Mexico and the globalization of services: outflanked once again?
| Autor | Mullan, Jessica E. |
| Cargo | Report |
Introduction
The offshoring of an increasing number of white-collar jobs from developed to developing countries presents a significant economic opportunity to any developing nation having a low-cost and educated workforce. In 2003, when Business Week published its first article on the offshoring of service work, Mexico was not even mentioned. However, by 2006 the assessment had changed, as Business Week (Smith, 2006b) published an article on the offshoring of engineering jobs focusing entirely upon Mexico. This article explores the offshoring to Mexico of information technology, administrative, and technical services (ITAS). (1) We contrast the case of Mexico with that of India, where a rich and diverse ITAS offshoring ecosystem has emerged. Within this context, we also explore the growing relationship between the Indian and Mexican ITAS industries. This has been of particular importance recently, as TCS, Infosys and Wipro, the top three Indian outsourcing companies, have begun to play an increasing role in the Mexican ITAS sector. TCS, for example, announced a large government contract with Mexico in November 2007, and major investments in Guadalajara. The ability of Mexico to leverage its proximity to the vast US ITAS market may be the most important development opportunity Mexico will face this decade, and should be of significant interest to Mexican policymakers and the business community. By analyzing the key actors in the Mexican environment, both corporate and governmental, we provide a nuanced assessment of the potential for Mexico to benefit from this new turn in globalization.
As a global industry, the sheer number of ITAS activities that might be offshored is remarkable. On the more conservative side, from a study of eight industries, the McKinsey Global Institute (2005) suggests that approximately 11 million jobs are potentially offshorable in the next five years, of which the US would, by their estimation, account for probably 60 per cent or 6.6 million. Alan Blinder (2007) has come to an even more dramatic conclusion, suggesting that "the total number of current US service-sector jobs that will be susceptible to offshoring in the electronic future is two to three times the total number of current manufacturing jobs (which is about 14 million)" (Blinder, 2007). IT is impossible to predict the number of jobs at risk, but the number is large, and IT is likely the relocation will be more rapid than the relatively slow offshoring of manufacturing. To illustrate, in 2000, 232,000 Indians were employed in offshore service provision. This grew to 1, 251, 000 in 2007, and was expected to continue growing at over 20 per cent per year (Nasscom, 2007). (2) ITAS offshoring will, in the next two decades, massively reorganize where Robert Reich's (1991) symbolic analysts and non in-person service providers will be located. If Mexico could divert only a small percentage of these jobs from India, IT would be an important benefit, particularly because ITAS employs educated persons, and could thereby increase the return to education in Mexico.
The establishment of a substantial ITAS export sector could provide employment to educated Mexicans in activities that offer considerable prospects for industrial upgrading and even entrepreneurship. Offering such services to global buyers would allow Mexican professionals to integrate more firmly into the global economy. IT would contribute to the improvement of Mexico's internal economic productivity through learning global state-of-the-art practices and techniques. As is evident, this new wave of globalization offers significant economic development opportunities.
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Mexico and the Globalization of Manufacturing
To better understand the context in which the Mexican IT service sector emerged and Mexico's previous experience with globalization, IT is important to review Mexico's experience as a manufacturing destination, with a specific focus on its relationship with the United States. For manufactured exports Mexico's breakthrough came in the late 1960s, when, in response to Asian competition, many US firms simultaneously relocated production to Mexican cities along the US border to take advantage of cheaper labor costs. In Mexico, this was encouraged by the Border Industrialization Program (BIP) established in the 1960s, which encouraged export firms to establish industries within a 12.5-mile border strip. The BIP, besides providing substantial tax holidays, also allowed for the import of machinery, equipment, and manufactured components duty-free for processing and assembly, provided that all imported products were re-exported (Sklair, 1989; Shaiken, 1990). As Mexico faced periodic economic crises, and as the maquiladoras were the most dynamic part of its economy, the government opened the entire country to foreign investment for export. In 1965 there were nearly 3,000 employees in the maquiladoras. Since 2000 employment has fluctuated between 1 and 1.3 million, finally settling at approximately 1.2 million in 2006 (Federal Reserve Bank of Dallas, 2007). This was approximately 2.6 per cent of the total 2007 labor force of 45.38 million (of which approximately 25 per cent are underemployed) (CIA, 2007).
