Structural Economic Change and the EU, 2008

8/9/2019 Structural Economic Change and the EU, 2008

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WWW.IPPR.ORG

StructuralEconomicChangeandthe

EuropeanUnion:Winners,losersandpublicpolicyoptions

ByHowardReed,OlgaMrinskaandMiguelCastroCoelho

December2008

InstituteforPublicPolicyResearchChallengingideas Changingpolicy


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ippr|StructuralEconomicChangeandtheEuropeanUnion:Winners,losersandpublicpolicyoptions2

Contents

Aboutipprandipprnorth .................................................................................................................... 3

Abouttheauthors ................................................................................................................................ 3

Acknowledgements .............................................................................................................................. 3

Executivesummary.............................................................................................................................. 4

1.Introduction .................................................................................................................................... 8

2.MeasuringstructuraleconomicchangeintheEU ....................................................................... 10

IndustrialstructureandproductivityintheEU............................................................................... 10

TheEUsaggregateproductivity..................................................................................................... 13

TradeandForeignDirectInvestment.............................................................................................. 15

OffshoringandoffshoreoutsourcingintheEU ............................................................................. 22

Migration..........................................................................................................................................30

Innovation........................................................................................................................................ 32Inequality......................................................................................................................................... 34

Economicgrowth............................................................................................................................. 38

Summary:TheimpactofglobalisationontheEUeconomies ........................................................ 40

3.Policyresponsestostructuraleconomicchange............................................................................. 43

TheLisbonAgenda.......................................................................................................................... 43

Industrialpolicy ............................................................................................................................... 45

Entrepreneurship ............................................................................................................................. 50

Skillspolicy ...................................................................................................................................... 53

Cohesionpolicy(structuralfunds) .................................................................................................. 54

Europeanemploymentandactivelabourmarketpolicies.............................................................. 56

AssessmentofEUpolicyresponsestostructuraleconomicchange............................................... 584.Conclusionsandrecommendations................................................................................................. 60

Conclusions...................................................................................................................................... 60

Directionsforfutureresearch.......................................................................................................... 62

Recommendations........................................................................................................................... 63

References ........................................................................................................................................... 66

Appendix:TrendsinemploymentstructureintheEU ........................................................................ 72


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TheInstituteforPublicPolicyResearch(ippr)istheUKsleadingprogressivethinktank,producingcutting-edgeresearchandinnovativepolicyideasforajust,democraticandsustainableworld.

WithofficesinbothLondonandNewcastle,weensureouroutlookisasbroad-basedaspossible,whileourinternationalandmigrationteamsandclimatechangeprogrammeextendourpartnershipsandinfluencebeyondtheUK,givingusatrulyworld-classreputationforhighqualityresearch.

ipprnorth,theNewcastle-basedofficeoftheInstituteforPublicPolicyResearch,producesfar-

reachingpolicyideas,stimulatingsolutionsthatworknationallyaswellaslocally.Theseareshaped

fromourresearch,whichspansthenortherneconomicagenda,publicservices,devolution,foodpolicy

andruralissues,aswellasastrongdemocraticengagementstrandwhichinvolvesawiderangeof

audiencesinpoliticaldebates.

ippr,30-32SouthamptonStreet,LondonWC2E7RA.Tel:+44(0)2074706100E:[email protected]

www.ippr.org.RegisteredCharityNo.800065

ipprnorth,BioscienceCentre,CentreforLife,NewcastleuponTyneNE14EPTel:+44(0)1912112645www.ippr.org/ipprnorth.RegisteredCharityNo.800065

ThispaperwasfirstpublishedinDecember2008.ippr/ipprnorth2008

Aboutipprandipprnorth

Abouttheauthors

HowardReed isdirectorofLandmanEconomics,aneconomicresearchconsultancy.Whileworkingon

thisreporthewaschiefeconomistatippr.

MiguelCastroCoelho wasaneconomistatipprandnowworksatthePrimeMinistersStrategyUnit.

OlgaMrinska isresearchdirectoratipprnorth.

ipprwouldliketothankitsprojectpartner,LordSainsbury,withoutwhomthisprojectwouldnothave

beenpossible.

TheauthorswouldliketothankJurajDraxler,SusanHitch,AlisonHunter,MichaelJohnson,Carey

OppenheimandDannySriskandarajahforusefulcommentsonpreviousdraftsofthispaper,and

seminarparticipantsinBrusselsinJune2008whodiscussedanearlyversion.ThanksalsototheNorth

EastEnglandOfficeinBrusselsforhostingtheseminar.

ThankstoGeorginaKyriacouatipprforcopyeditingthereport.

Acknowledgements


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ThisreportisabouttheeconomiceffectsofglobalisationintheEuropeanUnion,andhowthe

EuropeanCommissionandcountriesintheEUshouldrespondtoit.

Ouraimsarethreefold.

First,weexaminewhattheextentandnatureofrecentstructuraleconomicchangestotheEUseconomieshavebeen,andattempttoidentifywhothemainwinnersandlosersfromglobal

economicintegrationareintheEU.

Second,weassesstheeffectivenessofrecentinitiativesattheEuropeanCommunitylevelaimedatimprovingEuropeseconomicperformanceandrespondingtothechallengesposedby

increasedglobaleconomicintegration.

Finally,weofferrecommendationsforhowEUpolicymakerscanmaximisethebenefitsfromglobalisationwhileminimisingitsside-effects.

TheextentofstructuraleconomicchangeThisreportusesdatafromseveralsources,inparticulartheOrganisationforEconomicCooperation

andDevelopment(OECD)andEurostat(theEuropeanUnionsstatisticalagency),toanalysethe

extentofstructuraleconomicchangeintheEUoverrecentdecades.Theevidenceshowsthat

globalisationisarealphenomenon,notaproductofmediahypenoranoutgrowthofpoliticians

imaginations.Thedatafullysupportthenotionthatnationstatesandregionalblocsofnationshave

becomemorefullyintegratedwitheachotherthroughtrade,investment,multinationalcorporate

activity,knowledgetransfer,andlabourforcemigration.Since1945thetrendshaveallmovedinone

directiontowardsgreaterglobaleconomicintegration,drivenbytechnologicalprogress,the

expandedroleofmultinationalcorporationsintheglobaleconomyandlowertariffbarriers.

Keytrendssince1995

SeveralkeytrendsareevidentforEUmemberstatesovertheperiodsince1995.First,therehasbeen

apronouncedshiftfrommanufacturingtoserviceindustriesineachEUcountry.

TradehasexpandedmarkedlyasaproportionofeachEUcountrysvalue-addedoverrecent

decades.ImportsofbothgoodsandserviceshaveincreasedasashareofGDP.Tradeinintermediate

goodsandservices(thatis,servicesrequiredforlaterstagesofproduction,beforefinalproductsare

soldtoconsumers)hasincreasedatafasterratethantradeinfinalgoodsandservices.Foreigndirect

investment(FDI)intheEUhasalsogrownquicklyoverthelastdecade,atafasterratethanGDP

growth.

Improvementsininformationandcommunicationstechnologyhavevastlyexpandedthescopefor

relocationofproductionviaoffshoringandoutsourcing,particularlyintheservicesectors.However,

ouranalysisofproductionrelocationusingtheEuropeanRestructuringMonitordata(thebestdatacurrentlyavailable)showthatonlyasmallproportionoftotaljoblossesintheEU27countries

195,000jobsor8percentweretheresultofoffshoringandoffshoreoutsourcingovertheperiod

2003to2006.OffshoringisnotamajorfactorinrecentEUjoblosses.

Migrationhasbeenontheincreasegloballyoverthepast20years,withanincreaseinthenumberof

foreignworkersandforeign-bornpopulationmoregenerallyinmost(butnotall)EUcountries.

However,increasedimmigrationhashadminimal,ifany,effects,onoverallwagesandemployment

prospectsforworkersalreadyintheEU(asintheUnitedStates).

TheEUsaggregateproductivitygrowth(measuredasrealGDPperhourworked)sincethemid-1990s

hasbeenroughlyequaltoJapansbuthasbeenslowerthanintheUS,meaningthatthegapbetween

thetwohasgrown.Europesinnovationperformance,measuredasthepercentageofnationalincome

spentonR&D(researchanddevelopment)hasalsounderperformedtheOECDaverage.

Finally,simulationsbytheEuropeanCommissionofthemacroeconomicimpactsofglobalisationsince

1945suggestthattheperiodfrom1990to2003wassomethingofananomalyinthattheoverall

Executivesummary


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gainstotheEUfromglobaleconomicintegrationinthistimeperiodweresmall,whereasbetween

1945and1990theyweremuchlarger.Nonetheless,thepoorpayofftotheEUfromglobalisation

since1990canbemostlyexplainedbyone-offtransitioncostsrelatedtomajorindustrialrestructuring

processes.

ThemainwinnersfromglobalisationintheEUoverthelast10to15yearsinparticularhavebeentheownersofcapital(giventhatcapitalsshareofeconomicrewardshasincreasedrelativetolabour

acrosstheworld),andworkersinthetophalfoftheearningsdistributionandespeciallythoseat

theverytopoftheincomedistribution(thetop0.1percent).Thebiggestlosers,atleastintheshort

run,arepeoplewhohavelosttheirjobsinindustriesthathavebeenthemostbadlyaffectedby

increasedglobaleconomicintegrationandcompetitionfromabroadparticularlywherethosejobs

haveveryspecificskillswhichcannotbeusedinthenewjobstowhichworkershaverelocated.Net

gainsfromglobalisationarecloselyrelatedtohowsmoothlyresourcescanbereallocatedfrom

decliningtoexpandingsectors.

Inturn,theEUsadjustmentcapacitydependstoalargeextentonpoliciesaffectingthelabour

market,aswellasonthegeneralskilllevelofthepopulation.Thereareotheraspectsofglobalisation,

too,thathavewiderbenefitstoEUconsumersinparticular,reductionsinpricesforgoodsandserviceswhicharerelocatedtocountrieswhereproductioncostsarelower.

TheEUspolicyresponsetoglobalisation

TheEuropeanUnionsresponsetotheeconomicchallengesposedbyglobaleconomicintegration

havebeencentredontheLisbonAgendaanoverarchingframeworkreflectingtheEUsintentionto

movetowardsamorecompetitiveeconomywithmoreandbetterqualityjobs.The2005revisionof

theAgendafocusesonareasofeconomicpolicythatshouldimproveeconomicperformanceifthe

rightreformsaremadeincreasedsupportforinnovationandR&Dspending,combiningimproved

workeradaptabilityandlabourmarketflexibilitywitheffectivesocialprotectionsystems,increased

humancapitalinvestment,improvedinfrastructureandthecompletionoftheEuropeansinglemarket

ingoodsandservices.

However,thereareseveralproblemswiththeimplementationoftheLisbonAgenda,andreformsto

thevariouspolicyareasthatarecrucialtoitssuccessinnovation,entrepreneurship,industrialand

skillspolicies.RecentCommissionpublicationsonindividualpolicyareasstillsufferfromanexcessof

initiatives,withalackofprioritisationandamisguidedattempttobeallthingstoallpeople.This

makesprogressoneconomicreformharderthanitshouldbe.

