How To Understand The Role Of Services In The Global Value Chain

Transcription

1 II INTER AMERICAN DIALOGUE OF HIGH LEVEL MSME AUTHORITIES Public Policies to Enhance the Competitiveness, Innovation and Internationalization of MSMEs New Orleans, September 10 11, 2012 EMERGENCE OF SERVICES, GLOBAL VALUE CHAINS (GVC) AND RESULTING IMPLICATIONS FOR LATIN AMERICA Sherry Stephenson With the financial support of the Canadian International Development Agency

2 EMERGENCE OF SERVICES, GLOBAL VALUE CHAINS (GVC) AND RESULTING IMPLICATIONS FOR LATIN AMERICA ORGANIZATION OF AMERICAN STATES* Department of Economic Development, Trade and Tourism Executive Secretariat for Integral Development (SEDI) Sherry Stephenson * This study was prepared by Sherry Stephenson, Senior Advisor on Trade in Services in the Executive Secretariat for Integral Development at the Organization of American States (OAS), for the II Inter American Dialogue of High Level MSME Authorities, to be held in New Orleans on September 10 11, The views expressed in the paper are personal and should not be attributed to any OAS Member State or the OAS General Secretariat. Research assistance provided by Jimena Sotelo is much appreciated. 3

3 EMERGENCE OF SERVICES GLOBAL VALUE CHAINS (GVC) AND RESULTING IMPLICATIONS FOR LATIN AMERICA Executive Summary 5 I. Introduction 6 II. Services in the Global Economy 7 III. Statistical Flaws in the Measurement of the Services Trade 8 A. Adding Embedded Services to Exports 8 B. Steps for Measuring the Services Trade According to Value Added 8 C. Assessment of the Importance of the Embodied and Embedded Services 9 IV. Growth of Global Value Chains and the Role of Services 9 V. Global Value Chains for Services 11 A. Structural Changes that Drive Growth in Offshore Services 12 B. The Offshore Services Value Chain 12 C. Primary Components of the Offshore Services Value Chain 13 VI. Global Offshore Services, According to Sector 14 VII. Participants in Service GVCs: Companies 15 A. Type of GVC Governance 16 B. Upgrading in the Service Value Chain 17 C. Trajectories within the GVC: Upgrading Strategies 17 VIII. Latin American Insertion into GVCs for Services 19 A. Centers of Supply and Demand for Offshore Services 19 B. Factors of Attraction for Offshore Services in Latin America 24 IX. Presence of International Offshore Service Providers in Latin America 26 X. Benefits to be Derived from Participation in Services GVC 31 XI. Small and Medium Enterprises (SMEs) Involved in Services GVCs 32 XII. Conclusions 34 XIII. Bibliography 35 4

4 EMERGENCE OF SERVICES GLOBAL VALUE CHAINS AND THEIR IMPLICATIONS FOR LATIN AMERICA Executive Summary The structure of global trade is changing rapidly in the XXI century. In recent times, trade discussions have focused a lot of attention on the issue of global value chains for goods. However, the concept is as relevant for service activities as it is for production activities and trade in goods. In the new business models, companies are not only subcontracting or outsourcing the assembly of goods, but an increasingly larger volume of service related fragmented tasks as well. This means that there is a great need to understand more clearly the role played by services in this new trade environment, so that the provisions of trade agreements, as well as national policies, take into account and facilitate the operation of global value chains (GVCs) for services as well as goods, and enhance the benefits that can be derived from participation in these chains. From the perspective of companies in the region, in most SMEs, GVCs offer the possibility of entering the global market on a less costly basis, more suited to their conditions and advantages. GVCs eliminate the need to have a competitive advantage in terms of costs for an entire product. Instead, they can focus on a single task within the value chain. The needs of the private sector should have a direct correlation to the formulation of public policies, hence the interaction between both sectors, and with academia, is essential for the development of the region s potential to provide offshore services. The potential for being able to harness offshore services within the context of GVCs still has great prospects for growth and can provide companies with opportunities to diversify and improve their economic activities. The positive externalities of these activities are many and include the transfer of knowledge, creation of more and better jobs, access to new markets, and improvements in the telecommunications infrastructure, as well as deeper insertion of countries in the region in the global economy. 5

