Latin America As Outsourcing Hub

ARINDAM BERA 1. What is India’s competitive advantage in services? In India the services sectors with an around 57% contribution to the GDP that emerged as the largest and fastest growing sector of the economy. India’s service sector covers a wide variety of activities that have different features and dimensions. They include trade, hotel, and restaurants, transports, storage, community, social, and personal services and services associated with construction. Services in India are emerging as a prominent sector in terms of contribution to national and states incomes, trade flows, foreign direct investment inflows and employment. Gross Value Added (GVA) at current prices for Services sector is estimated at 92.26 lakh crore INR in 2018-19. Services sector accounts for 54.40% of total India's GVA of 169.61 lakh crore Indian rupees. With GVA of Rs. 50.43 lakh crore, Industry sector contributes 29.73%. While, agriculture and allied sector shares 15.87%. At 2011-12 prices, composition of Agriculture & allied, Industry, and Services sector are 14.39%, 31.46%, and 54.15%, respectively. ADVANTAGES IN TRADE SERVIECE: India has not only experienced substantial growth in its services trade with the rest of the world but has also become a net exporter of services. Using the annual exports and imports data of 10 disaggregated service items from 2000 to 2013, this paper computes and analyzes various comparative advantage (CA) measures. The analysis reveals that India has had a CA in computer and information services and other business services (that include a wide range of information-intensive services) for the entire sample period. These two service categories together accounted for more than two-thirds of the total commercial services export from India. Furthermore, according to an alternative CA measure that considers intra-industry trade, India seems to have CA over the rest of the world in different services such as travel, communication services, and personal, cultural, and related services as well. This paper further explores the shape and dynamics of the distribution of the CA measures by employing a nonparametric method. The distributional dynamics analysis indicates that India is more likely to lose CA over the rest of the world than to gain dominance from a comparative disadvantage position in services trade. ADVANTAGES IN IT SERVICES: Low cost skilled labour is one of the most important factors which is giving advantages to compete. Accordinng to NASSCOM study, it says Indian software professionals have tended to enjoy wage advantages vis-à-vis their counterparts in the US and Europe. Estimated wage costs in India in 1997 were about 1/3 to 1/5 of the US levels for comparable work. The cost arbitrage remains unchanged even today notwithstanding the wage inflation due to decline in billing rates by around 5% in the last 4–5 years.” The fact that most of the technically trained manpower in India have proficiency in English also contributes to the competitive edge. The Government of India has introduced reforms to liberalise, regulate and enhance this industry. At present, India is undoubtedly one of the world's most vibrant capital markets. Challenges remain, but the future of the sector looks good. The advent of technology has also aided the growth of the industry. About 75 per cent of the insurance policies sold by 2020 would,

in one way or another, be influenced by digital channels during the pre-purchase, purchase or renewal stages, as per a report by Boston Consulting Group (BCG) and Google India. The service sector consists of the soft parts of the economy such as insurance, government, tourism, banking, retail, education, and social services. In soft-sector employment, people use time to deploy knowledge assets, collaboration assets, and process-engagement to create productivity, effectiveness, performance improvement potential and sustainability. Service industry involves the provision of services to businesses as well as final consumers. Services may involve transport, distribution and sale of goods from producer to a consumer as may happen in wholesaling and retailing, or may involve the provision of a service, such as in pest control or entertainment. Goods may be transformed in the process of providing a service, as happens in the restaurant industry or in equipment repair. However, the focus is on people interacting with people and serving the customer rather than transforming physical goods. 2. How do you rate the sustainable competitive advantage of Latin America? Competitiveness-enhancing reforms have become more urgent in Latin America as the shock of falling commodity prices has exacerbated economic difficulties in many countries – the IMF is projecting growth of below 1% for the region in 2015, down from 2.9% in 2013. The Global Competitiveness Index uses quantitative data and the results of a survey of executive opinion to rank countries on 12 pillars of competitiveness, which are combined to make up their overall position. Chile: Despite dropping two places to 35th overall, Chile retains fundamental strengths including well-functioning financial markets, a relatively stable macroeconomic environment and effective institutions. It has lost ground in the last year on the pillars of goods and labour market efficiency, with restrictive labour regulation identified by the executives surveyed as the most problematic factor for doing business in the country. The quality of primary education is another area holding back Chile’s competitiveness. Panama: With modest advances on some pillars mixed with retrenchment on others, Panama drops two places to 50th on the overall Index. Its strongest pillar, and one which improved in the last year, is financial market development – here it rates 15th globally. Panama also scores respectably on infrastructure, goods market efficiency, business sophistication and innovation. It is held back by the quality of its institutions, with diversion of public funds a particular concern, and its education system. Costa Rica: Scoring two places lower than its neighbour Panama, at 52nd, Costa Rica likewise outperforms its overall ranking on the innovation and business sophistication pillars – although it has lost some ground here in the last year. Costa Rica has also gone backwards on the pillars of goods and labour market efficiency. It performs better than Panama on institutions, however, and its higher education system is rated as one of its strengths. Mexico: Despite further deterioration in an already-poor institutional environment, with executives again voting corruption as their biggest concern, Mexico progresses four places to 57th in the overall Index. It owes this advance largely to improvements in the financial markets, business sophistication and innovation, which suggest that recent reforms are bearing fruit. While progress has also been made on improving the country’s labour market efficiency, this remains its weakest pillar.

