side to work done. Second, Artifact
Oriented Mechanism is to clients are providing document to the vendor side. Last, Interaction
and Artifact Oriented Mechanism is to finishing the task that using transferring knowledge from
client side.
Conclusion, basic exchange of offshore and outsourcing is to transferring knowledge
from clients to vendor to the finish tasks. The case of Bank of Denmark IT section has high
percentages of Indian employees trained themselves by Denmark professionals which took the
advantages in the case.
Managing Global Outsourcing to Enhance Lean Innovation (Tucker J. Marion and John
H. Friar)
According to the article, explaining R&D cost, R&D expenses are a type of
operating expense and can be deducted as such on a business tax return. This type of expense is
incurred in the process of finding and creating new products or services. The outsourcing
increase the market development, improve products, less labor cost also profit would increase.
R&D cost is short term period highly sustainable to fixed cost of production.
Outsourcing of large firms are using new technology to make products fast and cheap but
the products has developed by the new technology growth companies short time period. Also the
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supply chain of the corporation has completely developed in email, phone, skype, etc. it could
vendors and clients are easily to communication with save time and money.
Conclusion, R&D cost reduced by the technology that we everyday was completely best
source of outsourcing many companies such as supporting networks, rapid prototyping, short run
and manufacturing. Lately, companies are affordable cost to produce less time to deliver and
more profits and growth.
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Chapter 3
Research Design
This research paper used both qualitative and quantitative research methodology and case
studies collections included to understanding global offshoring impact that economic, politic and
social to know how this issue becoming and how it will be revolving another walkway. The
paper used secondary data collected such as reports, books article, case study, companies and
government data to analyze primary data and graphics to produce.
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Chapter 4: Data Collection and Analysis
There are ten best places that you can offshore to put your money in the bank accounts
which are Panama, Seychelles, Hong Kong, Singapore, Switzerland, United Arab Emirates,
Cayman Island, Lebanon, Luxembourg and Belize. The reason of offshore account in countries
of those is advantages of tax heaven from different countries people because, it has less tax or no
tax, less interest to saving their property such as money documents jewelry etc. (Courtney, 2012)
According to the journal of The International Consortium of Investigative Journalists
released that tax heaven secrecy revealed database of offshore leaking from Mongolian 43
person having accounts in Panama has 4 offshore leaks has one of the most senior politician from
Mongolia having an account in Panama which has $1M (Hager, 2013) They had an interview
with the guy when the account has started he was Mongolian Finance Minister at the time of his
annual salary was only $4200 before tax (National Statistical Office of Mongolia, 2016).
The graphic has 40 years data from Panama paper in operating more than 21 Jurisdictions
by Mossack Fonseca is that world best wholesalers of offshore secrecy. (Rigoberto Carvajal,
2015).
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Those are the tax heaven report in Panama paper as you see less tax to more tax yet, other
un-included countries are higher tax and interest fee. Most tax heavenly countries has to open an
accounts are British Virgin Islands, Panama and Bahamas. (Rigoberto Carvajal, 2015).
According to the article America`s biggest companies are holding about 1.4 trillion in
cash offshore to avoid paying billions in U.S. Taxes (Oxfam America). The U.S. companies
supposed to pay federal tax from their global profit. Apple, Microsoft and Google are holding
big money outside of the U.S. The Government of U.S. impose that 35% for cash that companies
used to pay last years and years, According to Oxfam, Apple tax rate was 25% through 2008-
2014. Based on the Oxfam, financial report from 2014 that 50 largest companies tax calculated
$1.4trillions. (Petroff, 2016).
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According to Fortune 500, 30 companies having large holdings abroad the U.S. compered
deferred between offshore.
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According to (McCormack, 2013), Trade Adjustment Assistance (TAA) survey that most
of American companies send off to work by offshoring such as “IBM, Walgreens, International
Paper, Sanmina Corp., Chicago Bridge and Iron, NCR, AT&T, Tenneco Automotive, Micron
Technology and Honeywell etc”.
