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II INTER‐AMERICAN DIALOGUE OF HIGH‐LEVEL MSME AUTHORITIES Public Policies to Enhance the Competitiveness, Innovation and
Internationalization of MSMEs
New Orleans, September 10‐11, 2012
EMERGENCE OF SERVICES, GLOBAL VALUE CHAINS (GVC) AND RESULTING
IMPLICATIONS FOR LATIN AMERICA
Sherry Stephenson
With the financial support of the Canadian International Development Agency
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EMERGENCE OF SERVICES, GLOBAL VALUE CHAINS (GVC) AND RESULTING IMPLICATIONS FOR LATIN AMERICA
ORGANIZATION OF AMERICAN STATES* Department of Economic Development, Trade and Tourism
Executive Secretariat for Integral Development (SEDI)
Sherry Stephenson
* This study was prepared by Sherry Stephenson, Senior Advisor on Trade in Services in the Executive Secretariat for Integral Development at the Organization of American States (OAS), for the II Inter‐American Dialogue of High‐Level MSME Authorities, to be held in New Orleans on September 10‐11, 2012. The views expressed in the paper are personal and should not be attributed to any OAS Member State or the OAS General Secretariat. Research assistance provided by Jimena Sotelo is much appreciated.
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EMERGENCE OF SERVICES GLOBAL VALUE CHAINS (GVC) AND RESULTING IMPLICATIONS FOR LATIN AMERICA
Executive Summary 5
I. Introduction 6
II. Services in the Global Economy 7
III. Statistical Flaws in the Measurement of the Services Trade 8
A. Adding Embedded Services to Exports 8
B. Steps for Measuring the Services Trade According to Value Added 8
C. Assessment of the Importance of the Embodied and Embedded Services 9
IV. Growth of Global Value Chains and the Role of Services 9
V. Global Value Chains for Services 11
A. Structural Changes that Drive Growth in Offshore Services 12
B. The Offshore Services Value Chain 12
C. Primary Components of the Offshore Services Value Chain 13
VI. Global Offshore Services, According to Sector 14
VII. Participants in Service GVCs: Companies 15
A. Type of GVC Governance 16
B. Upgrading in the Service Value Chain 17
C. Trajectories within the GVC: Upgrading Strategies 17
VIII. Latin American Insertion into GVCs for Services 19
A. Centers of Supply and Demand for Offshore Services 19
B. Factors of Attraction for Offshore Services in Latin America 24
IX. Presence of International Offshore Service Providers in Latin America 26
X. Benefits to be Derived from Participation in Services GVC 31
XI. Small and Medium Enterprises (SMEs) Involved in Services GVCs 32
XII. Conclusions 34
XIII. Bibliography 35
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EMERGENCE OF SERVICES GLOBAL VALUE CHAINS AND THEIR IMPLICATIONS FOR LATIN AMERICA
Executive Summary The structure of global trade is changing rapidly in the XXI century. In recent times, trade
discussions have focused a lot of attention on the issue of global value chains for goods.
However, the concept is as relevant for service activities as it is for production activities and
trade in goods. In the new business models, companies are not only subcontracting or
outsourcing the assembly of goods, but an increasingly larger volume of service‐related
fragmented tasks as well. This means that there is a great need to understand more clearly the
role played by services in this new trade environment, so that the provisions of trade
agreements, as well as national policies, take into account and facilitate the operation of global
value chains (GVCs) for services as well as goods, and enhance the benefits that can be derived
from participation in these chains.
From the perspective of companies in the region, in most SMEs, GVCs offer the possibility of
entering the global market on a less costly basis, more suited to their conditions and
advantages. GVCs eliminate the need to have a competitive advantage in terms of costs for an
entire product. Instead, they can focus on a single ‘’task’’ within the value chain. The needs of
the private sector should have a direct correlation to the formulation of public policies, hence
the interaction between both sectors, and with academia, is essential for the development of
the region’s potential to provide offshore services.
The potential for being able to harness offshore services within the context of GVCs still has
great prospects for growth and can provide companies with opportunities to diversify and
improve their economic activities. The positive externalities of these activities are many and
include the transfer of knowledge, creation of more and better jobs, access to new markets, and
improvements in the telecommunications infrastructure, as well as deeper insertion of countries
in the region in the global economy.
6
I. Introduction
The offshoring of economic activities in pieces or segments came to the services industry toward
the middle and end of the 1990s, as occurred with the manufacturing sector during the previous
twenty years. The factors that led to this situation were similar to those that impacted the
manufacturing sector: the push from new technologies that allowed for the production of
service components in different parts of the world and the capacity to integrate them, especially
through information technology and telecommunications. Companies internationalized their
operations while they started to look for new markets. The production processes for services, as
well as goods, began to be disseminated to different parts of the world, to meet two objectives:
cost reduction and the search for greater economic efficiency.
In this globalized scenario of commercial and economic integration, it has become difficult to
make a distinction between domestic production and final goods and services. Companies go
beyond their borders to make economic decisions, which means that countries participate
jointly in this production process. An increasingly larger percentage of global trade is
attributable to intermediate goods and services, many of which cross national borders several
times before becoming final finished products. New options are emerging for regional and
global integration through these wider possibilities, both within and outside of regional groups.
It is important to adopt and implement similar policy decisions so that these GVCs may operate
in the most efficient manner possible.
In this changed global trade structure, the practice of governments basing their decisions solely
on the production of goods within their own territory is fast becoming a thing of the past. Many
questions arise in this new context. What services can or should be outsourced, or offshored
(when companies located in another country are the ones that provide these services)? In which
part of the GVC should companies try to position themselves? Should they do so as affiliates,
branches of other companies, or own‐account entities? Should they try to participate in the
GVCs established by large multinational companies? Would it be more efficient to do so at the
local, regional, or international level? What role should be played by the respective
governments in a world in which trade involves products and services “Made in the world’’ and
not “Made in a country?” How should trade agreements take into account this new reality?