TheCommissionalsoneedstosecurebuy-infromEuropescitizens,businessesandgovernmentsfor

theLisbonreforms.Nationalgovernmentsareprimarilyresponsibleformostofthepolicyareascrucial

toEuropeseconomicsuccess,andunlesstheyareconvincedthattheLisbonreformsareintheir

interests,theyareunlikelytodeliverontheCommissionsvision.Also,thereisanurgentneedfor

bettercoordinationbetweendifferentbranchesoftheECandnationalgovernments,andforbetter

disseminationofbestpractice,drawingontherecentlyestablishedOpenMethodofCoordination(OMC)processwherebymemberstateslearnfromeachothersbestpractice.

TherevampedLisbonstrategyalsopaysinsufficientattentiontootherobjectivesthatarenoless

importantthanimprovingtheEUseconomicperformance.Inparticular,identifyingandassistingthe

mostseverelosersfromglobalisation,andreducingEuropesgreenhousegasemissionstomitigate

thethreatofdangerousclimatechangeduringthe21stcentury,aretwoobjectivesthatarejustas

importantassecuringeconomicprosperity.

TheproofoftheLisbonpuddingisintheeconomicdataontheEUsperformanceonproductivity,

employment,skillsacquisition,entrepreneurialactivityandinnovationperformanceandinmany

areas,theEUisstillalongwayfromtopoftheeconomicleaderboard.Productivitygrowthremains

sluggishinmanyEUcountries.TheEU27scombinedR&DspendingasapercentageofitsGDPisstill

alongwaybelowtheOECDaverageletalonetheUSsorJapanslevelsofspending.TheEUs

targetof70percentemploymentamongworking-agepeopleby2010lookswildlyoptimistic,and

theproportionofchildrenwithpoorreadingcapabilityisincreasingratherthanfalling.Clearly,despite


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recentprogress,theEUhasaverylongwaytogotorealisetheLisbonvisionofthemostdynamic

knowledge-basedeconomyintheworld.

Conclusions

TheEUfacesanongoingeconomicperformancedeficitrelativetocompetitornations,bothold(for

example,theUS,Japan)andnew(forexample,China,India).Inparticular,agapbetweentheEU

andtheglobalbestperformersexistsinproductivityandinnovation(especiallyR&D).Thelatest

economicevidence(asofAugust2008)suggeststhatrecentturbulenceinfinancialmarketstheso-

calledcreditcrunchhashitEuropemuchharderthanwasinitiallyexpected.Totheextentthatthe

EUsuffersaworseslowdownthantheUSorJapanasaresultofthecrisisinfinancialmarkets,itwill

fallfurtherbehindthemonthemaineconomicindicators.

Inthemediumterm,theemergenceoftheBRICcountriesBrazil,Russia,IndiaandChinaasnew

economicsuperpowers(especiallyinChinascase)posesnewissuesforEUeconomicpolicy.The

incidenceofoffshoringofbothmanufacturingandservicesjobstotheselow-costlocationsislikelyto

increase,whichwillprobablyresultinincreasedadjustmentcostsfortheEUseconomies.Future

decadesarelikelytoseetoughercompetitionforEuropeanmanufacturingasChinesemanufacturers

moveupthevaluechaintohigherqualityproducts.

ThustheEUwillhavetoruntostandstillintermsofpreservingitseconomiccompetitiveness.The

prioritiesidentifiedbytheLisbonAgendaareessentiallycorrect,butpolicyinmanycrucialareas

remainsfarfromintegrated.Thereisafundamentalchallengetosecurebuy-infromtheEUsmember

stategovernmentsandnationalpopulationsforreformswithoutsparkingresentmentoftheEuropean

Unionscoreinstitutionsandapoliticalbacklashagainstfurthereconomicintegration.

Recommendations

WemakethefollowingrecommendationsforEUpolicy:

1.FosterbetterlinksbetweendifferentEUpolicystreams

DifferentEUpolicystreamsareaffectedbyglobalisation.ThereneedstobebettercommunicationbetweenthedifferentdirectoratesoftheECtominimisetheextenttowhichtheyworkatcross-

purposestooneother,andtoexploitthepotentialforsynergiesbetweendifferentpolicyareas.

2.ObtainstrongercommitmentsfromnationalgovernmentstoachievetheLisbonstrategy

GiventhattheweightofavailableeconomicevidencesupportstheviewthatfollowingtheLisbon

AgendaproperlywillimprovetheEUseconomicperformance,theCommissionneedstoencourage

memberstategovernmentstopointoutthesynergiesbetweentheirnationaleconomicpoliciesand

theLisbongoalsintheirownpublications.Thisshouldimprovethecohesionofcommunity-leveland

nationaleconomicpoliciesandmighthelptorehabilitatetheEUintheeyesofmanyofitscitizens.

3.CreateaneffectiveEuropeaninformation(media)spacetoreachtheEUscitizens

WeproposethattheEC,inassociationwithmemberstates,createsanaccessibleinformationspace(throughallmediameans,includingvirtual)todiscusstheCommissionsprioritiesforeconomicpolicy,

toobtainfeedback,andtodisseminatetheevidencefromtheCommissionandexpertcommunityon

thechallengesandopportunitiesposedbyglobaleconomicintegration.

4.FacilitatepracticalexchangeofideasandexperiencesacrosstheEUintheareaof

economicpolicies

ThereissubstantialvariationacrosstheEUintheeconomicpolicieswhichmemberstatespursuein

differentareasandagooddealofevaluationthatshowsthecomparativeeffectivenessofdifferent

nationalpoliciesinthoseareas.Thereisamplescopeforexchangeofideasanddisseminationofbest

practiceapproachesbetweencountries,buildingonthecurrentOMC(OpenMethodofCoordination)

framework.

5.Expandtheuseoftargetedpolicyinstruments(subjecttopositiveevaluation)

TheEuropeanGlobalisationAdjustmentFund(EGAF)shouldbeabletoplayanimportantrolein

compensatingthelosersfromglobalisation.However,thedataonworkerdisplacementneedtobe


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muchimproved,andtheEUneedstoundertakeanextensiveevaluationofEGAFsperformance(in

howitselectsworkersforhelp,andinwhathappenstothemafterreceivingfunding)afterthreeor

fouryearsofitsactivities.Iftheresultsshowthattheprogrammeisperformingwellthenthebudget

fortheprogrammeshouldbeextended,perhapsbyreallocatingmoneyfromotherEUbudgets(such

asstructuralfunds).

6.Improvestandardisationofregulatoryframeworkstoreducetransactionscosts

OneoftheEUssuccessstoriesisthereductioninthecostsofdoingbusinessacrossnationalborders

whichhasresultedfromtheharmonisationofregulationsgoverningcertainareasofeconomicactivity.

Thisshouldnowbeextendedintoharmonisationandstandardisationintonewareasofpolicy,for

exampleanintellectualproperty(IP)regimewithasingleEuropeanpatentingprocess,andasingle

corporatelegalframework,whichwouldbeparticularlyusefulforSMEs.

7.Investmoreinqualitydata(particularlyatthefirmlevel)throughEurostat

ThecurrentdataontheeffectsofglobalisationontheEUarescant,particularlyfirm-leveldataon

production,investmentandinnovation.WerecommendthatEurostatinvestsconsiderablyinbetter

data,workingwithmemberstatesstatisticalofficesasappropriate.Betterdataonwhathappensto

workersdisplacedbyoffshoringisalsoessentialtoassesshowwelltheEuropeanGlobalisation

AdjustmentFundisworking.


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ThisreportisabouttheeconomiceffectsofglobalisationintheEuropeanUnion,andhowthe

EuropeanCommissionandcountriesintheEUshouldrespondtoit.

ThequestionofhowpolicymakersintheEUshouldaddresstheeconomicchangeswroughtbyglobalisationhasbeenhighonthepolicyagendainrecentyears.RecentopinionsurveysofEU

citizensshowthatlargeproportionsofthepopulationsinmanymembercountriesareworriedabout

globalisation.Forexample,accordingtoastudybyEurobarometer(aEuropeanCommissionagency

whichconductsregularsurveysofpublicopinion)in2003,60percentofemployeesinFranceand

Greecewereveryconcernedaboutglobalisation,whilelessthanathirdofemployeesinDenmarkand

Swedenwereconcernedaboutit.Morerecentpollssuggestthatthecitizensofnewmemberstates

aremoreoptimisticabouttheconsequencesofglobalisationthanthecitizensoftheEU15(the

countriesthatwerealreadymembersoftheEUbefore2004)(Eurobarometer2007).

TherearecontinuingfearsamongeconomiccommentatorsabouttheEUsabilitytocompete

effectivelywiththeleadingeconomicpowerhousesoftheworldsuchastheUnitedStates.Addedto

thisoverthelastdecadehavebeenconcernsovertherisetoeconomicprominenceofseverallargenewlyindustrialisingcountriesinparticularIndiaandChina,whosecombinedpotentiallabourforces

outnumbertheexistingindustrialisedcountriesbymorethantwotoone(Maddison2007).

Atthesametime,thereisconcerninmanyquartersoftheEUoverneweconomicandsocialtrends

thatarelinkedinpopulardiscussiontoglobalisation.Increasedimmigrationhasfiguredwidelyacross

theEUonthelistoftrendsthatcitizensaremostconcernedabout,withworriesthatwagesand

employmentprospectsarebeingthreatenedbyaninfluxofarrivalsfromlower-costcountries1.The

accessiontotheEUof12newandlesswealthymemberstatesbetween2004and2007hasledto

growingconcernsamongthepopulationsofthepre-existingmemberstates(knownastheEU15).It

ispossiblethattheseconcernsmayhavecontributedtothenegativeresultsofreferendumsonthe

proposedEUConstitution(inFranceandtheNetherlands)andonthesubsequentLisbonTreaty(in

Ireland),althoughthereislittlehardempiricalevidenceonthisissue.

Additionally,thereisconcernthatincreasedimportsoflow-costmanufacturedgoodsandtradable

services,andtheassociatedoffshoringofjobsinthemanufacturingandservicesectorstolower-cost

locationsoutsidetheEU,threatentheviabilityoffullemploymentintheEUinthefuture.Giventhe

concernthatexistsamongmanysectionsoftheEuropeanpublicabouttheEUsabilitytorespond

effectivelytostructuralchangesintheglobaleconomicandpoliticalspheres,thisprojectisvery

timely.

Questionsaddressedbythereport

Chapter2looksathowextensivetherecentstructuralchangesintheeconomiesoftheEUhavebeen.

Whichcountriesandgroupsofthepopulationhavebeenmostaffected,andwhohavebeenthe

winnersandlosers?Towhatextentarethetrendswehaveobservedoverrecentdecadeslikelytocontinue?OuranalysisdrawsonaselectionofdatadrawnmainlyfromEurostat(theEuropean

Unionsstatisticaloffice)andtheOrganisationforEconomicCooperationandDevelopment(OECD).

Westartwithbasicstatisticalevidenceonindustrialrestructuring,employment,trade,foreigndirect

investment(FDI)andrelocation(offshoringandoutsourcing).Wethengobeyondsimpledescriptive

evidenceandcross-tabulationtryingtoestablishwhatthenetimpactofglobalisationhasbeen.

Wefocushereonthetie-up(orlackofit)betweeneconomictheoryandempiricalevidence,and

1.Introduction

1.Ofcourse,inthecaseoftheEU15countries,someofthisincreaseininwardmigrationisaresultoftherecentexpansionoftheEU.However,migrantinflowsfromoutsidetheEUhavealsoincreasedin

mostcountries(seePollardetal 2008).


