Offshoring & Outsourcing , Overseas investment

1. WHAT IS INTERNATIONAL INVESTMENT?

Foreign Portfolio Investment (FPI): passive holdings of securities and other financial assets, which do NOT entail active management or control of the securities's issuer. FPI is positively influenced by high rates of return and reduction of risk through geographic diversification. The return on FPI is normally in the form of interest payments or non-voting dividends.

Foreign Direct Investment (FDI): acquisition of foreign assets for the purpose of control. FDI, according to the US government's definition, is "ownership or control of 10 percent or more of an enterprise's voting securities, or the equivalent interest in an unincorporated business.

FDI is positively affected by the ability to earn profits on activities in the foreign country. The key distinction is FPI is passive, FDI is active. The payment for FDI is normally in the form of profits (dividends, retained earnings, royalty payments, management fees).

FDI can be either inward FDI (foreigners taking control over US assets) or outward FDI (US investors taking control over foreign assets). Outward FDI is sometimes called direct investment abroad (DIA).

FDI is measured either as a flow (amount of investment made in one year) or a stock (the total investment accumulation at the end of the year).

The country where the investor resides is called the home country; the country where the investment is made is called the host country.

Outward FDI can take various forms. Home country residents can:

• purchase existing assets in a foreign country
• make new investment in property, plant & equipment in a foreign country
• participate in a joint venture with a local partner in a foreign country
   

2. THEORIES OF FOREIGN DIRECT INVESTMENT

A. The Theory of FDI: Five "W's" and an "H"

I think that it helps to understand the theory behind foreign direct investment if one conceptualizes it as answers to the typical who-what-where-why-how questions:
 

• Who - who is the investor?
• What - what type of investment?
• Why - why go abroad?
• Where - where is the investment made?
• When - When does the firm choose to go abroad?
• How - How does the firm go abroad? What mode of entry into the foreign market does it choose?

In more detail:

1. Who - who is the investor?

(a new firm or an established MNE? an insider or an outsider?)

2. What - What kind of investment?

(Greenfield v. brownfield? merger & acquisition? first time investment or sequential investment?).

3. Why - why go abroad?

(Firm X wants to earn more profits either by raising its revenues or reducing its costs.)

4. Where - where is the investment made?

(Choice of host country location - affected by economic, social/cultural and political factors)

5. When - when is the investment made?

(Timing of entry decision - affected by age of product, multinationality of firm. Product life cycle theory offers an explanation for the timing of FDI.)

6. How - how does the firm go abroad? What mode of entry?

(choices include exports, licensing, franchising, FDI)

The OLI paradigm provides a theoretical base for answering at least some of these questions.

 

B. The OLI Paradigm (a.k.a. the Eclectic Theory of FDI)

The OLI paradigm was developed by John Dunning, professor emeritus at the University of Reading (UK) and Rutgers University (US). The paradigm is a blend of three different theories of foreign direct investment = O + L + I, each piece focusing on a different question.

• O = Ownership Advantages (Firm Specific Advantages): Ownership advantages address the WHY question [why go abroad?]. The WHY question hypothesizes that the MNE has one or more firm specific advantages (ownership advantage, core competency) which allows it to overcome the costs of operating in a foreign country. This firm specific advantage (FSA) is normally intangible and can be transferred within the multinational enterprise at low cost (e.g., brand name, benefits of economies of scale, technology). The advantage either generates higher revenues and/or lower costs that can offset the costs of operating at a distance in a foreign location.
• L = Location Advantages (Country Specific Advantages). Location advantages address the WHERE question [locate where?]. The motive to move offshore is to use the FSA in conjunction with factors in a foreign country. Through these factors (e.g. labor, land), the MNE makes profits (earns rents) on its FSAs. The choice of investment location depends on a complex calculation that includes economic, social and political factors.
• I = Internalization Advantages. Internalization advantages address the HOW question [how go abroad?]. The MNE has various choices of entry mode, ranging from the market (arm's length transactions) to the hierarchy (wholly owned subsidiary). The MNE chooses internalization (the internal route) where the market does not exist or functions poorly so that transactions costs of the external route are high. [Note this is NOT internationalization but internalization. ]

Let us look at the O - L - I paradigm in more detail:

 

Firm Specific Advantages (The O Factor)

A MNE operating a plant in a foreign country is faced with additional costs compared to a local competitor. The additional costs could be due to (i) cultural, legal, institutional and language differences; (ii) a lack of knowledge about local market conditions; and/or (iii) the increased expense of communicating and operating at a distance. Therefore, if a foreign firm is to be successful in another country, it must have some kind of an advantage that overcomes the costs of operating in a foreign market. Either the firm must be able to earn higher revenues, for the same costs, or have lower costs, for the same revenues, than comparable domestic firms.

PROFIT = TOTAL REVENUES - TOTAL COSTS - COST OF OPERATING AT A DISTANCE

Since only foreign firms have to pay "costs of foreignness", they must have other ways to earn either higher revenues or have lower costs in order to able to stay in business. So if the MNE is to be profitable abroad it must have some advantages not shared by its competitors. These advantages must be (at least partly) specific to the firm and readily transferable within the firm and between countries. These advantages are called ownership or firm specific advantages (FSAs) or core competencies. The firm owns this advantage: the firm has a monopoly over its FSAs and can exploit them abroad, resulting in a higher marginal return or lower marginal cost than its competitors, and thus in more profit. These advantages are internal to a specific firm. They may be location bound advantages (i.e. related to the home country, such as monopoly control over a local resource) or non-location bound (e.g. technology, economies of scale and scope from simply being of large size).

The enclosed box provides a list of the various types of FSAs which the MNE can possess. We identify three basic types of ownership advantages for a multinational enterprise. These include:

• knowledge/technology, broadly defined so as to include all forms of innovation activities;
• economies of large size (advantages of common governance) such as economies of scale and scope, economies of learning, broader access to financial capital throughout the MNE organization, and advantages from international diversification of assets and risks; and
• monopolistic advantages that accrue to the MNE in the form of privileged access to input and output markets through patent rights, ownership of scarce natural resources, and the like.

Some of these O advantages can be found with de novo firms (i.e. first time overseas investments), others come from being an established affiliate in a large, far flung multinational enterprise. Economies of common governance clearly belong to the latter category. Therefore FSAs can change over time and will vary with the age and experience of the multinational.

Country Specific Advantages (The L Factor)

The firm must use some foreign factors in connection with its domestic FSAs in order to earn full rents on these FSAs. Therefore the locational advantages of various countries are key in determining which will become host countries for the MNE. Clearly the relative attractiveness of different locations can change over time so that a host country can to some extent engineer its competitive advantage as a location for FDI.

The country specific advantages (CSAs) that influence where an MNE will invest can be broken into three categories: E, S and P (economic, social and political). Economic advantages include the quantities and qualities of the factors of production, size and scope of the market, transport and telecommunications costs, and so on. Social/cultural advantages include psychic distance between the home and host country, general attitude towards foreigners, language an cultural differences, and the overall stance towards free enterprise. Political CSAs include the general and specific government policies that affect inward FDI flows, international production, and intrafirm trade. An attractive CSA package for a multinational enterprise would include a large, growing, high income market, low production costs, a large endowment of factors scarce in the home country, and an economy that is politically stable, welcomes FDI and is culturally and geographically close to the home country.

 

Internalization Advantages (The I Factor)

The existence of a special knowhow or core skill is an asset that can generate economic rents for the firm. These rents can be earned by licensing the FSA to another firm, exporting products using this FSA as an input, or setting up subsidiaries abroad. The ownership advantages of MNEs thus explain why they go abroad while the locational advantages of countries explain where MNEs set up foreign plants.

How they go abroad is another issue. The OLI model argues that external, arm's length markets are either imperfect or in some cases nonexistent. As a result, the MNE can substitute its own internal market and reap some efficiency savings. For example, a firm can go abroad by simply exporting its products to foreign markets; however, uncertainty, search costs and tariff barriers are additional costs that will deter such trade. Similarly, the firm could license a foreigner to distribute the product but the firm must worry about opportunistic behavior by the licensee.

The OLI model predicts that the hierarchy (the vertically or horizontally integrated firm based on internal markets) is a superior method of organizing transactions than the market (trade between unrelated firms) whenever external markets are nonexistent or imperfect. The theory predicts that internalization advantages will lead the MNE to prefer wholly owned subsidiaries over minority ownership or arm's length transactions. It is therefore the internalization advantages part of the OLI paradigm that explains why MNEs are integrated businesses, producing in several countries, and using intrafirm trade to ship goods, services and intangibles among their affiliates.

Internalization within the MNE is designed to reduce market failures by replacing missing or imperfect external markets with the hierarchy of the multinational organization. These market imperfections are of two basic types: natural and structural market failures.

Natural market imperfections are caused by failures in, or the lack of, private markets; these failures arise naturally in the course of market making. There are several general types of market imperfections that arise naturally in external markets. Two of the most important are imperfections in, or the lack of, a market for knowledge, and the existence of transactions costs in external markets. Other important market failures occur because of risk and uncertainty, and interdependence of demand and supply.

First, the external market for knowledge may fail due to three inherent characteristics: (i) transactions in knowledge suffer from impactedness and opportunism; (ii) uncertainty plagues this market; and, most importantly, (iii) knowledge is a intermediate good with strong elements of publicness. Because technology is intangible and firm specific, it is difficult for either the owner or the potential buyer to assess its value. The seller must explain to the buyer how it can be used without telling enough that the buyer could replicate the knowledge; hence, knowledge is impacted. This can cause opportunistic behavior as each party attempts to shift the terms in his/her favor. Impactedness and opportunism are worsened by uncertainty, leading the buyer to underestimate the benefits. If both parties are risk averse, the private market underproduces knowledge.

