1980s Onwards: India
India has become a lodestar of export-oriented development based on services. In 2016, India was exporting a large variety of IT and ITES services, collectively amounting to US $110 billion export revenue and employing 3.7 million workers. The ITES sub-sector (business process management) employed 1.04 million workers and generated US $26 billion export revenue in 2015 (NASSCOM 2016).
India’s spectacular ascendance as the ‘back office of the world’—from the short-term labour migration of IT specialists to client sites (‘body-shopping’) to a global delivery model of integrated services—has been explained in more detail elsewhere (e.g. Dossani and Kenney 2009; Lee et al. 2014; Parthasarathy 2013). Scholars explaining India’s trajectory have highlighted different factors for its success. Above all, the availability of a large pool of skilled labour at relatively lower cost made labour arbitrage possible. British colonial rule led to the prevalence of the English language skills and the creation of a highly educated elite upon which the sector could draw.
The existence of educated English-speaking surplus labour alone, however, would not have sufficed to allow India to plug into global production networks with such intensity. Crucially, the temporal-specific demands of multinational lead firms presented a key window of opportunity for India’s specific skill sets to be matched with global industries’ needs. These were a mix of financial pressures as a result of the recession following the bursting of the dot-com bubble, the massive amount of coding-labour required to fix the Y2K-bug at the end of the millennium and financialization leading to pressures in high-income countries to create shareholder value through leaner firms, thereby transferring all non-core activities to foreign suppliers and/or off-shoring to different locations. Another key feature for India has been the existence of a strong transnational community in export markets, in particular the USA, through overseas study or work experience. Through these personal connections, members of the diaspora could link firms to clients in the global North (Saxenian 2005).
Both the inflow of foreign investors such as General Electric Capital, which later spun-out as Genpact (now India’s largest ITES firm), and the diversification of existing Indian conglomerates such as Tata Steel (the founder of Tata Consultancy Services, the country’s second largest ITES firm) contributed to the rise of the domestic Indian service sector. In addition, the sector founded an umbrella organization for all IT-ITES firms in 1988, NASSCOM, which developed into a powerful business association that has since been active both in negotiating with the government for favourable policies and in marketing the sector to prospective clients abroad (Karnik 2012).
Several policies contributed to the rise of India on the global services map. Initially, India’s import-substitution policy led to a decoupling of India’s economy with global production networks, epitomized by IBM’s departure from India in 1978. This period was markedly different from the early development of the sector in the Philippines and Kenya, as import-substitution policies were part of the developmental toolkit in the 1970s. While this period’s political-economical environment created many barriers for export-led development, this widened policy space helped nurture Indian-owned firms throughout the period. Once gradual liberalization of the economy began in the 1990s, Indian firms were quick to recouple with global production networks and foreign clients, with some former hardware firms shifting into new sectors such as software and ITES (Gregory et al. 2009). A respondent from NASSCOM argued that Indian firms were fast to upgrade their service offerings precisely because of the export-orientation of the sector from the start: “We had to meet benchmarks internationally, since no domestic market for IT was existing in India”. In addition to reducing barriers to trade, relevant policies included the liberalization of telecommunications (with subsequent reduction of costs) and the opening of the education sector in selected states to private actors. The reform led to an upsurge of engineering and technical universities, thereby increasing the educated labour pool with technical skills relevant to the IT sector. In more direct terms, the Indian government instituted the Software Technology Parks of India (STPI) in 1991, a critical policy for creating subsidized infrastructure for services-export and offering tax incentives. Though officially terminated in 2011, it has been replaced with a special economic zone initiative, granting largely similar benefits. While these policies have not targeted specific firms, they targeted specific needs and requirements of the ITES sector (through the involvement of NASSCOM) and thus went beyond general ‘business enabling’ policies and foreign direct investment (FDI) attraction activities.
