DEFINITION: As an adjective, the colloquial term “offshore” refers to any subsidiary entity of a company that is located outside the recognized political borders of the nation in which the company is situated.
As a verb, the term refers to the company’s action of setting up such a subsidiary entity abroad.
USAGE: The term “offshore” is used in a variety of contexts, from petroleum engineering to alternative power generation.
However, in the economic/financial sense of the term that is our primary concern here, “offshore” refers to the practice of a company’s transplanting a portion of its operations outside the legal jurisdiction in which its main operations are situated into a foreign jurisdiction.
The reason for offshoring operations is that the business expects the foreign legal jurisdiction will be more favorable to its operations in some way or other (see below).
Since the term “offshore” is an English word that originated in the US, it is most often used to refer to American-based companies that engage in the practice of offshoring. But it applies equally well to any company, located in any country anywhere, that engages in the practice.
There are a host of legal nuances regarding the legal jurisdictions of companies engaging in business operations in multiple countries.
Here, we will only look at the distinction between two most-fundamental types of offshoring: namely, for wage reasons and for tax reasons.
The first type of offshoring is a subset of the practice of “outsourcing.”
In outsourcing, a larger company engages a smaller company to carry out a portion of its operations as an outside contractor. When the outside contractor is located in another country, the instance of outsourcing becomes an instance of offshoring.
The main economic motivation for this type of offshoring is to get the needed work done at a lower cost. For this reason, such contractors will naturally be located in countries with a much-lower wage structure.
Familiar examples of this type of offshoring are the maquiladores (relatively low-tech manufacturing facilities) located in Mexico and elsewhere in Latin America; the human-resource and software-writing contractors located in India; and the hi-tech manufacturing operations located in China.
The other type of offshoring has a name of its own: “tax havens.”
These are jurisdictions which offer an extremely favorable tax environment to foreign companies which open subsidiary operations on their soil.
Some small countries and territories—notably, the Cayman Islands, the British Virgin Islands, Bermuda, Singapore, Mauritius, and others—have specialized in attracting such subsidiary operations to their shores.
Such tax havens are perhaps what the term “offshore” most readily brings to mind.