The evolution of the global Information Technology Enabled Services (ITES) sector and the shrinking gains of FDI for low- and middle-income economies

Laura Mann
Jun, 2024
#Trade and FDI
#Services
The information-technology-enabled services (ITES) sector, or business process outsourcing (BPO) sector, as it is sometimes known, encompasses all services that can be digitized and delivered at a distance, including call centre services, back-office processes, data management, information technologies (IT) development, software support, transcription and engineering services. Some ITES work is relatively low skilled and low value such as outbound call-centre activities, which involves hard-selling and unwanted old-calling. Other activities such as Computer Aided Design (CAD) engineering requires quite advanced technical skills and are therefore far more lucrative.

Over the past three decades, India has established itself as a leading ITES hub for clients around the world, exporting a large variety of IT and ITES services, collectively amounting to US $110 billion export revenue and employing 3.7 million workers in 2016 (NASSCOM 2016). Its success has prompted policy-makers elsewhere to aspire to copy its experience. In the most optimistic assessments, some commentators claim that the service sector may allow other developing economies to ‘leapfrog industrialisation’ (Larson and Munger, 2017, p. 134; for a critique, Behuria and Goodfellow, 2019). Jana Kleibert and I scrutinised these ideas in close detail. In our 2020 paper in the European Journal of Development Research, we compare the historical trajectories of three ITES destinations as they have emerged over time: India from the 1990s, the Philippines from the early 2000s and Kenya from the late 2000s onwards, in order to understand whether other countries can indeed follow in India’s footsteps.

Embedded in the idea of copying and replicability are three core assumptions: First, that the technology underpinning ITES production remains unchanged; second, that the geography of this sector is determined by a mix of labour and internet costs alone; and third, that as fibre optic connectivity spreads more widely and as India’s labour costs rise, newly connected providers will be able to take India’s place and enjoy the same developmental benefits. Such assumptions reflect older, now quite out-dated, ideas about the diffusion of technological capabilities through foreign direct investment, which emerged in the 1960s such as Kaname Akamatsu’s (1961) notion of Flying Geese and Raymond Vernon’s (1971) Product Life Cycle theory.

Such earlier theorists postulated that as manufacturing production costs rose in high-income countries, profit-maximizing firms would seek out lower cost workforces elsewhere and transfer their technological capabilities in the process. Over time, these workforces would in turn mature, and thus manufacturing firms would once again seek out lower cost shores elsewhere. Scholars predicted that such production shifts would slowly disperse the benefits of FDI to more and more parts of the global economy, shifting low and middle income economies up the ladder of technological sophistication, starting with textiles, moving into automobiles, and later into the most technologically sophisticated products and services of all, electronics (at that time). However, as Bernard and Ravenhill (1995) demonstrated with respect to manufacturing value chains in the 1990s, various technological transformations in the preceding decades have altered this pattern of technological diffusion and call into question simple assumptions about diffusing developmental gains.

The spread of fibre optic internet cables, along with the development of shipping technologies and other communication and transport infrastructures have made it possible for firms to coordinate complex production processes across borders. Engineers and consultants have likewise used digital technologies to rationalise production, breaking down production processes into constituent parts. In place of the production of a whole good or service, firms now offshore specific discrete tasks. This ‘unbundling’ of production, as economic geographers term this restructuring, places limits on the amount of technological learning economies can expect to flow from FDI.

When it comes to the ITES sector in particular, our fieldwork in India, the Philippines and Kenya revealed that rising wages in India and expanding fibre optic connectivity elsewhere have not forced Indian firms and workforces to simply exit the market nor move into alternative higher-value activities, as Akamatsu’s and Vernon’s theories would have predicted. Rather, leading firms in India (and other ITES destinations like the United States and Ireland) have reconfigured production, breaking down large contracts into discrete tasks. Tasks requiring more sophisticated skills have remained in India, while less demanding (and less lucrative) tasks have meanwhile been shifted into firms in countries like the Philippines. Here, the sector remains largely foreign owned, with workers heavily clustered in low skilled customer service operations like outbound sales. More recently, Indian firms have begun to experiment more with robotic process automation (RPA) and business process as software (BPaaS), and are thus potentially drying up these low cost opportunities elsewhere. Meanwhile in Kenya, domestic owned ITES firms have struggled to even establish themselves in these low-end positions. Thus, rather than the technology and production of ITES diffusing ‘naturally’ across borders through expanding internet connectivity and rising labour costs, distinct hierarchies of production have emerged, with new entrants facing drastically different sets of conditions than those faced by earlier entrants like India. Indian firms have reconfigured the global network and changed the nature of engagement for others, making it difficult for new entrants to replicate India’s same mix of policies and private sector initiatives.