Initially, the Indian off-shore service sector’s ‘body-shopping’ practices represented a very temporary low-end integration into the ITES sector, followed by the delivery of basic software services from India through foreign investors’ and domestic-owned firms (structural coupling). From this initial step, over time, some firms were able to upgrade and become strategic partners of lead firms by diversifying beyond their competitive advantage in IT, offering ITES functions, such as enterprise resource management or customer services (functional coupling). More recently, several Indian off-shore service firms have expanded globally by opening subsidiaries abroad, both to access markets in advanced economies such as the USA and to broaden their delivery networks by adding subsidiaries in other low- or middle-income economies such as the Philippines. Operating a global delivery model, with office networks spanning continents, several firms have become lead firms with the power to decide whether to subcontract lower-end tasks to second- or third-tier suppliers or to off-shore tasks to captive offices in low- and middle-income countries (indigenous coupling). India’s large domestic market has also led to the simultaneous development of a domestic services outsourcing sector, which offers employment opportunities to workers who are not proficient in English. Examples include customer service centres for telecommunications corporations. Moreover, the vibrant ITES sector is able to support domestic firms in other sectors.
Despite India’s successful integration in global networks of ITES, the services sector has been critiqued for its failure to foster inclusive development. The most frequently voiced concern is the perpetuation of existing inequalities and increased socio-economic polarization. Drawing on highly educated, often urban, employees, well-paid employment and careers are available primarily to workers from existing middle classes, who have benefitted from high-quality (and often, international) education (D’Costa 2011). ITES thus does not offer the same developmental opportunities as the large-scale integration of rural agricultural workers into low-wage labour in factories through the off-shoring of manufacturing activities. Employment is moreover spatially concentrated in the most advanced urban centres, as firms depend on an infrastructure of strong universities, airports, telecommunications connectivity and other amenities, thereby potentially increasing rural–urban inequalities.
Automation and the increasing use of artificial intelligence for less-complex processes at the lower end of the ITES spectrum has not only affected firms in India, but its development has also been driven by lead firms involved in developing and training software to take on routinized tasks (Roberts 2019). Thus, while some Indian firms have lost employment through automation, others have been able to offer competitive cost–capability ratios at the high-value end while seeking to eliminate skill or even human cognition from production at the low end. This strategy to erode potential opportunities at the lower rungs makes it very difficult for new entrants to replicate India’s early experiences.
Early 2000s Onwards: The Philippines
The Philippines’ engagement with service exports started much later, was less strategic and has primarily been based on the country’s surplus of unemployed graduates with English-language skills which were rather ‘accidentally’ coupled with the demands for cheaper English-language customer service by MNCs. Foreign investors, some of which had experience with off-shoring to India, capitalized on English-language skills with ‘neutral’ accents, relocated call centre work and, increasingly, administrative back-office tasks in finance and other sectors to the Philippines. In one and a half decades, the ITES sector grew to employ 1.2 million workers and generate US $24.7 billion revenue in 2018, making it the second-largest foreign revenue earner after remittances (IBPAP 2019). Unlike India, the sector is largely driven by foreign investments, with the vast majority of subsidiaries exporting voice-based services to North America.
The key window of opportunity arose as a result of the technological changes and political decisions that led to substantially reduced prices of long-distance phone calls and internet connectivity in the early 2000s. This shift created opportunity for new kinds of work: long-distance conversational interactions with clients, in which the spoken English-language capabilities with ‘neutralized’ accents demanded a premium. Secondly, the Asian financial crisis led to a severe reduction of office costs even for prime real estate locations in Metro Manila.
Policy-makers were largely taken by surprise. The main policy responses, then, were modifications of existing policies (enabling FDI, advocating export-oriented development and providing incentives through special economic zones) that had been devised for export-oriented manufacturing now adapted to services. Later, the government, together with the Business Processing Association of the Philippines (BPAP), supported the sector in two ways: first, through sector-specific education initiatives, in particular, by financing scholarships for post-graduate vocational training, so-called ‘near-hire-training’, of more than 65,000 individuals for job-market entry in lower-skilled call centre jobs (Kleibert 2015); and second, through branding and selling the country and the ‘Filipino worker’ abroad, rather than particular firms, as ‘national champions’. Both strategies were largely adapted from the remittance-based long-term economic labour export strategy of the Philippines (Rodriguez 2010).
