Five Investments India is Making to Become China's "Plus One" in Manufacturing

Apple is in the news today for announcing that they will create manufacturing capacity in India to produce 25% of the world’s iPhones from there.  Apple is acting on a trend with other multinationals to reduce reliance on China as their primary manufacturing source.  The COVID-19 pandemic and geopolitical events such as the Russia-Ukraine war have vividly illustrated the fragility of the world’s supply chain.

India is one country that’s been working hard to become China’s Plus One and improve its attractiveness as a manufacturing hub.  Currently, manufacturing contributes 17% of the GDP.  The government’s goal is to expand manufacturing to 25% of GDP by 2025.  Below are five investments India is making to attract foreign investment and build domestic manufacturing capacity.

Investment #1: Production Linked Incentives (PLI)

The PLI schemes provide economic incentives to foreign companies, like Apple, to set up manufacturing facilities in India.  It also provides incentives to domestic Indian companies to set up or expand manufacturing capacity to increase employment and reduce reliance on imports to meet domestic demand.  These schemes are targeted at 14 key sectors including electronics, pharmaceutical drugs, and medical devices.  In exchange for investing in plants, machinery, and R&D, the government is providing various incentives for up to five years.

Investment #2: Special Economic Zones

India has approximately 270 Special Economic Zones (SEZ) to attract Foreign Direct Investment (FDI).  These SEZs give favorable tax treatment to companies setting up manufacturing sites.  Often, these zones are targeted at specific industries to develop manufacturing clusters.  As an example, Pune attracts about 20% of India’s FDI with a concentration in automobiles and durable goods.  Pune also serves as an engineering R&D hub for companies such as Tata Motors, Volkswagen, and Visteon.

Investment #3:  Road Infrastructure

India is focused on improving road infrastructure with agencies such as the Ministry of Road Transport and Highways (MoRTH) and the National Highways Authority of India (NHAI).  India’s roads support over 60% of freight transportation in the country.  In FY22, India completed over 6,200 miles (10,000 kilometers) of roads, up significantly from previous years.  Much of that has been built under the Toll-Operate-Transfer model where India builds the highways and then monetizes them by selling the right to operate the roads and collect tolls.  Companies like Canada’s Brookfield Asset Management are providing the capital for this monetization process.  The Indian government has even gone digital with the deployment of a Project Management and Data Lake cloud-based software used to manage the bid and execution process of all contracts.

Investment #4: Shipping Port Infrastructure

The Indian maritime sector accounts for 95% of export-import trade by volume.  Like roads, India has been actively working to build port capacity through the use of Foreign Direct Investment.  The Maritime Vision 2030 initiatives seeks to attract foreign investment to build and operate ports under long-term contracts.  A central component of the Maritime Vision 2030 is the creation of four mega-port clusters.  These will come in the states of Gujarat, Maharashtra, Tamil Nadu, and West Bengal-Odisha.  Key features will include port automation, seamless movement of cargo, and paperless transactions to create standard processes and provide access to real-time information for port management.

Investment #5: Human Capital Development

According to a 2020 World Bank study, India’s Human Capital Index places it 116th out of 174 countries.  The index measures a variety of factors including projected life expectancy and quality of education.  India’s population skews younger, with 65% of the population under 35.  As part of the challenge to develop skills to compete, India has a partnership with the World Bank to improve education quality.  Additionally, private companies run programs to further improve skills after completion of education at the university level.

Conclusion

India is not alone in its desire to take manufacturing from China.  Other Asian countries like Vietnam, Thailand, and Malaysia are also ramping up to compete.  However, India is making serious commitments to increase its global competitiveness and become a central part of the world’s manufacturing sector.

The Impact of Rising Trade Restrictions

Rising trade restrictions between countries can have significant economic and geopolitical implications, leading to a range of key issues that affect various stakeholders. The International Monetary Fund (IMF) has an interesting article out this month in Foreign Affairs in which they argue that the world is moving in the wrong direction by increasing the number of trade barriers.

According to the latest International Monetary Fund projections, annual global GDP growth in 2028 will be only three percent—the IMF’s lowest five-year-ahead forecast in the past three decades, which spells trouble for poverty reduction and for creating jobs among burgeoning populations of young people in developing countries. - International Monetary Fund

Since the Global Financial Crisis in 2008, growth in world trade has more or less leveled out, what some have described as “slobalization”. While the growth in trade has been slowing, the nature of trade is also morphing. In light of the Covid pandemic and the Russia-Ukraine war, countries are reevaluating which trading partners can be counted on in difficult times. This “friendshoring” movement will reduce supply chain risks, but also impact the cost of goods and services, with developing countries much more likely to feel the brunt of reduced trade and global growth.

Countries perceive trade restrictions as working in their best interests, but this is a short-term view. I’ve written elsewhere that India would do well to rethink its trade restrictions, including taxes on imported sub-components for the assembly of mobile phones. This is just one example where lessening trade restrictions would eventually lead to longer-term economic growth, with millions of Indians benefiting from a broad and efficient manufacturing economy.