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econometricstudiesdesignedtoestablishwhattheparticularimpactofdeeperglobaleconomic

integrationis,andtowhatextentthiscanbedisentangledfromcontemporaneoustrendssuchas

technologicalprogress.

InChapter3weassesstheEUspolicyresponsestoglobalisationacrossanumberofdifferentareas

includinglabourmarket,industrial,innovation,enterpriseandcohesionpolicies.OurfocusisonnewdevelopmentsinEUpoliciesatthecommunitylevel,andhowtheyinterfacewithwhatnational

governmentsaredoing.InparticularwefocusontheEUsprogresstowardsmeetingthegoals

establishedbytheLisbonAgendaestablishedin2000,whichaimedtomaketheEUthemostdynamic

andcompetitiveknowledge-basedeconomyintheworldby2010(EC2004).

Chapter4presentsourconclusionsandrecommendations.

Whatdowemeanbyglobalisation?

Beforewemoveon,westrikeanoteofcautionontheuseofthewordglobalisation,whichisused

extensivelyinthemediaandinpopulardebatewithoutanyattemptbeingmadetodefineit.This

invariablyresultsinsloppyandill-formedanalysis.Intheboxweprovidearangeofdefinitions.To

minimiseconfusionwehavechosentousethetermstructuraleconomicchangeinthisreport,asthisisamoreprecisedefinitionofwhatwearereallyinterestedinhere.Weexplainfurtherinthebox

below.

Structuraleconomicchangeandglobalisation

Inthisreportweusethetermstructuraleconomicchangetorefertoglobaleconomictrendsthat

changethestructureofanationaleconomyintermsofindustrialmix,wageandskilllevels,

investmenttrends,spatiallocation,technology,anddemographics(forexample,throughmigration).

Structuraleconomicchangeisamorepreciseandusefultermthanglobalisationforthepurposes

ofthisreport,fortworeasons.First,therearealsonon-economicaspectstoglobalisation(for

example,cultural,socialandpoliticalaspects),whereasourfocusinthisreportislargelyon

economicphenomena.Second,globalisationhasbecomeanimpreciseandoverusedterm

(particularlybypoliticiansandthemedia)whichhasreduceditsvalueasasharpandpreciseterm

forresearchers.

ThefollowingdefinitionbyFischer(2003)isclosetotheessenceofwhatwearelookingatinthis

report:

Economicglobalisation,theongoingprocessofgreatereconomicinterdependenceamongcountries,

isreflectedintheincreasingamountofcross-bordertradeingoodsandservices,theincreasing

volumeofinternationalfinancialflows,andincreasingflowsoflabour.

Thus,wheneverthetermglobalisationisusedinthisreportthereadershouldassumethatitis

thesetypesofeconomictrendstowhichwearereferring.

SeealsotherecentreportbyBeggetal (2008),whichgivesanexcellentsummaryofthewider

socialaspectsofglobalisationintheEUandtheirimplicationsforfutureEUsocialpolicies.


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Asexplainedintheintroduction,itisessentialtohaveclearevidenceonthemagnitudeofeconomic

changeinordertoderivesensiblepolicyprescriptionsforhowEUcountriesmightrespondto

economicglobalisation.Thischapterprovidesthatevidenceacrossanumberofdifferentdimensionsofeconomicactivity.Itlooksatthefollowingissues:

Changesthathavetakenplaceoverthepastdecadeorsoinindustrialstructureandemploymentpatterns,byindustrialsectorineachEUcountry,andtheEUsaggregateproductivity

performanceversusitsmaincompetitorsintheglobaleconomy.

Thedynamicsoftradeandforeigndirectinvestment(FDI)2 intoandoutoftheEUoverthelastfewdecades.

TrendsintherelocationofproductioninsideandoutsideEUstates(outsourcingandoffshoring),theextentofmigrationintoEUmemberstatesandpatternsofinnovationintheEU.

TheimpactoftheseeconomicchangesonkeyeconomicoutcomesparticularlyinequalityinEUmemberstates,andeconomicgrowthandproductivityintheEUasawhole.WeattempttoseparateouttheeffectsofincreasedeconomicintegrationoftheEUfromothertrendsthatare

occurringatthesametimeinparticular,technologicalprogress.Thisisdifficultastechnical

innovationsareunlikelytobecompletelyseparatefromeconomicintegration,butwedistinguish

betweenthesedifferentfactorsasmuchasthedataallow.

Thefinalsectionprovidesasummaryofthemainempiricalevidenceonstructuraleconomicchange.

IndustrialstructureandproductivityintheEU

ThissectionusesdatafromEurostattolookatthechangesinindustrialstructureandemployment

patternsinmostofthe27currentEUmemberstates.Thisanalysisisusefulasitgivesustheraw

numbersofstructuraleconomicchangeshowing,forexample,whichcountrieshavehadthelargestchangesinindustrialstructureoverthelastdecade.

ThedatafromEurostatarethemostcomprehensivesourceforlookingatthefullsetofEUmember

states,includingtherecentaccessioncountries.However,theydosufferfromanumberoflimitations:

TheEurostatdataseriescurrentlyavailableonlyrunsfrom1995to2005(andformanycountriesthetimeperiodisshorterthanthis).

OnlyindustriescorrespondingtotheUKStandardIndustrialclassificationsCthroughI,plusK,areincluded.Thiscorrespondstominingplusprivatesectormanufacturingandservicesindustries,

meaningthathealth,educationandotherpublicservicesareexcluded,asisagriculture.Financial

servicesarealsoexcluded,whichmakesabigdifferencefortheUKinparticular,wherethe

financialservicessectorisaparticularlylargepartoftheeconomy(seeJohnsonetal2007fordetails).However,realestate,rentingandbusinessservicesareincluded.

Dataforsomecountriesareincompleteeveninrecentyears(forexample,Malta).

2.MeasuringstructuraleconomicchangeintheEU

2.Foreigndirectinvestmentisthecategoryofinternationalinvestmentinwhichanentityresidentin

oneeconomy(thedirectinvestor)acquiresalastinginterestinanenterpriseoperatinginanothercountry

(thedirectinvestmententerprise).Thelastinginterestimpliestheexistenceofalong-termrelationshipbetweenthedirectinvestor,whoacquiresatleast10percentoftheequitycapitalofthedirect

investmententerprise,andthisenterprise.Theformeralsohasasignificantdegreeofinfluenceonthe

managementofthelatter.Thereafteralltransactionsbetweenaffiliatedenterprisesareclassifiedasdirect

investmenttransactions(OECD1999).Investmentmaytakeplacethroughcreationofanentirelynew

company(greenfieldinvestment)orthroughcompleteorpartialpurchaseoftheexistingfirmthroughamergeroranacquisition.ThroughoutwardFDIflows,aninvestorcountrybuildsupFDIassetsabroad(outwardFDIstocks).Correspondingly,inwardFDIflowscumulateintoliabilitiestowardsforeign

investors(inwardFDIstocks).


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NonethelessitisworthincludingananalysisofEurostatdatahereasitrevealsimportantdifferences

inthenatureandextentofstructuralchangesbetweenEUcountries.

Value-added,byindustry

Firstwelookatvalue-added.Figure2.1comparestheindustrialstructureof22EUcountriesin2005.

(Notethatfiveofthe27currentEUmemberswereexcludedbecausetheirdataonindustrialproductionintheEurostatdatabasewasnotofsufficientquality.)

InFigure2.1thecountriesarearrangedfromlefttorightinorderofthesizeoftheirmanufacturing

andminingindustriesasaproportionoftotalvalue-addedacrossallthesectorsfeatured.Theleft-

handsideofthegraphisdominatedbynewmemberstatesinCentralandEasternEurope(CEE),

manyofwhichtendtohavelargermanufacturingand/orminingsectors:Poland,theCzechRepublic,

Hungary,SloveniaandRomania.However,notallofthesecountrieshavelargemanufacturingsectors;

inEstonia,LatviaandLithuania,manufacturingaccountsforalowerproportionofvalue-addedthan

theEUaverage.

FortheEU15oldmemberstates,FinlandandGermanyhavethelargestmanufacturingsectors,and

theUKandGreecethesmallest.TheEU10countries(thetenthatjoinedin2004)3 tendtohave

smallerrealestateandbusinessservicessectorsthanmostoftheEU15countries.Thelargest

constructionsectorsarefoundintheSouthernEuropeancountriesofSpain,PortugalandItaly.

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Polan

d

CzechR

ep

Hung

ary

Slovenia

Roma

nia

Finlan

d

Germ

any

Slovakia Ita

ly

Bulga

ria

Belgi

um

Austria

EU-27

Lithu

ania

Denm

ark

Fran

ce

Esto

nia

Portu

gal

Neth

erlan

dsSp

ain UK

Gree

ceLa

tvia

Proportionofvaluea

ddedbysector

Real estate

Transport

Hotels

Distribution

Construction

Electricity

Manufacturing

Mining

Figure2.1.

Comparisonof

industrialstructure

of22EUcountries,

2005

Source:

Eurostat2008

Notes:Alldatafrom2005exceptforCzechRepublic,whichare2004.

Keytoindustrynames(andcorrespondingInternationalStandardIndustrialClassificationletters):Mining

C:miningandquarrying;ManufacturingD:manufacturing;ElectricityE:electricity,gasandwater

supply;ConstructionF:construction;DistributionG:distributivetrades;HotelsH:hotelsand

restaurants;TransportI:transport,storageandcommunication;RealestateK:realestate,rentingand

businessactivities

3.Poland,theCzechRepublic,Estonia,Slovakia,Latvia,Lithuania,Cyprus,Malta,HungaryandSlovenia.


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Figure2.1isausefulsummaryofhowvalue-addedbreaksdownacrossthisselectionofindustriesfor

2005,butitdoesnottellusanythingaboutchangesovertheyearsbeforehand.Figures2.2and2.3

belowshowusthechangesinvalue-addedasashareofGDPfortwoparticularindustrialsectors

manufacturing,andrealestate,businessandfinancialservices,respectively.(Wehavepickedthese

becausethereisnotroomtopresentgraphsforalltheeightcategoriesfromFigure2.1.)Additionally,

wehavereducedthenumberofdifferentcountriesshowninFigures2.2and2.3totwelve,tokeep

thegraphsreadable.

Figure2.2showsthattheoveralltrendinthesizeofthemanufacturingsectorrelativetotherestof

theeconomy,forthe12EUcountriesconsideredhere,hasbeendownward.Forsomecountriesthere

isastraightforwarddeclineoverthetimeperiodshown(forexampleFrance,ItalyandtheUK).In

others,thereisariseovertheperiodupto2000-01followedbyafallthereafter(forexample,Latvia,

SlovakiaandFinland).ForGermany,SwedenandLithuaniathepatternsince2000isrelativelyflat.So

overall,therehasbeenadownwardtrendinmanufacturingasashareofoutputinallthecountries

shownhere,butthespecificpatternofthattrendvariesfromcountrytocountry.Figure2.3(nextpage)isalmostthemirrorimageofFigure2.2,withanincreaseinrealestateand

businessactivitiesasaproportionofvalue-addedinallthecountriesshownovertheperiodforwhich

dataareavailable(althoughinGermanytheincreaseisonlymarginal).Ingeneral,accessioncountries

havesmallerrealestatesectorsasaproportionofvalue-addedthanEU15countries.

