The Business Service Sector in India, Ireland and Poland. A Comparative Analysis

Mroczek, Arkadiusz Article The Business Service Sector in India, Ireland and Poland. A Comparative Analysis Comparative Economic Research. Central and Eastern Europe Provided in Cooperation with: Institute of Economics, University of Łódź Suggested Citation: Mroczek, Arkadiusz (2019) : The Business Service Sector in India, Ireland and Poland. A Comparative Analysis, Comparative Economic Research. Central and Eastern Europe, ISSN 2082-6737, De Gruyter, Warsaw, Vol. 22, Iss. 2, pp. 159-172, https://doi.org/10.2478/cer-2019-0018 This Version is available at: https://hdl.handle.net/10419/259203 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. 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A Comparative Analysis Arkadiusz Mroczek Ph.D., Krakow University of Economics Faculty of Economics and International Relations Department of International Economic Relations, Krakow, Poland e-mail: mr[email protected]akow.pl Abstract The fast growth of the service sector is one of the characteristic features of the con‑ temporary economy. Amongst other CEE countries, Poland is one of the emerging locations for this sector. The aim of the paper is to examine and compare the business service sector in India, Ireland and Poland. Both India and Ireland are exceptional loca‑ tions for this industry, so comparing the state and operating conditions in Poland with those countries can be insightful. A literature study is used to determine the motives of companies undertaking offshore investments, upon which a selection of location factors is made. In the empirical part, those factors are analyzed in a descriptive way. This allows us to draw conclusions concerning this sector in Poland. This country, to some extent, possesses selected positive features of both India and Ireland, which explains the current growth of the sector. Keywords: Business Process Outsourcing, Business Service Sector, BPO, SSC, location choice JEL: F21, F23, O32 160 Arkadiusz Mroczek Introduction The fast growth ofthe service sector isone ofthe characteristic features ofthe con‑ temporary economy. Amongst other CEE countries, Poland isone ofthe emerging lo‑ cations for this sector. The aim ofthe paper isan examination and comparison ofthe business service sector inIndia, Ireland and Poland. Both India and Ireland are ex‑ ceptional locations for this industry. Comparing the state and operating conditions inPoland with those countries can beinsightful, allowing usto draw conclusions concerning the latter. Inthe 1970s and 1980s, the managerial mindset was dominated byinternalization and vertical integration. This path ofgrowth and full control was pursued bylead‑ ing companies. Yet inthe next decades, the international business world experienced ashift inparadigm that led tolarge scale outsourcing and offshoring projects (Kedia & Mukherjee 2009, p.258). Outsourcing can beunderstood astransferring certain pro‑ cesses toanother firm basically tosave costs and tofocus onareas ofkey competence. Ifoutsourcing isimplemented onawide scale, itdrastically changes the role ofthe parent company. The value creation that was hitherto focused under one ownership and directcommand isnow, ingreat part, disaggregated and dispersed between sub‑ contractors. This way, apyramidal model ofsubcontracting and horizontal networks can emerge. The parent organization inthis model isan integrator that synthesizes the work ofthe contractors and benefits from the synergy effects that appear (Ram‑ achandran & Voleti 2004, pp.49–62). Some authors argue that organizational forms have evolved inthis way, from multinational enterprises tointernational networks (Grimes 2003, pp.3–14). For the benefits ofoutsourcing tobe observed, both the parent company and the subcontractors can work inthe same location. However, agreat increase invalue and its meaning are connected with another business phenomenon– offshoring. The lat‑ ter isdefined asthe sourcing ofactivities outside afirm’s home country and issome‑ times referred toas global sourcing. This term emphasizes the ability ofacompany totake advantage ofglobal resources byactively choosing locations inwhich itoper‑ ates (Gooris & Peeters 2014, p.73–86). Touse foreign resources, direct engagement ispossible, which iscalled captive offshoring. Accessing these resources isalso possi‑ ble inan indirect way, through offshore outsourcing. Incaptive offshoring, acompa‑ ny creates ashared service center (SSC) inthe host country that takes over processes from different locations. Offshore outsourcing isheld inbusiness process