Countries should be thinking about the following issues before they erect even more trade barriers:

• Economic Impact: Trade restrictions, such as tariffs, quotas, and import/export bans, can hinder the flow of goods and services across borders. This can lead to reduced economic growth and lower consumer welfare. Industries that rely heavily on international trade might face challenges in accessing foreign markets or sourcing necessary inputs, which can disrupt supply chains and lead to higher production costs.

• Price Increases: Tariffs and other trade barriers often result in higher prices for imported goods, as the cost of complying with these barriers is passed onto consumers. This can lead to inflationary pressures, particularly if the affected goods are essential or inputs for other industries. For Western countries, moving supply chains to “friendly” countries will almost surely have the impact of rising prices from both labor and materials.

• Reduced Competition: Trade restrictions can limit the level of competition in domestic markets, as they protect domestic industries from foreign competitors. While this might offer short-term advantages to domestic producers, it can lead to complacency, decreased innovation, and reduced efficiency in the long run.

• Global Value Chains Disruption: Modern production processes often involve components and materials sourced from different countries. Trade restrictions can disrupt global value chains, causing delays in production and increased costs as companies search for alternative suppliers. In an example like rare earth metals, there are relatively few countries that have these materials. Countries, and companies that need these materials for production will have to find a way to deal with these countries, even if they are deemed “unfriendly”.

• Retaliation and Trade Wars: When one country imposes trade restrictions, its trading partners might retaliate with their own restrictions. This tit-for-tat escalation can result in a trade war, where both sides suffer economic losses, reduced trade volumes, and increased uncertainty.

• Impact on Developing Countries: Developing countries often rely heavily on exports to drive economic growth. Trade restrictions can limit their access to global markets, reducing their ability to generate income, create jobs, and improve living standards.

• Global Economic Uncertainty: Rising trade tensions and protectionist policies can create uncertainty in global markets. Businesses might delay investment decisions due to the unpredictability of trade relations, leading to reduced economic activity. Already, many companies including Apple are looking at a China Plus One manufacturing strategy, given the geopolitical risks of dealing with China.

• Inefficiency and Resource Misallocation: Trade restrictions can lead to inefficient resource allocation as countries are forced to produce goods domestically that could be produced more efficiently elsewhere. This can result in a waste of resources and reduced overall economic output. It may also result in the misallocation of human resources, where domestic resources could be involved in higher-value activities if low value activities where outsourced to other nations.

• Neglect of Multilateral Agreements: Increasing trade restrictions can undermine multilateral agreements like the World Trade Organization (WTO), which aim to promote global trade cooperation, reduce barriers, and resolve trade disputes. A disregard for these agreements can weaken the international trade framework.

• Geopolitical Tensions: Trade restrictions can exacerbate geopolitical tensions between countries. Economic conflicts can spill over into political and security issues, making it more challenging to resolve international disputes.

According to the IMF, over the long term, trade fragmentation—that is, increasing restrictions on the trade in goods and services across countries—could reduce global GDP by up to seven percent, or $7.4 trillion in today’s dollars, the equivalent of the combined GDPs of France and Germany and more than three times the size of the entire sub-Saharan African economy.

Rising trade restrictions for goods and services between countries can create a range of negative consequences, affecting economic growth, consumer welfare, global cooperation, and geopolitical stability. It's important for countries to carefully consider the potential drawbacks of protectionist policies and to seek avenues for constructive dialogue and negotiation to address trade-related issues.

Questions:

• What do you see as the primary negative consequences of increasing trade restrictions?

• Do you think there are positive benefits that outweigh the negative consequences outlined above?

• How do you think companies should balance Foreign Direct Investment (FDI) against national interests?

Let us know your thoughts in the comment section.

Odds & Ends in a World of Globalization - 29 August 2023

A monthly roundup of interesting stories on the reach of globalization.

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Fashion execs plan more reductions in sourcing from China in 2023: report

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The Mesa Method: Championing A New Era Of Global Business Problem-Solving

10 Key Findings: Trends in Global Business Services

Indian Manufacturing and Import Tariffs

The Covid pandemic revealed weaknesses in global supply chains, and recent tensions between the United States and China have companies rethinking their global strategy. A case in point is manufacturing. Many companies are now pursuing a China Plus One strategy to reduce the risk of putting all of their manufacturing eggs in one basket. Eyes are turning towards India as the next great manufacturing shop floor.

There are good reasons to like India for manufacturing. They have a large and increasingly educated workforce, wages are generally low compared to China, and various Indian government initiatives are giving credibility to the claim that India seeks to be a global manufacturing partner. The government is promoting legislation to promote investment. This includes:

• Make in India Initiative: Designed to incent companies to develop, manufacture, and assemble products in India, with a focus on encouraging dedicated manufacturing investment.

• Industrial Corridor Development: Focused on infrastructure and smart cities development in key cities.

• Modified Semiconductor India Program: Promotes the development of the semiconductor industry specifically. Several deals have fallen through and the government is looking at relaunching the program.

