Statistics Explained

Archive:Global value chains - international sourcing to China and India

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Data from March 2011.

Authors: Pekka Alajääskö (Eurostat), Peter Boegh Nielsen (Statistics Denmark), Samuli Rikama and Johanna Sisto (Statistics Finland)

This article analyses European Union (EU) international sourcing to China and India, more particularly in knowledge-intensive services, providing insight into global value chains i.e. the parts of a value chain that are internationally sourced. The patterns observed may be valid for any global value chain.

Figure 1: Destination of international sourcing - Share of core and or support functions sourced internationally (%) - see list of country codes
Figure 2: Sourcing to Asia - Share of enterprises having sourced core and or support functions internationally (%)
Figure 3: Sourcing to China - Share of enterprises having sourced core and or support functions internationally, by sector (%)
Figure 4: Sourcing to India - Share of enterprises having sourced core and or support functions internationally, by sector (%)
Figure 5: Sourcing to China - Manufacturing enterprises sourcing core support functions to China, as a percentage of all enterprises sourcing to China (%)
Figure 6: Sourcing to India - Service enterprises sourcing core support functions to India, as a percentage of all enterprises sourcing to India (%)
Figure 7: Insourcing vs. outsourcing to China - Share of enterprises having sourced to China (%)
Figure 8: Insourcing vs. outsourcing to India - Share of enterprises having sourced to India (%)
Figure 9: Cutting labour costs seen as very important - Share of enterprises (%)
Figure 10: Access to new markets seen as very important - Share of enterprises (%)
Figure 11: Concern over patents and or intellectual property rights seen as very important
Figure 12: Reduction of labour costs, positive impact
Figure 13: Enterprises which have sourced internationally, broken down by their main economic activity (%)
Figure 14: Enterprises sourcing R&D functions and engineering functions; share of enterprises sourcing internationally (%)
Figure 15: Destinations for sourcing R&D functions; share of enterprises sourcing these functions (%)
Figure 16: Destinations for sourcing engineering functions; share of enterprises sourcing those functions (%)

A new and important feature of globalisation is that enterprises split their production processes into a number of business functions which they then move around the world to gain efficiency and/or new markets. This subscribes to the well known concepts of global value chains and international sourcing. Eurostat has, with its partners in the European statistical system, embarked upon an ambitious project to capture data on global value chains and on those parts that are internationally sourced. Voluntary data collections with more than a dozen European countries have been performed at a moment that would clearly be known to be "before the crisis", i.e. in 2007. Plans to move forward with another set of data collections in the EU in 2011/2012 are well advanced, with results on global value chains and international sourcing expected for end 2012.

International sourcing is not only about moving manufacturing core functions from old to new Member States of the EU. It is increasingly about moving these functions out of the EU to new emerging markets such as China and India.

Service providers, too, sourced both their core and support functions to China and in particular to India.

Main statistical findings

Analysis of sourcing to China and India and of knowledge-intensive functions shows that:

  • European manufacturing enterprises source to China while those providing services tend to source to India;
  • By far the most important motive for sourcing to China and India is to cut costs;
  • R & D functions are mainly insourced, i.e. moved abroad within the same enterprise group, because knowledge-intensive functions are strategically important;
  • Engineering functions are largely sourced to the EU's new Member States and to China and India — reflecting the sourcing pattern for core production functions.

In 2009 Eurostat published the overall results of the first large-scale survey of international sourcing in 2001–2006 in 13 European countries. These results show that European enterprises still mainly source their core and/or support functions internationally within the EU and elsewhere in Europe.

However, for enterprises in many European countries – e.g. in Denmark, Finland, Germany, Italy, Norway and Sweden – the second most frequent destination for international sourcing is China; see Figure 1. India is also an important sourcing destination for many European enterprises.

International sourcing to Asia

The remainder of this analysis provides detailed information on how European business functions are moving to China and India. It also focuses on the international sourcing of knowledge-intensive business functions. This information is a result from an on-going project, which links and analyses international sourcing survey results at enterprise level. Czech Republic, Denmark, Finland, Ireland, Italy, the Netherlands, Portugal, Slovenia and Norway participate in the project.

