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Unformatted text preview: The Impacts of Environmental Regulations on Global vs. Local Product Sourcing Decisions Daniel Bryce Greenia October 31, 2009 1 Introduction With a surge in public awareness of environment degradation and climate change in recent years, the global business landscape has never been more open to implementing the integrated triple bottom line (TBL) as a business practice. The TBL approach to business first described by John Elkington (1998) accounts for the importance of societal welfare and the environment when making business decisions. These considerations are made in addition to company profit requirements, since corporations must remain profitable when making environmentally sustainable business decisions. One area of global business that has largely ignored the TBL framework is that of offshoring various business operations. Offshoring refers to the outsourcing 1 or relocation of a business unit to foreign countries. While motives for offshoring vary, the primary driving force is the relatively low costs of operating in economically developing countries. In the case of offshored manufacturing, these low costs have driven product prices down, but have supported unregulated manufacturing methods that impose negative environmental externalities (e.g. water pollution, air pollution, despoiled land) on the surrounding areas (Quiroga et al. 2007). While offshored IT and customer service providers can virtually perform at the same level as an in-house provider, offshore manufacturing has the unavoidable drawback of distance from the products end user. The need to physically ship the goods to their point of use adds additional costs of shipping and increases the chance of delays. Also, imported goods are subjected to import tariffs and inspections upon arrival to the country of use, which cause further delays. The additional time required until offshored products become available leads to higher inventory safety stocks and lower 1 Outsourcing is the practice of contracting an external firm to fulfill a business function 1 market response times. These hidden costs of offshored manufacturing erode initial benefits of offshoring. A McKinsey Quarterly report (Ritter and Sternfels 2004) shows initial estimated savings in offshoring in the apparel industry fall from 50% to 13% when shipping and import costs are included in the cost, and lean manufacturing is practiced at the local manufacturer. The shift of dirty manufacturing to economically developing countries is supported by the pollution-haven hypothesis that suggests lax environmental regulations play a role in encouraging offshored manufacturing (Cole 2003). Historically, the impacts of loose pollution control are never felt by the end consumer of most products, but as manufacturing operations continue to spread across increasingly diverse global landscapes, concerns for the environment are beginning to mount....
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