Offshore Staffing in the Asia-Pacific Region:

1. Offshore Staffing in the Asia-Pacific Region: Financial, Administrative, and Regulatory Impacts on Location Attractiveness Stan Malos, J.D., Ph.D. Professor of Management/HRM Organization and Management Department College of Business San Jose State University San Jose, California USA

2. Overview of Presentation *This paper examines financial, administrative, and regulatory effects that may impact the expansion of offshoring beyond established locations such as India, China, and Malaysia. *Investments in global labor markets can be seen as options on future employment sources that help create sustainable competitive advantage by diversifying staffing locations throughout the Asia-Pacific region and elsewhere. *An apparent trend toward “nearshoring”—shifting overseas operations closer to home bases in more developed countries—is also examined and discussed.

3. Motivations for Offshoring *Developed countries may have higher standards of living, a greater supply of educated and trained workers, better infrastructure, more favorable business environments, but ... *These factors typically reflect higher wage and income levels or tax burdens that may lead to the desire to offshore. *Developing countries offer lower apparent labor costs but may be undermined in attractiveness if administrative or regulatory burdens on doing business are seen as too great.

4. Effects on Offshore Location Attractiveness *Certain business functions may be stronger candidates than others for nearshoring rather than offshoring. *Asia-Pacific countries such as Malaysia that wish to encourage their greater use as an offshore location by Western companies should consider competitive threats from emerging economies in the Western Hemisphere. *Such countries may have similar profiles and tradeoffs among cost, skill, and infrastructure dimensions but shorter supply chains to and from the home country. *Other Asia Pacificoffshore locations (e.g., the Philippines, Vietnam) have also increased overall offshore attractiveness.

5. Research Methods *A. T. Kearney’s Global Services Location Index (2005) and World Bank ratings on ease of doing business internationally (2005 & 2006) were used to investigate relationships among levels of economic development, administrative and regulatory burdens on employing workers, and perceived overall attractiveness of the top 40 offshore staffing locations. *Kearney data split into sub-ratings for Financial Structure (compensation costs, overhead, tax and regulatory costs), People Skills and Availability (labor force availability, education and language ability, business process skills and experience, attrition rates), and Business Environment (economic and political stability, cultural adaptability, infrastructure quality, security of intellectual property).

6. Data Analyses *Regression Analysis used to investigate impact of regulatory constraints on ease of starting a business, obtaining licenses, employing workers, trading across borders, enforcing contracts etc. on the Kearney sub-ratings (Financial Structure, People Skills and Availability, and Business Environment). *Cluster Analysis with same Kearney sub-ratings used to create profiles of countries as (1) developed offshore user, (2) established offshore location, or (3) less developed but emerging offshore location.

7. Selected Results re: Regulatory Burdens *GNI per capita was strongly and negatively associated with favorable (low cost) financial structure. *But, administrative and regulatory burdens associated with difficulty of employing workers also related negatively to favorable financial structure even after controlling for GNI. *Greater rigidity of employing workers (difficulty in ending the employment relationship) also related negatively to favorable financial structure after controlling for GNI.

8. Further Results re: Regulatory Burdens *Reduced regulatory burdens associated with employing workers related positively to favorable levels of people skills and availability even after controlling for GNI. *Lower hiring difficulty, firing costs related positively to favorable business environment even after controlling for GNI.

9. Validation Evidence for Cluster Analysis Results: Countries Profiled based on levels of Financial Structure, People Skills and Availability, and Business Environment *U.S., Canada, the U.K., and industrialized European countries (France, Germany) classified as developed offshore user countries, as would be expected. *India, China, and Malaysia classified as established offshore locations, as would be expected. *Vietnam, Chile, Costa Rica, and Mexico classified as emerging offshore locations, as would be expected.

10. Cluster Profiles and Country Classifications [See separate slides (Tables from complete paper)]

11. Offshoring Attractiveness Implications: Status of Asia Pacific Region *India’s overall lead in attractiveness has dwindled due to wage inflation, improvements by China along people skills and infrastructure dimensions. *The Philippines, despite weaknesses in infrastructure and political stability, continues to benefit from better education and English language skills of its workforce.

12. Offshoring Attractiveness Implications: Status of Asia Pacific Region (continued) *Indonesia benefits from low wage, tax, & infrastructure costs, but education, language skills, and business environment remain ongoing concerns. *Thailand still competes mostly on cost advantage. *Malaysia government has made substantial investments in infrastructure and continued improvements to the technical and English language skills of its labor pool.

13. Offshoring Attractiveness Implications: Regional Strategic Threats and Responses *India now appears to lag behind Philippines and Indonesia in cost advantage, and may wish to take action to stem rising wage levels that go with its lead in people skills/availability. *Malaysia appears to lead the region in infrastructure and business environment, but needs to catch up with India and China in people skills/availability to compete more effectively. *Philippines poses a competitive threat; Malaysia compares almost as well on people skills/availability, but remains well behind on cost advantage and financial structure; improving workforce skills while also getting competitive on labor costs may prove a daunting challenge—these usually contradict!

14. Offshoring Attractiveness Implications: Regional Strategic Threats/Responses (continued) *Vietnam holds a decided cost advantage over all established offshore locations in Asia Pacific region except Philippines, but lags well behind on workforce skills and business environment, areas in which it may wish to improve.

15. Offshoring Attractiveness Implications: Global Strategic Threats and Responses *Brazil, an emerging Latin American offshoring site, has a financial structure score not far behind Malaysia’s but levels of people skills higher than all Asia-Pacific countries except India and China, and a business environment score comparable to India’s, thus posing a growing strategic threat.

16. Offshoring Attractiveness Implications: Global Strategic Threats and Responses *Similarly, Chile and Costa Rica exhibit profiles highly similar to Malaysia, with comparable scores on financial structure but lower scores on people skills and business environment. *These countries could become viable competitors with Malaysia by improving investments in education. *These countries are in the same time zones as the U.S., so travel times to offshore locations could be greatly reduced, further threatening Malaysia’s market share. Similar analyses can be performed for other Asia Pacific countries and Latin American, African, European, or other global counterparts.

17. Questions, Comments, or Suggestions?

18. Thank you for your interest! 