Companies that participate actively in GVC structures have more options available to them than
in the past. What proportion of their production is done in their own country? What proportion
is outsourced or subcontracted? What percentage of the components and inputs of the
outsourcing should come from foreign companies? Should foreign affiliates be established to
produce these intermediate products in third countries? Of course, all these decisions will be
guided by cost and efficiency considerations. The four possibilities for company location
decisions are presented in the following diagram, with the subcontracting of offshore services
being discussed broadly throughout the study. Instead of producing exclusively at the domestic
level with domestic affiliates (quadrant 1), the company may decide to be supplied by other
7
domestic suppliers (quadrant 2) through local outsourcing or subcontracting. On the other hand,
the company may also decide to establish foreign affiliates and produce a part of the product
overseas, making it possible to re‐import the input (quadrant 3). This option is usually referred
to as “captive offshoring,” since although the supply source is not located in the domestic
market, total control over the production or provision of services is still maintained. Finally, the
company may opt to outsource part of the production to foreign suppliers in third markets
(quadrant 4), which forms part of the phenomenon of international offshoring.
Figure A: Determinants for Location Decisions
Source: Sako, Mari (2005). Outsourcing and Offshoring: Key Trends and Issues. Document presented in the Emerging Market Forum.
II. Services in the Global Economy
The cross‐border trade in services (modes 1 and 2) has represented on average between 21%
and 23% of global exports for several years (World Trade Organization, WTO). Although this
percentage has remained relatively stable, research indicates that this figure has been
substantially underestimated and that if the transactions from mode 3 were added, it would
practically double the size of services in global trade. The value of exports in commercial
services increased by 11% in 2011, totaling $4.2 billion.1
III. Statistical Flaws in the Measurement of the Services Trade
1 WTO (2012)
8
In light of the increasing growth of global value chains for services, the traditional way in which
services are currently measured is obviously inadequate, and as a result, international trade
statistics underestimate the importance of the services trade.
Trade statistics for goods are based on customs documents, for which reason they erroneously
assign the entire gross value of an international transaction to the country of origin or to the last
producer in the value chain. But the place where the last shipment was made is often just the
last assembler in a long supply chain, who is not necessarily the one who created the total value
in the final product. The value added necessary to produce the good could be disseminated
across different economies, which form part of the value chain.
A. Adding Embedded Services to Exports
Some of these intermediate steps in the production of a final product correspond to
components of goods, but many others correspond to services “tasks”. The services sector
contributes much more to exports than is recognized because often services are integrated or
combined with goods or services indirectly, as intermediate inputs in the production of goods.
It is estimated that if the contribution of intermediate services inputs to goods is taken into
account, the participation of services in global trade would double (Christen, Francois and
Hoekman, 2011). In measuring it like this, services would represent almost 50% of global trade,
even without taking into account the predominant component of transactions in international
services, that is, mode 3.
B. Steps for Measuring the Services Trade According to Value Added In light of the current deficiencies in measuring the international trade in final products, the
WTO and OECD recently reached an agreement to develop and disseminate trade statistics on
goods that take into account the value added, using the national input‐product tables of OECD
members. It is expected that several countries will use these new statistics in 2013. This is a
positive development and should help to highlight the growing importance of the trade in
intermediate goods in current trade patterns, and thus help governments and policy analysts to
make more sound decisions.2
What is now obvious, although it cannot be estimated quantitatively, is that the services sector
contributes much more to exports than is normally recognized, because services are often
2 Presentation by Sebastien Miroudot of the OECD at a seminar held in Washington DC, on March 20, 2012. The OECD has a website dedicated to studies on the topic of trade with value added on: www.oecd.org/trade/valueadded. The press note from the Director General of the WTO, Pascal Lamy, on the WTO‐OECD agreement to develop statistics on trade based on value added are found on: http://www.wto.org/english/news_e/news12_e/miwi_15mar12_e.htm, March 15, 2012.
9
embedded or combined with goods, so they are also components of an indirect trade as
intermediate inputs in the production of goods.
C. Assessment of the Importance of the Embodied and Embedded Services Services that are combined with goods, and therefore traded indirectly as intermediate inputs,
are also classified in two categories: embodied services and embedded services. Embodied
services are added during the production process of goods in the manufacturing, agriculture,
and mining sectors, for example: energy, transportation, communications, insurance,
accounting, design, software, and other types of specialized technical knowledge. On the other
hand, embedded services are those that are “embedded” at the point of sale of the product; for
example: financing, training, maintenance, repair, and other after‐sales services. For trade
purposes, the total value of exports is calculated as manufactured exports, without an export
value being attributed to the services inputs. For many consumption goods, the combination of
goods and embedded services has become a method of differentiating goods in the market and
a key method for reaching a generally higher value added.
IV. Growth of Global Value Chains and the Role of Services
During the last 25 years (approximately since the end of the 1980s), the emergence of GVCs has
led to impressive changes in global trade patterns. More than the trade in goods produced in
one place and exported to the final consumer in another place, the production of goods, and
increasingly, the production of services, entails a combination of intermediate inputs and service
activities from different parts of the world for the creation of a finished product. The global
trade is being carried out through the “trade in tasks.” The increase in trade in intermediate
inputs represents a higher trade index in relation to global GDP (from 16% in 1990, to 27% in
2008).3 This currently represents more than half of the goods imported by OECD economies and
almost three quarters of the imports of large developing economies, such as China and Brazil.4 It
is the growing trade in intermediate inputs that is creating GVCs for production and trade, while
making the distinction between imports and exports increasingly unclear, and distorting the real
description of a good or service as being produced in a single place.
In general, it is evident that the elements that stimulated the development of GVCs are the
following: lower transportation costs; improvements in information and communications
technologies; telecommunications infrastructure; technological innovations; availability of
human capital or education and training of the labor force; competitive labor costs; political,
social, and cultural environments; stable legislation and the capacity to enforce contracts;
proximity to supply sources and proximity to markets, which is important for many industries
3 Sydor (2011), chapter 1. 4 Shimelse and Dadush (2011).
10
given the need to receive information from clients, a speedy customizing of products, or shorter
delivery times or periods for projects.
