COVID-19 has led many analysts and politicians to advocate in favor of rebuilding regional supply chains. However, there is a subtle but important distinction to be made in this debate between attempts to improve the security of supply chains by strengthening existing local supply options, on the one hand, and attempts to encourage the back-shoring of manufacturers who have previously moved their production overseas, on the other. Here we reflect specifically on the issue of back-shoring, where we see some ‘fool’s gold’ in the well-intended arguments that have been issued to encourage such actions.

As economies internationalize, Foreign Direct Investment (FDI) in the form of overseas production plants becomes part of the game, and the corresponding factories often become embedded in their foreign environment over time. This means that they develop a symbiosis with their environment, either from a production and/or a sales perspective.

Take the Basque Country, where we have seen how since the 2008 financial crisis the pace of foreign plant openings by Basque firms has grown on a much stronger footage (7.5% per year) than the evolution of export growth (3.3% per year). The steadily growing number of foreign production locations suggests that Basque firms rarely close production plants abroad after opening them. Consequently, prior to the pandemic there were no clear signs of back-shoring strategies.

 

Evolution of Basque export OK

 

This was also the conclusion of a 2019 study based on a survey and round of interviews among Basque firms with overseas production sites, which manifested that back-shoring is a rare phenomenon:

 

Basque Country percentage over total OK

 

Regarding the back-shoring cases that we did encounter, it turned out that these were largely the consequence of three scenarios. In some cases, there was a mismatch between the production output of overseas plants and the demand specifics of the surrounding markets that they were supposed to serve (lack of “local responsiveness”). In other cases, back-shoring maneuvers took place because a company ran into financial problems and had to divest a foreign factory while placing priority on their home base assets, or because the mother firm undertook a global reorganization of its production network.

The former is coherent with the overriding pattern behind the offshoring motives that guided Basque FDI throughout this century. Namely, that offshoring of production activities takes place for market-seeking reasons rather than for cost-efficiency reasons. Hence, the lion’s share of foreign manufacturing sites produces for the markets in their vicinity and only a fraction of them re-export their output back into Europe.

How then does the COVID-19 pandemic and its disruption of global supply chains, particularly those that originate in Asia, affect the former?

Basque companies have opened factories across all continents, and a fair share of them are located in China and other places in Asia. Interestingly, the majority of these factories also comply with the market-seeking rationale. Thus, they were not opened to seize labour cost advantages and/or to produce for distant, developed, economies. Instead: their output finds its way largely to the Asian marketplace. Hence, as long as the Asian sales outlook is good for Basque products that are manufactured on-site, there is no reason to consider back-shoring. And in fact, forecasts from multilateral organizations like the IMF and the World Bank show that Far East and Southeast Asia are the economies across the globe that are projected to come out most swiftly from the current downturn.

Evidently, in those (hypothetical) cases that Basque companies would consider taking back-shoring decisions, strengthening the capacities of local suppliers would help to embed the re-patriated activities into a regional context. This should include strengthening their skills and use of technologies related to manufacturing digitalization, in line with the analysis of Orkestra’s recent Basque Country Competitiveness Report. By extension, industrial policy makers and cluster organizations should partner with businesses to redevelop value chains that are strategic from a place-based perspective.

 


bart kamp

Bart Kamp

Bart Kamp is Principal Investigator in the focus area of Business Internationalisation and Servitization at Orkestra-Institute of Basque Competitiveness. His research centres on competitive strategies that enable firms to be leaders in their niches on the international market and on servitization processes between manufacturing firms.

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james wilson

James Wilson

James Wilson is Research Director at Orkestra-Basque Institute of Competitiveness and teaching faculty at Deusto Business School.

His research interests are in policy-relevant analysis of territorial competitiveness and socio-economic development processes.