Danish companies are going about their business wrongly when they outsource their production to cheap and low-wage markets like the ones found in China and India.

There are bigger gains to be made by outsourcing to higher-wage nations like Germany, Sweden and the UK, Danish research has found.

“My research shows that companies generally improve by outsourcing,” Roger Bandick, a lecturer at the Institute of Economics at Aarhus University, told Videskab.dk. “But if you look at which countries are being outsourced to, companies don’t see that positive effect if they outsource to low and middle-wage nations outside the OECD.”

 The yet-to-be published research – which is based on figures stemming from Danish companies in the manufacturing industry that outsourced parts of their activities in the period 1995-2006 – showed that a positive effect was gained by outsourcing to high-income nations.

Bandick’s research showed that companies outsourcing to high-wage nations enjoy 2 percent more productivity, 15 percent better product development and 20 percent increased export intensity compared to companies outsourcing to low-wage nations.

READ MORE: Once outsourced, production rarely returns to Denmark

Quality, culture and import cost
Jakob Roland Munch, a professor at the Department of Economics at the University of Copenhagen, said that Bandick’s research complements his own previous conclusions on the subject.

“All in all, there are still Danish companies that will find it optimal to offshore to China, but most will likely experience that offshoring to European countries is more beneficial,” Munch said.

Bandick and Munch argue that there are three central reasons why companies can gain more by outsourcing to Europe rather than China.

They argue that the quality of the products are better in Europe, while the closer to Denmark the parts needed for the products are found, the lower the costs associated with importing them to Denmark.

Finally, nations far away from Denmark probably have a different culture, other regulations and perhaps communicate with one another differently, thereby making business dealings more difficult and cost-inefficient.

Industry advocate Dansk Industri agreed with the two academics and said that it expects fewer Danish companies to outsource to low-income countries in the future.