International sourcing and relocation of business functions
Data extracted on 1 July 2019
Planned article update: July 2022
Author: Nikola Sunjka (Eurostat, Economic globalisation, International sourcing and global value chains), Georgios Papadopoulos (Eurostat, International trade in services)
Most enterprises internationally source within European Union, underlining the importance of the European Single Market.
To stay competitive, enterprises increasingly organise their production globally, breaking up their value chains into smaller parts supplied by a growing number of providers located worldwide. International sourcing of business functions is a key feature as European businesses increasingly globalise their production processes. To find out more about this phenomenon, the new International Sourcing (IS) survey gathered data on international organisation and sourcing of business functions in 16 European countries, covering the periods 2014-2016 and 2015-2017. The survey results cover nearly 60 000 businesses each with more than 50 persons employed (see the section on "Data sources" for more details about the survey).
The survey revealed that for the periods in focus:
- The majority of international sourcing takes place from one European Union Member State to another, underlining the importance of the European Single Market.
- The highest share of sourcing internationally is found in small, open economies with high labour costs.
- Sourcing is still mainly driven by manufacturing enterprises. The number of enterprises in the industry sector and in the non-financial business economy sourcing internationally is almost equal.
- Since the previous IS survey (2009-2011), there has been a shift from sourcing more ICT services to sourcing more administrative and management functions abroad, with more than a third of enterprises that source internationally sourcing administrative and management functions.
- Proximity is a major factor in sourcing, with domestic sourcing being more prominent than international sourcing.
- Cost cutting is still the main motivation for international sourcing. However, enterprises increasingly source abroad as they want to focus on their core business.
- Direct employment consequences are limited but their cumulative and indirect effects should not be underestimated.
International sourcing and destinations of sourcing
International sourcing prominent in small, open, high labour cost economies
The highest share of sourcing internationally is found in small, open economies with high labour costs (see Figure 1). The relatively high percentage of international sourcing found in Portugal seems not so much driven by labour costs as by the cultural and historical closeness of the Brazilian economy, which is an important market for Portuguese exports.
Most European enterprises source domestically
Although European businesses use international sourcing in some way, they still apply the business model of sourcing core or support functions within their own countries more than internationally (except the Netherlands). Domestic sourcing is more frequent than international sourcing in most countries, with the biggest difference between international and domestic sourcing in Romania, Hungary and Finland (see Figure 2). In general, domestic sourcing (7.5 %) is more than twice as frequent than international sourcing (3.2 %).
Enterprises sourcing within their enterprise groups are predominant
Multinational enterprises are the drivers of globalisation and this is also the case with international sourcing. The survey distinguishes between international sourcing to a foreign affiliate or daughter company within the same multinational enterprise group — so-called insourcing — and sourcing to external providers, called outsourcing.
Evidence for the key role of multinationals in Member States in international sourcing is supported by the fact that 21 % of sourcing enterprises carry out insourcing, while only 11 % outsourced their business functions abroad (see Figure 3). The highest shares of insourcing are found in the Netherlands, Germany and Italy, while the lowest are found in Slovakia and Romania. The highest share of outsourcing is found in Portugal, while the lowest shares are found in Slovakia, Poland and Hungary.
International sourcing - comparison with previous periods
The results from the first two surveys monitoring international sourcing patterns, covering the periods from 2001 to 2006 and from 2009 to 2011, showed that enterprises in Denmark and Finland were already using international sourcing as a business model quite extensively. For countries that took part in all three surveys, the patterns of sourcing behaviour are rather different and a clear conclusion cannot be made. It would seem that all countries had a decrease in international sourcing in the observed period (halved). While that might be true, a large portion of the decrease in international sourcing can be attributed to the decrease in the size of enterprises in the sample. The sample of surveyed enterprises included only enterprises with 100 employees or more in the 2009-2011 survey, while the latest survey took into account enterprises with 50 employees or more. Since the probability of sourcing is lower for smaller enterprises, a decrease in sourcing activity is expected.
With the additional difference in observation period, it is best to compare survey results between different countries in the same period only.
