1. Shenzhen 1995 Shenzhen 2005 Shenzhen 1985 Kun Chen 2005

2. *Keynote presentation at the Innovation in Services Conference, Manchester, UK, June 15-18, 2006. Offshored Services, Innovation, and Knowledge Intensity* Martin Kenney UC Davis & Berkeley Roundtable on the International Economy & Rafiq Dossani Stanford University

3. The Story Is No Longer... about domestic markets confined to call centers, simple software coding, or data entry about only large MNCs, small knowledge- intensive firms are rapidly building capabilities abroad about India alone (Martha shows)

4. It Is Also About... high value-adding capabilities being developed in low-wage economies interesting entrepreneurial initiatives in developing nations interesting entrepreneurial initiatives in the developed nations to use low cost think workers MNCs creating global centers of excellence offshore new business models (virtual receptionist) global knowledge networks –Different mix-and-match (in-house/external)

5. The Discussion of Whether Knowledge-Intensive Services Will Be Relocated to Developing Nations Is Over

6. And That Is Why This Conference Is So Exciting and the Reason We All Came -- We Are Studying a Major Shift the Organization and Geography of Value Creation Blinder (2006) claims that it will be a new Industrial Revolution. Will it be like China in manufacturing, was that an industrial revolution

7. Consider the Issues With Which Our Work Intersects The boundaries of the firm The reorganization of the firm (e.g., Sako 2005) –Vertical disintegration –Dismantling the Chandlerian firms staff function Changing location of work –Division of labor Changing organization of work What does information technology enable

8. The Enabling Conditions -- We All Know Increasingly accessible workers in developing nations Standardized platforms & now open source Digitization –data and info fluidized –increasing volume –plummeting transfer and telecom costs –copying and use costs zero w/t state protection Corporate reengineering and outsourcing domestically becomes normal practice

9. Patents as a Measure of Knowledge Creation

10. ChinaIndia

11. USPTO Patents per 10,000 Persons, 2004 Taiwan-- 2.5835 (5,938)Taiwan-- 2.5835 (5,938) Korea--.9145 (4,428)Korea--.9145 (4,428) Japan-- 2.7436 (35,350)Japan-- 2.7436 (35,350) U.S.-- 2.850 (84,271)U.S.-- 2.850 (84,271) India--.00336 (363)India--.00336 (363) China--.00457 (597)China--.00457 (597)

12. India as an Exemplar

13. 2005 -- Employment Growth CAGR 29.8% Employee numbers 000s Source: NASSCOM 2005 37.0% 18.5% Remember US Work Force is 130 million

14. Employment for Global Operations in India by Selected Large Non-Indian Software Firms

15. Sales for IBM GS, TCS and Infosys Source: Various Annual Reports 31.6% CAGR 23.4% CAGR 6.3% CAGR

16. Profitability of Infosys, TCS, IBM, 2003-2005 27.5% CAGR 15.3% CAGR 6.6% CAGR Source: Various Annual Reports

17. ITES Exports from India, 2004-05 Call centers are declining as a share EvalueServe

18. By the year 2010, several new KPO services will become prominent in the global offshoring space … Source: Evalueserve 2005

19. The Indian IT Services Landscape Future growth Focus Current Strength IS Outsourcing (110 Bn) System Integration Network Consulting and Implementation H/w support and Installation (120Bn) Training & Education ($50Bn) Application development, maintenance and outsourcing (60Bn) Packaged S/W support & Integration IS consulting R&D Services Management Processing Services (80Bn) Leveraging current strengths to grow and move up the value chain High ValueHigh Volume Technology & Domain IP Direction of Evolution Network Infrastructure

20. BPO maturing and moving up the value chain GrowthEmbryonicMatureAging Time Maturity Insurance Claims IT Outsourcing Accounting HR Admin Call Centers Engineering High Low Tech Support Knowledge Processes Specialized players emerging Complexity quickly increasing From captives to third-party Double Sourcing Source: Alok Agarwal/Evalueserve 2005

21. Case Studies

22. MNC A -- Regional and Global Consolidation Decentralized (1990-95) Regional Consolidation (1996-99) Off-Shore Global Consolidation (2000-03) India as the global center of excellence