These initiatives are a step forward to make India more competitive against China; however, India is stuck in the past with their imposition of tariffs on imported components. Designed to protect domestic production, the tariffs often hit components that have no domestic equivalent. India tariffs are also high in comparison to Asian competitors, such as Thailand and Vietnam. India has a lot to offer the world in the area of manufacturing, but if it’s serious about becoming an alternative to China, it must reform its tax code to facilitate the importation of critical manufacturing components.

Internal Controls in the Global Organization

Internal control is an essential component of organizational governance that helps ensure the effectiveness, efficiency, and integrity of operations. For a global organization, with operations spread across different countries and regions, implementing robust internal controls becomes even more critical. Here are key aspects of internal control that are important for a global organization:

1. Control Environment: The control environment sets the tone for the organization and influences the control consciousness of its employees. It encompasses factors such as management's integrity and ethical values, commitment to competence, and the organization's overall risk appetite. A global organization should establish a strong control environment that is aligned with its values and takes into account cultural differences across various locations.

2. Risk Assessment: A thorough risk assessment process is crucial for identifying and evaluating risks that could impact the achievement of the organization's objectives. For a global organization, the risk assessment should consider both global and local risks, taking into account factors such as legal and regulatory requirements, geopolitical risks, currency fluctuations, and cultural nuances. This assessment forms the basis for designing effective internal controls.

3. Control Activities: Control activities are the specific policies, procedures, and practices implemented by an organization to mitigate risks and achieve its objectives. In a global organization, control activities should be tailored to address the unique risks associated with each location while also ensuring consistent adherence to global policies and standards. Examples of control activities include segregation of duties, authorization and approval processes, physical safeguards, and IT controls.

4. Information and Communication: Effective communication and information flows are essential for internal control. A global organization should establish clear communication channels to disseminate policies, procedures, and control-related information across different locations. It should also ensure that relevant information is captured accurately, timely, and in a manner that facilitates decision-making, compliance, and monitoring. Robust information systems and reporting mechanisms should be in place to support these objectives.

5. Monitoring: Regular monitoring and evaluation of internal control effectiveness are critical to identify deficiencies, assess their impact, and take corrective actions. Monitoring can be achieved through ongoing supervision, internal audits, self-assessments, and external assessments where appropriate. In a global organization, monitoring should encompass both centralized and decentralized mechanisms to provide reasonable assurance over controls at various levels.

6. Compliance and Legal Considerations: Global organizations need to navigate a complex web of legal, regulatory, and compliance requirements across multiple jurisdictions. Internal controls should include measures to ensure compliance with applicable laws, regulations, and industry standards in each country of operation. This involves staying updated with changes in regulations, maintaining effective compliance programs, and conducting periodic assessments to ensure adherence.

7. Ethical Conduct and Fraud Prevention: Promoting a culture of ethical conduct and preventing fraud is vital for any organization, including global ones. Internal controls should include measures to detect and deter fraudulent activities, such as establishing a whistleblower hotline, conducting periodic fraud risk assessments, and implementing anti-corruption and anti-bribery policies. Training programs and awareness campaigns should be conducted to educate employees about ethical standards and their responsibilities.

By addressing these key aspects of internal control, a global organization can enhance its operational efficiency, minimize risks, safeguard assets, and ensure compliance with applicable laws and regulations across its diverse operations.

Embracing the Power of Outsourcing: Unlocking a World of Benefits

In today's globalized and interconnected world, outsourcing has emerged as a strategic business practice that empowers organizations to tap into specialized skills, enhance operational efficiency, and drive growth. Outsourcing involves delegating certain tasks or processes to external service providers, allowing businesses to focus on their core competencies and gain a competitive edge. In this blog post, I will explore the numerous benefits of outsourcing and shed light on how it can revolutionize businesses across various industries.

Cost Savings

One of the most significant advantages of outsourcing is the potential for cost savings. By outsourcing non-core activities or functions to countries with lower labor costs, businesses can significantly reduce their operational expenses. These cost savings can be attributed to factors such as lower wages, reduced infrastructure investments, and decreased overhead expenses. Outsourcing also eliminates the need for recruiting, training, and managing additional in-house employees, saving on recruitment and human resource costs. Such financial efficiencies can enable businesses to allocate resources more strategically and invest in other critical areas of their operations. However, while cost is always important, outsourcing has other benefits that enhance process effectiveness.

Access to Specialized Skills and Expertise

Outsourcing opens the doors to a global talent pool, allowing organizations to access specialized skills and expertise that may not be readily available internally. External service providers often possess deep domain knowledge, technical proficiencies, and industry-specific experience. Whether it's software development, digital marketing, customer support, or accounting services, outsourcing offers access to professionals who are highly skilled in their respective fields. This not only enhances the quality of work but also promotes innovation and enables organizations to stay ahead in rapidly evolving industries.

Access to Latest Technology

A compelling reason to choose an outsourcer is that the outsourcing firm typically has access to the latest technology. This can also include proprietary technology unique to a particular outsourcer. Rather than invest the time and money to bring the application architecture up-to-speed, companies can outsource functions and let the outsourcer enable the processes with the latest technology.

