1. RSA Research Network Seminar, Outsourcing and Offshoring Business Services 1 Global trends in business service movements: the role of East Central Europe with special emphasis on related methodological problems Magdolna Sass Institute of Economics of the Hungarian Academy of Sciences and ICEG EC

2. RSA Research Network Seminar, Outsourcing and Offshoring Business Services 2 Outline of the presentation 1.BPO, East Central Europe/Hungary: new hosts 2.Methodological problems 3.Location advantages 4.Impact on the local economy 5.Relocation 6.Conclusion Research on BPO in ECE is based on company interviews Work in progress Presentation based on the project „"Foreign Direct Investment in Central and Eastern Europe: What Kind of Competitiveness for the Visegrad Four?" and OTKA no. 68435 (Hungarian research fund).

3. RSA Research Network Seminar, Outsourcing and Offshoring Business Services 3 East Central Europe and Hungary as a new location for BPO Movements of jobs/related FDI mainly between developed countries and India (started out from English-speaking countries, continental Europe only followed) in East Central Europe, especially the Czech Republic, Hungary and Poland are the main hosts to BPO projects, though their share is much lower than expected on the basis of media reports, Romania and Bulgaria catching up after 2007 (EU-membership) Estimation on the basis of the number of projects: 1400-1500 in Europe, 150-180 in the three countries in CEE (India, other Western European locations dominate), distributed approx. equally (biggest project go to India or are in W.Europe) Combined market share of CEE’s globally: less than 1 per cent (McKinsey (2006)) – still very limited

4. RSA Research Network Seminar, Outsourcing and Offshoring Business Services 4 Hungary as a host to BPO Service centres receiving financial incentives in Hungary Company Home countryLocation in HungaryNumber of jobs (actual or planned) ExxonMobilUSABudapest1200 IBM ISSCUSABudapest1300 DiageoUnited KingdomBudapest600 GetronicsNetherlandsBudapest510 JabilUSASzombathely719 SAPGermanyBudapest600 TataIndiaBudapest450 ConvergysUSABudapest282 EDSUSABudapest, Szeged1150 InBevBelgiumBudapest380 Budapest BankUSABékéscsaba530 Morgan StanleyUnited KingdomBudapest450 CitigroupUSABudapest302 VodafoneUnited KingdomBudapest746 British TelecomUnited KingdomBudapest, Debrecen700 T-SystemsGermanyBudapest, Debrecen1750 Source: ITDH

5. RSA Research Network Seminar, Outsourcing and Offshoring Business Services 5 Hungary as a host to BPO Approx. 50 centres Approx. 20-22 thousand people, 99 % white collar, between 80 and 90 % with university diploma and multiple language knowledge Going to the countryside now (university towns close to the border are the new locations) Dynamic growth in output, exports (high share in EU27 comparison, turnover centred on the EU, share of other services /other business services grew in services exports, specialisation indices show a relative specialisation on other business services – though methodological problems) Various activities (often more activities in one project) Common corporate functionsCommon corporate functions Knowledge services and decision analysisKnowledge services and decision analysis Research and developmentResearch and development Transaction processingDocument managementData entryData processingTransaction processingDocument managementData entryData processing Call centresCall centres HRAccountingAdministrativeFinancial servicesIT call centres and other IT servicesQuality managementHRAccountingAdministrativeFinancial servicesIT call centres and other IT servicesQuality management Program and project managementFinancial program managementIntegration engineeringSupply chain managementAnalytical accounting servicesBusiness performance analysisCost analysisProgram and project managementFinancial program managementIntegration engineeringSupply chain managementAnalytical accounting servicesBusiness performance analysisCost analysis Software developmentSoftware development

6. RSA Research Network Seminar, Outsourcing and Offshoring Business Services 6 Research questions and method Methodological problems of measurement Location advantages determining the choice of the new location (inside CEE) Impact on the host economy Relocations in business services Methods Methodological problems: literature review and own calculations (illustrations) Location advantages and impact: questionnaire based company interviews (5 in Hungary: 2 captive, 3 non-captive) and as a basis for comparison: 3-3 interviews in the Czech Republic, Poland and Slovakia; Case by case analysis for relocations for the period between July 2003 and September 2005, based on the database of Hunya, Sass (2005)

