Part 3 of a 3 part series
Editor: Paula Jones FCMA *

As a small island economy, Sri Lanka has no alternative but to develop its export markets. “Export or perish”, is a truism for the island, and what can be exported has changed in a twenty-first century economy. In the past, goods and capital could be exported relatively easily while services and labour could not. Successful economic strategies attempted to attract capital to an economy in order to produce more goods that could be exported and traded for other goods that could not be produced at home. However, the technological advances of the late twentieth and early twenty-first centuries mean that it is no longer true that goods are tradable and services are not. In fact more and more services are easily tradable. And countries that are realizing this are reaping great benefits from adapting their economies to be able to better compete in services trade.….. read more by clicking on the continue reading link below.

Look out for our next fortnightly blog: Outsourcing: an important tool for helping SMEs cope with the recession

For more information on outsourcing for SMEs, contact: Outspan. www.outspan.co.uk, 0845 838 1965

The advances that have made this possible include; cheap mobile connectivity, high speed internet access and digital convergence. These advances have created a truly global marketplace for services, especially those that are labour intensive and can be commoditized, and digitized: services such as legal advice, accounting and management consulting services, ICT services, software development, IT training and call centres. In the industrial era, such services were delivered domestically and often produced very close to the point of demand. Increasingly, such services are being produced in the locations that are able to deliver the lowest cost and the highest quality product. Like an incoming tide, this trend cannot be rolled back. It offers tremendous opportunities for developing countries as well as considerable risks.

In India, a global leader in outsourcing, IT exports account for close to US$20 billion and almost half of total export revenues. The total number of jobs created in the Indian IT industry is close to one million, many of them filled by women (2001 figures)

Not only does the development of this industry segment create job and export opportunities, it also creates positive spillovers such as: enhanced incentives for education, technology and knowledge transfer, environmental protection and an improvement in the quality of locally provided services.

Services that will be offshored in the future will go far beyond the traditional call-centres and back-office functions and it is estimated that this will result in 18 million jobs being offshored with a multiplier effect that could in turn create a further 60 million jobs in developing countries.

Firms move parts of their operations to offshore locations to reduce operating costs, reduce their capital requirements and to increase productivity, global competitiveness and operational efficiency. Countries wishing to attract offshored investments must therefore offer a politically and economically stable climate that also exhibits a low cost structure, educated workforce and sound infrastructure. Sri Lanka provides these conditions.

The impact of outsourcing on Sri Lanka’s economic development

Economic growth is a critical factor in poverty reduction and services provide a key engine for this type of growth. In countries that have grown quickly and have been able to sustain high growth rates over long periods, services have been responsible for much of that growth, generally growing much faster than other sectors of the economy. Even in countries that experienced a rapid growth of manufactured exports there was also a parallel and rapid growth in services. The service sectors, from finance and accounting to IT and advertising, also provide valuable inputs that the manufacturing sector needs to be able to compete effectively in global markets in terms of quality, flexibility and reliability.

Services trade enables developing countries to potentially leapfrog the industrial development stage. The economic models of the past assumed that countries grew by creating an agricultural surplus and borrowing to invest in manufacturing capital. Only when countries went through the industrial stage of development could they consider a focus on services, as domestic demand for such services was still nascent and services trade was non-existent. The communications revolution of the last decade now permits lower income countries to leapfrog that stage of development and directly focus on expanding the service sectors of their economies. The technology itself does not depend on first building a solid industrial base: mobile telephones don’t rely on an extensive network of landlines. And countries that have not yet invested heavily in old technologies can simply choose to by-pass it. Sri Lanka now has more mobile phone subscribers than those with landlines.

The contribution of services offshoring to the GDPs of provider countries has increased substantially over the last few years. As a pioneer and leader within the offshoring market, India has benefited tremendously from growth in this area while growth has exceeded all expectations.