5 I. Introduction The offshoring of economic activities in pieces or segments came to the services industry toward the middle and end of the 1990s, as occurred with the manufacturing sector during the previous twenty years. The factors that led to this situation were similar to those that impacted the manufacturing sector: the push from new technologies that allowed for the production of service components in different parts of the world and the capacity to integrate them, especially through information technology and telecommunications. Companies internationalized their operations while they started to look for new markets. The production processes for services, as well as goods, began to be disseminated to different parts of the world, to meet two objectives: cost reduction and the search for greater economic efficiency. In this globalized scenario of commercial and economic integration, it has become difficult to make a distinction between domestic production and final goods and services. Companies go beyond their borders to make economic decisions, which means that countries participate jointly in this production process. An increasingly larger percentage of global trade is attributable to intermediate goods and services, many of which cross national borders several times before becoming final finished products. New options are emerging for regional and global integration through these wider possibilities, both within and outside of regional groups. It is important to adopt and implement similar policy decisions so that these GVCs may operate in the most efficient manner possible. In this changed global trade structure, the practice of governments basing their decisions solely on the production of goods within their own territory is fast becoming a thing of the past. Many questions arise in this new context. What services can or should be outsourced, or offshored (when companies located in another country are the ones that provide these services)? In which part of the GVC should companies try to position themselves? Should they do so as affiliates, branches of other companies, or own account entities? Should they try to participate in the GVCs established by large multinational companies? Would it be more efficient to do so at the local, regional, or international level? What role should be played by the respective governments in a world in which trade involves products and services Made in the world and not Made in a country? How should trade agreements take into account this new reality? Companies that participate actively in GVC structures have more options available to them than in the past. What proportion of their production is done in their own country? What proportion is outsourced or subcontracted? What percentage of the components and inputs of the outsourcing should come from foreign companies? Should foreign affiliates be established to produce these intermediate products in third countries? Of course, all these decisions will be guided by cost and efficiency considerations. The four possibilities for company location decisions are presented in the following diagram, with the subcontracting of offshore services being discussed broadly throughout the study. Instead of producing exclusively at the domestic level with domestic affiliates (quadrant 1), the company may decide to be supplied by other 6

6 domestic suppliers (quadrant 2) through local outsourcing or subcontracting. On the other hand, the company may also decide to establish foreign affiliates and produce a part of the product overseas, making it possible to re import the input (quadrant 3). This option is usually referred to as captive offshoring, since although the supply source is not located in the domestic market, total control over the production or provision of services is still maintained. Finally, the company may opt to outsource part of the production to foreign suppliers in third markets (quadrant 4), which forms part of the phenomenon of international offshoring. Figure A: Determinants for Location Decisions Source: Sako, Mari (2005). Outsourcing and Offshoring: Key Trends and Issues. Document presented in the Emerging Market Forum. II. Services in the Global Economy The cross border trade in services (modes 1 and 2) has represented on average between 21% and 23% of global exports for several years (World Trade Organization, WTO). Although this percentage has remained relatively stable, research indicates that this figure has been substantially underestimated and that if the transactions from mode 3 were added, it would practically double the size of services in global trade. The value of exports in commercial services increased by 11% in 2011, totaling $4.2 billion. 1 III. Statistical Flaws in the Measurement of the Services Trade 1 WTO (2012) 7

7 In light of the increasing growth of global value chains for services, the traditional way in which services are currently measured is obviously inadequate, and as a result, international trade statistics underestimate the importance of the services trade. Trade statistics for goods are based on customs documents, for which reason they erroneously assign the entire gross value of an international transaction to the country of origin or to the last producer in the value chain. But the place where the last shipment was made is often just the last assembler in a long supply chain, who is not necessarily the one who created the total value in the final product. The value added necessary to produce the good could be disseminated across different economies, which form part of the value chain. A. Adding Embedded Services to Exports Some of these intermediate steps in the production of a final product correspond to components of goods, but many others correspond to services tasks. The services sector contributes much more to exports than is recognized because often services are integrated or combined with goods or services indirectly, as intermediate inputs in the production of goods. It is estimated that if the contribution of intermediate services inputs to goods is taken into account, the participation of services in global trade would double (Christen, Francois and Hoekman, 2011). In measuring it like this, services would represent almost 50% of global trade, even without taking into account the predominant component of transactions in international services, that is, mode 3. B. Steps for Measuring the Services Trade According to Value Added In light of the current deficiencies in measuring the international trade in final products, the WTO and OECD recently reached an agreement to develop and disseminate trade statistics on goods that take into account the value added, using the national input product tables of OECD members. It is expected that several countries will use these new statistics in This is a positive development and should help to highlight the growing importance of the trade in intermediate goods in current trade patterns, and thus help governments and policy analysts to make more sound decisions. 2 What is now obvious, although it cannot be estimated quantitatively, is that the services sector contributes much more to exports than is normally recognized, because services are often 2 Presentation by Sebastien Miroudot of the OECD at a seminar held in Washington DC, on March 20, The OECD has a website dedicated to studies on the topic of trade with value added on: The press note from the Director General of the WTO, Pascal Lamy, on the WTO OECD agreement to develop statistics on trade based on value added are found on: March 15,

