Offshoring: the impact on the German economy

In times of global networking and digitalisation, German companies are faced with the decision of whether they should rely on offshoring. German offshoring led to 475,000 new jobs in Eastern Europe from the 1990s onwards. Germans relocate jobs primarily because of the lower costs. While German companies benefit from offshoring, their national economy loses out.

But what exactly is behind this term, what advantages and disadvantages does it entail and what impact it has on the companies and the economy of the home country of these companies? Let's take a look at the importance of offshoring for Germany's economy and examine the various facets of this strategy.

What does offshoring mean?

Offshoring refers to the relocation of company activities or production processes abroad in order to reduce costs or benefit from specialised labour. This process has become increasingly important in recent years and has a direct impact on the German economy. For example, companies are relocating call centres to Eastern Europe or having their software development carried out in India. The background to offshoring often lies in the search for cheaper labour costs and a greater global presence in order to remain competitive. Thanks to the use of modern communication technologies, it is now easier than ever to relocate business processes across borders. However, this approach also harbours risks and challenges, such as loss of data and expertise as well as social impacts on the domestic labour market.

Offshoring offers various advantages for companies

Offshoring is a business practice in today's globalised world. In this practice, the company relocates certain activities, processes or functions to another country. The purpose of relocation is usually to reduce costs. It is also done for purely operational reasons. Greater efficiency gains and access to specialised skills and resources. Offshoring can include part of production, customer support or other services.

Risks and challenges in connection with offshoring

However, offshoring also harbours risks and challenges for German companies. One of the biggest concerns is the risk of losing expertise if important business processes are relocated abroad. This can lead to dependencies on external partners and jeopardise the security of sensitive data. Cultural differences and language barriers can also impair the efficiency of collaboration. There is also a risk of quality problems with outsourced services, which could damage the company's image. It is therefore crucial to identify these risks at an early stage and take appropriate measures to safeguard against them in order to minimise any negative impact on the company.

German companies see fewer benefits from offshoring than their American counterparts - Why?

According to a research report from the Cologne Institute for Economic Research, the main reason why offshoring has fewer advantages for German companies than for American companies is language and cultural issues. This results in additional administrative costs for offshore projects.

Another reason is that German companies usually organise their operational processes according to Eastern Europe, Polandwhich Slovakia and Romania relocate. In contrast to the Americans, who normally do this in India. In comparison, Eastern and Middle Eastern European countries have much higher infrastructure and labour costs. In contrast to India and similar countries with lower offshore costs.

Germany is missing out on a lot of high-tech exports. This is because American companies dominate this sector. While America generates more wealth for the USA through offshoring than is lost. This is not the case in Germany.

Companies in Germany are benefiting from offshoring. But the country appears to have economic problems. The unemployment rate is higher than in almost all other European countries.

How does offshoring affect unemployment in Germany?

Offshoring has led to job losses in certain sectors in Germany. This applies in particular to the manufacturing industry and low-skilled labour.

A large proportion of the registered long-term unemployed in Germany are unskilled workers. These unskilled workers are causing the unemployment rate to rise. And more and more qualified staff are needed. On the other hand, this has contributed to the creation of jobs in other sectors, e.g. in the high-tech industry.

So the country began to utilise its strengths to overcome the challenge of offshoring. Germany is utilising its skilled workers, innovation and technology. This has enabled it to continue to position itself as a competitive player in the global economy.

Measures to minimise the negative consequences of offshoring

Targeted measures are required to minimise the negative effects of offshoring on Germany's economy.

Companies should focus more on social responsibility and comply with ethical standards in order to reduce job losses in Germany. It is also important to invest in employee training in order to increase their employability and make them fit for future challenges.
Politicians should create incentives for companies to invest more in Germany and maintain jobs here.
Transparent communication about the reasons for and consequences of offshore activities is also crucial in order to create trust among the population and reduce fears.

Only a holistic concept can mitigate the negative consequences of offshoring in the long term.

Conclusion

Offshoring in Germany is both an opportunity and a challenge. The German government has taken various measures to deal with this challenge.

It has taken initiatives to support domestic industry and promote innovation. To this end, the country has made investment in education and skills one of its top priorities.