Climate change and the offshoring decision: Risk evaluation and management

Abstract

The problem of climate change is becoming increasingly prevalent in the business context. Risks such as increased risk of extreme weather events and the attendant loss of production site facilities, and changes in population density and migration patterns, may seem remote from the business offshoring decision. However, it is in fact highly relevant, as the recent case of flooding in Thailand and its effects on the global hard drive industry shows. The discussion in this chapter focuses on the risk of climate change for the offshoring decision at the firm level. That is, how does the potential for climate change effects occurring in a given locale influence the offshoring decision? This chapter argues for a risk management approach to climate change at the firm level, in which specific locational risks are assessed as a key component in the offshoring decision. The specific problems of climate change, including the potential for coastal flooding, extreme weather events, and hot or cold waves, do not influence all regions in the same way. Similarly, they also do not influence all firms in the same way. Instead, each firm must determine how climate change could affect its offshoring decisions and to what degree this risk should be controlled. In addition to arguing for the use of risk management for climate change at the firm level, this chapter also provides some tools for assessment and evaluation of climate change risk. These tools include a summary of the risk categories required and a risk exposure/vulnerability matrix that can help assess how significant the risk of climate change is for a given location. The tools within this chapter provide a basic guideline for firms to determine the overall climate change risk levels faced by their outsourcing partners and to make a careful decision based on these perceived risks.