Offshoring: A loss of jobs

or a gain in profits?
by Brian Groom

The bitter US-inspired debate about offshoring, the transfer of jobs to low-cost labour
markets, is spreading to the non-English-speaking world. The issue is rising up the political
register in countries such as France, Germany and Spain. While it often arouses emotion
out of proportion to the jobs involved, the underlying questions go to the heart of Europe's
competitiveness. To the French, the phenomenon is 'delocalisation'. In Germany, it merges
into a longer-running debate about de-industrialisation or the 'bazaar economy' in which
goods made elsewhere are sold on through the world.

West Europeans are as worried about losing jobs to Eastern Europe as to India or China.
Increasingly, these are white-collar and skilled technology posts as well as the
manufacturing jobs that have been moving for more than a decade. The European Union's
enlargement gave the argument fresh impetus. Cheap and often highly skilled workers can
be found in countries such as Slovakia, Russia, Croatia or Bulgaria.

Germany's Chancellor denounced offshoring as 'unpatriotic' after Ludwig Georg Braun,

head of the chambers of commerce, urged businesses to take advantage of possibilities
afforded by EU expansion. Siemens, Volkswagen, Continental and SAP are among
companies that have shifted activities abroad, and now financial institutions such as
Commerzbank and Deutsche Bank are looking at relocating back-office work. Medium-sized
Mittelstand companies are joining to exodus.

At first, Berlin responded by saying Germany must improve its own skill levels. Recently,
however, it has shown more protectionist impulses by joining France in calling for new
member states to be denied EU regional aid unless they raise company tax levels. Nicolas
Sarkozy, France's finance minister is proposing tax incentives to persuade companies to
stay at home and encourage others to return. In Spain trade unions say nearly 40 foreign
multinationals have left in the past three years, creating a challenge for the government.

What impact is offshoring having? The evidence is patchy, which has helped fears to grow.
A recent survey, by the United Nations Conference on Trade and Development and
Munichbased Roland Berger Strategy Consultants, found nearly half of European
companies planned to shift more services offshore. UK companies accounted for 61 per
cent of the total of jobs moved, followed by Germany and the Benelux countries with 14 per
cent each. It was not a one-way street, though. Asia was top destination, with 37 per cent of
projects, but Western Europe itself benefited with 29 per cent - the favoured locations being
the UK, Ireland, Spain and Portugal - and Eastern Europe with 22 per cent.

Forrester Research forecasts 1.2m European information technology and service jobs will
move offshore over the next ten years, nearly three quarters from the UK. It sees continental
countries as slower to outsource, whether because of management caution, tight labour
laws or union resistance, and argues that Germany, Italy, France and the Netherlands will
lose by being less competitive as a result.

However Forrester's definition of offshoring - use of service providers based at least 500
miles away- ignores Eastern Europe. On that issue, a study of German and Austrian
companies by Dalia Marin, professor at the University of Munich, found surprisingly limited
negative impact. While German multinationals created
460,000 jobs and Austrian ones 201,000 in Eastern Europe between 1990 and 2001. The
result was a direct Ioss of only 90,000 jobs in Germany and 22,000 in Austria - partly
because of productivity differences.

What drove many companies east was the search for skilled employees because of a
shortage at home, where there was a 'human capital crisis'. Ms Marin's remedies include
better education and looser immigration rules to import skilled workers. In France, a finance
ministry study found the negative impact of 'delocalisation’ greatly exaggerated. Only 4 per
cent of the French foreign investment was production moved offshore in order to re-import
goods into France.

That still leaves governments wrestling with the problem of how to act. Tax breaks to
encourage companies to stay seem likely to have only a limited effect. More fruitful would
be a determined effort to reform labour, product and capital markets as promised under the
EU's Lisbon agenda. A report by McKinsey Global Institute found that every dollar of
corporate spending shifted offshore generates up to $1.14 in US wealth. But when a German
company invests a euro in a cheaper place, its home economy is on average 20 cents worse
off. The main difference is that displaced workers in the US quickly and replacement jobs.
In Germany, because of labour laws and slow growth, they do not.

Companies can benefit from outsourcing if it makes them more competitive. Increased
profits can then translate into higher investment and more employment at home – but
governments must first create conditions for job creation to thrive.