Innovative ICT industrial architecture in east asia

Becoming an offshoring destination for software outsourcingand call centers, India acquired the latest technology for software development.Leveraging its relatively less accented English

New Frontiers in Regional Science: Asian Perspectives 17

Off shoring of Japanese Firms and

Challenges Faced by East Asian

Economies

Sakai Yasuhiro (Advisor Chief Japan), Shiga University

Yasuhide Okuyama, University of Kitakyushu

Zheng Wang, Chinese Academy of Sciences

Yuzuru Miyata, Toyohashi University of Technology

Hiroyuki Shibusawa, Toyohashi University of Technology

Saburo Saito, Fukuoka University

Makoto Okamura, Hiroshima University

Moriki Hosoe, Kumamoto Gakuen University

Budy Prasetyo Resosudarmo, Crawford School of Public Policy, ANUShin-Kun Peng, Academia Sinica

Geoffrey John Dennis Hewings, University of Illinois

Euijune Kim, Seoul National University

Srijit Mishra, Indira Gandhi Institute of Development Research

Amitrajeet A Batabyal, Rochester Institute of Technology

Yizhi Wang, Shanghai Academy of Social Sciences

Daniel Shefer, Technion - Israel Institute of Technology

Akira Kiminami, The University of Tokyo

Advisory Board

Peter Nijkamp (Chair, Ex Officio Member of Editorial Board), Tinbergen InstituteAmsterdam

Rachel S Franklin, Brown University

Mark D Partridge, Ohio State University

Jacques Poot, University of Waikato

Aura Reggiani, University of Bologna

This series is a constellation of works by scholars in the field of regional science and

in related disciplines specifically focusing on dynamism in Asia

Asia is the most dynamic part of the world Japan, Korea, Taiwan, and Singaporeexperienced rapid and miracle economic growth in the 1970s Malaysia, Indonesia,and Thailand followed in the 1980s China, India, and Vietnam are now risingcountries in Asia and are even leading the world economy Due to their rapideconomic development and growth, Asian countries continue to face a variety ofurgent issues including regional and institutional unbalanced growth, environ-mental problems, poverty amidst prosperity, an ageing society, the collapse of thebubble economy, and deflation, among others

Asian countries are diversified as they have their own cultural, historical, andgeographical as well as political conditions Due to this fact, scholars specializing

in regional science as an inter- and multi-discipline have taken leading roles inproviding mitigating policy proposals based on robust interdisciplinary analysis ofmultifaceted regional issues and subjects in Asia This series not only will presentunique research results from Asia that are unfamiliar in other parts of the worldbecause of language barriers, but also will publish advanced research results fromthose regions that have focused on regional and urban issues in Asia from differentperspectives

The series aims to expand the frontiers of regional science through diffusion ofintrinsically developed and advanced modern regional science methodologies inAsia and other areas of the world Readers will be inspired to realize that regionaland urban issues in the world are so vast that their established methodologies stillhave space for development and refinement, and to understand the importance ofthe interdisciplinary and multidisciplinary approach that is inherent in regionalscience for analyzing and resolving urgent regional and urban issues in Asia.Topics under consideration in this series include the theory of social cost andbenefit analysis and criteria of public investments, socio-economic vulnerabilityagainst disasters, food security and policy, agro-food systems in China, industrialclustering in Asia, comprehensive management of water environment and resources

in a river basin, the international trade bloc and food security, migration and labormarket in Asia, land policy and local property tax, Information and CommunicationTechnology planning, consumer “shop-around” movements, and regeneration ofdowntowns, among others

Researchers who are interested in publishing their books in this Series should obtain

a proposal form from Yoshiro Higano (Editor in Chief, higano@jsrsai.envr.tsukuba.ac.jp) and return the completed form to him

More information about this series at http://www.springer.com/series/13039

Ferdinand C Maquito • Norio Tokumaru

Editors

Innovative ICT Industrial

Architecture in East Asia

Offshoring of Japanese Firms and Challenges Faced by East Asian Economies

Hitoshi Hirakawa

Kokushikan University

Tokyo, Japan

Nobuhiro TakahashiOsaka City UniversityOsaka, JapanFerdinand C Maquito

Temple University

Tokyo, Japan

Norio TokumaruNagoya Institute of TechnologyNagoya, Japan

New Frontiers in Regional Science: Asian Perspectives

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Will Asia continue growing in the twenty-first century? How will Asia changeits economic structure? What kind of interdependence will Asia and developedcountries have?

Entering this century, there have been prolific discussions on Asia’s future.Much research by international institutions, such as the World Bank, the AsianDevelopment Bank, and the OECD, predicted that in the first half of this century,the Asian region will occupy the dominant position in the world economy On theother hand, there are indications that Asia’s growth will be fraught with difficulties

A World Bank study in 2007, “an East Asian Renaissance”, discussed necessity of

“looking for strategies to move to rich country status” Another World Bank study

in 2012, “China 2030” estimates that out of 101 middle-income economies in 1960,only 13 countries became high income economies by 2008 It calls this phenome-non the “middle income trap” Many researchers have become highly interested inwhether or not Asian countries could escape this trap The issue has also been citedfrom a population composition perspective Not a few Asian countries are nowgoing towards aging societies The ratio of working population to non-workingpopulation has been decreasing or will start decreasing in many Asian countries,including China This implies a shift from the so-called population bonus to thepopulation onus phase is occurring in Asia

In retrospect, Asia’s growth for more than half a century was achieved throughthe globalization of manufacturing Multinational companies, mainly Japanese andthe U.S., engaged in the offshoring of manufacturing processes amidst the intensifi-cation of international competition East Asian countries gained a foothold ongrowth and development by taking advantages of a large number of low-wagelabor force

Some manufacturing firms in East Asia have been changing their businessmodel In the 1980s, Taiwanese firms manufactured products for U.S firms Inthe 1990s, Taiwanese firms started establishing their factories in China at the largescale and exported the products to the U.S and Japanese firms from China In the2000s, along with the growth of the Chinese economy, Taiwanese firms increased

v

the R&D investment for their subsidiaries in China and provided more products forthe Chinese market On the other hand, Japanese manufacturing firms establishedmany factories in China These firms produce components in Japan, assemble them

in China, and export their products to Japan, America, and Europe In the 2010s,they are transferring their factories from China to Southeast Asia due to the rise inlabor costs

Entering the 1990s, service activities also came to be vigorously transferredacross national borders due to the further development of Information and Com-munications Technology (ICT) U.S and European ICT firms aggressively adoptedthis business model Becoming an offshoring destination for software outsourcingand call centers, India acquired the latest technology for software development.Leveraging its relatively less accented English capability, the Philippines became

an offshoring destination for call centers and other business process outsourcing.China also became the offshoring destination for software outsourcing, call centers,data entry, and other business process outsourcing for Western and Japanese firms.Firms in Vietnam and other East Asian countries are imitating the business strat-egies of Indian and Chinese firms

The changes in offshoring phenomenon are dynamic, and its impact on Asia isdeepening As Chap.4shows, some Japanese manufacturing firms are outsourcingthe design process to their Vietnamese subsidiaries by taking advantage of ICT.Japanese headquarters often have difficulty in hiring young and excellent CAD(Computer Aided Design) engineers, while their Vietnamese subsidiaries hireexcellent engineers locally ICT allows the communication between headquarterand subsidiaries, and the easy transfer of the design from Vietnam to Japan at a lowcost The able Vietnamese engineers are now indispensable for the Japanese parentfirms This fact shows that offshoring promotes the business activities of the firms

in advanced economies The foreign firms provide products and services with lowercost and better quality by using offshoring

The above story also shows that East Asia is now emerging as a region forsupplying a large number of skilled workers required for the business activities indeveloped economies Advanced countries face the shrinking of the middle class,which normally is the source of intellectual labor The emerging countries in EastAsia, whose development phases vary from country to country, supply largeamounts of human resources, not only the conventionally low-waged but also ofthe intellectual sort

Offshoring brings technology transfer Without technology transfer, firms indeveloping economies are often not able to supply for the products and serviceswith which the clients in advanced economies are satisfied Technology transferencourages the emergence of the knowledge-based economy in East Asia.Western and Japanese firms are also targeting the potentially huge servicemarket of offshoring destinations of East Asia As we mentioned, Asia emerged

as an economic zone that saw the rise of the middle class Firms in advancedcountries increase their investment in Asia, which accelerates further economicgrowth and technology transfer As a result, the development of service activities inAsia is one of the important factors to promote the growth of the world economy

This book deals with the development of ICT industry in East Asia and focuses

on the effects of offshoring of software development, business process, andmanufacturing, especially by Japanese ICT firms We analyze how the offshoringhas affected the local industry, how ICT firms in advanced countries have takenadvantage of offshoring, and how the local countries have tried to promote thedevelopment of the ICT industries We will show that offshoring has had asignificant impact on the development of the ICT industry and ICT-based serviceactivities in East Asia, and that the interdependence between developed countriesand emerging East Asia has been becoming stronger This research suggests that therelationship between Japan and East Asian emerging countries are moving towardsthe integration in intellectual as well as manual activities