8 embedded or combined with goods, so they are also components of an indirect trade as intermediate inputs in the production of goods. C. Assessment of the Importance of the Embodied and Embedded Services Services that are combined with goods, and therefore traded indirectly as intermediate inputs, are also classified in two categories: embodied services and embedded services. Embodied services are added during the production process of goods in the manufacturing, agriculture, and mining sectors, for example: energy, transportation, communications, insurance, accounting, design, software, and other types of specialized technical knowledge. On the other hand, embedded services are those that are embedded at the point of sale of the product; for example: financing, training, maintenance, repair, and other after sales services. For trade purposes, the total value of exports is calculated as manufactured exports, without an export value being attributed to the services inputs. For many consumption goods, the combination of goods and embedded services has become a method of differentiating goods in the market and a key method for reaching a generally higher value added. IV. Growth of Global Value Chains and the Role of Services During the last 25 years (approximately since the end of the 1980s), the emergence of GVCs has led to impressive changes in global trade patterns. More than the trade in goods produced in one place and exported to the final consumer in another place, the production of goods, and increasingly, the production of services, entails a combination of intermediate inputs and service activities from different parts of the world for the creation of a finished product. The global trade is being carried out through the trade in tasks. The increase in trade in intermediate inputs represents a higher trade index in relation to global GDP (from 16% in 1990, to 27% in 2008). 3 This currently represents more than half of the goods imported by OECD economies and almost three quarters of the imports of large developing economies, such as China and Brazil. 4 It is the growing trade in intermediate inputs that is creating GVCs for production and trade, while making the distinction between imports and exports increasingly unclear, and distorting the real description of a good or service as being produced in a single place. In general, it is evident that the elements that stimulated the development of GVCs are the following: lower transportation costs; improvements in information and communications technologies; telecommunications infrastructure; technological innovations; availability of human capital or education and training of the labor force; competitive labor costs; political, social, and cultural environments; stable legislation and the capacity to enforce contracts; proximity to supply sources and proximity to markets, which is important for many industries 3 Sydor (2011), chapter 1. 4 Shimelse and Dadush (2011). 9

9 given the need to receive information from clients, a speedy customizing of products, or shorter delivery times or periods for projects. Services perform a dual role in the globalized economy: they are a product in their own right, capable of forming their own GVCs, and at the same time, they are a link to the manufacturing GVCs. In this last sense, they are the link between the production segments of the manufacturing GVCs, since they act as the glue that keeps the chains together and allow them to operate. Services bring together the production and distribution spheres through the geographical and transactional connections that comprise and coordinate the globalized production process. Services activities in the main niches help to join both the producerdriven and the consumer driven GVCs. Activities that were previously conducted entirely within big companies, are now subcontracted and outsourced to independent companies, so the production process is broken down even more not only into goods tasks but also into service tasks. 5 The role played by services in facilitating trade in tasks, as the link between each point in the goods GVCs, is being increasingly recognized. Therefore, the embedded services component in production and trade (especially in the case of elaborately transformed goods) can represent a high percentage, more than 50%, of the total value of goods. As demonstrated by Stan Shih of the computer company, ACER, with its famous smiley face model (Figure B), services activities with the highest value added are increasingly dominating the value of traded products. Although the essential node of the production process is found at the bottom of the smiley face in the form of manufacturing and assembly, it may be considered that the activities that add value to this nucleus are located on both sides of the value chain, with each end having R&D/ innovation center activities, and those of the global logistics center. All value added, from one end of the spectrum (base of the smiley face) to the other comes from services activities. To improve their competitiveness, service companies are trying to move up the value chain, on both sides of the smiley face, to dedicate themselves to their core capacities and subcontract the rest, thereby increasing the fragmentation of the production process and international trade. 5 Rabach and Kim (1994). 10

10 Figure B: Smiley Face Model: Shift to a High Value Added, Globally Integrated, Services Economy Source: Business Week Online Extra, May 16, V. Global Value Chains for Services Services also constitute global value chains their own right, although much less research has been conducted on this phenomenon and it is less understood than GVCs for goods. In new business models, service companies are attempting to move upwards in the value chain and to outsource non core activities much in the same way as manufacturing companies do. Consequently, services are incorporated not only into the process of exporting goods but also into exportation of final services. At the moment, statistical limitations make it extremely difficult to quantify these service value chains, and thus, our knowledge of them is dependent on case studies and on research about service sectors or specific products. 11

