1. Strategic (re)coupling with GPNs via ‘offshored’ corporate services: Early observations on the experience of Northern Ireland Mike Crone (m.crone@shu.ac.uk) ‘Old’ Harland & Wolff shipyard ‘New’ Citi in the Titanic Quarter Acknowledgements: Research partly funded by British Academy SG-51878. Research assistance provided by Iain Livingston, Brett Zych and Cherith Poots. Some data kindly supplied by Richard Johnston, InvestNI & Judith Walker, OCO.

2. Agenda 1.Point of entry, the wider project and the nature of service offshoring 2.Some relevant prior literatures and concepts that inform the study 3.Case study context: Northern Ireland’s economy, the role of inward investment, and the ‘shift to services’ since the mid-1990s 4.Types, and task roles, of offshore services inward investment subsidiaries in Northern Ireland (i.e. how the region is tied into wider inter-firm and intra-firm corporate networks/division of labour) 5.Evolution and upgrading in offshore services subsidiaries – some preliminary observations & insights

3. 1a. Point of entry Background in econ-geog and reg-stud; previous research on host economy impacts of manufacturing FDI in UK & Ireland (1994-2005) A ‘new’ empirical phenomena => service offshoring Teaching IB for 8+ years => new (inter-disciplinary) perspectives? Resident in N. Ireland since 1998 => familiarity with local context Pre-disposition towards in-depth case study research A regional case study with regional economic development concerns Disclaimer: work-in-progress, no co-authors, complex project! Future? multiple papers on related themes for different academic and policy audiences. Today: just some preliminary observations – largely descriptive

4. 1b. Themes of interest (in the wider project) A.Types and task roles of offshore services inward investment projects (i.e. how the region is tied into wider inter-firm and intra- firm corporate networks/division of labour) B.Location decision / basis of ‘strategic coupling’ between GPNs and regional economies C.‘Quality’ and regional economic development issues D.Evolution/upgrading of offshore services subsidiaries E.Policy issues relating to the above F.Theorisation of the above (new theory development &/or inter- disciplinary integration of existing theories) => Focus today will be on ‘A’ and ‘D’

5. 1c. Methodology Longitudinal, single region case study (Northern Ireland) with multiple (10- 12) embedded UoA (offshore services subsids) Exploratory (and ultimately explanatory?) case study (after Yin) ‘Studying regions by studying firms’ (Markusen, 1994) Chronological focus: mid-1990s to present (~20 yrs) Desk-based: diverse range of secondary data sources (both quantitative and qualitative) – including statistics, company websites and reports, regional and local media coverage, etc. Supplemented by ‘expert interviews’ (e.g. FDI consultants, IPA/RDA) and ‘corporate’ face-to-face semi-structured interviews (subsidiary managers) Possible theoretical generalisability?

6. 1d. Service offshoring and traded services An understanding of ‘service offshoring’? the relocation by a firm of certain ‘white-collar’ service activities, processes, or tasks from one country (typically – but not always - the firm’s home country) to another country (often - but not always - a less developed country) …not unproblematic (vs. traditional US-to-India view) ‘tradability revolution’/’global shift in services’ (UNCTAD, 2004) ‘second global shift’ (Bryson, 2007) ‘next industrial revolution’ (Blinder, 2006) ‘trade in tasks’ rather than goods (Grossman/Rossi-Hansberg, 2008) ‘Tradability’ in services: where services are sold to customers/clients outside home country (or region) …but what is the home country and how do ownership issues fit?

7. Characteristics of ‘offshorable’ services No frequent/intensive face-to-face servicing requirement High codifiable information content Work processes ICT enablable, ‘telecommutable’ and standardisable High wage (and other factor cost) differentials between places Low set-up costs (compared to manufacturing) Low social networking requirements Location in ‘semi-periphery’ of developed economies or ‘hotspots’ in certain emerging economies? [within cultural/time-zone constraints] Source: author’s elaboration on UNCTAD (2004, p.149)

8. Examples of service activities that have been offshored Source: UNCTAD (2004) World Investment Report

9. Source: Gary Gereffi & Karina Fernandez-Stark (2010) The Offshore Services Global Value Chain. Center on Globalization, Governance & Competitiveness, Duke University.

