Online Extra: Up-and-Comers in the Outsourcing Race
Inspired by India's success at turning itself into the king of global outsourcing, countries all over the world are trying to perform the same feat on their often-struggling economies. Many send delegations to India to meet with experts and visit its hundreds of call centers, into-tech support operations, and back-office processing facilities. They also tap into expertise at the World Bank or hire consultants such as Accenture, McKinsey, or market researcher Gartner.
Armed with support from ambitious politicians, many countries then roll out packages of economic reforms to sweeten their appeal to foreign investors. Changes can include relaxing import or export tariffs, loosening business rules, and creating special tax categories or economic zones for outsourcing operations.
Some governments throw money into improving airports, highways, and telecommunications systems -- all necessary infrastructure to attract outsourcers and support general business growth. Many create education and training programs to boost English proficiency or skills such as network management or accounting. And some invest directly in service centers or other facilities to kick start development of a local outsourcing industry.
PROS AND CONS.
Foreign investors are attracted by such incentives, but carrots aren't enough to sway a decision if the fundamentals aren't right. Western companies looking for offshore or nearshore suppliers need most of all to trust in the availability of skilled employees and the quality and cost-effectiveness of their work. Hourly wages are a critical factor but must be weighed against other expenses such as the cost and time involved in traveling to and from the outsourcing center and managing it from a distance.
Potential turn-offs for potential clients are signs of political instability, bureaucracy, and corruption. But all other things being equal, incentives can tip the balance, which is why so many countries use them.
Here's a short list of some of the countries trying to grab outsourcing work, and what they're offering to lure business:
Despite its ample supply of sophisticated engineers and scientists, Russia didn't embrace outsourcing until about a year ago. That's when President Vladimir Putin made an official visit to Bangalore, India, and returned singing the praises of IT services and programming-for-hire.
Since then, the government has trotted out a new policy aimed at beefing up Russia's appeal. It has approved legislation and funding to create "technoparks" in St. Petersburg, Novosibirsk, Nizhny Novgorod, and Dubna, near Moscow. Each will receive government funding of $80 million to $100 million.
The government is also implementing more favorable tax treatment for the IT industry. Under tax amendments set to kick in this year, IT companies will be able to pay a lower rate of social security tax -- just 14%, vs. the norm of 30% -- and they'll be exempted from value-added taxes on exports.
All these changes are warmly embraced by Russoft, the association of Russian software and IT-services companies, which tries to promote Russian outsourcing through conferences and events such as the annual U.S.-Russia Technology Symposium and U.S-Russian IT-Season.
Decades after the Sandinista revolution in the 1970s put it at loggerheads with the Reagan Administration and prompted an estimated 400,000 people to flee the country, Nicaragua is trying to get back into the global economy by embracing outsourcing. With the prodding of trade promotion agency ProNicaragua, the Spanish-speaking country of 5.3 million people has rolled out an aggressive package of incentives to attract foreign investment.
ProNicaragua's pitch emphasizes the country's low crime rate, moderate 5% annual inflation, and a newly-improved telecom infrastructure that features fiber-optic connections to the U.S. Nicaragua is staking its ground on attracting call centers, and to speed the process along, the government spent $3 million to build a 500-seat call center in the capital of Managua. ProNicaragua hopes to announce its first major tenant early this year.
Most of the work there will likely serve Spanish-speaking customers in the U.S. or elsewhere in Latin America, but to highlight Nicaragua's potential for bilingual customer service, the government also has assembled a database of 5,000 English-speaking workers available for hire. Call center workers typically earn $300 to $600 per month -- higher than in India, but only half the rate in neighboring Costa Rica and Panama.
To sweeten the deal, ProNicaragua has pushed through an impressive package of economic incentives, including a 100% exemption from income and capital gains taxes for call-center businesses in special economic zones. Such businesses also will be able to import equipment with no duties, avoid value-added taxes, and pay no property taxes on their facilities. Nicaragua's modest goal is to create 4,000 call-center jobs by 2009, but ProNicaragua Director Juan Carlos Pereira thinks it can do far better.
The landlocked nation bordering South Africa has only 2 million inhabitants and must contend with HIV infection that could affect as much as one-third of its population. But unlike many neighbors, Botswana has had a stable democratic government since 1966 and enjoys the highest bond rating in sub-Saharan Africa from Standard & Poor's. It's also ranked as the least corrupt nation in Africa by advocacy group Transparency International.
Strong English-language skills have prompted the government to chase call centers as a path to economic growth. Trade representatives travel to conferences on global outsourcing to pitch Botswana, talking up its top-flight telecom infrastructure and eight daily flights to Johannesburg from the capital of Gabarone. To attract foreign businesses, Botswana offers them exemption from value-added taxes and a flat 15% corporate tax rate guaranteed until 2020. Tax treaties with numerous countries around the world spare foreign investors from double taxation at home and abroad.
Perhaps Botswana's most remarkable incentive is a 200% credit on employee training programs. For every dollar companies spend training workers for call center or other outsourcing work, the government pays them two -- in effect, turning training of Botswanan workers into a revenue source for foreign companies.
Reinhardt is a correspondent for BusinessWeek in Paris
By Andy Reinhardt
EDITED BY ROSE BRADY