11 A. Structural Changes that Drive Growth in Offshore Services Structural changes in the world economy have provided developing countries with the opportunity to become players on the world stage and to enter global value chains by capturing a variety of offshored service activities. Information technology has eliminated the need for on site operations. Companies seeking to cut costs are offshoring support activities, and are even beginning to do so with their core activities, with a view to accessing more qualified personnel. During the recent economic crisis, offshored activities were affected both by the substitution effect, as new activities were transferred to more cost effective locations, as well as by the impact of decreased demand from customers affected by the recession. However, despite the extent of the impact, offshore activities also recovered faster than expected, contributing to the economic recovery beginning in B. The Offshore Services Value Chain A number of activities are outsourced and/ or offshored by both multinational companies and medium sized companies. In the balance of payments, most of these activities fall under the rapidly growing category of other commercial services, which incorporates many types of services offered to companies in a broad sense, including those outlined in Figure C, which illustrates an Offshore Services GVC model. 6 In reality, after the recent financial crisis, developing countries were at the forefront of the world economic recovery. Their exports grew by 11%, compared to 7.5% in developed countries. Policy experts attribute this phenomenon to the insertion of primary emerging markets into global value chains. Cattaneo, Gereffi, and Staritz (2010), Chapter 1. 12

12 Figure C: Offshore Services Value Chain Source: Gary Gereffi (2010). The Offshore Services Global Value Chain, Center on Globalization, Governance & Competitiveness at Duke University. Pp.14. Available at: ORFO_The_Offshore_Services_Global_Value_Chain_March_1_2010.pdf. The offshore services industry includes service activities undertaken in one country either as a result of direct foreign investment or from acquisition or direct hiring, usually by multinational corporations headquartered in one country, developing products used or consumed in another. This value chain is subdivided into services that can be provided across all industries (horizontal services), as well as services that are industry specific (vertical services). Companies with operations in the horizontal sector should be process experts, whereas those in the vertical chains should possess technical expertise in the industry in question, and their services may have limited applicability in other industries. C. Primary Components of the Offshore Services Value Chain The three primary components of the offshore services value chain, as illustrated in Figure C are: Information Technology Outsourcing (ITO), Business Process Outsourcing (BPO), and Knowledge Process Outsourcing (KPO). 13

13 The BPO component includes activities to support generic business functions, such as network management, application integration, payroll, call centers, accounting, document management, supply chain logistics and management, and human resources. ITO activities range from activities low on the value chain to those at the very top of the chain. Thus, they include IT (information technology) infrastructure and software support up to IT consultancy services and software R&D. The KPO component encompasses business consultancy and analysis, market intelligence and legal services. Generally, most, but not necessarily all BPO related activities are situated in the low and mid value segments. On the other hand, ITO activities span segments from the lowest to the highest, the latter being where most of these activities take place. Finally, KPO activities can be found at the highest level of the service value chain. KPO services required higher qualifications, extensive coordination between parties, and greater flexibility in comparison to BPO services. By and large, the value of each activity correlates to the respective human capital component (education level), in the sense that individuals with fewer years of formal education provide lower value added services. This categorization offers an initial guide to economic upgrading strategies, as companies attempt to climb the offshore services value chain in much the same manner as is done in manufacturing value chains. The substantial growth in the offshore services industry creates challenges for data collection on the relevant services. According to OECD estimates, the size of the offshore services market should have amounted to approximately $252 billion in Similarly, the compound annual growth rate for these three segments between 2005 and 2010 was estimated to be 58% for the KPO segment, followed by ITO (26%), and finally BPO (25%). 7 Currently, the global supply of offshore services is concentrated in the hands of a small group of business from a few countries. Large global service providers focus on catering to large companies and governments, and have located these offshore service operations in developing countries where costs are lower. VI. Global Offshore Services, According to Sector The following graph illustrates to what extent various sectors of economic activity participate in global offshoring of services. It should be noted that the manufacturing sector only accounts for 20% of offshore services on a global scale, with service activities accounting for the remaining 80%. Thus, the majority of offshore service activities apply specifically to the service sector. Currently, the financial, telecommunications and energy services sectors have the greatest demand for offshore services in absolute terms. However, the most dynamic offshore service sectors in terms of growth are computing and electronics, medical care and the software and 7 OECD (2008) 14

14 internet industries. Moreover, the innovation industry is expanding, and is a key provider of higher value added services. It was estimated that this industry grew to $ 492 billion in Graph 1: Participation of Various Sectors in the Offshore Services Market Source: Taken from Gereffi and Fernández Stark; The Offshore Services Global Value Chain. Center of Globalization, Governance & Competitiveness, Duke University. 2010, pp. 28. The supply, on the other hand, is controlled by a small group of companies from a few countries. This concentration of supply hinders the entry of new companies into the market, forcing them to identify specific niche areas, since they cannot compete internationally with the economies of scale of industry leaders. However, large companies do not have the same flexibility that may allow small and medium enterprises (SMEs) to adapt to the customized demands of the client. It is this quality that may offer the latter the opportunity to gain that critical access to the market (See: Small and Medium Enterprises Involved in Services GVCs) VII. Participants in Service GVCs: Companies Whereas discussions often focus on the entry of countries or regions into the GVC, the major and indisputable participant in the value chain is the company. GVCs offer companies the opportunity to develop their potential and capabilities at the global level. One important matter that must be addressed (either at a company or public level) is whether the GVC will be accessed individually or by networking with other companies, be it through contractual (consortiums, multiple contracts) or organizational networks (cooperatives). Whereas 8 Gereffi and Fernández Stark (2010), pp

