PowerPoint Presentation

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OUTSOURCING

Accessing Developing Countries’ Knowledge Pool and

Creating a Global Thinking System

Mina MashayekhiHead, Trade Negotiations

and Commercial Diplomacy BranchUNCTAD

Geneva, 28-29 April 2005

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The Data• A new way to leverage skills and markets

• Win-win situation: for DCs and ICs: productivity, competitiveness, higher employment, faster economic growth• every dollar of outsourcing creates $1-45-1-47 of

value of which the US captures $1.12-1.15 while India gets only 33 cents

• Outsourcing ‘industry’: to exceed $1 trillion by 2006

• Total savings from global outsourcing:• to grow from $6.7 bn (2003) to $20.9 bn (2008)

• Developing countries’ gains: $60 billion in ITES by 2008

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The Data

• Outsourcing: North-South issue? Hardly…• More North-North trade-68% of trade

• North America, largest market: 60% of total • Canada, largest exporter of private services to US

• Job displacement, unfounded:• Net creation of 22 million new jobs in the US (from 2000-

2010); shortage of 10 million in 2010

• Estimates for outsourcing: job creation: 317,000 net new jobs by 2008 in the US

• 2003: 98% of total contract value for outsourced business process service delivery in the US is done domestically (only 2% off-shored)

• India accounted for only 1% of total US imports of private services (of which, 2% - business services)

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Worldwide ITES-BPO Spending by region 2002-

2006Region 2002 2006 2002-

2006(CAGR %)

Americas 484,732 647,427 7.5

EMEA 171,303 237,390 8.5

Asia/Pacific

117,622 194,228 13

Worldwide 773,657 1.079.054

8.6

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The Benefits• Contributes to the MDGs:

• gender empowerment, poverty reduction, access to technology

• Has positive spill-over effects: • gains from additional consumption, skills and technology

transfer, secondary employment

• Strengthens local capacity: • through ToT and technological developments • could assist DCs in building their own industries• Indian example: TCS, Infosys, Wipro Technologies

• Expands markets: • through inter-modal linkages, especially with Mode 4• could benefit late entrants, esp. if trend continues

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Gains for Outsourcing Companies

• Strategic decision / competitive necessity • Lower labor costs • Economies of scale • Round the clock operations / time zone• Access to skills (including language skills)• Legal and regulatory framework• Quality • Structure of existing corporate network• Global R&D teams working in tandem

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The Activities• Lower end: customer contact centres, data

entry operations, telemarketing, basic technical support

• Middle: processing of financial transactions (credit-card billing, insurance claims)

• Higher end: professional services such as research and development, accounting, engineering and architechtural design services, investment analysis, medical diagnostics

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Developing Country Beneficiaries

• India: a wide known success story • 18 percent share of the global market• Growth rate: 54% in 2003-04• Total export revenues to touch US$ 57 bn by

2008; US$ 148 bn by 2012• Employment to rise from 110,000 (2003) to 2.7

mn by 2012

• Philippines, China, Malaysia, Vietnam, Bangladesh, S.Africa, Ghana, Senegal, Kenya, Jamaica, Mauritius, Nicaragua, Barbados, Mexico, Brazil.

• Others:• Hungary, Czech Rep.

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Programmers’ Wages(Average Wage/year (US$000)

2.45.88 6.4 6.5 7.2 7.2 8 8.9

2528

6

0

5

10

15

20

25

30

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Vietnam Experience• Nortel, Cisco, IBM, Hewlett-Packard, British Petroleum,

Sony, Fuji, TCS, now in Vietnam

• IT training specialists (NIIT, Aptech, Oracle) and Royal Melbourne Institute of Technology, providing training

• Attractions: • cost advantage• strong mathematical skills ( focus of educational system)• knowledge of French and English

• Government: providing incentives to IT sector (tax holidays, infrastructure development, education)

• Vietnamese diaspora: key driver of IT industry

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Ghana Experience

• Government: pro-active role: campaign, promotion for major US BPO players to set-up presence

• Attractions:• stable political environment• english-speaking workforce; high literacy