Services perform a dual role in the globalized economy: they are a product in their own right,
capable of forming their own GVCs, and at the same time, they are a link to the manufacturing
GVCs. In this last sense, they are the link between the production segments of the
manufacturing GVCs, since they act as the “glue” that keeps the chains together and allow them
to operate. Services bring together the production and distribution spheres through the
geographical and transactional connections that comprise and coordinate the globalized
production process. Services activities in the main “niches” help to join both the producer‐
driven and the consumer‐driven GVCs. Activities that were previously conducted entirely within
big companies, are now subcontracted and outsourced to independent companies, so the
production process is broken down even more not only into goods “tasks” but also into “service
tasks.”5
The role played by services in facilitating “trade in tasks,” as the link between each point in the
goods GVCs, is being increasingly recognized. Therefore, the embedded services component in
production and trade (especially in the case of elaborately transformed goods) can represent a
high percentage, more than 50%, of the total value of goods.
As demonstrated by Stan Shih of the computer company, ACER, with its famous “smiley face”
model (Figure B), services activities with the highest value added are increasingly dominating
the value of traded products. Although the essential node of the production process is found at
the bottom of the “smiley face” in the form of manufacturing and assembly, it may be
considered that the activities that add value to this nucleus are located on both sides of the
value chain, with each end having R&D/ innovation center activities, and those of the global
logistics center. All value added, from one end of the spectrum (base of the smiley face) to the
other comes from services activities. To improve their competitiveness, service companies are
trying to move up the value chain, on both sides of the “smiley face,” to dedicate themselves to
their core capacities and subcontract the rest, thereby increasing the fragmentation of the
production process and international trade.
5 Rabach and Kim (1994).
11
Figure B: “Smiley Face” Model: Shift to a High Value Added, Globally Integrated, Services Economy
Source: Business Week Online Extra, May 16, 2005.
V. Global Value Chains for Services
Services also constitute global value chains their own right, although much less research has
been conducted on this phenomenon and it is less understood than GVCs for goods. In new
business models, service companies are attempting to move upwards in the value chain and to
outsource non‐core activities much in the same way as manufacturing companies do.
Consequently, services are incorporated not only into the process of exporting goods but also
into exportation of final services. At the moment, statistical limitations make it extremely
difficult to quantify these service value chains, and thus, our knowledge of them is dependent
on case studies and on research about service sectors or specific products.
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A. Structural Changes that Drive Growth in Offshore Services
Structural changes in the world economy have provided developing countries with the
opportunity to become players on the world stage and to enter global value chains by
‘capturing’ a variety of offshored service activities. Information technology has eliminated the
need for on‐site operations. Companies seeking to cut costs are offshoring support activities,
and are even beginning to do so with their core activities, with a view to accessing more
qualified personnel. During the recent economic crisis, offshored activities were affected both
by the substitution effect, as new activities were transferred to more cost‐effective locations, as
well as by the impact of decreased demand from customers affected by the recession.
However, despite the extent of the impact, offshore activities also recovered faster than
expected, contributing to the economic recovery beginning in 2010. 6
B. The Offshore Services Value Chain
A number of activities are outsourced and/ or offshored by both multinational companies and
medium‐sized companies. In the balance of payments, most of these activities fall under the
rapidly‐growing category of “other commercial services”, which incorporates many types of
services offered to companies in a broad sense, including those outlined in Figure C, which
illustrates an Offshore Services GVC model.
6 In reality, after the recent financial crisis, developing countries were at the forefront of the world economic recovery. Their exports grew by 11%, compared to 7.5% in developed countries. Policy experts attribute this phenomenon to the insertion of primary emerging markets into global value chains. Cattaneo, Gereffi, and Staritz (2010), Chapter 1.
13
Figure C: Offshore Services Value Chain
Source: Gary Gereffi (2010). “The Offshore Services Global Value Chain”, Center on Globalization, Governance & Competitiveness at Duke University. Pp.14. Available at: http://www.cggc.duke.edu/pdfs/CGGC‐ORFO_The_Offshore_Services_Global_Value_Chain_March_1_2010.pdf.
The offshore services industry includes service activities undertaken in one country either as a
result of direct foreign investment or from acquisition or direct hiring, usually by multinational
corporations headquartered in one country, developing products used or consumed in another.
This value chain is subdivided into services that can be provided across all industries (horizontal
services), as well as services that are industry‐specific (vertical services). Companies with
operations in the horizontal sector should be process experts, whereas those in the vertical
chains should possess technical expertise in the industry in question, and their services may
have limited applicability in other industries.
C. Primary Components of the Offshore Services Value Chain
The three primary components of the offshore services value chain, as illustrated in Figure C are:
Information Technology Outsourcing (ITO), Business Process Outsourcing (BPO), and Knowledge
Process Outsourcing (KPO).
14
The BPO component includes activities to support generic business functions, such as network
management, application integration, payroll, call centers, accounting, document management,
supply‐chain logistics and management, and human resources. ITO activities range from
activities low on the value chain to those at the very top of the chain. Thus, they include IT
(information technology) infrastructure and software support up to IT consultancy services and
software R&D. The KPO component encompasses business consultancy and analysis, market
intelligence and legal services. Generally, most, but not necessarily all BPO‐related activities are
situated in the low and mid‐value segments. On the other hand, ITO activities span segments
from the lowest to the highest, the latter being where most of these activities take place.
Finally, KPO activities can be found at the highest level of the service value chain. KPO services
required higher qualifications, extensive coordination between parties, and greater flexibility in
comparison to BPO services.