A second source of natural market failure are the transactions costs which are incurred in overcoming market imperfections or obstacles to trade in all external markets. The higher the costs, the smaller the volume of trade. All markets are faced with the costs of search, communication, specification of details, negotiation, monitoring of quality, transport, payment of taxes and enforcement of contracts. Transactions costs may be reduced if the two parties are jointly owned. For example, it may be difficult to conclude a long run, fixed price contract if comparable, external prices are not readily available since future price fluctuations will benefit one party at the expense of the other. If the two firms merge, the probability of making a market increases. In addition, quality control can be improved through backwards integration. Vertical integration to ensure quality control, for example, can be found in the high quality, high priced end of the market (e.g. name-brand perishable produce such as Dole bananas and pineapples).

A third type of natural market failure arises because external markets fail to deal adequately with risk and uncertainty. Risk is the possibility of loss; risk aversion can be a motive for foreign direct investment. Under uncertainty, individuals can only make rational decisions within an area bounded by what they know. As a result, individuals with information not available to the other party may use this information to behave opportunistically, in order to improve their bargaining position vis à vis the other party. Internalization lessens the incentives for opportunistic behavior by buyers and sellers. It can also compensate for the lack of futures markets since individual units of an MNE are less concerned about future price changes within the MNE than are independent entities. Internalization therefore can provide a form of insurance against unexpected price changes, particularly in the long run and where futures markets do not exist to provide such a hedging cushion.

Structural market failures are due to MNE oligopolistic behavior arising from general exploitation of markets, or from arbitraging differences in government regulations between countries. Structural market failures are created by the multinational enterprise as it exploits its monopoly power in domestic and international markets. First, because multinationals, especially the largest ones, are powerful and mobile nonstate actors in the global economy, their ability to move assets and incomes has been a constant bone of contention with host country governments, especially developing countries (whose GDP may often be smaller than the global sales revenues of the biggest MNEs). Nation states fear that multinationals can and do abuse their relative bargaining power in ways that benefit the MNEs at the expense of host country citizens, businesses, and governments. For example, as members of an international oligopoly, MNEs can raise global profits by segmenting domestic markets and price discriminating, erecting entry barriers to limit competition from domestic firms, restricting the decision making and R&D activities of its subsidiaries by centralization within the parent firm, using transfer pricing to shift rents out of host countries, and so on. These are endogenous market imperfections, caused by the international oligopolistic nature of the MNE.

Second, when governments levy taxes, tariffs and other forms of trade barriers, these regulations create additional costs for firms that reduce profits. Although the regulations generally have a legitimate economic purpose (e.g. raising government revenue), from the firm's point of view these are exogenous factors distorting international markets. Unrelated firms trading across international borders must pay these taxes; however, MNEs can, through transfer pricing and other financial maneuvers, at least partly arbitrage these exogenous imperfections. These are exogenous, government imposed market imperfections. Where government regulations exist, integration can therefore reduce the regulatory burden on firms. MNEs can arbitrage government regulations such as tariffs or differences in tax rates. Ad valorem tariffs can be avoided by underinvoicing imports. If the profit tax rate is higher in one country than another, tax payments can be reduced by overinvoicing intrafirm imports to, and underinvoicing exports from that country. The amounts and timing of head office fees, dividends, royalties can all be manipulated to reduce tax payments. Thus, the MNE through internalization can arbitrage exogenous market imperfections, in the process earning higher after-tax and tariff profits than can unrelated firms engaging in similar transactions.

Note, however, that even though there are benefits to internalization; there are also costs involved in being an integrated business. One of the most important of these is governance costs, that is, the costs of administering a large, vertically and horizontally integrated enterprise with its complicated internal markets for goods, services and intangibles. Secondly, integrated businesses, in order to compete on a global scale, also require enormous financial resources that may not be available to the firm or only available at a cost that is higher than that available through other forms of organizational structure, for example, through more loosely related structures such as business networks and strategic alliances. Thirdly, new lines of business may require core competencies or co-specialized assets not possessed by the MNE; rather than either forgo entering these areas or incur the costs of entry the firm may choose a looser contractual arrangement. The combination of high governance costs, inadequate financial resources, and missing FSAs or co-specialized assets may rule out vertical integration as a mode of entry or expansion, even where the wholly owned subsidiary route is the most preferred route for the firm.

This means that the choice between the market and the hierarchy is not so simple. There are many different modes of engaging in international production, ranging from simple exporting on the one hand, through subcontracting, licenses and joint ventures, to the polar extreme of a wholly owned subsidiary or branch. Each has its own benefits and costs to the MNE and these vary depending on the home and host countries, potential partners, the market for the product, government and non-governmental barriers to trade, and so on. The MNE compares the advantages and disadvantages of these various contractual arrangements. Generally, we expect that the MNE prefers the wholly owned subsidiary route to other contractual arrangements, unless the costs of governance (running the hierarchy) exceed the benefits of internalization (in terms of internalizing natural and structural market failures). This is illustrated by the horizontal line below, showing a variety of entry modes along the line.

Exports	licensing	franchising	minority joint venture	Majority Owned Foreign Affiliate (MOFA)	WOS
External                                                                                                                      Internal

We can think of modes of entry as along a line. On the left end is the 100% external market [exporting at arm's length between unrelated parties] where governance costs and the firm's control level should be very low but transactions costs high. At the other extreme is the 100% internal market, the wholly owned subsidiary [WOS], where governance costs and control are high but transactions costs are low. Moving from left to right, the modes of entry become more expensive in terms of commitment levels but offer more control. Transactions costs should fall and governance costs rise as we move from left to right. The firm chooses its mode of entry, for a particular foreign investment at a particular point in time, from among the range of possible modes of entry. Note that the choice can change over time, and for different investments.

 

Summary: The OLI Paradigm

This is the OLI or eclectic paradigm explaining the existence of multinationals. The O factor answers the "why?" question; that is, why the firm goes abroad. The reason is to exploit its firm specific advantages in other markets and countries; these FSAs allow the firm to overcome the costs of transacting and producing in a foreign location.

The L factor answers the "where?" question of location. Since international production requires the use of foreign factors in conjunction with the firm's FSAs, the MNE chooses its where to locate its foreign operations by comparing each country's locational attractiveness in terms of country specific economic, social/cultural, and political factors.

The I factor answers the "how?" question as to what mode of entry the firm uses to penetrate the foreign location. The MNE has a variety of alternative contractual arrangements, ranging from arm's length international trade through the wholly owned foreign subsidiary, and weighs their relative benefits and costs to determine how the enterprise enters the foreign market and expands its operations over time.

The successful MNE simultaneously combines these ownership, location, and internalization advantages to design its network of activities and affiliates in ways that maximize its market shares and growth. Now let us look at one example of how the OLI model can be applied to a particular industry in order to provide some concreteness to this theory.

 

The Theory of FDI: Five "W's" and an "H"

1. Who - who is the investor?  (a new firm or an established MNE? an insider or an outsider?) 2. What - What kind of investment? (Greenfield v. brownfield? M&A? first time or sequential investment?).  3. Why - why go abroad?  (Firm X wants to earn more profits: raise revenues or lower costs.) 4. Where - where is the investment made? (Choice of host country location - affected by economic, social/cultural and political factors) 5. When - when is the investment made? (Timing of entry decision - affected by age of product, multinationality of firm. Product life cycle theory offers an explanation for the timing of FDI.) 6. How - how does the firm go abroad? What mode of entry?  (choices include exports, licensing, franchising, FDI)

The OLI or Eclectic Paradigm

Ownership/Firm Specific Advantages (FSAs): The O Factor Knowledge/Technology: new products, processes, marketing and management skills, innovatory capacity, the non-codifiable knowledge base of firm. Economies of large size: economies of scale and scope, product diversity and learning, access to capital, international diversification of assets and risks. Monopolistic advantages: privileged or exclusive access to markets due to patent rights, brand names, interfirm relationships, ownership of scarce natural resources.

Location/Country Specific Advantages (CSAs): The L Factor Economic Advantages: spatial distribution of factor endowments, costs and productivity of inputs, size of market and income levels, international transportation and communication costs. Social/Cultural Advantages: cross-country differences such as psychic distance, language barriers, social and cultural factors. Political Advantages: political stability, general public attitude and government policies towards MNEs, specific policies that affect MNEs such as trade barriers, taxes and FDI regulations, investment incentives.

Internalization Advantages: The I Factor

Natural or Endemic Market Failure (natural imperfections) Difficulties in pricing knowledge: information impactedness, opportunism, uncertainty, public goods characteristic of knowledge, failure to account for all costs and benefits. Transactions costs of making markets under conditions of risk and uncertainty: search and negotiation costs, problems of moral hazard and adverse selection, lack of futures markets and insurance, risk of broken contracts. Structural Market Failure (imperfections created by the MNE) Exertion of monopoly power: Using oligopolistic methods, such as predatory pricing, cross-subsidization, cartelising markets, market segmentation, creating barriers to entry, that distort external markets and cause structural market failures. Arbitraging government regulations: Exploiting international differences in government regulations such as tariffs, taxes, price controls, and other nontariff barriers.