Overall, Ireland and Denmark have the largest share of firms that have sourced to Asia – closely followed by Italy, Finland and the Netherlands; cf. Figure 2. Asia attracts far fewer firms from the new EU Member States. This is probably because labour is cheaper in these countries – and saving labour costs is the main motivation for sourcing to Asia; cf. Figure 9.

China is the most important sourcing destination in Asia for enterprises in all countries included in this analysis except for the Netherlands and Norway. In Ireland, Denmark, Italy and Finland, roughly a quarter of all companies sourcing internationally did so to China.

European businesses also frequently source functions to India – though not as often as to China. India especially attracts Danish, Irish, Dutch and Finnish companies, of which more than 15 % have been sourcing to India. Other Asian countries as a group are the most popular sourcing destination for Danish, Irish, Dutch and Portuguese enterprises. In the case of the Dutch and Portuguese, this is probably partly due to their historical ties with certain parts of Asia.

China's importance as the "world's factory" is confirmed by the fact that manufacturing companies in particular have been sourcing there; cf. Figure 3. This pattern is clear in all European countries, and in most of them the share of manufacturing enterprises sourcing to China was more than double the share of service enterprises.

Furthermore, the functions which manufacturing companies source to China are mainly their core production activities, and much less frequently their support functions. This pattern confirms that the main motivation for sourcing to China is to cut costs rather than to gain access to new markets.

The profile for sourcing to India is different. India is used as a sourcing destination more frequently by service providers than by manufacturers, cf. Figure 4. This underlines the popular notion of India as the "world's service centre". The pattern is particularly clear for enterprises in the Netherlands and Denmark, where service providers sourced to India more than twice as often as manufacturers.

The division of tasks between China and India is also underlined by the different patterns of sourcing for core and support functions. Typically, a larger percentage of firms sourcing to India source their support functions there. These functions consist of different types of services (see Data sources and availability), cf. Figure 6.

It should be noted that manufacturing firms from the Northern European countries (Denmark, the Netherlands and Finland) source their support functions to India more frequently than their core production.

Insourcing rather than outsourcing

When sourcing business functions abroad, enterprises need to decide whether to source to an affiliate belonging to the same enterprise group (i.e. insourcing) or to an external supplier (i.e. outsourcing). The advantage of insourcing is that full control over production of that good or service remains within the enterprise group.

In general, insourcing was clearly the preferred option for enterprises sourcing their business functions abroad. Some 60 to 80 % of the firms that carried out international sourcing say they used insourcing, while typically around a third used outsourcing. However, in Denmark and Ireland the pattern was different. In these countries, insourcing and outsourcing appeared to be equally popular forms of sourcing abroad.

The pattern for sourcing to India is less clear. The percentages of companies insourcing and outsourcing to India are much more even than for sourcing in general. In Ireland, Denmark and the Czech Republic, outsourcing is used even more frequently than insourcing; cf. Figure 8.

The relatively high share of outsourcing may be because there are more obstacles to foreign investment in India and China than in many of the most frequent destination countries within the EU. The percentage of companies outsourcing to China is rather high, especially in view of concerns over intellectual property rights in these countries; cf. Figure 11.

The 60-80 % figure for international insourcing in general also applies to insourcing to China in particular. However, the share of enterprises outsourcing there (40-60 %) is somewhat larger than for outsourcing in general. Again, Danish and Irish firms follow a different pattern: more of them outsource than insource, cf. Figure 7.

Cutting labour costs is the main motivation for international sourcing

It is often said that the main reason for moving production or support functions abroad is to increase efficiency – for example by cutting labour costs. The survey confirmed this. For cost-cutting purposes, Asia appears to be a particularly attractive destination. Clearly, enterprises which source to Asia are motivated by cost considerations more often than enterprises which source to other regions.

This is particularly true of companies sourcing to China rather than India; cf. Figure 9. Around 60 to 80 % of enterprises sourcing to China considered labour cost reduction very important. Labour cost savings were considered particularly important by enterprises in countries such as the Netherlands, Denmark, Finland and Norway, where labour is expensive.

