Transcript Changes in the Competitiveness in the Service Sector of

Global trends in business service
movements: the role of East
Central Europe with special
emphasis on related
methodological problems
Magdolna Sass
Institute of Economics of the Hungarian
Academy of Sciences and ICEG EC
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Outline of the presentation
1. BPO, East Central Europe/Hungary: new
hosts
2. Methodological problems
3. Location advantages
4. Impact on the local economy
5. Relocation
6. Conclusion
Research on BPO in ECE is based on company interviews
Work in progress
Presentation based on the project „"Foreign Direct Investment in Central and Eastern
Europe: What Kind of Competitiveness for the Visegrad Four?" and OTKA no.
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68435 (Hungarian researchOutsourcing
fund).
and Offshoring
East Central Europe and Hungary
as a new location for BPO
• Movements of jobs/related FDI mainly between developed
countries and India (started out from English-speaking
countries, continental Europe only followed)
• in East Central Europe, especially the Czech Republic,
Hungary and Poland are the main hosts to BPO projects,
though their share is much lower than expected on the basis
of media reports, Romania and Bulgaria catching up after
2007 (EU-membership)
• Estimation on the basis of the number of projects: 1400-1500
in Europe, 150-180 in the three countries in CEE (India, other
Western European locations dominate), distributed approx.
equally (biggest project go to India or are in W.Europe)
• Combined market share of CEE’s globally: less than 1 per
cent (McKinsey (2006)) – still very limited
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Hungary as a host to BPO
Service centres receiving financial incentives in Hungary
Home country
Location in Hungary
Number of jobs (actual or planned)
ExxonMobil
USA
Budapest
1200
IBM ISSC
USA
Budapest
1300
Diageo
United Kingdom
Budapest
600
Getronics
Netherlands
Budapest
510
Jabil
USA
Szombathely
719
SAP
Germany
Budapest
600
Tata
India
Budapest
450
Convergys
USA
Budapest
282
EDS
USA
Budapest, Szeged
1150
InBev
Belgium
Budapest
380
Budapest Bank
USA
Békéscsaba
530
Morgan Stanley
United Kingdom
Budapest
450
Citigroup
USA
Budapest
302
Vodafone
United Kingdom
Budapest
746
British Telecom
United Kingdom
Budapest, Debrecen
700
T-Systems
Germany
Budapest, Debrecen
1750
Company
Source: ITDH
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Hungary as a host to BPO
• Approx. 50 centres
• Approx. 20-22 thousand people, 99 % white collar, between 80 and
90 % with university diploma and multiple language knowledge
• Going to the countryside now (university towns close to the border
are the new locations)
• Dynamic growth in output, exports (high share in EU27 comparison,
turnover centred on the EU, share of other services /other business
services grew in services exports, specialisation indices show a
relative specialisation on other business services – though
methodological problems)
• Various activities (often more activities in one project)
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Research questions and method
• Methodological problems of measurement
• Location advantages determining the choice of the new location
(inside CEE)
• Impact on the host economy
• Relocations in business services
Methods
• Methodological problems: literature review and own calculations
(illustrations)
• Location advantages and impact: questionnaire based company
interviews (5 in Hungary: 2 captive, 3 non-captive) and as a basis for
comparison: 3-3 interviews in the Czech Republic, Poland and
Slovakia;
• Case by case analysis for relocations for the period between July
2003 and September 2005, based on the database of Hunya, Sass
(2005)
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Methodological problems 1
1.
2.
3.
4.
5.
6.
7.
8.
9.