Colombia: Ranking 61st overall, Colombia gains five places compared to last year thanks largely to its progress on the financial market development pillar – a dramatic improvement from 70th to 25th. Colombia also benefits from a relatively stable macroeconomic environment by regional standards. Its weakest pillars are goods market efficiency and institutions, with corruption and security remaining particular concerns. Peru: A drop of four places to 69th is accounted for largely by Peru losing ground on the pillars of labour and goods market efficiency and business sophistication. Its main competitive strengths are relative macroeconomic stability and well-developed financial markets, a pillar on which it moved forward in the rankings compared to last year; its weakest pillars are institutions and innovation. Uruguay: While gaining seven places to rank 73rd overall, Uruguay still has not recovered the ground it lost between the 2011-2012 edition of the Index. As with Colombia and Peru, financial markets were its main area of improvement in the last year, while it lost ground on the macroeconomic environment pillar due mainly to a poorer government budget balance. Unusually for the region, institutions are Uruguay’s strongest pillar, with a global ranking of 30th. Labour market efficiency is its weakest pillar, with executives also rating restrictive labour regulations as the biggest concern for doing business. Brazil: Continuing its downward trend, Brazil drops 18 places to 75th overall, and is now 27 places lower than in the 2012-2013 edition. It fell in nine of the 12 pillars, with particularly notable drops in health and primary education, higher education and training, the macroeconomic environment – with a high fiscal deficit, rising inflationary pressure and poor growth prospects – and institutions, amid recent high-profile corruption scandals. Brazil’s main competitive strength is its large market size, ranking 7th globally. Ecuador: Excluded from last year’s Index due to concerns over the reliability of data, Ecuador returns in 76th position overall. Its weakest pillars are institutions and the efficiency of goods and labour markets; restrictive labour markets top the list of executives’ concerns, followed by tax rates and the complexity of tax regulations. Its strongest pillar, albeit with a relatively modest global ranking of 59th, is health and primary education. Guatemala: Placing 78th for the second year in a row, Guatemala’s performance is little changed from last year,although it has made progress in financial development, now its strongest pillar ahead of goods market efficiency and business sophistication. In a familiar story for the region, its weakest pillar is institutions among executives surveyed, crime and theft narrowly beat corruption as the issue of most concern for doing business. FAVORABLE POINTS AS COMPITIVE ADVANTAGES: Basically in Latin America availability of young quality labour is high. And they also have bilingual skills so the communication helps a lot. These two things are the major competitive advantages of Latin America. Another favorable ponts like time zone proximity and physical proximity in the hand of latin America for which companies choose to establish firms here due to such competitive advantages. 1. Time zone: One of the biggest challenges of working with personnel in India or China has been the large time zone difference. There’s a 13.5-hour difference between the U.S. and Bangalore. By comparison, time zone differences between the U.S. and Latin America are negligible: Colombia is on Eastern Time, while Argentina is only two hours earlier. This allows synchronous communication and reduced response times between teams, enabling them to resolve issues quickly. When face-to-face meetings are a must, travel within similar time zones is