10. Different Models of Service Offshoring Firm boundary decision In-houseOutsource Geographical location decision Onshore In-house at home FDI ITS Domestic outsourcing FDI ITS Offshore Captive offshoring FDI ITS (intra-firm) Offshore outsourcing FDI ITS (inter-firm) Notes: FDI = foreign direct investment; ITS = international trade in services Source: based on UNCTAD (2004) and Sako (2006)

11. 2a. Areas of prior literature relevant to analysis of offshore services investments: International Business/business-management PerspectiveDiscipline(s)Key authorsKey concepts and terminology and themes Classic IB work (MNEs & FDI) International Business Dunning, Rugman & Verbeke OLI: Ownership advantages, location-specific advantages, internalisation advantages; 4 motives for FDI (market-, efficiency-, resource- and strategic asset-seeking) Subsidiary management IB & strategic management Birkinshaw et al. Subsidiary development/evolution; subsidiary roles and mandates; subsidiary initiative-taking and entrepreneurship; head office assignment-subsidiary choice-local environment determinism; dual embeddedness; weight and voice Value chain frag. offshoring & outsourcing IB, strategic management, org. studies? Contractor, Mudambi, Doh et al., Vertical disintegration, value chain fragmentation, functional de-coupling, capability specialists and orchestrators; Typology of offshoring and outsourcing; Captive vs. outsourced model ‘Distance’ in IBMainly IB/IMGhemawat, Berry et al., Shenkar CAGE distance (Ghemawat); institutional distance; psychic distance; cultural distance (Kogut-Singh index based on Hofstede)

12. 2a. Areas of prior literature relevant to analysis of offshore services investments: Economic geography, regional studies, etc. PerspectiveDiscipline(s)Key authorsKey concepts and terminology and themes Marxian political economy (in human geog.) Economic geography of 1970s and 1980s Massey, D. Harvey, Neil Smith, Ray Hudson Uneven development, capital-labour, class, spatial division of labour, spatial ‘fix’, rounds of investment (layering?) Host economy impacts of FDI (empirically- focused) Econ-geog, reg. studies, planning, applied economics (1970s-90s) Firn, Watts, Pike, Hill & Munday, Phelps, Crone & Roper, etc. Branch plant economy, functional truncation, enclave economy, ‘cathedrals in the desert’, local embeddedness, dependent vs. developmental linkages, knowledge transfers and spillovers Global production networks Economic geography (since c.2000) Manchester school (Coe, Dicken, Hess, Yeung, etc.) Strategic coupling, value capture, regional development, multi-scalar and relational perspective, institutional actors, trans-local networks, power Global value chains Development studies and economic sociology Gereffi, Sturgeon, Humphrey, Bair, etc. Value chain, value added, upgrading (product, process, functional or chain), governance types (market, relational, modular, captive, hierarchy)

13. 2b. The Global Production Network (GPN) approach and the ‘strategic coupling’ concept From economic geography (esp. 'Manchester School'): “The fortunes of regions are shaped not only by what is going on within them, but also through wider sets of relations of control and dependency, of competition and markets …increasingly occur at the international scale… the strategic coupling of global production networks and regional assets may (or may not, depending on the context) facilitate the processes of the creation, enhancement and capture of value upon which regional development ultimately depends” (Coe et al, 2004, p.469) Strategic coupling as a process mediated by local institutional actors? Strategic coupling, de-coupling & re-coupling => a dynamic process Source: Coe, Hess, Yeung, Dicken & Henderson (2004) 'Globalizing' regional development: a global production networks perspective, Transactions of the Institute of British Geographers, 29(4): 468-84.

