Global service delivery: history and context

The Information and Service EconomyOctober 22 2007

Bob Glushko and Anno Saxenian

Outline

1. The new Argonauts2. The globally integrated enterprise3. Global disaggregation of services4. Offshoring of services

The new Argonauts

Global flows of labor and talent not new Historians document long distance migrations,

transfers of tacit knowledge via skilled labor Japan’s Meiji restoration, British textiles &

German steel to US

Global labor mobility has increased: migration is now a reversible choice can live and work in more than one nation, hold

dual citizenship From “brain drain” to “brain circulation”

Innovation in the periphery

The new Argonauts spur innovative upgrading in periphery Taiwan and Israel, peripheral in 1970s, became centers of

entrepreneurship and innovation in 1980s & 1990s “Brain circulation” between Silicon Valley, China and India

has created new, linked clusters of skill and entrepreneurial experimentation in policy and business

=> Successful regions don’t build SV in isolation, rather they connect to its professional and technical networks

A new global environment

1. Liberalization of global markets 2. Reductions in transportation, communication

costs expand options for immigrants3. Decentralization of corporate hierarchies and

vertical specialization of production lower barriers to entry

4. Open supplier networks and advanced software platforms support real-time long distance collaboration

Origins: the postwar “brain drain” Following WWII best and brightest students

from developing nations gain access to US education

Most students remain in US or European host country due to superior professional and economic opportunities

US accused of creating a vicious cycle: the brain drain made peripheral nations poorer and rich nations richer

The analysis was not wrong –but unanticipated benefits in recent decades

SV absorbs skilled immigrants

1970-2000: Silicon Valley expands, local firms absorb US educated science & engineering grads 1970: 15% of S&E in region are foreign-born 2000: 52% of S&E in region are foreign born

Most have master’s or doctorates degrees (i.e., more educated than native-born counterparts)

“Silicon Valley is built on ICs” (Indians and Chinese, not integrated circuits).

Foreign-born S&E in SV

0

20

40

60

80

100

120

140

160

180

1970 1980 1990 2000

Foreign-born

Native-born

0000

Th

ou

san

ds

Foreign-born S&E in SV, 2000

n=81,267

All other foreign born6%

India24%

China18%

Taiwan8%

Vietnam9%

Philippines5%

Europe15%

Canada3%

Middle East4%

All other Asian born5% Korea

3%

N=81,267

The rise of immigrant networks

Immigrants build associations to support integration and professional advancement in Silicon Valley Help immigrants find jobs or promotions when “glass

ceilings” limited advancement within companies A source of skill, relationships, and learning the

Silicon Valley model of entrepreneurship and experimentation

Although many groups had associations, Chinese associations were especially strong and numerous…

1. Indian and Chinese started ~27% of SV technology companies, 1980 -2000

4,146 companies 122,386 jobs $37 billion sales

2. High profile successes build confidence and reputation in home countries

Hotmail’s Sabeer Bathia Yahoo’s Jerry Yang Netscreen’s Li Gong and Ken Xie

3. Immigrant associations build connections to home countries via former classmates, policymakers

Immigrant impact on SV

The new Argonauts exploit their linguistic and cultural capabilities and institutional know-how to identify and tap under-utilized resources and/or potential markets in their home countries:

Seeking the “golden fleece” at home Israelis tap military technology and skill base Taiwanese seek low-cost manufacturing talent Indians tap underemployed programming skill Chinese seek to serve large domestic market

The new Argonauts in action

Hsinchu Science Park: SV sibling

The new Argonauts in action

1. Institutions and policy: Collaborate with policymakers to identify and remove obstacles to local development (transform educational and research institutions, capital markets, regulation)

2. Entrepreneurship: Set up development centers, start firms, advise and/or invest in local firms, build local and cross-regional partnerships

3. Corporate governance: Focus on transparency, minimization of hierarchy, merit-based advance, and venture capital-based entrepreneurship to countries dominated by state or family-run firms

Taiwan IC foundries: new model

Silicon Shanghai

Bangalore: software services

Actors in the global economy

Not just global corporations Cross-regional entrepreneurial networks transfer

technical, market, & business information rapidly between distant regions

Not just the nation-state Sub-national clusters of skill and know-how in

periphery—supported by local policymakersNot just low-cost labor Entrepreneurial experimentation and learning

support upgrading and fast rising wages in emerging regions

Long term scenario

Global network of specialized, high wage regional economies replaces core-periphery

Open systems allow co-design and mutual upgrading and innovation across the value chain

New regional partners can contribute to creation of entirely new products, industries and markets

Global shortages of talent for for-seeable future Potential for more widely distributed and

sustained global development…alongside challenge of enclave development and uneven development within national economies

History of global integration: IBM

Sam Palmisano on corporate evolution 1. International corporation: hub & spoke

networks, home country manufacture and international distribution, 19th c

2. Multinational corporation: national markets, adapt to trade barriers building local production, global R&D and product design, 20th c

3. Globally integrated enterprise: liberalization of trade & investment flows, IT standardizes techno and business operations around world=> global integration of production & value delivery

From MNC to GIE

Two forms of shift from MNC to GIE:1. Changes in where companies produce

things: no longer produce for local markets, produce for global markets—mfg to China, services to India

2. Changes in who produces them: more reliance on outside specialists; company as array of specialized components, some tightly bound, some loosely coupled

Systemic changes GIE requires fundamentally different

approach to production, distribution, and work-force deployment

Corporation recombines operations and functions based on its core strengths and those of partners Not labor arbitrage or offloading non-core activities Actively manage operations, expertise, and

capabilities to open enterprise and connect more intimately with partners, suppliers, and customers

Integration and innovation Competitive advantage from fusion of invention

& transformation of how things are done

“Real innovation is about more than the simple launching of new products. It is also about how services are delivered, how business processes are integrated, how companies and institutions are managed, how knowledge is transferred, how public policies are formulated – and how enterprises, communities, and societies participate in and benefit from it all.”

New opportunities & challenges Enormous economic benefits to developing and

developed nations Challenges:

Securing supply of high value skills Intellectual property as one of the key

geopolitical issues of the century Maintaining trust in distributed businesses—

across national and organizational borders Organization of business and institutions,

e.g. capital markets Global security and order

Global disaggregation of services

Why disaggregate?1. Cost reduction2. Skill base3. Cycle time with working 24/74. Market access

Global disaggregation of services

Disadvantages: Communication & coordination Potential IPR violations Difficulty monitoring progress Government attitudes, taxes Managing cultural diversity Economic, social, political instability

Managing global disaggregation

1. Select services**2. Choose location3. Design organization4. Manage diversity

Taxonomy of actions

1. Physical actions2. Information actions (symbol

manipulation)3. Interpersonal actions4. Non-value adding actions

physical

customer

Symbolicmanipulation

physical

customer

SymbolicPart 2

SymbolicPart 1

Non-value added

Components of service activities

Non-value added

Analysis of actions

1. Information intensity2. Customer contact

In-person Symbolic

3. Physical presence