Services – definition: missing, unclear (Knight, 1999; Bryson, 2001), Nachum
(1999): larger differences in between service industries than between services and
manufacturing + lack of definition of business services (various definitions used)
FDI data – problems + usually small/diverse amounts invested (case studies: FDI
in the range of 1 million to 1 billion USD in Hungary)
Number of projects can be misleading as well– differing sizes; number of
jobs/employment can be the best proxy, but 1. data relatively old + usually less
jobs are created in relocated and/or newly opened plants in CEECs (Hunya, Sass,
2005)
Captive and non-captive; manufacturing and services (captiveÍ) may be mixed up
in one project
Categories: data are presented at a too high level of aggregation (e.g. in NACE);
classification problems (Thakor, Kumar, 2000)
Data on services foreign trade would be good for showing the extent of
BPO/relocation: many problems (transfer pricing, etc.) – see later
Inside BOP: services export lines are used for profit repatriation as well (evidence
from Hungary)
Recording problems present in both manufacturing and services
Relocation: only on a case by case basis, but even this can be misleading
(relocated and new activities ,mixed in one project)
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Methodological problems 2
• Specific problem: large differences between reported and mirror
statistics, which indicates that data are unreliable
• Reasons:
– different thresholds and different correction methods in EU-member
countries,
– simplified reporting,
– coverage different,
– exchange rates used ,
– double or triple reporting due to „intermediary” trade (important in the
EU),
– no reporting,
– VAT-fraud,
– Time lag in reporting
• Relatively big in goods trade, and is expected to be even larger for
services trade due to even more problematic tracing (no actual cross
border transport of goods is involved)
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Methodological problems 3
• Correction: problematic (both sides
(reported and mirror statistics) are „moving
targets”)
• Extent: in 2006: export overreported by
almost 10 %, import underreported by
almost 4 %
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Problems with services trade data
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Location advantages 1
• determine which countries are chosen as hosts to new or
relocated service centres (based on Dunning (1983) OLIparadigm)
• similar to those of efficiency seeking investments (costs
and availability of appropriately trained or trainable
skilled work in the required quantity) + specific:
infrastructure (mainly telecom)
• Additional: availability of certain services (financial etc.),
good regulatory and business environment, protection of
IP, office space, geographical proximity/same/similar
time zone in some cases (nearshoring), different time
zone in others, language knowledge (specific: other than
English European languages, „small” European
languages (including Turkish in Hungary))
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Location advantages 2 – inside the
region
Specific advantage: knowledge of
„smaller” languages, good
geographical position
Inside CEE:
Poland stands out with its size (bigger
projects), location (NE, Baltics)
Czech Republic: central location, best
flight connections, specialisation
on IT
Hungary: minor languages (minorities
in neighbouring countries), good
location (CEE, towards SEE)
Choosing among the three countries is
based on:
• Earlier presence of the company;
• Previous good (or bad) experience
with the country;
• Choice is influenced by the relative
dynamism, success of local affiliates;
• Special language requirements;
• Active lobbying of the local affiliate;
• Quality of life, culture, English
schooling etc. in the target city,
especially in cases when expatriates
are involved
• Very limited role of incentives (mainly
for bigger projects)
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Impact on the host economy 1
•
•
•
•
1.
2.
3.
4.
5.
Companies with foreign participation have the potential to impact
upon positively on the business environment, on local companies
in the host country, though this impact is not automatic
Analysed in the literature almost exclusively in manufacturing,
though it is relevant for services sector FDI as well
While the share of the three analysed countries in BPO is not
high, from the host economy point of view, these are big projects
and have a potentially big impact on the local economy
Various fields of impact on the local economy is analysed on the
basis of company interviews:
Job creation
Linkages and other local contacts
Impact on the business environment and infrastructure
Spillovers through trained employees
Market acces, FT, BOP
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Impact on the host economy 2
Job creation
- Significant impact: in Hungary approx.
