International sourcing and relocation of business functions


Data extracted in May-June 2017

No planned article update

Highlights

Between 2009 and 2011, international sourcing was used by a higher proportion of the EU’s industrial enterprises than by construction and services enterprises.

Between 2009 and 2011, outside of other EU Member States, China and India were the most common destinations for EU enterprises to develop international sourcing relationships.

Sourcing options for business functions
Source: Eurostat, based on Global value chains and economic globalisation: towards a new measurement framework — a special report to Eurostat; Sturgeon, Timothy — European Commission — February, 2013

Globalisation patterns in EU trade and investment is an online Eurostat publication presenting a summary of recent European Union (EU) statistics on economic aspects of globalisation, focusing on patterns of EU trade and investment.

Business functions are a set of generic, easy-to-understand categories that describe the various production processes carried out by enterprises, irrespective of their main economic activity. In addition to producing the goods or services from which they earn their revenues, enterprises typically require a variety of service functions to support their core business. In an effort to gain efficiency, scale economies and/or new markets enterprises move various core and support business functions around the world. This form of industrial organisation, based upon breaking up global value chains into specialised parts, is a key feature of many global businesses.

A widespread business model in which domestic enterprises move abroad their core and support business functions that were previously performed in-house is called international sourcing. It can be motivated by a variety of factors, although the overriding goal is usually to increase efficiency by sourcing more cost efficient inputs, whether of labour, capital, goods or services. It concerns the reallocation of productive capacity, through the total or partial movement of (core or support) business functions currently performed in-house (or domestically sourced) to foreign affiliates (or non-affiliated external suppliers) located abroad.

In relatively recent times, international sourcing in the EU was based around moving core manufacturing functions to southern EU Member States. Subsequently there was a new development following the end of communism, as international sourcing within the EU was increasingly focused on eastern Member States and this was followed by international sourcing spreading further afield to a number of emerging markets outside of the EU. These changes in how enterprises operate have been further reinforced by the introduction of new information and communication technologies which have extended international sourcing to (some) services too; such patterns of development form the basis for this article.

Full article

General overview

Statistics on international sourcing

Eurostat conducted a survey on international sourcing covering the period 2009-2011. It gathered data for nearly 40 000 enterprises (each with more than 100 persons employed) that were spread across 15 different European countries: Belgium, Bulgaria, Denmark, Estonia, Ireland, France, Latvia, Lithuania, the Netherlands, Portugal, Romania, Finland, Slovakia, Sweden and Norway.

International sourcing by broad economic activity

International sourcing was used by a higher proportion of the EU’s industrial enterprises

One of the principal findings of the survey was that it is important to note that while European businesses make use of international sourcing, they are more likely to source core or support functions from within their own domestic economy, rather than from international partners.

During the period 2009-2011 international sourcing for selected EU Member States was concentrated among industrial enterprises (defined here for this source as NACE Sections C-E). Figure 1 shows that across the 15 countries for which data are presented, there were 13 where the proportion of industrial enterprises making use of international sourcing was higher than the corresponding share for construction and services excluding financial services (as defined by NACE Sections F-N excluding Section K). Lithuania and Slovakia were the only exceptions and in both cases their shares of industrial enterprises making use of international sourcing were almost as high as for other enterprises in the remainder of the economy.

The highest propensity for using international sourcing was recorded in Denmark and Finland

The highest use made of international sourcing was often recorded in relatively small economies characterised by high labour costs. The proportion of industrial enterprises making use of international sourcing peaked in 2009-2011 in Denmark (33.6 %), while shares for Finland (28.7 %) and Belgium (23.5 %) were also relatively high. At the other end of the range, less than 1 in 20 industrial enterprises made use of international sourcing in Romania (3.4 %), Bulgaria (1.4 %) or Lithuania (0.0 %).

Denmark also recorded the highest proportion of construction and non-financial business economy enterprises that made use of international sourcing (20.5 % in 2009-2011), while six other EU Member States recorded shares within the range of 10-15 %. At the other end of the range, less than 1 in 20 construction and non-financial business economy enterprises made use of international sourcing in France (3.6 %), Romania (3.1 %), Estonia (3.0 %), Lithuania (1.2 %) and Bulgaria (0.7 %).

Figure 1: Enterprises which made use of international sourcing, by broad economic activity, 2009-2011
(%)
Source: Eurostat (iss_11sfsour)

International sourcing by partner and motivation factor

Proximity appears to be an important criteria when enterprises choose to outsource

An average of 8.3 % of all enterprises across 13 EU Member States made use of international sourcing in 2009-2011 (see Figure 2 for details of coverage). The most common destination for their international sourcing was other EU Member States (54.2 %), followed by India (11.8 %), China including Hong Kong (10.2 %) and other European countries outside the EU (8.8 %).