By and large, the value of each activity correlates to the respective human capital component
(education level), in the sense that individuals with fewer years of formal education provide
lower value added services. This categorization offers an initial guide to economic upgrading
strategies, as companies attempt to “climb” the offshore services value chain in much the same
manner as is done in manufacturing value chains.
The substantial growth in the offshore services industry creates challenges for data collection on
the relevant services. According to OECD estimates, the size of the offshore services market
should have amounted to approximately $252 billion in 2010. Similarly, the compound annual
growth rate for these three segments between 2005 and 2010 was estimated to be 58% for the
KPO segment, followed by ITO (26%), and finally BPO (25%).7 Currently, the global supply of
offshore services is concentrated in the hands of a small group of business from a few countries.
Large global service providers focus on catering to large companies and governments, and have
located these offshore service operations in developing countries where costs are lower.
VI. Global Offshore Services, According to Sector
The following graph illustrates to what extent various sectors of economic activity participate in
global offshoring of services. It should be noted that the manufacturing sector only accounts for
20% of offshore services on a global scale, with service activities accounting for the remaining
80%. Thus, the majority of offshore service activities apply specifically to the service sector.
Currently, the financial, telecommunications and energy services sectors have the greatest
demand for offshore services in absolute terms. However, the most dynamic offshore service
sectors in terms of growth are computing and electronics, medical care and the software and
7 OECD (2008)
15
internet industries. Moreover, the innovation industry is expanding, and is a key provider of
higher value added services. It was estimated that this industry grew to $ 492 billion in 20078.
Graph 1: Participation of Various Sectors in the Offshore Services Market
Source: Taken from Gereffi and Fernández‐Stark; “The Offshore Services Global Value Chain”. Center of Globalization, Governance & Competitiveness, Duke University. 2010, pp. 28.
The supply, on the other hand, is controlled by a small group of companies from a few countries.
This concentration of supply hinders the entry of new companies into the market, forcing them
to identify specific niche areas, since they cannot compete internationally with the economies of
scale of industry leaders. However, large companies do not have the same flexibility that may
allow small and medium enterprises (SMEs) to adapt to the customized demands of the client.
It is this quality that may offer the latter the opportunity to gain that critical access to the
market (See: Small and Medium Enterprises Involved in Services GVCs)
VII. Participants in Service GVCs: Companies
Whereas discussions often focus on the entry of countries or regions into the GVC, the major
and indisputable participant in the value chain is the company. GVCs offer companies the
opportunity to develop their potential and capabilities at the global level. One important matter
that must be addressed (either at a company or public level) is whether the GVC will be
accessed individually or by networking with other companies, be it through contractual
(consortiums, multiple contracts) or organizational networks (cooperatives). Whereas
8 Gereffi and Fernández‐Stark (2010), pp. 52.
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organizational networks offer an advantage by facilitating a stable production process with
some level of rigidity, contractual networks are more flexible and adaptable but are often less
stable9.
The manner in which companies insert themselves into the GVC is closely linked to the
governance structure of the chain, and to the company’s, region’s or country’s ability to upgrade
through the value chain10; that is, their ability to potentially undertake activities of greater
value, and that are therefore more profitable and more complex, either technologically or skill‐
wise within the GVC.
A. Type of GVC Governance
The type of governance structure refers to the overall organization of the industry, and
especially to the level of coordination of activities between different players. 11 Different types
of governance may exist, and interestingly enough, these may evolve over time. At one end of
the spectrum, governance may involve a horizontal structure in which activities are coordinated
between peers with similar technological development and in which suppliers and buyers
benefit from each other’s complementary qualities. At the other, it may entail a quasi‐
hierarchical structure, in which there are imbalances in power and decision‐making, due to the
fact that one of the players has a monopoly on information, is more technologically‐developed
or is in a preferential position in relation to the client, or to some aspect of supply or product
design; and is therefore in a position of dominance12.
To understand the correlation between the ability to upgrade and the type of governance,
Humprey and Schmitz 13 (2000) define the following relationship. In quasi‐hierarchical
structures, lead companies are knowledge owners and only impart technical requirements to
their suppliers. Consequently, there is no knowledge transfer of intangible competencies.
Therefore, only processes or products can be upgraded. However, when collaborative networks
are formed, cooperation between firms is more feasible and thus functional upgrading is more
likely.
Factors that tend to determine the governance structure of these chains are: the intrinsic
features of the services; costs and risks involved in carrying out the activities internally, as
9 Cafaggi, Fabrizio and Swensson, Luana. European University Institute (Florence) and Law Faculty of the Getulio Vargas Foundation (San Paulo). Presentation on the situation in Brazil at the “International Fragmentation of Production and Entry of Latin America and the Caribbean into Global Production Networks” Conference (Fragmentación Internacional de la Producción e Inserción de América Latina y el Caribe) (IDB) , Buenos Aires, June 7, 2012. 10 López, Ramos and Torres (2009). 11 Fernández‐Stark, Bamber and Gereffi (2011). 12 Kosacoffi and López. (2008). 13 Humphrey and Schmitz (2000).
17
opposed to those involved in outsourcing them; the level of legal security, the contractual
climate and operation of the financial systems, and innovation by the countries.
B. Upgrading in the Service Value Chain
Overall, activities with the greatest value added are R&D software development and IT
consulting within the Information Technology Outsourcing category, as are all activities linked to
Knowledge Process Outsourcing (business consulting and analysis, legal services); whereas BPO
activities are generally considered to be lower value added services.
Identifying higher value added service activities is critical in order to determine which segment
of the GVC the company would like to enter. However, when the company then sets out to
identify these services of greater value, another problem will arise. As mentioned previously,
the current statistical problem will complicate the process of measuring the base value of the
price of inputs made and products obtained throughout the production process, which would be
easier to accomplish in the manufacturing industry. As an alternative, experts from Duke
University propose using the qualification of human resources, that is skill level and work
experience, as a measurement variable. Human resources are a fundamental determinant of
value creation and in determining competitiveness in trade in services. Yet, using this
variable creates another problem: how to measure it. There is an established correlation
between education level and experience (qualification of human resources) and salary level.