15 organizational networks offer an advantage by facilitating a stable production process with some level of rigidity, contractual networks are more flexible and adaptable but are often less stable 9. The manner in which companies insert themselves into the GVC is closely linked to the governance structure of the chain, and to the company s, region s or country s ability to upgrade through the value chain 10 ; that is, their ability to potentially undertake activities of greater value, and that are therefore more profitable and more complex, either technologically or skillwise within the GVC. A. Type of GVC Governance The type of governance structure refers to the overall organization of the industry, and especially to the level of coordination of activities between different players. 11 Different types of governance may exist, and interestingly enough, these may evolve over time. At one end of the spectrum, governance may involve a horizontal structure in which activities are coordinated between peers with similar technological development and in which suppliers and buyers benefit from each other s complementary qualities. At the other, it may entail a quasihierarchical structure, in which there are imbalances in power and decision making, due to the fact that one of the players has a monopoly on information, is more technologically developed or is in a preferential position in relation to the client, or to some aspect of supply or product design; and is therefore in a position of dominance 12. To understand the correlation between the ability to upgrade and the type of governance, Humprey and Schmitz 13 (2000) define the following relationship. In quasi hierarchical structures, lead companies are knowledge owners and only impart technical requirements to their suppliers. Consequently, there is no knowledge transfer of intangible competencies. Therefore, only processes or products can be upgraded. However, when collaborative networks are formed, cooperation between firms is more feasible and thus functional upgrading is more likely. Factors that tend to determine the governance structure of these chains are: the intrinsic features of the services; costs and risks involved in carrying out the activities internally, as 9 Cafaggi, Fabrizio and Swensson, Luana. European University Institute (Florence) and Law Faculty of the Getulio Vargas Foundation (San Paulo). Presentation on the situation in Brazil at the International Fragmentation of Production and Entry of Latin America and the Caribbean into Global Production Networks Conference (Fragmentación Internacional de la Producción e Inserción de América Latina y el Caribe) (IDB), Buenos Aires, June 7, López, Ramos and Torres (2009). 11 Fernández Stark, Bamber and Gereffi (2011). 12 Kosacoffi and López. (2008). 13 Humphrey and Schmitz (2000). 16

16 opposed to those involved in outsourcing them; the level of legal security, the contractual climate and operation of the financial systems, and innovation by the countries. B. Upgrading in the Service Value Chain Overall, activities with the greatest value added are R&D software development and IT consulting within the Information Technology Outsourcing category, as are all activities linked to Knowledge Process Outsourcing (business consulting and analysis, legal services); whereas BPO activities are generally considered to be lower value added services. Identifying higher value added service activities is critical in order to determine which segment of the GVC the company would like to enter. However, when the company then sets out to identify these services of greater value, another problem will arise. As mentioned previously, the current statistical problem will complicate the process of measuring the base value of the price of inputs made and products obtained throughout the production process, which would be easier to accomplish in the manufacturing industry. As an alternative, experts from Duke University propose using the qualification of human resources, that is skill level and work experience, as a measurement variable. Human resources are a fundamental determinant of value creation and in determining competitiveness in trade in services. Yet, using this variable creates another problem: how to measure it. There is an established correlation between education level and experience (qualification of human resources) and salary level. Therefore, the indicator used to identify services of greater value will be salary 14. C. Trajectories within the GVC: Upgrading Strategies Upgrading within the GVC is possible when companies improve processes, when they increase the value of their service, when they take on new roles or when they undertake multi sector upgrading by entering another value chain. Five general value chain entry and upgrading trajectories have been identified as outlined below although the precise means of upgrading will depend on the specific case. 1. Entry into the GVC The most common means of entering the offshore services process is by installing callcenters, thereby taking advantage of low labor costs, without the need for an abundance of highly qualified human resources. For the most part, companies hire young people with good communication skills and problem solving abilities, and train them, as needed. Entry via BPO segment activities is common. A regulatory framework that addresses information protection and intellectual property rights (IP) is critical in order to gain entry to the GVC with this service. 14 _ Fernández Stark, Bamber and Gereffi (2011). 17

