unctad.org | Offshoring of net-based services to grow rapiditly in wake of economic crisis, report says
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Offshoring of net-based services to grow rapiditly in wake of economic crisis, report says

UNCTAD/PRESS/PR/2009/056
21 October 2009


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Geneva, 22 October 2009 - When the economic cycle improves, a surge can be expected in services exports made possible by information and communication technologies (ICTs), UNCTAD predicts in its Information Economy Report 2009: Trends and Outlook in Turbulent Times (1). While exports of ICT goods such as computers and consumer electronic devices have been hit hard by the global recession, IT and ICT-related services appear to have been more resilient, the report notes.

Asian economies increasingly dominate exports of ICT goods

Between 1998 and 2007, the value of exports of ICT goods rose from US$813 billion to $1.73 trillion, representing 13% of all merchandise trade. During the same period, the share of developing countries in such trade jumped from 38% to 57%. This increase was almost entirely attributable to developing Asia. Other developing regions as well as economies in transition remain marginal exporters of ICT goods. China has quickly emerged as the world´s largest exporter, with its market share shooting up from 3% in 1998 to 20% in 2007, more than twice the share of the second largest exporter, the United States. Hong Kong (China) and the Republic of Korea saw the second- and third-largest increases in market share, while the United States and Japan experienced the greatest declines (chart 1).

The recession has had significant repercussions on the global trade of ICT goods. The fall in exports appears to have been particularly steep in economies whose exports were already stagnant or in decline prior to the crisis (Germany, Japan, and the United States) (chart 2). Of the world´s top six exporters, Japan experienced the steepest decline, with its exports of ICT goods shrinking from US$5.1 billion in October 2008 to $2.9 billion in March 2009. It is possible that the crisis will accelerate a further shift in the geographic composition of ICT goods trade, with developing Asia reinforcing its market share.

Market surveys suggest that it may take a while before spending on ICT picks up significantly. The IT departments of most large companies lowered their budgets in the first quarter of 2009 and only a few signalled increases. Even as the recovery begins, it is likely that ICT goods exports will remain well below their pre-crisis levels for an extended period of time.

Exports of IT and ICT-enabled services are set to expand

IT and ICT-enabled services - such as computer programming, software development, customer-service call-centre work and back-office services - are of growing importance in world trade and have been more resilient during the crisis. Increased broadband connectivity in a rising number of countries has eased the reorganization of the production of many services and led to the expansion of export-oriented production of services in places offering attractive locations or lower wages. The expansion of offshore services has only just begun, the report says.

According to market analysts, the global market for the offshoring of IT and ICT-enabled services was estimated to be worth around US$90 billion in 2008, of which IT services accounted for 60%. A closer examination of the data suggests a trend towards geographical diversification, at least in the case of ICT-enabled services. While the top five countries - Canada, China, India, Ireland, and the Philippines - still account for four fifths of exports related to offshoring, many new destinations are emerging and account for a growing share. More countries in Africa, Asia, Europe, and Latin America and the Caribbean are today perceived as attractive candidates for the production of various business services. This trend is particularly visible in the case of voice-based services, where companies look to develop global supply capabilities covering many language areas and time zones. In IT services, however, India remains the dominant exporter, with an estimated market share of about 55%.

Exporters of IT and ICT-enabled services have generally weathered the global economic crisis much better than ICT goods exporters. Corporations see the offshoring of services as an important way of reducing costs and enhancing competitiveness. On the one hand, services exports may decline in the short term due to the general slowdown in economic activity. This applies especially to services offshored by the financial industry, as some banks and other financial institutions may disappear altogether. But as the recession adds to the pressure on firms of all types to reduce costs, some will choose to offshore more and new services to lower-cost locations. In the medium to long term, as the global economy recovers, UNCTAD expects the offshoring of services to widen geographically and sectorally as well as across business functions.

Long-term growth prospects for the offshoring of IT and ICT-enabled services therefore are promising for early starters (such as India) as well as for many other emerging nations. As the global offshoring business is poised to grow, there should be room for more countries to develop sizeable export-oriented services industries.

"Latecomer offshoring destinations in Africa, Asia, and Latin America and the Caribbean should continue to improve their locational advantages and identify niches in which they can compete most effectively," UNCTAD Secretary-General Supachai Panitchpakdi said recently.

Countries should carefully assess in which areas they represent a competitive export location, the report counsels. For African economies connecting to submarine fibre optic cables in coming years, new possibilities will emerge for serving foreign locations with voice-based services, provided the right framework conditions are created. Challenges include developing the necessary human resources as well as the regulatory frameworks needed to compete with other locations.


ANNEX

Tables and figures

Chart 1. The 10 largest gains and losses in market shares of ICT goods exports, 1998-2007 (Per cent)

Chart 1. The 10 largest gains and losses in market shares of ICT goods exports, 1998-2007 (Per cent)
Source: UNCTAD, Information Economy Report 2009, Figure III.3.

Chart 2. Monthly exports of ICT goods by the top six exporters, in current prices, August 2007-May 2009 (index, August 2007 = 100)

Chart 2. Monthly exports of ICT goods by the top six exporters, in current prices, August 2007-May 2009
(index, August 2007 = 100)
Source: UNCTAD, Information Economy Report 2009, Figure III.8.


Downloads [PDF]: | Information Economy Report 2009 (Only in English) [1805 KB, 153 Pages] |



Endnotes

1.The Information Economy Report 2009: Trends and Outlook in Turbulent Times (Sales No. E.09.II.D.18, ISBN 978-92-1-112778-2) may be obtained from United Nations Sales Offices at the below-mentioned addresses or from United Nations sales agents in many countries. Price: US$ 60 (50% discount for residents in developing countries and a 75% discount for residents in least developed countries). Residents of countries in Europe, Africa and West Asia may send orders or inquiries to: United Nations Publication/Sales Section, Palais des Nations, CH-1211 Geneva 10, fax: +41 22 917 0027, e-mail: unpubli@un.org; and those from the Americas and East Asia, to: United Nations Publications, Two UN Plaza, DC2-853, New York, N.Y. 10017, U.S.A., telephone: 1 212 963 8302 or 1 800 253 9646, fax: 1 212 963 3489, e-mail: publications@un.org. Internet: http://www.un.org/publications





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