Transcript Changes in the Competitiveness in the Service Sector of

Relocation and outsourcing of
services activities to Hungary
Magdolna Sass
Institute of Economics of the Hungarian
Academy of Sciences and ICEG EC
10th EACES Conference,
Moscow, 28-30 August, 2008
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Outline of the presentation
1. What is BPO? What are its main
characteristics?
2. Hungary as a host to BPO
3. Research on: location advantages and impact
on the host economy
4. Relocation
5. Conclusion
Research on BPO in ECE is based on company interviews
Presentation based on the project „"Foreign Direct Investment in Central and Eastern
Europe: What Kind of Competitiveness for the Visegrad Four?" and OTKA no.
10th EACES Conference,
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68435 (Hungarian research fund).
Moscow, 28-30 August, 2008
Business process outsourcing1
Location of production
Internalised
Home country
Production kept in-house at Outsourcing (at home)
home
Foreign
country Intra-firm
(offshoring)
offshoring
•
•
•
•
Externalised
(outsourcing)
(captive) 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
Relocation: a process, in which either there is a transfer of production
capacities from another country, or there is a capacity extension in one
affiliate parallel with a capacity reduction in another, or there is a capacity
extension in one affiliate, while other affiliates‘ capacities do not change.
10th EACES Conference,
Moscow, 28-30 August, 2008
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East Central Europe and Hungary
as a new location for BPO
• Movements of jobs/related FDI mainly between developed
countries and India (started out from English-speaking
countries, continental Europe only followed)
• 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 projects: 1400-1500 in Europe,
150-180 in the three countries in CEE (India, other Western
European locations), distributed approx. equally (biggest
project to India)
• Combined market share of CEE’s globally: less than 1 per
cent (McKinsey (2006)
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Moscow, 28-30 August, 2008
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Hungary as a host to BPO
Service centres receiving financial incentives in Hungary
Home country
Location in Hungary
Number of jobs (actual or planned)
ExxonMobil
USA
Budapest
1200
IBM ISSC
USA
Budapest
1300
Diageo
United Kingdom
Budapest
600
Getronics
Netherlands
Budapest
510
Jabil
USA
Szombathely
719
SAP
Germany
Budapest
600
Tata
India
Budapest
450
Convergys
USA
Budapest
282
EDS
USA
Budapest, Szeged
1150
InBev
Belgium
Budapest
380
Budapest Bank
USA
Békéscsaba
530
Morgan Stanley
United Kingdom
Budapest
450
Citigroup
USA
Budapest
302
Vodafone
United Kingdom
Budapest
746
British Telecom
United Kingdom
Budapest, Debrecen
700
T-Systems
Germany
Budapest, Debrecen
1750
Company
Source: ITDH
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Hungary as a host to BPO
• Approx. 50 centres
• Approx. 20-22 thousand people, 99 % white collar, between 80 and
90 % with university diploma and multiple language knowledge
• Going to the countryside now (university towns close to the border)
• Dynamic growth in output, exports (high share in EU27 comparison,
turnover centred on the EU, share of other services /other business
services grew in services exports, specialisation indices show a
relative specialisation on other business services – though
methodological problems)
• Various activities (often more activities in one project)
10th EACES Conference,
Moscow, 28-30 August, 2008
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Research questions and method
• Locational advantages determining the
choice of the new location (inside CEE)
• Impact on the host economy
• Method: questionnaire based company
interviews (5 in Hungary: 2 captive, 3 noncaptive) and as a basis for comparison: 33 interviews in the Czech Republic, Poland
and Slovakia
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Moscow, 28-30 August, 2008
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Location advantages 1
• determine which countries are chosen as hosts to new or
relocated service centres
• similar to those of efficiency seeking investments (costs
and availability of appropriately trained or trainable
skilled work in the required quantity) + specific:
infrastructure (telecom)
• Additional: availability of certain services (financial etc.),
good regulatory and business environment, IP, office
space, geographical proximity/same/similar time zone in
some cases (nearshoring), different time zone in others,
language knowledge (specific: other than English
European languages, „small” languages)
10th EACES Conference,
Moscow, 28-30 August, 2008
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Location advantages 2 – inside the
region
Specific advantage: knowledge of
„smaller” languages, good
geographical position
Inside CEE:
Poland stands out with its size (bigger
projects), location (NE, Baltics)
Czech Republic: central location, best
flight connections, specialisation
on IT
Hungary: minor languages (minorities
in neighbouring countries), good
location (CEE)
Choosing among the three countries is
based on:
• Earlier presence of the company;
• Previous good (or bad) experience
with the country;
• Choice is influenced by the relative
dynamism, success of local affiliates;
• Special language requirements;
• Active lobbying of the local affiliate;
• Quality of life, culture, English
schooling etc. in the target city,
especially in cases when expatriates
are involved
• Very limited role of incentives (mainly
for bigger projects)
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Moscow, 28-30 August, 2008
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Impact on the host economy 1
•
•
•
•
1.
2.
3.
4.