Therefore, the indicator used to identify services of greater value will be salary14.
C. Trajectories within the GVC: Upgrading Strategies
Upgrading within the GVC is possible when companies improve processes, when they increase
the value of their service, when they take on new roles or when they undertake multi‐sector
upgrading by entering another value chain. Five general value chain entry and upgrading
trajectories have been identified ‐ as outlined below – although the precise means of upgrading
will depend on the specific case.
1. Entry into the GVC
The most common means of entering the offshore services process is by installing call‐
centers, thereby taking advantage of low labor costs, without the need for an
abundance of highly qualified human resources. For the most part, companies hire
young people with good communication skills and problem‐solving abilities, and train
them, as needed. Entry via BPO segment activities is common. A regulatory framework
that addresses information protection and intellectual property rights (IP) is critical in
order to gain entry to the GVC with this service.
14_ Fernández‐Stark, Bamber and Gereffi (2011).
18
2. Upgrading within the Business Process Outsourcing Segment
Basic activities, such as call‐centers are followed by complex and higher value
operations such as accounting and financial services, supply chain administration,
payment administration, to name a few.
Another way to achieve this type of upgrading is to expand call‐center‐related services
or to target them towards specific niches, such as finances. At this level, a relatively
skilled and experienced labor force is required.
3. Offering Complete Service Packages
This option tends to arise when companies that are already offering ITO (information
technology outsourcing) and KPO (knowledge process outsourcing) services want to
increase their offering to include operations in the BPO (business process outsourcing)
category. To do so, they usually acquire small BPO companies or create business units
dedicated to these activities. In this way, they offer services with both low and high
levels of sophistication and value.
4. Expansion of IT Companies into the Knowledge Services Sector
Companies that already offer information technology services not only release programs
but begin to offer business consulting services that aim to develop programs that solve
problems specific to the client. This requires highly qualified human resources
(generally at an MBA level) with analytical abilities and business experience.
5. Specialization in Vertical Industries
This specialization may require a company to begin to undertake activities of lower or
higher value than before. The objective is to build on expertise in services that are
already offered in any of the three categories (BPO, ITO and KPO) for specific
industries.15
The trajectories described above clearly indicate that the potential to upgrade within the GVC
depends on the education level of the labor force. This critical factor may be developed and
brought about either through private or public initiative.
15 Fernández‐Stark, Bamber and Gereffi (2010). Pp. 13 ‐ 14.
19
VIII. Latin American Insertion into GVCs for Services
Latin American participation in global value chains for services is at the moment relatively low in
comparison to that of other regions. In this section, regional participation will be analyzed and
the situation of certain countries will be discussed, including factors which determine the
insertion of companies into services GVCs.
A. Centers of Supply and Demand for Offshore Services
The map below shows the worldwide centers of supply and demand for offshore services in the
year 2008, with a perspective on the exploitable potential of the region.
Figure D: Global Centers of Supply and Demand for Offshore Services (2009)
Source: Taken from: Gereffi, G. and K. Fernandez‐Stark (2010) “The Offshore Services Value Chain: Developing
Countries and the Crisis” Washington, DC: World Bank. Pp. 8
Stripes indicate demand centers while supply centers appear in solid colors which vary to reflect
the level of offshore services available. This determination is based on the number of service
centers to be found in each country. The major demand centers are: USA and Canada (51.1%),
Europe (30.6%) and Asia‐Pacific (16.2%). The level of demand for the rest of the world is 2.1%,
20
tending to conform to the geographical distribution of the multinationals which establish
regional operating centers16.
With regard to supply centers, India and the Philippines (in green) are the leading countries with
over 50 centers in each country. However, new locations (in red) are beginning to compete in
this industry including: Morocco, Egypt and South Africa. Costa Rica and El Salvador are also
part of this group. The “emerging countries” category includes between 5 and 15 service
centers.
The countries which are emerging as international supply centers (in yellow) have between 15
and 50 service centers. In this category are: China, some Eastern European countries, Singapore
and Malaysia as well as several Latin American countries. The countries in the region which are
emerging supply centers are: Mexico, Brazil, Argentina and Chile. The potential of the region for
participation in GVCs is enhanced by proximity of geographic location and time zone to the USA.
There is, in addition, cultural similarity and the availability of qualified human resources at a
relatively low cost.
Mexico and Brazil were the first countries in the region to enter, in the late nineties, in services
GVCs for the IT sector. Between 2003 and 2009, approximately half the BPO and KPO projects
undertaken in Latin America were based in these two countries. Some of the factors which could
explain this phenomenon are: previous experience in GVC insertion through the production of
manufactured goods and electronic products; the large size of their domestic markets; proximity
to the US. When production plants began to relocate to China in the late nineties, these
countries had to transform their existing plants into service centers. They were thus able to take
advantage of the infrastructure and qualified human resources they already had and to
integrate themselves into GVCs for services. This was the case with IBM, HP and EDS. Brazil and
Mexico therefore began not only to establish a presence in the industry but their companies
also began to compete on the international stage. The four main providers of offshore services
in the region are Mexican or Brazilian (CPM Braxis, Softec, Neoris and Politec)17 .
One determining factor in the emergence of Argentina as a supply center for offshore services is
that it was the first country in the region to be recognized by the European Commission as
providing adequate protection for personal data. This recognition spurred the establishment of
call centers and contact centers in the country. In 2008, that country’s IT exports were worth
approximately $ 422 million. In Chile, the factors which facilitated the upgrading of the level of
insertion for that country were economic stability, qualified human resources and relatively low
costs. In 2008 the value of ITO service exports was $ 200 million, BPO was $170 million and KPO
$470 million. Within the KPO18 category, engineering and financial services were outstanding.
16 Gereffi and Fernández‐Stark (2010). 17 Gereffi, Castillo and Fernández‐Stark (2009), Pp. 23‐24 18 Gereffi, Castillo and Fernández‐Stark (2009). Pp 25‐26.
