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China is now the biggest exporter of ICT goods and moving up the value chain. Indian IT services firms are adopting global strategies, setting up in North America and Europe and recruiting software engineers from these regions. But can they keep up the pace? Do they have enough home-grown engineering or management talent to compete with the rest? And what can developed economies do to meet these challenges?
See below the questions and answers from the online debate that took place on Monday 20 November with OECD economists Graham Vickery, Desirée van Welsum and Sacha Wunsch-Vincent from the OECD’s Science, Technology and Industry directorate.
Q. As China becomes a leader in ICT and develops innovative technology for export how will it defend its intellectual property rights? Is there a trend emerging in China that shows that maybe they will outpace Europe in the defense of ICT patents? from Ray Pinto, Microsoft
A. The broader point the OECD makes in its Information Technology Outlook 2006 www.oecd.org/sti/ito is that most of the Chinese ICT goods exports, domestic production and technology production is still very much influenced by foreign firms. So China does not yet have broad stakes in defending it own IPRs. By 2006, most Chinese ICT firms are still small, in terms of revenue and employment, when compared to the most important global ICT firms. One can see this in the high proportion of Chinese ICT goods exports being mostly influenced by foreign firms. Also, China has a high level of foreign ownership of domestic inventions (share of foreign-owned patents) compared with large OECD countries. Between 1999 and 2001, around half of Chinese ICT-related patents filed with the European Patent Office included inventors from other countries. We also make the point that the domestic ICT services sector is still very small. The challenge of moving up the value ladder in terms of innovation, patents and technology still lies before China in most ICT areas (see ICT-related objective in the Chinese 11th Five-Year National Plan for 2006-2011).
Yet various Chinese ICT firms are moving up the value chain. Examples of Chinese ICT leaders include semiconductor companies (e.g. Semiconductor Manufacturing International), telecommunication equipment manufacturers (e.g. Huawei, ZTE Corporation) and Internet portals (e.g. Baidu, Alibaba/eBay partnership). In fact, it is found that the few Chinese firms with strong globalisation potential come from the ICT- and electronics-related sectors. These firms increasingly innovate and patent. As this process continues, these firms will insist on improved protection of intellectual property rights as well and start having a stake in the protection of their own IPRs (in addition to protecting IPRs to comply with the WTO’s TRIPS and in creating a good investment framework). Moreover, the availability of competing IPR-based technologies and patents from a non-OECD country (vying for royalty and license fee flows from its users) may spur competition in the realm of global technology innovation and competing standards.
Q. What does the OECD recommend Europe should do to prepare itself to compete with the Chinese ICT industry? from Ray Pinto, Microsoft
A. OECD countries (including European countries) are focusing on key policy elements of innovation, entrepreneurship and high skills to maintain business competitiveness. ICT policies for growth and competitiveness have given high and/or increasing priority to R&D programmes to raise national technological levels (including government development programmes and promoting multi-partner networks for innovation); encouraging technology diffusion and use to business, particularly small business; enhancing ICT skills often in conjunction with the business sector; expanding digital content supply and use; encouraging competition in ICT goods and services markets to spur innovation and use; paying attention to intellectual property protection to both reward inventors and speed diffusion and use; and encourage the widespread roll-out and use of broadband.
These initiatives are encouraging, but the remaining questions are whether they are effective and are they enough.
Q. There have been worries of a "brain drain" in China and India and other parts of the work as students with the most education look for jobs abroad. Does the rise of both these economies mean that now "brain drain" will become less of a problem? Or does this mean there are even more opportunities for the "best and the brightest" to leave. From Peter Marley
A. Migration of highly skilled workers is often thought of in terms of brain drain/brain gain or even brain circulation, but in fact, little is known about its effects. For India and China, there is some evidence of returning students and workers (forthcoming OECD report on the offshoring of IT and ICT-enabled services in China). Furthermore, as the economic opportunities in these countries improve, more emigrated students and workers are likely to return, and more are likely to stay at home, in other words, fewer are likely to leave in the first place. However, these returning students and workers can play an important role in further economic development as they have developed many of the necessary skills (e.g. language skills, but also other skills such as working with people of different backgrounds, western corporate cultures, and establishing and maintaining networks of contacts) and networks to work with multinational companies.
The accumulation of the knowledge stock is an important concern in both developing and developed countries. It is related to issues such as how transferable skills are between countries and the factors that determine where firms engaging in foreign direct investment and R&D decide to invest. The international migration of highly skilled workers may have both positive and negative effects arising mainly from technological, knowledge and cultural spillovers. However, there is little empirical evidence to shed light on such alleged effects.