This book consists of ten chapters Chapter 1 provides an overview of theoffshoring of global ICT-based services The variety of services has been offshored

to developing countries Knowledge process outsourcing activities, such as ness consulting, business analysis, market intelligence, and legal services are alsooffshored East Asia is the major destination of the offshoring Many East Asiancountries, such as China, the Philippines, and Vietnam, have been becomingoffshoring destinations, following India

busi-Chapter2shows that the offshoring of Japanese ICT vendor and user companieshas been gradually increasing and discusses the reasons behind such increase Theoffshoring of these companies goes mainly to East Asia This chapter also discussesthat East Asian countries are in the process of forming an economic zone ofknowledge-based economy Intellectual processes and white-collar jobs are beingtransferred to East Asia, giving rise to quality upgrading through the accumulation

of knowledge

Chapter3 analyzes the current state of Japanese ICT firms’ software ment and other business activities in East Asia Japanese ICT firms haveimplemented offshore software development in China at a large scale This chapterexamines its influence on the improvement of the technology in the Chinesesoftware industry At the same time, Japanese ICT firms plan to expand theiroffshore development and software business in Southeast Asia However, thesefirms are poor at management of foreign subsidiaries This chapter discusses thereasons for the poor international management

develop-Chapter4 investigates the offshoring of the Japanese manufacturing industrythrough the case studies of Japanese die and mold firms in Vietnam Digitalizationmakes possible the decoupling of design and production processes However,designers cannot design functional dies and molds unless they understand produc-tion processes Therefore, Japanese headquarters relocate to Vietnamese subsidi-aries not only simple design and production activities but also integration activitiesbetween design and production that are highly skill-intensive This chapter concep-tualizes this transfer as “comprehensive offshoring.”

Chapter 5 examines the development of the ICT/BPO (Business ProcessOutsourcing) industries in Dalian, China, which is noted for being the destination

of offshore software development and BPO of Japanese and Western ICT nies This chapter analyzes the critical factors for competitiveness of Dalian’s ICT

compa-industrial clusters based on Michael Porter’s Industrial Cluster Theory (also known

as the Diamond Framework) The chapter also discusses that due to the rise of laborcosts and depreciation of the Japanese yen, Dalian’s offshore industry is now at thestage of searching for a new way of development

Chapter6overviews the development of the ICT/BPO industries in Vietnam.Very early in this century, the Vietnamese government embarked on the provision

of ICT infrastructure and the promotion of the software industry, and has becomeone of the most attractive global offshoring destinations The country has especiallyattracted the attention of Japanese firms as the offshoring destination due to therapid rise of the labor cost in China Vietnam’s software industry is collaboratingwith Japan in strategically targeting Japan’s ICT-based services offshoring Inaddition, the small- and mid-sized software firms are proliferating at a tremendousrate, and the government has been supporting the expansion of the ICT/BPOindustries

Chapter 7 analyzes the BPO industry in the Philippines driven by U.S andEuropean offshoring The industry is a leading source of economic growth of thecountry This chapter presents the current state of the BPO industry and examinewhether the Philippine BPO industry can bring about shared growth in the country

In addition, Japanese ICT firms will play an important role to promote the opment of the industry in the future This chapter discusses how Japanese firmsovercome their weakness vis-a-vis Western firms, and shows the possibility thattheir business activities may alleviate the middle income trap of the Philippines.Chapter8provides a macro perspective of the ICT sector in the Philippines Theanalysis focuses on two structural phenomena that have been associated with themiddle income trap: early deindustrialization and product trap This chapter usesthe Kaldorian Laws to study the ICT software sector, and uses product spaceproximity and input-output tables to study the ICT hardware sector The analysisindicates the possibility of the premature deindustrialization, and the possibility ofthe product trap for the economy in general, and for ICT-related manufacturingindustry, in particular

devel-Chapters9and10analyze from both macro and micro perspectives TaiwaneseICT hardware industry Chapter9tracks the growth of this industry from a macroperspective The industry established the cross-strait division of labor with main-land China Consequently, Taiwanese ICT manufacturers have been increasingR&D in China in order to quickly respond to clients’ demands They also need tocontinue developing high value added products This chapter shows that TaiwaneseICT hardware industry has transformed its business models to adjust to the change

of economy and the technological improvement

Chapter10focuses on the Original Design Manufacturing (ODM) business ofthe Taiwan’s ICT hardware industry Taiwanese firms received technology transferfrom U.S firms on ODM contracts, which enabled them to become the world’sleading personal computers manufacturers Along with the falling of global demandfor personal computers, they shifted their business to internet servers, and then

started creating their private brands of servers This means that Taiwanese firmshave been becoming competitors of U.S ICT hardware firms This chapter reviewshow Taiwanese original equipment manufacturing (OEM) firms have changed theirbusiness models.

What effects has the global ICT-based services offshoring had on Japan and Asia?This book attempts to study the prospects that have been revealed from theperspectives of Japan and the emerging economies Through this research, wefocused on the difficulty but inevitability of the knowledge and technology transferthrough offshoring.

This book was naturally made possible through the cooperation of many people.Special thanks are due to the following individuals and companies who gave usvaluable information and comments about ICT-based services offshoring at thetime of seminars at Nagoya Institute of Technology, Osaka City University, NagoyaUniversity, the University of Asia and the Pacific (Manila, the Philippines), andForeign Trade University (Hanoi, Vietnam) and accepted the company visits asinterviewees for our research: Bernardo M Villegas and Peter U Lee (Professors atthe University of Asia and the Pacific); Peng Huy (Lecturer at Royal Phnom PenhUniversity, Cambodia); Chiaki Kitagawa (President of Gifu Kogyo Co Ltd., Gifu,Japan); Pham Dinh Luat (Director of Gifu Kogyo Vietnam, Ltd., Ho Chi Minh);Masayasu Mori (Management Director of Japan Technical Steelworks Co Ltd.,Phnom Penh); Yukio Watanabe (President of Nagoya Precision Mold Co Ltd.,Nagoya); Motomi Hattori (President of Hattori Industry Co., Nagoya); Koji Masuda(President of Tsukiden Global Solutions, Inc., Manila); Okuda Masayuki (SeniorResearcher of Juroku Research Institute Company Limited, Gifu); Akito Fujii,Akinobu Adachi, and Kazuma Kurushima (Assistants of Nagoya Institute of Tech-nology, Nagoya); and Yoshizumi Endo (Adjunct Professor at Soka University,Tokyo)

We would like to thank the editorial board and Japan section of the RegionalScience Association International for compiling this volume as one in the NewFrontiers in Regional Science: Asian Perspectives series Special thanks are due toYasuhiro Higano, Professor at the University of Tsukuba and Editor in Chief of theEditorial Board of the Association, and Makoto Tawada, Professor Emeritus atNagoya University and Managing Editor of this series Professor Tawada

xi

warmheartedly supported our aspiration to publish so that this volume could berealized.

Chapters 1, 2, 4, 6, 7, 8 and 9 are supported by the Japan Society for thePromotion of Science (JSPS) Grant-in-Aid for Scientific Research(A) (No 23243049) from 2011 to 2015 “Symbiotic Regional Institution Buildingtowards Knowledge-based Economy in Asia.” The financial assistance of JSPS isgratefully acknowledged

We hope that this volume can contribute in understanding the dramaticallychanging East Asian region

1 Global ICT-Based Services Offshoring and Asia 1Hitoshi Hirakawa

2 East Asia’s Economic Development and Japanese Firms’ ICT-BasedServices Offshoring 33Hitoshi Hirakawa

3 Japanese ICT Firms’ Offshore Development and Software Business

in East Asia 61Nobuhiro Takahashi

4 Offshoring of Engineering Labor in Japanese Manufacturing SMEs:Evolution of the “Comprehensive Offshoring” Model 79Norio Tokumaru

5 The Development of the Chinese ICT Industry and Japanese Firms’Offshoring: With a Focus on Dalian’s Case 99Minghua Jin

6 The Development of ICT-Based Service Industries in Vietnam andJapanese Firms’ Offshoring 115Hitoshi Hirakawa and Thi Bich Ha Nguyen

7 Development of Business Process Outsourcing in the Philippines 141Ferdinand C Maquito and Sergio M Andal Jr

8 The Philippine ICT Industry and the Middle Income Trap 167Ferdinand C Maquito

xiii

9 The Development of the Taiwanese ICT Hardware Industry: WithFocus on “Cross Strait” Division of Labor 193Ching-Jui Liu

10 The Development of Taiwanese ICT ODM Companies 215Yumiko Nakahara

Andal Sergio, Jr.; obtained his M.S in industrial economics in 1986 from theCenter for Research and Communication in the Philippines He is currently aLecturer at the Graduate School of Business at Far Eastern University–Makatiand Jose Rizal University His research interests are in the field of developmenteconomics, urban development, and political economics.