 

MODES OF ENTRY INTO FOREIGN MARKET

USE THE INTERNAL OR EXTERNAL MARKET?

Exports à licensing à franchising à minority JV à MOFA à WOS  EXTERNAL <------------------------------------------------------------------------> INTERNAL

FACTORS AFFECTING CHOICE: NATURAL MARKET FAILURES DIFFICULTIES IN PRICING KNOWLEDGE  TRANSACTIONS COSTS STRUCTURAL MARKET FAILURES MONOPOLY POWER ARBITRAGING GOVERNMENT REGULATIONS GOVERNANCE COSTS OF USING HIERARCHY

Indian Multi-national companies continue global march: ISB Study

Top Indian transnational companies (TNC) continued their aggressive globalisation march by showing double-digit growth in international revenue, assets and employees despite the general dip in aggregate overseas FDI in 2012, according to a study conducted by the Indian School of Business (ISB).


"We anticipate that the extent of globalisation will only increase further as India becomes more integrated with the rest of the global economy and as Indian companies gain more confidence by acquiring experience in overseas markets," says Professor Raveendra Chittoor, who conducted the study along with Deepak Jena.

The recent years have seen the rapid emergence of a number of firms from developing countries as significant players in global markets. The study that ranks India's TNCs based on their international asset size shows that the majority of the companies on the list are affiliated to business groups, a phenomenon unique to emerging economies, with companies from the Tata group dominating the list.

This is the second year of the survey and ranking by ISB. The ranking methodology is based on the framework (TNI) developed by the United Nations Conference on Trade and Development (UNCTAD). The UNCTAD index uses a combination of three measures to determine the degree of internationalisation of companies — percentage of international assets, percentage of international revenues and percentage of foreign employees.

The study shows that India's top TNCs have a balanced presence in developed and developing markets. It shows emerging market MNCs do not necessarily have a preference for expanding into culturally closer and low technology markets of developing countries, but tend to look beyond for growth.

The study also shows that India's top TNCs follow unconventional internationalisation paths, sometimes preferring to expand first into developed markets rather than into other developing economies. They display risk-taking behaviour and make large investments and resource commitments even in the initial phases of their international expansion.

While the proportion of international assets and revenues of top Indian TNCs is somewhat comparable to that of top global TNCs, Indian companies lag when it comes to employing a global workforce.

The top 15 TNCs with assets of $500 million or more earned 75% of their total revenues from global operations, held 57% of their total assets overseas, and employed 20% of their total workforce abroad. 
 

Finance and Accounts BPOs in India - Capital IQ , Genpact, Deloitte, Accenture, Shell

Captive BPO :Shared service centre for global operations : Like the one Shell have in Chennai India

Shared services refers to the provision of a service by one part of an organization or group where that service had previously been found in more than one part of the organization or group. Thus the funding and resourcing of the service is shared and the providing department effectively becomes an internal service provider. The key is the idea of 'sharing' within an organization or group.

The shared service centre for Shell operating from India caters to the following  processes required to meet the growing business needs of Finance Operations :

Order to Cash - Maintain customer master data, Invoice customers, Process receipts, Administer customer accounts, Document Management, Billing, Cash Allocation, Debt Chasing, Controls.

Purchase to Pay - Administer vendor accounts, Workflow Management, Invoice Processing, Process invoices & expense claims, Payment Initiation, Process payments, Controls, Disbursement Audit

Record To Report -

     Managed Close - Group Reporting – GARANCE, Inter-Reporting, General Ledger & Period END, Intra Group, Financial Accounting.

·         Capital & Assets - Projects/ Fixed Assets, Capitalization, Fixed Assets Reporting, Project Accounting.

·         Treasury - Bank Account Management, Cash Forecasting & Banking / TBO.

·         Settlements - Invoice Processing, Billing, Collections, Freight / Shipping, Gas Accounting.

·         Taxation - Direct Taxes, Indirect Taxes, Personal Taxes, Transfer Pricing.

·     

      Statutory Reporting - Prepare Statutory Books, Statutory Financial Statements & Disclosure Notes based on Country GAAPs, Co-ordinate with Country Statutory Auditors, Directors & Legal for sign off and submission of accounts, Implement and Maintain  Standardized Statutory Reporting Process Globally, Support Legal Entity Rationalization.

Management Information - Management Internal Reporting, Variance Analysis, Decision Support, Budgeting & Planning.

Manual of Authority - Maintenance of the MOA Tool, Adding Positions, Assigning  Authorities, Modification to  Access, Guidance to Users.

Business Intelligence & Strategy Analysis - The  Business Intelligence & Strategy Analysis (BISA) Centre is an internal consulting and analytics unit of Royal Dutch Shell located within the Shell Business Service Center in Chennai, India. The purpose of the unit is to help businesses make better decisions. This is achieved by using an in-house team of consultants and analysts, who have access to all Shell-subscribed EIS tools and databases coupled with prior experience in business analysis and  consulting.

BISA’s core expertise lies in its ability to provide an external market perspective in its business and strategic analysis, in a context relevant to Shell.

Control & Compliance - Risk, Business Controls, Financial Controls, Risk Management Program, Shell Control Framework.

GSAP - SOD Checks, Monitor SOD Reporting for SOX , C11.12 E Compliance & In-house Role Mapping Databank  Maintenance, Updation.

Continuous Improvement & Service Delivery - Shell Six Sigma & LEAN, Service Delivery Management.

Service Delivery Management - Performance Report, Post go live KPI Reviews, Performance Analysis, Customer Interaction, Customer Surveys




Paralegal outsourcing to India 

Outsourcing the law to India

Legal work from America is already changing lives in India — and the business is just starting to take off.

NEW DELHI, India — On the 15th floor of a gleaming new office building on the outskirts of New Delhi, around 100 professionals — fresh-faced enough to be college students — peer at flat-screen monitors and peck away at keyboards. The cluster of pink and blue cubicles might easily be confused for one of India's infamous call centers.

But the hushed, library silence hints there's something different going on here at the Indian outpost of Overland, Kansas-based UnitedLex. With revenue of $40 million and 750 employees, the company has emerged as one of America's fastest growing over the past three years, somewhat paradoxically, by outsourcing to India the work once done by American lawyers and paralegals.

“I'm 41, so I'm like the office elder,” said Vikram Masson, the transplanted US lawyer who runs the company's litigation support services division. Most of his team, which reviews hundreds of thousands of legal documents each month, is between 24 and 28 years old.

Welcome to the world of legal process outsourcing (LPO).

The LPO industry has had a profound effect on 34-year-old Nitin Jain, who works in UnitedLex's contract review division. Since joining from a firm where becoming partner would have taken at least a decade, he's climbed the ladder in less than half that time — and now leads a team of more than 20 associates. Along the way he's earned enough to help renovate the family home, which now has separate apartments for his parents and siblings. And he's started to spring for luxuries like vacations abroad.

“In day to day life, you don't have to think twice about things you want to own — a big LCD [TV], better furniture, all those things that affect you in day-to-day life,” Jain said.

LPO is the latest iteration of India's wildly successful offshoring industry. Demand for low-cost call centers and information technology services have spawned local multinationals such as Infosys and Wipro. “Business process outsourcing,” or BPO, created a new career path allowing millions of young Indians to enter the middle class, and to start fresh out of engineering school earning more than their fathers. This year, the Indian BPO business generated more than $100 billion in revenue. The industry employs nearly 3 million people — and has created some 300,000 US-based jobs over the past five years, according to India's National Association of Software and Services Companies (Nasscom).

LPO looks set to play an even greater role in the next wave — expanding the scope of India's legal profession to push more Indians into the rapidly growing middle class.

India's middle class grew from about 3 percent of the population in 1995 to nearly 13 percent, or around 160 million people, in 2010, according to India's National Council for Applied Economic Research. LPO could swell those numbers, and skew their earnings upward, as the current definition includes families that earn as little as $6000 to $30,000 a year.

Currently, the entire Indian LPO sector only employs some 50,000 people, according to Sanjay Kamlani, the co-CEO of New York-based Pangea3, another top firm. But there's room for massive expansion. India already has more than a million practicing lawyers, and its law schools add another 70,000 new graduates to the rolls every year. Moreover, the LPO sector increasingly promises bright new careers for lawyers who may otherwise struggle to move up the socio-economic ladder.

“The Indian court system is pretty tough. It's not easy to make it as a litigator. Compounding that is the fact that most firms have some sort of family relationship, so unless you have a background or family influence, it's very hard to make it as a litigator on your own,” said Masson. “That's one of the prime drivers of the attractiveness of LPOs, especially for women.”

Growing at 60 percent a year, according to industry insiders, the LPO business could also dramatically increase the market for Indian lawyers over the coming years.

“We're the largest LPO in India, and we have 1,000 employees. The largest BPOs have 30- to 40,000 employees,” said Kamlani. “We have a lot of room in the LPO industry to scale [up], and there's no problem adding double, triple, even going to ten times the current headcount.”

For 30-year-old Aby Mahajan, an associate at a small, New Delhi-based LPO called Trustman Legal Services, the payoff has already begun. A graduate of Jeeva University in Gwalior, Uttar Pradesh, Mahajan entered the profession with two strikes against him: He was a small town guy from Himachal Pradesh, without much swagger, in elitist and aggressive New Delhi, and he'd done his degree at a lesser law school. If he'd hung out his own shingle, he would have been scrambling for work with little hope of standing out from the horde.

