Offshoring found to create new jobs

A joint trade union/employer study published in May 2005 finds that the 'offshoring' of Danish companies' activities abroad does not necessarily result in fewer jobs in Denmark. The specific employment effect of offshoring is limited, whereas in manufacturing industry and business services, total employment shows a more positive development among offshoring companies than in these sectors as a whole.

A process of cooperation between two trade unions, the Union of Danish Metalworkers (Dansk Metal) and the Danish Society of Engineers (Ingeniørforeningen i Danmark, IDA), and the Danish Federation of Small and Medium-Sized Enterprises (Håndværksrådet, HVR) trade association resulted in May 2005 in a joint report about the consequences for jobs in Denmark of economic globalisation, ie relocation, 'outflagging' or 'offshoring' as it is called in the report.

The aim of the report, Jobskabelse gennem globalisering ('Job creation through globalisation - experiences and scenarios concerning Danish businesses'), is to map and analyse Danish companies’ use of offshoring. defined as 'outflagging'/outsourcing of workplaces and/or activities abroad. The report was drawn up by consultants from Mussmann Research and Consulting and from IDA. The comprehensive study is based on a questionnaire survey among 1,017 companies with more than 20 employees, and qualitative interviews with 20 relevant companies. Together the companies in the survey represent 27% of all jobs in private enterprises with at least 20 employees.

Main conclusions

The study has three main findings:

  • the specific employment effect of offshoring is limited, whereas in manufacturing industry and business services, total employment shows a more positive development among offshoring companies than in these sectors as a whole;
  • interviews indicate that offshoring increases the number of employees with a higher level of education, while skilled and unskilled workers come under pressure. However, this has not been proven by official statistics yet; and
  • offshoring within a company by establishing subsidiaries in Asia and/or central and eastern Europe involves new challenges for management and employees in relation to developing the firm’s internal relations, organisation and company culture across its activities nationally and internationally. The answer to these challenges is to create optimal conditions for creating new, challenging jobs with, for example, project management focusing on 'intercultural sourcing competences', innovation, knowledge/learning transference and other management issues.

China tops offshoring list

Danish companies are wide-ranging when it comes to choice of offshoring/relocation destinations. However, China tops the list so far, and is typically chosen with the aim of reducing production costs and at the same time securing entrance to a future growth market. However, the survey also finds that companies with numerous or long-term offshoring experiences seldom have any country-specific and well-analysed strategy. It is often concrete circumstances that determine where the companies choose to operate.

There is a large supply of engineers and metalworkers in Poland and Russia, the report states, but it concludes that these workers lack competences in innovation and problem-solving. Furthermore, company culture and hierarchical management forms in Russian companies make cooperative relations between Danish and Russian companies complex. Experiences of operating in Poland are more positive and wider. The survey finds that Polish engineers and metalworkers have a high level of skills, although they cannot compete with Danish engineers and metalworkers in relation to competences and experience relating to integration of skills, multitasking, flexibility and project cooperation.

Offshoring has not had general impact

According to the survey, Danish companies are still at a relatively early stage of offshoring. Only 158 out of the 1,017 companies with at least 20 employees included in the survey offshored tasks during 2003 and 2004. This challenges to some extent the widespread public view that companies in general are interested in moving production to low-pay countries, in particular to China.

The survey focus on two types of offshoring: relocation of workplaces and/or activities to other parts of the same company outside Denmark, for instance a subsidiary in another country; and outsourcing to independent subcontractors in another country. Offshoring or outsourcing involves both existing and new activities.

Of the 158 offshoring companies surveyed, 101 report a 'job effect'- 70 companies a negative effect and 28 a positive effect (three companies did not give details). The specific employment effect of offshoring activities in 2003-4 amounted to 1,814 jobs lost net out of 285,000 jobs in all. Seen as part of the greater whole, employment is to a very small degree determined by the relatively isolated offshoring activities. According to the survey, the proportion of job losses that can be related to offshoring should be seen in a much larger perspective than focusing on the exact job losses in connection with, for instance, moving a production line to another country. The job loss caused by offshoring can be put into perspective by comparing it with the specific job losses caused by increased workforce productivity. For every increase in workforce productivity of 1%, an unchanged range of products and services can be produced/provided by 3,000 fewer employees a year - which is a much larger number than the 900 jobs lost per year as a consequence of offshoring.

The skilled and unskilled workers group represents 83% of total job loss in the companies surveyed. Engineers and others with further and higher education represent 6% and 7% respectively. The survey states that job losses thus hit all groups in a company and that continuing vocational training and education for all groups is vital.

Offshoring 'creates jobs' in industry

One of the report's surprising conclusions, in contrast to the widespread view that Danish industry is losing jobs 'in thousands' because of offshoring, is that companies in manufacturing industry that have engaged in offshoring have subsequently experienced positive job creation in Denmark, whereas industrial firms in Denmark as a whole are losing jobs. Offshoring companies have increased employment by 4.9% over the period in question whereas total employment in industry has fallen by 1.7% (continuing the trend of the past five years or so). However, the new jobs created are different than those outsourced. The survey finds that the core of the new jobs requires mainly a higher or specialised educational background, in contrast to the 'low-tech' jobs outsourced to countries such as China.

Commentary

Economic globalisation, company closures, offshoring relocation etc are hot issues in the daily political and public debate and enjoy comprehensive media coverage in Denmark (DK0502102N). During April and May 2005 alone, four different reports were issued by the social partners and the government on aspects of globalisation and employment. The Dansk Metal/IDA/HVR report highlighting the relatively limited scale of Danish offshoring is an important counter-argument to the many, often dramatic contributions to the public debate and in the media, which mostly deal with individual cases. More importantly, this report underlines what others have suggested, ie that a comprehensive level of education and training is, and will remain, the key factor in Denmark's competitiveness in a globalised economy.

Those people who lose their job through offshoring do not get them back and this can create human tragedies. Northern Jutland has been hit particularly hard during the last year. Other reports, however, have found that many of the redundant people find jobs in other sectors more or less rapidly after redundancy. The conclusion that the new report offers, seen in the wider perspective, is that adaptability and development of skills at all levels are the major tasks for the government and the social partners to solve, if Denmark wants to remain competitive and maintain high employment levels. (Carsten Jørgensen, FAOS)

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