Its mode of integration can be classified as structural coupling, based on access to labour arbitrage and exports from ‘production platforms’ in special economic zones. While employment creation has been substantial, opportunities for local value capture beyond individual employee’s salaries appear limited. Though policy-makers and firm managers express ambitions to ‘move up the value chain’, this drive to date has primarily involved the addition of more skill-intensive tasks in captive back-office operations. Functional coupling remains difficult to achieve and would require investment into different skills sets, including managerial and technical skills. Padios (2018) analyses the rise of Philippine call centre employment as a post-colonial predicament, in which she shows how “despite its economic promise, the cultural and social value of call centre work is anything but stable” (Padios 2018, p. 4) and oscillates between transnational white-collar work in the knowledge economy and precarity at the bottom of feminized and racialized global hierarchies of labour that is (re)negotiated by workers and the state.
In contrast to the experience of India, in which domestic-owned companies have been able to capture a larger share of the global market over time and develop strategic network positions as a result, the Philippines ITES sector depends increasingly on foreign investors, who account for 93% of the sector (Yi 2012, p. 137). The few domestic-owned firms in the sector face competitive pressures and are crowded out by MNCs. In the words of a chairperson of the Contact Centre Association of the Philippines (CCAP): “There are [Philippine-owned call centres], but they are all small. The big ones are all multinationals; that’s different from India. […] Some are just surviving, if that’s the right word, there are a lot of challenges and they cannot compete head-to-head with the MNCs. That’s a reality now.” The lack of domestic-owned firms presents a severe obstacle for knowledge spillovers and learning, pre-empting any opportunities for indigenous coupling in the near future.
Lacking personal relations and networks in relevant professions in overseas client markets, entrepreneurs from the Philippines depend on chance encounters, brokers or cost-based competition in online platforms for short-term projects for market-entry. Many of the small domestic-owned firms in the sector occupy a low rung of the value chain, for example, outbound call-centre activities, involving hard-selling and cold-calling. In interviews, domestic-firm managers in the Philippines explained the challenges: unreliable clients, non-payment, scams and a constant struggle to remain in the market. Some even operate in a grey market of home-based self-employed micro-entrepreneurs.Footnote 3
Large MNCs are able to offer competitive salaries above the minimum wage and additional incentives including bonuses and gadgets upon hiring. The largest private sector employer, with 35,000 staff, is a US-headquartered call centre. This dependency on a single sector, located at the lower-end of the value chain, is questionable as a sustainable long-term development trajectory, given threats of relocation (to lower-cost countries) or automation. To truly benefit from the possibly short-term windfall gains of ITES employment that the Philippines is currently experiencing, it would be prudent to invest these gains into building skills and technological capabilities that contribute to broader productivity within the domestic economy. Domestic firms in the Philippines are largely absent from direct involvement in the ITES sector but are able to capture value from transnational flows of capital through related and supporting industries (real estate, telecommunications, retail, restaurant-franchises, etc.) without necessarily investing into increasing productivity or driving innovation. A move towards higher-value-added functions and increased power positions within global production networks would require strong domestic firms and government support with strategic intent to move up into higher-rent-generating sectors.
Late 2000s Onwards: Kenya
Our final case represents an ongoing attempt by a new entrant to integrate into ITES: Kenya. Although no reliable current statistics exist as to the sector’s economic contribution, it is estimated to consist of 30 to 50 firms and continues to be discussed as a viable driver of future growth. Initially, several small-scale Kenyan firms began to source informal work from online platforms, which drew the attention of larger investors and officials, aware that underwater fibre optic internet cables were about to substantially lower connectivity costs. A commissioned McKinsey study identified Kenya to be internationally competitive in low-cost customer service for European and North American markets (Kariuki 2010). Like the Philippines, Kenya was said to benefit from rising costs in India and from large numbers of unemployed English-speaking high-school and university graduates in a favourable time zone (Waema 2009). Yet, key actors underestimated the difficulties of accessing lucrative international contracts and underappreciated the unique first-mover advantages of incumbents India and the Philippines.
