DARE - Because Entrepreneurs Do

In today's technology-enabled environment, geography is no longer the core determinant on which the location of a business depends. Yet, businesses which may be geography-neutral in theory may not be so in practice, as several other factors go into creating an overall value proposition for the business. Here’s a DARE analysis.

In this age of everything seamless, from where you operate your business is no more sacrosanct. In other words, it does not really matter in which corner of the world you operate from; you can transact any business from anywhere. Where IT and IT-enabled businesses like Business Process Outsourcing (BPO), Banking, Financial Services and Insurance (BFSI), consultancies and other businesses, within the knowledge economy and with a skilled workforce, can truly straddle across geographies without a hitch the old economy players like grain trading, textiles or mining, where the production of the chief raw material is geographically-linked, do have some limitations and are therefore not as mobile as the former lot. Yet, the advent of technology has ensured that they can be effectively remote managed from anywhere. So, at least in theory, managing most businesses has become geography-neutral, thanks to technology.

Yet, in practice, the story is quite different, for technology in itself does not guarantee geographical-neutrality especially in case of businesses that typically hire a semi-skilled workforce in bulk. It is just one of the several factors that determine where businesses set up shops. Factors such as human resource skill-sets, relative wage bill, overall ease of setting up shop and operating the same, labor laws that determine ease of hiring and firing, local customs and traditions, law and order issues and norms related to taxation, inflow of capital and repatriation of profits have a bearing on the value proposition that a place offers.

Before we delve into the nitty-gritties of how such factors impact businesses (and analyze the same generically), let us verify their importance vis-a-vis technology as a singular determinant, using the rise of the BPO industry in India as a case-in-point, to determine the effect of such qualifiers on the capital flow across the borders.

As the IT industry is entirely technology-enabled, geography per se should have little significance. Yet, things are not so straight forward. Let’s take the case of the global BPO/KPO/LPO industry making India its preferred destination. Human resource followed by some of the lowest wage bills in the global IT domain, were perhaps two of the most important reasons why India has managed to become the back office of the world. Also, Indians have a good understanding of the English language and they come cheap, allowing their employers to play on labor arbitrage. These factors, coupled with the fact that India and the US have complementary time zones i.e. a 12-hour time difference which means India works when the US sleeps, enabled the BPO boom that has given millions employment in the last decade. Moreover, attractive tax sops and the fact that the knowledge industry, by virtue of employing white collared workers is not unionized went in India's favor. Cities like Bangalore, Chennai, Pune, Gurgaon and Mohali not only enjoy a stable law and order situation but also have well-educated people, often underemployed. Thus, in a nutshell, the reason India secured a bulk of the back office and subcontracting business was because several critical factors fell into place.

In fact in the recent past, there have been persistent fears in some quarters that the rising wage bill and the fact that countries like The Philippines might offer an equally competent English- speaking workforce at cheaper rates, might lead to a flight of the IT and ITeS industries from India. Add to that, fears of a populist regime extending caste-based quotas to the private industry and the 'new economy' workforce in states like West Bengal threatening to unionize, we are suddenly looking at the value proposition that India offered, taking a substantial hit.

Now, these factors do not hold good just for the IT/ITeS industry. Generically speaking, across industry domains from manufacturing to services, most of these factors hold good albeit with some minor variations.

Some of the major factors that help create the value proposition that a geographical location offers include:

1. Human Resources skill set (education, linguistic skills, etc): This is perhaps the most important factor that works in favor of driving businesses to specific locations. Most industries today are intrinsically linked to the knowledge economy in some form or the other and this makes it pertinent for employees not only to be skilled in specific areas but also have a working knowledge of one or more languages in which international business is transacted. Therefore, any area wishing to attract a particular business, IT or otherwise, must offer adequate vocational training facilities to prepare the potential employees. It may however happen that at times some geographical locations that do offer other infrastructural and financial incentives, do not offer adequate training facilities. In such scenarios, it has been observed that businesses often partner with local governments to set up training facilities that serve not only their needs but also of other businesses in that area. Though this leads to the development of permanent training infrastructure and adds to the cost of doing business; it might trigger the company to move into another area which has better training facilities.

2. Relative wage bill: Countries like India and China have a distinct advantage as they offer skilled and semi-skilled labor at a fraction of the cost as compared to the West. Moreover, in technology-intensive industries, it has been noticed that such people are often better trained and more innovative than their western counterparts. However, rising cost of living (a direct result of spiraling inflation) has led to a higher wage bill, especially in India. Now, because China has a closely controlled currency and has perfected the art of getting economies of scale, it can keep its wage bill artificially low, thereby giving itself a distinct advantage over India when it comes to manufacturing. Also, in regions like South America and South East Asia, not only is the actual cost of manufacturing competitive, but the infrastructure is better and labor, cheaper. So, in times to come, these countries might offer stiff competition to India.

3. Tax sops and general tax structure: While it may not always be possible to keep wage bills down, the negative effect of riding wages and inadequate infrastructure can be offset to a considerable degree by affording incoming businesses with long term tax sops. This is one area where India, because of its growth trajectory, continues to have a distinct advantage over the developed West. Several Indian states have been competing with each other to offer lucrative tax havens to companies both in the IT/ITeS space as well as in manufacturing and services sectors. While tax incentives come at a significant cost to the exchequer, the long term incentive for the local economies is that people, often unemployed or underemployed, get permanent employment and the setting up of new industries leads to overall infrastructure development.

4. Overall state of the country's polity and economy and the maturity and stability of the financial markets: Business thrives only in an environment that is secure both financially and politically. When companies move into a foreign country, the safety of their human and physical capital assets on the one hand and financial assets on the other becomes the responsibility of the host country. Any major political or financial upheaval may not only dissuade businesses from investing in that country in the future, but a severe crisis might even lead to existing businesses shutting shops. Such a scenario will adversely impact the revenues of the host country and would also render a large number of people jobless. On top of this, a persistently unstable situation will be a public relations disaster for the host country.

5. Labor laws and unionization/non-unionization of the labor: The easier it is to hire or to lay people off, the easier and more cost-effective it becomes for businesses to set up shop in any part of the world. However, most developing countries like India and China, that covet such businesses, have extremely stringent and circuitous labor laws. While the rationale behind such stringent laws is to protect the labor force in a society that does not otherwise offer any obvious social security; it often becomes difficult for businesses to operate in such environments as it impacts restructuring and rationalization of business processes which could otherwise bring economies, bring down costs and improve overall profitability.

6. Customs and traditions: In some countries, local customs and traditions, often linked to the dominant religion of the place, can be a deterrent to starting businesses in such parts. Countries like Saudi Arabia follow a strict religious code which bars women from working in most industries and imposes other restrictions. Traditions are intrinsic to the social fabric of the nations and therefore cannot be wished away. In such a scenario, businesses have little choice but to align their processes as per the prevailing social norms, to the extent possible.

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