The Impact of Outsourcing on Domestic Capabilities

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Decline of Innovation Abilities

One of the main risks of producing abroad would be the loss of product innovation skills itself and capabilities slowly leading to the decline in their competitive edge. Pisano and Shih (2012a) have argued that “mass migration of manufacturing has seriously eroded the domestic capabilities needed to turn inventions into high-quality, cost-competitive products...”. Looking at Kodak, back in the 1960’s and 1970’s it’s profits were from the sale of colour films and not cameras therefore it allowed it’s lens, shutter and other mechanical components to shut down while other Japanese companies like Canon, Nikon and Minolta took over film cameras instead. However as the company tried to build their digital camera business, most of their components were from Asia- memory cards, rechargeable batteries, electronic sensors and the like. Kodak had lost its capability to manufacture and along with it the ability to innovate crucial components of a camera. (Pisano 2012a)
Naghavi and Ottaviano (2009) came up with a model where offshoring is associated with less feedback from the offshored production plant to domestic innovation divisions and more coordination problems slowly leading to lower product innovation. It especially so in sectors where R&D are cheap and product differentiation is strong. Fuchs and Kirchain (2005) suggests also that “the static economies of offshore manufacture .... lead to dynamic diseconomies—specifically, disincentives for innovation”.

Variety of Operational Risks
Another disadvantage would be operational risks. There could always be a chance of increasing costs, over-dependence on a supplier, exploiting of knowledge transfer and even diminishing quality of goods ...

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