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  1. 1. <ul><li>OUTSOURCING </li></ul><ul><li>Accessing Developing Countries’ Knowledge Pool and </li></ul><ul><li>Creating a Global Thinking System </li></ul><ul><li>Mina Mashayekhi </li></ul><ul><li>Head, Trade Negotiations </li></ul><ul><li>and Commercial Diplomacy Branch </li></ul><ul><li>UNCTAD </li></ul><ul><li>Geneva, 28-29 April 2005 </li></ul>
  2. 2. The Data <ul><li>A new way to leverage skills and markets </li></ul><ul><li>Win-win situation: for DCs and ICs: productivity, competitiveness, higher employment, faster economic growth </li></ul><ul><ul><li>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 </li></ul></ul><ul><li>Outsourcing ‘industry’: to exceed $1 trillion by 2006 </li></ul><ul><li>Total savings from global outsourcing: </li></ul><ul><ul><li>to grow from $6.7 bn (2003) to $20.9 bn (2008) </li></ul></ul><ul><li>Developing countries’ gains: $60 billion in ITES by 2008 </li></ul>
  3. 3. The Data <ul><li>Outsourcing: North-South issue? Hardly… </li></ul><ul><ul><li>More North-North trade-68% of trade </li></ul></ul><ul><ul><ul><li>North America, largest market: 60% of total </li></ul></ul></ul><ul><ul><ul><li>Canada, largest exporter of private services to US </li></ul></ul></ul><ul><li>Job displacement, unfounded: </li></ul><ul><ul><li>Net creation of 22 million new jobs in the US (from 2000-2010); shortage of 10 million in 2010 </li></ul></ul><ul><ul><li>Estimates for outsourcing: job creation: 317,000 net new jobs by 2008 in the US </li></ul></ul><ul><ul><li>2003: 98% of total contract value for outsourced business process service delivery in the US is done domestically (only 2% off-shored) </li></ul></ul><ul><ul><li>India accounted for only 1% of total US imports of private services (of which, 2% - business services) </li></ul></ul>
  4. 4. Worldwide ITES-BPO Spending by region 2002-2006 8.6 1.079.054 773,657 Worldwide 13 194,228 117,622 Asia/Pacific 8.5 237,390 171,303 EMEA 7.5 647,427 484,732 Americas 2002-2006 (CAGR %) 2006 2002 Region
  5. 5. The Benefits <ul><li>Contributes to the MDGs: </li></ul><ul><ul><li>gender empowerment, poverty reduction, access to technology </li></ul></ul><ul><li>Has positive spill-over effects: </li></ul><ul><ul><li>gains from additional consumption, skills and technology transfer, secondary employment </li></ul></ul><ul><li>Strengthens local capacity : </li></ul><ul><ul><li>through ToT and technological developments </li></ul></ul><ul><ul><li>could assist DCs in building their own industries </li></ul></ul><ul><ul><li>Indian example: TCS, Infosys, Wipro Technologies </li></ul></ul><ul><li>Expands markets: </li></ul><ul><ul><li>through inter-modal linkages, especially with Mode 4 </li></ul></ul><ul><ul><li>could benefit late entrants, esp. if trend continues </li></ul></ul>
  6. 6. Gains for Outsourcing Companies <ul><li>Strategic decision / competitive necessity </li></ul><ul><li>Lower labor costs </li></ul><ul><li>Economies of scale </li></ul><ul><li>Round the clock operations / time zone </li></ul><ul><li>Access to skills (including language skills) </li></ul><ul><li>Legal and regulatory framework </li></ul><ul><li>Quality </li></ul><ul><li>Structure of existing corporate network </li></ul><ul><li>Global R&D teams working in tandem </li></ul>
  7. 7. The Activities <ul><li>Lower end: customer contact centres, data entry operations, telemarketing, basic technical support </li></ul><ul><li>Middle: processing of financial transactions (credit-card billing, insurance claims) </li></ul><ul><li>Higher end: professional services such as research and development, accounting, engineering and architechtural design services, investment analysis, medical diagnostics </li></ul>
  8. 8. Developing Country Beneficiaries <ul><li>India: a wide known success story </li></ul><ul><ul><li>18 percent share of the global market </li></ul></ul><ul><ul><li>Growth rate: 54% in 2003-04 </li></ul></ul><ul><ul><li>Total export revenues to touch US$ 57 bn by 2008; US$ 148 bn by 2012 </li></ul></ul><ul><ul><li>Employment to rise from 110,000 (2003) to 2.7 mn by 2012 </li></ul></ul><ul><li>Philippines, China, Malaysia, Vietnam, Bangladesh, S.Africa, Ghana, Senegal, Kenya, Jamaica, Mauritius, Nicaragua, Barbados, Mexico, Brazil. </li></ul><ul><li>Others: </li></ul><ul><ul><li>Hungary, Czech Rep. </li></ul></ul>
