The implications for developing countries of the increased tradability of consultancy services are of interest in terms of the following three aspects: the potential for expansion and improvement of consulting service industries in developing countries; the localization of services production and delivery within developing countries; and the potential for exports of intermediate and final services.
1. Potential for expansion and improvement of the consultancy industry in developing countries
Consulting in general, and the three consulting industries analysed in the present volume in particular, are relatively young and often small components of the services sector in developing countries (where, for instance, lawyers may have practised for a much longer period). It is mostly in large developing countries such as India and Brazil that domestic consulting firms of significant size exist. Therefore, the impact of tradability, given the liberalization of trade restrictions, will usually not immediately threaten the market for a well-established indigenous industry in most developing countries. In a long-term perspective, of course, there is a risk that tradability may reduce the domestic market for services provided by indigenous firms, in particular if these firms do not keep abreast of the need for new skills and technology.
On the other hand, consulting is an industry of strategic importance. Although they provide relatively little in terms of employment to the national economy, the services offered in accounting, management consultancy and engineering consultancy contribute significantly to the competitiveness of manufacturing, other services and other essential functions of modern economies. Thereby, they help foster economic growth and improve the possibilities for productive employment in a wide variety of industries.
The tradability identified for some of the products analysed in this volume, supported by an increased divisibility of production processes, may provide opportunities for a new division of labour to take place between consultants located in developing countries and those located in developed countries. In many instances, this would enable consultants in developing countries to draw directly on knowledge that has been accumulated by consultants in developed countries. Some of the most significant elements of consultancy methodologies and various data sources have been made available to employees of major international firms in various locations via telecommunications networks. It is also increasingly becoming technically feasible for consultants in developing countries to access such sources of methodology and vital data. In reality, however, access to methodologies and data is usually protected by intellectual property rights or secrecy since they may constitute the core of competitive assets for a consultancy firms. Therefore, in spite of their technical tradability, they are often not available for trade on the international market.
Access to important databases and other vital information may thus become an important motivation for firms in developing countries to join international consultancy firms as affiliates or partnerships. In this case, the interests of a transnational service firm can be protected while the costs of providing services, traditionally rendered by dispatching a consultant in person to a developing country, can be kept low. The tendency for foreign affiliates to draw on international networks established by offices in developed countries has already become apparent in accounting and management consulting. For engineering consultancy, elements of the same tendency can be seen as local offices and engineers in the field increasingly rely on information available from head offices. Engineering consultancy firms often participate in consortia including independent local firms or even erstwhile competitors, and, for this reason, some restrictions on the access to vital information for the firm may be a major concern.
In many instances, it is the ability of local affiliates of international accounting and management consultancy firms to draw on the training and resources of an international network that provides local partners in developing countries with strong competitive assets. One of the
such local partnerships; in addition, the quality of consultancy products delivered by such partners is also enhanced. Currently, many consultancy firms in developing countries experience difficulties in providing advice to local clients on matters related to international issues, since they lack the appropriate information and contacts; with increased tradability of the products of major international firms, such services may become more widely available in developing countries.
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2. Enhancing local production of services with overseas quality control
An important implication of tradability for consultancy services that are divisible into various intermediate products along the production chain is that it is possible not only to carry out major portions of a consultancy task in a particular location, but also to involve personnel in overseas offices in vital elements of control and other forms of quality assurance. In the case of engineering consultancy, some international firms are already utilizing computer and communication networks to ensure that a certain level of quality of reports and design is maintained. For example, designs produced in Asian countries have been transmitted to the United States for control of interdependence, conflicts and overall quality by highly skilled and experienced engineers in head offices of engineering consultancy TNCs.
The divisibility and transportability of intermediate services in principle enables international consultancy firms to blend the inputs of a local team with services produced by staff in overseas offices. In some respects, this offers the major firms increased capabilities to ensure that local knowledge is utilized to the fullest extent. With project teams that are made up of local personnel, experienced professionals in head offices, for example, of engineering consultancy firms will have better possibilities to ensure the appropriateness of design and cost of a project; this would often represent a definite improvement on project designs that are based on a few weeks of field survey on the project site.
In circumstances where locally produced services are expanded and improved, this would provide new employment opportunities in the industry. However, most of the employees in such firms are highly qualified consultants, often with a university degree or similar qualification. The opportunities for job creation in low-wage areas are therefore limited.
3. Potential for exports of services
In some of the large and more advanced developing countries, opportunities exist for generating employment and foreign exchange from exports of consulting services. The most prominent example is that of India, where a number of both engineering firms and software houses are located. India has a comparative advantage in human resource costs, and has also been able to build up its own expertise to an internationally competitive level in certain areas. Substantial successes have been noted among Indian software firms in exporting to developed countries on the basis of their software production skills. In relation to consultancy industries, however, a large part of this kind of activity has taken place within the organizational frameworks of FDI and the establishment of affiliates by TNCs in India. Moreover, Indian suppliers have seldom been responsible for the delivery of final consultancy products or software, but have primarily worked on intermediate products.