7. RSA Research Network Seminar, Outsourcing and Offshoring Business Services 7 Methodological problems 1 1.Services – definition: missing, unclear (Knight, 1999; Bryson, 2001), Nachum (1999): larger differences in between service industries than between services and manufacturing + lack of definition of business services (various definitions used) 2.FDI data – problems + usually small/diverse amounts invested (case studies: FDI in the range of 1 million to 1 billion USD in Hungary) 3.Number of projects can be misleading as well– differing sizes; number of jobs/employment can be the best proxy, but 1. data relatively old + usually less jobs are created in relocated and/or newly opened plants in CEECs (Hunya, Sass, 2005) 4.Captive and non-captive; manufacturing and services (captiveÍ) may be mixed up in one project 5.Categories: data are presented at a too high level of aggregation (e.g. in NACE); classification problems (Thakor, Kumar, 2000) 6.Data on services foreign trade would be good for showing the extent of BPO/relocation: many problems (transfer pricing, etc.) – see later 7.Inside BOP: services export lines are used for profit repatriation as well (evidence from Hungary) 8.Recording problems present in both manufacturing and services 9.Relocation: only on a case by case basis, but even this can be misleading (relocated and new activities,mixed in one project)

8. RSA Research Network Seminar, Outsourcing and Offshoring Business Services 8 Methodological problems 2 Specific problem: large differences between reported and mirror statistics, which indicates that data are unreliable Reasons: –different thresholds and different correction methods in EU-member countries, –simplified reporting, –coverage different, –exchange rates used, –double or triple reporting due to „intermediary” trade (important in the EU), –no reporting, –VAT-fraud, –Time lag in reporting Relatively big in goods trade, and is expected to be even larger for services trade due to even more problematic tracing (no actual cross border transport of goods is involved)

9. RSA Research Network Seminar, Outsourcing and Offshoring Business Services 9 Methodological problems 3 Correction: problematic (both sides (reported and mirror statistics) are „moving targets”) Extent: in 2006: export overreported by almost 10 %, import underreported by almost 4 %

10. RSA Research Network Seminar, Outsourcing and Offshoring Business Services 10 Problems with services trade data

11. RSA Research Network Seminar, Outsourcing and Offshoring Business Services 11 Problems with „other services” trade statistics (related to BPO)

12. RSA Research Network Seminar, Outsourcing and Offshoring Business Services 12 Trade statistics: goods and services

13. RSA Research Network Seminar, Outsourcing and Offshoring Business Services 13 Location advantages 1 determine which countries are chosen as hosts to new or relocated service centres (based on Dunning (1983) OLI- paradigm) similar to those of efficiency seeking investments (costs and availability of appropriately trained or trainable skilled work in the required quantity) + specific: infrastructure (mainly telecom) Additional: availability of certain services (financial etc.), good regulatory and business environment, protection of IP, office space, geographical proximity/same/similar time zone in some cases (nearshoring), different time zone in others, language knowledge (specific: other than English European languages, „small” European languages (including Turkish in Hungary))

14. RSA Research Network Seminar, Outsourcing and Offshoring Business Services 14 Location advantages 2 – inside the region Specific advantage: knowledge of „smaller” languages, good geographical position Inside CEE: Poland stands out with its size (bigger projects), location (NE, Baltics) Czech Republic: central location, best flight connections, specialisation on IT Hungary: minor languages (minorities in neighbouring countries), good location (CEE, towards SEE) Choosing among the three countries is based on: Earlier presence of the company; Previous good (or bad) experience with the country; Choice is influenced by the relative dynamism, success of local affiliates; Special language requirements; Active lobbying of the local affiliate; Quality of life, culture, English schooling etc. in the target city, especially in cases when expatriates are involved Very limited role of incentives (mainly for bigger projects)

15. RSA Research Network Seminar, Outsourcing and Offshoring Business Services 15 Impact on the host economy 1 Companies with foreign participation have the potential to impact upon positively on the business environment, on local companies in the host country, though this impact is not automatic Analysed in the literature almost exclusively in manufacturing, though it is relevant for services sector FDI as well While the share of the three analysed countries in BPO is not high, from the host economy point of view, these are big projects and have a potentially big impact on the local economy Various fields of impact on the local economy is analysed on the basis of company interviews: 1.Job creation 2.Linkages and other local contacts 3.Impact on the business environment and infrastructure 4.Spillovers through trained employees 5.Market acces, FT, BOP

16. RSA Research Network Seminar, Outsourcing and Offshoring Business Services 16 Impact on the host economy 2 Job creation -Significant impact: in Hungary approx. 20-22 thousand people working in BPO (incl. captive) -Medium to high skilled jobs (very little unskilled) for young university graduates, usually with (multiple) language knowledge -Activities carried out: table (overtrained…), though VA/output among the highest in services -Shortage of properly trained employees in all 3 countries – wages growing very fast (high attrition rate) -Spreading out to the countryside (from the beginning in Poland, now in the Czech Republic and Hungary) Linkages and other local contacts -(Very) limited backward linkages (cleaning, security, cafeteria, etc., little substantial outsourcing) -Forward linkages come as local companies become more „mature”, as competition is more intense (in Hungary seems to be more important compared to the other two countries) -Contribution of linkages to raising the level of competitiveness/productivity of local companies: very limited