Increased Operational Efficiency

Outsourcing non-core business functions enables companies to streamline their operations and improve overall efficiency. By entrusting specialized tasks to external experts, organizations can leverage their expertise and benefit from streamlined workflows, optimized processes, and industry best practices. This, in turn, helps to enhance productivity, reduce turnaround times, and deliver higher-quality outcomes. With outsourcing, businesses can focus their internal resources on core activities, allowing for greater operational agility and a more efficient allocation of time and talent.

Scalability and Flexibility

Outsourcing provides businesses with the flexibility to scale their operations rapidly and efficiently. As organizations grow or experience fluctuations in demand, outsourcing offers the ability to quickly adapt and scale resources up or down as needed. Service providers can accommodate variable workloads and effectively manage peaks and troughs in business activity, ensuring uninterrupted service delivery. This scalability allows businesses to respond swiftly to changing market dynamics and seize opportunities without being constrained by internal resource limitations.

Enhanced Focus on Core Competencies

By outsourcing non-core activities, businesses can concentrate their internal resources and energy on their core competencies. This focus allows organizations to excel in areas that differentiate them from competitors and add significant value to their customers. Outsourcing peripheral tasks frees up time and resources that can be redirected towards strategic planning, product development, and improving overall business performance. This laser-like focus on core competencies enhances competitiveness, fosters innovation, and positions businesses for long-term success.

Risk Mitigation and Business Continuity

Outsourcing provides a robust risk mitigation strategy for businesses. External service providers often have established business continuity plans, disaster recovery measures, and risk management frameworks in place. By outsourcing certain functions, organizations can leverage the expertise of these service providers to ensure uninterrupted service delivery even during unforeseen events or disruptions. Service level agreements (SLAs) and contractual obligations also provide a layer of accountability and ensure that service providers adhere to agreed-upon quality standards and performance metrics.

Conclusion

The benefits of outsourcing are far-reaching and extend across various dimensions of business operations. From cost savings and access to specialized skills to enhanced operational efficiency and scalability, outsourcing empowers organizations to focus on their key competitive advantages rather than being distracted by back-office activities that are better handled by an experienced outsourcing provider.

Keys to Successful Globalization of the Finance Organization

Successful globalization of the finance organization requires careful planning, implementation, and ongoing management. Here are key factors to consider:

• Clear Strategy: Develop a clear strategy that aligns with the organization's overall goals and objectives. Define the scope and purpose of globalization, including target markets, products/services, and growth expectations. A strategy of Operational Excellence will require a different type of finance organization than would a strategy of Product Leadership. A clear business strategy will also feed into the location strategy to align global resources with the required finance capabilities.

• Strong Leadership: Appoint capable leaders who understand the nuances of global finance and can effectively manage diverse teams across different regions. They should possess cross-cultural communication skills and be adaptable to local market conditions. The Sponsor of the globalization initiative is critically important. He or she will be the one to cast the vision for the future state and will provide personnel and other resources to drive the initiatives to success.

• Standardization and Localization: Establish standardized financial processes, systems, and reporting frameworks that can be adapted to local requirements. Strike a balance between centralization for efficiency and localization to accommodate regional variations. It will depend on the business and the industry, but a good rule of thumb to shoot for is to have 80% of processes world-wide standardized. Exceptions will need to be made for local regulatory and statutory requirements.

• Regulatory Compliance: Understand and comply with international financial regulations, including tax laws, accounting standards, and reporting requirements in each target market. This ensures transparency and builds trust with local stakeholders. Compliance considerations should be built into the processes and systems. A good example would be structuring the Chart of Accounts to facilitate statutory reporting requirements in each local.

• Technology Enablement: Digital technologies are a game changer for many companies. Leverage advanced financial technologies to streamline processes, enhance data accuracy, and enable real-time reporting across geographies. Implement robust financial systems and consider cloud-based solutions for scalability and accessibility. Use investments in technology to drive the standardization necessary to drive economies of scale in the global delivery model.

• Talent Development: Invest in talent development programs to build a globally competent finance workforce. Provide cross-cultural training, offer international assignments, and encourage knowledge sharing among employees from different regions.

• Risk Management: Develop a comprehensive risk management framework to identify, assess, and mitigate risks associated with global operations. This includes currency fluctuations, geopolitical uncertainties, compliance risks, and operational vulnerabilities. Internal controls are an essential part of the global delivery model. Segregation of duties and other controls should be built into processes as they are designed and updated.

• Effective Communication: Foster open and transparent communication channels across the organization. Encourage regular interaction between global teams through video conferencing, collaboration tools, and periodic face-to-face meetings to build trust and alignment. In addition to live meetings during overlapping time zones, internal intranets can be used to disseminate information and templates required by teams globally.

• Local Partnerships: Establish strategic partnerships with local institutions, advisors, and consultants who have deep knowledge of regional markets. Leverage their expertise to navigate cultural nuances, legal requirements, and market dynamics.