It is possible to conceive of strategies that could be pursued by Governments and firms in developing countries which attempt to exploit the tradability of specific products more explicitly, seeking to establish independent, offshore centres for certain basic services. One example would be to undertake services related to basic bookkeeping and accounting which could be exported to developed countries (box V.2). Another strategy would be for the suppliers of such services to be established as members of a consortium providing around-the-clock services on, for example, engineering design (box V.3). In recent years, several international firms in the engineering consultancy industry have established procedures that
enable them to shift work on a design from an office in one part of the world to one in another location in order to enable them to maintain close to 24-hour schedules on a project, thereby cutting lead time in the design phase.
Box V.3. A strategy for an “around-the-clock” consortium in engineering design services
The time factor is frequently crucial for the completion of detailed engineering designs, and many large, international projects demand very intensive work by teams numbering hundreds of engineers over extended periods of time.
The ability to reduce delivery time for such detailed designs can be a major competitive factor in the industry. The potential to cut down on the time required for completing a design by shifting work on it between locations in major time zones, e.g. from the east coast to the west coast of the United States or from the United States to Asia, may enable a consortium to maintain continuous work for speedy delivery.
The main problems related to moving design activity from one location to another include: the large volume of data that has to be transmitted on international telecommunications lines; the requirements that all locations work with the same advanced CAD software; and the stringent requirements of work organization and, in particular, quality assurance procedures.
The establishment of a consortium for “around-the-clock” performance of design may be supported by the Government in a developing country, together with one or several engineering consultancy firms. The role of the Government may be particularly vital in ensuring that access to international communications infrastructure is available, making initial capital obtainable through guarantees etc., and helping domestic firms establish contacts abroad and in ensuring appropriate training for their engineers.
Box V.2. A proposed strategy for experts of accounting services
The tradability of basic services related to bookkeeping and accounting, such as handling of vouchers, verification and correction of transactions, and preparation of accounting documents, is relatively high. Provided a firm in a developing country can access the documents entering the accounts (for example, via transport by air courier, scanning and transmission of a document, or access to EDI messages), most of these services may be conducted using personnel with modest levels of skills. Moreover, a firm may move up the value-added scale by providing analysis of accounts and financial statements for management purposes, and even develop budgeting services.
The requirements for offering such services relate primarily to the need for a location easily accessed by air transport and reliable facilities for data processing and international communications.
A few firms in developing countries have also attempted to produce engineering services directly for export. Exports of engineering design services on a subcontracting basis are feasible, provided that qualified labour and adequate information and communications technology are available. For example, the Jamaican company Mona Informatrix was set up in 1994 by the Mona campus of the University of the West Indies explicitly for the purpose of utilizing local skilled personnel for providing services to the United States market. It offered CAD/CAM services to foreign as well as local companies; among others, it entered into a one-year, one million dollar contract with the Boeing Commercial Airplane Group (United States) for the provision of CAD/CAM services involving precision scanning of engineering drawings (Schware and Hume, 1996, p. 16). Mona Informatrix represented an attractive location for CAD/CAM services for a number of reasons. First, it was able to provide data conversion and drafting services for approximately a third of the cost of similar services in the United States. Second, its United States customers felt that the confidentiality of the highly sensitive CAD/CAM data was less subject to risk in the Caribbean, given the absence of competition providing similar products. Third, the minimum requirements for a CAD/CAM technician are a high-school certificate and at least one year's training using the relevant CAD/CAM software. This allows the industry potentially to recruit individuals with a range of lower levels of computing skills (ibid.). CAD/CAM services, however, are expensive to provide. They require a wide range of sophisticated computer hardware and software, including scanners and large format plotters. In 1994, the typical cost of computer hardware was between $5,000 and $10,000 per workstation, and software from $3,000 to $20,000. In addition, accuracy and attention to detail are crucial determinants of success. Therefore, the experience in the area of direct exports to the market that is represented by Mona Informatix appears to be unique so far. An important role played by developing country affiliates of consultancy firms has been to supply sub-components of major databases and expert systems to be used by offices worldwide. This has been the case, for instance, with software developed in India for PricewaterhouseCoopers.3 With increased specialization among local affiliates of major transnational service firms, as witnessed in connection with e.g. the extension of global networks in PricewaterhouseCoopers, the potential for local affiliates to supply data or conceptual models to central databases will be improved.
Altogether, the implications of tradability are likely to become apparent first in connection with an enhancement and possibly restructuring of the work of affiliates and local partners of international consultancy firms. Such arrangements for intra-firm exports of services from affiliates and partners will, on account of the importance of the protection of intellectual property rights and competitive assets in consultancy services, be a preferred mode of transaction before such services are traded on the market, i.e. before tradability starts to have a strong impact on the international market or in the domestic markets of developing countries.