Offshoring and global standards

Abstract

In this commentary, we address some issues concerning the relationship between international standards (regulations) and offshoring. The definition used for offshoring that is put forward in this commentary, relates to the relocation of production to affiliated or non-affiliated enterprises abroad. We begin by laying out some situations that relates to the decision between offshoring and non-offshoring. It is shown, in a simple production framework, that these decisions are mainly driven by profits that are made dependent by a combination of asymmetries in factor input prices and regulatory costs. Our discussion focuses on contributions of recent literature that incorporates (and empirically verifies) the broad assumption that better contract enforcements and institutionally qualities are an important factor for offshoring decisions. These factors can be easily related to also the regulatory quality within the host country. We than discuss literature focusing on differences and similarities of a broad range of regulatory issues between countries and how it relates to offshoring. The common trends are in line with theoretical and empirical verifications about the importance of the institutional regulatory framework and minimizing cost externalities that may arise from contract incompleteness by considering affiliates within the same enterprise group. The rapid growth in the convergence of a broad range of standards and regulations is an important achievement for assuring regulatory compliance. However, empirical verifications are still lacking.