And if he'd stuck with a senior lawyer or family-owned firm, he would have faced years of hard work, bad pay, and little recognition. As a recruitment advertisement on LegallyIndia.com suggests. “Fed up with uncle partner syndrome?” the ad reads. It advises lawyers to “Even the odds of the job hunt.”

“I worked earlier with some law firm, but my areas of interests changed, and I was not satisfied with my work,” Mahajan said. “Moneywise also, LPOs are giving better pay. The starting salary in LPO is better than joining a law firm. The growth opportunities are also more.”

Like most fresh lawyers, Mahajan was born into the middle class — his mother was a teacher and his father worked at a government-owned manufacturing company. Until he joined Trustman, he was living in what's known as a “PG,” or paying-guest accommodation, sharing a dormitory with 20 to 30 other young men. Now he has his own flat, and when it comes to clothing, says, “I'm only into brands now,” though he still takes public transportation to work.

New opportunities for young lawyers in India could spell trouble for lawyers and paralegals in the US, however. Currently, the Indian LPO sector as a whole employs fewer than 50,000 lawyers, but with the kind of growth envisioned by Pangea3 and other firms, it's hard to imagine America's legion of temp lawyers and paralegals will escape unscathed.

A vast increase in the offshore LPO business could make the already tough job market for US lawyers even tougher. After all, an Indian lawyer at one of the top LPO firms might earn an annual salary of $6,000 to $8,000, while US lawyers at temp staffing firms earn 10 times that amount. And, for the work law firms are the keenest to outsource, Indian lawyers say they do the work better.

“On an hour per hour basis it costs less. But there's a lot more going on than that,” said Pangea3's Kamlani.

“The associates at law firms don't like to do the work, and it's not their expertise, so they don’t achieve the same result that we do here in India,” Kamlani added. “We have 600 people for whom electronic discovery is their expertise and their business. They talk about it with enthusiasm and interest you won't get from a domestic associate.”

Mark Ford, who runs a captive LPO for Clifford Chance, agrees.

“One of my pitches to lawyers within the firm is that we can take some of the less interesting work off your plate,” Ford said. “We love the jobs you hate.”

Indeed, this is not the courtroom grandstanding you know from watching “The Good Wife,” though the work is just as essential to a firm's success. As much as two-thirds of the LPO business is in areas like “e-discovery” and “document review” — which means poring over literally hundreds of thousands of deeds, contracts, memoranda and spreadsheets to find a single line relevant to a multimillion dollar law suit.

That means logging some serious screen time, says UnitedLex's Masson.

“Sometimes it's a scientific or patent case where you have to read a little slower,” Masson said. “But typically they can go from 40-80 documents an hour, depending on the complexity. That translates to 650 documents a day.”

Like more traditional business process outsourcing (BPO), to improve efficiency LPO uses software tools — which, for example, can batch similar documents together to save the human reviewers time. And, increasingly, the “process” part is the most important piece of the puzzle, as companies apply the efficiency measures and analytical tools of BPO to reduce work, save time, and keep track of exactly where that's saving the client money.

“It's about using technology to perform the service more efficiently,” said Anup Bhasin, chief operating officer of UnitedLex in India. “If you were not using this intelligent batching technology, you would be reviewing each of these documents separately, which means time and cost to the client.”

Similarly, UnitedLex builds custom software to supplement off-the-shelf contract systems such as Upside, Selectica and Nextance, which help corporations that manage thousands of contracts to keep track automatically of expiration dates, milestones and other points when action needs to be taken.

“We build small systems that take care of the pain points of to our customers, which these big systems don't attend to,” Bhasin said.

That suggests two different LPO business models are emerging. On the one hand, there's the low-margin business of “bodies,” as industry experts often say about BPOs. This game is all about labor arbitrage: Making a buck by replacing a body in the US with a body in India, and taking a percentage off the top.

On the other hand, LPOs — which really only emerged five years ago — are steadily moving into higher-end services much faster than the BPO companies did. Now, along with grunt work like document review and basic due diligence, the top LPOs are consulting clients on automation and process efficiency, as well as reviewing contracts, drafting patent applications, processing loans, providing expert witness advice on data-collection, and conducting litigation-readiness assessment.

“In my group, the contract solutions vertical, the work is anything but basic,” said Joginder Yadav, who heads the contracts management division at UnitedLex. “I look at this as a postively disruptive model, [changing] the way legal services were traditionally delivered, or perceived as being delivered.”

In India, LPOs are helping to modernize a legal industry still dominated by family-owned firms where there is little opportunity for an outsider to make partner. They're giving fresh law graduates, many of whom would otherwise be serving as poorly paid apprentices to established lawyers, experience working with top international law firms and Fortune 500 clients. And they're pushing the best practices of the global legal industry deeper and wider into India's community of lawyers, through extensive training programs and one-on-one collaborations with experienced US and UK professionals.

“I worked with [an Indian] law firm for about four years before I joined UnitedLex in 2008,” said UnitedLex's Jain. “But my scope was limited to domestic clients. LPO provided me a background and an opportunity to do global work, and in the process learn about interacting [with foreign clients] and other legal practices.”

And, of course, there's the monthly “decorate your cubicle” contest, which doesn't happen at firms where the average age is higher than 30 years old.

Jason OverdorfOctober 24, 2012

Finance and Accounts BPOs  - Capital IQ 

When Purnachandra Rao kolla joined smart soft in Dec 1997 , it was a small team of around 100 semi qualified chartered accountants and cost accountants. During that period some finance professionals who joined the company were not sure whether the model of operations which involved supporting a US based investor website simplystocks from offshore data processing centre would give them a sustainable career. Some of the guys who stayed back have really seen the company grow from strength to strength

SmartSoftware acquired by Capital IQ

In November 2003, Capital IQ had acquired Smart Sandiego and its Indian operations, Smart Software in Hyderabad in a stock-swap deal and converted the Indian operations into a subsidiary of Capital IQ of the US. Since then, the Hyderabad operations have grown rapidly from 250 professionals to 750. The company is said to have invested $7 million in the last one year, including acquisition of Smart Software.

Capital IQ collects the data of all the companies from leading stock exchanges like Nasdaq, New York Stock Exchange, London Stock Exchange, Luxembourg, Canada and processes it with its analytical  software tools and presents it with more value addition by way of analyses in a format beneficial for investors, fund managers, investment bankers and private equity firms to enable them to decide on the investments in a particular company.

Earlier, Capital IQ raised $50 million in three tranches and some of the major investors/strategic shareholders include Bank of America, Bear Stearns, Credit Suisse First Boston, Dresdner Kleinworth Wasserstein, JP Morgan Chase & Co,

Capital IQ acquired by S&P

The US-based publishing firm McGraw Hill, which owns Standard & Poor’s, has made its entry into India by acquiring the Hyderabad development centre of US-based Capital IQ.

McGraw Hill, which holds stakes in Crisil and in a Tata publishing company, (Tata McGraw Hill), through Standard & Poor’s, has acquired Capital IQ (said to be again through Standard & Poor’s), a leading financial and capital market information provider with a major presence in Hyderabad in September this year.

Following the acquisition, Capital IQ operations in Hyderabad and Gurgaon have become 100% subsidiaries of McGraw Hill and will continue to remain as Capital IQ till the US major decides to change so, according to sources here on Thursday.

When contacted, a senior official of Capital IQ here told eFE that the company was acquired by McGraw Hill (through Standard & Poor’s) in September. The Hyderabad centre has over 750 associates while the Gurgaon operation has 120 associates. “The Indian operations will become 100% subsidiaries and continue functioning under the Capital IQ name till such time the acquirer decides to change the name.” He, however, refrained from disclosing the nature and details of the deal.

Genpect

Genpact began in 1997 as a business unit within General Electric that is - as a captive BPO.

In January 2005, Genpact became an independent company to bring our process expertise and unique DNA in Lean Six Sigma to clients beyond GE, and then in August 2007, we became a publicly-traded company (NYSE: G). Since December 31, 2005, we have expanded from 19,000+ employees and annual revenues of US$ $491.90 million to 67,000+ employees and annual revenues of US$2.28 billion as of December 31, 2014. Bain Capital became Genpact’s largest shareholder in November 2012, with the strategic objective to grow the company further.

Deloitte Tax Services India Private Limited 

Deloitte Tax Services India Private Limited commenced operations in January 2002. Since then, nearly all of the Deloitte Tax LLP (“Deloitte Tax”) U.S. service lines and regions have developed their affiliations in India.

The U.S. India Tax Compliance Group works with U.S.-based clients to provide tax compliance services, including income and several other tax return preparation, and computations. 

Deloitte US india

Captive BPO of Deloitte International operations

HSBC Captive BPO

Shell Shared services/ Captive BPO  located in Chennai.

Globalisation of business : prevalence of outsourcing and offshoring


MIT News talked about the findings with Tim Sturgeon, a senior research affiliate at MIT’s Industrial Performance Center, who is co-author of the study with Berkeley economist Clair Brown. 2/21/2014

Q. What are your major findings on the extent of outsourcing and offshoring among U.S. organizations?

A. On the domestic side we found is that about half of the organizations surveyed have some domestic outsourcing. This is concentrated in tasks you would expect: transportation services; facilities maintenance, such as janitorial services; and IT support. 

About a quarter of companies have some international sourcing. That’s a pretty high number. But when we asked about spending, the numbers were surprisingly low: Only 3 percent of primary business function costs were outsourced within the U.S., and 4 percent were offshored, on average. So most organizations in the U.S. are [still] entirely local, and do most of their work in-house. This was true for the primary business function, which accounts for about two-thirds of domestic employment, and support functions too.