21
Colombia and Peru are different, in that although they are involved in the provision of offshore
services, their insertion into this industry is recent and limited. Colombia achieved this
integration following a change in the international perception of the country triggered by the
political and social stability which it has achieved. Services GVC insertion has taken place in the
voice and data services sector and most of the 50,000 persons employed in the offshore services
sector work in this area19. In an effort to encourage human resource training and insertion in
this sector, the “Talk to the World” program was launched, targeting students in the last three
years of public secondary education, students in the final semesters of tertiary education;
persons employed in priority investment sectors; and persons interested in finding work in
priority investment and export sectors. The program is free of cost for secondary and tertiary
level students20. With regard to Peru, there is great potential in that country for localization of
offshore services arising from the growth it has experienced the opening up of its economy and
the availability of qualified human resources at a low cost. Given these conditions, Peru’s
potential for integration into the ITO and BPO sectors is significant21.
Continuing the analysis of supply centers, a study conducted by A.T. Kearney22 examined three
major variables to determine the ranking of the 50 most attractive countries in the world for
locating offshore services. The variables considered were:
Financial Attractiveness: this includes labor costs, cost of infrastructure usage, and taxes and
regulatory expenses. This variable is measured on a scale of 0 to 4 points.
People Skills and Availability: indicators measured here include the availability of a
workforce, academic and linguistic qualifications, experience and quality of remote services
sectors. The scale of measurement for this variable is 0 to 3.
Business Climate: this includes the socio‐political stability of the country, infrastructure, the
cultural aspect, security of intellectual property rights. This variable is measured on a scale
of 0 to 3.
To arrive at a total attractiveness weighting for each country the variables are weighted: 40% for
financial attractiveness and 30% for each of the other two. The total attractiveness of each
country is therefore measured on a scale of 0 to 10 points.
19 Gereffi, Castillo and Fernández‐Stark (2009). Pp 26. 20 Information available at <www.investinbogota.org/t2w> 21 Gereffi, Castillo and Fernández‐Stark (2009). Pp. 27. 22 The A.T. Kearney Global Services Location IndexTM, 2011.
22
Table 1: Countries Ranked by Total Attractiveness as a Location for Offshore Services Activity (2011)
Source: Table taken from: “Offshoring Opportunities Amid Economic Turbulence”, The A.T. Kearney Global Services Location IndexTM, 2011. Pp.2. Available at: <http://www.atkearney.com/images/global/pdf/Offshoring_Opportunities_Amid_Economic_Turbulence‐GSLI_2011.pdf>
23
It is clear therefore that several Latin American countries figure among the 50 most competitive
for the provision of offshore services.
India, China and Malaysia occupy the three top positions followed by Egypt and Indonesia. It
should be mentioned that Egypt, despite being a relatively recent entrant into the industry, has
achieved a significantly high ranking. Mexico, the first Latin American country to appear in the
ranking, occupies sixth place (6th). According to the abovementioned study, salaries there fell by
18% in 2010 as a result of the international crisis, rendering the country more competitive.
In addition, there are certified service centers, a fact which enhances the quality of the services
product offered by the country’s companies. Finally, improvements in business education have
also created a growing window of opportunity for participation in an industry in which skilled
human resources are a fundamental and differentiating factor.
The next Latin American country in the ranking is Chile, now in tenth place (10th), having
previously occupied eighth place. This slippage can be attributed to the fact that the post‐crisis
contraction of the economy was not as severe as it was in other parts of the world; salaries
remained relatively stable, making the country less competitive than other locations in terms of
costs. Further, despite good management by the authorities, the earthquake of February 2010
left in its wake certain complications at the infrastructural level, a factor which is also taken into
account for the purpose of the ranking.
Brazil occupies twelfth (12th) place in the ranking; while Costa Rica is in nineteenth (19th)
position, having moved up three places as a result of the modernization of its infrastructure, in
particular its telecommunications (broad band) and electricity infrastructure. Panama holds
thirty‐fourth (34th) position, very close to Argentina in thirtieth (30th), the latter having slipped
five places as a result of inflation and salary increases given in response to the demands of labor
leaders.
In thirty‐third (33rd) position, Jamaica is the only Caribbean country figuring among the 50 most
attractive locations for offshore services.
Uruguay is in forty‐first (41st) place, while Colombia is forty‐third (43rd), principally because of
the high rating received for availability of skilled human resources (HR). Colombian speakers do
not have a distinctive accent; for this reason a great deal of call‐center activity in Spanish takes
place there. There are however very few professionals who speak English fluently. This obstacle
is being overcome through specific programs as described in this section. The appreciation of
the local currency is, on the other hand, creating pressure to offer a higher level of service if the
country is to remain an attractive supply center.
24
B. Factors of Attraction for Offshore Services in Latin America
Several countries in Latin America and the Caribbean have been identified as having great
potential for offshore services activity. According to the A.T. Kearney study (2011) cited above,
there are nine Latin American countries among the most internationally competitive for
offshoring services: Mexico, Chile, Brazil, Costa Rica, Argentina, Jamaica, Panama, Uruguay and
Colombia. Other countries such as Guatemala and Peru are mentioned as locations to watch,
having the potential to attract offshore services business23.
The table below assesses six Latin American countries by reference to various factors which
influence the location of offshore services in their territories.
The factors analyzed for each of the six Latin American countries are: cost, economic and
political scenario, government initiatives in support of activities connected to the IT sector,
cultural and linguistic compatibility. The factors are finally reconciled to yield a total
attractiveness factor which, for most of the countries studied, is very positive. It should be
pointed out that the information on which the table is based dates from the year 2007; the
figures attached to each factor may therefore have changed since then. In any case, the table is
a good initial representation of this type of assessment and includes determining factors for the
analysis.
