Globalization, Outsourcing and Labour Development in ASEAN

Shandre Thangavelu, Aekapol Chongvilaivan

• Publisher: Routledge
• Year: 2013
• Topic: Economics
• eBook ISBN:
  9781135049997
• Subtopic: Operations
• Index: Economics

Due to technical advances in production and communication technology, outsourcing – contracting out production of intermediate materials and services – has affected the economic growth of the ASEAN region. This new book fills an important gap in the literature looking at the impact outsourcing has on labour markets, its subtle effects on regional economies and policy implications.

Shandre Thangavelu and Aekapol Chongvilaivan investigate various impacts of outsourcing on labour markets, such as its effects on labour productivity, skill upgrading, human capital, and training, in ASEAN economies with a focus on the experience of the two ASEAN countries as a global hub of outsourcing: Singapore and Thailand. This book approaches these research inquiries by developing several econometric models, including primal production functions and dual cost functions, among others. The empirical evidence this book reveals provides interesting insights into and implications on labour and industry development.

1 Introduction

Thanks to substantial plunges in transportation and communication costs on top of ever-expanding globalization, outsourcing — contracting out production of intermediate materials and services — has diffused deeply into the Association of Southeast Asian Nations (ASEAN) region. While there have been various accounts of the causes and consequences of outsourcing in the international trade, labour economics, development economics and industrial organization literature, much research in this subject that zeroes in on the issues related to the ASEAN region has been largely limited. This is because the nature and characteristics of outsourcing activities in the emerging markets in ASEAN differ greatly from those of developed countries. These unique features require thorough understanding and careful deliberation and thus impose considerable complications and challenges on the analytical tools. Additionally, the absence of detailed, concise and comprehensive ASEAN databases has hindered researchers and policy analysts in producing in-depth studies on outsourcing in this region.

This book is an attempt to theoretically and empirically investigate various subjects of outsourcing, such as the effects of outsourcing on labour productivity, wage inequality and human capital development in ASEAN economies (with emphasis on selected ASEAN countries' experience of emerging as a global hub of outsourcing). We approach these research inquiries by developing several theoretical and econometric models, including primal production functions and dual cost functions, among others. The analytical results and empirical evidence of the book provide interesting insights into and implications for labour and industry development in the context of emerging markets in ASEAN.

This chapter is structured into three parts. Section 1.1 elaborates on the recent developments and current global trends of offshore outsourcing in Asia and selected countries. Section 1.2 identifies the major players of off shoring in Asia and analyses their strengths and weaknesses. Section 1.3 provides an overview of the rest of the book.

1.1 Current global trends of outsourcing in Asia and selected countries

For the past decade, the practice of offshore-outsourcing or offshoring has received widespread attention and created much controversy due to the potentially large number of job shifts from the industrial economies, particularly the United States (US), to developing countries such as China and India. The phenomenon of offshoring is not a new one. The 1970s saw the manufacturing companies of Europe and America offshoring their blue-collar jobs to developing countries, and in the 1980s, we witnessed the start of offshoring in information technology (IT) software-development jobs. It was only in the late 1990s that the scope of offshoring expanded to include white-collar jobs in corporate business functions and the service sectors, posing a threat to the employment of skilled workers in developed countries.

Outsourcing is traditionally defend as the contracting out of activities previously performed within a form to third-party contractors or outsourcers outside the firm. In this context, outsourcing may also be termed in economics parlance as “vertical disintegration”, “fragmentation”, “vertical specialization” or, in business terminology, “contracting out” and “smart sourcing”. Although most commonly associated with IT, outsourcing also includes other areas such as contract manufacturing. The term “offshoring” or “offshore outsourcing” normally refers to the relocation of business functions and processes from a high-cost country to a cheaper offshore location. Firms typically offshore to achieve benefits such as cost savings, access to skilled resources and creating economies of scale by the consolidation of functions from several locations. For example, Johnson (2003) reports that Procter & Gamble offshore global tax returns to its subsidiary in Manila, employing over 600 accountants and auditors.

In local outsourcing, the loss of local jobs is less of a concern as compared to off shoring. Local firms could transfer a large proportion of its employees to the outsourcer, contractually guarantee the staff retention for a period of time, or retrench the employees and devolve the jobs entirely to the outsourcing providers. In this case, jobs will still be retained within the national boundaries, although there will be some overall job losses due to consolidation and economies of scale. For example, DBS Bank in Singapore outsourced some of its IT activities to IBM, transferring its 500 staff from Singapore and Hong Kong to IBM in the process (Rae, 2002). However, increasingly, the trend is for local outsourcers to offshore parts of their processes through offshore subsidiaries or offshore service providers, which will result in an outflow of jobs to foreign markets.

Several factors account for the outsourcing of activities overseas. Global development of information and telecommunication technologies is one key trigger that reduces network cost and increases the returns on production networks. This reduction in IT costs increases the diffusion of information and thus allows forms to seek cheap and high value-added technology. Second, global trade barriers have been declining for the past two decades with greater trade and