Overall,theshiftsinsectoralcompositionshowamovementfrommanufacturingtoservicesacrossall

EUcountriesoverthelastdecade.Thisisconsistentwithincreasesinimportsofmanufacturedgoods

intotheEUfromcountrieswhereproductioncostsarelower,suchasChina(examinedinmoredetail

inthenextsubsection),andtherelocationofproductivecapacityinmanufacturingviaoffshoring

(alsoexaminedbelow).Appendix1givesananalysisofemploymentpatternsalongthesamelines,

whichreachessimilarconclusions.

Obviously,thisisahighlyaggregatedlevelofanalysis,andamoredetailedbreakdownoftrendsin

value-addedacrosstheEUwouldexaminesubcategoriesofindustrialproductionandalsogobelow

thenationalleveltolookatregions(forexampleatthelevelofNUTS2orNUTS3).Timeandresource

0.2

0.25

0.3

0.35

0.4

0.45

0.5

20052004200320022001200019991998199719961995

Year

Proportionofprivatesectorworkfor

ceinmanufacturing

France

Italy

Latvia

LithuaniaRomania

Portugal

Slovakia

Sweden

Germany

Czech Rep

UK

Finland

Figure2.2.

Proportionof

value-addedacross

privatesector

industrial

categories

(excluding

financialservices)

madeupbymanufacturing,

1995-2005,

selectedEU

countries

Source:

Eurostat2008

Note:Dataseriesisnotcompletebackto1995formanycountries


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constraintsprecludeourundertakingsuchananalysishere,butthereaderinterestedintheregional

patternsisreferredtotheanalysesmadebytheEuropeanCommissionsfourthandfifthCohesion

Reports(EC2007a,2008a)andBachtlerandMcMaster(2007).Inaddition,previousipprworkby

Johnsonetal (2007)givesadetailedanalysisfortheUKwhichshowsthattheNorthEastofEngland

istheregionthathasexperiencedthegreatestdegreeofshiftinindustrialstructuresincetheearly

1980s.

TheEUsaggregateproductivity

TheprevioussubsectionlookedatthecompositionofindustrialoutputintheEU;herewelookat

trendsintheefficiencyofproductiveoutputintheEUcomparedwithothercountriesintheglobal

economy.Figure2.4presentssomebasicempiricalevidenceonthegrowthratesofGDP(gross

domesticproduct)perhourworkedoneofthestandardmeasuresofproductivityusedbytheOECD

forinternationalcomparisonsovertheyears1970to2006fortheEU15,theUnitedStatesand

Japan.Thefigurebreaksdownthisperiodintosixshortertimeperiodstoshowtrendsinproductivity

growthratesforeachareaoverrecentdecades.Thefiguresareinrealtermsthatis,theyallowfor

eachcountryspriceinflationovertheperiod.

TheEU15sufferedamarkeddecelerationingrowthinGDPperhourworkedinthe1980scompared

withthe1970s.Whiletheearly1990ssawaslightpickupingrowth,thelatterpartofthatdecade

andthefirstyearsofthe21stcenturysawafurtherslowdowninproductivitygrowth,totheextent

thatannualgrowthinGDPperhourworkedwaslessthan1.5percentbetween2000and2006.

TrendsinproductivitygrowthforJapanlooksimilartotheEUsexceptthatJapansperformance

duringthelate1980swasmuchbetteranditsproductivityslowdownsince1995hasnotbeenso

marked.

TheUSsproductivitygrowthtrendsarecompletelydifferentproductivitygrowthwaspoorrelative

totheEUandJapanbefore1995,butperformancesince1995hasroughlyequalledJapansand

outstrippedtheEUs.ItisimportanttopointoutherethattheUShasthehighest levelofGDPper

hourworkedofthethreeareasshownhere.In1995theUSsproductivityperemployeewas3per

centhigherthantheEUsandthegapincreasedto12percentby2005duetothesuperior

productivityperformanceoftheUSafter1995(asshowninFigure2.4)(OECD2008a).Clearly,over

0

0.05

0.1

0.15

0.2

0.25

0.3

0.35

20052004200320022001200019991998199719961995

Year

Proportiono

fprivatesectorworkforceinrealestate,renting&business

France

Italy

Latvia

Lithuania

Romania

Portugal

Slovakia

Sweden

Germany

Czech Rep

UK

Finland

ac

tivitie

s

Figure2.3.

Proportionof

value-addedacross

privatesector

industrial

categories(excluding

financialservice)

madeupbyreal

estate,rentingand

businessactivities,

1995-2005,

selectedEU

countries

Source:

Eurostat2008

Note:Dataseriesisnotcompletebackto1995formanycountries


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thelastdecadeorsotheEU15doesnotseemtohavegainedasmuchfromtheongoingprocessof

ofeconomicintegration(intermsofproductivity)asitstwomaincompetitors.

Figure2.5showsmoredetailedtrendsinproductivitygrowthforaselectionofEUcountriesand

competitorcountriesbetween2000and2006.Overall,aswasshowninthepreviousfigure,the

EU15sproductivitygrowthoverthisperiodwasrelativelypoor.However,someEU15members

performedalotbetterthanaverage:inparticularSweden,Greece,Ireland,FinlandandtheUK.AlloftheEU10memberstatesintheOECDsdatabasetheCzechandSlovakRepublics,Hungaryand

Polandperformedmuchbetterthanaverage.Canadasrelativelypoorproductivitygrowthshows

thatitwasnotjustdevelopedEUcountriesthatsufferedfromlowgrowthoverthisperiod.Inshort,

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

1970-1980 1980-1985 1985-1990 1990-1995 1995-2000 2000-2006

Time period

Averageannualproductivitygrowth(%)

Japan

United States

EU15

Figure2.4.Annual

growthinrealGDP

perhourworked:

EU15,Japanand

UnitedStates,

1970-2006

Source:OECD2008a

0 1 2 3 4 5 6

Slovak Republic

Korea

Hungary

Czech Republic

Sweden

Poland

Greece

Ireland

Finland

United Kingdom

United States

Japan

France

Belgium

GermanyDenmark

EU15

Austria

Canada

Netherlands

Spain

Portugal

Italy

Average annual growth in GDP per hour worked (%)

Figure2.5.

Averageannual

productivity

growth,2000-06,

selectedEU

countriesand

competitors

Source:OECD2008a


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theEU15hashadrelativelylowproductivitygrowthoverthelastdecade,butthereisalotof

variationinproductivitygrowthacrossEU15members.

Asfaraswecantellfromthedata,thecountriesthathavejoinedtheEUsince2004haveamuch

betterproductivitygrowthrecordinrecentyearsalotofthisislikelytobecatch-uptotheEU

average,astheyarestartingfromamuchloweraverage level ofproductivitythantheEU15countries.

MoreevidenceontheimpactofrecentstructuraleconomicchangesonthegrowthrateoftheEUis

presentedinthesubsectionEconomicgrowthbelow.

TradeandForeignDirectInvestment

Theintegrationoftradeandcapitalmarkets,aswellasextensiveproductrelocation(through

outsourcing,offshoringandoffshoreoutsourcing)provideclearevidenceofthegatheringpaceof

globalisationoverthelastdecade.Moreintensivetradeandcapitalflowshavebeenstimulatedby

structuralchangesinnationaleconomiesacrosstheglobe,promptedbydeepeningspecialisationand

evolvingcomparativeadvantages,andthesimplificationandharmonisationoftheregulatory

environment.Multi-nationalcorporationshavedriventhisprocessevenfurtherbyintensively

exploitingvertically-andhorizontally-integratedproductionchainsandglobalproductionnetworks,eitherthroughtheirinternalstructures(subsidiariesandaffiliatedfirms)orthroughexternalpartners.

Therearefewerbarrierstopreventandmoreincentivesforcompaniestotradeinternationallyand

toinvestinothercountries,wherecostsavingsormarketconditionsmightmaketheirbusinessmore

profitable.

Cross-boundaryeconomicactivitiessuchastrade,investment,andmergersandacquisitionshavealso

beenspurredbytheunificationofrulesandprinciplesthroughinternationalorganisationssuchasthe

WorldTradeOrganisation(WTO),asubstantialdecreaseintradebarriers,andstrictercorporate

regulationswhichhavereducedtransactioncosts.Inadditiontotraditionaltradeinprimaryandfinal

products,thereisanincreasingamountoftradeinintermediategoods(thoseusedforindustrial

production,thatis,semi-finishedgoods,partsandcomponents)andincreasinglyservices,whichuntil

recentlyweremostlyuntradeable.

Globalproductlocationshavealsobeendrivenbyahugeincreaseintheinternationallabourforceas

theonce-closedeconomiesoftheformerUSSRandChinahavejoinedthefreemarket,bythe

intensificationofinnovationprocessesthankstoincreasedinvestmentinR&Dandthedevelopment

ofICT,andincreaseddemandforproducts.Newinternationalrelocationmechanismsallowcompanies

tousetheirresourcesmoreeffectively,thusmaximisingprofitsandreducingthecostsofgoodsand

services(seenextsubsection).Crucially,aswellastheproductionofnewgoodsandservices,more

innovativetradeandinvestmentflowsarealsostimulatingmoreinnovativemanagementprocesses,as

companiesneedtoadjusttonewmoresophisticatedandgeographicallydispersedoperations.

Tradehasplayedanincreasingroleintheworldeconomyoverthepastdecadesasillustratedbythe

factthatthegrowthofrealtradeexceededthatofworldoutput.Theratioofworldexportsofgoods

andservicestoGDProsefrom13.5percentin1970to32percentin2005.Thegrowthoftradein

goodsandserviceshasbeensubstantiallyhigherthanglobalGDPgrowth(around6percentayear

onaverage)sincethe1990s(ILO/WTO2007).

Thedrivingforcesinthistradeexpansionoverrecentdecadesincludethedeepeningofregional

integrationinEurope(theEU)andNorthAmerica(NAFTAtheNorthAmericanFreeTrade

Association)andtheshifttomoreoutwardorientatedtradepoliciesinseverallargeemergingmarkets

suchasChinaandMexico,combinedwithunilateralliberalisationmeasuresinmanyotherdeveloping

countriesandthemultilateralliberalisationintheWTOUruguayRound.Othermotorsoftheglobal

tradeexpansionincludethedynamicgrowthoftheinformationandtelecommunicationsectorandthe

riseinforeigndirectinvestmentflowssince1980.

GlobaltrendsIn2006,totalworldtradeingoodsreachedUS$11,783billion,ofwhichalmostUS$5,000billion

originatedinEurope(WTO2008).Inthesameyear,worldtradeincommercialservicesreached


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US$1,027billion.Contrarytopopularperception,growthinservicestradehasnotbeenfasterthan

growthingoodstrade.Indeed,theservicesshareoftotaltradehasremainedfairlystableatabout20

percentsincethe1970s,evenastheshareofservicesinoutputandemploymenthassteadily

expanded.

However,overthelastdecadetradeininformation,financial,insuranceandcommunicationsservices,takentogether,hasincreasedinsizebyathird.Tradeintheseservicesnowconstitutesaround10per

centoftotalservicestrade,growingatafasterratethantraditionalservicessuchastransportand

tourism.In2003theEUwasresponsiblefor18.9percentofworldimportsand18.7percentofworld

exports(excludingtradewithinEUmemberstates).(Tocompare,theUSshareofimportsandexports

inthesameyearwas17.7and10.2percentrespectivelyandtheChinesesharewas5.6and6.2per

centrespectively.)

