Global value chains :  International sourcing primarily to the European Union

Over the last twenty years the global business environment for companies located in France has changed profoundly. There has been a drop not only in import tariffs, but also in transaction and data processing costs, coupled with the emergence of new industrialised countries where labour costs are low. All of which has resulted in companies and groups rethinking the way they are organised and reconsidering the location of their activities. The Chaînes d’activité mondiales (Global value chains of activity) survey carried out by Insee in 2012 (sources) looked at the strategic choices made by companies between performing activities themselves and having them done by others. When they carry out activities themselves, production is internalised ; when they call on others, all or part of the company’s activities are sourced, or externalised, either in France or abroad. When activities are carried out by another company located abroad, this is defined as international sourcing, where the internationally sourced activity may previously have been carried out within the company or it may already have been sourced in France.

It is only to be expected that a company concentrates its resources on those activities that it can carry out most effectively and considers contracting with other firms for the rest. This sourcing of certain tasks is a longstanding practice in industry, but it was always the norm to use service providers that were close by, and hence located in France. With the fall in communication and information processing costs, the issue is now much more likely to be considered in an international context, both for industrial activities and for services.

In 2012 there were 28,000 non-financial companies in the market sector which had at least 50 employees at the end of 2008 located in France. According to the Chaînes d’activité mondiales survey, in the course of the three years from 2009 to 2011, 4.2% of these companies sourced internationally some or all of their activities (graph 1). These companies accounted for almost 500,000 employees in 2011, or 6.5% of jobs in the 28,000 companies studied. Similarly, almost as many companies (3.1%) considered international sourcing, although they did not actually do so and 7.3% of companies sourced part of their activities to another company located in France. In all, 10.1% of non-financial companies in the market sector with 50 or more employees sourced in France, or sourced internationally some of their activities.

The manufacturing industry and information and communication services were the two sectors where international sourcing occurred most frequently, with 8.8% of companies concerned in both instances (graph 2). In 2011, these represented 13.6% and 19.2% of all jobs in companies with 50 or more employees in their respective sectors.

In manufacturing, the production of electrical equipment (25% of the companies concerned) and computers, electronic and optical products (22%) were most particularly concerned. In the information and communication services sector, it was mainly services linked with computer activities that sourced internationally (11%). In contrast, the construction, transport, hotel, catering and real estate sectors sourced internationally very little between 2009 and 2011 (less than 1% of the companies concerned).

In the period of observation, internationally sourced activities in the manufacturing industry were related more to the company’s core business, and in the other sectors to support activities.

Between 2009 and 2011, the proportion of companies to have sourced internationally part of their activity was naturally greater where the workforce was larger : 5.9% of companies with 100 employees or more at the end of 2008 were concerned, compared with 2.7% of those with 50 to 99 employees. And this percentage was as high as 7.6% for companies of 250 employees or more and 10% for those with 5,000 employees or more.

Companies that were part of a group in 2009 sourced internationally more than independent companies (5.2% compared with 1.6%). When groups were international in scale, this strategy was more pronounced : 12.7% of companies that were already present abroad in 2009 through subsidiaries sourced internationally between 2009 and 2011. This percentage was 20.8% when these companies also formed part of a foreign group.

Many more exporting companies sourced internationally (7.7%) than companies whose market was solely in France (0.7%). For a given sector, size and company type (type denoting whether or not the company was part of a group, whether the group was French or foreign, and whether or not the company controlled subsidiaries abroad), exporting companies sourced internationally on average four times more often than non-exporting companies.

Of the companies that sourced internationally between 2009 and 2011, 55% moved into the European Union (EU) : 38% to the EU15 Member States and 22% into the new Member States, with companies sometimes moving into several countries (table 1). Africa was also high on the list with 24%, due to its proximity to France and the fact that French is spoken in some African countries. China (18%) and India (18%) offset the fact that they are far away and have a business environment that is sometimes considered less attractive with advantages in terms of industrial fabric, labour costs and size of the domestic market.

The EU is by far the preferred destination for French companies moving their support activities (65%), due to the quality of the contractual environment. A quarter of companies that sourced internationally this type of activity moved into India, especially administrative or management services, computer or telecommunications services and design, research and development (R&D), engineering and technical services. The international sourcing of support activities to Africa concerned mainly marketing, after-sales service and call centres, for the obvious reason of a common language.

94% of companies that sourced internationally between 2009 and 2011 belonged to a group, and for the most part they sourced internationally within their group : this was the case for 73% of companies, while only 35% chose partners outside the group (table 2). When companies chose to source internationally to one of their subsidiaries, in the vast majority of cases this was a pre-existing subsidiary.

Companies that sourced internationally core business usually did so within the group (80%) rather than outside it (28%). For support functions, the gap was not so wide (66% compared with 41%). However, for support activities relating to design, R&D, engineering and technical services, the group was far and away the preferred target for international sourcing (85% compared with 19%).

International sourcing to the emerging countries like India and China is often motivated by access both to low costs, which may include low wage costs, but not exclusively, and to promising markets (sources). In the case of the new EU Member States too, wage costs can be attractive. For international sourcing to the EU15, companies are primarily looking to reduce production costs other than wages and their reasons for international sourcing are much more diverse. International sourcing to Africa, on the other hand, are mainly because companies are looking for low wage rates for labour-intensive activities. Note that for companies that form part of a group, the decision to source internationally often stems from strategies prepared by the head of the group, irrespective of the area to which international sourcing will take place.

As we have already seen, 3.1% of companies covered by the scope of the survey considered international sourcing, but did not in fact do so. Eight times out of ten, these were exporting companies. More than half of these companies cited uncertainty about the quality of goods and services produced once the international sourcing had taken place as a considerable obstacle, as well as the need to be in close contact with existing clients. Legal or administrative barriers and anxiety among the workforce or the unions followed close behind.

Obstacles also emerged for those companies that did source internationally (sources). Concerns among employees and the unions were often mentioned as a great obstacle or even a very great obstacle ; in fact this was the only really major obstacle mentioned in the context of international sourcing to the EU15. Concerns about the quality of goods and services produced were the main problem for companies sourcing internationally to China, India or Africa. The need to stay close to existing clients was also often a very important obstacle when sourcing internationally to Africa and China. Also mentioned as very important obstacles when sourcing internationally to Africa were legal or administrative barriers, inadequate management and expertise, and political and economic instability in the area. When sourcing internationally to China, concerns about the protection of intellectual property rights were considered as a very big obstacle, while the difficulty in identifying suitable foreign suppliers or import tariffs and non-tariff barriers were often mentioned as important obstacles, but rarely as very important.