Companies with foreign participation have the potential to impact
upon positively on the business environment, on local companies
in the host country, though this impact is not automatic
Analysed in the literature almost exclusively in manufacturing,
though it is relevant for services sector FDI as well
While the share of the three analysed countries is not high, from
the host economy point of view, these are big projects and have a
potentially big impact on the local economy
Various fields of impact on the local economy is analysed on the
basis of company interviews:
Job creation
Linkages and other local contacts
Impact on the business environment and infrastructure
Spillovers through trained employees
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Impact on the host economy 2
Job creation
- Significant impact: in Hungary
approx. 20-22 thousand people
working in BPO (incl. captive)
- Medium to high skilled jobs (very
little unskilled) for young university
graduates, usually with (multiple)
language knowledge
- Activities carried out: table
(overtrained…), though VA/output
among the highest in services
- Shortage of properly trained
employees in all 3 countries
- Spreading out to the countryside
(from the beginning in Poland,
now in the Czech Republic and
Hungary)
Linkages and other local contacts
- (Very) limited backward linkages
(cleaning, security, cafeteria, etc.,
little substantial outsourcing)
- Forward linkages come as local
companies become more
„mature”, as competition is more
intense (in Hungary seems to be
more important compared to the
other two countries)
- Contribution of linkages to raising
the level of
competitiveness/productivity of
local companies: very limited
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Table 16 Activities carried out in the companies interviewed in Hungary
Customer contact
Back office
Transaction
processing
Document
management
Data entry
Data
processing
Call centres
Common
corporate
functions
Knowledge
services and
decision analysis
Research and
development
HR
Accounting
Administrative
Financial
services
IT call centres
and other IT
services
Quality
management
Program and
project
management
Financial
program
management
Integration
engineering
Supply chain
management
Analytical
accounting
services
Business
performance
analysis
Cost analysis
Software
development
Source: own compilation based on company interviews
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Impact on the host economy 3
Impact on the business
environment, infrastructure
- Competition for
appropriately trained
employees is intense:
companies are more active
locally, than „ordinary” FIEs
(participation in local
business associations, links
with universities)
- Intense use of local
infrastructure: in some
cases results in better
services
Spillovers through trained
employees
- This seems to be one of the
most important local
impacts
- Trained employees in
certain cases set up their
own enterprises or go to
work to domestic
companies
- Not only skills, but business
culture, business ethics are
transferred
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Impact on the host economy 4
Graph 1 Balance of trade in computer services and Other business
services, 1995-2006, million euros
BOP, FDI, FT, other
• Methodological and data
problems
• Relatively high share in
FDI stock (10 %)
• Increase in services
trade, especially in other
services and other
business services
• Balance of trade: turned
positive (graph)
• Specialisation indices
and RCA show change
in business services
towards relative
specialisation and RCA
300
200
100
0
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
million euros
-100
-200
-300
-400
-500
-600
-700
Computer services
10th EACES Conference,
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Other business services
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Relocation
• Even more methodological problems
• Case by case analysis is needed
• In Hunya, Sass (2005): company cases of relocations in the period
between July 2003- September 2005
• 9 of 61 cases affected business services (declared relocations)
• Affected locations (from which the activity was transferred): mainly
Western Europe (Germany, the Netherlands, Austria, UK, Ireland,
non-specified Western Europe) and the US
• Owners of companies: mainly US and UK
• Activities: various, more than one per project, but not all activities of
a firm are relocations (company interviews)
• Location in Hungary: mainly Budapest
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Declared relocations in business services, July 2002-September 2005
Activity
Foreign location
affected
Munkahelyteremtés vagy veszteség
Regional call centre
Other Western
European locations
+400-500
Regional logostocs centre
Austria
+60-80
Electronic Data Systems
(USA)
Regional centre
Western Europe and
the US
+350-400
Avis (UK)
Financial administrative centre,
regional call centre, financialinformatics services
Germany, (Belgium)
+400
Diageo (UK)
Extension of capacities of service
centre, new activities (accounting)
UK
+60
Electronic Data Systems
(USA)
Capacity extension for new activities,
call centre
Western Europe,
USA
+400
Avis Europe Plc. (UK)
Extension of financial services centre
Western Europe
+135
Maxtor Group (USA)
African, European and Middle-Eastern
service centre relocation (leaving call
centre and financial planning there)
Ireland
+ Approx. 20
Marsh (USA)
European accounting and
administrative activities (except for
UK, Ireland and the Netherlands)
UK
+12
Company
GE Capital (USA)
Renault Nissan
(French-Japanese)
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Conclusion
From a competitiveness point of view BPO projects in CEE
- Contribute to the formation of a better domestic business
environment, in some cases availability of high quality services for
domestic companies (forward linkages)
- Local contacts- backward linkages (suppliers): minimal, though, esp.
forward linkages increasing over time
- Job creation for medium to high skilled, (though overtrained, partly
due to the language knowledge requirement) spillovers through
employees (skills, culture, ethics, own SMEs)
- Significant impact on the BOP, though due to methodological
problems, it is difficult to quantify separately for these projects (FDI,
FT-balance, profit repatriation etc.)
- (Inside EU movements) Importance from the point of view of raising
the competitiveness of overall EU-27
10th EACES Conference,
Moscow, 28-30 August, 2008
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Thank you for your attention!
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Moscow, 28-30 August, 2008
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