Hitoshi Hirakawa (b 1948); received his Ph.D in economics from Kyoto sity He is a Professor at Kokushikan University and a Professor Emeritus in AsianEconomies at Nagoya University He is also a Visiting Professor at Nankai Uni-versity, Tianjin, China He is the author and editor of several books on Asianeconomies and economic history, including (with H Shimizu)Japan and Singa-pore in the World Economy: Japan’s Economic Advance into Singapore,1870–1965 (London and New York: Routledge, 1998); (with Y-H Kim asco-editor) Co-design for a New East Asia After the Crisis (Tokyo, Berlin andHeidelberg: Springer Verlag, 2004); and (with N Tokumaru et al as a co-editor)Servitization, IT-ization and Innovation Models: Two-Stage Industrial ClusterTheory (Oxon: Routledge, 2013)

Univer-Minghua Jin (b 1974); received her Ph.D in economics from Yokohama NationalUniversity She is a Lecturer at College of Foreign Languages, Lingnan NormalUniversity, Guangdong, China, and the author of “Skill formation and promotion inJapanese companies in China: A case study of Da Lian and Dong Guan” (TheYokohama Journal of International Social Sciences, 17(6), 2013; in Japanese).Ching-Jui Liu (b 1966); received his Ph.D in economics from Kobe University

He is an Associate Professor at Fu Jen Catholic University, Taiwan, and a ProjectResearcher at Chung-Hua Institution for Economic Research, Taiwan He is theauthor ofThe Economic Development of Japan: Concurrently Discuss the ForeignEconomic Relations (Taipei: Zhliang 2007; in Japanese)

xv

Ferdinand C Maquito; obtained his Ph.D in economics from the University ofTokyo in 1996 Prior to this, he obtained his M.S in industrial economics in 1986from the Center for Research and Communication, Manila He is currently anAdjunct Professor at the Temple University, Japan Campus, and is the PhilippineChief Representative of the Sekiguchi Global Research Association, under theAtsumi International Foundation His main research field is development econom-ics, which heavily refers to the shared growth development experience ofJapan Some of his works are: “A comparative economic analysis of Japanese-style labor contracts from a shared growth perspective” (Philippine Journal ofLabor and Industrial Relations, 31(1&2), 2011, 2nd author: H Hirakawa); and

“Rediscovering Japan’s leadership in shared growth management” (Rikkyo ness Review, (3), July 2010)

Busi-Yumiko Nakahara; is a Professor at Kyushu Sangyo University She had beeninvolved in joint projects with companies worldwide, including those from Asiannewly industrializing economies and at the Computer Division of Sharp Corpora-tion in the 1990s and got her Ph.D in economics at Kyushu University Her mainconcerns are the development of Taiwanese IT companies, the global R&D activ-ities of Taiwanese companies, and the skilled migration around Taiwan Her recentwork is “Highly skilled migration in Taiwan: current status and possible problems”(Asian Profile, 43(6), 2015)

Thi Bich Ha Nguyen; obtained her Ph.D in linguistics from Hanoi NationalUniversity She is the Director of the Linguistic Department, Japanese Faculty,and an Associate Professor at Foreign Trade University, Hanoi, Vietnam She hasbeen a Visiting Professor at Nagoya University, Japan (2010–2011) She is theauthor of several books and papers on Japanese linguistics and Asian economy,including: “Inter-enterprises networks and efforts to carry out Schumpeterianinnovations: the case of manufacturing enterprises in Hanoi”(Vietnam EconomicManagement Review, 6(1), 2011, with D.N Tien)

Nobuhiro Takahashi (b 1967); is a Professor at Osaka City University, Japan

He received his Ph.D in economics from Kyoto University He is the author ofseveral papers on offshore software development, including “Unintended technol-ogy transfer to Chinese software firms from Japan through offshore software devel-opment” (Information Technologies & International Development, 9(4), 2013, with

M Takahashi)

Norio Tokumaru (b 1971); obtained his Ph.D in economics from Kyoto sity He is an Associate Professor at Nagoya Institute of Technology, Japan, andinterested in globalization of innovation systems and its consequence for theadvanced economies He is the co-editor of the book titled Servitization,IT-ization, and Innovation Models: Two-Stage Industrial Cluster Theory(Routledge, 2013)

Univer-ASEAN Association of Southeast Asian Nations

BPO Business process outsourcing

BPAP Business Process Association of the Philippines

BPM Business process management

BRICs Brazil, Russia, India, and China

CAD Computer aided design

CAE Computer aided engineering

CAM: Computer aided manufacturing

CPE Customer premises equipment

DR Design review

DSC Digital still camera

DSL Digital subscriber line

EMS Electronic manufacturing service

IBPAP Information Technology and Business Process Association of the

Philippines

IC Integrated circuit

ICT Information and communication technology

III Institute for Information Industry (Taiwan)

IP Internet Protocol

IPA Information-Technology Promotion Agency, Japan

IT Information technology

ITIS Industrial & Technology Intelligence Service

ITU International Telecommunication Union

JETRO Japan External Trade Organization, Japan

LCD Liquid crystal display

METI Ministry of Economy, Trade and Industry, Japan

MIC Market Intelligence & Consulting Institute

MOEA Ministry of Economic Affairs, R.O.C

MOEAIC Investment Commission, Ministry of Economic Affairs, R.O.C

xvii

NASSCOM National Association of Software and Services Companies (India)NIEs Newly industrializing economies

NTD New Taiwan dollar

ODM Original design manufacturing (sometimes referred to as original

development manufacturing)

OEM Original equipment manufacturing

OJT On-the-job training

OLED Organic electroluminesent display

PC Personal computer

PND Portable navigation device

PoBMEs Potentially bigger market economies

R&D Research and development

SMEs Small and medium-sized (scale) enterprises

STB Set-top box

UNCTAD United Nations Conference on Trade and Development

USAID United States Agency of International Development

VCCI Vietnam Chamber of Commerce and Industry

VINASA Vietnam Software Association

WLAN Wireless local area networks

Global ICT-Based Services Offshoring

and Asia

Hitoshi Hirakawa

Abstract The development of an information and communication technologysince the 1990s has spawned new business model of outsourcing of softwaredevelopment, data entry, call center, administrative works, and many other servicesthat centered on the US and European multinational firms Such ICT-based serviceswere not limited to advanced countries and spread out to offshore destinations inemerging countries Initial subcontracting destinations included Ireland andCanada, as well as India in Asia However, entering this century, various EastAsian countries, such as China, the Philippines, and Vietnam, have attempted toenter this offshoring market, following India Amidst the global expansion ofoffshoring destinations, India and East Asian nations have established a centralposition in offshoring destinations East Asia is a production base for ICT hardware,but it has also emerged as a notable offshore destination for the ICT-based servicesindustry In this chapter, we define outsourcing and offshoring, organize the variousbusinesses of ICT-based services, and attempt to grasp the overall picture Next, weconfirm condition of transfer of ICT-based service businesses from India to thePhilippines, China, and Vietnam Finally, we give an overview of features of ICToffshore industry of these countries in East Asia

Keywords Business process outsourcing • ICT • ICT-based services • Offshoring •R&D

1.1 Introduction

In this chapter, we shall provide an overview of the offshoring of global ICT-basedservices while at the same time focus on conditions that develop industries, whichquickly rode on this wave in East Asian countries, such as the Philippines, China,and Vietnam, following the development of these industries in India

H Hirakawa ( * )

School of Asia 21, Kokushikan University, Tokyo, Japan

e-mail: hhirakaw@kokushikan.ac.jp

© Springer Japan 2017

H Hirakawa et al (eds.), Innovative ICT Industrial Architecture in East Asia,

New Frontiers in Regional Science: Asian Perspectives 17,

DOI 10.1007/978-4-431-55630-5_1

1

The widespread use of computers and Internet in corporate activities began inthe 1990s Through the development of transport and communication industries inthe 1960s to the 1970s, the offshoring of manufacturing processes, mainly bymultinational firms of the USA and Japan, was already starting in East Asia,connecting across space East Asian production with the US market However, thefusion of IT and communication technology since the 1990s gave birth to newbusiness model of the outsourcing of business processes centering on the US andEuropean multinational corporations This surpassed the framework of advancednations and widened the subcontracting destination across the globe The initialsubcontracting destination included Ireland and Canada, as well as India Since the1990s, India at the blink of an eye grew to be the number one nation in the world interms of accepting IT-business process outsourcing (BPO) offshoring However, inthe past 10 years or since entering this century, some East Asian countries are trying

to catch up with India

Asia developed as a receiving place for ICT-based services and a global duction base for ICT-manufactured goods Within production framework in suchplaces as Taiwan and South Korea, the opportunity for developing localmanufacturing firms was seized upon India has been elevating its position in theworld through the IT-BPO business model In pursuit of India, East Asian countriessuch as China, the Philippines, and Vietnam are competing in rising up the softwareindustry in order to become offshoring destinations

pro-While the interest in ICT-based services offshoring has been strong in practicalresearch fields such as business studies, it has been generally weak in economics.The interest in offshoring has been moving toward its effects on the economies andlabor of advanced countries (Panel of the NAPA2006,2007) There has not beenmuch effort of getting an overview and understanding the features of the transfer ofglobal ICT-based services to Asia The task of this chapter is precisely in this area