20-22 thousand people working in
BPO (incl. captive)
- Medium to high skilled jobs (very little
unskilled) for young university
graduates, usually with (multiple)
language knowledge
- Activities carried out: table
(overtrained…), though VA/output
among the highest in services
- Shortage of properly trained
employees in all 3 countries – wages
growing very fast (high attrition rate)
- Spreading out to the countryside (from
the beginning in Poland, now in the
Czech Republic and Hungary)
Linkages and other local contacts
- (Very) limited backward linkages
(cleaning, security, cafeteria, etc.,
little substantial outsourcing)
- Forward linkages come as local
companies become more
„mature”, as competition is more
intense (in Hungary seems to be
more important compared to the
other two countries)
- Contribution of linkages to raising
the level of
competitiveness/productivity of
local companies: very limited
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Table 16 Activities carried out in the companies interviewed in Hungary
Customer contact
Back office
Transaction
processing
Document
management
Data entry
Data
processing
Call centres
Common
corporate
functions
Knowledge
services and
decision analysis
Research and
development
HR
Accounting
Administrative
Financial
services
IT call centres
and other IT
services
Quality
management
Program and
project
management
Financial
program
management
Integration
engineering
Supply chain
management
Analytical
accounting
services
Business
performance
analysis
Cost analysis
Software
development
Source: own compilation based on company interviews
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Impact on the host economy 3
Impact on the business
environment, infrastructure
- Competition for
appropriately trained
employees is intense:
companies are more active
locally, than „ordinary” FIEs
(participation in local
business associations, links
with universities)
- Intense use of local
infrastructure: in some
cases results in better
services
Spillovers through trained
employees
- This seems to be one of the
most important local
impacts
- Trained employees in
certain cases set up their
own enterprises or go to
work to domestic
companies
- Not only skills, but business
culture, business ethics are
transferred through (former)
workers
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Impact on the host economy 4
million euros
Graph 1 Balance of trade in computer services and Other business
services, 1995-2006, million euros
Market acces, BOP, FDI, FT, other
• Methodological and data
300
problems
200
• Export-intensive projects
(lower export/sales rate is
100
above 60 %)
• Relatively high share in FDI 0
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
stock (10 %) in Hungary
-100
• Increase in services trade,
especially in other services -200
and other business services
-300
• Balance of trade: turned
positive (graph)
-400
• Specialisation indices and
-500
RCA show change in business
services towards relative
-600
specialisation and RCA
-700
Computer services
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Other business services
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Relocation
•
•
•
•
•
•
•
•
•
Relocation: a process, in which either there is a transfer of production
capacities from another country, or there is a capacity extension in one
affiliate parallel with a capacity reduction in another, or there is a capacity
extension in one affiliate, while other affiliates‘ capacities do not change.
Even more methodological problems
Case by case analysis is needed
In Hunya, Sass (2005): company cases of relocations in the period between
July 2003- September 2005
9 of 61 cases affected business services (declared relocations)
Affected locations (from which the activity was transferred): mainly Western
Europe (Germany, the Netherlands, Austria, UK, Ireland, non-specified
Western Europe) and the US
Owners of companies: mainly US and UK
Activities: various, more than one per project, but not all activities of a firm
are relocations (company interviews)
Location in Hungary: mainly Budapest
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Declared relocations in business services, July 2002-September 2005
Activity
Foreign location
affected
Munkahelyteremtés vagy veszteség
Regional call centre
Other Western
European locations
+400-500
Regional logistics centre
Austria
+60-80
Electronic Data Systems
(USA)
Regional centre
Western Europe and
the US
+350-400
Avis (UK)
Financial administrative centre,
regional call centre, financialinformatics services
Germany, (Belgium)
+400
Diageo (UK)
Extension of capacities of service
centre, new activities (accounting)
UK
+60
Electronic Data Systems
(USA)
Capacity extension for new activities,
call centre
Western Europe,
USA
+400
Avis Europe Plc. (UK)
Extension of financial services centre
Western Europe
+135
Maxtor Group (USA)
African, European and Middle-Eastern
service centre relocation (leaving call
centre and financial planning there)
Ireland
+ Approx. 20
Marsh (USA)
European accounting and
UK
administrative
(except
for Seminar,
RSAactivities
Research
Network
UK, Ireland and
the Netherlands)
Outsourcing
and Offshoring
Company
GE Capital (USA)
Renault Nissan
(French-Japanese)
+12
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Conclusion
CEEs/Visegrad countries increasingly involved in BPO
Many methodological problems hinders the analysis (esp. the extent of
relocation)
From a competitiveness point of view BPO projects in CEE
- Contribute to the formation of a better domestic business environment, in
some cases availability of high quality services for domestic companies
(forward linkages)
- Local contacts- backward linkages (suppliers): minimal, though, esp.
forward linkages increasing over time
- Job creation for medium to high skilled, (though overtrained, partly due to
the language knowledge requirement) spillovers through employees (skills,
culture, ethics, own SMEs)
- Significant impact on the BOP, though due to methodological problems, it is
difficult to quantify separately for these projects (FDI, FT-balance, profit
repatriation etc.)
(Inside EU movements) Importance from the point of view of raising the
competitiveness of overall EU-27
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Thank you for your attention!
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