Flextronics America, has hired from Mexico 147 employees hired that same amount of
employees cut off the job.
Jabil, has offshored Asia and Mexico to cost saving strategy meanwhile 500 employees
lost their jobs from Arizona U.S.
Joy Global, outsourced to the foreign country 245 employees lay off.
265 workers also lay of at same situation by Philips Lightning Company`s.
Hewlett Packard, lay off 500 workers by global restructuring.
DAK America, has shut of whole facility that has 340 full-time and 264 contract workers
unemployed due to situation.
Eli Lilly, send facilities abroad the states that has 1000 workers lost their jobs.
Charles Inc., imported raw materials from Mexico, Asia cut off 60 furniture workers.
PDM Bridge, same company has bit contract of PDM bridge 35 employees lay off.
Honeymoon Process Solutions, a company has relocated in Mexico that 110 employees
cut off.
Nordex USA Inc., lay off 80 employees due to relocated abroad.
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Tyco Electronics TE Connectivity/ ICT Division, lay off 33 employees move to
another country.
Campbell Soup Co, the service moved to another country due to 100 workers lay off.
Cooper Interconnected, product manufacturing moved to Mexico that 56 workers lost
their job.
Sensata Technologies, moved to China and Korea to manufacture due 16 employees lost
their job.
Motorola Solutions, relocated in Mexico due 55 employees lay off.
SealedAir Corp, outsourced to India that big number of employees lay off.
Transportal, lay off 25 employees underbid by another company.
NIDEC Motor Corp, move to another country that 8 employees are unemployed due
situation.
Omega Engineering, manufactured in China due to 40 employees laid off.
Walgreens, IT operation has outsourced to India and Mexico that 23 data processing
workers laid off.
Narroflex, due to the import of product outsourced foreign country that laid off 55
workers which made textiles.
Keystone Printed Specialties, has laid off 40 employees due competitors outsourced
abroad.
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Council for South Texas Economic Progress, has shut down the call center because
cheap call labor due employees left itself.
Staples, accounts payable laid off 20 employees due to department moved to the India.
IMB, has laid off 500 employees due to operation move to foreign country, also laid off
747 employees manufacture moved to Brazil, China and India.
Spartanburg Steel Products, laid off 500 workers the reason of the company lost
contract for automotive stamping.
Atlas-Copco Drilling Solution LLC/ Dynapac, the roller machine move to Sweden due
15 to 20 employees laid off.
Boeing Co, laid off 1000 employees because offshore and moved multiple location.
General Motors Powertrain, laid off 150-200 jobs because of the move to the Mexico,
China and Korea.
Kingston Technology, laid off 80 employees unemployed due to companies moving U.S
to China.
Hasbro Inc., laid off 200 employees reason why move to the Hong Kong due low labor.
Perkin Elmer, laid off 110 employees because relocation two facilities to Singapore.
Keithley Instrument, laid off 59 move to manufacturing operation in China.
Cambridge International`s Alloy Wire Belt, moved whole facilities to Mexico due low
labor cost.
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Callaway Golf Balls, moved facilities to Mexico, China and Taiwan due to 23 employee
laid off.
Cameroon PCS, laid off 100 employees because relocated China also 80 workers laid
off due to move in Mexico.
Wonik Quartz International Corp, all part outsourced to China because low cost labor.
General Dynamics Armament and Technical Products, laid off 100 employees the
reason lost the contract to the different company.
Rockwell Automation, laid off 45 employees moved to location on Poland.
A.A. Laun Furniture Co, laid off 45 employees due to low cost material another
country.
Automatic Data Processing, laid of 50-200 employees because outsourced to India.
Federal Mogul, laid off 130 employees due to move in Mexico.
Sony Pictures Imageworks, laid off 100 employees because relocated in Canada and
India.
Seco Tools, laid off 72 employees due to move in France, Sweden and India.
Baldwin Hardware, laid off 166 workers because outsourced to Mexico.
Osram Sylvania, laid off 24 workers due to move in Mexico.
Agilent Technologies, laid off 41 employees due to move in Malaysia. (Walton, 1996).