In this chapter, we will consider East Asia as the region combining NortheastAsia, formed by Japan, China, South Korea, and Taiwan, and Southeast Asiaformed by ASEAN nations The World Bank published “The East Asian Miracle”report in 1993, where East Asia is effectively formed from the two abovementionedareas (World Bank 1993) This area’s economic growth now encompasses thewhole of Southeast Asia, including Vietnam and Myanmar, making it possible toexpress economic growth with one regional concept Taken as an economic zone, ithas already grown to surpass the USA and EU This is the reason why in this chapter

we consider East Asia as one regional concept

1.2 Development of ICT-Based Services Offshoring

in the Global Economy

1.2.1 Definition of Offshoring and Typology of ICT-Based

Services Offshoring

Concomitant with the development of ICT and economic globalization, offshoring

of business processes became more active since the end of the 1990s This could betaken as the newest form of globalization of economies, but such an understandingreveals a great confusion with regard to concepts related to outsourcing Therelationship between the two concepts of offshoring and outsourcing is ordered inTable1.1using Lydia et al (2013, p 194) and UNCTAD (2004) Offshoring refers

to the case where the subcontracted firm is outside the country Outsourcing is used

in the case where the subcontracted firm is a third party without a capital-basedrelationship Accordingly, the relationship between these two concepts could beshown in a matrix When a job is subcontracted within a firm inside the country, itbecomes in-house production or insourcing When a job is subcontracted to anotherfirm, it becomes outsourcing In the case when a job is subcontracted abroad to anaffiliated firm, it becomes captive (intra-firm) offshoring and to an unaffiliated thirdparty (e.g., local company), it becomes offshore outsourcing

When the term offshoring is used, it either refers to the case of offshoreoutsourcing by an advanced country firm to an unaffiliated firm abroad (G€org

et al.2008, p 2) or the case of captive offshoring to a subsidiary abroad (Kobayashi

2005) Owing to the strong tendency of the USA and Europe to subcontractbusinesses to unaffiliated firms, offshoring is easily thought as outsourcing Onthe other hand, Japanese firms have been generally halfhearted about outsourcing;hence, there is a strong tendency for the subcontracting of jobs abroad to beundertaken by overseas subsidiaries (Autososhingu Kyogikai2000, pp 25, 31) InIndia and the Philippines, where the BPO industry has developed, outsourcing andoffshoring are actually normal Hence, the two terms are easily directly tied to each

Table 1.1 A simple model of offshoring and outsourcing (goods, services, and R&D)

Location

Foreign

(international)

Captive offshoring (by own foreign affiliates)

Offshore outsourcing (to third party provider abroad)

Domestic

Domestic insourcing, in-house production

Domestic outsourcing (to third party provider at home)

Ownership

Source: The table is a revision based on Pedersen et al ( 2013 , pp 12, 194), UNCTAD ( 2004 ,

p 148) and the Panel ( 2006 , p 38)

other Such a conceptual confusion arises from differences in the corporate featuresand position of each country However, amidst the increasing international activity

of firms in offshoring and outsourcing, an accurate definition is needed in order tograsp the situation This is why this chapter begins with definitions

This classification can be applied to all types of activities including ing, services, and R&D In a vague form, we of course show a joint type for the sake

manufactur-of confirmation

What factor differentiates in-house production from outsourcing and domesticfrom foreign? In general, we could cite cost as the biggest factor, followed byhuman resource procurement In the selection of an offshoring destination, asidefrom technology, the importance of communication-related factors, such as lan-guage and culture, has been cited

The phenomena of offshoring and outsourcing are not new Offshoring wasinitially used by the financial sector It was later used for the internationalization

of production and lately for the overseas transfer of business services (Winkler

2009, p 25) In the 1960s, US dollars crossed the border and were brought mainly toLondon This gave birth to the euro dollar market, which was called the offshorefinancial market Since the second half of the 1960s, offshoring also appeared in themanufacturing sector The multinational firms of advanced nations activated inter-nationalization of production processes (UNCTAD2005, p 6) This is, in short, theoffshoring of production At that time, various terms emerged, such as internationalsubcontracting, international sourcing, and new international division of labor.However, the term offshoring has solely come to refer recently to the overseastransfer of ICT-based services (Panel2006, p 38)

Bearing in mind the above historical circumstances and referring to the research

of the US National Academy of Public Administration considered to be useful atthis point, we mainly define offshoring as the overseas transfer of ICT-basedservices by corporations to subsidiaries and non-subsidiaries In a broad sense,however, we define it to be “shifting service and manufacturing activities abroad”(Panel2006, p xiv) We shall indicate when this term is being used in the broadsense In this chapter, we use the notation ICT-based services or ICT-relatedservices to generally refer to services related to ICT

Now, which kind of jobs would be the object of offshoring? Service-related jobs

to be offshored are difficult to strictly define due to the rapid evolution of related jobs, as well as complexity arising from breadth and diversity First, let uscategorize based on our confirmation of the situation Table1.2is the classificationtable of ICT-based services created by the World Bank Group Global Informationand Communication Technologies Department’s ICT policy experts R Sudan et al.based on the classification of ICT-based services by the Business ProcessingAssociation of the Philippines (BPAP)

service-According to this, ICT-based services are broken down into two broad categories

of IT services and ICT-enabled services The former is further broken down intoapplications services and engineering services IT application services includeapplication development, system integration, and consultant jobs, while engineer-ing services include manufacturing engineering and software product development,

using CAD/CAM and others On the other hand, ICT-enabled services are mentally considered as business process services and have three groupings There isthe horizontal process group which includes customer relations support (e.g., callcenters), human development, and supply chain business Vertical processesinclude various service businesses that utilize ICT such as banking, insurance,travel, manufacturing, and telecommunications The last group is knowledge pro-cess outsourcing (KPO) (Sudan et al.2010, p 3) The difference between classifi-cations of the Philippines and the World Bank is that BPAP uses a simple parallelclassification of three groups: IT application services, engineering services, andbusiness process services (BPAP2007) On the other hand, Sudan et al classify itinto two groups: IT services that are carried out through IT and ICT-enabledservices for which the use of communications technology is unavoidable.

funda-IT services are further broken down into two groups: application services andengineering services

The classification of an UNCTAD report (UNCTAD2014) is given in Table1.3.Classifications of the World Bank and UNCTAD both have the two categories of ITservices and ICT-enabled services However, details are different In terms of

Table 1.2 World Bank ’s typology of ICT-based services

Application services Engineering services Business process services

Application development and

Simulation Design engineering Downstream product engineering Computer aided design, manufacture, and engineering Embedded software Localization Plant and process engineering

Software product development Product development System testing Porting variants Localization Maintenance and support Gaming

Horizontal process Customer interaction and support (including call centers) Human resource management Finance and administration Supply chain (procurement logis- tic management)

Vertical process Banking Insurance Travel Manufacturing Telecommunications Pharmaceuticals Other

Knowledge process outsourcing Business and financial research Animation

Data analytics Legal process and patent research Other high end processes

Source: cited from Sudan et al ( 2010 , p 3)

Notes: In this table, IT-enabled services is replaced with ICT-enabled services, based on the recent UNCTAD ’s report It should be noted there are often cases, in which IT services are called application services In this case, engineering services are excluded from IT services, giving rise

to confusion in the definition of IT services

format, classification of UNCTAD has no subclassifications for IT services and istreated as one lump On the other hand, ICT-enabled services are subclassified intofront-office and back-office processes, instead of horizontal and vertical processes.The main difference is in the location of the engineering category, which is located

in KPO inside ICT-enabled services in the UNCTAD classification, but in ITservices in the World Bank classification This could be considered as reflecting adifference in awareness about engineering services The classification of engineer-ing is an issue for consideration, but more importantly is the upgrading of processes

in recent years, and the focus on engineering and R&D as important areas ofoutsourcing and offshoring.1As was mentioned above, BPAP breaks down ICTservices into IT services, engineering services, and ICT-enabled services AlthoughIndia’s NASSCOM broadly distinguishes between two outsourced services(IT sourcing and business process sourcing), classification of exports of services

is broken down into the three categories of IT services, business process

Table 1.3 UNCTAD ’s typology of ICT-based services

Service

category IT services

ICT-enabled services Front-office services

Back-office services

Knowledge process outsourcing (KPO)

Business process outsourcing (BPO)

Data entry, human resources, finance and accounting, payroll, procure- ment and transcription

Financial analysis data mining, engi- neering, insurance claims processing, remote education and publishing, research and devel- opment, architec- tural design, medical diagnos- tics, journalism

Source: UNCTAD ( 2014 , p 4) The table is a revised version

Note: Knowledge process outsourcing activities, such as business consulting, business analysis, market intelligence, and legal services, are particularly human capital intensive as they are performed by highly educated professionals holding master ’s degrees or PhDs and thus belong

to the highest segment of the ICT-enabled value chain

1 NASSCOM has come to use business process management (BPM) as an evolved form of BPO In such a case, the terms BPM or BPM/KPO are used AVASANT issued a report that engineering service outsourcing is the next frontier in global sourcing (AVASANT 2011 ).

management (BPM), and engineering and R&D (ER&D).2The classification ofexports is close to the Philippine definition.

