The globalization of production has introduced many -shorings in the economic jargon. Off-shoring takes place when a company relocates its operations from its home country to another country. Re-shoring (or back-shoring) occurs when a company moves its operations back to its home country from another country. Far-shoring refers to companies that transfer their business operations to a distant location; near-shoring occurs when those business operations are relocated back to countries closer to home.
The period 1980–2010 was dominated by off-shoring. Companies moved their production to other countries in search of lower production costs. This was made possible by technological advancements, faster and cheaper transportation of goods as well as by the opening of China and other Asian economies.
There has been a marked slowdown in off-shoring activities since the Great Recession of 2007–2009. Eurofound 20161 refers to the decline in off-shoring activities as a “globalization slowdown”, and finds that re-shoring is on the rise. According to Eurofound, this development is a direct consequence of increased global uncertainty, but might also indicate that the past 20 years were an exception in the history of globalization, attributable to the integration of China and Eastern Europe in the global economy.
Yet concrete examples of re-shoring and near-shoring remain scarce. Using data from the German Manufacturing Survey, De Backer et al.2 find that only around 2 per cent of all German manufacturing companies were actively engaged in re-shoring and near-shoring between 2010 to mid-2012. They conclude that re-shoring is a trickle rather than a flood.
Eurofound 20193 has only counted 253 cases of re-shoring and near-shoring to Europe between 2014–2018. The estimated number of jobs created as a result of these relocations is 12,840. Eurofound notes, however, that an upward trend is evident and that the number of re- or near-shorings is likely to increase in the near term.
The COVID-19 pandemic has added to this story by unearthing all of global production’s weaknesses. Some supply chains came to a complete halt at the onset of the crisis, leaving the world void of certain essential goods, such as personal protective equipment. This meant losses for many companies, giving them food for thought about changing the way they have organized their production in recent decades.
UNCTAD4 postulates that the COVID-19 pandemic will redirect companies’ focus on increasing the resilience of their supply chains. They will seek to reduce the risk of supply chain disruptions and increase production’s self-sufficiency and autonomy, thereby shortening the supply chains. UNCTAD also predicts that re-shoring and near-shoring will gradually increase.
A Vienna Institute for International Economic Studies' recent report examines near-shoring trends among German companies and investigates whether the Western Balkan economies could actually benefit from these trends. Its main findings are summarized below.
What is German companies’ take on this issue?
Several surveys were analysed for the report and in-depth interviews were conducted to determine whether a tendency towards near-shoring is evident among German companies, and what the underlying reasons are for German companies to invest abroad, particularly in the Western Balkan region. Three groups of German investors were interviewed from November to December 2020: (i) German companies with international operations not necessarily related to the Western Balkan region; (ii) German companies that are considering to invest in the Western Balkan region but have not yet done so; and (iii) German companies that have already invested in the Western Balkans.
The DIHK “Going International 2021” survey, which is conducted regularly at the beginning of each year and includes 2,400 German companies with international operations, finds that 40 per cent of German companies with foreign operations have experienced supply chain problems. Among these, 68 per cent are thinking about rebuilding their supply chains. The most common changes the companies are considering are finding new or additional suppliers (47 per cent) and increasing inventories (41 per cent). These findings imply that some near-shoring is likely to take place after the pandemic. Even if only a fraction of the planned near-shoring initiatives are actually realized, the implications for Western Balkan economies could be significant due to their small size.
To gain further insights into which regions might be attractive for post-pandemic investments, we interviewed German companies that are planning to invest abroad and/ or are considering to invest in the Western Balkan region but have not yet made an investment decision. The Western Balkans’ main “rival” investment destinations according to the respondent companies are Eastern European countries (including Turkey, Bulgaria, Romania and Ukraine) (28 per cent) and Central European countries (Visegrad countries) (20 per cent). A lower share of respondents would consider investments in other regions such as South-East Asia, India, China and MENA. This has important implications – if Western Balkan economies want to attract foreign investors, they should compare their strengths and weaknesses with those of Central and Eastern European competitors rather than with Asian countries’. It should be noted, however, that this finding is very ‘Germany-specific’. Due to a different geographic location and cultural ties, investors from Southern Europe, for example, might be more prone to investing in the MENA region.
Turning to German companies that have already invested in Western Balkan countries, the survey shows that they are generally satisfied with the overall experience of working and investing in the region – 62 per cent of companies reported being either satisfied or very satisfied.
The three most common reasons driving German companies’ decision to invest in the Western Balkan region are: 1) relatively low wages; 2) geographic location; and 3) educated labour force.