• Continuous Evaluation and Adaptation: Continuously evaluate the effectiveness of global finance operations, monitor key performance indicators (KPIs), and adapt strategies as needed. Stay agile and responsive to market changes and emerging opportunities. Given the rate of technological change, it’s essential to continually review emerging technologies to evaluate the potential to revise and updated the finance operating model.

  Successful globalization of the finance organization requires a holistic approach that considers cultural, regulatory, and operational aspects. By addressing these key factors, organizations can navigate the complexities of global finance and drive sustainable growth.

Developing a Global Managerial Mindset

Developing a global managerial mindset is crucial in today's interconnected and diverse business environment. It involves expanding your perspective beyond local boundaries and understanding the complexities of operating in a global context. Here are some steps your organization’s managers can take to develop a global managerial mindset:

1. Embrace cultural diversity: Gain an appreciation for different cultures, traditions, and business practices. Recognize that there are multiple ways to approach problem-solving and decision-making. Actively seek out opportunities to engage with people from different cultural backgrounds, both in your personal and professional life.

2. Stay informed about global trends: Stay updated on global economic, political, and social trends. Read international news, follow industry reports, and attend conferences or seminars that focus on global issues. Understanding global trends will help you anticipate challenges and identify new opportunities.

3. Develop intercultural communication skills: Effective communication is essential in a global setting. Learn to adapt your communication style to different cultural norms and be aware of potential language barriers. Improve your listening skills and develop empathy to understand different perspectives. Consider learning foreign languages to facilitate better communication.

4. Expand your network globally: Build a diverse professional network that includes individuals from various countries and industries. Engage in international business forums, join professional associations with global memberships, and leverage social media platforms to connect with professionals around the world. Networking with a global mindset will provide you with valuable insights and opportunities.

5. Seek international experiences: Actively pursue opportunities to work or study abroad. International experiences expose you to different business practices, cultural norms, and ways of thinking. It helps you develop adaptability, cross-cultural leadership skills, and a broader perspective on global business challenges.

6. Foster a global mindset within your organization: If you are in a managerial position, promote a global mindset within your team or organization. Encourage diversity, create opportunities for cross-cultural collaboration, and support initiatives that foster cultural understanding. Provide training programs or workshops on intercultural competence and global business practices.

7. Continuously learn and adapt: The global business landscape is constantly evolving, so it's crucial to be open to learning and adapting. Pursue professional development opportunities, such as attending workshops, obtaining certifications, or pursuing advanced degrees in international business or global management. Stay curious and embrace lifelong learning.

Remember that developing a global managerial mindset is a continuous journey. It requires a genuine interest in understanding and embracing diversity, as well as a commitment to ongoing learning and self-improvement. By developing this mindset, you'll be better equipped to navigate the complexities of a globalized world and effectively lead in a global business environment.

Challenges of Global Business Services

Embracing global business services enables companies to drive organizational effectiveness while driving down the overall cost of finance. It also allows companies to outsource, where appropriate, processes which are not core to their competitive advantage while also leveraging technology investments made by the outsource provider. However, global business services (GBS) face several challenges in today's dynamic and interconnected business environment. Organizations need to think through these issues before embarking on the redesign of their organizational model. Some of the key challenges include:

1. Cultural and Language Differences: Operating in a global context means dealing with diverse cultures and languages. GBS organizations need to navigate and understand these differences to effectively communicate and collaborate across borders. Managing cultural nuances, language barriers, and local customs can be challenging but crucial for successful global operations.

2. Regulatory and Compliance Complexity: Different countries have varying regulatory frameworks and compliance requirements. GBS entities must ensure they adhere to local laws, regulations, and tax requirements while maintaining global standards. Staying up to date with ever-changing regulations and ensuring compliance can be complex and demanding.

3. Talent Management and Skill Gaps: Building a skilled and diverse workforce is essential for GBS success. However, finding and retaining talent with the right skill sets can be challenging in a competitive global market. GBS organizations often face skill gaps in areas such as language proficiency, cross-cultural communication, and specialized expertise, requiring ongoing training and development programs.

4. Technology Integration and Infrastructure: GBS heavily relies on technology to streamline processes, enhance efficiency, and facilitate global collaboration. However, integrating different technologies, systems, and platforms across various locations can be a significant challenge. Ensuring seamless connectivity, data security, and infrastructure scalability are essential for effective global operations.

5. Data Privacy and Security: Global businesses handle vast amounts of sensitive data, including customer information, financial data, and intellectual property. Ensuring data privacy and security across multiple jurisdictions is a critical challenge for GBS. Compliance with data protection regulations, implementing robust cybersecurity measures, and safeguarding against data breaches require constant vigilance and investment.

6. Supply Chain Complexity: Global businesses often have complex supply chains that span across different countries and regions. Managing and coordinating suppliers, logistics, and inventory across borders can be challenging due to varying regulations, transportation constraints, and geopolitical risks. Supply chain disruptions, such as natural disasters or political instability, can have a significant impact on GBS operations.