Q. We assist to a relocation of manufacturing activities, including in ICT, from Europe to China. What is the extent of this phenomenon compared with the size of European ICT sector? Can it be seen as a threat to European competitiveness? Are the low wages the major reason for this trend? What are the other factors and how much do they weight in the trend? From Geomina Turlea, European Commission
A. Wage differentials are often mentioned as a driver for production relocation, not only in manufacturing but now also in services, and they can constitute a factor in the location decisions of firms, although other factors, such as skills and talent also count. However, wage differentials to some extent reflect differences in productivity and therefore wage differentials between China and OECD countries are likely to be bigger than overall unit labour cost differentials. Furthermore, in addition to direct labour costs, the relocation of production activities also involves other types of costs, including overhead, organisational and transactions costs. It is important to note of course that a large share of global manufacturing restructuring is driven by investment and sourcing strategies of global firms.
With rapid technological developments, especially in ICTs, and liberalisation of trade and investment in services, relocation of production is increasingly also taking place in the services sector. Looking at wages in the ICT services sector, China does have relatively low wages compared with many OECD countries, but wages in the ICT services sector have been approximately equivalent to wages in other lower-cost countries providing ICT services. Nevertheless, the current wage differential between professionals in China’s IT Offshoring and Business Process Offshoring industries and those in the USA is still about 88%. This does not however take into account productivity differences, and other management, organisation and transactions costs associated with offshoring of IT services to China., so the overall labour cost differences are somewhat (and probably considerably) lower (forthcoming OECD report on the offshoring of IT and ICT-enabled services in China). Furthermore Chinese wages have been rising. According to the Economist Intelligence Unit (2004), between 2001 and 2004, the annual increases in wages were around 7.5% for management, 8% for professional, technical and support jobs, and 7% for clerical and manual jobs.
Comment from Wim Suyker, CPB Netherlands Bureau for Economic Policy Analysis
Chinese numbers are always huge but do not tell the story
In China, absolute numbers are always huge. This also holds for the number of graduates from tertiary education. However, as a percentage of the population the number of tertiary graduates is still limited according to Western standards. In 2001, the proportion of the population at the typical age for graduating at the tertiary level was in China five times smaller than in the United States and the EU. The differences are even bigger for graduation rates for advanced research programmes and for the total labour force. The graduation rate for advanced research programmes was 1.3% of the 25-29 years olds in 2001 for the United States and for the EU, while it was only 0.1% for China. In the United States, 37% of the working-age population had completed a tertiary-level education in 2001, while this stood at 21% in the EU and only 5% in China.
Moreover, there are doubts about the quality of Chinese graduates. Many of the Chinese engineering graduates are not more qualified than technicians in the US and Europe. According to a McKinsey survey, 9 out of 10 Chinese engineers are not suited to work for a multinational because of poor communications, lack of teamwork skills and an excessively theoretical approach. Strong boosts to high-tech production are therefore not very likely in the near future. Finally, as we concluded in our recent study on China and the Dutch economy (http://www.cpb.nl/nl/pub/cpbreeksen/document/127/), given the vast reserve of cheap labour, the use of tertiary graduates in the production of low-tech goods may be more welfare-enhancing for China than their employment in the production of high-tech goods.
Response. These are interesting points and are in agreement with our recent analysis on whether China will become the new India for ICT-enabled services offshoring as well as the analysis on ICT manufacturing in China in the Information Technology Outlook 2006 (see link below). On the last point in the comment, it depends on whether we have a static view of comparative advantage or a dynamic one. Over the long run Chinese tertiary graduates will increasingly be in higher value production, to the benefit of all.
Q. Given the challenges of controlling commitments to green issues in India and China, will the business culture of emissions need to change in companies from these countries as the western world comes to an understanding that things need to be done to address carbon emissions (at 40% of total emissions for the UK coming from business) and that technology innovation plays a huge part in this? From Justin Hayward, Manning Selvage & Lee Public Relations
A. Clearly, rising global demand on energy which is very much influenced by China’s and other emerging economies’ energy needs, is leading to a greater awareness about the scarcity of energy resources. This greater awareness should influence energy production and consumption habits worldwide (and not only in emerging economies). The quest for technological innovations easing the demand on traditional energy sources, more energy-efficient technologies and use of alternative energy sources (all these three potentially positively influenced by ICTs) should be accelerated.