17 2. Upgrading within the Business Process Outsourcing Segment Basic activities, such as call centers are followed by complex and higher value operations such as accounting and financial services, supply chain administration, payment administration, to name a few. Another way to achieve this type of upgrading is to expand call center related services or to target them towards specific niches, such as finances. At this level, a relatively skilled and experienced labor force is required. 3. Offering Complete Service Packages This option tends to arise when companies that are already offering ITO (information technology outsourcing) and KPO (knowledge process outsourcing) services want to increase their offering to include operations in the BPO (business process outsourcing) category. To do so, they usually acquire small BPO companies or create business units dedicated to these activities. In this way, they offer services with both low and high levels of sophistication and value. 4. Expansion of IT Companies into the Knowledge Services Sector Companies that already offer information technology services not only release programs but begin to offer business consulting services that aim to develop programs that solve problems specific to the client. This requires highly qualified human resources (generally at an MBA level) with analytical abilities and business experience. 5. Specialization in Vertical Industries This specialization may require a company to begin to undertake activities of lower or higher value than before. The objective is to build on expertise in services that are already offered in any of the three categories (BPO, ITO and KPO) for specific industries. 15 The trajectories described above clearly indicate that the potential to upgrade within the GVC depends on the education level of the labor force. This critical factor may be developed and brought about either through private or public initiative. 15 Fernández Stark, Bamber and Gereffi (2010). Pp

18 VIII. Latin American Insertion into GVCs for Services Latin American participation in global value chains for services is at the moment relatively low in comparison to that of other regions. In this section, regional participation will be analyzed and the situation of certain countries will be discussed, including factors which determine the insertion of companies into services GVCs. A. Centers of Supply and Demand for Offshore Services The map below shows the worldwide centers of supply and demand for offshore services in the year 2008, with a perspective on the exploitable potential of the region. Figure D: Global Centers of Supply and Demand for Offshore Services (2009) Source: Taken from: Gereffi, G. and K. Fernandez Stark (2010) The Offshore Services Value Chain: Developing Countries and the Crisis Washington, DC: World Bank. Pp. 8 Stripes indicate demand centers while supply centers appear in solid colors which vary to reflect the level of offshore services available. This determination is based on the number of service centers to be found in each country. The major demand centers are: USA and Canada (51.1%), Europe (30.6%) and Asia Pacific (16.2%). The level of demand for the rest of the world is 2.1%, 19

19 tending to conform to the geographical distribution of the multinationals which establish regional operating centers 16. With regard to supply centers, India and the Philippines (in green) are the leading countries with over 50 centers in each country. However, new locations (in red) are beginning to compete in this industry including: Morocco, Egypt and South Africa. Costa Rica and El Salvador are also part of this group. The emerging countries category includes between 5 and 15 service centers. The countries which are emerging as international supply centers (in yellow) have between 15 and 50 service centers. In this category are: China, some Eastern European countries, Singapore and Malaysia as well as several Latin American countries. The countries in the region which are emerging supply centers are: Mexico, Brazil, Argentina and Chile. The potential of the region for participation in GVCs is enhanced by proximity of geographic location and time zone to the USA. There is, in addition, cultural similarity and the availability of qualified human resources at a relatively low cost. Mexico and Brazil were the first countries in the region to enter, in the late nineties, in services GVCs for the IT sector. Between 2003 and 2009, approximately half the BPO and KPO projects undertaken in Latin America were based in these two countries. Some of the factors which could explain this phenomenon are: previous experience in GVC insertion through the production of manufactured goods and electronic products; the large size of their domestic markets; proximity to the US. When production plants began to relocate to China in the late nineties, these countries had to transform their existing plants into service centers. They were thus able to take advantage of the infrastructure and qualified human resources they already had and to integrate themselves into GVCs for services. This was the case with IBM, HP and EDS. Brazil and Mexico therefore began not only to establish a presence in the industry but their companies also began to compete on the international stage. The four main providers of offshore services in the region are Mexican or Brazilian (CPM Braxis, Softec, Neoris and Politec) 17. One determining factor in the emergence of Argentina as a supply center for offshore services is that it was the first country in the region to be recognized by the European Commission as providing adequate protection for personal data. This recognition spurred the establishment of call centers and contact centers in the country. In 2008, that country s IT exports were worth approximately $ 422 million. In Chile, the factors which facilitated the upgrading of the level of insertion for that country were economic stability, qualified human resources and relatively low costs. In 2008 the value of ITO service exports was $ 200 million, BPO was $170 million and KPO $470 million. Within the KPO 18 category, engineering and financial services were outstanding. 16 Gereffi and Fernández Stark (2010). 17 Gereffi, Castillo and Fernández Stark (2009), Pp Gereffi, Castillo and Fernández Stark (2009). Pp