Tradeingoodscontinuestobedominatedbymanufacturedproducts(twothirdsoftotalgoods

trade).However,therehasbeenadramaticincreaseoftradeinintermediategoods(54.1percentof

totalworldimportsin2003)andcapitalgoods(thoseusedmainlyforcapitalformation)(16.6per

cent)attheexpenseofconsumptiongoods(thoseforfinalconsumptionpurposes)andunclassified

goods.Thisisstrongevidenceofgrowingintra-industryandintra-firmtrade,aswellasincreasedflowsofanddemandforFDIfromtheemergingeconomiesofAsia,EuropeandLatinAmerica.The

ICT(informationandcommunicationstechnology)andautomotiveindustrieshavebeenparticularly

affectedbythesetendencies.

Therehavealsobeenincreasesinintermediatetradeintheservicesector,particularlyinother

servicessuchasbusiness,financialandinsuranceservices.Tradeinintermediateserviceswas

catalysedbyaboominInternetdevelopmentandrapidchangesintheICTsectorduringthe1990s.

Indiahasseenthegreatestincreaseofanymajoreconomyinexportsofintermediateservices,while

ChinaandthenewmemberstatesoftheEUexportthemostintermediategoods(Denisetal2006).

Overthelastfewyearstherehavebeendramaticchangesinthestructureofworldtrade,largelydue

totheactiveexpansionofChinesetrade,particularlyinlow-qualityandmid-qualityproducts(Table

2.1).JapanandtheUSAsawsubstantialfallsintheirsharesofworldtradeoverthisperiod.

Meanwhile,theEUlostonlyarelativelysmallshareofitsglobaltradepositionanditstotaltrade

balancepositionremainsalmostunchangedsincetheearly1990s.TheEUsawanincreaseinits

marketshareofhigh-andmedium-qualityproducts,andaslightfallinitsmarketshareoflow-quality

products,overthisperiod.

Asforforeigndirectinvestments(seenote2,p10fordefinition)overthethreeyearsfrom2003to

2006,therewasasteadygrowthinFDIacrosstheglobe,benefitingnotonlydeveloped,butalso

developingandtransitioneconomies(thosethatarechangingfromcentrallyplannedtofreemarket)

Table2.1:Worldmarketsharesinlow-,medium-andhigh-qualityproductsin2003andchange

overthe1995-2003periodselectedcountriesandregions

Country/group Down-market Mid-market Up-marketofcountries 2003 Change 2003 Change 2003 Change

1995-2003 1995-2003 1995-2003

EU 12.9 -1.8 20.0 2.0 32.3 3.1Japan 6.7 -2.2 11.7 -4.4 15.2 -6.9

Korea 5.1 -0.1 4.4 0.8 3.1 -0.6

USA 12.0 -3.7 13.6 -4.1 17.9 0.2

China 20.4 8.1 8.2 4.6 3.7 1.5

Mercosur* 3.0 0.1 4.2 0.6 0.9 -0.1

ASEAN** 7.4 -2.8 7.7 -1.5 5.3 -0.3

*Argentina,BrazilandUruguay.**Brunei,Cambodia,Indonesia,Laos,Malaysia,Myanmar,Philippines,Singapore,ThailandandVietnam.

Source:EC2006a,basedonUNComtradedatabase


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(UNCTAD2007).In2006,globalFDIflowsreachedUS$1,306billion,a38percentincreaseonthe

previousyearandalmostmatchingthepeakflowsachievedin2000(US$1,411billion).Developed

countriesenjoyed45percentFDIgrowthin2006comparedtothepreviousyear,developing

countriesexperienced21percentgrowth,andthetransitioneconomiesofSouthEasternEuropeand

theCommonwealthofIndependentStates(CIS)sawarecord68percentincreaseinFDI.

Allthisishappeninginthecontextofgeneraltrendstowardsmoreinvestmentoriginatingfrom

developingcountriesinAsiaandLatinAmericaandasubstantialincreaseinSouth-SouthFDI

(betweendevelopingcountries).TheUSA,theUKandFrancearestillthethreebiggestrecipientsof

FDIinthedevelopedworld,whileChina,HongKongandSingaporearetheleadingrecipientsofFDI

amongdevelopingcountriesandRussiathenumberoneamongtransitioneconomies.Thestrongest

bilateralinvestmentlinkscurrentlyexistbetweentheUSA(recipient)andtheUK(investor)and

betweenChina(recipient)andHongKong(investor).

Theroleofservicesinglobalcapitalflowscontinuestogrow.In2006,almosttwothirdsofworldFDI

wasconcentratedinservices,andthissectorwasresponsiblefor58percentofcross-bordermergersand

acquisitions.Thisgrowthishappeninglargelyduetotheexpansionofbusinessandfinancialservices,in

contrasttopreviousyearswhentransportandtourismtendedtodominateglobaltradeinservices.

TradetrendsintheEU

TheEUplaysacrucialroleinglobaltradeflowsasasingleeconomicentitywhichenjoyssinglemarket

regulationsanda(partially)unitarymonetarysystemintheEuro,currentlyusedby15outofits27

members.

Inrecentyears,theEUhasmanagedtostrengthenitspositionintradeinhigh-technology

manufacturedgoods.In2003,theUnionpossessedathirdoftheentireworldmarketandhad

increaseditsshareby3.1percentsince1995(EC2006a),whiletheUSandJapantakentogether

wereresponsibleforanotherthird.TheEUalsohasalargeshareofmedium-technologyproduct

markets20percentin2003.China,ontheotherhand,hasthestrongestpositioninlow-

technologyproducts,with20percentofworldmarketshare.TheEUhasmoreorlessmaintaineditsmarketshareofworldexportsoverthepast15years(Table

2.2).MarketsharesfortheEU15havebeenfairlystable,whiletheEU10(whichtogetherwith

BulgariaandRomania,makeuptheEU12)haveincreasedtheirshareofworldtradeingoodsbut

havenotmadesignificantprogressinservices.

ConsiderablechangesinthegeographicaldistributionoftradehaveaffectedtheEU15sexport

markets.Since1992,theEU10andChinahavebecomeincreasinglyimportantexportmarkets,with

theUSremainingabigconsumerofEUgoods(Table2.3).However,itisonlywiththeUSandthe

EU10thattheEU15hasapositivetradebalance.ThetradedeficitwithAsianeconomies,especially

ChinaandJapan,remainsveryhigh(Denisetal2006)andinthecaseofChinareached0.5percent

oftheEU15sGDPby2003.Thisgeographicshiftmightbeexplainedbytheshiftinworldtrade

flows,whichareincreasinglydominatedbyintermediategoods.Thesegoodsconstitutealmost72percentoftotalChineseexports,comparedwith54percentofaverageworldlevelin2003.

Table2.2.Shareofworldexportsofgoodsandservices(%)

Country/area Shareofworldexports(%oftotal)

Goods Services

1995 2000 2005 1995 2000 2005

EU15 15 14 15 21 19 21

EU12 2 3 4 2 2 2

Japan 10 7 5 6 5 5

China 2 4 7 1 2 3RestofAsia 14 14 13 7 9 9

UnitedStates 13 12 9 19 20 16

Source:RaeandSollie(2007)basedoncalculationsfromUNComtradedatabase,IMFandOECD


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ThemainreasonforthechangedpatternoftradewithChinahavinganadverseimpactonthetrade

balancesoftheUSandJapan,butnotontheEU,isthatthestructureofEUproductionismorecomplementarytothestructureofChinesetradethantheAmericanorJapanese.CurrentlytheEU

specialisesinproducinggoodswhichChinastillhasrelativelylittleexpertisein:mediumandhigh

technologygoods,difficult-to-imitateresearchgoodsandcapitalgoods(classificationfromHavikand

McMorrow2006).Chinasstrengthistheproductionoflowtechnologicalandlabour-intensivegoods,

whichisnotsoimportanttotheEUeconomy.

However,thesetrendscouldchangeinfutureif,asislikely,theChineseeconomymoveshigherup

thevaluechainofgoodsandservices.Thereislesscomplementaritybetweenthestructureof

productioninChinaandtheUSandJapan.Moreover,itisestimatedthat60percentoftheUnited

StatestradedeficitwithChinaisduetoimportsfromsubsidiariesofUSfirms;penetrationofthe

ChinesemarketbyEU-basedmultinationalcompaniesisonamuchsmallerscale.

ItmaybearguedthattheEUenjoysauniquesituationinthisrapidlychangingworld,largelythanks

toitsrecentexpansion.Theaccessionof12newcountriesbetween2004and2007hasopenedup

theSingleMarkettoyoungmarketeconomieswithquitedifferentpatternsofproduction,

productivity,labourcostsandspecialisation.Infact,thenewmemberstateshavequitesimilar

productionandexportstructurestoChina,whichisdominatedbyintermediategoods(Table2.4).

However,theirtradebalanceislargelynegativeandthegapisgrowing.

Table2.3.DestinationofEU27exports(%)

Country/area 1995 2000 2005

UnitedStates 20 30 26

Japan 6 5 5

OtherOECDnon-EUcountries 25 24 25

Non-EUcountriesinEurope 6 5 10

China 3 4 5

India 2 2 2

OtherdynamicAsia 12 10 8

RestofAsia 4 4 3

AfricaandMiddleEast 11 10 11

Source:RaeandSollie(2007)basedoncalculationsfromUNComtradedatabase,IMFandOECD

Table2.4.EU10tradepatternsandcomparativeadvantagebystageofproduction

%breakdown %breakdown Actualtradeofimports ofexports balance (%ofGDP)

1992 2003 1992 2003 1992 2003Intermediategoods,comprising: 56.4 59.0 52.7 54.3 -2.2 -5.7

Primarygoods (13.6) (8.2) (10.1) (3.2) (-0.1) (-2.5)

Partsandcomponents (10.4) (19.5) (11.3) (22.9) (-0.2) (0.0)

Semi-finishedgoods (32.3) (31.3) (31.3) (28.2) (-1.1) (-3.3)

Finalgoods,comprising: 35.9 34.5 40.0 36.5 -0.3 -1.4

Consumption (18.4) (15.9) (31.5) (21.0) (1.7) (1.0)

Capital (17.5) (18.6) (8.5) (15.5) (-2.0) (-2.4)

TOTAL 100 100 100 100 -2.8 -6.6

Note:EU10hereincludesthenewmembercountriessince2004butexcludingRomaniaand

BulgariaSource:HavikandMcMorrow2006,basedonUNComtradedatabase


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Despitethis,thelevelofintra-EUtradeoverthelastfiveyearshasremainedunchanged.Attheend

ofthe1990s,intra-EU25manufacturingtradeincreasedsignificantlyrelativetoGDP(from30to38

percent),whichwasassociatedwiththeaccessioncountriesgraduallyimplementingthenecessary

regulationsinordertogainaccesstotheEU15smarkets.However,from2000thisgrowthstabilised;

therewasaslightdecreasein2003-2004,beforetheratioreached39percentin2005.

Tradeinservicesremainslow,partlyreflectingtheEUsfragmentednationalmarketsforservices(Rae

andSollie2007).Manyexpertslinkthisnegativetrendinintra-EUtradewiththeintroductionofthe

singlecurrencyin15memberstates,whichtheybelievedidnothavethedesiredimpactofboosting

trade.However,recentresearchsuggeststhatmostoftheeffectisduetorelativelyloweconomic

growthintheEurocurrencyzonecomparedtootherdevelopedeconomies(Ilzkovitzetal2007).