But when you start drilling into large goods-producing companies, international sourcing costs go up significantly. That’s why people have the perception they do. When they look at their iPhone or go to The Gap and see [that products] were made in China or Bangladesh, they assume that sourcing from low-cost countries is pervasive. What we found is a tale of two economies, in that you have large goods-producing companies that are heavily globally engaged, and then you have everybody else. Smaller organizations, which account for about 80 percent of employment, tend to be very domestically oriented. These are nursing homes, county and city governments, and retail; these are the sorts of places where most people work.

Q. What findings do you have about the effects of these practices on jobs?

A. In terms of wages, the companies that were engaged in international sourcing had a smaller number of low-wage jobs in the primary business function. But there are a variety of reasons that could happen. Offshoring could be siphoning away low-wage jobs or increasing the need for skilled work. We can’t show causality with a survey from just one year. 

There’s been a debate about what the scale of offshoring is and what the trend is — how fast it’s moving into services, for example. While our study provides some baseline answers, you’d need to run larger and repeat surveys to delve into all the important questions. We’d like to see this approach picked up by U.S. data agencies. The approach we used [asking about business functions] is meant to be in tune with the way managers think about their organizations. It worked really well. Managers were able to answer our questions in a very short survey.

Q. What’s the global distribution of these offshore jobs?

A. For the companies that are sourcing internationally, a majority of the work was in high-cost locations. That’s also counter to what popular opinion might be. The EU and Canada are also our largest trading partners, and that’s been the case for many decades. So there’s a historical base of these sourcing relationships, business relationships, across the Atlantic and in Canada. But China’s running a close third and closing fast, and we think a lot of this has to do with international sourcing by U.S. companies. That’s why institutionalizing this type of survey would be so important, to see the change and what’s happening at the margins. 

The companies that had services as their primary business function were much less internationally engaged, but when they did source internationally, costs from low-cost countries were higher. What that suggests to us is that these companies are newer to the game of international sourcing, and that the game that’s being played today probably involves a greater focus on cost cutting. Coming out of the [recent global] recession, there’ll be a question of whether to build up capacity here or source offshore. It will be interesting to see what happens now as the economy recovers.

The problem has been that there’s no solid data on this in general. So we don’t know the scale of things. Some people say globalization is the best thing that’s ever happened to the U.S., but in certain communities and industries it’s been pretty devastating, and the manufacturing ecosystem has certainly taken a big hit, so the question is how to have a sober debate. Maybe I’m idealistic, but I think better data can lead to a better debate and better policy outcomes. The differences between large and small firms suggests that compared to cookie-cutter policy ideas, a more targeted approach might be useful. It’s a debate we can only have with better numbers.

RESPONDING TO GLOBALIZATION: INDIA’S ANSWER

by

Dr. C. Rangarajan

Chairman

Economic Advisory Council to the Prime Minister

Globalization has become an expression of common usage. While to some, it represents a brave new world with no barriers, for some others, it spells doom and destruction.  It is, therefore, necessary to have a clear understanding of what globalization means and what it stands for, if we have to deal with a phenomenon that is willy-nilly gathering momentum.

 

Globalization and its Meaning

        Broadly speaking, the term 'globalization' means integration of economies and societies through cross country flows of information, ideas, technologies, goods, services, capital, finance and people.   Cross border integration can have several dimensions – cultural, social, political and economic.  In fact, some people fear cultural and social integration even more than economic integration.  The fear of "cultural hegemony" haunts many.  Limiting ourselves to economic integration, one can see this happen through the three channels of (a) trade in goods and services, (b) movement of capital and (c) flow of finance.  Besides, there is also the channel through movement of people.

Historical Development

        Globalization has been a historical process with ebbs and flows.  During the Pre-World War I period of 1870 to 1914, there was rapid integration of the economies in terms of trade flows, movement of capital and migration of people.  The growth of globalization was mainly led by the technological forces in the fields of transport and communication.  There were less barriers to flow of trade and people across the geographical boundaries.  Indeed there were no passports and visa requirements and very few non-tariff barriers and restrictions on fund flows.  The pace of globalization, however, decelerated between the First and the Second World War.  The inter-war period witnessed the erection of various barriers to restrict free movement of goods and services.  Most economies thought that they could thrive better under high protective walls.  After World War II, all the leading countries resolved not to repeat the mistakes they had committed previously by opting for isolation.  Although after 1945, there was a drive to increased integration, it took a long time to reach the Pre-World War I level.  In terms of percentage of exports and imports to total output, the US could reach the pre-World War level of 11 per cent only around 1970.  Most of the developing countries which gained Independence from the colonial rule in the immediate Post-World War II period followed an import substitution industrialization regime.  The Soviet bloc countries were also shielded from the process of global economic integration.  However, times have changed.  In the last two decades, the process of globalization has proceeded with greater vigour.  The former Soviet bloc countries are getting integrated with the global economy.  More and more developing countries are turning towards outward oriented policy of growth.  Yet, studies point out that trade and capital markets are no more globalized today than they were at the end of the 19^th century.  Nevertheless, there are more concerns about globalization now than before because of the nature and speed of transformation.  What is striking in the current episode is not only the rapid pace but also the enormous impact of new information technologies on market integration, efficiency and industrial organization.  Globalization of financial markets has far outpaced the integration of product markets.

 

Gains from Globalization

        The gains from globalization can be analyzed in the context of the three types of channels of economic globalization identified earlier.

Trade in Goods and Services

        According to the standard theory, international trade leads to allocation of resources that is consistent with comparative advantage.  This results in specialization which enhances productivity. It is accepted that international trade, in general, is beneficial and that restrictive trade practices impede growth.  That is the reason why many of the emerging economies, which originally depended on a growth model of import substitution, have moved over to a policy of outward orientation.  However, in relation to trade in goods and services, there is one major concern.  Emerging economies will reap the benefits of international trade only if they reach the full potential of their resource availability.  This will probably require time.  That is why international trade agreements make exceptions by allowing longer time to developing economies in terms of reduction in tariff and non-tariff barriers.  "Special and differentiated treatment", as it is very often called has become an accepted principle.

Movement of Capital

        Capital flows across countries have played an important role in enhancing the production base.  This was very much true in 19^th and 20^th centuries.  Capital mobility enables the total savings of the world to be distributed among countries which have the highest investment potential.  Under these circumstances, one country's growth is not constrained by its own domestic savings.  The inflow of foreign capital has played a significant role in the development in the recent period of the East Asian countries.  The current account deficit of some of these countries had exceeded 5 per cent of the GDP in most of the period when growth was rapid.  Capital flows can take either the form of foreign direct investment or portfolio investment.  For developing countries the preferred alternative is foreign direct investment.  Portfolio investment does not directly lead to expansion of productive capacity.  It may do so, however, at one step removed.  Portfolio investment can be volatile particularly in times of loss of confidence.  That is why countries want to put restrictions on portfolio investment.  However, in an open system such restrictions cannot work easily.

 

Financial Flows

        The rapid development of the capital market has been one of the important features of the current process of globalization.  While the growth in capital and foreign exchange markets have facilitated the transfer of resources across borders, the gross turnover in foreign exchange markets has been extremely large.  It is estimated that the gross turnover is around $ 1.5 trillion per day worldwide (Frankel, 2000).  This is of the order of hundred times greater than the volume of trade in goods and services.  Currency trade has become an end in itself.  The expansion in foreign exchange markets and capital markets is a necessary pre-requisite for international transfer of capital.  However, the volatility in the foreign exchange market and the ease with which funds can be withdrawn from countries have created often times panic situations.  The most recent example of this was the East Asian crisis.  Contagion of financial crises is a worrying phenomenon.  When one country faces a crisis, it affects others.  It is not as if financial crises are solely caused by foreign exchange traders.  What the financial markets tend to do is to exaggerate weaknesses.  Herd instinct is not uncommon in financial markets.  When an economy becomes more open to capital and financial flows, there is even greater compulsion to ensure that factors relating to macro-economic stability are not ignored.  This is a lesson all developing countries have to learn from East Asian crisis.  As one commentator aptly said "The trigger was sentiment, but vulnerability was due to fundamentals". 

Concerns and Fears

        On the impact of globalization, there are two major concerns.  These may be described as even fears.  Under each major concern there are many related anxieties.  The first major concern is that globalization leads to a more iniquitous distribution of income among countries and within countries.  The second fear is that globalization leads to loss of national sovereignty and that countries are finding it increasingly difficult to follow independent domestic policies.  These two issues have to be addressed both theoretically and empirically.

       

The argument that globalization leads to inequality is based on the premise that since globalization emphasizes efficiency, gains will accrue to countries which are favourably endowed with natural and human resources.  Advanced countries have had a head start over the other countries by at least three centuries.  The technological base of these countries is not only wide but highly sophisticated.  While trade benefits all countries, greater gains accrue to the industrially advanced countries.  This is the reason why even in the present trade agreements, a case has been built up for special and differential treatment in relation to developing countries.  By and large, this treatment provides for longer transition periods in relation to adjustment.  However, there are two changes with respect to international trade which may work to the advantage of the developing countries.  First, for a variety of reasons, the industrially advanced countries are vacating certain areas of production.  These can be filled in by developing countries.  A good example of this is what the East Asian countries did in the 1970s and 1980s.  Second, international trade is no longer determined by the distribution of natural resources.  With the advent of information technology, the role of human resources has emerged as more important.  Specialized human skills will become the determining factor in the coming decades.  Productive activities are becoming "knowledge intensive" rather than "resource intensive".  While there is a divide between developing and the advanced countries even in this area – some people call it the digital divide - it is a gap which can be bridged.  A globalized economy with increased specialization can lead to improved productivity and faster growth.  What will be required is a balancing mechanism to ensure that the handicaps of the developing countries are overcome. 