• Role of diaspora population:• setting-up their own companies in Ghana; some in

partnership with foreign investors• knowledge of foreign culture and their networks

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Success Stories: Summary

• Competitive cost• Language, education, skills

• also enables moving up the value chain

• Ability to develop global networks• Adequate and reliable infrastructure

• Government role: infrastructure, education, various incentives, marketing, political stability, regulatory framework (e.g., security of data and IPR protection)• relates to long-term prospects of doing business

• Role of diaspora population• Cultural and relational proximity and trust

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The Challenges to Overcome• Lack: infrastructure, trained HR, local market-

base

• Difficulty in gaining confidence of outsourcing companies: • regulatory framework still under development • political instability and governance issues

• Lack of coverage for liability and risk• putting in place a strong risk-control framework

• Potential erosion of competitive advantage• through new laws and regulations (e.g., restrictions on

transfer of personal data)

• Growing protectionism in outsourcing countries

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Intermodal Linkages

• Mode 1-Mode 4:• need for professionals to travel for

negotiating contracts, trouble shooting, maintenance, training, supervision, monitoring etc.

• Mode 1-Mode 3:• Indian companies benefiting from

outsourcing now have established their own commercial presence in major markets:• 480 Indian companies in UK; India, now 8th

largest investor in the UK; • have also established operations in China,

Philippines, etc. to leverage specific skills and take advantage of lower costs.

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Liberalization: The Targeted Approach

Full MA and NT commitments on positive list of service sectors at aggregate (2 digit) level:

• ensures a reasonable degree of coverage to include large part of current IT & BPO trade;

• is focused on the sectors in question; • allows for gradual liberalization (bearing in mind

regulatory and institution constraints in developing countries);

• allows for more predictability;

But:• may still miss out on a number of services currently

being traded; • may not cover other new services to be traded in the

future;

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Liberalization: The Horizontal Approach

Full MA and NT to ALL services supplied on a cross-border basis (excl. certain financial and certain transport services):

• includes also those services not listed in schedule, and any new service that will be traded in the future;

• reduces negotiating capital; • more accelerated market opening.

But:• creates challenges for the basic structure and approach

of the GATS (bottom-up); • does not allow for targeted and focused liberalization; • does not easily account for development flexibilities; • makes it hard to anticipate impact.

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Domestic RegulationSpecific commitments:

• can potentially be undermined through protectionist domestic regulations.

Challenges…• developing countries are still experimenting with

their regulatory systems; • cross border delivery through new technological

means gives rise to new regulatory issues (liability; consumer protection etc.);

• new governance and institutional frameworks for cross-border delivery and outsourcing services are required.

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UNCTAD Expert Meeting

Professional Services & New and Dynamic Sectors • Analyzing trade opportunities arising from global outsourcing;

• Identifying best practices to strengthen domestic capacity and increase participation in international trade;

• Exploiting existing frameworks for cooperation and coordination among international organisations;

• For UNCTAD, to intensify its capacity-building efforts for developing countries, esp. LDCs;

• For developing countries, to build necessary infrastructure and domestic capacity;

• Effective implementation of Article IV, Telecom Annex;

• For WTO Members, to address issues of market access in the ongoing GATS negotiations;

• Cooperative measures through RTAs.

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Way Forward

Proactive role for DC governments: • Identifying their ‘natural’ advantage and

taping/developing it to boost competitiveness

• Building and maintaining appropriate infrastructure

• Setting up appropriate regulatory frameworks, maintaining political stability

• Becoming responsive to private sector needs• Tapping diaspora support to build domestic

industries

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Way ForwardProvide assistance to strengthen DC

capacity• support for skills and infrastructure

development, e.g. through a ‘digital fund’ (external financing)

Curb protectionism • through industry support measures

(redeployment, placement support, training grants, etc.)

• through international trade negotiations (market access issues in the GATS)

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To Sum Up….

• Outsourcing is an inevitable trend in the global economy…

• with potentially huge gains (for both developed and developing countries).

• Benefits are not automatic…• but require targeted action…

• at national level (policies to support outsourcing, e.g. create infrastructure and educational base);

• at international level (TA for national policies and negotiating outcomes to curb protectionism).

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