Offshoring of White-Collar Services
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Artur Klimek Offshoring of white-collar services Artur Klimek Offshoring of white-collar services Business and economic perspective ISBN 978-3-11-069058-3 e-ISBN (PDF) 978-3-11-069066-8 e-ISBN (EPUB) 978-3-11-069069-9 https://doi.org/10.1515/9783110690668 This work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License. For details go to http://creativecommons.org/licenses/by-nc-nd/4.0/. Library of Congress Control Number: 2020938627 Bibliographic information published by the Deutsche Nationalbibliothek The Deutsche Nationalbibliothek lists this publication in the Deutsche Nationalbibliografie; detailed bibliographic data are available on the Internet at http://dnb.dnb.de. ©2020 Artur Klimek, published by Walter de Gruyter GmbH, Berlin/Boston. The book is published open access at www.degruyter.com. Cover image: metamorworks/iStock/Getty Images Plus Typesetting: Integra Software Services Pvt. Ltd. Print and Binding: CPI books GmbH, Leck www.degruyter.com To my wife, Aleksandra, and my daughters, Alicja and Amelia Acknowledgement The project has been financed by the National Science Centre, Poland according to the decision no. DEC-2015/19/B/HS4/00356. Open Access. © 2020 Artur Klimek, published by de Gruyter. This work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License. https://doi.org/10.1515/9783110690668-202 Contents Acknowledgement VII Introduction 1 1 Past developments and recent trends in offshoring of white-collar services 7 1.1 Offshoring and offshorability 7 1.2 Five waves of business services offshoring 10 1.3 Potential economic gains due to service offshoring 17 1.4 Potential economic losses due to service offshoring 18 1.5 Contemporary forces shaping business services offshoring 22 2 Conceptualisation of advanced business services and offshoring 24 2.1 Advanced business services and knowledge intensive business services 24 2.2 Classification of business services 26 3 Theory of offshoring of advanced business services 32 3.1 Specifics of theorising on offshoring 32 3.2 International economics and services offshoring 35 3.3 International business and service offshoring 36 3.4 Transaction costs approach to offshoring 39 3.5 Agglomeration economies and advanced business services 40 4 Business perspective on offshoring of white-collar jobs 44 4.1 Motives of offshoring of advanced business services 44 4.2 Modes of delivery of advanced business services 47 4.3 Shared services centres 51 4.4 Business process outsourcing 55 4.5 Information technology outsourcing 57 4.6 Research and development units 58 4.7 Managing advanced business services units 59 5 New trends in advanced business services 62 5.1 Global business centres 62 5.2 Automation and machine learning in business services 64 5.3 Transformation of business services and their execution 69 5.4 Cybersecurity and data protection 72 X Contents 6 Global perspective on advanced business services 75 6.1 Landscape of international sourcing of advanced business services 75 6.2 India 82 6.3 The Philippines 90 6.4 Poland 96 7 Host country perspective – focus on Central and Eastern European economies 102 7.1 Overview of advanced business services in Central and Eastern Europe 102 7.2 Environment for offshoring of advanced business services in Central and Eastern Europe 105 7.3 Firm-level approach to advanced business services in V4 economies 115 7.4 Incentives towards advanced business services in selected CEE economies 141 7.5 Impact of advanced business services on CEE economies 145 7.6 Survival analysis of service units in CEE economies 149 7.7 Conclusions regarding economic role of advanced business services 152 8 Policy implications 154 Concluding remarks 157 References 161 List of figures 177 List of tables 179 Index 181 Introduction Intangible processes shape the global economy. Value and utility are derived from constant flow of data between entities located in various spots in the world. Most users of the digital content would not be able to indicate its country of origin or explain the mechanics behind the provided service. Similar phenomenon occurs in the business relations, which are shaped by processes of the international supply of services. Data, information and knowledge flow seamlessly between entities engaged in global value chains (GVCs). Its crucial elements are multinational enterprises (MNEs) and the persistent transformations of their operations. One of the major elements of the international sourcing of goods and services is offshoring. According to my best knowledge, no other activities concerning MNEs have recently been so dynamic and brought such profound changes to their struc- tures, as reorganising the execution of the headquarters’ services via various forms of offshoring arrangements. Many crucial business activities are provided by speci- alised vendors located in business services hubs. It is frequently visualised as em- ployees from a distant and