Mapping the Philippines in the Offshoring Services Global Value Chain.

• Author: Aldaba, Rafaelita M.
• Position: Report

1. Introduction

   The global offshoring industry in the Philippines is one of those industries that have thrived despite the uncertain economic environment in the more recent years. The Philippines has become one of the top offshoring destinations in the world, primarily due to its large pool of college-educated and English-speaking talent. A decade ago, the industry comprised of a few sectors dominated by call centres. Today, the Philippines is the largest global provider of voice-based business process outsourcing (BPO) services. To maintain competitiveness, it is important to understand how the country can move from low-end to high-end and shift to value-driven and complex services, given the new age of global offshoring services, emerging technology, new media and vertical expansion and development.

   This paper aims to analyse the current position and potential for upgrading of the Philippines in the global value chain of information technology offshoring services. It adopts the IT offshoring services framework introduced by Gereffi, Fernandez-Stark, and Psilos (2011) (Duke CGGC GVC framework) to map the IT offshoring services for the Philippine economy. The analysis shows that the industry's upgrading strategy could pursue the following trajectories: first, upgrading from BPO to knowledge process outsourcing (KPO), especially in medical, financial and legal services; second, expansion and upgrading within information technology outsourcing (ITO); and third, inter-sectoral upgrading to verticals or industry specific activities, particularly shared services companies, game development, and engineering design in manufacturing. The results of the paper indicate that human capital development and improvement of soft and hard infrastructure will be critical factors in upgrading in the information technology and business process management (IT-BPM) global value chain (GVC) for the Philippines.

   The study is organized as follows. The next section provides an overview of the Philippine services sector, including policy reforms, performance and contribution to the economy. The third section discusses the GVC framework and economic upgrading approaches for the IT offshoring services developed by the Duke Center on Globalization, Governance and Competitiveness (CGGC). The current state and performance of the Philippine IT-BPM industry is discussed in the fourth section. The subsequent section maps out the position of the industry in the offshoring services GVC, formulates potential upgrading trajectories, and presents a case study of engineering services outsourcing. The final section presents some policy implications and recommendations on how to build on and strengthen existing assets towards upgrading the industry and moving up the value chain.

2. An Overview of the Philippine Services Sector: Performance and Policy Reforms

   The services sector consists of a wide diversity of industries ranging from traditional personal services like wholesale and retail trade, hotels and restaurants, education and health, transport, and government and public administration service to modern impersonal services that make intensive use of information and communications technology (ICT) like banking, insurance, communication and business-related services. Since the 1980s, the services sector has been a major source of economic growth for the Philippines, with the average share of the sector increasing from 49 per cent in the 1980s to 52 per cent in the 1990s. Its share continued to rise from an average of 53 per cent during the period from 2000 to 2005 to 57 per cent in the most recent period from 2011 to 2015 (Table 1). Trade and repair of motor vehicles, personal and household goods, with an average share of 17 per cent, constituted the bulk of the services sector, followed by real estate, renting, and business activity which accounted for an average share of 11 per cent. Transportation, communication, and storage and private services subsectors registered an average share of around 8 per cent. All services subsectors except for public administration and defence services experienced rising shares between 2000-5 and 2011-15. Meanwhile, both agriculture and manufacturing saw declining trends in their value-added shares.

   In terms of average growth, services registered an increase from 5.6 per cent for the period 2001-5 to 6.4 per cent from 2011 to 2015 (Table 1). The sector has also grown much faster than the average GDP for all periods under study. Services subsectors such as trade and repair of motor vehicles, personal and household goods, final intermediation, real estate, renting and business activity, and other services witnessed noticeable increase in their average growth rates during the same periods. Meanwhile, the growth of transportation, communication and storage slowed down.

   Table 2 shows that services has been the largest source of employment as its contribution continued to increase from 53 per cent in 2012 to 55 per cent in 2015, while the share of agriculture has been declining. Moreover, manufacturing has not been able to generate enough employment to absorb new entrants to the labour force as well as those moving out of the agricultural sector. Within the services sector, wholesale and retail trade and repair of motor vehicles and motorcycles registered the highest share of about 19 per cent in 2015 followed by transportation and storage with a share of 7 per cent, public administration and defence with a 5.4 per cent share, accommodation and food services accounted for a share of 4 per cent, while information and communication contributed a share of 1 per cent.

   Based on the national balance of payments accounts, average net services trade balance increased from US$4.2 billion in 2005-10 to US$5.7 billion in 2011-15 (Table 3A). However, while trade in services surplus grew by an average of 48 per cent during the 2005-10 period, it contracted by 4 per cent in the more recent 2011-15 period. Telecommunications, computer and information services, other business services, and construction continued to register surpluses during the periods under review. Average surplus in other business services rose from US$6.1 billion to US$10.6 billion during the same time while telecommunications, computer and information services surplus went up from US$1.3 billion to US$2.7 billion.

   Average services exports grew by 16 per cent during the 2005-10 period, although this slowed down to 10 per cent in 2011-2015 (Table 3B). Top exports include other business services, travel, and telecommunications, computer and information services. Note that BPO falls under other business services. On the average, services imports increased from US$8.8 billion to US$17.5 billion during the same periods. Average growth was maintained at 15 per cent.

   The first wave of services liberalization took place in 1987 with the opening up of generation under the power sector. This abolished the monopoly of the government-owned National Power Corporation by allowing private sector to invest and participate in augmenting generation capacity. In 1990, the first build-operate-transfer (BOT) in Asia was passed. In 2001, the Electric Power Industry Reform Act (EPIRA) was legislated, which restructured the industry by permitting competition in generation and supply and regulating transmission and distribution.

   Another wave of reforms occurred in the early 1990s with the liberalization of the telecommunications industry that was dominated by a private monopoly for more than half a century. Likewise, the shipping industry was also opened up with the deregulation of first- and second-class passage rates. Subsequently, surcharges for insurance premiums were abolished while freight rates for cargoes were deregulated.

   In the mid-1990s, the air transport industry was also deregulated, thus challenging the supremacy of the country's only designated flag carrier, Philippine Airlines. Restrictions on domestic routes and frequencies and government control on rates and charges were eliminated. In the late 1990s, the water sector, too, was privatized through competitive bidding won by two firms that were granted concessions to bill and collect water and sewerage services in two separate areas for twenty-five years. As early as the 1980s, the financial sector was undergoing reforms through the liberalization of interest rates and easing of restrictions on the operations of financial institutions. In 2000, the General Banking Law was enacted to allow a seven-year window for foreign banks to own up to 100 per cent of one locally incorporated commercial or thrift bank.

   To reduce shipping costs in the country, the cabotage law was amended in July 2015, allowing foreign vessels to transport and co-load foreign cargoes for domestic transshipment. This liberalized the operations of foreign shipping companies in the domestic market. Foreign shipping lines can now dock at multiple Philippine ports and co-load import and export cargoes. The Philippine Competition Act was also legislated in 2015 creating the Philippine Competition Commission tasked to promote competition policy and prohibiting anti-competitive agreements, abuse of dominant position and anti-competitive mergers and acquisitions. Also, since 2014, foreigners have been allowed to own 100 per cent of Philippine domestic banks.

   In general, the reforms were crucial in introducing competition in the above-mentioned sectors as well as in disciplining incumbent monopolies. Note that the liberalization of the telecommunications sector was crucial to the growth and development of the IT-BPO sector. However, there are still remaining entry barriers in the services industry due to constitutional restrictions limiting foreign equity participation to 40 per cent in certain sectors like telecommunications, maritime, air transport, road, electricity, water, and health services. For instance, foreigners are not allowed to own land but...