23 Gartner (2009).
25
Table 2: Factors of Attraction in Six Latin American Countries for Location of Offshoring (2007)
Source: Gereffi, G; M. Castillo, and K. Fernández‐Stark (2009). “The Offshore Services Industry: A New Opportunity for Latin America”. Inter‐American Development Bank (IDB). Pp.22.
26
IX. Presence of International Offshore Service Providers in Latin America
The following table shows 20 of the most outstanding offshore service providers at the
international level.24. It can be noted that there is a significant concentration of the principal
global offshore service providers in a few regions. Of these 20 principal multinational
companies, 65%, or two thirds, have their headquarters in North America, 20% in India and 15%
in Europe.
Table 3: Principal Offshore Service Providers
Source:: Gereffi, Gary y Karina Fernández‐Stark (2010). “The Offshore Services Value Chain. Developing Countries and
the Crisis”. World Bank, April. Pp. 9.
24 Gereffi and Fernández‐Stark (2010).
27
Almost all these providers are included in the BPO and ITO segments in which many activities do
not require highly qualified personnel and where there is strong competition for costs, as these
factors are the motivators of relocation of activities in these categories.
Below, the presence of the principal international offshore service providers in the various
countries of Latin America will be analyzed. Several tables presented are configured in
accordance with the origin of the companies. Table 4 shows eight of the main offshore service
providers originating from developed countries and which have a presence in the region. Details
are given of the countries in which they have a presence, the year in which they established
their centers of operation, their activities, the segments in which they have been included, the
number of employees they have in the region and the total number of employees as well as the
profits gained. (It is worthwhile mentioning that most of the information was gathered in
2008)25.
As the table indicates, while several companies operate within the three service categories (ITO,
BPO and KPO)26, others are only involved in the BPO segment. The companies which offer the
three categories of services as well as those which operate only in the BPO segment have wide
geographical coverage in Latin America and the Caribbean, with presence in 20 countries and
employing approximately 78,800 persons at the regional level. It may be observed that there
would be no direct correlation between a country and a particular segment.
25 Gereffi, Castillo and Fernández‐Stark (2009). 26 The service categories are referred to by their English acronyms: ITO (information technology outsourcing ) refers to subcontracting and outsourcing of information technologies; BPO (business process outsourcing) implies the subcontracting of business processes; KPO (knowledge process outsourcing)comprises the subcontracting of knowledge processes with this category covering the initial conception of R&D projects and activities.
28
Table 4: Companies in Developed Countries with Offshore Service Centers in Latin America
Source: Gereffi, G; M. Castillo y K. Fernández‐Stark (2009), “The Offshore Services Industry: A New Opportunity for
Latin America”. Inter‐American Development Bank (IDB). December. Page 30.
29
The following table shows companies originating from India with a presence in Latin America
and the Caribbean.
Table 5: Companies in India Dedicated to Outsourcing Offshore Services with a Presence in Latin America27.
Source: Gereffi, G; Castillo, M; Fernandez‐Stark, K. (2009), “The Offshore Services Industry: A New Opportunity for
Latin America. Inter‐American Development Bank (IDB). December.
Six companies located in India have a presence in seven counties in the region. All the
companies presented operate in the ITO category, whether or not they do so exclusively, as a
result of the expertise that India developed in this segment. Foreign direct investment (DFI) in
27 Gereffi, Castillo and Fernández‐Stark. (2009). Page. 32.
30
this case began about the year 2002, in general terms, with the exception of Getronics which
was established in Brazil in 1989. Five of the six Indian companies have presence in Brazil, three
in Mexico, two in Colombia and one in Chile.
The following table shows several companies which offshore services providers are originating
from Latin America. The data provided indicate the origin of each company, countries in which
it has subsidiaries, segments of activity in which it is involved, the number of employees and
income in millions of dollars up to 2008.
Table 6: Companies Providing Offshore Services Originating in Latin America28
Source: Gereffi, G; M. Castillo and K. Fernández‐Stark (2009), “The Offshore Services Industry: A New Opportunity for
Latin America”. Inter‐American Development Bank (IDB). December. Pp. 33.
These companies, also known as multi‐Latinos, have achieved a presence not only at the
western hemispheric level but also in Europe and Asia; 80% of these companies have a presence
outside of the continent. It is noteworthy that all the companies mentioned participate in more
than one segment of activity. This also occurs in the case of the CPM Braxis, Neoris and Politec ‐
companies which carry out activities in all three segments. In total, they generate 24,600 jobs.
28 Gereffi, Castillo and Fernández‐Stark (2009). Page. 33.
31
X. Benefits to be Derived from Participation in Services GVC
Entry into services GVCs offers numerous advantages both for the companies that are truly
participating as well as for the countries to which they belong. On one hand, services, and in
particular business services that can be provided electronically, do not require significant
financing as does the production of goods. In this regard, the entry of companies into services
GVCs poses an advantage with regard to the entry into manufacturing GVCs which may normally
imply the purchase of capital goods.
Specialization in services is advantageous in comparison to specialization in the production of
goods. The fragmentation of goods production implies a vertical specialization for the countries.
Although this specialization seeks to obtain the competitive advantage par excellence, the
capacity to change this specialization carries a greater opportunity cost in financial and
economic terms. Firstly, this is so since precisely when an important vertical specialization exists
there is less control over task design, which in this case is apparent because of the composition
of the entire GVC. Any decision to change the specialization in the production of goods would
imply: investment in the development of another industry; the reformulation of public policies
for the promotion of the sectors; a change in the manner in which the country enters the GVC
and how this relates to other participating countries; a change in the image of the country which
had originally been perceived as a reliable and efficient provider of a particular part of the
production process. In other words, specialization in the production of goods is less susceptible
to change than is specialization in the production of services.
The global demand for services seemed to be less affected by international crisis than the
demand for goods. While on one hand there did indeed exist a contraction in the demand for
offshore services, on the other hand, new companies began to relocate their services in order to
obtain better costs. Information that is no less significant states that specifically in periods of
crisis, the demand for advisory and consultancy services (part of the category termed “other
commercial services”) is customarily greater.