FDIflowsintheEU

TheEuropeanUnionremainsoneofthelargestglobalinvestors:intheyears2002to2004,itsshare

inworldFDIinflowswasequalto27percent,comparedto17percentfortheUS.Atthesametime,

theEU25s4 shareofFDIoutflowswas33percent,whichwasstilllessthantheUSsshareof38per

cent.ItisimportanttodistinguishtheEUsexternalinvestments(outwardandinwardFDIflows)from

itsinternalinvestments(intra-EUinvestmentflows),especiallyasthelatterrepresentsamuchgreatershareofthecapitalinvestedabroadbymembercountries.

AfterrelativestabilityinFDIoutwardflowsfromtheEU25between2002and2004,therewasa

dramaticincreaseof36percentin2005andlessergrowthof9percentin2006,reachingatotal

amountofEUR202billion(Figure2.6).ThebiggestEUinvestorsoutsidetheEU25wereGermany,

FranceandItaly,whiletheUKlostitspositionasoneofthebiggestcapitalexporters(adecreaseof

EUR20billionbetween2005and2006).

FDIflowsintotheEU25fromabroadincreasedlessdramatically,butafterstagnationbetween2002

and2004,whentheamountdroppedbyalmosttwothirds(fromEUR127billiontoEUR53billion),

theyear2005sawanalmosttwo-foldincreaseininflowinvestmentsuptoEUR94billion.Therewas

afurtherincreaseby54percentin2006,withtotalEUFDIinflowsreachingEUR145billion.The

biggestbeneficiariesofthisgrowthweretheeconomiesoftheUK,GermanyandIreland,whichare

themostopen(andareamongthebiggest)EUeconomiesintermsofattractingforeigncapital.

4.Inthischapterwemainlyreferto25ratherthan27EUmemberstatesasthedatacoversperiodbefore

2007whenRomaniaandBulgariajoinedtheUnion

0

50

100

150

200

250

300350

400

450

2002 2003 2004 2005 2006

EURb

illion

Outward flows to extra EU25

Inward flows from extra EU25

Intra-EU25 flows

Figure2.6.EU25

FDIflows,inbillion

EUR

Source:Eurostat2007b


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In2006,SpainachievedarecordnetinvestmentlevelbyinvestingEUR55.5billionmorethanitsinwardFDIflowsoutsidetheEU25(Table2.5).ItwasfollowedbyGermany,Franceandthe

Netherlands,whoalsohadasubstantialpositiveinvestmentbalance.Attheotherendofthe

scale,theUKisthemostdependentonforeigninvestmentsfromoutsidetheEU25,withatotal

negativebalanceofEUR47.3billion.Luxembourgisanothermembercountrywithquite

substantialnegativenetinvestmentflows(EUR12.3billion).Formostnewmemberstates,

investmentsoutsidetheEU25playamarginalroleandmostoftheirstocksandflowsoriginate

fromother(old)EUmemberstates.

AmongkeydestinationsforEU25outwardinvestmentaretheUS,CanadaandSwitzerland(Figure

2.7).Traditionally,theUSandSwitzerlandhavebeensubstantialrecipientsofEU25FDI;Canada

joinedthisclubin2006withanalmosttwo-foldincreaseofcapitalinvestmentcomparedwiththe

previousyear.

AmongcoreinvestorsintheeconomyoftheEU25,theUSiswayaheadofanyotherstate,withone

thirdofallinwardFDIin2006originatingfromtheUS(Figure2.8).Japan,SwitzerlandandCanada

arealsoimportantinvestorsfortheEU,buttheirshareofinvestmentisconsiderablyless.

Table2.5:EUNetFDIoutflowswiththerestoftheworldin2006,billionEUR

Country Outflows Inflows Net

Belgium 49.9 57.0 -7.1

CzechRepublic 1.1 4.8 -3.7

Denmark 6.5 5.6 0.9

Germany 63.3 34.2 29.1

Estonia 0.8 1.3 -0.5

Ireland 17.6 10.2 7.4

Greece missingorconfidentialdata

Spain 71.5 16.0 55.5

France 86.7 58.0 28.7

Italy 33.0 29.9 3.1

Cyprus 0.6 1.2 -0.6

Latvia 0.1 1.3 -1.2

Lithuania 0.2 1.4 -1.2

Luxembourg 65.0 77.3 -12.3

Hungary 5.9 8.4 -2.5

Malta 0.0 1.3 -1.3

Netherlands 18.1 3.5 14.6

Austria 3.3 0.2 3.1

Poland 3.3 11.1 -7.8

Portugal 2.8 5.9 -3.1

Slovenia 0.6 0.3 0.3Slovakia 0.3 3.3 -3.0

Finland 0.0 3.0 -3.0

Sweden 19.2 22.1 -2.9

UnitedKingdom 63.6 110.9 -47.3

Bulgaria 0.1 4.1 -4.0

Romania 0.0 9.2 -9.1

Source:Eurostat2007b


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Overthelastfewyears,flowsofintra-EU25FDI(calculatedasanaveragebetweenoutwardand

inwarddataassuppliedbythememberstates)havealsoseensubstantialchanges.Theyremain

higherthanoutwardflows,andin2006reachedEUR396billion,whichisstill6percentlessthanits

peakin2005.Thoughthemajority(89percent)ofallintra-EUinvestmentflowsoccurbetweenthe

EU15countries,investmentinnewmemberstatesisgrowingsteadily,reaching11percentin2006

fromjust6percentin2005;inabsolutenumbersthismeantanincreasefromEUR21billiontoEUR

46billion.

Spain,France,BelgiumandGermanyarethebiggestinvestorsinotherEUcountries,whilethenew

memberstates(withtheexceptionofPoland)haverelativelymodestinvestmentoutflowsinsidethe

Union.FranceandBelgium,alongwiththeUKandItaly,arealsothebiggestrecipientsofintra-EU

FDIinflows.Amongnewmemberstates,PolandandRomaniaarethehotdestinationsforintra-EU

investments.

AswiththesectoralstructureofFDIflows,thereweredramaticchangesoverthelastfewyears,with

servicesstartingtodominatebothglobalandEuropeanFDIflows.Vertically-integratedproduction

andglobalproductionchainsarenowcommonnotonlyinmanufacturingbutalsoinservices,which

hasmadeformerlyuntradeableservicestradeableandhasspurredinvestment,especiallyinbusiness

andotherservices.

Servicesdominatedextra-EU25FDIoutflowsin2004(thelatestyearforwhichsectoraldatais

available),withEUR52.5billionoutofatotalofEUR136.4billion.This,however,wasadramatic

declineof35percentcomparedwiththepreviousyear,mostlybecauseofdisinvestmentsinsectors

2%

11%

34%3%4%

1%

35%

10% Switzerland

Russian Federation

Canada

United States

Brazil

China

India

Others

Figure2.7:

Outwardflowsof

FDIfromEU25,

2006,by

destination

country(%)

Source:Eurostat

2007b

4% 3%

33%

1%

1%7%0%

51%

Figure2.8:Inwardflowsof

FDIintoEU25,

2006,bycountry

oforigin(%)

Source:Eurostat

2007b

Switzerland

Canada

United States

Brazil

China

Japan

India

Others


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suchasbusinessservices,tradeandrepairs,hotelsandrestaurants.Manufacturingandmining/

quarryingweretogetherresponsibleforaroundEUR36billioninoutwardinvestmentsin2004.

FDIinflowsfromothercountriestotheEU25wereequaltoEUR53billion,whichwasadramatic

declinecomparedwithEUR123billionin2003.Servicesconstituted65percentoftotalflows,andit

wasduetothemthattheamountdeclinedsosignificantly(fromEUR103billionin2003toEUR33billionin2004).ManufacturingbenefitedfromEUR10.5billionin2004,whichwas70percentless

thanthepreviousyear.Financialintermediation,tradeandrepairs,petroleum,chemical,rubberand

plasticproductsandothersectorsdominatedFDItotheEU25fromothercountries(Eurostat2007a).

OffshoringandoffshoreoutsourcingintheEU

Theimpactsofglobalisationaremulti-facetedandcomplex.Deeperglobaleconomicintegrationis

notonlydrivingmoredynamicmovementofcapital,people,goodsandinformationaroundthe

globe:ithasalsobroughtchangestoproductioncycles,throughglobalsupplychains,vertically

integratedproductionandInternationalProductionNetworks(IPNs).InIPNs,thesequential

stagesintheproductionofafinalgoodorservicearedistributedacrossproductionsitesin

differentcountries,aprocesswhichisfacilitatedbylowtransactionandtransportationcosts.

Theseverticaltradingchainscantakemanyforms,involvingboththeforeignaffiliatesof

multinationalcorporationsandarms-lengthrelationshipswithforeignsuppliers(Antrs2003).Due

toinnovationsdrivenbyICT,companieshavemoreopportunitiestomaximisetheirincomeand

increaseproductivitythroughtherelocationofproduction,namelyoutsourcing(thepurchasingof

intermediateinputsbycompaniesorgovernmentsatarmslength,exceptrawmaterialinputs)and

offshoringsomestagesofproduction(acquisitionofintermediateinputsbycompaniesor

governmentsfromlocationsoutsidetheconsumingcountry5;Figure2.9explainsthedifferent

typesofrelocation).

RevolutionarydevelopmentsinICToverrecentdecadeshaveopenednewavenuesforrelocations,

andtodayanythingthatcanbetransportedindigitalformmightbeacandidateforrelocation.In

the1980sitwasmainlyintermediategoodsthatwereoffshoredoroutsourcedbycompanies,but

todayitispossibletooutsourceaverywideselectionofservices:fromITsupportandbackoffice

functionsthroughtocallcentres,softwareproductionandR&Dfunctions.Ingeneral,the

evidencesuggeststhatcurrenttradebetweendevelopedcountriesischaracterisedbyalarge

shareofverticalinter-industrytrade(seeFontagneetal 2006).Stronginternationaltrade

integrationisthusstimulatingfurtherinter-industryrelocationandtheshiftingofjobsfromone

countrytoanother.

Inpractice,itisoftendifficulttodistinguishoffshoringfromFDI.Morecompaniesaremoving

theirentireproductionfacilitiestoothercountriesandthenimportingthefinalproducts(services)

backtothecountryoforigin.AnactivityisusuallyclassifiedasFDIifthecompanyinvestsinthe

productionfacilityorassetsinaforeigncountrywiththeaimofgettingtheproduct/serviceon

themarketofthiscountry.TheresultofFDIisusuallyfinalproducts/serviceswhichareproduced

inthenewcountrywithoutcausingdisturbancestoproductioninthehomecountry.

However,newtechnologiesandtheblurredbordersbetweenintermediateandfinal

products/servicesoftencomplicatethetaskofdefiningwhatisoffshoredproductionandwhatis

FDI.Someauthors(forexample,Kirkegaard2005)pointoutthatthesensitivityofrelocationto

thedomesticfiscalandmacroeconomicconditionsintherecipientcountryarecrucialfor

distinguishingbetweenoffshoringandFDI:decisionstoinvestarequitedependentonissuessuch

ascorporatetax,accountingstandards,andsoon,butthesedeterminantsareonlymarginal

factorsinthedecisionstooffshoreproduction.

5.Offshoringcanalsohappenwhencompanies(orgovernments)purchaseintermediateinputsatarms

lengthfromforeignsuppliersthisisoffshoreoutsourcing.