Manufacturing still leads international sourcing
Manufacturing drives international sourcing. In bigger economies, enterprises sourcing internationally are in the majority in the manufacturing sector. Italy has a particularly high level of manufacturing enterprises sourcing internationally (63 %) with Germany (55 %) and Hungary (54 %) following (Figure 4).
Looking at broader categories, when comparing industry with other non-financial business economy, the pattern is very similar, since manufacturing takes up such a large proportion of international sourcing. In Member States in total, enterprises sourcing internationally in industry and in non-financial business economy without industry are distributed evenly (50 % vs. 50 %) (Figure 5). One other thing can be noted, that in 11 out of the 16 countries, enterprises sourcing internationally in non-financial business economy without industry are in the majority. However, Italy and Germany are the largest economies in the sample and they both have a majority of enterprises sourcing internationally in the industry sector.
Moving business functions abroad
Majority of employment is in core function
Enterprises have 75 % persons employed in the core function, with the highest percentage of persons employed in the core function in Romania (88 %) and Bulgaria (85 %). Italy (66 %), Denmark (74 %) and Germany (74 %) have the fewest people employed in the core function compared with those employed in support functions (Figure 7.
Support business functions frequently moved abroad
Enterprises were asked to divide their functions into core (their main activity) and support functions (service functions for internal use). International sourcing was originally a model used by manufacturing enterprises to move their production abroad, but with the growth of digitalisation and codification of services, the sourcing model has expanded to service functions and services enterprises too. In relative terms, Germany had the highest proportion of enterprises sourcing their core function internationally (68 %) with Portugal (64 %) following. Sourcing of core functions — often in manufacturing — was also relatively high in Sweden, Denmark, Slovakia and the EFTA country Norway (see Figure 8).
In general, businesses more frequently source support functions than core functions. About 73 % of enterprises said they had sourced support functions, compared to 51 % that source core functions. Only in Germany were core functions sourced more frequently. The importance of sourcing support functions is noteworthy, taking into account that most sourcing enterprises are in manufacturing.
Administrative and management function the most frequently sourced support function internationally
The survey looked at several types of functions that support the core business function of an enterprise. These are distribution and logistics, marketing and sales, administration and management, ICT services, research and development (R&D) and engineering (Figure 9).
The previous two surveys showed that ICT services were the most frequently sourced support function. This latest survey, however, shows a different pattern, as more than a third of enterprises reporting international sourcing had moved administrative and management functions abroad. The proportion of enterprises sourcing administrative and management functions was highest in Slovakia, the Netherlands and Norway (over 45 %). By contrast, in Bulgaria and Romania, this proportion was equal to or less than 25 % (see Figure 10).
Business functions mainly sourced within the EU
For most countries, EU Member States are the primary destination for the international sourcing of business functions. When investigating international sourcing of business functions, most sourcing is to other EU countries (EU countries - group 1 with 47 %, and group 2 with 40 %), followed by India (15 %), other European countries (14 %) and China (8 %). This seems to indicate that proximity is still an important factor when sourcing internationally (see Figure 11), with the largest emerging economies playing an important role.
China and India as sourcing destinations
China and India, two leading emerging economies, are both important locations for business functions sourced from the EU. They attract different types of business functions. Not surprisingly, China is strong in attracting core business functions (7 %), generally in manufacturing (see Figure 12). Enterprises in Denmark, Romania and Italy engage the most in sourcing core functions to China, enterprises in Hungary, Austria and Poland the least.
On the other hand, India is strong in supplying business support services globally. EU countries are three times more likely to source support functions to India (12 %) than to China (4 %), especially the Netherlands, Latvia and Finland (see Figure 13). Portugal is on the other side of the spectrum, with no sourcing to China and the lowest sourcing to India (4 %).
These results show a similar structure to the previous survey, where China was an important destination for core business function sourcing and India for support business function sourcing.
Motivations for international sourcing
Cost cutting drives international sourcing
As in the previous survey, in most countries, the main reason businesses moved functions abroad between 2014 and 2016 or between 2015 and 2017 was to cut labour and other costs (see Figures 14 and 15).