What can the Western Balkan region offer investors?
In-depth interviews were conducted with 13 German investors in the Western Balkan region, and confirm the survey’s results. The three factors most frequently mentioned—relatively low labour costs, geographic location and educated workforce—were decisive factors for the investors’ decision.
“For sure, this is and will remain a low labour-cost country in the near future, and having a plant there is a competitive advantage for us.” (BiH)
“Wages, taxes, etc. do not play an important role. […] Geographic location is far more important.” (Serbia)
“The population’s general level of education compared with that of other regions is quite high.” (Serbia)
Some of the reasons underpinning the respondents’ investment decisions were unexpected, indicating that the investment decision-making process is multi-layered. Some German companies, for example, stated that one of the reasons for investing in the Western Balkan region was its cultural proximity to Germany, as well as positive past experiences they have had working with people from the region.
“Many young Bosnians lived in Germany during the Balkan War, learned the language and got to know the culture. That makes it easy to collaborate." (BiH)
This finding indicates that it is not only the “hard” facts, such as labour force, production costs, etc., that play a role in investment decisions, but that social ties are important as well. Such “soft” advantages and a good reputation based on past experiences could be decisive for German companies’ decision to invest in the Western Balkans. If decision-makers in the Western Balkan region are aware of this factor, they can use it to their advantage.
The companies interviewed mentioned education as both a reason for investing in the country but also as a challenge. The quality of education often does not meet the initial expectations and a large number of highly qualified workers have already emigrated (brain drain):
“Educated workforce and low wages. That was our expectation at the outset. We were right about the low wages, but not about the educated workforce.” (Serbia)
“They try to lure companies into the country at all costs, but have not done their homework. The skilled labour you need is nowhere to be found. That means that we have to fight over the few skilled workers that are available. And that doesn't work well in the long run, either. There is a huge deficit in terms of education and quality of universities.” (Serbia)
To mitigate brain drain in the region and to ensure access to a skilled workforce, companies have taken an active role in creating training programmes at schools and universities and are investing in upskilling their employees.
The interviews also confirm the survey results that good governance, infrastructure and political stability were not leading factors in the decision to invest in the Western Balkan region. On the contrary, the respondents stated that weak governance and institutions, insufficient government support (incentives, tax schemes), and poor infrastructure are the biggest shortcomings in the Western Balkans.
“There is limited legal certainty and predictability, as governments and their approach to FDI incentives, tax schemes, etc. changes over time.” (North Macedonia)
The decision-making process of companies to invest abroad is quite complex. It is therefore impossible to identify just one decisive factor that drives an investment decision. What makes the Western Balkan region attractive to foreign investors is thus a combination of factors, and also includes instinct.
“So, these are the three factors: geographic proximity, competitiveness, and some degree of political and economic stability. And at the end of the day—and this is a factor that should not be overlooked—we listened to our gut feeling.” (Serbia)
The main findings of our study on the potential benefits of post-pandemic near-shoring trends for the Western Balkans can be summarized as follows.
Near-shoring is likely to increase after COVID-19. The survey of German companies confirms that many companies are thinking about near-shoring. This does not, however, mean that all companies that have invested in Asia in the past will move their production closer to home.
The Western Balkan region is the first obvious choice for European companies that are planning to near-shore their operations. Western Balkan countries are located in close proximity to the EU, both geographically and culturally; they have the lowest wage costs on the continent and are perceived as having a skilled and educated labour force.
The region has some shortcomings, however. Governance and institutions in the Western Balkan region are still weak, the infrastructure needs to be improved, and education has been neglected in recent decades.
To fully benefit from potential near-shoring trends after the pandemic, Western Balkan economies will need to maximize their advantages and minimize their weaknesses.
Disclaimer: The views expressed in this article are those of the authors based on their experience and on prior research and do not necessarily reflect the views of UNIDO (read more).
- Eurofound (2016). ERM annual report 2016: Globalisation slowdown? Recent evidence of offshoring and reshoring in Europe. Publications Office of the European Union, Luxembourg.
- De Backer, K., et al. (2016) Reshoring: Myth or Reality? OECD Science, Technology and Industry Policy Papers, No. 27, OECD Publishing, Paris.
- Eurofound (2019). Future of manufacturing in Europe - Reshoring in Europe: Overview 2015–2018. Publications Office of the European Union, Luxembourg. Davies, R.B. (2008). Hunting high and low for vertical FDI, Review of International Economics, 16(2), 250-267.
- UNCTAD (2020). World Investment Report 2020 - International Production Beyond the Pandemic. United Nations.