Ultimately, the classification of ICT-based services conceptually comprises thetwo categories of IT services and ICT-enabled services, but in actuality there arethree categories, namely, IT services, ER&D, and ICT-enabled services (BPM) Itwould be easier to understand if we assert that engineering service is one more ITservice category Table1.2by Sudan et al of the World Bank would be close tothese three categories We adopt these definitions of ICT-based servicesoffshoring

1.2.2 From Manufacturing Offshoring to ICT-Based

Services Offshoring

Offshoring since the 1970s started from transfer to developing countries of intensive tasks or part of the manufacturing process Fr€obel, Heinrichs, and Kreyenamed this as “new international division of labor.”3In short, it is the transferring todeveloping countries of production processes or tasks undertaken by unskilledlaborers through developments in transport and communication technologies.Since then, low-wage workers of developing countries have been assimilated intothe international production process through the offshoring of manufacturing tasks.The services offshoring that started from the 1990s has the same merits:(a) Access to low-cost labor (e.g., the salary of an experienced Indian accountantwould be a tenth of an American accountant)

labor-(b) A round-the-clock shift by developing country workers made possible by speedobtained through a time difference and more flexible labor laws (e.g., AmericanExpress and Dell provide round-the-clock customary care)

(c) Acquisition of high-level human resources

(d) Ease of adjustment

(e) Focus on core businesses through offshoring (UNCTAD2005, pp 20–21)

2 The explanation of export estimates for 2015 in the NASSCOM website is given for four ICT export categories: IT services, BPM, ER&D, and hardware This reflects the recently newfound interest of NASSCOM on the development of the hardware industry (NASSCOM website India IT-BPM Exports, accessed 24 Mar 2015).

3 They pointed out three conditions for a new international division of labor Firstly, a practically inexhaustible reservoir of disposable labor has come into existence in the developing countries over the last few centuries Secondly, the division and subdivision of the production process is now

so advanced that most of these fragmented operations can be carried out with minimal levels of skill easily learnt within a very short time Thirdly, the development of techniques of transport and communication has created the possibility, in many cases, of the complete or partial production of goods at any side in the world (Fr €obel, Heinrichs, and Kreye 1980, p 13).

The offshoring of service businesses has increasingly been more flexible compared

to manufacturing tasks Moreover, services offshoring in terms of quality andquantity opens up for the recipient countries the possibility and/or opportunity ofupgrading services activities

The offshoring of services is actually different in character from that formanufacturing UNCTAD, in its 2004 World Investment Report, puts together afeature on the ICT-based services offshoring and cited five features of servicebusiness offshoring:

While the fragmentation and globalization processes in services and manufacturing are similar, there are important differences First, although the services sector is much larger than the manufacturing sector, only some 10 % of its output enters international trade, compared with over 50 % for manufacturing Second, the pace of globalization of services affected by the tradability revolution is faster than in manufacturing Third, whereas the relocation of goods production has involved, overwhelmingly, firms in manufacturing only, service functions are offshored by companies in all sectors Fourth, the skill intensity is generally higher for offshored tradable services than for manufacturing located abroad, thus affecting white-collar jobs in particular And fifth, services that are offshored may be more footloose than relocated manufacturing activities because of lower capital-intensity and sunk costs, especially services that don ’t not require high skills (UNCTAD 2004 , pp xxvi– xxv)

Bals et al emphasize its novelty by saying that offshoring of services is not anew phenomenon, but is “one important discontinuity in the evolution of offshoringactivities” (Bals et al 2013, p 4) and is the information and communicationtechnology revolution that started in the 1990s:

This has enabled companies to locate digitized business processes almost anywhere in the world Companies in high-cost economies could begin to rapidly organized and locate activities and processes globally Increasingly, this meant that firms did not only offshore labor-intensive manufacturing jobs, but also higher value-added activities, such as innova- tion and product development (Bals et al 2013 , p 4)

UNCTAD also mentions the possibility of higher value added and diversification

as well as upgrading of businesses of the recipient country through offshoring Thedecisive factor for offshoring, which was already mentioned as an importantopportunity, is cost cutting, but access to skilled labor and improvement of quality

of service, among others, are also important:

As a result, a wide range of newly tradable services is now entering the exports of countries, developed and developing alike These can be simple, low-value added activities (such as data entry), or more sophisticated, high-value added activities (such as architectural designs, financial analysis, software programming, R&D) They span the full diversity of skills, and some cut across all sectors (UNCTAD 2004 , p xxvi)

The range of service products or functions affected by the fragmentation are huge As a result, wide range of services are already being exported, including by developing econo- mies, whether relatively simple low-value data (e.g numbers entered into a computer) or more sophisticated, high-value data (e.g architectural designs, results of sophisticated financial analyses, R&D, X-rays, films, software programs, advertising clips) (UNCTAD

2004 , p 149)

Another UNCTAD report explains as follows two technological advancementsthat cause upgrading of offshoring: the availability of low-cost (high-speed) datanetworks, primarily the Internet, and the widespread digitization of texts images,sounds, and videos:

An increasing number of corporate functions have become mobile, that is outsourceable offshore Besides, the sophistication of these “relocatable” has been increasing steadily: not only simple functions such as entering data and answering simple phone calls are outsourced to remote countries but also complex tasks such as financial analysis In a way, there is a real globalization of white-collar jobs (UNCTAD 2005 , p 6)

Bals et al refer to the information communication technology revolution, andUNCTAD emphasizes the “tradability revolution in services.” Both researchesfocus on the advancement of information and communication technology, whichenables the offshoring of activities or white-collar jobs beyond spatial and temporalconstraints and at the same time upgrading and creating higher value added fromsuch services P Verma indicated that the outsourcing and offshoring of engineer-ing services in Europe’s aircraft instrumentation industry, automotive industry, andelectronic industry, among others, have greatly prospered Engineering servicesinclude design, manufacturing, and field engineering In order to undertake theseservices, 2D and 3D, CAD/CAM/CAE, advanced simulation prototyping, testing,PLM, product design (engineering), process engineering, plant automation, andasset management services are used, producing higher level of services (Verma

2010)

Summing up the above, ICT-based service businesses encompass a wide anddiverse set of businesses: from development to design of software using IT andInternet, from data encoding to analysis, and from consultancy to its maintenanceservices It would cover about all of the industries and sectors, greatly influencingthe existing international economic relations and corporate activities In most cases,

it includes high-level businesses that are transferred outside the firm or overseas, as

an opportunity for cost cutting In actuality, the earlier offshoring of manufacturingjobs was mainly the overseas transfer of blue-collar labor of advanced countries.However, the recent ICT-based service businesses are office work or white-collarlabor and, compared to manufacturing job offshoring, span higher and widerintellectual levels The offshoring of services, of course, opens up a bigger set ofpossibilities for producing a high value added through subcontracting of emergingcountries

1.2.3 Upgrading of Globalization of ICT-Based Services

Offshoring

A research by the OECD Development Center called the offshoring of ing processes at the beginning of the 1980s the “international subcontracting” andconsidered it as a new form of investment by multinational corporations of

manufactur-advanced countries (Germidis ed.1980) However, as UNCTAD (2004) indicates,through the development of ICT entering the 1990s, it became possible to transact

or transfer engineering and white-collar jobs, prompting the spread of the ity of a new offshoring across all industries The founder of Taiwan’s Acer, StanShih, proposed the idea of a smile curve that combines the production chain (fromconcept creation, R&D, branding, design, manufacture, distribution, marketing tosale/after service) with the value chain New business models were developed ineach process of the production chain Centering on European and American firms,there was a rapid diffusion of the outsourcing and offshoring of service businesses.The director of the McKinsey Global Institute of the USA, D Farrell, wrote anarticle in 2004 in the Harvard Business Review about a globalization survey carriedout by the said research institute According to this research, the global index,defined as an industry’s annual trade value divided by its annual revenue, was 77 %for apparels, 42 % for automotive, 33 % for steel, and 1 % for IT/BPO The lowglobal index for IT/BPO was recognized as showing the possibility of futuredevelopment (Farrell2004, p 3) This global index reflects the expanding interme-diate transactions in manufacturing, such as electric/electronics, automotive, andaerospace industries However, this is also related to the creation of businessmodels of the new international division of labor through the development ofICT In the corporate forms of the semiconductor industry, there is an integrateddevice manufacturing (IDM) wherein circuit design, manufacturing, and sales areundertaken within the company New forms, however, have emerged where on theone hand there are fabless (fabrication-less) companies, which do not have factoriesand completely subcontract semiconductor manufacturing to outside parties, and onthe other hand, there are the foundries, which have specialized in the production of

possibil-IC Moreover, the electronics manufacturing service (EMS) business model, whereelectronic products are manufactured on commission from OEM companies, is nolonger rare

