Expanding International Supply Chains

Abstract

Offshoring of business process services (BPS) and information technology services (ITS) – whether through international insourcing or international outsourcing – is transforming the way many companies do business. This paper looks at the expansion of international supply chains and the rise of China, the Czech Republic, India and the Philippines as exporters of BPS and ITS. It also analyses the nature of and factors behind this trade and identifies major business- and trade-related challenges arising. In this context it presents some of the labour market implications resulting from increasing trade between OECD and non-OECD economies. The analysis shows that the BPS and ITS sectors in the four emerging economies are very differently structured: Chinese and Czech companies are predominantly supplying their domestic markets while Indian and Philippine companies are focused mainly on supplying foreign markets. In terms of exports, they also supply different geographies: China is mainly exporting to Japan; the Czech Republic to the European Union; the Philippines to the United States; and India to the United States and UK. Several of the larger home-grown companies in the four countries are establishing significant presence in foreign markets, in particular in other emerging markets, to build capacity and leverage local comparative advantage. This highlights the fact that different geographies have different strengths and BPS and ITS-related FDI between emerging economies is likely to expand rapidly in the future. All four countries are facing supply side constraints. The low supply of senior personnel with industry-relevant experience in China, the Czech Republic and the Philippines acts as a break on growth. Many companies are also struggling to manage high levels of staff attrition and salary inflation. Regulatory restrictions are relatively few but still affect some companies. In the ITS sector, temporary movement of personnel can pose a significant challenge for home-grown exporters. The issue is most relevant for the Indian ITS sector that is dependent on sending professionals for longer visits to client premises. Slow and unpredictable procedures for issuing business visas and work permits, and quota limitations for work permits, give rise to operational challenges. In the BPS sector, and to a lesser extent in the ITS sector, data privacy and security legislation can have a negative effect on international outsourcing. But new regulations have also created entirely new business opportunities, including the medical transcription sector.