When looking at reasons for enterprises to move functions from abroad, the factor most often considered as important is a strategic decision taken by the group head. This is perhaps due to the fact that the surveyed enterprise was not in a position to identify the actual reason behind such a decision (Figure 16). Other than that, the two most prominent answers were that the quality of product/service was insufficient or that there was a lack of qualified personnel abroad.
Focus on core business becoming an important factor
Looking at the previous surveys, the motivational factors of cost cutting seem to be decreasing in importance, with the motivation to ‘focus on core business’ increasing in importance, particularly in Hungary and Austria (Figure 17). This could show either a trend where EU countries want to specialise in the core business, or indicate that international sourcing motivated by cost cutting that has already been carried out has left little room for more.
Access to new markets can influence the decision to relocate business functions, particularly for global enterprises. Often, access to new markets requires new or expanded activities abroad, typically through existing or new affiliates. This is not counted as international sourcing, since no moving of business functions is involved (see methodological notes). Therefore, access to new markets is not ranked very high as a reason for moving business functions abroad.
International sourcing and employment development
Job losses due to international sourcing prevalent in small, open economies
By definition, international sourcing implies that jobs are moving out of the domestic economy, which can cause concerns for policy makers. This international sourcing survey measures job losses in isolated terms, meaning it does not directly capture the overall effects of job losses (e.g. when sourcing enables an enterprise to survive). The survey tries to produce statistical evidence regarding the impact of international sourcing on employment.
The survey provided information on the number of jobs lost from 2014 to 2016 or 2015 to 2017 due to business functions being relocated abroad. The countries reported on job losses due to international sourcing per business function and NACE aggregate. Figure 18 shows job losses as a proportion of total employment reported in the survey by business functions. A couple of outliers can be noticed, such as high job losses in ICT services for high and medium-high technology manufacturing (4.7 %) and knowledge intensive market services (3.4 %). In the non-financial business sector without industry, engineering and related technical services (4.5 %) and research and development (3.0 %) business functions had a relatively high number of job losses. For the industry sector, only ICT services function had job losses over 1 % (1.1 %).
Job losses due to international sourcing in enterprises with 50 or more persons employed were relatively low for the observed periods (see Figure 19). The biggest job losses in relative terms were reported in the Netherlands and the Nordic countries, especially in the industry sector. Job losses in industry were highest in Sweden (1.8 %), the Netherlands (1.8 %) and Denmark (1.6 %) and lowest in Latvia, Bulgaria and Poland (less than 0.1 %). In the non-financial sector without industry, job losses were highest in Denmark (0.6 %) and the Netherlands (0.6 %) and lowest in Bulgaria, Lithuania and Poland (less than 0.1 %). This confirms that job losses caused by international sourcing usually happen in countries with high labour costs, while they occur very rarely in countries with lower labour costs.
It should be noted that the flow of jobs abroad is continuous, and the cumulative and indirect effects of this should not be underestimated (reported by previous surveys).
The way forward
The survey shows interesting results and changes that happen in modern Europe as regards globalisation. The majority of sourcing still stays in Europe regardless of the dominant sourcing destinations on the rise, such as China and India. In general, the sourcing direction shows that enterprises in the smaller, open countries with high labour costs source the most to enterprises in other countries. There are indications that the sourcing wave of ICT services from the beginning of the 2000s has reached a plateau, with administrative and management services surpassing them in total sourcing in Europe.
Sourcing patterns are interesting for policy makers in Europe and there are often debates about sourcing as an agent of globalisation and its positive or negative effects on an economy. Having in mind the scarcity of statistical data on sourcing, this survey should provide new insight into the effects and motivations of sourcing. The next survey should capture the changes that have happened as well as provide information on new, emerging concepts. It might offer a more detailed and accurate view of the type of jobs lost, and facilitate breaking down almost any enterprise characteristic or strategy, such as employment and wages, technology adoption, training and skill requirements, etc.
The methodology will be further developed in the next survey, for example by exploring ways to better choose the sample to take into account the presence of domestic and multinational enterprise groups. International sourcing and its role in researching and measuring increased global organisation and fragmentation of global value chains constitutes one of the most important measurement challenges for business and trade statistics. This survey has hopefully shed some new light on this complex issue and strives to pave a way forward for new statistical developments.