This is hardly surprising, given that China is the largest emerging market in the world.

Market access is a less important motivation for firms sourcing to India. Part of the explanation is probably that the functions sourced to India are often support functions not intended for direct consumption on local or regional markets. Danish and Norwegian firms rarely mention access to new markets as a motivation for sourcing internationally. In these countries, only 10-15 % of enterprises considered access to new markets a very important factor for sourcing.

Another key factor driving globalisation is access to new markets. Enterprises that source to China rate market access as an important motivating factor much more often than those engaged in international sourcing in general; cf. Figure 10.

Concern over patents and intellectual property rights is judged to be an important barrier in the way of sourcing to China; cf. Figure 11. This concern was expressed much more frequently by enterprises sourcing to China than by those sourcing internationally in general. This pattern is seen in all the countries surveyed.

This survey also asked enterprises what they saw as the impact of international sourcing. Most said they had largely succeeded in cutting their labour costs by sourcing their production or their support business functions abroad.

In almost all countries, 50-70 % of firms reported that they had reduced labour costs by international sourcing; cf. Figure 12. In the Netherlands, Norway and Finland, around 90 % said they had cut labour costs by sourcing to China.

International sourcing of knowledge-intensive business functions

International sourcing has been seen as an issue mainly in the context of European firms moving non-skilled manufacturing jobs to countries abroad. The Eurostat survey confirmed that international sourcing is mainly carried out by manufacturing companies. Around 20-25 % of manufacturing enterprises employing 100+ persons have sourced internationally, compared to only 10 % of similar-sized companies in other sectors of the economy; cf. Figure 13.

Results from the on-going project on microdata linking indicate that Europe should be concerned not only about job losses in manufacturing but also about the risk of losing knowledge-intensive jobs and thus hollowing out the knowledge base in European industries. The following analysis focuses on the business functions sourced, not on the activity of the enterprises which source them (see methodological notes for more information). It shows that the knowledge-intensive functions most closely related to the production process – functions such as engineering and research and development – are quite often sourced internationally.

These results underpin the need – even in our global information society – for close proximity between production and the engineering and R & D functions which support it.

Around 10-15 % of the companies which sourced internationally are sourcing R & D functions; cf. Figure 14.

The most frequent destination for R & D sourcing is the old Member States (EU-15). This is the case for all the countries surveyed: around 40-60 % of all enterprises sourcing R & D internationally source to EU-15 Member States; cf. Figure 15. However, China and India are also frequent destinations for R & D sourcing, especially for Danish, Dutch and Finnish firms. China and India each account for around 10-20 % of enterprises sourcing R & D functions internationally.

The EU's new Member States were the destination for around 20 % of the R & D functions sourced from the majority of countries.

The results show that around 10-20 % of firms sourcing internationally are sourcing engineering functions; cf. Figure 14.

The destinations for sourcing engineering functions are more diverse than for R & D. The old EU Member States are still the most important destination for companies based in Ireland, Portugal, the Czech Republic, Italy and Slovenia; cf. Figure 16. On the other hand, the new Member States are the most frequent destination for Dutch and Danish enterprises.

When sourcing engineering functions abroad, China is the most frequent destination for Finnish companies (40 %) and also an important destination for Danish and Italian firms (around 20 %). In addition, India attracted business from around 20-30 % of the Danish, Dutch, Italian and Finnish enterprises that sourced engineering functions abroad.

The geographical pattern of sourcing destinations for engineering functions underlines the importance of keeping these functions in close proximity to the firm's core production operations, which are often already sourced abroad. This may be necessary in order to stay competitive. The EU's new Member States and China are important destinations to which European enterprises source their manufacturing operations.

Strategic decisions often lie behind international sourcing

A large majority of all enterprises – except in Denmark – has chosen to use insourcing. Typically more than 80 % of those surveyed source their R & D functions within the same enterprise group; cf. Figure 17. By comparison, the average figure for all functions and all enterprises sourcing internationally in the countries surveyed is between 60 and 80 %.