Apart from the possible iniquitous distribution of income among countries, it has also been argued that globalization leads to widening income gaps within the countries as well.  This can happen both in the developed and developing economies.  The argument is the same as was advanced in relation to iniquitous distribution among countries.  Globalization may benefit even within a country those who have the skills and the technology.  The higher growth rate achieved by an economy can be at the expense of declining incomes of people who may be rendered redundant.  In this context, it has to be noted that while globalization may accelerate the process of technology substitution in developing economies, these countries even without globalization will face the problem associated with moving from lower to higher technology.  If the growth rate of the economy accelerates sufficiently, then part of the resources can be diverted by the state to modernize and re-equip people who may be affected by the process of technology up gradation.

        The second concern relates to the loss of autonomy in the pursuit of economic policies.  In a highly integrated world economy, it is true that one country cannot pursue policies which are not in consonance with the worldwide trends.  Capital and technology are fluid and they will move where the benefits are greater. As the nations come together whether it be in the political, social or economic arena, some sacrifice of sovereignty is inevitable.  The constraints of a globalised economic system on the pursuit of domestic policies have to be recognised.  However, it need not result in the abdication of domestic objectives.

        Another fear associated with globalization is insecurity and volatility.  When countries are inter-related strongly, a small spark can start a large conflagration.  Panic and fear spread fast.  The downside to globalization essentially emphasizes the need to create countervailing forces in the form of institutions and policies at the international level.  Global governance cannot be pushed to the periphery, as integration gathers speed.

        Empirical evidence on the impact of globalization on inequality is not very clear.  The share in aggregate world exports and in world output of the developing countries has been increasing.  In aggregate world exports, the share of developing countries increased from 20.6 per cent in 1988-90 to 29.9 per cent in 2000.  Similarly the share in aggregate world output of developing countries has increased from 17.9 per cent in 1988-90 to 40.4 per cent in 2000. The growth rate of the developing countries both in terms of GDP and per capita GDP has been higher than those of the industrial countries.  These growth rates have been in fact higher in the 1990s than in the 1980s.  All these data do not indicate that the developing countries as a group have suffered in the process of globalization.  In fact, there have been substantial gains.  But within developing countries, Africa has not done well and some of the South Asian countries have done better only in the 1990s.  While the growth rate in per capita income of the developing countries in the 1990s is nearly two times higher than that of industrialized countries, in absolute terms the gap in per capita income has widened.  As for income distribution within the countries, it is difficult to judge whether globalization is the primary factor responsible for any deterioration in the distribution of income.  We have had considerable controversies in our country on what happened to the poverty ratio in the second half of 1990s.  Most analysts even for India would agree that the poverty ratio has declined in the 1990s.  Differences may exist as to what rate at which this has fallen.  Nevertheless, whether it is in India or any other country, it is very difficult to trace the changes in the distribution of income within the countries directly to globalization.

India's Stance

        What should be India's attitude in this environment of growing globalization?  At the outset it must be mentioned that opting out of globalization is not a viable choice.  There are at present 149 members in the World Trade Organisation (WTO).  Some 25 countries are waiting to join the WTO.  China has recently been admitted as a member.  What is needed is to evolve an appropriate framework to wrest maximum benefits out of international trade and investment.  This framework should include (a) making explicit the list of demands that India would like to make on the multilateral trade system, and (b) steps that India should take to realize the full potential from globalization.

Demands on the Trading System

        Without being exhaustive, the demands of the developing countries on the multilateral trading system should include (1) establishing symmetry as between the movement of capital and natural persons, (2) delinking environmental standards and labour related considerations from trade negotiations, (3) zero tariffs in industrialized countries on labour intensive exports of developing countries, (4) adequate protection to genetic or biological material and traditional knowledge of developing countries, (5)  prohibition of
unilateral trade action and extra territorial application of national laws and regulations, and (6) effective restraint on industrialized countries in initiating anti-dumping and countervailing action against exports from developing countries.  

        The purpose of the new trading system must be to ensure "free and fair" trade among countries.  The emphasis so far has been on "free" rather than "fair" trade.  It is in this context that the rich industrially advanced countries have an obligation.  They have often indulged in "double speak".  While requiring developing countries to dismantle barriers and join the main stream of international trade, they have been raising significant tariff and non-tariff barriers on trade from developing countries.  Very often, this has been the consequence of heavy lobbying in the advanced countries to protect 'labour'.  Although average tariffs in the United States, Canada, European Union and Japan – the so called Quad countries – range from only 4.3 per cent in Japan to 8.3 per cent in Canada, their tariff and trade barriers remain much higher on many products exported by developing countries.  Major agricultural food products such as meat, sugar and dairy products attract tariff rates exceeding 100 per cent.  Fruits and vegetables such as bananas are hit with a 180 per cent tariff by the European Union, once they exceed quotas.  The tariffs collected by the US on $ 2 billion worth of imports from Bangladesh are higher than those imposed on imports worth $ 30 billion from France.  In fact, these trade barriers impose a serious burden on the developing countries.  It is important that if the rich countries want a trading system that is truly fair, they should come forward to reduce the trade barriers and subsidies that prevent the products of developing countries from reaching their markets. Otherwise the pleas of these countries for a competitive system will sound hollow.

To some extent, conflicts among countries on trade matters are endemic. Until recently, agriculture was a major bone of contention between U.S. and E.U. countries. Frictions are also bound to arise among developing countries as well. When import tariffs on edible oil were increased in India, the most severe protest came from Malaysia which was a major exporter of Palm Oil. Entrepreneurs in India complain of cheaper imports from China. In the export of rice, a major competitor of India is Thailand. If development is accepted as the major objective of trade as the Doha declaration proclaimed, it should be possible to work out a trading arrangement that is beneficial to all countries.

       

There have been protracted negotiations at WTO in reforming the trade system.  Admittedly, the tariff and non-tariff barriers are coming down.  However, there are apprehensions that the concerns of developing countries are not being addressed adequately.  Looked at from this angle, the recent Hong Kong Ministerial is a modest success.  Despite reservations, we must acknowledge that it is a step forward.  Domestic support to agriculture by developed countries constitutes a major stumbling block to third world trade expansion.  However, India's stand in relation to agriculture has been `defensive'.  We are not a major player in the world agricultural market.  The impact of what has been accepted in relation to Non-Agricultural Market Access and services will vary from country to country.  Despite some contrarian opinion, the gain to India from services can be significant.  However, the Hong Kong Ministerial is only a broad statement of intentions.  Much will depend upon how these ideas are translated into concrete actions.

  Actions by India

The second set of measures that should form part of the action plan must relate to strengthening India's position in international trade.  India has many strengths, which several developing countries lack.  In that sense, India is different and is in a stronger position to gain from international trade and investment.  India's rise to the top of the IT industry in the world is a reflection of the abundance of skilled manpower in our country.  It is, therefore, in India's interest to ensure that there is a greater freedom of movement of skilled manpower.  At the same time, we should attempt to take all efforts to ensure that we continue to remain a frontline country in the area of skilled manpower.  India can attract greater foreign investment, if we can accelerate our growth with stability.  Stability, in this context, means reasonable balance on the fiscal and external accounts.  We must maintain a competitive environment domestically so that we can take full advantage of wider market access.  We must make good use of the extended time given to developing countries to dismantle trade barriers.  Wherever legislations are required to protect sectors like agriculture, they need to be enacted quickly.  In fact, we had taken a long time to pass the Protection of Plant Varieties and Farmers' Rights Act.  We must also be active in ensuring that our firms make effective use of the new patent rights.  South Korea has been able to file in recent years as many as 5000 patent applications in the United States whereas in 1986, the country filed only 162.  China has also been very active in this area.  We need a truly active agency in India to encourage Indian firms to file patent applications.  In effect, we must build the complementary institutions necessary for maximizing the benefits from international trade and investment.

Changes in the foreign trade and foreign investment policies have altered the environment in which Indian industries have to operate. The path of transition is, no doubt, difficult. A greater integration of the Indian economy with the rest of the world is unavoidable. It is important that Indian industry be forward looking and get organized to compete with the rest of the world at levels of tariff comparable to those of other developing countries. Obviously, the Indian Government should be alert to ensure that Indian industries are not the victims of unfair trade practices. The safeguards available in the WTO agreement must be fully utilized to protect the interests of Indian industries.

Indian industry has a right to demand that the macro economic policy environment should be conducive to rapid economic growth. The configuration of policy decisions in the recent period has been attempting to do that. It is, however, time for Indian industrial units to recognize that the challenges of the new century demand greater action at the enterprise level. They have to learn to swim in the tempestuous waters of competition and away from the protected waters of the swimming pools. India is no longer a country producing goods and services for the domestic market alone. Indian firms are becoming and have to become global players. At the minimum, they must be able to meet global competition. The search for identifying new competitive advantages must begin earnestly. India's ascendancy in Information Technology (IT) is only partly by design. However, it must be said to the credit of policy makers that once the potential in this area was discovered, the policy environment became strongly industry friendly.