  9. 9. Programmers’ Wages (Average Wage/year (US$000)
  10. 10. Vietnam Experience <ul><li>Nortel, Cisco, IBM, Hewlett-Packard, British Petroleum, Sony, Fuji, TCS, now in Vietnam </li></ul><ul><li>IT training specialists (NIIT, Aptech, Oracle) and Royal Melbourne Institute of Technology, providing training </li></ul><ul><li>Attractions: </li></ul><ul><ul><li>cost advantage </li></ul></ul><ul><ul><li>strong mathematical skills ( focus of educational system) </li></ul></ul><ul><ul><li>knowledge of French and English </li></ul></ul><ul><li>Government: providing incentives to IT sector (tax holidays, infrastructure development, education) </li></ul><ul><li>Vietnamese diaspora: key driver of IT industry </li></ul>
  11. 11. Ghana Experience <ul><li>Government: pro-active role: campaign, promotion for major US BPO players to set-up presence </li></ul><ul><li>Attractions: </li></ul><ul><ul><li>stable political environment </li></ul></ul><ul><ul><li>english-speaking workforce; high literacy </li></ul></ul><ul><li>Role of diaspora population: </li></ul><ul><ul><li>setting-up their own companies in Ghana; some in partnership with foreign investors </li></ul></ul><ul><ul><li>knowledge of foreign culture and their networks </li></ul></ul>
  12. 12. Success Stories: Summary <ul><li>Competitive cost </li></ul><ul><li>Language, education, skills </li></ul><ul><ul><li>also enables moving up the value chain </li></ul></ul><ul><li>Ability to develop global networks </li></ul><ul><li>Adequate and reliable infrastructure </li></ul><ul><li>Government role: infrastructure, education, various incentives, marketing, political stability, regulatory framework (e.g., security of data and IPR protection) </li></ul><ul><ul><li>relates to long-term prospects of doing business </li></ul></ul><ul><li>Role of diaspora population </li></ul><ul><li>Cultural and relational proximity and trust </li></ul>
  13. 13. The Challenges to Overcome <ul><li>Lack: infrastructure, trained HR, local market- base </li></ul><ul><li>Difficulty in gaining confidence of outsourcing companies: </li></ul><ul><ul><li>regulatory framework still under development </li></ul></ul><ul><ul><li>political instability and governance issues </li></ul></ul><ul><li>Lack of coverage for liability and risk </li></ul><ul><ul><li>putting in place a strong risk-control framework </li></ul></ul><ul><li>Potential erosion of competitive advantage </li></ul><ul><ul><li>through new laws and regulations (e.g., restrictions on transfer of personal data) </li></ul></ul><ul><li>Growing protectionism in outsourcing countries </li></ul>
  14. 14. Intermodal Linkages <ul><li>Mode 1-Mode 4: </li></ul><ul><ul><li>need for professionals to travel for negotiating contracts, trouble shooting, maintenance, training, supervision, monitoring etc. </li></ul></ul><ul><li>Mode 1-Mode 3: </li></ul><ul><ul><li>Indian companies benefiting from outsourcing now have established their own commercial presence in major markets: </li></ul></ul><ul><ul><ul><li>480 Indian companies in UK; India, now 8 th largest investor in the UK; </li></ul></ul></ul><ul><ul><ul><li>have also established operations in China, Philippines, etc. to leverage specific skills and take advantage of lower costs. </li></ul></ul></ul>
  15. 15. Liberalization: The Targeted Approach <ul><ul><li>Full MA and NT commitments on positive list of service sectors at aggregate (2 digit) level: </li></ul></ul><ul><ul><ul><li>ensures a reasonable degree of coverage to include large part of current IT & BPO trade; </li></ul></ul></ul><ul><ul><ul><li>is focused on the sectors in question; </li></ul></ul></ul><ul><ul><ul><li>allows for gradual liberalization (bearing in mind regulatory and institution constraints in developing countries); </li></ul></ul></ul><ul><ul><ul><li>allows for more predictability; </li></ul></ul></ul><ul><ul><li>But: </li></ul></ul><ul><ul><ul><li>may still miss out on a number of services currently being traded; </li></ul></ul></ul><ul><ul><ul><li>may not cover other new services to be traded in the future; </li></ul></ul></ul>