According to the IT Insight News (7 May 2014), a global share in IC gross sales

of fabless companies has increased from 7.1 to 29.2 % during the period from 1999

to 2013 In 2013, the top 25 fabless IC firms earned $77.9 billion in gross revenuesand accounted for 81 % of gross revenues of fabless corporations The major fablesscompanies are American, but fast-growing Taiwanese and Chinese firms are rapidlycatching up Moreover, the world financial crisis has prompted the further diffusion

of the fabless business model In an analysis about the American contractmanufacturing (CM) of electronic goods, L€uthje considers such a business model

as “de-coupling of product innovation and manufacturing” or “separation of uct design and manufacturing” (L€uthje2002, pp 243, 245)

prod-According to a research of a German consultancy firm, under an automotivemarket greatly depressed by the global recession of 2008, the outsourcing of R&Dand engineering businesses, on the other hand, started to spread out In 2009, theR&D expenditures of the automotive sector dropped by 10 % compared to theprevious year and thereafter returned to a recovery track The annual averagegrowth rate of automotive R&D and outsourcing expenditures over the 4-yearperiod from 2009 to 2013 grew by about 12 times from 0.4 to 4.7 % The share in

R&D expenditures also grew from 9 to 12 % This research report also containedsimple data about the R&D offshoring of the aerospace industry The annual growthrate of R&D for this industry during the same period was 4.7 %, while the growthrate for outsourcing expenditures was 7.2 % The share in R&D expenditures ofoutsourcing was almost doubled from 16 to 31 %.

Incidentally, the share in this expenditure accounted for by offshore is at bestonly 10 %, but there is a possibility of its greatly increasing moving forward Thisresearch cites three merits of outsourcing and one merit of offshoring First is costreduction, second is flexibility of engineering resources, third is the access toadditional competencies, and fourth is the merit, particularly of offshoring and ofacquiring a large pool of talented engineers (Wolfgang et al.2010, pp 6–7).Let us look here at the scale of ICT-enabled services As can be seen in Tables1.2and1.3, the business for ICT-enabled services cover an extremely diversified andwide range of businesses, and it is difficult to get a complete picture According to

an estimate of the US consultancy company McKinsey, which Sudan et al cite, theestimated addressable market of ICT-enabled services as of 2007 was $475 billion.However, the penetrated market was $65 billion and was forecasted to double to

$130 billion in 2010 The breakdown of growth for this period is as follows: from

$27 billion to $55 billion for IT services, from $20 billion to $30 billion forengineering services, and $18 billion–$45 billion for ICT-enabled services Thehighest growth is for ICT-enabled services followed by IT services and engineeringservices, in that order (Sudan et al.2010, pp 2–4) Based on the figures publishedrecently by NASSCOM, the global outsourcing of ICT-enabled services hasincreased twofold From 2013 to 2014, IT sourcing grew from $81–85 billion

to $88–91 billion and business process (ICT-enabled services) sourcing from

$53–55 billion to $60–62 billion, for a total of $134–140 to $148–153 billion(NASSCOM website: Resource Center/Global Sourcing, accessed 24 Mar 2015)

Of course, there is a large disparity on estimated addressable market of ICT-basedservices depending on the estimation methodology The estimate of addressablemarket by India’s NASSCOM-Everest is about three times that of Gartner (Sudan

et al.2010, p 5)

What is important at this point is the fact that a diverse set of businesses usingICT are increasingly being outsourced or offshored A 2012 report by A.T Kearneypublicized data of ICT outsourcing expenditures by location According to this, thismarket showed a slight stagnation in 2009 due to the global financial crisis, but itgrew from $526 billion in 2003 to $799 billion in 2010 In 2015, it further expanded

to $1,016 billion The annual average growth rate from 2003 to 2015 is estimated to

be 5.6 % (Kearney2012, p 2)

The above outsourcing, as we can see, is the prediction of active offshoring fromchanges in regional composition The country with the largest outsourcing expen-ditures is the USA, but looking at the future trend from the changes in the2003–2005 period, America will decline from 51 to 46 % and Western Europefrom 32 to 29 %, while the Asia Pacific region will increase from 14 to 19 %(Kearney2012, p 2) In short, as shown below, the major offshoring destinations

are gradually becoming the emerging economies, replacing America, Europeancountries, and Canada.

Amidst the growing interest in the offshoring of ICT-based services from 2003,A.T Kearney developed a Global Service Location Index,4making public globaloffshoring destination rankings by country This is computed from evaluations byconsulting specialists regarding 39 measurements from three main categories(financial structure, people skills and availability, and business environment) Thethree main categories have weights of 40:30:30, respectively, and are rated from ascale of zero to four or zero to three Figure1.1shows the top-ranking countriesbased on this index India has a prominent lead, which tends to grow stronger inrecent years We can see that in pursuit of India is China, followed by a wideninggroup of countries mutually competing as a group

Let us take a look at Fig.1.2, which shows separately the two major competitivefactors of financial and other factors (total of other factors) and how the relationship

Fig 1.1 A.T Kearney global service location index Centering on East Asian countries 2004–2014 (Source: Kearney 2004 , 2007 , 2009 , 2011 , 2014 ) Note: The index is evaluated against

39 measurements across three major categories: financial structure, people skills and availability, and business environment The weight distribution for the three categories is 40:30:30 Financial attractiveness is rated on a scale of 0–4, and the categories for people and skills availability and business environment are on a scale of 0–3 The ranking of Vietnam rose from 20th in 2004 to 8th

in 2011 and slipped down to 12th in 2014

4 In the beginning, the index was named “offshore location attractiveness index.”

of these two factors changed between 2004 and 2014 From this figure, we can seethat a composition of each country’s score has moved from the lower right to theupper left We can also see that it is important for the strongly competitive countries

to have a balanced position based on two scores This would imply the following: In

2004, the major competitiveness factor was the financial score, which includesaverage wages, electricity rates, communication costs, taxes, and bribes, but in

2014 the importance of other factors has been growing In short, factors, such asICT and BPO scale and skill, management, IT training, education quality, govern-ment support for the ICT sector, quality of ICT infrastructure, and cultural com-patibility, have been gaining importance Competitiveness is simply not based onthe cost of labor force but has become determined comprehensively by a balance ofcost and quality There is an upgrading of offshore business contents

The 2011 report of the same company writes as follows regarding the GlobalService Location Index:

As we publish the 2011 A.T Kearney Global Services Location Index, we find that the world of services offshoring has changed dramatically since we published the first report in

2003 What was then an emerging phenomenon that seemed to have great potential is now a

India

China

Malaysia Czech Republic

Singapore

Philippines Brazil

Canada

Poland Hungary

Thailand Mexico

1→1 5→48

20→12

6→7 13→6 15→38

4→33

3→3

2→2 11→31

10→11 7→8 14→4 8→37

Fig 1.2 Changing evaluation structure of A.T Kearney global service location index: from 2004

to 2014 of major countries (Source: Kearney 2004 , 2014 ) Notes: The weights distribution for the three categories is the same as Fig 1.1 In this figure, horizontal axis is on 0–4 rating of financial attractiveness, and vertical axis is on 0–6 rating, total of “people skills and availability” and business environment Numbers following country name are ranked of 2004 and 2014

natural element of corporate services supply chains The industry has grown significantly and in many cases exceeded expectations from the early days The part of the value chain that can be performed offshore has increased in value-added and complexity At the same time, the geography of offshore delivery has expanded to include a large number of countries specializing in different parts of the service-production ecosystem (Kearney

2011 , p 1)

The competition in the offshoring market of ICT-based services has increasinglybeen intense and global A diverse service business became the object of offshoring,and many countries, aiming to subcontract for such business, compete naturally interms of cost and increase in sophistication In the next section, we shall look at theglobal spread of offshoring ICT services, as well as the phenomenon of concentra-tion in Asia

1.3 Asia as a Major Destination of Services Offshoring

In this section, we take a concrete look at the rising position of Asian countries asmajor ICT-based services offshoring destinations and the expansion of offshoringdestinations from India to such countries as the Philippines, Vietnam, and China

1.3.1 Development of ICT-Based Services Exports in Asia

The development of ICT is certainly increasing international trade in services andthe importance of Asia in such a trade Let us first confirm from UN trade data thatthe rapid increase of services exports is being realized through Asian exports.Taking a very simple look at the changes of services exports from 2000 to 2013,the growth during this period was 2.7 times (compound annual growth rate 8.11 %)for advanced countries and 4.0 times (CAGR 11.3 %) for developing countries, ofwhich computer and information services growth was 5.0 times (CAGR 13.15 %)for advanced countries and 14.3 times (CAGR 22.72 %) for developing countries(UNCTADstat) The share of Asian developing countries in developing countrycomputer/information services export value for this period already exceeded 90 %.Furthermore, comparing the computer/information-related exports of Asian devel-oping countries and advanced economies for the same period, developing countriesrapidly grew from 13 to 40 % of advanced countries (calculated fromUNCTADstat) We can confirm that the role of Asia’s emerging countries inICT-based services exports has become larger