20 Colombia and Peru are different, in that although they are involved in the provision of offshore services, their insertion into this industry is recent and limited. Colombia achieved this integration following a change in the international perception of the country triggered by the political and social stability which it has achieved. Services GVC insertion has taken place in the voice and data services sector and most of the 50,000 persons employed in the offshore services sector work in this area 19. In an effort to encourage human resource training and insertion in this sector, the Talk to the World program was launched, targeting students in the last three years of public secondary education, students in the final semesters of tertiary education; persons employed in priority investment sectors; and persons interested in finding work in priority investment and export sectors. The program is free of cost for secondary and tertiary level students 20. With regard to Peru, there is great potential in that country for localization of offshore services arising from the growth it has experienced the opening up of its economy and the availability of qualified human resources at a low cost. Given these conditions, Peru s potential for integration into the ITO and BPO sectors is significant 21. Continuing the analysis of supply centers, a study conducted by A.T. Kearney 22 examined three major variables to determine the ranking of the 50 most attractive countries in the world for locating offshore services. The variables considered were: Financial Attractiveness: this includes labor costs, cost of infrastructure usage, and taxes and regulatory expenses. This variable is measured on a scale of 0 to 4 points. People Skills and Availability: indicators measured here include the availability of a workforce, academic and linguistic qualifications, experience and quality of remote services sectors. The scale of measurement for this variable is 0 to 3. Business Climate: this includes the socio political stability of the country, infrastructure, the cultural aspect, security of intellectual property rights. This variable is measured on a scale of 0 to 3. To arrive at a total attractiveness weighting for each country the variables are weighted: 40% for financial attractiveness and 30% for each of the other two. The total attractiveness of each country is therefore measured on a scale of 0 to 10 points. 19 Gereffi, Castillo and Fernández Stark (2009). Pp Information available at < 21 Gereffi, Castillo and Fernández Stark (2009). Pp The A.T. Kearney Global Services Location Index TM,

21 Table 1: Countries Ranked by Total Attractiveness as a Location for Offshore Services Activity (2011) Source: Table taken from: Offshoring Opportunities Amid Economic Turbulence, The A.T. Kearney Global Services Location Index TM, Pp.2. Available at: < GSLI_2011.pdf> 22

22 It is clear therefore that several Latin American countries figure among the 50 most competitive for the provision of offshore services. India, China and Malaysia occupy the three top positions followed by Egypt and Indonesia. It should be mentioned that Egypt, despite being a relatively recent entrant into the industry, has achieved a significantly high ranking. Mexico, the first Latin American country to appear in the ranking, occupies sixth place (6 th ). According to the abovementioned study, salaries there fell by 18% in 2010 as a result of the international crisis, rendering the country more competitive. In addition, there are certified service centers, a fact which enhances the quality of the services product offered by the country s companies. Finally, improvements in business education have also created a growing window of opportunity for participation in an industry in which skilled human resources are a fundamental and differentiating factor. The next Latin American country in the ranking is Chile, now in tenth place (10th), having previously occupied eighth place. This slippage can be attributed to the fact that the post crisis contraction of the economy was not as severe as it was in other parts of the world; salaries remained relatively stable, making the country less competitive than other locations in terms of costs. Further, despite good management by the authorities, the earthquake of February 2010 left in its wake certain complications at the infrastructural level, a factor which is also taken into account for the purpose of the ranking. Brazil occupies twelfth (12th) place in the ranking; while Costa Rica is in nineteenth (19th) position, having moved up three places as a result of the modernization of its infrastructure, in particular its telecommunications (broad band) and electricity infrastructure. Panama holds thirty fourth (34th) position, very close to Argentina in thirtieth (30th), the latter having slipped five places as a result of inflation and salary increases given in response to the demands of labor leaders. In thirty third (33rd) position, Jamaica is the only Caribbean country figuring among the 50 most attractive locations for offshore services. Uruguay is in forty first (41st) place, while Colombia is forty third (43rd), principally because of the high rating received for availability of skilled human resources (HR). Colombian speakers do not have a distinctive accent; for this reason a great deal of call center activity in Spanish takes place there. There are however very few professionals who speak English fluently. This obstacle is being overcome through specific programs as described in this section. The appreciation of the local currency is, on the other hand, creating pressure to offer a higher level of service if the country is to remain an attractive supply center. 23

23 B. Factors of Attraction for Offshore Services in Latin America Several countries in Latin America and the Caribbean have been identified as having great potential for offshore services activity. According to the A.T. Kearney study (2011) cited above, there are nine Latin American countries among the most internationally competitive for offshoring services: Mexico, Chile, Brazil, Costa Rica, Argentina, Jamaica, Panama, Uruguay and Colombia. Other countries such as Guatemala and Peru are mentioned as locations to watch, having the potential to attract offshore services business 23. The table below assesses six Latin American countries by reference to various factors which influence the location of offshore services in their territories. The factors analyzed for each of the six Latin American countries are: cost, economic and political scenario, government initiatives in support of activities connected to the IT sector, cultural and linguistic compatibility. The factors are finally reconciled to yield a total attractiveness factor which, for most of the countries studied, is very positive. It should be pointed out that the information on which the table is based dates from the year 2007; the figures attached to each factor may therefore have changed since then. In any case, the table is a good initial representation of this type of assessment and includes determining factors for the analysis. 23 Gartner (2009). 24

