This is a form of de facto inter-country capital mobility and is associated with a corresponding flow of exports from the host country to the outsourcing one. It is an innovative method used by big companies for:
i. Ensuring input supplies,
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ii. Cutting costs, and
iii. Gaining competitive strength.
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Meaning:
Outsourcing means procuring inputs (including components, spare parts and services) and even finished products (for resale), from the market. “Business Processing” (such as processing of accounts, insurance claims etc.) is the latest and fastest form of outsourcing.
It, however, does not include purchases for consumption purposes. It only includes purchases of inputs for use in the final product being marketed by the buyer, or products meant for resale (with or without a value-adding processing). In an extended sense of the term, it also includes “farming out” of after-sales services.
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Thus, outsourcing comprises procuring, by a producer/seller, from other suppliers, all kinds of inputs, including components, spare parts and services (including after-sales services), but not the goods and services purchased by consumers.
Restricted Meaning:
These days, the usage of the term ‘outsourcing’ has come to be restricted to outsourcing from abroad, i.e. the coverage of the term ‘outsourcing’ is restricted to procurement of goods and services from abroad.
However, sources of procurement need not be only the native firms. They may include the purchaser’s own subsidiaries, branches, or production facilities etc., located abroad.
In each of these cusses, the outsourcing producer uses at least some productive resources (such as land, infrastructure, etc.) from the seller country.