Global service delivery: history and context The Information and Service Economy October Bob Glushko and Anno Saxenian

Outline 1.The new Argonauts 2.The globally integrated enterprise 3.Global disaggregation of services 4.Offshoring of services

The new Argonauts Global flows of labor and talent not new Historians document long distance migrations, transfers of tacit knowledge via skilled labor Japan’s Meiji restoration, British textiles & German steel to US Global labor mobility has increased: migration is now a reversible choice can live and work in more than one nation, hold dual citizenship From “brain drain” to “brain circulation”

Innovation in the periphery The new Argonauts spur innovative upgrading in periphery Taiwan and Israel, peripheral in 1970s, became centers of entrepreneurship and innovation in 1980s & 1990s “Brain circulation” between Silicon Valley, China and India has created new, linked clusters of skill and entrepreneurial experimentation in policy and business => Successful regions don’t build SV in isolation, rather they connect to its professional and technical networks

A new global environment 1.Liberalization of global markets 2.Reductions in transportation, communication costs expand options for immigrants 3.Decentralization of corporate hierarchies and vertical specialization of production lower barriers to entry 4.Open supplier networks and advanced software platforms support real-time long distance collaboration

Origins: the postwar “brain drain”  Following WWII best and brightest students from developing nations gain access to US education  Most students remain in US or European host country due to superior professional and economic opportunities  US accused of creating a vicious cycle: the brain drain made peripheral nations poorer and rich nations richer  The analysis was not wrong –but unanticipated benefits in recent decades

SV absorbs skilled immigrants  : Silicon Valley expands, local firms absorb US educated science & engineering grads 1970: 15% of S&E in region are foreign-born 2000: 52% of S&E in region are foreign born  Most have master’s or doctorates degrees (i.e., more educated than native-born counterparts)  “Silicon Valley is built on ICs” (Indians and Chinese, not integrated circuits).

Foreign-born S&E in SV Thousands

Foreign-born S&E in SV, 2000 n=81,267 N=81,267

The rise of immigrant networks  Immigrants build associations to support integration and professional advancement in Silicon Valley Help immigrants find jobs or promotions when “glass ceilings” limited advancement within companies A source of skill, relationships, and learning the Silicon Valley model of entrepreneurship and experimentation  Although many groups had associations, Chinese associations were especially strong and numerous…

1.Indian and Chinese started ~27% of SV technology companies,  4,146 companies  122,386 jobs  $37 billion sales 2.High profile successes build confidence and reputation in home countries  Hotmail’s Sabeer Bathia  Yahoo’s Jerry Yang  Netscreen’s Li Gong and Ken Xie 3.Immigrant associations build connections to home countries via former classmates, policymakers Immigrant impact on SV

The new Argonauts exploit their linguistic and cultural capabilities and institutional know-how to identify and tap under-utilized resources and/or potential markets in their home countries: Seeking the “golden fleece” at home Israelis tap military technology and skill base Taiwanese seek low-cost manufacturing talent Indians tap underemployed programming skill Chinese seek to serve large domestic market The new Argonauts in action

Hsinchu Science Park: SV sibling

The new Argonauts in action 1.Institutions and policy: Collaborate with policymakers to identify and remove obstacles to local development (transform educational and research institutions, capital markets, regulation) 2. Entrepreneurship: Set up development centers, start firms, advise and/or invest in local firms, build local and cross-regional partnerships 3.Corporate governance: Focus on transparency, minimization of hierarchy, merit-based advance, and venture capital-based entrepreneurship to countries dominated by state or family-run firms

Taiwan IC foundries: new model

Silicon Shanghai

Bangalore: software services

Actors in the global economy Not just global corporations  Cross-regional entrepreneurial networks transfer technical, market, & business information rapidly between distant regions Not just the nation-state  Sub-national clusters of skill and know-how in periphery—supported by local policymakers Not just low-cost labor  Entrepreneurial experimentation and learning support upgrading and fast rising wages in emerging regions

Long term scenario  Global network of specialized, high wage regional economies replaces core-periphery  Open systems allow co-design and mutual upgrading and innovation across the value chain  New regional partners can contribute to creation of entirely new products, industries and markets  Global shortages of talent for for-seeable future  Potential for more widely distributed and sustained global development…alongside challenge of enclave development and uneven development within national economies

History of global integration: IBM Sam Palmisano on corporate evolution 1.International corporation: hub & spoke networks, home country manufacture and international distribution, 19 th c 2.Multinational corporation: national markets, adapt to trade barriers building local production, global R&D and product design, 20 th c 3.Globally integrated enterprise: liberalization of trade & investment flows, IT standardizes techno and business operations around world=> global integration of production & value delivery

From MNC to GIE Two forms of shift from MNC to GIE: 1.Changes in where companies produce things: no longer produce for local markets, produce for global markets— mfg to China, services to India 2.Changes in who produces them: more reliance on outside specialists; company as array of specialized components, some tightly bound, some loosely coupled

Systemic changes  GIE requires fundamentally different approach to production, distribution, and work-force deployment  Corporation recombines operations and functions based on its core strengths and those of partners Not labor arbitrage or offloading non-core activities Actively manage operations, expertise, and capabilities to open enterprise and connect more intimately with partners, suppliers, and customers

Integration and innovation  Competitive advantage from fusion of invention & transformation of how things are done “Real innovation is about more than the simple launching of new products. It is also about how services are delivered, how business processes are integrated, how companies and institutions are managed, how knowledge is transferred, how public policies are formulated – and how enterprises, communities, and societies participate in and benefit from it all.”

New opportunities & challenges  Enormous economic benefits to developing and developed nations  Challenges: Securing supply of high value skills Intellectual property as one of the key geopolitical issues of the century Maintaining trust in distributed businesses— across national and organizational borders Organization of business and institutions, e.g. capital markets Global security and order

Global disaggregation of services Why disaggregate? 1.Cost reduction 2.Skill base 3.Cycle time with working 24/7 4.Market access

Global disaggregation of services Disadvantages:  Communication & coordination  Potential IPR violations  Difficulty monitoring progress  Government attitudes, taxes  Managing cultural diversity  Economic, social, political instability

Managing global disaggregation 1.Select services** 2.Choose location 3.Design organization 4.Manage diversity

Taxonomy of actions 1.Physical actions 2.Information actions (symbol manipulation) 3.Interpersonal actions 4.Non-value adding actions

physical customer Symbolic manipulation physical customer Symbolic Part 2 Symbolic Part 1 Non-value added Components of service activities Non-value added

Analysis of actions 1.Information intensity 2.Customer contact  In-person  Symbolic 3.Physical presence