The potential for employment creation in relation to offshore services is very important globally
and in particular for the region. In Latin America and the Caribbean, the majority of new jobs
continued to be created in the services sector. In 2011 employment in the services sector rose
to 62% in the region.29
Participation in services GVCs may eventually result in upgrading of activities, as it is the
overflow of R&D activities in the country or region which is fundamental to the enhancement of
competitiveness in different areas. On the other hand, participation in services GVCs through
29 International Labour Organization (ILO) (2012). Page 63.
32
high value added activities requires the availability of qualified human resources, with formal
and technical education playing a fundamental role in the process of developing workforce.
Finally, the participation of companies in the international market through services GVCs offers
an alternative to going international on an individual basis, as it facilitates risk sharing and
allows for greater focus on their area of expertise.
XI. Small and Medium Enterprises (SMEs) Involved in Services GVCs
The history of the value chain does not relate exclusively to large global enterprises. Small and
medium enterprises are also active participants and are increasingly the ones that play the role
of services providers in global value chains. OECD studies show that since 1997, the small and
medium companies in the services sector have been the ones with greater participation in
international alliances, as compared to the small and medium companies in the manufacturing
sector. For the year 2000, there were almost four times more small and medium companies in
services in these alliances than those in the manufacturing sector.30 By their very nature, global
value chains facilitate the participation of small and medium companies in this new structure. In
general, services activities are less capital intensive than those involving manufacturing, and
they therefore need less physical infrastructure, a situation which is an advantage to countries
with limited physical and financial capital. The separation of services activities into “tasks”
allows the enterprises in developing countries to select the particular services tasks which they
are more competent to execute, and so are able to establish themselves in a specific area of the
a value chain without the need to “take charge of” the entire value chain.
It must be noted that the supply of offshore services is being consolidated rapidly, with the
creation of giant firms dedicated to the provision of services at the international level and with
which it is difficult to compete. In this context, the companies of the region focus on finding
specific niches that would benefit from the flexibility that they possess, rather than attempting
to achieve large economies of scale. The difference that the small and medium companies have
to offer is their flexibility and their enormous capacity to adapt to technologies or systems
developed by the multinationals or by overseas firms with which they must interact in the GVC.
Although they have the advantage of flexibility, the small and medium companies do not
customarily operate at the standards that the international companies demand. Before their
entry into the services GVCs, they must go through a period of adaptation, generally supported
by the other actors involved in the GVC. In this regard, the existence of programs for quality
certification in services would constitute a useful initiative to facilitate these efforts. Another
obstacle which the PYMEs experience is their low visibility internationally, and the information
they lack on opportunities in the offshore services industry.
30 Pasadilla (2007).
33
The large enterprises that are outsourcing or offshoring services often do not consider the small
and medium companies in the region as they are not familiar with them. Added to this is the
fact that Latin America does not have an image or an important position yet in the area of
offshore services.
Small and medium companies, like any company involved in the area of offshore services,
require qualified personnel. Generally, however, they do not have the capacity to finance the
education of their employees in order to retain and upgrade their services, contrary to the
possibilities of multinational companies and large firms.
Small and medium companies do not need to participate in the entire range of activities
provided by a GVC in the same way as a multinational services provider; neither do small and
medium companies need to specialize in an entire segment of a services or manufacturing
activity, but can concentrate on a specific activity or segment. The expertise developed through
this specific activity may allow these small and medium companies to become involved not only
in one GVC but in several.
Finally, participation in services GVCs allows small and medium companies to become more
linked to the world economy in association with other actors, or with the other producing
entities in the global value chains. Through this involvement, small and medium companies may
succeed in entering the global market without having to become international competitive for
an entire product on an individual level. Joint participation with firms from other countries
allows for the distribution of risks according to the capacities and scales of each small or
medium enterprise. The participation of small and medium enterprises in the international
market and their exposure to a more stringent level of demand also serves to stimulate the R&D
process of the company, and so to strengthen its competitiveness.
34
XII. Conclusions
The fragmentation of world trade into components or “tasks”, many of which currently refer to
services, provides firms in developing countries with significant possibilities for participation in
world markets. There are still great opportunities in the area of offshore services activities in
different industries, and new segments are emerging such as retail banking, tourism, health and
education services with a growing demand for many offshore services companies and ITO
services. This is in addition to the current demand in the area of financial services, energy and
telecommunications. The growth in the demand for offshore services is being driven by the
quest for cost efficiency, participation in new markets and the possibility of gaining access to
strategic assets in other countries (low labor costs, access to technology, technical and language
capability, similar time zones, inter alia)
Entering into services GVCs is simply a “new” mode of moving into the international market
under a changed structure of world trade. This structure, made up of global value chains
incorporating a growing presence of services, offers new opportunities and at a lower cost for
small and medium sized firms in emerging countries. How these opportunities will be seized will
influence long term development. Designing policies that stimulate participation in GVCs will be
most important. Public policy must ensure the creation of a suitable institutional and economic
climate to attract offshore services, so as to facilitate the entry of SMEs into the services GVCs.
Even though many SMEs in the region have the capacity to enter into services GVCs and display
flexibility appreciated by large multinationals in their participation in these value chains, they
must overcome various obstacles. On the one hand, SMEs often are not able to comply with
internationally accepted quality standard requirements, implying that they must embark on an
adaptation process upon when linking into a GVC. On the other hand, making SMEs more visible
outside the region so that their potential contribution is appreciated is a necessity.
It could prove easier and less costly for SMEs to capture one or several of the “tasks” in a
services value chain, rather than attempting to compete at every point along it. Local companies
are able to engage with greater ease in global markets when governments create a climate that
encourages offshoring and when they are not obliged to have a competitive cost advantage for
an entire product. Rather, they can dedicate themselves to a single “task” within one or various
global value chains to enhance their insertion in global markets.
35
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