Business process outsourcing
in (to) the new member states
– the case of Hungary
Magdolna Sass
Institute of Economics of the Hungarian
Academy of Sciences
8th Annual EEFS Conference,
Warsaw, 4-6 May 2009
BPO to CEE and Hungary
• Technological advancements and trade liberalisation: fragmentation
in certain services – similarly to manufacturing
• Since around 2000: increasing number of FDI projects in business
services, especially in the Czech Republic, Hungary and Poland
(later: Romania)
• Altogether around 1200-1300 projects in Europe, of which 180-200
in CEE at present
• Both relocations and establishment of new capacities
• Mainly for the European market (in some cases global, larger
(EMEA) or smaller regional markets)
In CEE and in Hungary: (based on official statistics)
• Increasing number of employees, output and VA in the sector,
increasing trade in business and computer services, with trade
balances improving or turning to positive, increasing shares of the
analysed countries (though still small) in business and computer
services trade of the EU-27
• Specialisation indices (foreign trade) turned positive for business
services, converged to 0 in computer services; RCA approached 0
for both
Methodological issues
Literature: e.g. for services: Francois and Hoekman, 2009,
for BPO: UNCTAD (2004), OECD, Kirkegaard (2005),
Sturgeon et al. (2006), Sass (2009): problems with data
(FDI, trade, labour), unavailability of company data:
quantitative research must be supplied with qualitative
company level surveys, interviews etc.
This paper analyses:
• Impact on the local economy
Method:
• 8 company cases (questionnaire based interviews):
altogether in Hungary 45-50 such companies with
various sizes; these 8 represent about ¼ of total related
employment
• 4 independent and 4 captive, two established very
recently,
• Company interviews also showed the problems with
available data (especially FDI and trade)
Impact of MNEs on the local
economy
• All projects involve MNEs (100% foreign owned)
• Analytical framework: impact of MNEs on the local
economy (Dunning, 1993, Barba Navaretti, Venables et
al., 2004, Caves, 2007)
• Vertical FDI predominantly (two companies: confluence
of vertical and horizontal, but even in these vertical
dominates)
• Literature: basically non-existent on the impact of BPO
on host countries in CEE, very little on other countries
(see e.g. Hansen et al. 2007 for a literature review)
• Also „under-researched”: BPO in general in
CEE/Hungary (mainly consultation firms – possible bias)
Effects of MNEs on host countries
Effects
Where do the effects arise?
Host
Home
Productivity differences
Productivity differences
Competition and market supply
Output levels
Employment and wages
Employment and wages
Skills
Skills
Volatility
Volatility
Transmission of technology
Technological sourcing
Product markets
Factor markets
Spillovers
Transmission of intangible effects
Pecuniary externalities
Source: Barba Navaretti, Venables, 2004
Impacts of BPO related MNEs on
the host economy
• Differences between vertical and horizontal FDI
– here mainly vertical, in 2 cases confluence of
vertical and horizontal, but vertical dominates
• Product market: important only in these two
latter cases (analysis complicated by „political
influences” – no real market/competition)
• Factor markets: more important (main locational
advantage: price of factor, relatively more
intensively used in production)
• Spillovers: relatively important
Main areas of impact
Going through the possible impacts, the following
most important areas of impact were identified
based on company interviews (leaving out those
on which no reliable info)
• Raising demand for skilled labour (factor market)
• Linkages (backward, forward)
• Pecuniary spillovers: through trained employees
• Pecuniary spillovers: infrastructure and services
• Pecuniary spillovers: impact on the business
environment
• Regional impact
1. Raising demand for skilled
labour
• Jobs offered: mainly medium to medium-high
skilled (table)
• About 20,000 jobs created (interviewed
companies: 5,500), predominantly for young,
highly skilled university graduates with language
knowledge
• high wages in national comparison, raised
above national average by intense competition
for suitable workers
• Problem: shortage (+attrition driving up wages)
Activities carried out in the
companies interviewed in Hungary
Back office
►►►Increasingly
Transaction processing
Document management
Data entry
Data processing
Customer contact
Common
functions
corporate
Knowledge
services
and decision analysis
Research
development
and
HR
Accounting
Administrative
services
Financial services
IT call centres Other IT
services
Quality management
Cost planning
Service delivery (after
sales)
Supply
chain
management
Program and project
management
Financial
program
management
Integration engineering
Analytical accounting
services
Business performance
analysis
Cost analysis
(Original)
software
development
Mathematical
modelling
complex transactions►►►
Call centres
Telemarketing
2. Linkages
• Minimal; though increasing with age (corresponding to the literature,
e.g. Blomström, Kokko, 1998; factors influencing linkages are very
similar to those in manufacturing: mode of entry, share of foreign
ownership, sector, vertical versus horizontal FDI, difference between
the foreign and domestic sectors, age, quality and quantity of local
suppliers, size, nationality of investor, global strategy of MNC and
role of the affiliate in the global network of MNC, see e.g. UNCTAD
(2001), Tavares, Young (2006), Sass, Szanyi (2009))
• Backward: „usual” services (catering, cleaning, security, financial,
renting of premises, hiring agencies etc.), other than that only in two
cases (core activities)
• Forward: for two of 8 companies (the biggest and oldest ones)
important, their export/sales is around 60-70 % (for all others close
to 100%) – these are the colfluent vertical/horizontal ones
• Forward: mainly for independent service providers (understandably)
• Forward: minimal for those captives, which have another local
affiliate; none for those which do not have one
• Contribution to raising productivity of local companies: minimal
3. Pecuniary spillovers: through
trained employees
• Training: substantial (differently from Dunning, 1993: not
narrowly focused – specificity of the sector)
• Next workplace: another MNE in the sector (most often),
a domestic company or setting up their own business
• This latter: especially in IT-related, and in those where
there is an overview of the whole service process:
possibility in 3 of 8 interviewed companies (happened in
2, the third one is too „young”)
• Cooperation with „spin-offs” mentioned
• Not only skills but also management and organisation
techniques and „business ethics/ethos” are transferred importance
4. Pecuniary spillovers:
infrastructure and services
• Through high demand for these, especially
for IT-related infrastructure (broadband)
and services
• UNCTAD (2004) this is the most important
spillover
• Through backward linkages: high
competition in „usual” services, improving
competitiveness, even helping these local
companies (technical asistance)
5. Pecuniary spillovers: business
environment
• All companies very active in the local business
life (lobbying, improving their business
environment)
• Links-cooperation with universities, in one case
in R&D, in other cases scholarships, etc.
• Main reason: lack of suitable employees
(+lobbying, building up local „network”, contacts)
• Corresponding to the finding of Dunning (1993),
though business organisations contain few local
members – transfer of knowledge is minimal
through that channel
6. Regional impact
• Agglomeration effect very strong, partly because
of high demand for suitable workers and
infrastructure (similarly to UNCTAD (2004): „low
level of spreading out to the countryside”)
• However, because of shortage of labour,
spreading out to the countryside in Hungary:
especially university towns close to the border
(two sources of suitable labour) – this is a new
phenomenon + different in Poland
• For Hungary: low regional impact corresponding
to the above factors
Conclusion
• BPO: more and more important in CEE/Hungary, though
still minimal market share compared to WE
• Data and methodological problems (reinforced by the
company interviews)
• Little research on the impact on the host economy
• This paper: local impact, mainly in a qualitative analysis
• Mainly factor market impact (labour, esp. skilled)
• Limited contacts with the local economy, pecuniary
spillovers important mainly through trained employees
and use of local infrastructure and „usual” services
Thank you for your attention!