less painful. I’ve dealt first-hand with the challenges of working across distant time zones while managing a team of software developers in India. Those in India had to stay up until midnight in order to join conference calls with the U.S., and our communication suffered. By contrast, when working with developers in South America, we can chat on Slack or hop on a Skype call whenever the need arises. 2. Favorable business environment: According to the 2016 A.T. Kearney Global Services Location Index, a study tracking the offshoring landscape, six Latin American countries rank in the top 20 for financial attractiveness, people skills, and business environment: Brazil (4), Mexico (8), Chile (9), Costa Rica (19) and Colombia (20). With political stability and favorable business policies, these countries are becoming preferred offshore options. 3. Costs: Hiring quality developers in the US costs anywhere from $80 to $150 per hour, with Latin America and India ranging from $40 to $70 per hour and $20 to $50 per hour respectively. Hiring costs for developers in Latin America, although higher on average than places like India, are still less that half that of of developers in the United States, with the added advantage of similar time zones. 4. English proficiency: According to the EF English Proficiency Index 2015, a number of Latin American countries — including Peru, Chile, Ecuador, Mexicoand Brazil — have surpassed China in English proficiency. And more English-speaking Latin Americans could be coming: In 2013, President Barack Obama launched the 100,000 Strong in the Americas program to expand educational exchanges in higher learning by doubling the number of exchange students between the U.S. and Mexico. Latin America, with its countries investing more in English language training, may one day be the top destination for outsourcing services. \ 5. Tech talent numbers: The quantity and quality of Latin American tech talent has seen a significant rise over the last few years. According to Stack Overflow, a site for programmers with 4.7 million users, the average reputation of top users is higher for Latin American countries like Peru (24,809), Colombia (21,064), Chile (18,080), Argentina (16,500), and Brazil (14,150) than for India (13,882) and China (13,236). Even though India boasts a larger number of top users, the quality of developers in Latin America is higher or on par with Indian programmers. 6. Culture: The cultures of the United States and Latin America were both strongly influenced by European civilization. And while there are strong cultural differences, certain similarities do extend into the work styles and business approaches across the continents, making it somewhat easier to collaborate. Latin American developers seem to be more assertive and creative, viewing the relationship more as a partnership rather than a hierarchical client/worker relationship. For example, Latin American developers are more likely to give important feedback like “actually, that can’t be completed by your desired deadline” despite the risk of conflict, while in places like India, developers may have a more difficult time voicing important concerns early on. 7. Fastest-growing outsourcing market: As the global market for offshoring services expands, Latin America seems to be growing most rapidly, with Brazil, Colombia, and Chile leading the way. According to a 2014 KPMG study, while Latin America’s outsourcing industry currently represents only 5 percent of global spending, or around $7 billion, its annual growth rate through 2017 is projected to average nearly 10 percent, up from 5.3 percent in 2013. Most of the Latin American economies continue to expand at a steady pace, although they’ve been affected by political instability, language barriers, and a general inequality with supply and

demand. Despite these challenges, Latin America has emerged with great promise as a destination for offshore services. The Latin American Center for Competitiveness and Sustainable Development is INCAE's main research center and serves as a think tank for governments in the region, integration organizations, the private sector and civil society. In addition CLACDS provides analytical and programmatic support to bilateral and multilateral cooperation organizations working in the Region. Since its onset in 1996, CLACDS has cooperated with international organizations, governments, and private sector organizations to develop strategies, promote dialogue among countries, and strengthen capabilities in areas that are essential to regional development such as competitiveness, social progress, sustainability and governance, among others. 3. How are Indian IT companies leveraging factor conditions in Latin America? Today, Indian companies like TCS, Infosys, Wipro, KPIT Cummins and many others run software development units, BPOs, KPOs and call centres in Argentina, Brazil, Chile, Uruguay, Mexico, Colombia, Peru, Ecuador and Guatemala, and between them they employ almost 20,000 Latin Americans. And since 2000, Indian companies have pumped more than $12 billion in the region in IT and other sectors. Indian IT services companies that are dependent on the US and European markets see the emergence of Latin America as an opportunity. Latin America has young people who are educated and skilled. While Indians are good in software, South Americans are good in marketing and design. It’s a good opportunity for everyone. Latin America is not a homogeneous entity. While countries like Brazil and Chile are middle class, nations like Bolivia have rampant poverty. But there is something in common: they are growing faster than the US and Europe, they are adopting technology and the governments are spending money on E-services. The Latin American businesses are growing at a rapid pace and are opening up to IT products and services. The local IT players are not ready to meet this surge in demand, and this is where Indian companies can step in. Indian companies turned outsourcing into a virtue because of the low cost of labour in India. But in this region, especially in Brazil where the currency is high and the cost of living is high, BPO operations may not be profitable to Indian firms,” says Alick Barreto of Advantage Brics, a consultancy firm. “They have to get into services like banking and cloud in partnership with Brazilian companies.”