24 Table 2: Factors of Attraction in Six Latin American Countries for Location of Offshoring (2007) Source: Gereffi, G; M. Castillo, and K. Fernández Stark (2009). The Offshore Services Industry: A New Opportunity for Latin America. Inter American Development Bank (IDB). Pp

25 IX. Presence of International Offshore Service Providers in Latin America The following table shows 20 of the most outstanding offshore service providers at the international level. 24. It can be noted that there is a significant concentration of the principal global offshore service providers in a few regions. Of these 20 principal multinational companies, 65%, or two thirds, have their headquarters in North America, 20% in India and 15% in Europe. Table 3: Principal Offshore Service Providers Source:: Gereffi, Gary y Karina Fernández Stark (2010). The Offshore Services Value Chain. Developing Countries and the Crisis. World Bank, April. Pp Gereffi and Fernández Stark (2010). 26

26 Almost all these providers are included in the BPO and ITO segments in which many activities do not require highly qualified personnel and where there is strong competition for costs, as these factors are the motivators of relocation of activities in these categories. Below, the presence of the principal international offshore service providers in the various countries of Latin America will be analyzed. Several tables presented are configured in accordance with the origin of the companies. Table 4 shows eight of the main offshore service providers originating from developed countries and which have a presence in the region. Details are given of the countries in which they have a presence, the year in which they established their centers of operation, their activities, the segments in which they have been included, the number of employees they have in the region and the total number of employees as well as the profits gained. (It is worthwhile mentioning that most of the information was gathered in 2008) 25. As the table indicates, while several companies operate within the three service categories (ITO, BPO and KPO) 26, others are only involved in the BPO segment. The companies which offer the three categories of services as well as those which operate only in the BPO segment have wide geographical coverage in Latin America and the Caribbean, with presence in 20 countries and employing approximately 78,800 persons at the regional level. It may be observed that there would be no direct correlation between a country and a particular segment. 25 Gereffi, Castillo and Fernández Stark (2009). 26 The service categories are referred to by their English acronyms: ITO (information technology outsourcing ) refers to subcontracting and outsourcing of information technologies; BPO (business process outsourcing) implies the subcontracting of business processes; KPO (knowledge process outsourcing)comprises the subcontracting of knowledge processes with this category covering the initial conception of R&D projects and activities. 27

27 Table 4: Companies in Developed Countries with Offshore Service Centers in Latin America Source: Gereffi, G; M. Castillo y K. Fernández Stark (2009), The Offshore Services Industry: A New Opportunity for Latin America. Inter American Development Bank (IDB). December. Page

28 The following table shows companies originating from India with a presence in Latin America and the Caribbean. Table 5: Companies in India Dedicated to Outsourcing Offshore Services with a Presence in Latin America 27. Source: Gereffi, G; Castillo, M; Fernandez Stark, K. (2009), The Offshore Services Industry: A New Opportunity for Latin America. Inter American Development Bank (IDB). December. Six companies located in India have a presence in seven counties in the region. All the companies presented operate in the ITO category, whether or not they do so exclusively, as a result of the expertise that India developed in this segment. Foreign direct investment (DFI) in 27 Gereffi, Castillo and Fernández Stark. (2009). Page

29 this case began about the year 2002, in general terms, with the exception of Getronics which was established in Brazil in Five of the six Indian companies have presence in Brazil, three in Mexico, two in Colombia and one in Chile. The following table shows several companies which offshore services providers are originating from Latin America. The data provided indicate the origin of each company, countries in which it has subsidiaries, segments of activity in which it is involved, the number of employees and income in millions of dollars up to Table 6: Companies Providing Offshore Services Originating in Latin America 28 Source: Gereffi, G; M. Castillo and K. Fernández Stark (2009), The Offshore Services Industry: A New Opportunity for Latin America. Inter American Development Bank (IDB). December. Pp. 33. These companies, also known as multi Latinos, have achieved a presence not only at the western hemispheric level but also in Europe and Asia; 80% of these companies have a presence outside of the continent. It is noteworthy that all the companies mentioned participate in more than one segment of activity. This also occurs in the case of the CPM Braxis, Neoris and Politec companies which carry out activities in all three segments. In total, they generate 24,600 jobs. 28 Gereffi, Castillo and Fernández Stark (2009). Page