Looking at the ICT industry, the major part of growth in China has come from foreign firms, either from OECD countries or others such as Chinese Taipei (Taiwan) or Hong Kong. Either they are relocating production activities from other places to China or they are hiring third party contract manufacturers in China to do assembly previously done elsewhere. In both cases, foreign firms retain some control over a large share of ICT production. Thus, to the extent that these foreign firms take notice of green issues (which they should when ‘good global firms’and following OECD guidelines on multinational enterprises, see www.oecd.org/dataoecd/56/36/1922428.pdf) then there is already scope for the respect of environmental standards. Larger domestic firms from China (e.g. Lenovo, Huawei) have to sell into world markets and are increasingly establishing themselves there, so they have to take notice of global issues, including green issues as well. In the ICT services sector in India (Infosys, Wipro, Tata) the problem of emissions due to production facilities is less of a problem.
Q.China might become a competitor for EU in top layer ICT activities. Is it the case that China develops as well a high R&D activity in ICT sectors? In what specific domains/activities? Can it be considered edge R&D, in high tech domains, or is mostly local market oriented? Does it translate in available statistics in input (ex.: investment, employement) or output (ex.: patents). And to what extend is this trend financed fully or partly by foreign capital? From Geomina Turlea, European Commission
A.China is rapidly expanding domestic R&D, as it aims to move up the ladder into higher value-added activities. However, most domestic ICT firms are small and with some exceptions (e.g. Lenovo in PCs, Huawei and ZTE in telecommunications equipment) these firms undertake relatively little R&D, and none of them can be compared with the expenditures on R&D and innovation of the global ICT giants. Overall ICT R&D has been undertaken by foreign firms as part of their strategies to invest in China and often to fulfil joint venture requirements. Initially this was focused on adaptation for exports or for local markets. But global ICT firms starting to set up R&D centres to feed into their global strategies (e.g. Alcatel, Ericsson, Intel, Microsoft).
There is relatively little detailed statistical information to describe the move into higher value ICT products, but anecdotal evidence suggests that foreign direct investment has an increasing share going into higher value products, and of course, skill levels are increasingly as more people graduate from tertiary education in China. Furthermore, ICT trade is increasingly in higher value segments of computers, communications equipment etc. although it has to be remembered that the major share of this trade is driven by foreign firms investing in China or sourcing their products from China.
Q. How will the expansion of China, India or maybe others into ICTs affect the total number of people employed in the ICT sector in the traditional Western economies? Will the expansion of China, India put pressure on salaries in the Western countries and could you in anyway quantify the effect? From Lars Ole Løcke, Computerworld, Denmark
A. The number of people employed in the ICT sector depends on a number of factors, and depends on what happens to both supply and demand for ICT employees. Even with some production relocation, growth in the ICT sector globally may also create new employment opportunities in Western countries. It is important, therefore, to produce new graduates with the appropriate skills.
Looking at overall ICT sector employment in OECD countries we see an increase in employment, rather than a decrease. In 2003 (the year of most recent data) more than 14.5 million people were employed in the ICT sector in OECD countries, or more than 5.5% of total OECD business sector employment. Over 1995-2003, ICT sector employment increased by almost 8% (over 1 million people) with services playing a bigger and bigger role. And employment in ICT goods and services sectors combined grew over this period in all of the Nordic countries.
ICT specialists are up pretty well everywhere as a share of employment in OECD countries and has grown strongly in Denmark, Finland and Sweden. And usually job creation is happening in the higher wage categories. For instance, ICT R&D personnel in OECD countries has grown significantly over the past 10 years (up 34% in the 19 countries that reported ICT R&D personnel from 1993-2002).
Looking at companies, the Top 250 ICT firms as defined by the OECD Information Technology Outlook 2006 have improved revenue and R & D spending between 2000 and 2005. The top 250 ICT firms employ some 10 million people worldwide, near the levels of employment recorded during the boom year of 2000.
The fact that employment of the top 250 firms has not increased at the same speed as revenues may have several reasons. It may be due to ' outsourcing' domestically (shifting jobs on a national level) or abroad - with some of these jobs shifting towards small and medium sized companies with strong employment growth (but now showing in top 250 ICT firms). But some of this churning is also structural - manufacturing firms which are part of the top 250 shedding some jobs to become more competitive and services firms moving into the ranking: the latter starting with a lower number of employees than traditional ICT goods firm but growing fast in terms of revenues and employment, such as Google.
