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This article investigates the role of foreign affiliates in the employment by business function of European enterprises. It shows that employment in foreign affiliates of European enterprises is falling less than in the domestic enterprises. Most of the foreign affiliates are located within Europe and are found more often in Manufacturing than in Services. There is no evidence of major outsourcing of knowledge intensive business functions to destinations outside Europe but rather that outsourcing to foreign affiliates is used to establish a commercial presence in foreign markets through marketing and sales activities.

In today’s economy, enterprises increasingly organise their production globally by sourcing activities to foreign affiliates or external providers. The cross-border restructuring of business functions is a key feature of European businesses. It poses challenging questions for policy makers and therefore there is a big demand for adequate statistical data

In 2012, 15 European countries gathered data on the international organisation and sourcing of business functions. The survey covered nearly 40 000 European enterprises employing at least 100 persons in the non-financial business economy. This represents 17 million persons employed, or around 38 % of all employment in the non-financial business economy in the countries in question. The results presented here focus on the organisation of business functions between enterprises and their foreign affiliates (see methodological notes). The survey was a revision of the first survey conducted in 2007 in which 14 national statistical institutes participated.

Enterprises were asked to estimate how many people they employed and whether the numbers had increased, decreased or remained unchanged in 2009-11. They also provided details on how employment was distributed across the various business functions. They answered the same questions for their foreign affiliates (if applicable), regardless of their size, and the location (broad geographical region) of the affiliates was also recorded.

This article does not cover foreign affiliates other than those linked to enterprises in the survey population. Also, the graphs do not always show results from all participating countries due to differences in national questionnaires, data quality or confidentiality restrictions.

Main statistical findings

The main findings of the analysis are as follows:

Enterprises report more falls in employment domestically than in foreign affiliates;
The foreign affiliates are mostly located in EU Member States;
Manufacturing enterprises are more likely than services enterprises to have established foreign affiliates;
Employment relating to knowledge intensive support functions in foreign affiliates is mainly located in the EU;
The support business function with the most foreign affiliate employment is sales & marketing, which reflects the importance of commercial presence and;
Most domestic and foreign affiliate employment is in core business functions.

Manufacturing enterprises are more likely than services enterprises to have established foreign affiliates

Globalisation has been driven mainly by multinational manufacturing enterprises fragmenting their value chains by sourcing both production and support activities globally. Developments in technology and communication have been important drivers in this process and consequently the international organisation of services has also grown. Overall, however, far fewer services enterprises than manufacturing enterprises have established foreign affiliates. Roughly 20 % of Danish, Finnish and Dutch services enterprises control affiliates abroad, but typically the proportion is just over 10 % (see Figure 1).

This internationalisation in terms of enterprises establishing foreign affiliates is rather diverse across European countries and sectors. Traditionally, the Nordic countries are relatively open small economies and this is reflected in a high proportion of enterprises with foreign affiliates. Around 55 % of Danish manufacturing enterprises had affiliates abroad, followed by their Finnish (42 %) and Swedish (35 %) counterparts. There are also marked differences between the ‘EU-15’ countries and countries which joined the EU in 2004 and 2007. In general, enterprises in the latter had the lowest levels of foreign affiliates abroad – often 10 % or less. The proportions for Bulgaria and Romania are particularly low.

Figure 2 provides another view of the same data. It shows one group of countries is clustered around the black line where the percentage of enterprises controlling foreign affiliates is roughly the same for Services and Manufacturing and second group of countries clustered around the grey line where the percentage in Manufacturing is twice as high as in Services.

For the purpose of comparing across countries and economic breakdowns, Figure 3 shows foreign affiliate employment as a proportion of combined employment in domestic enterprises and foreign affiliates. For Denmark, Sweden, Norway and the Netherlands, foreign affiliate employment is considerable. In particular, Danish enterprises in services (including construction, trade and transport & logistics) have internationalised actively, with higher proportions of foreign affiliate employment than any other country. The second and third most active countries, Sweden and Norway (also Nordic countries), are well behind Denmark. In contrast to Denmark, their enterprises have higher proportions of foreign affiliate employment in manufacturing than in services. For the countries that joined the EU in 2004 and 2007, foreign affiliate employment abroad accounted for a very low percentage of combined employment, the one exception being the Estonian services sector.

Employment mainly in core business functions

Domestic employment (and, to a lesser extent, foreign affiliate employment) is mainly in enterprises’ ‘core business functions’, which account for 70 % to 90 % of all domestic employment (see Figure 4). The importance of core business functions in foreign affiliate employment abroad varies more from country to country. Typically, foreign affiliate employment is less focused on core business functions than domestic employment, but the proportions for the foreign affiliates of Danish, Norwegian, Latvian and Bulgarian enterprises were higher than for their domestic operations. Overall, proportions varied between 40 % in Portugal and 90 % in Bulgaria.