Table 1.1 The three waves of IT outsourcing

Period	Focus
The first wave (1970s–1980s)	IT performance management and cost savings This period saw great growth in IT usage. Outsourcing companies competed primarily against their clients' in-house IT departments, with a strong focus on IT performance improvement and cost savings. Companies did not require year-one savings. They often realized that some up-front investment on their part was required and they were looking for opportunities that outsourcing could bring. The human dimension was largely ignored.
The second wave (1980s–1990s)	Emergence of large systems integration and mega contracts This period witnessed the emergence of large systems integration and mega-contracts, especially within the government arena. The premium skill for outsourcers now was their ability to integrate different technologies and implement solutions.
The third wave (mid-1990s–2000 and after)	Moving beyond systems and technology into business processes (BPO) With a mature market, outsourcing is now strongly moving into business processes — such as logistics, procurement, human resources, customer service and accounting. These processes can be managed and integrated with technology to function more effectively through process engineering, integration and streamlining. As technology evolves to become a more integral part of a company's business operations, the perceived value of outsourcing will continue to shift from IT performance and efficiency to measurable business results.
	Commoditization of IT outsourcing Basic infrastructure processing components are becoming standardized.
	A thriving competitive marketplace of third-party intermediaries Consultants who research and act as intermediaries between outsourcers and customers play an increasingly important role.
	BPO now a strategic business-management tool for re-energizing the enterprise BPO has penetrated into many sectors including retail.
	Tremendous implications for workforce The outsourcer has become a significant employer, taking over the staff from the outsourcing companies. The nature of the huge workforce the third-party outsourcer takes on is largely clerical, and increasingly a burden.
	Emergence of the Internet and digitization together with availability of high-speed cable infrastructure The web, e-commerce, digitization and the availability of highspeed cable infrastructure increasingly makes it easy to offshore some parts of the business processes.

Source: authors' compilation.

Table 1.2 The five waves of outsourcing in the electronics industry

Period	Focus
The first wave (1970s–1980s)	North American IT companies began outsourcing PC manufacturing.
The second wave (1980s–1990s)	North American communication companies followed suit and adopted the outsourcing business model.
The third wave (1980s–1990s)	European original equipment manufacturers (OEMs) also began outsourcing. Lower-value manufacturing moves to low-cost Asian countries such as Malaysia, Singapore and Taiwan. The focus of electronics manufacturing services (EMS) providers is the offering of the lower-end traditional PCBA (printed circuit board assembly) services.
The fourth wave (1990s–2000 and after)	Japanese OEMs began outsourcing especially due to the country's prolonged economic downturn. This trend is still occurring and its impact will still be felt all across Asia. High-complexity manufacturing remains in Japan, while lower-complexity manufacturing moves to lower-cost geographies. Increasingly the trend is to move the lower-end assembly services to China. Emergence of local production players such as Flextronics.
The fifth wave (late 1990s and beyond)	The EMS providers not only offer the traditional range of PCBA services but also value-added offerings such as design, test, repair and after-sales support. There is greater partnership between the EMS providers and the global leading OEMs such as Cisco Systems, Dell Computer, NEC.

Source: authors' compilation

economic liberalization in developing countries, thereby increasing access to cheaper resources in developing economies. Third, in addition to increases in multinational activities, greater human capital mobility across developed and developing countries triggers greater diffusion of knowledge from developed to developing countries. Fourth, there is convergence of IT and science education between developing and developed countries. For example, universities in developing countries such as India and China are able to diffuse knowledge that is comparable to that in Western universities. This has led to the convergence of comparable human capital that is relatively cheaper than that in developed countries.

The primary reason for offshoring is to reduce and control operating costs, in particular labour costs. The large wage differential between developed and developing countries for comparable human capital spurs outsourcing activities. A particular example is the large wage differential between the US and developing countries, such as China, Brazil and India, which drives offshoring. For instance, a software developer costs US$60 per hour in the US while an Indian counterpart of comparable human capital costs only US$6 per hour. In addition, many of the offshored jobs that are considered unattractive and low-prestige jobs in the US and Europe are desirable to workers in the receiving countries. As a result, workers in low-wage locations often are more motivated than their counterparts in developed countries and outperform them.

Further, the presence of an English-speaking population is a major determinant in the choice of location for offshore of services. Countries that have a large base of English-speaking workers, namely Canada, Israel, Ireland and India, are attractive and well-established locations. Ireland has a US$6 billion software industry with a strong reputation for internationalization and customization, while Canada as a “nearshore” location is well suited for complex business processes that require close proximity to the US operations. India is one of the top choices, particularly for IT outsourcing. China, which has a lower labour cost than India, is becoming a very attractive offshoring destination for Indian IT companies. To a lesser extent, Japanese and Korean companies are also offshoring support functions to China. Australia, South Africa and the Philippines are also attractive locations due to their English-speaking population, while countries such as Costa Rica, Thailand, Mauritius, Russia, Poland, Romania, Hungary and the Czech Republic are emerging as alternative locations.

1.1.1 Offshoring IT functions

In the last two decades, IT offshore outsourcing, particularly to India, focused on limited software and applications development work. With the advent of the Internet and greater technological improvements, the offshoring scope in IT functions has expanded to include areas such as PC maintenance, web hosting, network management and data centre management and so on. Although IT outsourcers can perform the IT functions onshore, increasingly they are moving into offshore/onshore hybrid models whereby cheaper offshore staff manage the backend systems while the small onshore team maintains client contact.

1.1.2 Offshoring business processes and consolidating shared services

Apart from IT functions, offshore outsourcing of business processes, such as customer interaction, and shared corporate services, such as human resources (HR), finance and accounts and proc...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Table of Contents
• List of figures
• List of tables
• 1 Introduction
• 2 Economics of outsourcing: a literature survey
• 3 Outsourcing decisions: theory and evidence
• 4 Outsourcing and labour productivity
• 5 Outsourcing and wage inequality
• 6 Outsourcing in emerging countries: a case study from Vietnam
• 7 Managing global supply chain disruptions: experience from Thailand's 2011 flooding
• 8 Outsourcing and policy implications
• Notes
• References
• Index