According to the 2012 Information Economy Report of UNCTAD, the exportvalues of computer/information services were affected by the 2008 global financialcrisis, but it recovered to $215 billion in 2010, about twice the value it was in 2005.Looking at the countries with the large weights in the computer/informationservices exports of the GDP of their respective economies, Ireland was 15.5 %,

Costa Rica 3.6 %, India 2.3 %, and the Philippines 1.2 % In terms of amounts,Ireland and India were prominent with $37.3 billion and $33.8 billion, respectively.They were followed by America with $13.8 billion The same report estimated thesize of the global market for the offshoring of IT services to be $70–72 billion in

2011 The breakdown for the provider is partially as follows: 59 % for India, 13 %for Canada, 4 % for China, 6 % for the new EU member countries, and 1 % for thePhilippines (UNCTAD 2012, p 24) The above explanation cannot be directlycompared with the research of Sudan et al cited earlier, but the geographicaldistribution of the offshoring of IT service businesses from 2006 to 2008 used bythe latter is about the same in composition with that of the Information EconomyReport and showed that India has 54 %, followed by Canada with 29 %, Ireland with

8 %, China with 3 %, and the Philippines with 1 %

Let us check the changes in country composition with regard to BPO, which isthe major business of ICT-enabled services, using materials provided by UNCTAD

As can be seen from Fig.1.3, the major exporting countries in 2004 were Canadawith 45 %, India with 32 %, the Philippines with 9 %, and Ireland with 7 % In 2013,this became India with 38 %, the Philippines with 19 %, Canada with 15 %, theMiddle Eastern Europe with 5 %, and China with 4 % The share of advancedcountries Canada and Ireland declined In contrast, a tendency to grow could beclearly confirmed for the shares of the two countries of India and the Philippines, aswell as the emerging economies, to which China and Eastern Europe have beenadded

What developmental trends does the global outsourcing really show? Thechanges in the Top 20 of the Outsourcing Destination Ranking of Tholons are

15 17 18 19 19

7

6

5 5 4

2

2

2 2 3

1

1

2 4 6

Fig 1.3 Geographical structure of BPO by destination: 2004–2013 (Source: UNCTAD 2014 , p 8)

summarized in Table1.4from 2007 to 2015 Cities and regions in the top positions

as outsourcing destinations show India’s Bangalore at the top Listed also areMumbai; Delhi; Chennai; Hyderabad; Philippine cities such as Manila and Cebu;China’s Shanghai, Beijing, and Dalian; Vietnam’s Ho Chi Minh and Hanoi; andMalaysia’s Kuala Lumpur The top positions have been secured by Asian cities,with India and the Philippines at the top followed by China, Vietnam, and others Incontrast to it, in the case of developed countries and other developing regions, wecould see a tendency to concentrate on a limited number of cities

The development of offshoring is deeply related to the direct investments ofmultinational corporations Table 1.5shows the geographical distribution of thenumber of new direct investments to the software/ICT services sector from 2007 to

Table 1.4 Tholons top 20 global outsourcing cities

Rank

2007 2008 2009 2013 2014 2015

Manila NCR Philippines Southeast

Asia

Cebu City Philippines Southeast

San Jose Costa Rica Central

Republic

Eastern Europe

2011 The total number of direct investments was 7,553, about 60 % of which went

to advanced countries Of the 40 % or 2,956 cases that went to developing countries,about two-thirds was in Asia, with India and China getting an overwhelming

541 cases and 422 cases, respectively, followed by Singapore with 255 cases,Hong Kong with 164 cases, the Philippines with 46 cases, and Vietnam with

45 cases While investment destinations are spreading across the emerging nations,though developed countries continue to be major destinations, there appears to be aphenomenon of concentration toward Asian countries, with India and China as themajor investment destinations

Table 1.5 Greenfield FDI projects in software and ICT services, by destination, 2007–2011

1.3.2 Spread of ICT-Based Services Offshoring from India

to East Asian Countries

1.3.2.1 Growth of ICT-Based Service Industry in India

As an exporting country of ICT-based services entering this century, India quicklyjumped into the global market Of course, India’s acceptance of offshored jobs didnot start from zero as a precondition After its independence, India nurtured, as amatter of policy, the military and aerospace industries in Bangalore Around themiddle of the 1980s, it promoted the development of the software and computersoftware development industries With respect to the supply of human resources,there was support from research educational institutions, such as India Institute ofScience (IIS), which is India’s oldest scientific research institution This led to theformation of leading edge industrial clusters (Basant2008) In 1988, NASSCOMwas formed, and in 1990 the Software Park was established However, it was notuntil entering the 1990s, when economic liberation started, that the Software Parkbegan to function effectively

On the other hand, due to the development of ICT, an offshoring business modelwas born in the advanced countries, with the USA as the center There was a hugeneed for revising programs due to the 2000 computer problem (Y2K Crisis), andIndia had an abundant supply of ICT human resources During 1989–1990, India’sexport share of software and service revenue was about 50 % It became about 60 %

in the second half of the 1990s, recorded reaching the 70 % mark at the turn of thecentury, and now eyeing 80 % Sales were at $234 million in 1990, $8,386 million

in 2000, and rapidly growing to $58,700 million in 2008 (Parthasarathy 2013,

p 88) Taking the lead is Bangalore, which has come to be called “India’s SiliconValley,” borrowing from America’s Silicon Valley

Arun Kumar Jain of the Indian Institutes of Management wrote as follows in a

2006 edition of the “Harvard Business Review” about India being an ICT servicesindustry export base:

It already goes without saying that India ’s IT and BPO industries is highly esteemed in the world They were practically nameless, but if China is the “factory of the world”, then India

is the “back office of the world” A lot of European and US firms were aggressively pushing offshoring, and this trend is accelerating, so that even in the industrial world of India, BPO

is becoming to be widely used In particular, this is very prominent in such places as banks

in the financial services industry, airline companies, and makers of durable goods (Jain

2006 , p 100)

The gross revenue of Infosys Technologies, a representative IT firm in India, wasmerely about 90 billion rupees (20 million dollars) in 1995, but it exceeded anamazing 100 billion dollars in 2005 Not limited to Infosys, India’s IT or IT-enabledservice (ITeS) industry has been rapidly growing more than 40 % these past 3 years(Jain2006, p 100)

Taking advantage of the offshoring opportunities from European and US firmsdue to the development of ICT, India rapidly grew first in software development

and then in BPO, particularly in call center services American firms undertook70–80 % of the world’s BPO, but 80 % of that was headed for India (Remus andWiener 2009, p.6) Consequently, India’s export was $40.4 billion in 2008, thebreakdown of which is as follows: $23.1 billion for IT application services,

$6.4 billion for research and development services, and $10.9 billion forICT-enabled services (BPO) (Sudan et al.2010, p 6) NASSCOM’s prediction ofICT services exports for 2015 is $98 billion, the breakdown of which is as follows:

$55 billion for IT application services, $20 billion for ER&D, and $23 billion forBPM.5The 2015 value would be more than twice that of 2008 The direct employ-ment for this industry increased from 160,000 workers in 1996 to 2.60 millionworkers in 2011, with indirect employment reaching four times those figures(Joseph2014)

India’s ICT services exports actually saw dramatic increases in the 1990s Theaverage annual growth rate in the world for ICT services exports was 5.6 %, butIndia was growing at 17.3 % and China at 15.8 % From 1997 to 2001, worldexports were on the average growing by 3.6 % against a 23 % for India Exportvalues grew from 9.7 billion dollars in 1997 to 46.0 billion dollars in 2004 (Basu

2007, p 486) The structure of services exports also greatly changed The down of exports in 1997 was 31 % travel, 19 % transport, and 19 % software.However, in 2001, the composition showed software at top place with 34 % andother services with 23 % Basu (2007) explains as follows:

break-There has been a compositional shift in the structure of India ’s services exports away from traditional services such as transport and travel towards emerging services such as software and other services, the latter mainly consisting of a wide variety of business services like advertising, exhibitions, engineering, accountancy, and health services (Basu 2007 , p 487)

At the turn of the century, business processing outsourcing (BPO) portion ofICT-based services exports was the focus of attention Only a mere 665 milliondollars in 1999, India’s BPO reached 6.0 billion dollars in 2004, achieving anaverage annual growth rate of more than 50 % in the second half of the 1990s (Basu

2007, p 487) Basu did not show it, but the growth of the call center business wasremarkable, entering this century According to UNCTAD, the call centers thatstarted in America began to enter developing regions in the second half of the 1990sand rapidly spread out More than half of the 500 cases of direct investment to callcenters recorded in 2002–2003 headed for Canada, Ireland, and England India got