Over a wide spectrum of activities, India's advantage, actual and that which can be realized in a short span of time must be drawn up. Of course, in a number of cases, it will require building plants on a global scale. But, this need not necessarily be so in all cases. In fact the advent of IT is modifying the industrial structure. The revolution in telecommunications and IT is simultaneously creating a huge single market economy, while making the parts smaller and more powerful. What we need today is a road map for the Indian industry. It must delineate the path different industries must take to achieve productivity and efficiency levels comparable to the best in the world.

Globalization, in a fundamental sense, is not a new phenomenon.  Its roots extend farther and deeper than the visible part of the plant.  It is as old as history, starting with the great migrations of people across the great landmasses.  Only recent developments in computer and communication technologies have accelerated the process of integration, with geographic distances becoming less of a factor.  Is this 'end of geography' a boon or a bane?  Borders have become porous and the sky is open.  With modern technologies which do not recognize geography, it is not possible to hold back ideas either in the political, economic or cultural spheres.  Each country must prepare itself to meet the new challenges so that it is not being bypassed by this huge wave of technological and institutional changes.

Nothing is an unmixed blessing.  Globalization in its present form though spurred by far reaching technological changes is not a pure technological phenomenon.  It has many dimensions including ideological.  To deal with this phenomenon, we must understand the gains and losses, the benefits as well as dangers.  To be forewarned, as the saying goes, is to be forearmed.  But we should not throw the baby with bath water.  We should also resist the temptation to blame globalization for all our failures.  Most often, as the poet said, the fault is in ourselves.

Risks of an open economy are well known.  We must not, nevertheless, miss the opportunities that the global system can offer.  As an eminent critic put it, the world cannot marginalize India.  But India, if it chooses, can marginalize itself.  We must guard ourselves against this danger.  More than many other developing countries, India is in a position to wrest significant gains from globalization.  However, we must voice our concerns and in cooperation with other developing countries modify the international trading arrangements to take care of the special needs of such countries.  At the same time, we must identify and strengthen our comparative advantages.  It is this two-fold approach which will enable us to meet the challenges of globalization which may be the defining characteristic of the new millennium.

The key to India's growth lies in improving productivity and efficiency.  This has to permeate all walks of our life.  Contrary to the general impression, the natural resources of our country are not large.  India accounts for 16.7 per cent of world's population whereas it has only 2.0 per cent of world's land area.  While China's population is 30 per cent higher than that of India's, it has a land area which is three times that of India. In fact, from the point of view of long-range sustainability, the need for greater efficiency in the management of natural resources like land, water and minerals has become urgent.  In a capital-scarce economy like ours, efficient utilization of our capacity becomes even more critical.  For all of these things to happen, we need well-trained and highly skilled people.  In the world of today, competition in any field is competition in knowledge.  That is why we need to build institutions of excellence.  I am, therefore, happy that the Ahmedabad Management Association, besides other functions, is also focusing on excellence in education.  Increased productivity flowing from improved skills is the real answer to globalisation.New Delhi February 25, 2006

        

Attracting more offshoring to the Philippines

Beshouri, Christopher P., Farrell, Diana, Umezawa, Fusayo,

McKinsey Quarterly, 2005, Issue 4

The Philippines is emerging as an important supplier of labor to the global offshoring market, but new research finds that although the country has marked advantages, it must overcome significant obstacles to compete with nations such as India. The stakes are high: from 2003 to 2008 alone, the McKinsey Global Institute (MGI) estimates, an additional 2.6 million offshore services jobs will be created around the world, offering a valuable source of employment and exports for the low-wage countries that capture them.[1]

Offshoring is already important to the Philippines: In 2003 the country supplied $1.7 billion worth of offshore services to the world economy (Exhibit 1, on the previous page); today around 100,000 people are employed in call centers. Low costs are one reason for the country's emergence as an Offshoring location, Among the ten countries we examined for this article,[2] the Philippines has the second-lowest hourly wage for Offshoring professionals, at 13 percent of the US level; the salaries of Indian workers were the lowest, at 12 percent; wages in Malaysia are around twice that level.

The Philippines has a larger pool of workers suitable for multinational companies than its relatively small population of 88 million would suggest. For every 100 college graduates with finance and economics degrees from countries in our sample, executives of multinationals said they would hire 30 in the Philippines, compared with just 15 in India; the corresponding figures for generalists and life science researchers, respectively, were 25 versus 10 and 20 versus 15.[3] The Philippines even compares favorably on the suitability of its engineering graduates for employment with multinationals — a particular strength for India. Moreover, a higher percentage of the Philippines' population than of India's has earned a college degree.

The Philippines lags behind other potential destinations on five additional criteria that companies consider when choosing an offshore location, however (Exhibit 2). Of the countries we studied, it has the poorest risk profile — a legacy of natural disasters, security threats, and data theft — and very few third-party vendors. As a potential domestic market for services, the Philippines attracts only a fraction of the enthusiasm China and India generate.

The country's subpar business environment suffers from strict labor laws, high levels of corruption, and a surfeit of bureaucracy, Obtaining approval to open a call center in the Philippines, for instance, takes twice as much time as it does in India or Malaysia. Another drawback is a paucity of direct flights from the Philippines to distant markets such as the United States.

Management talent is also scarce in the Philippines, partly because its offshoring industry is still in the early stages of development and has yet to develop many managers. Furthermore, the country's economy is dominated by small and midsize companies that are often family owned and don't produce much management talent. The Philippines has a large diaspora that could be a potential source of managers, but these emigrants tend to take non-managerial jobs (as contract workers and nurses, for example) so they return home without suitable experience.

To remove these obstacles and further spur economic growth, the government must work with the private sector to attract foreign businesses and to increase the number of flagship multinational companies in the Philippines. Improving the infrastructure would be one place to start. Of the countries we examined, the Philippines has the highest electricity prices and one of the most expensive telecommunications systems. Although the country has enjoyed some success developing "cyber parks" (special zones with concentrated world-class infrastructure), it should expand this effort and pay more attention to enhancing their physical and digital security.

Whether multinationals view the Philippines as an attractive offshoring destination will ultimately depend on how they weigh the country's risks against its rewards. Indeed, cost-conscious companies may well regard it as an attractive offshoring location now (Exhibit 3). As its public- and private-sector leaders address the remaining barriers, the Philippines will become even more eye catching.

1. MGI analyzed the availability of offshore talent in 28 low-wage countries and estimated the demand for offshoring in the developed world by choosing for offshoring in the developed world by choosing eight sectors as a representative sample of the global economy. The full report The Emerging Global Labor Market, is available free of the charge at www.mckinsey.com/mgi
2. We studied Brazil, China, the Czech Republic, Hungary, India, Malaysia, Mexico, Poland, and Russia in addition to the Philippines.
3. MGI conducted a survey of 83 human-resources executives at multinational companies operating in low-wage countries.

Morocco's Offshoring Advantage :francophone offshoring

Taoufiki, Mourad, Tazi-Riffi, Amine, Tétrault, Jonathan,

McKinsey Quarterly, 00475394, 2005, Issue 4

 In an integrated global economy, a country is fortunate if it can find a comparative advantage in an industry where major positions have not yet been taken. Morocco, within eyeshot of the European Union across the Strait of Gibraltar, has identified an opportunity to become an offshoring center for Europe's French- and Spanish-speaking companies. Our study shows that, from 2003 to 2018, business process offshoring in Morocco could add 0.3 percent annually to its GDP growth, reduce its international trade deficit by around 35 percent, and create a total of some 100,000 new jobs.[1]

Morocco's need for new industrial growth is urgent. Competitors with lower costs and better access to natural resources are eroding the country's share of the global market for food processing and textiles, which together currently represent more than half of its industrial GDP and almost three-quarters of its exports (Exhibit 1). Without a proactive industrial-development policy, we reckon that Morocco's employment levels will stagnate, its trade deficit will increase, and its economy will grow at less than half the expected rate (Exhibit 2. on the next page).

To identify the most promising growth opportunities, we analyzed the competitiveness and global market share of Morocco's industries and benchmarked them against the competitiveness and market share of a selection of 11 developed and developing countries.[2] We also studied the impact of globalization on the value chain of each sector. After simulating the impact of potential industry strategies on Morocco's economy, we found that business process and IT offshoring represented the single biggest opportunity — an estimated DH30 billion (€2.7 billion), or around 8 percent of GDP in 2003.

Morocco's appeal includes wages for white-collar workers that are half those in France, a relatively high proportion of university graduates, and many citizens who speak French, the second language in the central region of the country. Furthermore, the cost and quality of its already respectable telecommunications infrastructure are set to improve further with the expected entry of Spain's Telefónica as a second fixed-line operator The country's nascent offshoring sector, with an estimated current turnover of €85 million, includes some 50 mostly small providers that will employ a total of about 10.000 people by the end of 2005. Still, Morocco has captured almost half of the fledgling market for call centers serving French-speaking companies. In addition, Telefónica has established a captive call center in northern Morocco, where Spanish is the second language.

Business process offshoring has yet to take off in any significant way among companies in Europe's francophone countries (Belgium. France. Luxembourg, and Switzerland) and in Spain. The main obstacles are labor laws, the political pressure against moving jobs abroad, and the fact that most existing offshoring vendors are predominantly English speakers. As these countries recognize that business process offshoring is vital to remaining competitive, however, we expect their market for it to grow to about €9 billion in the next ten years.

