Business Services in Developing Countries

In the global economy, developing countries specialize in two distinctive types of business services: offshore financial services and back-office functions. These businesses tend to locate in developing countries for a number of reasons, including the presence of supportive laws, weak regulations, and low-wage workers.

Offshore Financial Services

Small countries, usually islands and microstates, exploit niches in the circulation of global capital by offering offshore financial services. Offshore centers provide two important functions in the global circulation of capital:

• Taxes. Taxes on income, profits, and capital gains are typically low or nonexistent. Companies incorporated in an offshore center also have tax-free status, regardless of the nationality of the owners. The United States loses an estimated $70 billion in tax revenue each year because companies operating in the country conceal their assets in offshore tax havens.

• Privacy. Bank secrecy laws can help individuals and businesses evade disclosure in their home countries.

Corporations and people who may be accused of malpractice, such as a doctor or lawyer, or the developer of a collapsed building, can protect some of their assets from lawsuits by storing them in offshore centers. So can a wealthy individual who wants to protect assets in a divorce. Creditors cannot reach such assets in bankruptcy hearings. Short statutes of limitation protect offshore accounts from long-term investigation.

The privacy laws and low tax rates in offshore centers can also provide havens to tax dodges and other illegal schemes. By definition, the extent of illegal activities is unknown.

The International Monetary Fund, the Tax Justice Network’s Financial Secrecy Index, and the Organisation for Economic Co-operation and Development all maintain lists of offshore financial services centers. Below shows locations that appear on all three organizations’ lists. These include:

• Dependencies of the United Kingdom. Examples include Anguilla and Montserrat in the Caribbean, Isle of Man and Jersey in the English Channel, and Gibraltar off the coast of Spain.

• Dependencies of countries other than the United Kingdom. Examples include Cook Island (controlled by New Zealand), Aruba and Curaçao (controlled by the Netherlands), and Hong Kong and Macau (controlled by China).

• Independent island countries. Examples include The Bahamas and Grenada in the Caribbean, Nauru and Vanuatu in the Pacific Ocean, and the Seychelles in the Indian Ocean.

Independent countries that are not islands. Examples include Liechtenstein and Switzerland in Europe, Belize and Uruguay in Latin America, and Bahrain and Brunei in Asia.

Offshore Financial Service Centers

Most offshore financial service centers are microstates or dependencies of other countries.

Business-Process Outsourcing

A second distinctive type of business service found in peripheral regions is back-office functions, also known as business-process outsourcing (BPO). Typical back-office functions include insurance claims processing, payroll management, transcription work, and other routine clerical activities (Figure 12-26). Back-office work also includes centers for responding to billing inquiries related to credit cards, shipments, and claims, or technical inquiries related to installation, operation, and repair.

Call Center, India

Kolkata, India.

Traditionally, companies housed their back-office staff in the same office building downtown as their management staff, or at least in nearby buildings. A large percentage of the employees in a downtown bank building, for example, would be responsible for sorting paper checks and deposit slips. Proximity was considered important to assure close supervision of routine office workers and rapid turnaround of information.

Rising rents downtown have induced many business services to move routine work to lower-rent buildings elsewhere. In most cases, sufficiently low rents can be obtained in buildings in suburbs or nearby small towns. For many business services, improved telecommunications is the most important factor in eliminating the need for spatial proximity.

Selected developing countries have attracted back offices for two reasons related to labor:

• Low wages. Most back-office workers earn a few thousand dollars per year—higher than wages paid in most other sectors of the economy but only one-tenth the wages paid for workers performing similar jobs in developed countries. As a result, what is regarded as menial and dead-end work in developed countries may be considered relatively high-status work in developing countries and therefore may be able to attract better-educated, more-motivated employees in developing countries than would be possible in developed countries.

• Ability to speak English. Many developing countries offer lower wages than developed countries, but only a handful of developing countries possess a large labor force fluent in English.

In Asia, countries such as India, Malaysia, and the Philippines have substantial numbers of workers with English-language skills, a legacy of British and American colonial rule. The ability to communicate in English over the telephone is a strategic advantage in competing for back offices with neighboring countries, such as Indonesia and Thailand, where English is less commonly used. Familiarity with English is an advantage not only for answering the telephone but also for gaining a better understanding of the preferences of American consumers through exposure to English-language music, movies, and television. Major multinational companies such as American Express and General Electric have extensive back-office facilities in those countries.

Call Center Training

Madurai, India.

Workers in back offices often must work late at night, when it’s daytime in the United States, peak demand for inquiries. Many employees must arrive at work early and stay late because they lack their own transportation and depend on public transportation, which typically does not operate late at night. Sleeping and entertainment rooms may be provided at work to fill the extra hours.

Pause & Reflect 12.3.2

If it is 3 P.M. on a Tuesday where you live, what time and day is it at a call center in India?