EurWORK European Observatory of Working Life

Offshoring

 

Offshoring is when a business process is delocalised or outsourced outside of the country’s borders. The offshored activity may either continue to be owned by the company or may be outsourced offshore.

 

Offshoring is a specific type of restructuring. It occurs when a domestic economic activity is replaced by foreign production of goods or services due to a producer’s decision to cease or reduce a specific domestic activity in order to purchase or outsource it abroad. The definition implies the continued presence of the original producer company in the home country. It also implies that the offshored activities may either continue to be owned by the company or may be outsourced.

In general, offshored business processes include the production of goods and services. In the case of the production of goods, offshoring involves domestic companies producing or purchasing (intermediate) products abroad. In the case of services, offshoring frequently relies on the use of information technology providing for cross-border data transmissions or cross-border voice transactions, as in the case of call centres.

The aim of offshoring business processes consists of the reduction of costs, which may be achieved through lower labour costs, attractive regulatory environments or the proximity to sales markets. In most cases, the offshoring of domestic production activities concerns labour-intensive activities that are moved abroad in order to take advantage of lower wage costs.

The enlargement of the European Union as well as the creation of other regional free trade areas such as NAFTA (North American Free Trade Agreement) and CAFTA (Central America Free Trade Agreement) have facilitated the establishment of companies in countries with lower production costs. The growth of offshoring in the services sector is also linked to technological progress in the field of telecommunication. Finally, the decreasing costs of transportation also contributed to making offshoring more affordable.

With regard to the impact on employment, data collected by the European Restructuring Monitor (ERM) indicate that the offshoring of jobs from the European Union to lower-cost countries accounts for only a relatively small proportion of the overall number of job losses. According to the ERM, between 2003 and 2006, offshoring accounted for around 8% of all jobs lost.

Manufacturing dominates the offshoring statistics. In Europe, half of the jobs that are lost in the EU15 to other countries are in manufacturing sectors; most of these go to central and eastern European Member States or to Asia. Offshoring occurs in rather labour-intensive mid-tech sectors in the EU15 and in lower-tech sectors in the new Member States. The only service sector with significant offshoring is banking and insurance.

In general, offshoring processes affect blue-collar workers in sectors undergoing structural change due to globalisation. However, white-collar workers are increasingly among those workers whose jobs are vulnerable as a result of offshoring activities. In the services sector, occupations at risk are defined as those with an intensive use of information and communication technologies (ICT), an output that can be traded and transmitted by ICT and low face-to-face contact requirements.

As offshoring involves more than one country, European Works Councils (EWCs) are potentially an important forum with regard to interest representation at EU level. If, on the one hand, EWCs may facilitate the information and consultation of workers by the management of transnational enterprises that are undertaking major restructuring processes, then on the other hand, offshoring represents a particularly difficult issue for EWCs due to the potential conflicting interests between the representatives of different countries.

Although there have been isolated examples of EWCs’ involvement in negotiations over transnational restructuring that have resulted in the establishment of joint texts, from the perspective of the employee representatives, it would appear that the national structures of employee representation are still of primary importance. With regard to strategies of interest representation, it is necessary to distinguish between responses to actual offshoring processes and responses to the threat of offshoring.

In the case of offshoring threats, the response consists of attempts to reduce incentives for offshoring. In most cases, this strategy is based on proposals for cost reduction. Such a strategy may lead to the singning of pacts for employment and competitiveness providing for productivity increases through the reduction of labour costs and extension/flexibilisation of working time in exchange for safeguarding jobs. Research results also report cases in which cost reductions have been the result of proactive strategies aimed at anticipating change. In these cases, company-level actors succeeded in identifying likely changes and planning for product and/or process innovation, thereby avoiding offshoring processes.

In cases of actual offshoring, company-level actors, as well as public authorities at times, apply adjustment policies that may include arrangements for compensation, reconversion and identification of alternative employment opportunities as well as active labour market policies consisting of measures such as job-matching services, retraining and temporary employment subsidies. At the level of the European Union, the European Globalisation Adjustment Fund provides for funding active labour market policies for workers displaced due to the negative consequences of globalisation.

See also: European Monitoring Centre on Change; outsourcing.

 

Please note: the European industrial relations dictionary is updated annually. If errors are brought to our attention, we will try to correct them.

 

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