Quality Risk in Offshore Manufacturing: Evidence from the Pharmaceutical Industry

Abstract: Opening offshore manufacturing plants to serve the domestic market can provide many potential benefits for firms, including lower costs and tax benefits. In such cases, firms expect their offshore plants to be lower-cost “clones” of U.S. operations. However, companies also have to consider the potential quality risks. For the study, researchers focused on U.S. pharmaceutical companies with offshore production in Puerto Rico, where 16 of the top 20 drugs in the United States were produced during their research. Findings show that higher quality risk in offshoring is not just due to the physical distance, but rather greater potential for expropriation of assets and intellectual property; political, social, and currency instability; issues related to insufficient worker experience and infrastructure; more pronounced cultural issues, language, and communication incompatibilities.

Authors: John V. Gray, Michael J. Leiblein, Aleda V. Roth

Date: 2011

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