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IntheEU,thedistinctionbetweenoffshoringandoutsourcingbecomesevenmorecomplicateddue

totheSingleMarket,where(withafewexceptions)therearenobordersforthemovementsofgoods,

capitalandpeople.ThisadditionallevelofsophisticationmeansthatintheEUthereareboth

consumersandsuppliersofoffshoredandoffshoreoutsourcedgoods.Thisisespeciallytrueafterthe

accessionof12newmemberstates,whichareusuallysuppliersofgoodsandservicestotheold

memberstates.Dramaticdifferencesinlabourcostsandtheavailabilityofarelativelyhighlyqualified

labourforceallowscompaniesfromtheEU15andelsewhere(suchastheUSandJapan)toincrease

theirproductivity.

However,thereareagrowingnumberofexceptions:somenewmemberstatesarenowexperiencing

therelocationoftheirproductionfacilitiestoothercountrieswithevenlowerproductioncosts,in

particulartothecountriesoftheFormerSovietUnion,Balkancountries,China,andEastAsia.Thisislikelytoaddtopressureonthelocaleconomiesandnecessitateagreatersupportforgrowinglocal

businesses.

JapanwasoneofthefirstcountriestousethefourAsianTigers(Taiwan,SouthKorea,HongKong

andSingapore)withtheirrelativelycheapbuthighly-qualifiedlabour,andgrowth-orientatedfiscal,

industrial,education,competition,andR&Dpolicies,tomaximiseitsproductiongainsbybuilding

verticaldifferentiationandintegration(EMCC2007).Aso-calledtriangletradeemerged,where

Japanproducedhigh-techpartsdomestically,offshoredtheproductionoflabour-intensiveparts,and

thenexportedproductiontotheWest.TheseIPNsguaranteedthecompetitivenessofJapanese

manufacturing.Soonafter,othercountriesespeciallytheUSandtheEUstartedtofollowthis

model.

Initially,relocationwasundertakenprimarilyasaneffectiveformofcost-cutting.Butsincethe1980s

itsrolehasexpandedtoencompassnewdimensions:byrelocatingproductionactivitiesandservices

tootherregionsandcountries,companiesandorganisationshaveincreasedtheirproductivityand

profitability.Mostexpertsagreethatoffshoringandoffshoreoutsourcingisnotaone-offeventbuta

Ownership

Location

Internal (in-house) External

Domestic

Domesticinternalproduction Domestic external

production by non-affiliated producer(outsourced production)

Offshore outsourcing

In foreign country (cross-border/offshore)

Production within group(in-house) in foreigncountry (offshoredproduction)

Production outside groupin foreign country by non-affiliated producer(offshore outsourcedproduction)

Outsourcing

Offshorin

Figure2.9:

Standard

offshoringand

outsourcingmatrix

forproduction

relocation

Source:Kirkegaard

2007,adaptedfrom

UNCTAD2004,table

IV.1


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processthatallowscompaniestoimprovetheiroperationsandmanagementtechniquesand

establishtrulycollaborativerelationswiththeirpartnersandcustomers(EMCC2007).

Companiesthatrelyonlyontheshort-termgainsofrelocationarenotthebigwinnersoverthe

longerterm.Oneofthereasonsisthatcompaniesoftenhavedifficultiesincalculatingthefuture

gainsorlossesfromrelocation,asitinvolvescomplicatedprocesses,suchassettlinglabourdisputesandotherregulatorydifficulties(whichdependsontheregulatoryframeworkofthe

particularnationaleconomy).Also,nowadaysitisnotonlybluecollarjobsthatareunderattack

fromrelocation,butalsowhitecollarjobsinsectorssuchasbanking,insurance,

telecommunicationsandcomputing,asdemonstratedbythecasesofUKandIrelandinparticular.

Thisrequiressystemicchangesinthewaycompaniesoperate,andthusrelocationofproduction

andservicefacilitiesdefinitelyneedstobeconsideredasacontinuousprocess,notasaone-off

event.

Thestronggrowthinoffshoringandoffshoreoutsourcingactivitiesinthepastcoupleofdecades

canbeexplainedbyadramaticreductionofnon-markettransactioncosts,suchasthe

standardisationofcontractsandinternationallegalenforcementprocedures,whichhave

dramaticallyreducedtherisksofinternationalrelocationsandthusencouragedmorecompaniestotrythispath.Transportcostshavealsoreducedtoanextent,butduetohighdependencyonfuel

prices,transportwillremainasubstantialproportionofproductioncosts,whichmightlimitthe

extentoffuturemanufacturingrelocations.

Furtherchangestotheinternationaleconomyinrecentyears,suchastheriseoftheCentraland

EasternEuropeanandformerSovieteconomies,thegrowingstrengthofChinaandIndia,andthe

secondwaveofTigereconomies(inAsiaandLatinAmerica),havebroughtnewdynamicsto

relocation.Themaindrivebehindthecurrentwaveofrelocationsistheavailabilityofhuman

resources,oftenhighly-skilledandeducated,inthecountriesintowhichproductionisbeing

relocated,providingmulti-nationalcompanieswithnewopportunitiestoincreaseproductivityand

raiseprofits,andalsotogainnewmarkets.

Dataissues

Despitethefactthatoffshoringandoutsourcingarepopulartopicsinthemedia,thereisvery

littlesolidstatisticaldataonwhichtobaseinformationabouttheoveralldimensionsofthese

processesandthedriversbehindtherelocations.Thereareoftenstoriesaboutjoblossesandtotal

lossestothelocalornationaleconomyduetotherelocationofproductionorservicestoanother

regionorcountry.Buttheselossesarenormallymeasuredsolelyintermsofimmediateeffectson

thelabourmarket,aslaid-offworkersarethebiggestlosersfromtherelocationandrestructuring

processes.Littleattemptismadetoanalysethenetlabourmarketeffects,whichdependonhow

quicklytheworkerswhoarelaidoffcanbere-employed,andhowtheirwagesinnewjobs

comparewiththejobslostthroughproductionrelocation.

Also,therearelikelytobeproductmarketeffectsthatarelargelybeneficialtotheEUeconomyforexample,ifrelocationofproductionresultsinlowercostgoodsorservicesforEUconsumers,

thisisawelfaregainwhichshouldbetakenintoaccountwhenassessingtheoverallcostsand

benefitsofrelocationofproduction.Lackofcomprehensivereliableinformationalsocomplicates

analyticalwork,andquiteoftenpolicyrecommendationsarebasedontheexperienceofafew

specificcaseswhicharedifficulttogeneralise.

Thereisverylittlereliableadministrativedataonrelocation,includingoffshoringandoutsourcing,

fromnationalstatisticsagenciesorEurostat.Dataisinsteadcollectedthroughinterviewswith

seniorexecutives(regularsurveysareproducedbyfirmssuchasPricewaterhouseCoopersand

KPMG)orthroughmediascreeningandcontentanalysisinindividualmembercountries.Many

analystsunderlinetheweaknessofcollectingdatathroughinterviews,asthisprocessdoesnot

alwaysreflectthefullpictureandmightdistortthefactsregardingrelocation.Surveysofmediareportingonoffshoringandoffshoreoutsourcingareconsideredtobemorereliableastheyare

basedonpublicsourceswhichareeasytoverify.Currentlythismethodisconsideredthemost

reliablesourceofinformationonrestructuringprocessesintheEU(Kirkegaard2007).


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ThemostcomprehensivedataanalysiscurrentlyavailableisperformedbytheEuropeanMonitor

CentreonChange(EMCC2007),whichin2002launchedtheEuropeanRestructuringMonitor

(ERM)awide-rangingmediasurveillancesystemacrossEUmemberstates.Dataisgathered

throughanetworkofexpertsineachmembercountrywhoscanthroughkeynationaland

businessmediasourcestofindinformationaboutdifferenttypesofrestructuring(including

internalrestructuring,bankruptciesandclosures,mergersandacquisitions,andsoon).

ItisimportanttonotethattheMonitordoesnotgiveafullpictureofrestructuringprocessesin

theEU,asthethresholdforaneventtoberegisteredinthedatabaseisquitehigh:atleast100

jobslostastheresultofrestructuring,or10percentofjobslostinacompanywithatotalof250

jobsormore.Thismeansthatsmallerscalecasesofrestructuringarenotincludedintheiranalysis,

andthustherealnumberofjobslostmightbesomewhathigher.Thishighthresholdmightalso

resultineitherunderestimatesoroverestimatesofthescaleofoffshoringandoutsourcingin

overalljoblossesduetorestructuring,dependingontheproportionofrestructuringjoblossesin

episodesofjoblosswhichqualifyforinclusionintheERM,relativetothoseinstancesofjobloss

whicharenotincluded.

Furthermore,theMonitordoesnothavefullyconsistentdataovertime.Whenlaunchedin2002,itonlyobservedthemarketsoftheEU15,butafteramajorexpansioninthe200412morestates

wereaddedtothedatabase.Henceinformationonthese12countriesdoesnotincludepre-2004

factsandfiguresandthusdoesnotgiveafullpicturethroughoutthelifeoftheMonitor.

Inspiteoftheseflaws,theERMisstillbelievedtobethemostaccuratesourceofinformationand

iswidelyusedbytheEUinstitutionsandinmembercountries.Theanalysisinthissectionisbased

ontheERMdata.

Despiteheateddebatesinthepressaboutoffshoring,whichhaveoftenappearedtostoke

prejudiceagainstit,accordingtotheERMdataonly8percentoftotaljoblossesinEUcountries

aretheresultofoffshoringandoffshoreoutsourcing,andthereisnoevidenceofmajorgrowthin

thistrend.Manufacturingisresponsibleformostoffshoringlosses,withservicesplayingamuch

moremarginalrole(thoughtherearesomeexceptions,suchasbankingandinsurance,whichare

experiencingsignificantoffshoringactivity).Mostmanufacturingjobsthatarelostdueto

offshoringfromtheEU15gotothetennewEUmemberstates(exceptMaltaandCypruswhere

thescaleofoffshoringistooinsignificantforthoroughanalysis).Incontrast,bankingand

insurancejobssubjecttooffshoringhavelargelymovedtoAsia.

WeareespeciallyinterestedintheroleofnewmembercountriesinoffshoringprocessesintheEU.

Initially,theywerecompetingontheEUmarketwithhighlyqualifiedbutcheaperlabour.However

theirproductivitywasmuchlowerthanintheEU15.Recentempiricalstudies(seeLandesmannetal

2007)provideevidencethatalthoughtheskillscontentofimportsofintermediateinputsfrom

developedEUcountriesishigherthantheskillscontentofinputsfromnewmemberstates,thelatter

aregraduallyclosingthegap.TheskillscontentintheEU10sexportsofintermediaryinputsincreased

steadilyovertheperiodfrom1995to2005.Newmemberstatesalsohavebetterchancestowinmany

outsourcingcontractsbecausedistancedoesstillmatter.Forexample,statisticsshowthatwhile

ChinasexportstotheEU27aredominatedbyfinalgoods,CentralandEasternEuropeancountries

exportanequalshareofintermediateandfinalproductstotheEU15.

However,therearesomesignsthatnotallnewmemberstatesenjoythefruitsofrelocation.For

example,Sloveniaisnowmostlyacustomer,notasupplycountryforoffshoreproduction(relocations

fromSloveniaaremainlygoingtotheBalkancountriesandChina).SlovakiaandtheCzechRepublic

arealsograduallylosingtheirappealastheireconomiesdevelop,andcompanieswhichrelocated

productionthereinthe1990sarenowmovingtoothercountrieswithevenlowerproductioncosts.