Figure 5 shows the proportion of core business function employment in foreign affiliates broken down according to manufacturing and services. For all countries except Portugal, the proportion is higher in the services sector than in manufacturing. Figure 6 shows the proportion of core business function employment in domestic enterprises, broken down according to manufacturing and services. Here the importance of core business function employment in both sectors is obvious in all countries concerned.

A geographical breakdown of core business function employment in foreign affiliates shows that employment remains largely in the EU (see Figure 7). This is consistent with the survey’s general finding that a large proportion of international sourcing in 2009-11 took place in the EU. Over 40 % of core business function employment in foreign affiliates, in both manufacturing and services, is in EU-15 countries and 15 % is in countries that joined the EU in 2004 and 2007. EU Member States therefore capture most of the affiliate employment. ‘Oceania & other Asian countries’ is the third most popular location for affiliate employment in both manufacturing (8 %) and services (17 %).

Sales & marketing is the most important support business function in foreign affiliates

Business functions to support the execution of core functions comprise an integral part of the value chain for both manufacturing and services enterprises. Support functions have ‘services-like’ characteristics and relate to pre-production (e.g. R&D or logistical support) and post-production (e.g. sales & marketing). A few support functions account for the highest proportions of total support function employment in foreign affiliates (see Figure 8). The main one is ‘sales & marketing’, which typically covers 30 60 % of all employment in support functions (as many as 80 % in the case of Portugal). This suggests that a key driver for establishing foreign affiliates is having a commercial presence abroad.

‘Distribution & logistics’ and ‘administration & management’ are the other support functions most often handled by foreign affiliates, accounting for 10-20 % of total support function employment in foreign affiliates. Together, sales & marketing, distribution & logistics and administration & management often make up as much as 80-90 % of total support function employment in foreign affiliates. In contrast, sales & marketing accounts for a lower proportion of support function employment in domestic enterprises and the proportions for the other functions are consequently higher (see Table 1).

Knowledge intensive functions mainly located in foreign affiliates in other Member States

Knowledge intensive jobs are of particular interest, because they are crucial for maintaining and improving the competitiveness of European economies and thus the well being of European societies. The list of support business functions used in the survey therefore specifically identifies knowledge intensive support functions such as R&D and engineering. Below we analyse the location pattern of such functions in foreign affiliates. A general observation is that employment in R&D and engineering support functions is located in the EU (see Table 2). For all participating countries except Denmark, over half of those employed in enterprises’ foreign affiliates work in other EU countries. Danish enterprises are frequently present, through their foreign affiliates, in China, the USA and Canada. Portuguese enterprises employ significant numbers in R&D and engineering outside the EU, most likely in Africa.

The locations of affiliates’ R&D and engineering employment vary greatly across the participating countries. In the case of Swedish, Portuguese and Dutch enterprises, they are often based in other ‘EU-15’ countries, whereas for Estonia and Slovakia they are more likely to be working in other Member States that joined the EU in 2004 and 2007.

The domestic employment most affected by the economic crisis

The impact of the crisis is reflected in Figure 9, which shows the proportions of different types of enterprises reporting a fall in the number of people they employ.

• the left hand bar for each country represents domestic enterprises involved in international sourcing; • the middle bar represents all domestic enterprises (whether or not they are sourcing), of which the first group is therefore a subgroup; and • the right hand bar represents foreign affiliates of domestic enterprises.

Enterprises sourcing internationally more often reported jobs losses in 2009-11

Due to the economic crisis, 2009 11 has generally been characterised by enterprises employing fewer people and this is reflected especially in enterprises sourcing internationally. In eight out of 12 countries, over 50 % of such enterprises reported a decreasing number of jobs. Only in the Netherlands (24 %) and Latvia (12 %) were the proportions considerably lower.

Another way in which European enterprises have been trying to overcome the crisis is by cutting employment less in foreign affiliates than at home. In seven countries, less than 25 % of enterprises reported a fall in employment in their foreign affiliates. Only in Estonia was this proportion significantly higher (45 %). European enterprises have been cutting much more employment domestically. In ten out of 12 countries, 30 % to 50 % reported fewer jobs in 2009 11. Only in Denmark and Latvia did fewer than 30 % of domestic enterprises report decreasing employment.

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Source: Eurostat (educ_ilang)

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Archive:Foreign affiliates statistics - employment by business function

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