What is business relocation?

Business relocation is the transfer made by multinationals of certain activities to a country different from their own to reduce costs. This practice appeared at the end of the 20th century, when economic globalization strengthened the free circulation of goods, services and capital. In their goal of maximizing profits by reducing costs, companies saw that they could produce and sell more cheaply if they operated in places with certain competitive advantages.

Multinationals have offshored functions with lower business risk following the center-periphery model, according to which developed and industrialized countries consume and exploit the resources of developing countries. In this sense, large companies in the United States, France or the United Kingdom maintain management tasks in their headquarters and transfer administration and production to less industrialized economies, since they are low-specialized activities that allow for cheaper labor. In this way, automotive and technological parts or clothing items are designed in metropolises, and then manufactured or made in emerging countries.

Relocation, from the United States and Europe to Asia and Latin America

The main recipients of business relocation are Asia and Latin America, since their lower standard of living allows them to pay salaries that, because they are low, would not be legal in the countries of North America and Europe. Furthermore, most of these States have a large young active population and, in general, their labor laws allow longer hours or do not require employment insurance. All these advantages lower their costs, although with the transfer they eliminate jobs in the country of origin.

In receiving economies, the practice provides an opportunity, but favors exploitative conditions. In fact, governments themselves make efforts to attract multinationals, seduced by the jobs they generate. For example, Mexico, Paraguay or El Salvador have approved maquiladora legislation. Under this model, American companies pay regional companies to manufacture their products, usually clothing, in exchange for exporting them to the United States without applying tariffs. These, in turn, distribute the manufacturing among factories called maquilas, where in the Mexican case workers earn about $2.36 per hour, compared to the average salary of $26.19 in industries in the United States. Furthermore, to meet their schedules, workers are forced to survive in settlements around these factories.

In recent decades, however, there has been a double business relocation. The conventional process occurred from the United States, Canada, Europe, Japan and Australia to emerging economies such as Mexico, India, China, Taiwan, or South Korea, giving birth to the famous “Made in China” or “Made in Taiwan.” However, the economic growth of these countries has increased production costs, pushing multinationals to go further to maintain business profitability.

In this new model, they continue to transfer functions to China, India, Taiwan, South Korea or Hong Kong, which now outsource production and manufacturing to more peripheral countries, such as Pakistan, Bangladesh or Vietnam. This double relocation is carried out especially by the four Asian tigers or dragons—South Korea, Taiwan, Hong Kong and Singapore—thanks to their greater economic and industrial status.

China and the “relocalization” of the West

China, for its part, has been the destination of multinationals par excellence, the “factory of the world”, but the increase in its labor costs since 2015 and its trade wars with the United States have encouraged the relocation of American and European companies. . More and more companies are relocating production to their country of origin, thanks to new technologies that make manufacturing more efficient, allowing transportation costs to be reduced and quality controls to be improved.

American companies such as Hasbro, Carrier, Black & Decker or Dell have thus distanced themselves from China to return all their activities, and large technology companies such as Apple, Microsoft, Google, HP or chains such as Starbucks are in the process of reducing their dependence on production. of the Asian giant. The trend reached the European Union in 2015, which created the European Relocation Monitor to encourage relocation. Between 2015 and 2018, for example, 253 companies returned, the majority to the United Kingdom, France and Italy, while in Spain Mango, Orbea and Pepe Jeans have relocated.