Magdolna Sass Institute of Economics of the Hungarian Academy of Sciences and ICEG EC

Warsaw School of Economics, 12-13th June 2008

1

Changes in the Competitiveness in the Service Sector of the New

Member States The Role of Business Process

Outsourcing

Magdolna SassInstitute of Economics of the Hungarian

Academy of Sciences and ICEG EC


2

Outline of the presentation

1. What is BPO? What are its main characteristics?

2. East Central Europe as a host to BPO

3. Location advantages of East Central Europe

4. Impact of BPO projects on the host economy in East Central Europe

5. ConclusionResearch on BPO in ECE is based on company interviews

Presentation based on the preliminary results of the project „"Foreign Direct Investment in Central and Eastern Europe: What Kind of Competitiveness for the Visegrad Four?" and OTKA no. 68435 (Hungarian research fund).


3

Business process outsourcing1Location of production Internalised Externalised

(outsourcing)

Home country Production kept in-house at home

Outsourcing (at home)

Foreign country (offshoring)

Intra-firm (captive) offshoring

Offshore outsourcing

• Induced and facilitated by technological development: „fragmentation” in services and transferability (IT) + intense competition + liberalisation of services trade

• Certain services activities affected (not all) (IT, business process services, etc.), very diverse activities with various skill contents

• Further growth in BPO is expected due to various factors


4

Business process outsourcing 2

• Started out in the US, Great Britain followed, continental Europe joined in later

• Receiving end: English speaking countries first (Ireland, India, Canada, Israel)

• From inside Europe: Ireland, Great Britain, Portugal, Spain + India; CEE countries are relatively new targets

• Overall: movements between developed countries (+India) dominates


5

East Central Europe as a new location for BPO

• Though methodological problems of measurement (FDI, foreign trade, prices -market shares, number of jobs etc.),

• 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

• On the basis of the number of bigger/substantial projects: 1400-1500 in Europe, 150-180 in these three countries (India, other Western European locations), distributed approx. equally

• The biggest projects go to India from Europe, its share can be close to 50 %

• Combined market share globally: less than 1 per cent (McKinsey (2006)), it may be slightly higher by now


6

Location advantages 1

• determine which countries are chosen as hosts to new or relocated service centres

• similar to those of efficiency oriented investments (costs and availability of appropriately trained or trainable skilled work) + specific: infrastructure (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) and different time zone in other cases


7

Location advantages 2

In the three analysed countries additional advantages: knowledge of „smaller” languages, good geographical position

Inside the group: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 (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 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

• Incentives (?)


8

Impact on the host economy 1• 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

• While the share of the three analysed countries is not high, from the host economy point of view, these are in many cases big projects and have a potentially big impact on the local/regional economy

• Various fields of impact on the local economy is analysed on the basis of company interviews:

1. Job creation2. Linkages and other local contacts3. Impact on the business environment and infrastructure4. Spillovers through trained employees5. BOP (services trade, FDI, profit repatriation)6. Potential footloseness – introducing instability - too short history, though

some signs


9

Impact on the host economy 2Job creation- Significant impact: in Hungary

approx. 20-22 thousand people working in BPO (incl. captive, but only offshored)

- Medium to high skilled jobs (very little unskilled) for young university graduates, usually with (multiple) language knowledge

- Shortage of properly trained employees in all 3 countries

- 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, little substantial outsourcing etc.)

- 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


10

Impact on the host economy 3

Impact on the business environment, infrastructure

- Competition for appropriately trained employees is intense: companies are more active locally (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


11

Impact on the host economy 4BOP: FDI, FT, other• Methodological and data

problems• Relatively high share in

FDI stock• Increase in services

trade (combined intra-extra-EU; though intra-EU dominant), especially in other services and other business services

• Only 2004-6 data, RCA in certain subsectors of other business services for all 3 countries

Share in total EU-27 services export (%)

0,00

0,20

0,40

0,60

0,80

1,00

1,20

1,40

1,60

1,80

2004 2005 2006

Czech Republic

Hungary

Poland

Share in EU-27 services trade balance (%)

0,00

0,50

1,00

1,50

2,00

2,50

3,00

3,50

2004 2005 2006

Czech Republic

Hungary

Poland


12

Conclusion

From a competitiveness point of view BPO projects in CEE- Better domestic business environment, in some cases

availability of high quality services for domestic companies (forward linkages)

- Local contacts- backward linkages (suppliers): minimal- Job creation for medium to high skilled, spillovers

through employees (skills, culture, ethics)- 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.)

- Importance from the point of view of raising the competitiveness of overall EU-27


13

Thank you for your attention!

Documents

Magdolna Sass Institute of Economics of the Hungarian Academy of Sciences and ICEG EC