Source data for tables and graphs
The data presented in this article refers to enterprises with 50 or more persons employed in periods 2014-2016 or 2015-2017 (depending on the country). They cover 15 EU Member States (Austria, Bulgaria, Denmark, Finland, Germany, Hungary, Italy, Latvia, Lithuania, the Netherlands, Poland, Portugal, Romania, Slovakia and Sweden) and Norway.
As a general remark, it is worth noting that since the survey is still in pilot stages, the survey design and type vary among countries (mandatory vs. voluntary survey, census type vs. sample survey, difference in response rates, etc.).
Symbols, abbreviations and reference periods:
The international sourcing statistics cover NACE Rev.2 (Statistical classification of economic activities in the European Community) sections B to E and F to N excluding K which, broadly speaking, cover non-financial market activities. The data refers to enterprises with 50 or more persons employed.
Sourcing activities Sourcing: The total or partial movement of business functions (core or support business functions) currently performed in-house of a resident enterprise to either non-affiliated (external suppliers) or affiliated enterprises located either domestically or abroad.
International sourcing: The total or partial movement of business functions (core or support business functions) currently performed in-house or currently domestically sourced by the resident enterprise to either non-affiliated (external suppliers) or affiliated enterprises located abroad.
Sourcing does not include: Expansion domestically or abroad; for example a set-up of a new production line domestically or abroad without a movement of business functions domestically or abroad (core or support business functions) nor reduction of activity and/or jobs in the concerned enterprise.
Insourcing and outsourcing: The survey distinguishes between international sourcing to a foreign affiliate or daughter company within the same multinational enterprise group — so-called insourcing — and sourcing to external providers, called outsourcing.
Business functions Core business function: Production of final goods or services intended for the market/for third parties carried out by the enterprise and yielding income. Core business function equals in most cases the primary activity of the enterprise. It may also include other (secondary) activities if the enterprise considers these to comprise part of their core functions.
Support business function: Support business functions (ancillary activities) are carried out in order to permit or facilitate production of goods or services intended for the market/for third parties by the enterprise. The outputs of the support business functions are not themselves intended directly for the market/for third parties. The support business functions are divided into:
- Distribution and logistics
- Marketing, sales and after sales services
- ICT services
- Administrative and management functions
- Engineering and related technical services
- Research and development
- Other support functions
Enterprise: The statistical unit of this survey is the enterprise. The enterprise is the smallest combination of legal units that is an organizational unit producing goods or services, which benefits from a certain degree of autonomy in decision making, especially for the allocation of its current resources. An enterprise carries out one or more activities at one or more locations. An enterprise may be a sole legal unit but can also be part of an enterprise group. The head of an enterprise group can either be located in the same country as the enterprises or in another country.
Jobs (lost): Refers to the task carried out in the domestic enterprise and not to the person actually carrying out the tasks. This person could still be employed but carrying out other tasks in the same enterprise even if the task is sourced internationally.
- International sourcing statistics - all activities (ESMS metadata file — iss_esms)
- Reference period 2014-2016 was used in seven countries: Denmark, Germany, the Netherlands, Poland, Romania, Sweden and Norway. The remaining nine countries in the survey used the reference period 2015-2017. Although two different periods have been used, it is assumed that sourcing is not impacted significantly. Thus, comparison between countries using different periods can be made.
- Caution is advised when comparing and interpreting results in terms of frequency of international sourcing from the two different surveys since they covered different timeframes. The first survey covered six years from 2001 to 2006, whereas the second survey covered only three years from 2009 to 2011.
- EU countries - group 1: AT, BE, DE, DK, EL, ES, FI, FR, IE, IT, LU, NL, PT, SE and UK; EU countries - group 2: BG, CY, CZ, EE, HR, HU, LT, LV, MT, PO, RO, SI and SK.
- It should be noted that data gathering for “high and medium-high technology manufacturing” and “knowledge intensive market services” has been voluntary. These are additional aggregates and they are not counted towards the ‘Total’.