Prior to 2000 the bulk of Mexican economic growth during the last two decades was due to the expansion of the maquiladora sector (Gruben, 2001). And, by the late 1990s, some maquiladoras were participating in industrial upgrading, producing complex products and using advanced production processes (Carrillo and Hualde, 1998). Within these facilities there was greater focus on information technology, an increase in R&D capacity, and advanced manufacturing capabilities. The major avenue to upgrading manufacturing processes was an increase in the amount of R&D, product testing, design, and software development and use.
By 2000 a small Mexican software industry emerged in Guadalajara, where the (by then) largely closed computer assembly operations of IBM and HP were located (Ruiz-Durán, 2003). This fledgling software industry emerged from the engineering activities undertaken in the MNC facilities. In addition, expanding auto production operations gradually attracted some production engineering and basic design work. However, the degree to which these advanced manufacturing processes contributed to Mexico's growth as a provider of knowledge-based technology services is debatable as, judging by Mexican patenting at the US. Patent and Trademark Office (2006), which has stagnated the last 25 years at approximately 100 per annum, the volume of research was minimal. (3)
With the passage of NAFTA IT was possible that Mexico would become the offshore manufacturing supply center for the US. Though Mexican manufacturing exports continued to expand (particularly in goods for which transportation was expensive, where NAFTA local content rules were extant, or where short turnarounds were necessary), the focal point of offshore manufacturing moved inexorably towards China and East Asia. Today, few believe that maquiladora employment is likely to grow significantly (Federal Reserve Bank of Dallas, 2007). For the Mexican government, the realization that its growth potential in export-oriented manufacturing was limited came rather abruptly, with the recession beginning in 2000. This prompted a search for export industries within which Mexico might find employment opportunities. IT was within this context that ITAS exports offered a new growth opportunity.
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Mexico and the Globalization of ITAS
ITAS globalization refers to the relocation of work from high-cost developed nations to lower cost nations, and resembles the earlier relocation of manufacturing. To put IT into the vernacular of economists, during the last two decades many ITAS have become increasingly tradable in two ways: First, they became tradable across firm boundaries, i.e, they could be outsourced. Second, they became tradable across national boundaries, i.e. they could be offshored to an offshore subsidiary the firm owns. When the services are delivered across national and firm boundaries, they are outsourced offshore (Dossani and Kenney, 2007).
Prior to digitization, nearly all ITAS work was carried out on physical media such as paper, which is bulky and relatively expensive to transport. With only a few exceptions such as call centers and data entry, the initial large-scale offshoring of service work was in software programming and coding (Heeks, 1996; Arora and Arthreye, 2002), and India was the major beneficiary. An important expansion in offshoring came in the late 1990s due to a shortage of software programmers during the Internet Bubble and Y2K scare (Dossani, 2004). IT was also in the 1990s that other services began to be relocated, again with India as the leading destination (Dossani and Kenney, 2007).
Beyond the digitization of information, ITAS offshoring was further accelerated by the global telecommunications expansion during the Internet Bubble, which led to a dramatic drop in data transmission costs. This was accompanied by dramatic declines in the cost of computing and the increasing ubiquity of high-speed digital scanners, allowing the low-cost transmission of written materials. As a result, the Indian ITAS sector grew at a 24 per cent compounded annual growth rate (Nasscom, 2007) and expanded in number of employees, the value-added of the work, and types of activities (Dossani and Kenney, 2007).
There are four separate categories of ITAS offshoring: First, there are developed nation outsourcing firms, such as Accenture, CapGemini, EDS, HP, and IBM, which operate offshore facilities to provide contracted services to their customers in developed nations. In Mexico, there is a second category of foreign firms, namely Indian firms led by the giants, TCS, Infosys, and Wipro, which are expanding their global footprint to better compete with the developing nation service firms. A third category consists...
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