Creating new opportunities

The percentage of the total workforce engaged in services is expanding at a rapid pace. Services offshoring expands employment opportunities in developing countries. In terms of job creation, the growth in offshoring to India has created a significant number of jobs. IT-enabled services are projected to employ up 3.3 million by 2015. There is also evidence that as many IT related jobs are relatively well paid, they generate a further 3 jobs in the rest of the economy a highly desirable impact that does not come from low-end manufacturing jobs.

Women are considerably advantaged by offshoring opportunities. The ability to complete more responsibilities from remote locations that might be located in or closer to their homes has allowed more women to enter the offshoring workforce. For instance, Outspan (a leading UK outsource provider with service centres in Sri Lanka) employs approx. 50% women. With female education and literacy at par with that of males in Sri Lanka, the country is well positioned to take advantage of this potential.

Offshoring’s Positive Spillover Effects

Offshoring, especially captive offshoring, provides a significant contribution to foreign direct investment (FDI). In turn, FDI is often directly linked to economic growth because of the increased income sources and jobs generated which subsequently reduces poverty. FDI also generates several indirect benefits that increase productivity of the recipient economy through the adoption of managerial and technical best practices from foreign countries.

While FDI stimulates productivity improvements in general, services outsourcing has several specific characteristics that create unique spillover benefits and positive externalities for developing economies. These defining features differentiate services outsourcing from the traditional fields of manufacturing and goods outsourcing.

Incentives are created for education. While outsourced manufacturing relies on a cheap, low-skilled workforce, services outsourcing relies on a well educated and highly skilled workforce. The employment of a relatively skilled labour force in the services trade increases the return to education and, thus the incentives to acquire skills that are marketable in the global economy. Thus services offshoring has the potential to mitigate Sri Lanka’s perennial problem of educated unemployed youth.

The quality of exported services improves which benefits domestic consumers, especially manufactured goods exporters, of the same services as well. For instance, call centres in developing countries that are established to cater for the UK market are also being operated round the clock to provide services to local customers. The same is happening in Sri Lanka with the recently established HSBC call-centre providing local services to the whole of Sri Lanka.

Technology and knowledge transfer results. Services exports and outsourcing requires technical sophistication. For example, it is necessary to have dependable and cheap communication links with the rest of the world. Repeated and frequent interactions with foreign firms and, especially, their direct presence, also increases knowledge transfers. This is not limited to technical knowledge but includes business standards and know-how which are critical for integration of national economies into the global economy and factor prominently in the long-run growth implications for any developing country.

Improvements in human capital. Export-oriented zones have been shown to improve the quality of human capital and the productivity of the local workforce in domestic economies, foreign investors engage in substantial training and the workplace encourages learning by doing, as in Singapore and the Philippines. Furthermore, learning can also occur at the managerial and supervisory level, thus potentially fostering local entrepreneurship. This is important since firms in developing countries often lack the production and marketing know-how required to enter world markets. Outsource providers such as Outspan have management training programmes where senior managers spend significant time on training in the UK and US annually at universities and on accountancy profession courses.

The processes tend to be more environmentally friendly. Services exports and outsourcing do not create many of the negative externalities associated with manufactured goods, such as environmental pollution and lower labour standards. The effects of this type of environmental degradation are usually ignored since it is hard to quantify these negative externalities and the actual consequences are only revealed over a long period of time.

The Challenge

The challenge for outsourcing providers is to make sure they can maximise the benefits of global trade while minimising the problems, by ensuring that their staff are paid living wages, work reasonable hours and are provided with a safe place to work. The developed world’s role in this is to ask the right questions and, as customers, be comfortable that they are working with responsible organisations.

With companies in the developed world needing to keep costs down to stay competitive, outsourcing is set to become a permanent feature of our business world, and the future for the developing world is bright.

1 Extracts taken from the World Bank report: Sri Lanka: Offshoring Professional Services (Ismail Radwan, the World Bank, & Gihani Fernando of HAAS Business School, University of California at Berkeley). For the full article: siteresources.worldbank.org/…/Resources/Offshoring-in-Sri-Lanka.doc