outsourcing (BPO) centers that usually work for many clients. Inthis paper, both forms ofoffshor‑ ing are taken together and often referred toas business sector services (BSS) orsim‑ ply offshoring. Inhistory, the term offshoring referred implicitly tomanufacturing production. The recent wave, however, concerns business services, including IT, administration, finance and call marketing, and itbegan, although very moderately, inthe 1980s and 1990s. These kinds ofbusiness services have enormously increased inthe 21stcentury 161 The Business Service Sector in India, Ireland and Poland. A Comparative Analysis (Caniato etal. 2015, p.189). The reasons behind this rise are both political‑economic and technological.Both liberalization inAsia, aswell asthe fall ofcommunism inCen‑ tral and Eastern Europe, not only opened upconsumer markets but they also enriched the global talent pool available for companies. The most pioneering cases were India and Ireland. India turned into amore business‑friendly economy, and Ireland recog‑ nized business services asanother niche for itself, after advanced manufacturing. The advances incomputer technology and broadband Internet provided the necessary infrastructure (Metters & Verma 2008, p.142). The IT industry, itself, played anoth‑ er role inthe development ofbusiness offshoring. During the “millennium bug” cri‑ sis inthe 1990s, IT companies were looking for away tofix the “date problem,” and countries which offered cheap labor turned out tobe the solution (Abbott 2013, p.27). The service capacity that was created was then used toprovide other kinds ofIT ser‑ vices. The BPO industry, ingeneral, was worth $45.6 billion in2000, and $88.9 bil‑ lion in2017, with the peak in2014, when the total volume ofits sales equaled $104.6 billion (Statista, 2018). Methodological remarks First, aliterature review isperformed todetermine companies’ motives for undertak‑ ing offshore investments. The study continues bydetermining the factors that compa‑ nies take into consideration when choosing the host country for BPO/SSC activities. Weshow that location factors can beconnected with particular investment motives. Based onthe set offactors prepared inthe literature study, the empirical part iscar‑ ried out. For some ofthe selected factors, proxy indicators are ascribed for which data onthe three countries can befound. After presenting the factors, they are ana‑ lyzedin adescriptive way. This allows usto draw conclusions concerning the sector inPoland. Literature review Motives for making use of offshore business services Cost minimization isaprimary motive for most companies deciding tooutsource. Astime passes, management can learn that outsourcing can bring more benefits, in‑ cluding quality improvement and innovation (Maskell et al. 2006, p.3). Also, offshor‑ ing seems tobe first driven byopportunities for cost reduction. However,other rea‑ sons, such asaccess torecourses and markets, also are important. Companies can benefit from the “resources and competencies arbitrage” that globalization brought tothem (Munoz & Welsh 2006, p.112). Other authors have looked atthis case from asimilar perspective. Offshoring isinitially driven byefficiency‑seeking, usually inlow 162 Arkadiusz Mroczek value‑added activities. But later, the quality ofwork and the pool oftalent the parent company gains access tomake itlook for possibilities torebuild its business mod‑ el and improve the innovation process (Lewin & Volberda 2011, p.242), and benefit from new technologies and extra knowledge (Caniato etal., 2015, pp.190–191; Mus‑ teen 2016, p.3440). Narrowing the considerations only todemanding high skills, research and devel‑ opment (R&D) activities show aninteresting analogy tothe above pattern. Accord‑ ing toDemirbag & Glaister (2010, p.1554), while the cost factor isstill significant for companies offshoring their R&D activities, ashortage oftalent intheir home coun‑ tries appears tobe ofequal importance. Acombination ofthe intention togain ac‑ cess tocheaper assets, but also torich technology (Jabbour & Zuniga 2016, p.359), aswell asthe possibility ofbenefiting from talented human capital (Benito et al. 2013, pp.211–222) are often pointed out inthis context. For some authors, captive offshoring and offshore outsourcing are, first ofall, tools bywhich companies can take advantage offoreign sources ofknowledge (Mukherjee etal. 2017, p.1). Location factors of offshoring centers The framework for the discussion onthe location choice ofbusiness service centers isbased, ingeneral, onthe theory offoreign direct investment (FDI) location choice. The main concept exploited