7. Communication and Collaboration: Effective communication and collaboration are essential for global business success. However, coordinating teams spread across different time zones, languages, and cultures can be a challenge. GBS organizations need to establish clear communication channels, leverage technology for virtual collaboration, and foster a culture of inclusiveness and teamwork.

8. Economic and Political Uncertainty: Global businesses are exposed to economic fluctuations, geopolitical tensions, trade disputes, and policy changes. These uncertainties can impact market conditions, supply chains, and customer demand. GBS entities must monitor global trends, anticipate potential risks, and develop agile strategies to adapt to changing circumstances.

Successfully addressing these challenges requires strategic planning, strong leadership, adaptability, and continuous learning. GBS organizations that can effectively navigate these obstacles can leverage the benefits of globalization and achieve sustainable growth in the global marketplace.

Argentina and the truthiness of government statistics

Argentina was recently in the news for being in trouble with the International Monetary Fund (IMF).  It seems that the IMF, and many others, have an issue with the truthfulness of Argentina's government issued statistics, particularly with the stated inflation rate.  In 2012, the official inflation rate as determined by the government was 10%.  However, many private economists, both in Argentina and elsewhere, think the actual inflation rate is around 25% per year.

For the multinational looking at countries to locate operations, including Shared Services, the actual and expected inflation rate for a country is a critical factor in determining labor costs.  To that end, it's critical to have an understanding of the true economic factors of a country and city before committing to a long-term presence there.  So if you can't completely trust a country's published economic information, how can a company be sure that the data, particularly labor costs, it incorporates into its business case are reliable?  Here are three ways to corroborate, or refute, labor cost information published by a government:

1. For a first cut look at salaries, there are free resources such as Glassdoor that can give you some sense of the salaries in a particular country or city.  This data is unlikely to meet all of your data requirements, but it can give you a sense if the government published numbers are reasonable.
2. For a more comprehensive survey of global salaries, you can purchase information from companies that specialize in this type of information.  One example is Mercer, and their global salary survey.
3. A third option, if you have access to a consulting firm, is to get their take on particular countries and cities.  As an added bonus, they may be able to set up a call with one or more of their clients in that country or city to get a first hand assessment of life on the ground.

These options are by no means mutually exclusive, and it's likely that you'll incorporate one or more of them into your analysis.  It's important not to take government statistics at face value, even for more industrialized countries.  It's important to trust but verify.

Five ways for Finance to know it's time to engage in organizational redesign

In an increasingly global environment, a hallmark of leading finance organizations is the ability to reorganize to meet changing demands.  But how does Finance leadership know when it's time to make a major change in the structure of its organization?  Here are five ways to know it's time to realign organizational resources:

1. Change in strategic direction. Each organization has a basic strategy that guides its focus in the market.  These strategic intents focus on differentiators such as product innovation, customer intimacy or operational excellence.  A change in focus could warrant a redesign.  And it doesn't have to be a wholesale change.  Even a change in emphasis between the various dimensions of competitive advantage should drive changes in the organization.
2. Acquisition or divestiture. Mergers, acquisitions and divestitures can change the economics of previous design decisions.  An acquisition might bring with it certain in-house expertise that wasn't previously available.  A change in focus that comes with a major acquisition could drive the decision to outsource a number of finance functions.
3. Expansion into new product markets.  The introduction of new products or product lines could drive organizational change  to align finance resources more closely with the business.  Business units focused on industries with faster product introduction and obsolescence rates would likely warrant a higher degree of finance support embedded in their business.
4. Expansion into new geographic markets.  Entering into a new geographic market where the company has little to no experience may warrant a redesign.  In this situation a business case could be made to partner with a 3rd party service provider to facilitate the learning curve in a new market, as well as to assist with the development of a captive service center, if that's the long-term direction of the company.
5. Finance needs to improve its game. Even if none of the above are true, it may still make sense to engage in organizational redesign if the Finance group isn't meeting expectations.  This could be in the area of business partnership, or cost efficiency, or both.  The Finance organization should be continuously evaluating its performance through benchmarking and customer satisfaction surveys to monitor performance and improve accordingly.  An organizational redesign may be necessary to improve service delivery effectiveness and drive down cost to world-class levels.

Leading finance organizations focus on aligning their structure with corporate strategy. By evaluating these five factors, finance leadership can stay on top of changes in their organization to drive lasting value creation.

China FDI falls. Are cheaper rivals to blame?

While China as been a go-to destination for all sorts of work, including back office service centers, Foreign Direct Investment (FDI) has fallen relative to last year.  No firm conclusions can be drawn from this one statistic alone, but it does raise the question of investment choices as companies evaluate where to make future investments..  

It's no secret that China's coastal cities aren't the bargin they once were.  However, they're still proven locations within China to set up shop, and there are up-and-coming locations in China's interior such as Chengdu, in the Sichuan province in Southwest China.  The challenge for China is that it's lower cost neighbors have been watching China's success and working to emulate them.  That means more choices for Western companies to invest.

