Researchers from Aarhus University are now breaking with the long-standing policy of chiefly targeting outsourcing at cheap production economies in Asia and South America.

New results show that when Danish companies move production or other company processes overseas, it pays to find new business partners among companies in other high-income OECD countries.

Danish companies that collaborate with high-income countries, as opposed to outsourcing to low or mid-level income countries, benefit from increased exports, productivity and product development.

The study findings derive from the Tuborg Research Centre for Globalisation and Firms at Aarhus University, Department of Economics and Business and are based on registry data from Statistics Denmark. The figures include all Danish companies in the manufacturing industry with outsourcing activities from 1995 to 2006.

Profit growth for companies that outsource to high-income countries:

Productivity: + 2 per cent

Export intensity: + 20 per cent

Product development: + 15 per cent

(The figures are average and must be considered in relation to companies that move company processes to countries with mid and low level salaries.) 

Companies must streamline

According to Associate Professor Roger Bandick who is heading the project, the findings also stress how important it is for Danish executives to be able to streamline the company in answer to the challenges they face in the specific outsourcing scenarios.

Among other things, Roger Bandick has examined what happens to the composition of employee groups in companies that outsource. The pattern is clear: if a Danish company moves its production from a low-income economy such as China, the company’s low-paid workers are gradually laid off. If, on the other hand, the company chooses to outsource to a high-income economy, it is the highly paid workers who are gradually made redundant.

Both scenarios are cost-intensive processes, which the companies should take into consideration before outsourcing:

“The message to corporate executives is that they will emerge from any outsourcing process in better financial shape if they make effective adjustments to the composition of their workforce, among other things. Either before the outsourcing process gets underway or as soon as the need arises,” says Roger Bandick.

Demands on politicians

He goes on to say that a closer look at the figures reveals an even clearer picture of outsourcing. For example, the effect of outsourcing varies depending on the sector, company size, the outsourced activity and the specific country to which the activity is outsourced.  More research into the area is needed.

According to Roger Bandick this places special demands on politicians interested in legislating so that outsourcing activities strengthen the international competitiveness of Danish companies. The challenge is to avoid over-regulation:

 “Outsourcing is a complex area that crucially affects the competitiveness of Danish companies. Companies need free rein and scope for manoeuvre so they can fully exploit market opportunities,” concludes Roger Bandick.

Contact:

Roger Bandick, Associate Professor
Department of Economics and Business
Aarhus University, School of Business and Social Sciences

T: +45 8716 6921
Mobile: +45 50161776
Email: roger@hih.au.dk<mailto:roger@hih.au.dk> or rbandick@asb.dk<mailto:psc@asb.dk>
Web: http://pure.au.dk/portal/da/persons/id(00d770a6-e88b-44d1-9bdb-2553c4d31187).html