inthis case isthe eclectic OLI paradigm, which depicts the Ownership, Location and Internalization advantages that come from FDI. Atheory also recalled isRBV (resource‑based view),which emphasizes the company’s resources asakey for its strategic choices. Another important approach, especially inthe case ofoutsourcing, isTC (transaction cost theory), which underlines the cost ofcooper‑ ating with anexternal service provider (Rodgers et al. 2017, pp.1–12). The results ofstudies based onthose theories can beconnected with the motives for undertaking offshoring projects. Inshort, the most important local features that attract this kind ofcompanies are labor cost, the availability ofresources (access total‑ ent and human capital ingeneral, the presence ofservice providers), and close cultural distance, business environment, and local networks. Anattractive local market may also act asan incentive (Caniato etal. 2015, p.190). The cost factor isthe most com‑ monly accepted factor, and itseems tobe crucial especially atthe initial phase ofoff‑ shoring. The other features ofthe hosting economy are discussed more intensively, and the results ofstudies onthem are interesting. One such empirical analysis shows that besides wages, alarge educated workforce with language skills and low coun‑ try risk play animportant role inthe case ofany offshore business services, not only the most demanding R&D (Doh et al. 2009, p.938). Besides those factors, geograph‑ ic distance and acountry’s previous BPO experience also often play apart (Graf & Mudambi 2005, p.264). Geographic distance appears tobe abigger obstacle, interms ofgenerating organizational and control problems, than cultural distance (Handley & Benton 2013, p.124). 163 The Business Service Sector in India, Ireland and Poland. A Comparative Analysis R&D services demand high‑quality human capital and the location ofinvestments inthis sector isalso worth considering. For some authors, because companies use the offshoring ofR&D primarily asatool toaugment their knowledge base, adecisive lo‑ cation factor isthe pool ofskilled scientists and engineers (Demirbag & Glaister 2010, p.1555). Some studies suggest that companies tend tooffshore projects that are more innovative todeveloped economies and routine R&D tasks toemerging ones (Rodg‑ ers etal. 2017, pp.1–12; Martinez‑Noya etal. 2012, pp.18–37). Another useful insight into the topic ofbusiness service location can begiven byanalyzing how the specifics ofparticular companies influence their decisions inthis field. One such factor isthe company’s experience ininternational offshoring, and lack ofexperience seems tomake them prefer nearshore locations (Gerbl etal. 2015, p.516). Ifacompany isalready present inahost country, itcan encourage the com‑ pany tomake afast decision tooffshore business processes there (Luo & Jayaraman 2013, p.460). The internal reasons for outsourcing and the particular activities that are going tobe outsourced (“why and what” questions) may also beimportant (Hätö‑ nen 2009, pp.72–73). Moreover, even some behavioral factors concerning the deci‑ sion makers can beimportant for the choice oflocation. Onthe one hand, manpow‑ er and technology availability seem todominate hedonistic factors (Rajkumar 2013, pp.35–54); onthe other hand, managers may choose aparticular location not only based onin‑depth economic calculation, but also ontheir emotional attitude towards the place (Musteen 2016 pp.3439–3446). BPO seems tobe less path‑dependent than many other kinds ofindustry, especially manufacturing. Acombination ofuniversal infrastructure and acertain level ofhu‑ man capital with general skills may beenough tostart anew outsourcing center. Yet, itappears that also inthis field, agglomeration factors may prove tobe important. AsGrossman and Helpman argue (2005, p.158), for aclient company, itis more prof‑ itable ifit can choose between different providers inthe same location, and for ser‑ vice companies, itpays off more ifthey have many customers toserve. This isaclas‑ sic mechanism that drives agglomeration economies. This iswhy the business service sector also tends tofocus inparticular locations, forming clusters. Those clusters pro‑ vide them with high‑quality labor and other kinds ofresources, this way improving their performance. What isimportant isthe fact that inthe case ofemerging markets, those clusters are atthe early stage oftheir development, sodo not support compa‑ nies tosuch anextent asthose inthe more developed locations (Upadhyayula et al. 2017, pp.72–86). Both the geographic scale, aswell asthe kind ofagglomeration effects that appear, are