Offshoring of Services from Developing Countries: The New Wave of Emerging Offshorers

Offshoring of Services from Developing Countries: The New Wave of Emerging Offshorers

Kraiwinee Bunyaratavej (Wesley College, USA) and Eugene D. Hahn (Salisbury University, USA)
DOI: 10.4018/jssmet.2012040101
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Abstract

Offshore outsourcing of services accelerated at the end of 1990s in developed countries. Recently developing countries have also increasingly offshored services, not only to developed countries but also to other developing countries. Yet, to date little attention has been paid to the emergence of this reverse offshoring. This paper examines the determinants of offshoring of services from developing countries; as such the authors investigate what location factors drive these firms from developing countries to offshore services. Using data on service offshoring projects during 2001-2007 originating from developing countries, the authors found that the determinants of offshoring of services from developing countries followed similar patterns of conventional offshoring yet for different reasons. In addition, the authors also found that services offshoring from developing countries in some sectors appeared to occur because of the desire to be closer to customers.
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1. Introduction

Offshore outsourcing of services began to accelerate in the years leading up to 2000 to address the Y2K problem (Qu & Brocklehurst, 2003). In order to respond to this one-time problem quickly and inexpensively, firms from developed countries such as U.S. and U.K. offshored their services to developing countries such as India and the Philippines because of labor arbitrage and the search for qualified workers (Cuoto, Mani, Lewin, & Peeters, 2006, Bunyaratavej, Hahn, & Doh, 2007). The success of these efforts led firms to continue to offshore services in ever greater quantities in the years after 2000 and now the prevalence of offshoring of services (defined here as the relocation of services provision from developed countries to both developed and developing countries) is well-documented. In recent years, the tide has turned and more developing countries have offshored services to not only developed countries but also developing countries. However, to date little attention has been paid to the emergence of the service offshoring from developing countries (defined as the relocation of services provision from developing countries to other countries—both developed and developing countries). In this paper, the focus of this research is on the determinants of offshoring of services from developing countries and as such we will investigate what drives these firms from developing countries to offshore services.

Using a database of offshoring projects, we empirically investigate the projects from developing countries by examining the impact of wages, education (in terms of educationally qualified workers), language difference, and finally the number of pre-existing projects in that particular developing country as potential determinants of location choices. Our projects are captive offshoring which means firms continue to perform service activities in-house but have relocated them to other countries. We found that firms from developing countries do not offshore because of labor arbitrage; rather, they offshore to countries that have higher wages. They also offshore to locate a pool of educated workers and to move to countries that speak the same language. We also found the number of pre-existing projects in a host country is a driver for companies from developing countries to offshore in certain sectors, namely shared services centers and headquarters. We draw conclusions that developing country firms appear to be motivated to try to create a global network of service providers in different locations and also in order to be closer to their customers. Nevertheless, some basic macroeconomic drivers remain the same as in conventional offshoring such as of wage/quality considerations, the search for qualified personnel, and the importance of shared languages.

In the next section, we review the broader FDI literature. This will be followed by the offshoring literature with a particular emphasis on the literature addressing the determinants of offshoring. Based on the review, we develop four hypotheses for empirical examination. We test our hypotheses using a data set of 134 projects using a conditional logit model. Finally, we interpret the results, draw conclusions, and explain the limitations and implications of the research.

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