Insourcing is also the preferred option when sourcing engineering functions, though it is used less frequently than for R & D. The dominance of insourcing, especially for R & D functions, is related to the strategic importance of knowledge-intensive business functions. The enterprises want to keep control of the research within the group, even if the research activity itself is relocated.

The strategic importance of knowledge-intensive business functions – and especially R & D – is underlined by the relatively high share of businesses whose international sourcing is reportedly based on a strategic decision by the group head; cf. Figure 18. In all countries – except Denmark – this factor is more frequently mentioned by enterprises which source R & D functions than in general by enterprises sourcing internationally.

Data sources and availability

Data source

The data presented in this article refer to enterprises which carried out international sourcing during 2001-2006 and which employ at least 100 persons. They cover eight EU Member States (the Czech Republic, Denmark, Ireland, Italy, the Netherlands, Portugal, Slovenia, Finland) and Norway.

The data relate only to those enterprises which responded to the survey. They are therefore not comparable with previously published results derived from "raised" (i.e. extrapolated) data. Only Figures 1 and 13 are based on such data. Please note that, in the detailed analysis of sourcing to Asia and of R & D and engineering sourcing, the number of observations is often rather limited. This should be borne in mind when interpreting the results.

In the following figures observations are missing due to confidentiality/low frequencies (see list of country codes):

  • Figure 3: NO services;
  • Figure 4: NO manufacturing and SI;
  • Figure 6: CZ and SI;
  • Figure 8: SI, Figure: 9 SI India;
  • Figure 10: SI India;
  • Figure 11: NO;
  • Figure 12: SI India;
  • Figure 16: NO.

Definitions

Sourcing activities

International sourcing

Some or all of an enterprise's business (core or support) functions are transferred from in-house or domestic operators to a firm located abroad – whether an external supplier or an affiliated enterprise.

International insourcing

Some or all of an enterprise's business functions are performed within the group to which the enterprise belongs, but abroad (by affiliated enterprises)

International outsourcing

Some or all of an enterprise's business functions are performed outside the firm or enterprise group, and outside the compiling country, by non-affiliated enterprises. This involves foreign subcontracting.

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. The enterprise's core business function is, in most cases, its primary activity. The core function may also include other (secondary) activities if the enterprise considers them to be a part of its core business.

Support business functions

Ancillary activities which enable or help the enterprise to produce goods or services intended for the market/for third parties. The outputs of the support business functions are not themselves intended directly for the market/for third parties. The support business functions are a) Distribution and logistics, b) Marketing, sales and after sales services, c) ICT services, d) Administrative and management functions, e) Engineering and related technical services and f) Research and development.

In our analysis of the international sourcing of R & D and engineering functions, the data relate partly to enterprises which have sourced their core function, i.e. their main R & D activity (NACE Rev 1.1 section 73) or their engineering and related technical services (NACE Rev. 1.1 group 74.2) and partly to enterprises which have sourced R & D or engineering as support business functions.

Classifications

Activity of the enterprise

On the basis of their main activity, enterprises are classified as either manufacturing or service enterprises. 'Manufacturing' covers section D of the NACE Rev. 1.1 classification system, whereas 'services' covers sections C (mining and quarrying), E (electricity, gas and water supply), F (construction), G (wholesale and retail trade), H (hotels and restaurants), I (transport, storage and communication) and K (real estate, renting and business activities).

Avg.: average over the countries surveyed.

Context

A new and important feature of globalisation is that enterprises split their production processes into a number of business functions which they then move around the world to gain efficiency and/or new markets. This is called international sourcing. International sourcing is not only about moving manufacturing core functions from old to new Member States of the EU. It is increasingly about moving these functions out of the EU to new emerging markets such as China and India.

Service providers, too, sourced both their core and support functions to China and in particular to India.

See also

Further Eurostat information

Publications

Database

International sourcing - All activities (iss)
International sourcing - survey 2007 (iss_07)
Plans for and barriers on international sourcing - collection round 2007 (iss_planbarr)
International sourcing activity - collection round 2007 (iss_souract)
Background Information - collection round 2007 (iss_bckinfo)

Dedicated section

Methodology / Metadata

External links

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