  16. 16. Liberalization: The Horizontal Approach <ul><li>Full MA and NT to ALL services supplied on a cross-border basis (excl. certain financial and certain transport services): </li></ul><ul><ul><ul><li>includes also those services not listed in schedule, and any new service that will be traded in the future; </li></ul></ul></ul><ul><ul><ul><li>reduces negotiating capital; </li></ul></ul></ul><ul><ul><ul><li>more accelerated market opening. </li></ul></ul></ul><ul><li>But: </li></ul><ul><ul><ul><li>creates challenges for the basic structure and approach of the GATS (bottom-up); </li></ul></ul></ul><ul><ul><ul><li>does not allow for targeted and focused liberalization; </li></ul></ul></ul><ul><ul><ul><li>does not easily account for development flexibilities; </li></ul></ul></ul><ul><ul><ul><li>makes it hard to anticipate impact. </li></ul></ul></ul>
  17. 17. Domestic Regulation <ul><li>Specific commitments: </li></ul><ul><ul><li>can potentially be undermined through protectionist domestic regulations. </li></ul></ul><ul><li>Challenges… </li></ul><ul><ul><li>developing countries are still experimenting with their regulatory systems; </li></ul></ul><ul><ul><li>cross border delivery through new technological means gives rise to new regulatory issues (liability; consumer protection etc.); </li></ul></ul><ul><ul><li>new governance and institutional frameworks for cross-border delivery and outsourcing services are required. </li></ul></ul>
  18. 18. UNCTAD Expert Meeting Professional Services & New and Dynamic Sectors <ul><li>Analyzing trade opportunities arising from global outsourcing; </li></ul><ul><li>Identifying best practices to strengthen domestic capacity and increase participation in international trade; </li></ul><ul><li>Exploiting existing frameworks for cooperation and coordination among international organisations; </li></ul><ul><li>For UNCTAD, to intensify its capacity-building efforts for developing countries, esp. LDCs; </li></ul><ul><li>For developing countries, to build necessary infrastructure and domestic capacity; </li></ul><ul><li>Effective implementation of Article IV, Telecom Annex; </li></ul><ul><li>For WTO Members, to address issues of market access in the ongoing GATS negotiations; </li></ul><ul><li>Cooperative measures through RTAs. </li></ul>
  19. 19. Way Forward <ul><li>Proactive role for DC governments: </li></ul><ul><ul><li>Identifying their ‘natural’ advantage and taping/developing it to boost competitiveness </li></ul></ul><ul><ul><li>Building and maintaining appropriate infrastructure </li></ul></ul><ul><ul><li>Setting up appropriate regulatory frameworks, maintaining political stability </li></ul></ul><ul><ul><li>Becoming responsive to private sector needs </li></ul></ul><ul><ul><li>Tapping diaspora support to build domestic industries </li></ul></ul>
  20. 20. Way Forward <ul><li>Provide assistance to strengthen DC capacity </li></ul><ul><ul><li>support for skills and infrastructure development, e.g. through a ‘digital fund’ (external financing) </li></ul></ul><ul><li>Curb protectionism </li></ul><ul><ul><li>through industry support measures (redeployment, placement support, training grants, etc.) </li></ul></ul><ul><ul><li>through international trade negotiations (market access issues in the GATS) </li></ul></ul>
  21. 21. To Sum Up…. <ul><li>Outsourcing is an inevitable trend in the global economy… </li></ul><ul><li>with potentially huge gains (for both developed and developing countries). </li></ul><ul><li>Benefits are not automatic… </li></ul><ul><li>but require targeted action… </li></ul><ul><ul><li>at national level (policies to support outsourcing, e.g. create infrastructure and educational base); </li></ul></ul><ul><ul><li>at international level (TA for national policies and negotiating outcomes to curb protectionism). </li></ul></ul>
  22. 22. Thank You