A recent article from the South China Morning Post has the details.  Here's an excerpt:

China’s foreign direct investment inflows fell at their fastest rate in more than three years in January, highlighting the challenges it faces competing for funds with cheaper rivals in a sluggish global growth environment.

China Commerce Ministry data on Wednesday showed the world’s second-biggest economy drew in US$9.3 billion (HK$72.12 billion) of foreign direct investment (FDI) in January, down 7.3 per cent on a year ago.

The fall was the steepest in year-to-date inflows since a 9.9 per cent drop in November 2009, and it was the worst January performance in four years.

January FDI was down from December’s US$11.7 billion, with inflows from key Asian economies and the United States down in the latest period, reflecting what analysts say are foreign perceptions of a decline in China’s near-term growth prospects.

Zhang Zhiwei, chief China economist at Nomura in Hong Kong, said the continuing fall in FDI – the longest consecutive run since the global financial crisis – was indicative of the rising competitive challenges facing the world’s biggest manufacturer of exports.

“We expect more multinational companies will increase investment in cheaper countries, such as Vietnam and Indonesia,” Zhang told said.

If nothing else, this story illustrates that companies increasingly have choices when it comes to Asian operations.  A country like Vietnam doesn't necessarily have the infrastructure or trained labor pool that China has, but it isn't for lack of trying.  These countries are making investments in these very areas and may soon be credible alternatives to China for locating operations, including back-office staff for finance and accounting.  

Can business schools teach globalization?

It's always been the goal of MBA programs to offer relevant education that aligns with real world demands.  With the increased emphasis on globalization, MBA programs have tailored their programs to provide a stronger understanding of globalization.  But just how effective have these programs been in adapting to real world globalization issues?

The Wall Street Journal conducted an interview with Pankaj Ghemawat, a professor of global strategy at the IESE business school in Barcelona, Spain.  His central premise is that schools need to do a better job of explaining, not only the opportunities of globalization, but also the limits.  He points out that the common perception is that globalization is much further along than it really is.  The world is getting flatter, but it's not nearly as flat as people think it is.

Another point made by Professor Ghemawat is that more MBA programs are incorporating trips into their program to expose students to other cultures.  But how much can really be assimilated in a one or two week trip to another country?  Can it impose the illusion of understanding which could actually be damaging to students understanding of globalization?

These are relevant questions for finance organizations that are recruiting from MBA programs.  What skills should a finance organization expect from new recruits?  What additional training is required to develop a mature understanding of the opportunities and limits of globalization?  In subsequent posts I'll discuss my thoughts on what finance organizations can do to develop global competencies, not just with newly hired MBAs but with their global organization.

It's an interesting read and you can catch the entire interview at Can Globalization be Taught in B-School?

Brazil power outage reveals strain on country's infrastructure

Brazil has been in the news lately, and not for the reasons it would like.  Brazil recently suffered a failure of its electrical system that impacted large portions of the country, and highlighted the strain of growth that has been placed on the country's infrastructure.

Brazil has been at the forefront of economic development in Latin America.  Cities like Sao Paulo and Rio have been traditional choices for Shared Services but other cities like Campinas and Curitiba are also experiencing growth as more multinationals move into those cities.  The overall effect, along with the demand for electricity from Brazil's population, has put the spotlight on the country's infrastructure. Other sources of blame for the failure include government regulation, forced rate cuts and inadequate investment in transmission capabilities.

An article from Businessweek highlights the problems.  Here's an excerpt:

Power was knocked out in 11 Brazilian states last night, leaving residents in the dark for several hours as the country’s latest blackout raises questions about the reliability of the electricity grid.

Power failures can occur in any country.  Just ask India.  But as multinationals evaluate various locations around the globe for potential shared service center sites, it's good to keep in mind which countries can keep the lights on.

Source: http://www.businessweek.com/news/2012-10-26/brazil-suffers-fifth-power-outage-since-crackdown-on-utilities

Chile focuses higher education on global sourcing

An article at Nearshore Americas discusses Chile's focus on higher education and how they're working to equip Chileans to compete in the global market.  Of interesting note is that only 4% of Chileans speak English at the professional level.

An excerpt:

CORFO (Chile's Economic Development Agency) has a national English language registry that counts 46,000 Chileans.  In 2011, some 8,050 of those registered sought out testing and 34 percent of them tested at an intermediate level.

“CORFO is still giving grants to study English.  It is a model that has been adopted by other countries in South America.  Really only about four percent of Chileans speak and write English at a professional level, that is why bilingual call centers have never been so popular here.  Those that have a high level of English are usually working in some other capacity like KPO or IT Services,” added Stojkovic.

You can read the full article at: Chile’s Short History of Reshaping Higher Education to Power Global Services

Genpact Inaugurates Delivery Center in Dubai, UAE to Serve Middle East and North Africa-Based Clients

A press release from business process outsourcer Genpact announces the opening of a new delivery center in Dubai, UAE.  Here's an excerpt from the press release:

Genpact Limited (NYSE: G), a global leader in business process and technology management, today announced the opening of its Dubai, United Arab Emirates (UAE) global delivery center. The 80-seat modern center set up in Dubai as a licensed partner of Dubai Outsource Zone (DOZ) will provide business process services such as claims processing, customer service, collections, treasury operations, finance and accounting, analytics and risk-related services for clients in the Middle East and North Africa.