14. 3. CASE CONTEXT: NORTHERN IRELAND’S ECONOMY, THE ROLE OF INWARD INVESTMENT & THE ‘SHIFT TO SERVICES’

15. Northern Ireland N. Ireland population ~1.759 million (2008) Belfast Metro Urban Area = 579,500 Belfast City Urban Area = 276,500 Derry/L'derry Urban Area = 90,700 N. Ireland is smallest of 12 UK regions Belfast City Urban Area population was UK’s 15 th largest in 2001 Census Belfast is 2nd biggest city on island of Ireland (Dublin 1.046 m)

16. Source: Spiekermann & Neubauer (2002) European Accessibility and Peripherality: Concepts, Models and Indicators. Nordregio. Peripherality in Europe as measured by daily accessibility http://epp.eurostat.ec.europa.eu/statistics_explained/index.ph p/GDP_at_regional_level Regional GDP per capita in EU Northern Ireland in a European Context

17. Northern Ireland as a ‘weak’ region of the UK NI @ 81% of UK average GVA/capita NI economy is most dependent on public spending

18. The Northern Ireland ‘Troubles’ A period of ‘ethno-political conflict’ from late 1960s to 1998 Belfast Agreement Had political, religious and military (or paramilitary) dimensions Deep-seated historical antecedents relating to British rule in Ireland The principal issues at stake: –the constitutional status of NI –relations between the Protestant/unionist and Catholic/nationalist communities Despite the ‘success’ of the peace process, sporadic violence persists and social/political divisions remain Some grim statistics Civilians killed: 1,857 Total dead: 3,524 Injuries: 47,541 Shootings: 36,923 Charged w/ paramilitary offences: 19,605 Bombing and attempted bombing: 16,209 http://cain.ulst.ac.uk/sutton/ tables/Status.html

19. The Northern Ireland Economy Longstanding economic problems –A region of high unemployment (until recently) and low wages –Productivity gap; weak competitiveness; SME-dominated –‘Bad’ industrial structure and restructuring pressures –Exacerbated by The Troubles (but debateable how much) –Poor economic governance; lack of autonomy and policy innovation The role of inward investment –Policy-makers in NI have always seen it as a vital ‘tool’ –Historical emphasis on job creation –More recent emphasis on higher value-added? –Rhetoric of ‘peace dividend’ and role of inward investment –Reality check? Eastern enlargement of EU, rise of Asia, heightened competition for mobile investment, changes in the corporate world

20. Note: (clockwise from top-left) Ford-Visteon, DuPont, Nacco, Seagate, TK-ECC, Michelin, Inward investment in the past: 'branch plant' manufacturing Significant inward investment attracted from GB and outside UK (esp. USA) in ‘branch plant’ manufacturing operations during 1950s/60s/70s Further manufacturing FDI attracted in late 1980s/90s (but less than Wal/Sco/NE) Public policy regime (esp. grant support) combined with low(ish) labour costs and access to UK/EU markets were among the key drivers

21. But in the mid-2000s, N. Ireland attracted more jobs per capita in new FDI firms than other UK region but less than Irish Republic Source: Independent Review of Economic Policy (2009) Note: the ‘regional aid’ regime (SFA) in NI has been much more favourable than in the majority of other UK regions

22. RegionFDI Performance Index # Northern Ireland2.23 London & South East1.47 North East1.18 Wales1.11 Scotland1.01 North West0.77 West Midlands0.74 East Midlands0.58 Yorkshire & Humberside0.55 South West0.54 East Anglia0.32 Northern Ireland 'punching above its weight'? Relative FDI performance of UK regions (2005-09) # Regional share of all UK FDI projects / Regional share of UK GVA Source: fdi Markets, Financial Times < 181 projects (5% of UK total)

23. Source: based on data supplied by Invest Northern Ireland a ‘shift to services’ beginning around 1996/97 and esp. after 1999/2000

24. Job-related inward investment in Northern Ireland: sub-sectoral analysis of services (1995/96 - 2009/10) Sector SIC Based No. of offers New jobs Safe jobs Total assistance offered (£m) Planned investment (£m) Business & Financial Services8919,1381,452142.51537.80 Software & Computer Services1219,66716994.63390.39 Other Services (incl. construction)171,1582039.9349.42 Services Total22729,9631,824247.07977.61 Total (manufacturing + services)53755,47226,325929.934,775.16 Source: data supplied by Invest Northern Ireland Note: a significant proportion of the ‘business and financial services’ category is acknowledged to be accounted for by ‘contact centre’ and BPO projects