low-cost location providing IT or accounting services for a rich-country corporation. However, isittherealessenceofwhite-collarserv- ices offshoring? Does it change over time? What is its impact on businesses and economies? The importance of offshoring can be measured using various metrics, such as the value of the services offshored, number of jobs in offshore services, or the types of processes offshored. Because of the dynamics of offshoring, imperfections of sta- tistical tools, and intangible nature of offshore activities, there are only estimations available regarding the size of offshoring. According to various sources, the value of the market of offshored advanced business services (ABS) is worth more than 1 trillion dollars annually and employs millions of people. Importantly, the trend has been growing steadily for the past two decades. However, the real importance of service offshoring may be much higher due to efficiency and knowledge gains, but also risks incurred by the operations. I attempt to shed more light on the topic of offshoring of white-collar services, which are not frequently highlighted in the dis- cussion of international organisation of firms and markets. My aim is to present a comprehensive picture of the recent global and local landscapes shaping these activities. Business decisions have economic implications. Economic conditions influence business decisions. Therefore I argue that it is not only necessary to focus on eco- nomic or business issues without presenting the interactions between those two. Especially when it comes to the issue of offshoring, which is very multidimensional and dynamic, thus calls for the analysis of the links between particular elements of the offshoring arrangements, rather than those elements themselves. A one-sided ap- proach to offshoring is the main difficulty in understanding its essence. For example, Open Access. © 2020 Artur Klimek, published by de Gruyter. This work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License. https://doi.org/10.1515/9783110690668-001 2 Introduction the impact of offshoring on a host economy has been measured using changes in the job market, which is a part of economics. But the changes in the job market are closely linked to management practices and employees satisfaction with the jobs, which is the business part. An interdisciplinary approach brings many challenges and requires holistic thinking about the issue. But it will allow to use the findings in building business strategies, but also public policy regarding offshoring of ABS. I investigate whether offshoring of white-collar services is a win-win situation for economies of different levels of development. Such an assumption is supported by the evidence that workers in offshored jobs in home countries can be employed in higher value activities, thus receive higher wages, while firms report higher effi- ciency. From a host country perspective, it means inflow of jobs and knowledge, as well as the inclusion in GVC. Or maybe it is a zero-sum solution, which means that jobs are transferred from high-cost economies to low-cost ones. As a result there is a loss of jobs in a source economy and the same number of new jobs is created in a host economy. There is also the third possibility – a negative-sum game. The main argument for such a situation is that the number of jobs created in a host economy is lower, than the number of jobs lost in a source economy. It is due to the fact that offshoring results in centralisation of many activities, thus jobs in many local units are axed and only a fraction of the original number is created in a host economy. Moreover, there is the question of whether the jobs created are a blessing for the host economy or maybe a burden. I will apply the multidimensional analysis to pre- sented scenarios, both from the perspective of host and home economies. The idea of offshoring of ABS has been predominantly analysed from the per- spective of home countries. The other side of offshoring – host economies – has been to some extent neglected or at least stereotyped. There is vast literature regarding off- shoring of business services to Asia, particularly to India. Indeed, the economy be- came a symbol of offshoring and outsourcing of business services globally. The economy is considered to use the foreign direct investment (FDI) into service sector to alter its sectoral structure. There has been a leap from agriculture into services re- quiring highly skilled workers. However, the offshoring of services in not only about Asia. There are emerging locations in many parts of the world. I focus on ABS in Central and Eastern Europe (CEE) because of the enormous growth of FDI in professional services in recent years. From the perspective of the CEE countries, such a situation is new, as they focused on industrialisation during their dependence on the Soviet Union, and even after the fall of the Iron Wall, manufacturing was an important element of attracting FDI.