The government’s initial strategy sought to build up domestic-owned export-oriented firms by creating a positive and enabling environment through investments into large-scale internet infrastructure, the provision of a bandwidth subsidy to aspirant domestic firms, the commitment to build an ITES park in an export-processing zone outside of Nairobi, the development of basic training programs and the establishment of an autonomous government unit—the Kenya ICT Board—to globally market the Kenyan destination and develop incentives for foreign investors and clients (Government of Kenya 2007). Within the private sector, a Kenyan BPO and Contact Centre Society formed in 2007, in part modelled on NASSCOM and BPAP.
Public support was given to all aspirant domestic firms and was not targeted nor was performance monitored in a systematic way. Nevertheless, some interviewees felt preferential treatment had been given behind the scenes, and ultimately, these accusations led to the dissolution of the business association (which later re-emerged as a new body in 2012). The inability or reluctance to channel support to specific capable domestic firms made it difficult for the government to protect the country’s reputation.
Accordingly, a number of inexperienced firms took advantage of policies but were not able to perform. In a 2013 focus group, managers of prominent ITES firms stressed both the need for more targeted and tailored support and the need for a registration and vetting portal to establish standards and guard against inexperienced new entrants. One participant claimed: “If you get exploited, it is either because you don’t understand, you do not have the right skills or you are so desperate for work that you take it on anyways”. Managers stressed that outbound customer service and outcome-based contracts were not profitable, and yet, inexperienced actors fell prey to intermediaries passing on unprofitable work. Often these intermediaries were Indian firms or consultants potentially seeking out low-cost destinations as part of their own value chain strategies. Others got the ‘right’ kind of work but then failed to deliver due to lack of tacit skills and appropriate management practices. India’s long history in the sector has allowed its firms to build up, and then protect, important tacit knowledge, personal relationships and reputational capital, which allowed its firms to separate out and subcontract less-valuable work to less-experienced actors.
These problems led Kenyan stakeholders to shift attention away from international clients towards domestic and regional clients, particularly large multinational firms operating within East Africa and government institutions (Mann and Graham 2016). Some firms also tried to integrate into the ‘impact-sourcing’ market through re-branding and changing their employment practices to hire categories of disadvantaged workers fulfil corporate social responsibility contracts. Finally, domestic firms also began to push the government to attract foreign ITES firms from India and the Philippines to help mend Kenya’s reputation problem, thus attempting, in some ways, to replicate the Philippines’ model. These varied strategies signal the acute difficulties Kenya faced in trying to integrate even at the level of structural coupling at this late stage in the global network’s evolution. Simply put, market access is not mediated and accessed through technological infrastructures alone but depends on governance relations embedded in global production networks.
In recent years, the approach has adapted further in potentially more ambitious or perhaps more pragmatic ways. The East African region is becoming an increasingly lucrative market for multinational firms. It is also undergoing digitalization and financialization, as well as trade harmonization within the East African Economic Community. As the region’s economic hub, Kenya is well positioned. This market-seeking potential distinguishes Kenya from the case of the Philippines and offers the potential for functional and indigenous coupling based on regionally specific assets and domestic innovation clusters, although there is a danger of this market-seeking behaviour transferring value out of Kenya as well as in.
Kenya’s current enabling policies encompass both high-skilled and low-skilled service delivery. Stakeholders have made the case for Kenya to position itself in activities such as social media, software and mobile money innovations through supporting supply side digital training in schools through its digital literacy program, by promoting entrepreneurship programs and by funding incubation hubs and affordable bandwidth (Ndemo and Weiss 2016). However, from fieldwork interviews, managers of Kenyan start-ups expressed the desire to be acquired by a larger foreign firm, a circumstance that might limit the potential for value capture in Kenya. At the lower end, the government has also promoted and begun to train workers to engage in online low-skilled micro-work freelancing for overseas clients. This new approach is perhaps driven by a fear of jobless service growth (Te Velde et al. 2015, p. 5). Yet, such work is predominantly low value and cannot be used to drive productivity elsewhere within the domestic economy.