Michael Mol & Bent Petersen
Department of Strategic Management and Globalization
Copenhagen Business School
Indisputably, "Brexit" -- the UK’s forthcoming withdrawal from the EU – will have a major impact on the economic and political relations between the UK and the EU (and presumably the rest of the world as well). But how will the Brexit affect the outsourcing and offshoring landscape specifically? In this brief note we take a look into the crystal ball and try to make some educated guesses about the effects.
Overall, we can foresee various direct and indirect effects of ‘Brexit’ – pulling in different directions and to some extent offsetting each other. We first discuss direct and indirect outsourcing and offshoring implications to UK firms and thereafter implications to firms from other countries.
Implications to UK firms
The EU offers stronger regulation of labor and the environment than the UK has historically offered, and particularly more than the current UK government would like to offer. After Brexit, less protection will make it easier for firms to outsource activities, which will lead to more outsourcing. In the UK there has long been a discussion of the so-called "zero hour" contracts, and these kinds of contract are likely to flourish without EU regulation.
We could also expect more offshoring by UK firms, to the extent that Brexit presumably will make it more difficult to employ non-British citizens onshore (i.e. in the UK). As an example, if IT people from EU-countries like Rumania and Bulgaria cannot obtain or renew work permits in the UK, some British firms may choose to offshore IT services to these countries.
In principle, people from the Commonwealth countries, including India and Pakistan, are not directly affected by the Brexit, and may therefore make up for the EU guest workers that leave the UK. However, the widespread British antagonism towards "guest workers" (perhaps the main reason for the Brexit) makes a full substitution unlikely. The possible adoption of a green card point system à la that of Australia most likely implies a more restrictive policy towards guest workers from both EU and Commonwealth countries. Therefore, UK firms will be forced to offshore more to access low-cost, high-skilled labor.
A weakening of the British Pound as a result of Brexit pulls in the opposite direction: Labor costs in the UK fall compared to those in offshoring destinations. In other words, the arbitrage advantages of offshoring diminish. It is an open question if lower labor costs will neutralize, or even outdo, the positive offshoring effect mentioned above.
Implications to foreign/non-UK firms (including Danish firms)
As perhaps the most serious consequence of Brexit, non-UK firms with production subsidiaries in the UK may relocate to EU member countries in anticipation of rising trade barriers between the UK and the EU. The larger the extent to which the existing production sites in the UK are serving the EU as a whole (rather than the UK market), the higher the likelihood of relocation of these sites. As an example, the Japanese car producer, Toyota may choose to relocate its production plants to an EU country.
To our knowledge, no Danish manufacturing firms are using the UK as a production ‘hub’ for the European market. Major production units in the UK operated by Danish MNCs, such as Arla and Carlsberg, are mainly serving the British market. Thus, the Brexit is unlikely to trigger a relocation of these production sites.
Over time, the UK will adopt a different regulatory regime. Again, the wish not to follow all EU regulations was a big driver of Brexit votes. This means that firms will have to start to consider the EU and the UK as separate markets, each with their own rules. Offshoring operations will have to follow suit, so firms will be setting up two parallel operations, one for the EU and one for the UK.