interesting factors. Astudy onthe service sector inEngland shows that agglom‑ eration effects donot work atalocal scale but can berecognized ataregional level. They were not visible inthe case ofparticular cities (even London), but they did turn out tobe present inthe case ofSouth‑East England (Coe & Townsend 1998, pp.385– 400). Other research suggests that urbanization economies (the size ofacity) turn out tobe more important than localization economies inthe case ofattracting investments 164 Arkadiusz Mroczek (Guimarães et al. 2000, pp.132–133). Big cities and their regions are capable ofpro‑ viding workers who are both rich interms ofnumbers, aswell ashighly diversified interms ofskills. This notion can besupported byfindings from India, showing that BPO projects with higher knowledge specialization usually operate inthe most devel‑ oped cities. Projects that donot demand such ahigh level ofskills tend tobe located inless developed cities (Luo & Jayaraman 2013, p.460). Table 1. BPO motives and location factors Type of a project Motives and expectations of companies Location factors of host countries General BPO and routine R&D –cost reduction –low labor cost –quality improvement –high presence of service providers, –BPO experience, –low geographic and cultural distance, –innovation –‑strong local business networking –access to resources –access to human capital, –large educated workforce, –high language skills –market access –big demand on the host market Innovative R&D, knowledge‑intensive services –knowledge, talent and technology access, –cheaper access to resources, –innovations, –pool of skilled scientist and engineers, –labor costs less important, –location in more developed economies Spatial features Presence of BPO providers and human capital –variety of service providers, –large pool of human capital, –highly specialized labor force –large number of clients in the same location, –clusters providing talents and specialized subcontractors, –high presence of clusters in developed economies, –urbanization economies more important than localization economies Government activity Investments –hard and technological infrastructure, –availability of human resources –well developed infrastructure, –large pool of well‑educated labor force Administration and legislation –low risk, –low cost, –general ease of doing business –economic and political stability, –competitive taxation, including labor taxes, –low administrative burden and good investment climate Source: own preparation. Except for the structural factors presented above, local institutions also have anim‑ pact onattracting the BPO providers toaparticular location. Governments together with their regional and local partners can shape the right legislation, and local agencies 165 The Business Service Sector in India, Ireland and Poland. A Comparative Analysis can both promote their offer for investors aswell asprovide them with necessary sup‑ port (Kleibert 2014, p.257). Moreover, inthe long run, policies inthe field ofeducation and economic stability seem tobe crucial also for the BPO sector. Especially interest‑ ing isthe fact that inhigh political risk countries, the primary experience ofacom‑ pany seems tolower the value ofthis factor (Demirbag & Glaister 2010, 1554). Asynthetic presentation ofthe above motions ispresented inTable 1. The business service sector in India, Ireland and Poland Before the actual comparison ofthe three countries inquestion, some background tothe development ofBPO services inthose countries will beprovided. Itshould al‑ low usto better describe the similarities and differences between them. India isthe world’s leader inbusiness services, and this industry itself isan impor‑ tant part ofthe Indian economy. Itgenerates about 200,000 jobs each year, and the sec‑ tor provides employment for 3 million people directly and about 9 million indirectly. Asrecently asin 2012, the share ofGDP generated bythe sector was estimated tobe 7.5% (Raghunath 2014, p.6). Those results are because liberalization inthe country was in‑ troduced soon enough tobe combined with the growing technology. Together with the impressive resources ofaskilled English‑speaking labor force, those factors gave India the first mover advantage (Abbott 2013, p.29). Since the 1980s, India’s BSS gained expe‑ rience that allows itto bethe first choice for many kinds ofactivities, including R&D, al‑ though usually the more standardized activities. The main factor that seems todecrease India’s competitiveness inthis field isthe great geographic distance toboth the USA and Europe (Demirbag & Glaister 2010). This disadvantage