60 cases, China 30 cases, Malaysia 16 cases, and Singapore 16 cases More than

80 % of the investment cases to developing countries went to Asia (UNCTAD2004,

p 161) Having abundant human resources that can speak English, India becamethe largest host country According to NASSCOM, the BPO export value in 2012was 19.9 billion dollars and 23.0 billion dollars in 2014 (NASSCOM2014).According to country data on services exports published by the World Bankfrom 2005, India’s computer/communication services export value rapidly grew at

an annual average rate of 18.2 % between 2005 and 2012, from 35.08 billion dollars

5 NASSCOM website: India IT-BPM Exports Accessed 24 Mar 2015

to 95.89 billion dollars The share of BPO in services export exceeded 20 % Theshare of ICT-based services industry in GDP for India was 6.1 % in 2010 (Sudan

et al.2010, p 8) India has established a solid position as the world’s ICT-basedservice business offshoring destination, thereby also steadily raising the position ofthis industry in India’s economy

1.3.2.2 Spread of Services Offshoring from India to East Asia

Although India has built up an overwhelming position through the offshoring ofICT-based services activity, there is an intensification of global competition.Entering this century, from the second half of the first decade, the Philippines aswell as other countries such as China and Vietnam has been pursuing India In aninvitation to a forum in 2007 about emerging offshore locations for India’s IT/ICTeS-BPO firms, NASSCOM writes as follows:

There are emerging locations in the ‘supply side’ countries, such as Eastern Europe, Philippines, Vietnam, Brazil, Argentina, and Canada amongst others India can either view them as a threat or leverage them for its own benefit These emerging offshore locations not only offer new value proposition (European languages, Spanish/ Japanese clients, etc.), but also help address risk perception of completely India centric delivery model (NASSCOM 2007 )

Amidst business stagnation of 2009 resulting from the global financial crisis,NASSCOM recognizes the competitive pressure from such countries as China, thePhilippines, Vietnam, Brazil, and Egypt India is forced to make industrialupgrading of ICT service activities as follows:

India may have garnered the lion ’s share of the global outsourcing market with its BPO service offerings, but is facing stiff competition from countries like the Philippines, China, Vietnam, Brazil, Egypt, Jordan etc “According to NASSCOM Chairman Som Mittal,

80 percent of the future growth of the BPO sector will come from non-traditional markets

in terms of new verticals, customers and geographies.” (NASSCOM 2009b )

Indian BPO firms are tweaking their business models to remain relevant in thesetroubled times All of them are slowly moving away from voice services, which,

3 years ago, constitute almost 100 % of revenues Today, the revenue ratio is 60:40between voice and non-voice services While the Indian BPO sector grew frombeing a $1.6 billion industry in 2002 to $14.5 billion in 2008–2009, it has alwaysbeen associated with low-end work, most of it voice based Now, with manycountries like the Philippines and Vietnam having emerged as alternatives, India

is forced to look at adding more value to its basket of services (NASSCOM2009c).NASSCOM actually intends to nurture the current $50 billion ICT industry into a

$225 billion industry by 2020 Eighty percent of this growth will be obtained fromnontraditional markets and regions (NASSCOM2009d)

Amidst such a change, Ramit Sethi, senior VP, Wipro BPO, India’s well-knownICT firm, said “There’s a sea change in revenue models in the industry”(NASSCOM 2009c) Clearly, there is the intention to upgrade this industry In

2013, NASSCOM Chairman Som Mittal replied as follows in a newspaper view, with regard to the change made to business process management (BPM):The rebranding will give it (BPO) the identity of being a full-service value provider rather than an industry that plays only in the lower-end of the services spectrum BPM is a reflection of managing end-to-end services incorporating the best practices, rather than targeting specific process It ’s not about cheaper, better and faster, but a transformational journey to improve efficiencies ( The Times of India (Bangalore), 21 Sep 2013)

inter-Since the adoption of liberalization policies in 1991, India has begun its Indiaescape from the economy agonizing in stagnation Since the start of this century, ithas formed, together with Brazil, Russia, China, and South Africa, the BRICS,which has become one of the most watched regions in the world (O’Neill2001;Hirakawa and Aung2011) As part of BRICS, India is attracting attention because

of the existence of a large low-wage labor population In the second half of the1990s, based on understanding that the development of the NIEs and ASEAN wasrealized through the input of a large amount of labor, there emerged populationbonus discussion, wherein the scale of working population itself was favorablyconsidered as a condition for development Such a recognition heightened theinterest of the world toward labor-abundant India Moreover, at that time, Indiarapidly initiated the export of ICT-based services through a belatedly adoptedliberalization policy These two conditions were sufficient in recognizing thatIndia is an important member country of the BRICS

As was already mentioned, India’s position as an offshore destination remainsunshaken Bloomberg Businessweek interview article on 14 Aug 2009, McKinsey

& Company Mumbai office chief Noshir Kaka was asked “Who will dominateoffshoring in 2020?” Kaka replied:

India produces about three million graduates a year The entire offshoring industry across

IT and BPO is 2.1 million people, so clearly there are enough graduates – the real issue is the suitability of candidates Effectively we are using a tenth of our workforce that is suitable for this industry The global financial crisis has given India a bit of breathing room When you look at the volume hubs, it ’s very hard to get away from China and Russia, which are two of the largest by population locations Brazil is one of the few nations that offers an emerging working population of that size Vietnam and Egypt has a reasonable talent pool and a lot of government support to promote this industry, support by real initiatives on the ground making changes to the education system and infrastructure to support this industry.” (Kaka 2009 )

NASSCOM is also aware that these countries “offer substantial incentives(taxation, training subsidy, rent free accommodation, and so forth” (NASSCOM2009a)

Actually, there have been reports about a remarkable development of the ICTservices industry in such countries as the Philippines, Vietnam, and Malaysia.Japan’s biweekly magazine “Nikkei Computer” of April 2010 makes knownGartner’s selection of ten global offshore service destination countries and at thesame time explains that “Malaysia, the Philippines, and Vietnam, in particular, areeroding India’s share through market niches in call centers, distribution, and backoffice function offshoring” (Nikkei Computer, 28 Apr 2010 No 54)

The Philippines

It was from the end of the 1990s that the call center industry in the Philippinesflourished America’s global call center corporation, Sykes, first entered developingcountries through the Philippines in 1997 (UNCTAD2004, p 158) As such the callcenter industry was born in the Philippines, and the industry association “CallCenter Association of the Philippines” (CCAP) was established in 2001 startingwith seven firms According to CCAP, there are currently 84 member firms, bothdomestic and foreign, covering more than 80 % of the total industry employment.About 600,000 people work in this industry, and now the Philippines has officiallyovertaken India as the world’s call center capital (CCAP website, accessed 20Jul 2015) In 2011, the Philippines exported about $7.38 billion of voice-basedBPO services (call center business), while India for the same category exportedmore than $7.0 billion (Mishra2012) Thereafter, the gap with India widened, andaccording to a 2013 article, “The Philippines’ voice industry stands at $8.5 billionwhile India’s is around $7.5 billion” (Suneja2013)

Actually, the New York Times, at the end of the 2011, reported that “over thepast several years, a silent revolution has been reshaping the call center business:the rise of the Philippines” (The New York Times, 25 Nov 2011) The articlementions that the Philippines, a former colony of America, has a large population

of young people who understands American culture, can speak American English,and is supporting America’s business The preference for the Philippines reflects

“in part the maturation of the outsourcing business, and in part a preference forAmerican English” (Bajaj2011) Even in terms of quality, the Philippines is in acompetition with India As far as India is concerned, “the Philippines, the second-largest destination for outsourcing, is emerging as a serious competitor and isrelevant both for voice and non-voice services” (Suneja2013)

The core industry association for the ICT services industry of the Philippines,BPAP, was established in 2004 and was renamed to the Information Technologyand Business Process Association of the Philippines (IBPAP) in 2013 The reasonfor the change was to “accurately reflect the range of information technology andbusiness process management (IT-BPM) services provided from the Philippines”(IBPAP 2013) IBPAP receives support from industrial associations, such as thechamber of commerce, real estate, electricity, and communications, as well asemployee associations There are currently more than 200 member firms IBPAPdrafted the first “blueprint plan” in 2006 Based on this blueprint, individuals fromMcKinsey & Company, various government institutions, researchers, IBPAP, andits member firms set up in 2007 a research team, which formulated “Roadmap2010” (BPAP 2007) In 2010, another one was formulated, “Roadmap 2016,”which is aiming at the dramatic development of the ICT-related services industry

of the Philippines (BPAP and Partner Associations2010)

Figure1.4shows the targets and performance of the IT-BPO sector of Roadmap

2016 In the last year of the first Roadmap 2010, setting the goal of achieving 10 %global market share by 2010, sales reached 8.9 billion dollars, and the averageannual growth rate for 5 years was 29 % The second one, Roadmap 2016, is aiming