OUTSOURCING Accessing Developing Countries’ Knowledge Pool and Creating a Global Thinking System

1. OUTSOURCING Accessing Developing Countries’ Knowledge Pool and Creating a Global Thinking System Mina Mashayekhi Head, Trade Negotiations and Commercial Diplomacy Branch UNCTAD Geneva, 28-29 April 2005

2. 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

3. 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)

4. Worldwide ITES-BPO Spending by region 2002-2006

5. 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

6. 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

7. 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

8. 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.

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

10. 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

11. 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

12. 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

13. 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

14. 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.

15. 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;

16. 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.

17. Domestic Regulation Specific 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.

18. UNCTAD Expert MeetingProfessional 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.

19. 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

20. Way Forward Provide 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)

21. 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).

22. Thank You