Morocco should establish itself as the destination of choice, primarily for francophone offshoring. To achieve rapid progress, it should focus its efforts on 10 to 12 niches within selected business processes (accounting and finance and human resources, for example) and IT functions. Morocco is in a strong position: compared with competitors such as Mauritius, Senegal, and Tunisia, it is geographically closer to France, has a larger and more qualified talent pool, and boasts a better telecommunications infrastructure. When measured against Eastern European countries, Morocco can point to lower labor costs and, naturally, a larger pool of French speakers.

In order to create an attractive business environment for multinational companies, Morocco is launching a few special development zones, or "nearshore centers," which will offer tax breaks, less cumbersome administrative procedures, more flexible labor rules, and world-class infrastructure and services. Attracting four or five multinationals to these zones at an early stage will be a key component of the initiative's success. The country could target major IT firms seeking a place to locate francophone IT offshoring centers, for example, or large companies setting up captive business process units. Such early deals would serve as reference cases for later entrants.

1.      The study, undertaken on behalf of Morocco's Ministry of Industry and Commerce, highlighted ways the country could modernize traditional export sectors, promote opportunities in new ones (such as offshoring), and tackle the structural barriers to its economic growth.

2. The countries were benchmarked on 104 factors in 12 major categories: labor, capital, energy, natural resources, IT and telecommunications, logistics, customs and trade, taxes and tax incentives, the existence of special economic zones, utilities, business climate, and the size of the economy.

The African Emergence

Agriculture

"The agricultural sector is regarded as one of the most critical industries for the African continent due to economic potential and is projected to become a $1 trillion industry in sub-Saharan Africa (SSA) by 2030," a Price Waterhouse Coopers ( PwC ) report said. 

It came following a survey of respondents, 58.8 per cent of whom consider "investment in Africa as an opportunity for their businesses to expand". They named the top four countries they are planning to invest in as Zambia, Botswana, Tanzania and South Africa which all fall in the Southern African Development Community ( SADC ) region. 

And, as the Exim Bank of India is keen to direct more Indian investment to the SADC region, it looks like more emphasis would have to be put on agriculture and agribusiness. 

The study has also identified natural resources, agriculture, manufacturing and infrastructure as holding potential for Indian investors in the SADC region. 

The Exim study, 'Focus Africa: Enhancing India's Engagements with Southern African Development Community (SADC)' describes the region as of "strategic importance" as an investment destination for India. The community is made up of Angola, Botswana, Democratic Republic of Congo, Lesotho and Madagascar. 

The rest are Malawi, Mauritius, Mozambique, Namibia, the Seychelles, South Africa, Swaziland, Tanzania, Zambia and Zimbabwe. 

Exim Bank said the 16 member states account for nearly 30 percent of Africa's GDP and is the second-largest bloc (in terms of the economy's size) in the continent, after the Economic Community of West African States (ECOWAS). 

"For India especially, the SADC region is of strategic importance, accounting for nearly 40 per cent of its total trade with Africa, and a substantial portion of India's investments, with major destinations like Mauritius, Mozambique and South Africa, among others .. 

The African Emergence

African countries figure prominently as a sourcing destination for manufacturers who seek an alternative to China.

When global textile and apparel quotas were lifted on January 1, 2005, hardly anyone in the retail clothing industry thought the impact on global sourcing and manufacturing would be less than monumental, and they were right, says Paula Rosenblum, director of retail research for Aberdeen Group, “It’s been everything it was predicted to be. The trade volume in some categories has jumped by as much as 1000 percent or more.”

In turn, the flood of Chinese textile and apparel exports into Western markets has caused a backlash from the U.S. and EU, both of whom have renegotiated measures with China that puts limits on certain categories through 2008.

American clothing manufacturers and retailers have poured into China by the droves to take advantage of low-cost production and the removal of quotas, but there have been numerous growing pains.

For one, “China is becoming more expensive as a manufacturing destination,” explains Rosenblum, “and shippers are experiencing delays at U.S. West Coast ports.”

In a major development last September, New York-based Liz Claiborne said it would scale back its ambitious plans for China, which among other things called for slashing by half its roster of global suppliers to focus mainly on Chinese production. Instead, CEO Paul Charron said it would keep its sourcing levels for China at roughly 30 percent, given the tensions that had materialized between the U.S. and China over the textile and apparel trade. “The uncertainty has caused us to take a most conservative attitude to China,” remarked Charron. “We have to plan to go to the left and to the right, and that’s a physical impossibility.”

Other companies, particularly in the textile and apparel sector, have had similar experiences. Though some wisely anticipated the scenario that is playing out.

Diversifying the supply chain

“There’s a lot of value in diversifying your supply chain,” advises Rosenblum, who has seen what can happen when manufacturers put all their eggs in the ‘China’ basket.

That wisdom was not lost on The Children’s Place, who prior to the lifting of quotas had already sought out alternative markets for sourcing and manufacturing, including Africa. The company is one of a handful of children’s specialty retailing chains that has a reputation for trendy, well-priced clothing with style and durability.

“They really look at Africa as a way to differentiate themselves,” says Sue Welch, CEO of TradeStone Software, which has worked with The Children’s Place over the years to provide global supply chain solutions. “Africa has terrific fabrics and colors and their apparel production is really improving dramatically. I think that’s clearly reflected in The Children’s Place stores.” And, while Africa may not have as sophisticated an infrastructure as China, “don’t forget that China wasn’t all that sophisticated 10 or 15 years ago either,” remarks Welch, who shared several of her observations about Africa, having traveled to South Africa recently.

“I was struck with how service-oriented the economy and population was,” she says. “There’s a willingness to learn, a willingness to change. If you look at where they are today as opposed to where they were even just a few years ago, it’s amazing. They certainly have the drive to become more advanced in order to work with American and European companies.”

Dealing with Africa’s challenges

Admittedly, Africa poses a number of challenges for companies, and obviously some countries are better candidates for conducting business than other. A joint survey by the South African government and the World Bank uncovered some of the areas that are lacking.

A shortage of worker skills combined with high labor costs are some of the biggest obstacles to foreign investment in the country, the survey revealed. Rigid labor laws, exchange rate instability, and crime were also identified as key constraints by the 800 companies polled. “Wages for managers, professionals, and skilled workers are high by international standards, eroding South Africa’s competitiveness. Exchange rate volatility makes exporting difficult—yet for a high growth rate exports are critical,” noted the World Bank’s country director for South Africa.

Notwithstanding steep labor costs, the survey found that South African firms were more productive than those in other countries where World Bank investment surveys were carried out, including high-growth China, the report stated. “Productivity is…over three times higher than in China, although it is slightly lower than in the most productive cities in that country,” the report concluded.

Sidebar:

Africa’s Working Well for The Children’s Place

Clothing retailer The Children’s Place is frequently praised by industry experts who consider the company tops at getting the best garments made at the best prices. Part of the company’s success lies in its willingness to stray from the beaten path when it comes to sourcing destinations.

World Trade asked Mark L. Rose, senior vice president, chief supply chain officer, why Africa works so well for The Children’s Place.

WT: What are some of the main reasons The Children’s Place began sourcing in Africa as opposed to other countries or regions, such as China and elsewhere in Asia, Eastern Europe, or Central America and the Caribbean?

Rose: The Children’s Place is an aggressive sourcing organization that constantly evaluates opportunities around the globe for sourcing our products. The African market really opened up with the signing of the African Growth and Opportunities Act (AGOA) and the establishment of the Lesser Developed Countries (LDCs) within the trade group.

The large quantitative trade levels together with the duty preference elements of the agreement provided a competitive sourcing option to Asian countries...particularly prior to the removal of apparel quotas under the WTO. The main benefits of the region are in the competitive cost opportunities and the diversification of sourcing bases.

With the trade status of the LDC countries within the AGOA, we are able to procure globally competitive textiles and trim materials from Asia and assemble products in modern, large-scale, efficient production facilities in the LDC countries, which then qualify for duty-free entry into the U.S. market.

There are few places in the world allowing the combination of globally competitive textiles, efficient production facilities and a duty-free preference program. For many types of products we source, that is a very powerful competitive combination.

It’s no surprise to see that the vast majority of the trade growth between the U.S. and the AGOA countries has come from these LDC countries supported by materials from other areas of the world. Within our global sourcing strategy, we also value the geographic, political and financial diversification, which the AGOA markets offer.

WT: What are some of the primary challenges to doing business in Africa, such as corruption, infrastructure, communication, and transportation?

Rose: The biggest challenges of doing business in Africa surround logistics. These countries are far from the dominant material sources in Asia and far from the destination ports in the U.S. The local transportation infrastructures vary greatly by country, but generally are under-developed compared to the major Asian markets.

Companies have to be prepared to adjust their supply chains to accommodate the transportation time and recognize the additional transportation costs in evaluating the economics of doing business there. There are, of course, always additional challenges around the local customs laws, labor compliance, local financial institutions, et cetera, that must be solved prior to determining whom to do business with.

WT: Has the African Growth and Opportunity Act (AGOA) been helpful to advancing trade between the U.S. and Africa?

Rose: For sure. The AGOA agreement is the foundation of the export apparel manufacturing industry in the African countries. Without a trade preference package, the additional cycle time and transportation costs would greatly reduce the viability of the industry there.

WT: Any other comments that would be helpful to businesses who are considering Africa as a sourcing or manufacturing destination?

Rose: Like anywhere, know your demand, control your decision timing and know your suppliers. Success will come from a realistic assessment of what needs to be done and diligent execution of buyers together with suppliers and vendors.

by Lara L. Sowinski
January 6, 2006