25. Some recent services inward investment stories from N. Ireland

26. More recent traded services inward investment stories… [Etc.] Thursday, 26 February 2009

27. Stream, Derry Capita, Belfast Northgate, Newtownabbey Liberty & NYSE, Belfast PWC, Belfast Citi, Belfast Allstate & Fujitsu, Belfast Halifax/Lloyds, Belfast FirstSource, Derry

28. Bombardier H&WShipyard Citi Odyssey Arena PwC Santander & Concentrix Central Station Waterfront Hall Allstate&Fujitsu Belfast Lough RiverLagan City Centre Service-sector inward investors transforming Belfast cityscape – esp. in Belfast’s Laganside and Titanic Quarter waterfront re-development zones Capita Met College Docks City Airport

29. 4. TYPES, AND TASK ROLES, OF OFFSHORE SERVICES INWARD INVESTMENT SUBSIDIARIES IN NORTHERN IRELAND

30. Typology of leading offshore/traded services inward investors in Northern Ireland IT/softwareContact centre/BPOLegal services Captive offshore/ nearshore centres Allstate NI (US) * Citi (US) * Liberty Mutual (US) NYSE Technologies (US) CyberSource-VISA (US) Lloyds Banking Group (GB) Santander (Spain) Allen & Overy Herbert Smith Freehill LLP Outsourcing vendors operating ‘nearshore’ delivery centres Fujitsu Services (Japan) Northgate (GB) Stream Global Services (US) TeleTech (US) Teleperformance (France) FirstSource Solutions (India) HCL Technologies (India) Concentrix Technologies (US) Capita (GB) LBM (GB) HML (GB) Axiom * indicates also involved in (non-IT) BPO activities

31. Employment in leading offshore services inward investors in Northern Ireland (2012 data) Allstate Northern Ireland 2,004 Citi group 987 Fujitsu (Services) 706 Northgate Managed Services 603 Liberty Information Technology 353 NYSE Technologies Development 276 Customer contact & BPO centres (outsourcing vendors and captives) Captive IT/software development centres and IT outsourcing vendors Notes All US-owned except Fujitsu (Japan) and Northgate (GB) Allstate also engaged in some back office BPO tasks Citi also engaged in some KPO (e.g. legal compliance) Notes Stream Global Services employed 898 people in 2008, but had (controversially) closed by 2012 Teletech’s employment peaked at 928 in 2007 HCL BPO’s employment peaked at 2,096 in 2007 FirstSource Solutions (India)2,238 Teleperformance (France)2,008 Lloyds Banking Grp - Halifax (GB)1,911 Santander (Spain)1,069 LBM Holdings Ltd (GB)937 HCL BPO (India)924 Concentrix (prev. GEM) (US)683 Capita Business Services (GB) 370 Homeloans Management Ltd (GB)347 TeleTech UK Ltd (USA)293 Capita Life & Pensions (GB)171 Other: legal services & consultancy Allen & Overy Support Services 223 Herbert Smith Freehills LLP 56 PriceWaterhouse Coopers 742

32. Two contrasting, illustrative examples… Allstate NIStream Global Services Parent MNCAllstate Insurance (US)Stream Global Services (US) First invested in NI1999 (multiple re-investments)1996 (ultimately closed) Peak employmentOver 2,000~900 LocationsBelfast (+Derry +Strabane)Derry ModelCaptive OffshoringOffshore Outsourcing Type of activitiesIT & software development (+ later some BPO tasks) Contact centre (after-sales customer technical support) CustomersParent firm and its subsidiaries in USA and beyond External (large corporates in technology, telecoms, finance) for English-speaking markets

