Can offshoring destroy jobs or boost the economy?

Since the global financial crisis in 2007, researchers found offshoring led to an uplift in employment for the company on its home soil.

One of the central planks of globalisation – offshoring – has been found to have no effect on unemployment and on the whole boosts jobs in the home country.

A study of nearly 6,000 European service multi-nationals by Warwick Business School, the University of Wollongong, and Aston University, found no evidence that offshoring – the relocation of part of the business to another country – led to an increase in unemployment at home.

In fact, since the global financial crisis in 2007, the researchers found offshoring led to an uplift in employment for the company on its home soil.

“Unsubstantiated claims of loss of employment due to offshoring have played a part to the UK voting for Brexit and the rise of right wing protectionist governments across the world, so it is imperative that we have some proper evidence on the issue,” Warwick Business School’s Nigel Driffield said.

Most research has been on manufacturing companies, but with the service sector making up around 80 per cent of UK employment, the researchers focused on services. They looked at thousands of multi-national firms across Europe over a near 20-year period and calculated the impact of their offshoring activities.

“Not only is there no evidence of a reduction in employment at home, but on the whole offshoring in these sectors led to an increase in employment at home, particularly after the financial crisis.”

The European companies studied ranges from retailers and hoteliers to financial services and telecommunications – offshored to 9,416 subsidiaries in 87 countries around the world. Germany, Spain, France and Sweden hosted the majority of parent firms (66 per cent) followed by Belgium, Denmark, Finland and the UK.

They found the vast majority of the subsidiaries – 7,635 – were located not in developing countries, but in high income economies in Western Europe, North America or Japan and Australia.

Driffield and his colleagues also found companies offshoring to move into a new market, such as Walmart opening branches in another country, actually saw employment grow in their home country. These ‘location intensive’ firms make up 62 per cent of the multi-nationals studied.

Interestingly, offshoring by ‘information intensive’ companies – those with high levels of technology and knowledge like a UK advertising agency opening an office in Frankfurt – saw a drop in employment when offshoring before the financial crisis, but since then it has not impacted on unemployment.

“Since the financial crisis these ‘information intensive’ companies have engaged in labour hoarding to avoid the impact of skill shortages,” said Driffield. “The study also shows that is worthwhile policymakers encouraging ‘location intensive’ service firms to invest abroad, particularly in high income countries as that will generate more employment back home.

“It is possible that the effects of offshoring on jobs are being felt on the companies’ supply chain and this needs investigating. But our results suggest something of a breakdown of the traditional models of ‘job exporting’.”

In the short term, this is perhaps driven in the West by skill shortages, and the reluctance of firms to shed scarce labour, Driffield explained. “In the longer term, however, we may see a return to the pre-crisis norm, especially if higher levels of protectionism force firms to move nearer to their customers.”

Praseeda Nair

Kellen Rempel

Praseeda was Editor for from 2016 to 2018.