Figure 2: Enterprises which made use of international sourcing, by partner, EU, 2009-2011
(% of enterprises sourcing internationally)
Source: Eurostat (iss_11sfdest)

Global decision-making and cost-cutting measures drove international sourcing

Multinational enterprises organise their global value chains in order to achieve efficiency. Strategic decisions on international sourcing are often taken by head offices of global groups: for 11 out of the 15 countries taking part in the survey, the principal motivation for making use of international sourcing was as a result of a decision taken by the group head.

The next most common reasons for international sourcing were to reduce labour costs and/or other (non-labour) costs — see Table 1. This was particularly evident in some of the EU Member States that are characterised by relatively high domestic labour costs, for example, the Nordic Member States, Belgium and the Netherlands; for example, almost two thirds (61.7 %) of the Danish enterprises using international sourcing in 2009-2011, cited reducing labour costs as a motivating factor, while 41.8 % replied that reducing other (non-labour) costs were a motivating factor.

Table 1: Selected motivation factors for enterprises which made use of international sourcing, 2009-2011
(% of enterprises sourcing internationally)
Source: Eurostat (iss_11sbmot)

International sourcing by type of business function

European enterprises tended to outsource support (rather than core) business functions

Core business functions are defined as the production of final goods or services that are intended for market — in most cases, these are covered by the primary activity of the enterprise. In contrast, support business functions (ancillary activities) are carried out in order to permit or facilitate the production of final goods and/or services; the outputs of these support business functions are not themselves intended directly for market.

Although international outsourcing may have initially developed around core industrial activities, this pattern appears to have changed over time. Figure 3 shows that in the vast majority of the 15 countries for which data are presented, a higher proportion of those enterprises making use of international sourcing did so for support business functions (rather than for core business functions); the only exceptions to this pattern were France (where a higher proportion of enterprises made use of international sourcing for core business functions) and Bulgaria (where the same proportion of enterprises made use of international sourcing for core and support business functions).

Figure 3: Enterprises which made use of international sourcing, by type of business function, 2009-2011
(% of enterprises sourcing internationally)
Source: Eurostat (iss_11sfsour)

China and India were the two most common destinations for international sourcing relationships

As noted above, outside of other EU Member States, China and India were the two most common destinations for European enterprises to develop international sourcing relationships. Figures 4 and 5 present more detailed information on the types of international sourcing that took place in both of these emerging economies during 2009-2011. There is a clear contrast between the different types of business functions sourced to each country: a higher share of international sourcing arrangements with China tended to be for core business functions (often in industrial activities), whereas a higher proportion of outsourcing relations with India concerned support functions.

Figure 4: Enterprises which made use of international sourcing with China, by type of business function, 2009-2011
(% of enterprises sourcing internationally)
Source: Eurostat (iss_11sfdest)


Figure 5: Enterprises which made use of international sourcing with India, by type of business function, 2009-2011
(% of enterprises sourcing internationally)
Source: Eurostat (iss_11sfdest)

Enterprises which made use of backsourcing

A relatively small proportion of European enterprises resorted to ‘backsourcing’

In recent years there has been an increase in political and social movements that openly criticise the impact of global competition on domestic markets. These critiques are often supported by the development of protectionist policy agendas, designed to reduce voter concerns over a range of issues, such as: jobs being offshored; domestic producers facing competitive pressures that are perceived as being unfair; or the arrival of migrant workers. Eurostat’s survey on international sourcing asked respondents about the use being made of ‘backsourcing’, in other words, enterprises that chose to move the production of business functions that had previously been internationally sourced back to their host economy.

Figure 6 shows that there were relatively few European enterprises that resorted to use of backsourcing in 2009-2011; note that the results are presented in relation to the whole enterprise population and that only those enterprises that had already outsourced could engage in backsourcing. As with international sourcing in general, a somewhat higher share of industrial enterprises made use of backsourcing when contrasted with the share of construction and non-financial services enterprises.

Figure 6: Enterprises which made use of backsourcing, by broad economic activity, 2009-2011
(%)
Source: Eurostat (iss_11srentbck)

On the basis of results for 11 of the EU Member States, strategic decisions taken by the group head were given as the most common motivation for making use of backsourcing in 2009-2011 (some 42.2 % of all enterprises that backsourced; see Figure 7). The other principal reasons for resorting to backsourcing included: concerns over the quality of outsourced products/services; higher than expected costs; and difficulties in managing relationship that were linked to physical distance, language or cultural differences.

Figure 7: Motivation factors for enterprises which made use of backsourcing, EU, 2009-2011
(% of enterprises backsourcing)
Source: Eurostat (iss_11srmot) and (iss_11srentbck)
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