From FDI to the Investment in Outsourcing

From April 11 to April 13, I attended Annual Investment Meeting (AIM) in Dubai, one of the most important world forums on the promotion of Foreign Direct Investments (FDI).

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I had an honor to moderate a session on outsourcing within this conference, whose objective was to advise the governments on how to capture opportunities in this dynamic and global market of outsourcing. Here is a brief account on this session.

My panelists were renowned experts and global industry thought leaders:

  • Christina Knutsson, Director at GDP Global
  • Jon Becker, Legal Counsel at Clearly Legal Ltd
  • Michael Ansah, Vice President of Dell
  • Roland Jabbour, Chairman at Jabbour Holding Group
  • Zhengping Yu, Executive Director of IBM China GTS GCG

Outsourcing was selected as one of the hot topics at AIM due to the fact that more and more money is being channeled into the alternative forms of investment, like mergers and acquisitions, licensing, subcontracting and outsourcing.

Foreign Direct Investments

Several thousands participants, ministers of more than 100 countries, government officials, industry experts and consulting companies convened to a large number of sessions and country presentations. Here are just few numbers to illustrate the current state of foreign direct investments in the world:

  • Over $710B was invested worldwide and over 2 million of jobs were created in 2015. The total global FDI had an increase of 8.6% from 2014, but the number of FDI projects is actually declining. The reasons for this are worries over global security, political tensions practically everywhere, and weak growth in China.
  • Approximately half of these investments is directed toward developing economies and another half to the developed countries. Out of all destinations, South-East Asia attracted the most investments and showed the best performance in terms of job creation.
  • Out of BRICS countries, China is still the most attractive destination for FDI, but the overall performance declined and converged with that of India, who had a very successful year in attracting investments.
  • In Europe, only UK has booked an increase in FDI inflow: +6.6%, while Germany and Romania had the sharpest decline (Germany -7.5% in number of projects, and Romania -5% in jobs)
  • The strongest growth in terms of outwards investments (both FDI and M&A) was seen in China. Chinese FDIs represented $59B in 2015. The destinations were various countries and regions: US, Asia, Africa, Australia and the strategies were opportunistic – from strategic projects like the New Silk Road Economic Belt, to acquiring resources in Africa and advanced technologies in the West.

Outsourcing Market

Now back to the outsourcing market. The overall market value in 2015 was around $440B and it comprises mainly of IT and Business process outsourcing (BPO) industries. Five top destinations are still : India, Philippines, Poland, Ireland and China, but some emerging countries are making big steps to get to the first rank: Bulgaria, Brazil, Costa Rica, Czech Republic and Egypt.

The global market for outsourcing is slowing down. There is decline in large deals (with >$30M) of 25%, while the number of smaller deals remain steady. There are many challenges for outsourcing providers: government budget cuts, the clients expect constantly price reductions, the move of the IT infrastructure to the cloud environment. There is also a trend towards smaller contracts with shorter duration. An encouraging detail: there is an opportunity of $350B of the deal renewals in the next 24 months worldwide.

The outsourcing is being challenged by the new platforms like cloud computing and artificial intelligence, and is expected to move more and more towards knowledge and innovation outsourcing, instead of relying only on labor arbitrage.

Panel discussion on outsourcing at AIM 2016

My panelists agree that countries should first try to leverage the existing strengths, when developing outsourcing capabilities and then move up the value chain. Example is Philippines that managed to overpass India as prime location for call centers, generating more than 1 million jobs and estimated revenue of $25B only from call centers in 2016. Philippines are now moving up the value chain into activities like preparing research reports, and providing clinical support and other medical back-office services.

We heard of some very interesting projects in Caribbean countries to build up the call center capacities, and the case of a Chinese city that managed to transform a huge manufacturing zone into a major outsourcing and innovation cluster. Client companies appreciate stable political environment, availability of resources, but also tax and other incentives when selecting outsourcing locations.

Outsourcing is the way how global economy functions, and developed countries like Australia is using it not only to reduce the cost of operations of its industrial groups, but also to increase indirectly its presence and knowledge of Asian markets.

As the conclusion, outsourcing is very complex and dynamic field: many different activities can be outsourced, to different locations, through various outsourcing arrangements (captive units, joint-venture companies, Build-Operate-Transfer vehicles, third-party managed centers) and the overall industry keeps changing. But outsourcing is also means of improving local economies, creating jobs and balancing the global growth, which is very important from the sustainability point of view.

I had great pleasure moderating this discussion and socializing with friendly people from all over the world, in this fascinating financial and business center, the city of Dubai.

Outsourcing session panelists at Dubai AIM 2016Panelists (from left to right): Jon, Sasha, Christina, Michael, Roland and Zhengping