Overall, the increased demand of China, India and other emerging economies for ICT goods is expected to be a driver of ICT sector employment. In fact, for most OECD ICT firms these are their current major growth markets. Usually this strong demand impact on domestic employment and wage growth is overlooked.
Q. Most of the attention seems to be directed towards the Chinese ICT manufacturing industry while less is known about its ICT services industry. What are the predominant ICT services produced by the Chinese ICT services industry? In what services do they have (or can be expected to develop) comparative advantages? Isn't the fast growing Chinese economy a huge potential for the ICT services industries in other parts of the world? From Mats Marcusson, European Commission
A. India is currently the prime location for IT and ICT-enabled services offshoring. The question of whether China will be able to catch up and become "the new India" for IT and ICT-enabled services offshoring is examined in a forthcoming OECD report. In order to succeed in this, the main question for China is whether it will be able to move up the value chain and evolve from a manufacturing powerhouse and the world’s largest exporter of ICT goods, to a global services exporter. The large volume of trade in IT and ICT-enabled services, growing FDI and the increasing number of R&D centres set up by multinationals suggest that China is not yet a major supplier of these offshored services, but there is high potential for growth. This will require China to put in place the right conditions: human resources, ICT-related infrastructure and encouraging framework conditions including the macroeconomic and business climate. In particular, China needs to improve the skills and quality of its graduates. Despite a large labour pool, there may be a shortage of graduates suitable to work in globally engaged activities in IT and ICT-enabled services as they lack the relevant language, cultural and corporate culture skills.
It is important to bear in mind that even though China is extremely large, it is also a “lumpy destination”: not all regions in China are currently suitable and capable of receiving IT and ICT-enabled services offshoring. Offshored services activities are currently concentrated in the coastal economic zones and major cities in China, which are more developed economically. However, with economic policies promoting growth in the western regions of China, it can be expected that locations further inland can also increasingly enter the picture.
Offshoring of services is not a “one-way street” though. While it is increasing in China, Chinese firms are also starting to offshore some of their activities abroad. Chinese manufacturing multinationals have already started to offshore some of their R&D centres and sales services abroad to enter foreign markets and be closer to their customers. It is likely that these activities of Chinese firms abroad will continue to grow in the future. Growth in China is also likely to increase demand for services supplied from OECD countries.
Q. Looking at your question from the perspective of developing countries, what are the challenges and opportunities arising for smaller players who whish to compete in this market but do not have the resources (financial, human) of China and India? In Sub-Saharan Africa for instance, following the footsteps of South Africa, countries such as Ghana, Senegal or Kenya have started turning the IT-enabled services opportunity into business. Martin Labbé, International Trade Centre
A. From an ICT services perspective, a basic telecommunications infrastructure and certain skills are a necessary condition to compete in the services outsourcing business. This is missing in many poorer developing countries (LDCs). Another problem can be a country’s image and reputation as a reliable business partner, as well as concerns over ICT security or data privacy.
There is also a statistical problem: LDCs are often unable to produce reliable and timely statistics. The result is that most already providing export-oriented IT-enabled services are not really accounted for. This also complicates the issue of positioning the country as outsourcer.
Ultimately, the availability and quality of basic ICT-related infrastructure are very important for determining the location of globalised services activities. Some countries have large absolute amounts of infrastructure, which is one indication of national capacity for receiving extensive ICT-enabled offshored services. For example, China has more PCs than Germany and more Internet subscribers than the United States, and Brazil, India and Russia each have about as many PCs as Canada or Italy. However there is still a long way to go before even the largest developing economies can match OECD countries in terms of the intensity and quality of their infrastructure. Language skills are also often mentioned as important in choosing locations where people have the right skills mix. For example TOEFL (Test of English as a Foreign Language) test scores are often taken as an indicator of skills in some of these countries.
Economy-wide framework conditions are also important factors in firms’ decisions about where to locate globalised services activities. These include the cost and ease of setting up a business, the procedures for enforcing contracts, patent applications and urban population. They paint a picture broadly similar to indicators of the intensity and quality of infrastructure. Nevertheless, competitiveness in these countries, which may also reside in other factors, such as relatively lower costs for the factors of production (land, capital and labour), different time zones, pool of skilled labour, language skills, etc., can reasonably be expected to increase in future.
The opinions expressed and arguments employed on this page do not necessarily reflect the official views of the Organisation or of the governments of its member countries.
Background reading
Read the most recent OECD analysis of IT industry trends here:
Read the questions and answers from recent debates
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