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3/15/2005 12:07:00 AM

Advice to companies before going offshore

Global outsourcing -- or offshoring -- affords U.S. firms tremendous opportunities for transforming themselves by opening new markets. But, cautions a Rice expert in international joint ventures, offshoring is not a fad and and "should be part of a company's long-term strategy, not an end in itself."

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Global outsourcing is growing rapidly. In India, the Philippines and China alone, annual foreign investments have reached $50 billion. While these countries represent significant opportunities for U.S. businesses, a Rice expert on international joint ventures in China warns companies to think about their long-term competitive strategy before going global.

"Offshoring is very hot right now, and China with its low-cost, highly skilled labor force and impressive infrastructure is one of the most popular destinations," says Anthea Zhang, an expert in international joint ventures at Rice's Jesse H. Jones Graduate School of Management.

However, Zhang warns companies without the managerial capabilities to manage a global operation should be careful with regard to global outsourcing. A company that wants to open operations outside of the U.S. or outsource some of its functions to another country needs to remember that both decisions will increase the organizational complexity of the company.

"Offshoring should be part of a firm's long-term strategy, not an end in itself," she says.

Zhang advises companies to consider their core competencies and use outsourcing to transform their companies. "If a company can be better off by focusing on what it does really well," Zhang explains," it should consider having another company take over its peripheral functions."

Despite concerns that many American jobs are lost when companies move their operations overseas, Zhang believes offshoring can offer opportunities that benefit U.S. firms. For some American businesses, offshoring is a smart but necessary move in order to remain competitive.

"American companies aren't the only players in a global market," Zhang says. "If they don't seek the obvious benefits of lower costs from offshoring, they will eventually lose their global competitive advantage.

"They'll also lose their contact with emerging markets like India and China."

Zhang contends that companies who move operations into India and China, for example, are in a better position to learn about and make contacts in those very large emerging markets.

"To successfully penetrate markets like China or India, countries like the U.S. with significantly higher income markets must create alternative ways to serve consumers with lower incomes and in countries with fewer capital resources," Zhang says.

She points to firms such as Proctor and Gamble that have successfully built their brand images throughout China.

"Proctor and Gamble has been in China for over ten years," Zhang says. "Consequently, the company has become very knowledgeable about China's market and has a tremendous advantage over their competitors there."

Zhang also cites an Indian company that has been experimenting with manufacturing a car that would cost $2,200.

"Automobile manufacturers in the U.S., Germany and Japan currently couldn't compete in India's or China's market at that price," she notes. "To do so will require innovation in both products and processes, and learning about these markets may require locating in them."

In the not-so-distant future, she believes these innovations — coming as a result of global competition and outsourcing — will benefit U.S. consumers as well.

A native of China, Zhang has conducted research and written extensively about control, inter-partner threats and designing and measuring performance in international joint ventures. She earned undergraduate and graduate degrees in economics from Nanjing University in Nanjing, China, and a second master's in international business from City University of Hong Kong. She received her Ph.D. in strategic management from the Marshall School of Business at the University of Southern California.

An assistant professor of management at the Jones School, Zhang teaches the globalization of business, specifically how to analyze international markets, why and how firms go global, including capabilities needed to coordinate a firm's international operations. She also teaches a course on international joint ventures, why firms engage in them, and how to design, manage and measure the performance of such partnerships.

To learn more about this research, contact Zhang at yanzh@rice.edu or Debra Thomas in the Jones School at dthomas@rice.edu.

Research @Rice 2005