33. Locating Allstate NI in its parent firm’s value chain and Stream in other firms’ value chains Stream Global Services (the parent firm) is a ‘capability specialist’ which competes on ‘operational excellence’ in contact centres and has a network of 50+ centres in 22 countries worldwide. It is a narrowly-vertically-specialised outsourcing vendor. The Derry operation’s main role was to provide after-sales technical support to the end customers of various ICT MNEs (e.g. Dell) mainly in the UK & Irish markets. Allstate NI is a wholly- owned subsidiary of Allstate Insurance - a major US personal lines insurer. The NI operation provides various IT support and development services (and some BPO tasks) exclusively to its parent firm. It is a classic ‘captive’ offshoring centre

34. Northern Ireland’s role as a cost-effective ‘nearshore’ base for outsourced service provision to the UK market Foreign investment flow Contact/BPO delivery centre Nearshore service provision United States France India Inter-regional trade in services (within UK) FDI flow Northern Ireland

35. Example: Stream Global Services in Derry APACNAM CALAEMEA Ownership/control Outsourcing Customer contact Corporate/regional HQ Service delivery centre Client organisation United States Northern Ireland

36. Simultaneous strategic coupling with multiple GPNs Many empirical GPN studies leave the impression of a particular region being ‘coupled’ with a particular industry GPN The NI case shows that the same region can be simultaneously ‘coupled’ with multiple (sometimes quite different) GPNs, and play quite distinct roles within these different GPNs – e.g. nearshore contact centre versus offshore IT development centre (versus rationalised operator manufacturing branch plant or miniature replica manufacturing plant supplying a local market). These different coupling relationships can be based on different aspects of the region’s ‘pool’ of location-bound assets - i.e. some assets may suit one role in one GPN, whereas others assets in the same region may suit a different role in a different GPN – e.g. experienced graduate-level software developers for financial services vs. entry-level call centre agents. Northern Ireland’s polarised labour market seems to support two distinct types of GPN role. Raises questions about the portrayal of location-specific advantages in IB

37. 5. Evolution and upgrading in offshore services: some preliminary observations & insights 5a: An upside of corporate restructuring? (for some) Restructuring of TNCs - which is traditionally seen as a negative force affecting ‘peripheral regions’ – appears to have created some new opportunities for strategic coupling between regional assets and GPNs in offshore service roles 5b: Clear evidence of subsidiary evolution (upgrading?) in some cases Individual subsidiaries have received multiple rounds of re-investment Individual subsidiaries have broadened (and perhaps deepened) their role/‘task mandate’, sometimes considerably, beyond initial focus Also, new and different types of offshore services subsidiary have been attracted to the region (e.g. the recent additional of legal services)

38. 5b (continued): Regional ‘upgrading’ trajectories? Regional upgrading (EG) as the aggregation of subsidiary evolution (IB)? (How) does the upgrading typology from the GVC literature (product, process, functional, chain upgrading) fit with offshore service activities? – Ditto for product/function/geographical mandate extension in the subsidiary management stream in IB (after Birkinshaw & Hood, 1998) In this (longitudinal) Northern Ireland case study, we observe evidence of the diversification of the services project mix and task mandates over time – Initially more focus on contact centres, then widening to BPO, financial services and IT/software, and more recently legal services – Is this upgrading? (Ponte & Ewart, 2009, ‘Which way is “up”?’) – How was this achieved? (B&H 1998 tripod; local institutional actors?) Danny Mackinnon’s (2012, JEG) call for an evolutionary (EEG) perspective on strategic coupling, de-coupling, re-coupling with GPNs

39. 5c: GVC/GPN position and upgrading/evolution? Upgrading/evolution possibilities seem to be constrained by the intra-firm but also the wider inter-firm (i.e. GPN/GVC) context of the subsidiary. Outsourced contact centre projects suffer from a ‘double dependency’: 1.Part of large TNCs, narrow task mandate, lacking distinctive capabilities, classic external control and truncation issues 2.The parent TNCs themselves are in a subserviant, cost-driven value chain position So possibilities to improve ‘quality’, capture more value and widen task mandates is severely limited Captive IT/software centres ‘work for’ their parent company (mainly financial services firms), so the 2 nd problem above doesn’t apply. Local managerial entrepreneurialism and successful execution of initial mandate + exerting ‘voice’ with parent firm seems to have led to task mandate extension and increased strategic significance