23. Source: Working Council for Chief Financial Officer MNC A Global BPO Footprint with Regional Specializations Main Global Hub Low-Cost, Transaction Processing Center (Bangalore & Chennai) Activities Finance & Accounting Billing Order & rebates management Customer fulfillment Employee services & payroll Procurement/SCM Reporting Workforce 3,800 FTEs, HP employees 2 years to scale Language fluency in English, French, German, Spanish, Japanese, Chinese Support Centers Specialized Language Transaction Processing (Barcelona, Singapore, Guadalajara, Dalian & Costa Rica) Workforce 250 FTEs Barcelona 92 FTEs Singapore 380 FTEs Guadalajara 60 FTEs Dalian 120 FTEs Costa Rica 1 year to scale Activities Country-specific regulatory transactions Customer support for exotic languages (e.g., Serbo- Croatian, Chinese) Back-up and disaster recovery services Onshore Centers (Colorado Springs & Houston) Activities Call center support (A/P) Vendor refund & escalation Tax reporting Mail room & scanning Workforce 65 FTEs, contract labor 1 year to scale Scale of Operations: 4,700+ professionals Presence: 56 local front-offices, 7 regional business centers, 7 global business centers Language capabilities: Expertise in 30 languages

24. MNC A -- Business Growth over the Last 5 Years

25. Data Entry (Engineering Services) CAD Support Vendor Payables Accounts Receivables Product Development EDA, T&M ASIC Design Center Biz Process – Order Mgmt Professional Services Network Design QA Product Development IT ADMS Web Development Collections Finance Audit Nov 01Nov 04Nov 03Feb 02Nov 02 ERP Reporting COMPLEXITY MNC B -- Actual Transition of Projects at a Major US Firm Bold = unplanned 1,300 employees Global Trade & Logistics

26. The Educational Levels of Web Posted Job Descriptions for Intel, HP and Oracle, February 2005

27. A Job at Intel India CAD Engineer: Hardware Engineering is all about finding solutions. As a CAD (Computer Aided Design) Engineer with the Intel Hardware Engineering team, you'll work on teams designing, developing and implementing solutions. As part of Hardware Engineering at Intel, you'll have the opportunity to be involved from start to finish on the development of world-class innovations. Responsibilities As a CAD Engineer, you will be involved in developing new very large scale integration (VLSI) CAD tools and methodology solutions for design for testability (DFT) and test generation for high volume manufacturing of next generation microprocessor products. You will be responsible for development, deployment and maintenance of in-house fault simulation and test generation tools. This position will be based in Bangalore, India. Qualifications You must possess a Ph.D. or Master of Science degree in Electrical Engineering or Computer Engineering with five to ten years of related work experience. Additional qualifications include: Extensive knowledge of Digital Design and Design-for-test principles, digital circuit/fault simulation and automatic test pattern generation. Good working knowledge in developing CAD tools using C++ in a UNIX*/Linux* environment. Excellent experience in a related people management role would be an added advantage. http://appzone.intel.com/jobs/uRequisition.asp?Posting=34339Accessed April 9, 2004

28. An Example of Offshore KIS EvalueServe –Business Information & Market Research –Industry and Value Chain Analysis –In-Depth Analysis of Customer Segments, Products, Channels, Technologies –Competitive Intelligence and Benchmarking –Monitoring and Customized Newsletters –Primary Research Surveys of Industry Participants and Experts

29. Software As a Service Why own software and pay consultants to maintain it, when you can buy it as a service –Salesforce.com –Jotspot.com (uses programmers globally)

30. Questions How much KIS can be created in LDCs? –What are the limits and can we create theories that will tell us what they are? How does interpersonal knowledge creation across national boundaries work? Will a global wage be set for work? How do networks of intermediaries (these are also KIS) get created to facilitate globalization (Howells and others here at UM)? How is the increasingly encompassing open source movement going to affect KIS?

31. Questions With digitization, value created from the digital realm itself –Music mashups –Myspace –Web mashups What is the proper stance toward IP to maximize global value creation? How will entrepreneurs innovate new value propositions?

32. Thank You