17. RSA Research Network Seminar, Outsourcing and Offshoring Business Services 17 Table 16 Activities carried out in the companies interviewed in Hungary Back office Customer contactCommon corporate functions Knowledge services and decision analysis Research and development Transaction processing Document management Data entry Data processing Call centresHR Accounting Administrative Financial services IT call centres and other IT services Quality management Program and project management Financial program management Integration engineering Supply chain management Analytical accounting services Business performance analysis Cost analysis Software development Source: own compilation based on company interviews

18. RSA Research Network Seminar, Outsourcing and Offshoring Business Services 18 Impact on the host economy 3 Impact on the business environment, infrastructure -Competition for appropriately trained employees is intense: companies are more active locally, than „ordinary” FIEs (participation in local business associations, links with universities) -Intense use of local infrastructure: in some cases results in better services Spillovers through trained employees -This seems to be one of the most important local impacts -Trained employees in certain cases set up their own enterprises or go to work to domestic companies -Not only skills, but business culture, business ethics are transferred through (former) workers

19. RSA Research Network Seminar, Outsourcing and Offshoring Business Services 19 Impact on the host economy 4 Market acces, BOP, FDI, FT, other Methodological and data problems Export-intensive projects (lower export/sales rate is above 60 %) Relatively high share in FDI stock (10 %) in Hungary Increase in services trade, especially in other services and other business services Balance of trade: turned positive (graph) Specialisation indices and RCA show change in business services towards relative specialisation and RCA Graph 1 Balance of trade in computer services and Other business services, 1995-2006, million euros

20. RSA Research Network Seminar, Outsourcing and Offshoring Business Services 20 Relocation Relocation: a process, in which either there is a transfer of production capacities from another country, or there is a capacity extension in one affiliate parallel with a capacity reduction in another, or there is a capacity extension in one affiliate, while other affiliates‘ capacities do not change. Even more methodological problems Case by case analysis is needed In Hunya, Sass (2005): company cases of relocations in the period between July 2003- September 2005 9 of 61 cases affected business services (declared relocations) Affected locations (from which the activity was transferred): mainly Western Europe (Germany, the Netherlands, Austria, UK, Ireland, non-specified Western Europe) and the US Owners of companies: mainly US and UK Activities: various, more than one per project, but not all activities of a firm are relocations (company interviews) Location in Hungary: mainly Budapest

21. RSA Research Network Seminar, Outsourcing and Offshoring Business Services 21 Declared relocations in business services, July 2002-September 2005 Company ActivityForeign location affected Munkahely- teremtés vagy - veszteség GE Capital (USA)Regional call centreOther Western European locations +400-500 Renault Nissan (French-Japanese) Regional logistics centreAustria+60-80 Electronic Data Systems (USA) Regional centreWestern Europe and the US +350-400 Avis (UK)Financial administrative centre, regional call centre, financial- informatics services Germany, (Belgium)+400 Diageo (UK)Extension of capacities of service centre, new activities (accounting) UK+60 Electronic Data Systems (USA) Capacity extension for new activities, call centre Western Europe, USA +400 Avis Europe Plc. (UK)Extension of financial services centreWestern Europe+135 Maxtor Group (USA)African, European and Middle-Eastern service centre relocation (leaving call centre and financial planning there) Ireland+ Approx. 20 Marsh (USA)European accounting and administrative activities (except for UK, Ireland and the Netherlands) UK+12

22. RSA Research Network Seminar, Outsourcing and Offshoring Business Services 22 Conclusion CEEs/Visegrad countries increasingly involved in BPO Many methodological problems hinders the analysis (esp. the extent of relocation) From a competitiveness point of view BPO projects in CEE -Contribute to the formation of a better domestic business environment, in some cases availability of high quality services for domestic companies (forward linkages) -Local contacts- backward linkages (suppliers): minimal, though, esp. forward linkages increasing over time -Job creation for medium to high skilled, (though overtrained, partly due to the language knowledge requirement) spillovers through employees (skills, culture, ethics, own SMEs) -Significant impact on the BOP, though due to methodological problems, it is difficult to quantify separately for these projects (FDI, FT-balance, profit repatriation etc.) (Inside EU movements) Importance from the point of view of raising the competitiveness of overall EU-27

23. RSA Research Network Seminar, Outsourcing and Offshoring Business Services 23 Thank you for your attention!