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The World map U.S. trade balance: trade in good billion dollars. (Bureau, 2016)
American biggest companied offshore another country due to many American jobs lost
by this strategy yet for the company, using this strategy has best advantages to produce
affordable labor more products and less tax paid for Federal Tax in the U.S. (Walton, 1996).
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According to the Forbes Magazine article that Reshoring or Offshoring: U.S
Manufacturing Forecast 2015-2016 graphic that recent manufacturing trend from 1970 to 2015
that production cycle has surprisingly increase yet, employment fell down quite bit (Conerly,
2016).
Global wage comparison report of Global Wage Report 2014/15 by The International
Labour Organization that show bunches of figures to see how wages are differentiated by
economies which developed and developing.
According to the figure 1 global wage average was increasing 2000 to 2009 till
the attach of U.S two towers as you see in the future trend graphic will going down.
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As you see the figure 12 that developing countries by region wage average are going to
increase last few years of global offshoring (Report, 2015).
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Moreover, for all of those emerging issues in global offshoring and outsourcing to
companies are trying to make more profit, less federal tax homeland which has $1.4trillion didn’t
pay the time of federal tax period it has only deferral tax (Petroff, 2016).
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Chapter 5: Conclusion and Recommendations
Summary of the Findings
This research paper has lots of researches approached by global offshoring impact are
how affected in the world. For those information based on primary and secondary data collection
to analyze thus, organizational reports, peer review journals, articles to help me to found out the
wages, accounts through corruption, companies fails, economically and politically socially
impacted by offshoring strategy.
Conclusion
This research paper analysis of economic, political and social impacts of global
offshoring business strategy. In order to this research paper has hypothesis (global offshoring
contributes of developed and developing countries economy). The Questions are (what is
offshoring? how it works in corporations? what are the impacts, how to equalizing this impacts
of economically, socially and politically?) were answered basis of my research paper.
The reason of doing this research has impacted in world since early 1980s to revolution
of strategy of offshoring could be corruption, unemployment, foreign tax heaven corporate
owners are getting more profit than as usual. Because of offshoring will improve the company`s
ability to produce less labor and material cost. Since the beginning of offshoring and outsourcing
developed country to developing country the most companies from the U.S. thus a thousands of
people unemployed by top companies in the U.S.
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The purpose of global offshoring kind has many different issues that offshore account,
relocating different country, hiring labor from different countries yet, all of those offshoring
legal to impacting either countries economy, politic and social.
Recommendations
Based on the research paper there are many recommendation are becoming such as
organization to develop or control global offshoring as same as world trade organization. It will
help to protect willing crisis of the economic issue.
According to the wage income quality of world has all the counties has wage
differentiation which is offshoring could be perfectly works all around the globe. Because of the
wage average percentage based on the country`s living cost to compared by GDP. There are no
possibility to increase developing countries wages yet, its only inflating economy for developing
country.
Offshore accounts are totally secret to put money abroad the banks are locating different
countries it have to have safe. On the other hand, it have to be public which people would know
the money came from. Anyways, opening offshore account is legal.
Limitations of the Study
This research is limited to the purpose of the study which is exploring, analyzing the
impacts of global offshoring. Thus this research paper has economic, social and politic issues
from all over the world yet, the rules of duty is no included in the study. The data based on the
reports, peer review journal, websites, organization, research paper and the book were collected.
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Implication of the Study
There are many research papers, journals, article about global offshoring and outsourcing
yet, most of the data are aimed to the federal tax but due to order, there are impacting issues are
in the country of the culture and people behind all of these profit making strategy.
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References
References
Apple Inc. (2016). Apple Inc. Retrieved from www.apple.com: www.apple.com
Agrawal, V., Farrell, D., Remes, J., 2003. Offshoring and beyond. McKinsey Quarterly, Special
Edition, Issue 4.
Blinder, A. S. (2006). The Next Industrial Revolution? Volume 85, number 2. In Offshoring:
(pp. 113-127). foreign Affairs.
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