Table2.6showsareasonablysteadytrendintheamountofrestructuringandoffshoringtakingplace

acrosstheEUbetween2003and2006,withnomeasurableincreaseoccurringasaresultofEUexpansionin2004.AccordingtothedatafromERM,thesumofjobslostfromoffshoringoroffshore

outsourcingintheEU27between2003and2006,atjustunder200,000,constituteslessthanatenth

ofalljoblossesfromrelocation.Moreover,figuresfortheEU15states(notshowninTable2.6)suggest


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thatdespitelotsofattentionfromthemedia,relocation(includingoffshoring)isresponsibleforonlya

tinyfractionofthejoblossesinthe15oldmemberstates.Between2003and2006theabsolute

numberofjoblossesintheEU15duetorelocationwasonly47,500,ofwhichonly12,000werelost

duetorelocationtoothercountries.Otherrestructuringprocessessuchasclosuresandbankruptcyand

mergersandacquisitionsareresponsibleforamuchgreatershareofjoblosses(EMCC2007).

Theshareofjoblossesfromrestructuringasashareoftotalemploymentisinsignificantinmost

EUcountries(Table2.5).ItishighestintheUK(-2percent),Finland(-1.5),Sweden(-1.3),

Belgium(-1.2),Ireland(-1.2)andSlovenia(-1.2),withanaveragefigureacrosstheEUof1.2

percentofjoblosses.PortugalandIrelandarethemostseriouslyaffectedEUcountriesin

bothcountries,aroundaquarterofalljobslostwereduetooffshoringandoffshoreoutsourcing

(Table2.7).Othercountriesseriouslyaffectedbydelocalisationintermsofjoblossesin2003to

2006wereDenmark,EstoniaandSlovenia.

Table2.6:CasesofrestructuringandoffshoringintheEU27statesinvolvingjoblosses,2003-06

Totalcasesinvolving Casesinvolving Offshoringas% joblosses offshoring oftotal

No.ofcases Jobslost No.ofcases Jobslost No.ofcases Jobslost

2003 745 525,389 55 47,011 7 9

2004 745 662,986 89 45,241 12 7

2005 1,049 657,072 112 63,894 11 10

2006 936 600,346 100 38,144 11 6

2003-2006 3,475 2,445,793 356 194,290 10 8

Notes:Restructuringincludes:plantclosures,internalreorganisation,mergersandacquisitions,bankruptcies,outsourcing,offshoring.FiguresincludeEU12statesbothbeforeandaftertheiraccessiontotheEU.Source:EMCC2007

Table2.7:Joblossesfromrestructuringandfromoffshoringinmemberstates,2003-2006

Country Totaljoblossesfromrestructuring Joblossesfromdelocalisation(%totalemployed) (%totallossesfromrestructuring)

Belgium -1.2 4.4

CzechRepublic -0.6 3.6

Denmark -0.8 16.5

Germany -1.0 6.9

Estonia -0.4 14.0

Ireland -1.2 24.6

Spain -0.4 6.7

France -0.9 6.6Italy -0.2 6.4

Hungary -1.4 1.8

Netherlands -1.0 4.7

Austria -0.6 6.7

Poland -1.1 0.7

Portugal -0.8 25.6

Slovenia -1.2 14.1

Slovakia -0.5 9.0

Finland -1.5 9.7

Sweden -1.3 7.3

UK -2.0 8.9

EU -1.2 7.9

Source:EMCC2007


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Table2.8illustratesjoblossesfromrelocationbysectors,relativetothetotalemploymentreductionin

selectedEUcountries.Differentcountriessufferfromlossesindifferentsectors.Forexample,in

Finlandmorethanhalfofjobslostduetooffshoringwereintelecomsequipmentwhileinboth

PortugalandGermanyaroundhalfofjobslostwereinmotorvehicleproduction.Italy,Swedenand

Finlandlostjobsinthemachinerysector,whiletheUKexperiencedgreatestlossesinbankingand

insurance.TheUKisalsotheonlycountryfromthebiggroupwhichlostonlyamarginalshareof

jobsfromoffshoringmanufacturing.

Table2.9givesmoreinsightintojoblossesfromoffshoringindifferentservicesectors.Itisinteresting

tonotethatcountriesasdifferentasItaly,Portugal,FinlandandSwedenalllost100percentoftheir

jobsduetooffshoringinmanufacturing,withoutanytraceofserviceoffshoring.Germanylost90per

centofjobsduetooffshoringinmanufacturing,whileintheUKthisfigureisonlyaround30percentwellbelowtheEUaverageof51.5percent.

Onepossibleexplanationforthisphenomenonmightbelanguagebarriers.Itissimplertoovercome

languageproblemsinmanufacturing,wheremuchoftheworkrevolvesaroundmachinery,technical

skillsandknowledge.Inserviceindustries,languagebarriersaremuchmorenoticeable.Itiseasyfor

theUKtooffshoreservicestoEnglish-speakingcountriessuchasIndia,HongKongorSingapore,

whichmayexplainwhytwo-thirdsofjobslostduetooffshoringwereintheservicessector.However,

English-speakingIrelandislessaffectedbythistrend,whichmightbeduetothedifferentstructureof

itseconomy(atthesametimeithasexperiencedsomeoffshoringjoblossesinoperationalactivities).

Inthenearfuturegrowinglanguageskillsamongthelabourforceinsomenewmemberstates,aswell

asinLatinAmericaandSouthAfrica,mightchallengethebalanceincountriessuchasGermany,

France,ItalyandSpain.ITservicesisanothersectorwherethelanguageproblemiseasytoovercomeduetothespecifictechnicallanguageusedinthesector.

Table2.8:Reductionsinemploymentfromoffshoringbysector,2003-2006(%totalemployment

reduction)

Sector DE IE FR IT PT FI SE UK Multi- EUcountry

Food,drink, 2.6 2.3 0.0 0.0 0.0 0.0 0.0 3.5 4.2 3.4tobacco

Textiles,clothes,0.4 11.8 7.6 19.2 6.7 0.0 5.0 3.7 0.0 4.2footwear

Chemicals, 3.2 14.5 0.2 0.0 0.0 0.0 0.0 1.4 18.8 7.9refining

Machinery& 6.3 2.8 12.5 24.0 1.3 13.2 20.3 2.6 0.0 4.1equipment

Electrical 1.6 17.7 19.0 19.4 18.4 31.4 8.7 1.8 16.2 11.4machinery

TV,radio, 10.5 9.0 16.8 0.0 19.3 53.3 15.0 0.0 2.1 6.3telecoms

Motorvehicles 47.1 11.1 15.2 15.5 53.2 0.0 24.2 2.1 2.5 12.6

Banking& 2.7 0.0 11.4 0.0 0.0 0.0 0.0 59.2 27.1 24.8insurance

Computing 13.6 15.9 0.0 0.0 0.0 0.0 0.0 0.0 17.0 7.7

Business 0.0 0.0 4.3 0.0 0.0 0.0 0.0 4.0 0.0 1.4services

DEGermany,IEIreland,FRFrance,ITItaly,PTPortugal,FIFinland,SESweden,

UKUnitedKingdom

Source:EMCC2007


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Table2.10providesdatarelevanttothediscussionofwhethernewmemberstatesbenefitmostfrom

offshoringandoffshoreoutsourcingfromtheEU15.Itisevidentthatthosecountriesthatlostmost

ofthejobsduetooffshoringinmanufacturing(forexampleGermany,Sweden,PortugalandItaly)are

largelyrelocatingproductionfacilitiestothenewmemberstates.However,intheUK,wherethe

servicesectorisdominatinginoffshoringprocesses,85percentofalljobswereshiftedtoAsia

(comparedwithanEUaverageofonly36.3percent).Othercountriesthatshiftedaconsiderable

shareofjobstoAsiaincludeFinland,FranceandItaly.Bearinginmindthatthesecountriesmainly

shiftmanufacturingjobs,itispossibletoassumethatmostofthesejobsgotoChinaandother

countriesofSouthEastAsiathathavelowlabourcosts.

Table2.11providesmoredetailsaboutthecontributionsofjobsrelocatedfromoldtonewmember

statesbysectors.Itisworthstressingagainherethatrelocationisresponsibleforaverysmallfraction

ofjoblossesintheEU15around8percentoftotaljoblossesin2003-2006(thesameproportion

asfortheEU27).Productionofmotorvehiclesandcomputingareamongthemostaffectedsectors

anaverageof30percentand16percentrespectivelyofjobsinthesesectorswererelocatedtonew

memberstates.

ItisnotonlyEuropeancompaniesthatarechangingtheirproductionandservicechainstotap

intothebenefitsofoffshoringandoffshoreoutsourcing.Ifwetakecompaniesbycountryof

origin,Americancompaniesdominateinoffshoringcasesacrossarangeofcountries(Germany,

IrelandandPortugal),withJapanesecompaniesdominatinginsomecountries(FranceandPortugal).However,theshareofnationalcompaniesinoffshoringislessprominentanaverage

of4.8percentacrosstheEU.Portugalsufferedthemostfromthelossofjobsrelocatedby

Table2.9:Joblossesfromoffshoring,bytypeofserviceactivity,2003-2006(%oftotaljobs

offshored)

Sector DE IE FR IT PT FI SE UK Multi- EUcountry

Administration 2.1 4.4 2.3 0.0 0.0 0.0 0.0 15.7 10.5 8.3&finance

Customer 2.1 4.4 2.3 0.0 0.0 0.0 0.0 15.7 10.5 8.3service&sales

Callcentres 0.0 0.0 2.9 0.0 0.0 0.0 0.0 41.4 0.0 11.7

ITsupport 2.8 0.0 0.0 0.0 0.0 0.0 0.0 5.4 15.6 7.0

R&D 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.5 0.0 0.5

Manufacturing 90.3 70.9 69.4 100.0 100.0 100.0 100.0 31.4 24.3 51.5

Operational 0.0 24.8 4.9 0.0 0.0 0.0 0.0 0.0 49.6 16.4activities

Source:EMCC2007

Table2.10:Regionsoforiginanddestinationofoffshoredactivities,2003-2006

(%oftotaljobsshifted)

Sector DE IE FR IT PT FI SE UK Multi- EU

country

Newmemberstates 86.8 46.9 61.7 59.1 74.7 48.4 77.8 10.6 58.0 51.2

Asia,excl.new 13.4 13.4 21.7 24.9 6.4 45.6 14.9 85.3 24.5 36.3

memberstates

Other 0.0 39.7 16.6 16.0 18.8 6.1 7.3 4.1 17.5 12.5

Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Source:EMCC2007


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foreigncompanies.AtthesametimeintheUKitwasmainlynationalcompaniesthatwere

responsibleforjoblossesduetooffshoring,whichmightbeexplainedbythehighshareofthe

bankingandinsurancesectorsinthenationaleconomy,whichwerethemostaffectedbyrelocations.

SowhoarethewinnersandlosersfromoffshoringintheEU?Wellthought-outoffshoringand

offshoreoutsourcinginrealityshouldspurtradeflowsandimprovethetradebalanceofthe

developedEuropeaneconomies.Forexample,Germanyisoneofthebiggestwinnersfrom

offshoring,despitethefactthatitismostlyconcentratedinmanufacturing,particularlycar

buildingandmachinery,whicharecorecommodityexportsectors(seeTable2.11).Yetdespite

thefactthatmanyjobshavereloca

Documents

Structural Economic Change and the EU, 2008