maybe one ofthe reasons behind the international expansion ofsome Indian companies (Thite et al. 2016, p.443). Around the turn ofthe millennium, Ireland was often pointed out asan example ofan economic miracle. The country was located onthe peripheries ofEurope, and historically, even its proximity toGreat Britain was more asource ofexploitation than aneconomic partnership inmodern terms. Even for decades after World WarII , the British economy was not asource ofeconomic stimulation for Ireland, yet acombi‑ nation ofobjective factors and, asit turned out, well‑designed government policy led tosuccess. The restructuring ofthe British economy made itasource ofinvestment that could bedirected tothe neighboring island, especially since English isthe primary lan‑ guage there, asaheritage ofthe long British rule. This was also important for Ameri‑ can companies, for whom the location ofIreland was not peripheral, but the closest EU member state totheir shores. The country soon transformed into anexport platform for them. The main policy incentives that were implemented were the low capital tax rates (10%) that were first introduced inmanufacturing in1978 and extended toservices in1987. Also, anactive role ofthe government agency (IDA) played arole inattracting some companies that were leaders intheir industries (Barry et al. 2012, p.2). Ireland became ahigh FDI intensive country, which led toagreat increase inproduction and 166 Arkadiusz Mroczek exports ofhigh value‑added products (Romalis 2006, p.12). What isimportant isthat after the initial period, inwhich the FDI income was basically cost driven, the agglom‑ eration and demonstration effects started toplay acrucial part. The Irish workers, and then the managers, adopted international standards ofconducting business. They de‑ veloped technical, managerial and soft skills, and some ofthem used them later tostart their own companies. This, inturn, helped tocreate business networks that could at‑ tract more and more foreign investors (Ryan & Giblin 2012, p.1337; Grimes & White 2005, p.2185). The Irish ability todevelop infrastructure and human capital was shown asthe key factor ofdevelopment when wage competitiveness was exhausted (Grimes 2003, p.2185). The “Irish miracle” started with advanced manufacturing, but business services took their share from the 1990s. Asearly as2003, Ireland was ranked asthe leader inattracting offshore business services, comprising both IT and other processes. The Irish share was 8.3%while India’s was 7.7% (Barry et al. 2012, p.2). Despite all the impressive achievements, the Irish economy was not free from weak‑ nesses. Asmall country depending onexports and FDI had tobe strongly affected bythe international financial crisis of2008. Moreover, inthe case ofIreland, the ef‑ fects were also strengthened byits own financial sector. AsHonohan points out (2009, pp.1–11), after 2000, the growth ofthe economy was led more byan immobility bub‑ ble, and the Irish banks fueled the boom with cheap credit, which was partly possible due tomembership ofthe Eurozone. Inthese circumstances, the government lacked sound fiscal policy and bank sector regulation. This made Ireland suffer athree‑year recession; however, after that, the economy regained its vigor. Although not free oftur‑ bulences over time, in2018 Ireland ispredicted tobe the fasted growing EU member state (EC 2018). The strategy ofbuilding international competitiveness through ad‑ vanced manufacturing and business services seems tobe still valid. Poland, amongst other CEE countries, inherited many disadvantages from the com‑ munist era. The education system, however, delivered relatively good quality human capital, including inthe fields ofscience and technology. Demirbag and Glaister (2010) emphasize this asone ofthe most important factors driving BSS investments inthe country. Anindustrial report shows Poland tobe awell‑established, low‑risk country and asone ofthe arguments tosupport this, itshows that apart from the leading cities, such asKrakow, smaller ones are also beginning toattract investors (Heard et al. 2016, p.14). The situation seems toresemble India, where such anet ofBSS cities exists. Results and comparison Based onthe location factors depicted inTable 1, areduced list offactors, arranged ac‑ cording tothe same groups, was created. The reduction allowed usto get factors that are differentiated, and the arrangement allows usto interpret them easily. Next, for each factor, aproxy indicator was chosen, allowing usto compare the countries based onhard data. The factors, indicators and their values are presented inTable 2.