Business process outsourcing in (to) the new member states – the case of Hungary

1. 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

2. 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

3. 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)

4. 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)

5. Table 2 Effects of MNEs on host countries Effects of MNEs on host countries Source: Barba Navaretti, Venables, 2004

6. 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

7. 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

8. 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)

9. Activities carried out in the companies interviewed in Hungary

10. 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

11. 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

12. 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)

13. 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

14. 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

15. 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

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