"We are delighted to begin operations in Dubai and hope to grow this center into a 500-person center in the next three years," said Tiger Tyagarajan, President and CEO, Genpact, speaking at the opening. "Not only will the center deliver business impact through our uniquely scientific Smart Enterprise Processes (SEP^SM) framework, it will also help our clients make smarter business decisions through our Smart Decision Services comprising analytics and research, reengineering and risk management."

Setting up operations closer to clients is part of Genpact's growth strategy and the decision to set up in the UAE is based on the excellent infrastructure, supportive government policies, connectivity with the rest of the world, and the ease of doing business in Dubai. Genpact now has delivery centers in 17 countries around the globe.

"The Dubai center will increase our capabilities to deliver services in Arabic and we will initially be focusing on clients in the UAE, Kuwait, Qatar, Bahrain, Oman and the Kingdom of Saudi Arabia markets," saidVishal Pandit, SVP and Business Leader, Middle East at Genpact. "We will be providing project-based analytics and reengineering services as well as transaction processing and customer care services."

Dubai Outsource Zone caters to organisations specialising in services such as business process outsourcing, knowledge process outsourcing and legal process outsourcing. Additionally, it offers an environment that attracts different elements of the value chain, including banking and finance, insurance, IT, legal and airlines.

India Sees FDI Increase 43 Percent in April

A new article by Dezan Shira & Associates discusses a new report on Foreign Direct Investment (FDI) in India.  India is showing a sharp increase in April over the prior year for new investment.  An excerpt from the article:

Indian foreign direct investment in April grew at a rate of 43 percent year-on-year, up from US$2.17 billion in 2010 to US$3.12 billion this year.

The statistics show a global economic recovery, particularly in European regions. Mauritius, Singapore, the United States, United Kingdom, Netherlands, Japan, Germany and the United Arab Emirates were the major investors in India.

In particular, the highest investments for the month came from Singapore (US$1.17 billion), followed by Mauritius (US$976 million), Japan (US$235 million), France (US$220) and Cyprus (US$170 million).

India’s services sector was the leading sector in terms of FDI with the overall monthly statistics as follows:

• Services (US$658 million)
• Construction activities (US$311 million)
• Power (US$256 million)
• Computers and hardware (US$96 million)
• Telecommunications (US$46 million)
• Housing and real estate ($38 million)

 It's no surprise that services is the top category for FDI, but it's interesting that construction and power generation are also a focus.  This represents a prime area for FDI in India as the country works to upgrade its infrastructure.

Continue reading India Sees FDI Increase 43 Percent in April at India-Briefing.com.

Ernst & Young survey on India Foreign Direct Investment (FDI) shows investor optimism

A recently released survey by Ernst & Young shows that executives of multinational corporations still see India as an attractive place to invest.  The survey included approximately 500 executives and indicated that India is seen as a "global leader in education, R&D, innovation, and as a producer of high value-added goods and services".

The study was led by Rajiv Memani, Country Managing Partner at Ernst & Young India.  For the details, Ernst & Young encourages people to contact them (Hey, they've got to have a reason to fund the research!).

You can read more at Reaching towards its true potential - Ernst & Young's 2011 India attractiveness survey.

Globalization as a Transformational Lever for Finance

I have a new article posted today about leveraging globalization for finance transformation.  Here's an excerpt:

There is no doubt that globalization has had a profound impact on the way companies operate.  Yet many have successfully leveraged the dynamics of globalization to create sustained competitive advantage.  As a critical partner in the development of corporate strategy, leading finance organizations have made globalization a key component of their service delivery strategy to strengthen analytical insight, manage enterprise risk and achieve a competitive cost structure.

Continue reading Globalization as a Transformational Lever for Finance.

Deloitte Opens New Sourcing Center in Shanghai, China

A brief article on the Shanghai Daily website discusses a new delivery center opened by Deloitte.  It will serve China and portions of Asia and provide IT and BPO services to clients in that region.  This move was inevitable given the opportunities in that region.  Look for more service companies to set up BPO service centers as the market continues to grow.

DELOITTE Touche Tohmatsu Ltd has opened a global delivery center in Shanghai, the first of its kind in China.

The new GDC facility, located in the Zhangjiang Hi-Tech Park, is expected to employ more than 8,000 employees in future, which makes it the biggest facility among Deloitte's 11 global GDC centers.

The center will provide Deloitte's Chinese and North Asia enterprise clients information technology and business process services. It will help clients save cost and improve work efficiency.

Deloitte's biggest GDC center now is in India with 8,000 employees.

Here the link to the article: Center Opens.   (The Chinese make a lot of great products, but their journalists need to work on the creativity of their article headlines.)