One reason for this pattern of hierarchy is that the ITES sector has never been as frictionless as some commentators may have you believe. The sector remains heavily dependent on a whole swathe of consultants and intermediaries who have gained tacit knowledge and the lucrative trust of demanding clients. Part of the backstory of India’s rise is the country’s skilled labour migration to the United States and Europe, and the tacit knowledge, interpersonal relationships and trust these experiences cultivated (Dossani and Kenney, 2009; Lee et al., 2014; Parthasarathy, 2013). As my own interviews with Kenyan call centre managers revealed, it is actually very difficult to run a call centre efficiently. There is high labour turnover and small margins of error (and profit). When you get things wrong, trust can fray and your country’s reputation damaged as a result. Thus, even as fibre optic internet cables have theoretically brought new destinations into the global market, these intermediaries and lead firms in established destinations retain their trust, bargaining power and power.

Our paper thus argues that the developmental gains of the sector are technologically and temporally contingent. First, while digitisation has allowed whole new swathes of work opportunities to become ‘global’ in the first place, contemporary processes of digital innovation are more focussed on automation, potentially leading services to be delivered not by humans located off-shore but by robots ‘no-shore’. Second, as the growing prevalence and use of the platform economy and crowdwork grow, service work is becoming even more fragmented and unbundled, making it even more difficult for new entrants to follow India’s examples and upgrade within this fast changing technological landscape.

Our paper thus concludes that low- and middle-income countries need to look beyond the short-term employment benefits of digitisation and ITES to better understand these longer-term processes of unbundling and production geographies. Whereas the service offshoring and outsourcing sectors’ founding rationale has been labour arbitrage, automation and crowd work developments may entail that capturing the gains of ITES labour for structural change may be even more difficult in the future.
References

Akamatsu, K. (1961). A theory of unbalanced growth in the world economy. Weltwirtschaftliches Archiv, 86, 196-217.

Behuria, P., & Goodfellow, T. (2019). Leapfrogging manufacturing? Rwanda’s attempt to build a services-led ‘developmental state’. The European Journal of Development Research, 31(3), 581-603.

Bernard, M. & Ravenhill, J. (1995). Beyond Product Cycles and Flying Geese: Regionalization, Hierarchy, and the Industrialization of East Asia. World Politics 47, 171–209.

Dossani, R., & Kenney, M. (2007). The Next Wave of Globalization: Relocating Service Provision to India. World Development 35 (5), 772–791.

Larson, J., & Munger, M. (2017). Imagine What You Already Know: Towards New Solutions to Longstanding Problems’. In B. Ndemo and T. Weiss (Eds.), Digital Kenya: An Entrepreneurial Revolution in the Making (133–154). London: Palgrave Macmillan.

Lee, K., Park, T.Y., & Krishnan, R.T. (2014). Catching-up or Leapfrogging in the Indian IT Service Sector: Windows of Opportunity, Path-Creating, and Moving Up the Value Chain. Development Policy Review, 32 (4), 495–518.

NASSCOM (2016). Indian BPM Sector Witnessing Sustained Growth Through Constant Diversification. NASSCOM Press Release. http://www.nasscom.in/indian-bpm-sector-witnessing-sustained-growth-through-constant-diversification.

Parthasarathy, B. (2013). The Changing Character of Indian Offshore ICT Services Provision. 1985–2010. In A. Bardhan, D.M. Jaffee, and C.A. Kroll (Eds.), The Oxford Handbook of Offshoring and Global Employment (380–404). Oxford: Oxford University Press.

Vernon, R. (1971). Sovereignty at Bay: The Multinational Spread of U.S. Enterprises. New York, NY: Basic Books.

Laura Mann

Associate Professor in International Development, London School of Economics and Political Science

L.E.Mann@lse.ac.uk

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