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The United States is home to many of the worlds leading computer software companies, most of which
commonly outsource software development to the Philippines. Research and explain why it has become
a base for these computer software companies.
Contents
Executive Summary....................................................................................................................................... 2
1.
Introduction .......................................................................................................................................... 2
2.
3.
4.
5.
Conclusion ............................................................................................................................................. 7
References .................................................................................................................................................... 8
Appendices.................................................................................................................................................. 10
Appendix A Foreign Direct Investment Policies .................................................................................... 10
Executive Summary
This report attempts to set out and investigate why the Philippines has become the base for US software
development. To understand why the Philippines has become the base it is important to understand
why countries trade. By understanding what motivates countries to trade can then provide an insight as
to why they chose a particular country to trade with. Furthermore coupling Porters diamond framework
and OLI Paradigm (location factors) it is possible to explain why the Philippines specifically has been
selected by US firms.
1. Introduction
The software and IT services in the US are found to be the most advanced in the world with 55% of
global ICT research and development. Between 2010 and 2011 there was 6% increase in revenue for
this industry, totaling to $606 billion in 2011 (SelectUSA, n.d).
The Philippines software industry in 2011 also saw an increase of 37% with revenues of $993 million,
according to the PSIA (Cacho, 2012). This increased the demand by many multinational firms for Filipino
software programmers and increased the employment of IT professionals up to 50,000 (Vilavicencio,
2012).
why the Philippines has become the base for software development. Philippines have acquired
advantages in terms of their education, human capital and low labor costs. According to Ivant (2013)
there are almost 37000 IT graduates per year with this number of IT graduates there is a large pool of
educated professionals that are willing to work at a fraction of the cost, thus providing an advantage.
Comparative advantage is limited in its ability to provide a coherent insight into how the Philippines is
more productive and as a result Michael Porter developed the diamond framework to attempt to solve
this problem (Hill, 2011).
3. Porters Diamond
Using Porters Diamond framework (fig 1) one can attempt to explain further the Philippines comparative
advantage and also attempt to analyse why the Philippines has become successful in the software
industry. (Wang et al., 2004). Porters diamond framework consists of four attributes.
billion and 960,000 employees (Agence France-Press, 2013), Desiderio (2013) has found that more
companies prefer to outsource to the Philippines.
The Philippines is the third largest English speaking country, with a literacy rate of 94.6% (DTI, 2008).
This provides and advantage for US companies as English is the widely spoken language which enables
effective communication (BBC-News, 2013). A highly skilled labor force and education provides a major
advantage for companies in the US to outsource their software development and set base in the
Philippines.
Infrastructure is a key determinant US companies look at when outsourcing. Schwab (2013) has ranked
the Philippines infrastructure as 96 out of 148 (fig 2). This suggests that although there is adequate
infrastructure in place to enable software development, further development will be needed to
maintain the demand the growing IT industry. This can be seen through the development of submarine
cable systems which offer reliable internet connections. (SubmarineNetworks.com) Internet connections
are offered through cable, DSL and Fiber while Wireless broadband (WiFi) is to be introduced in public
places, thus creating an environment that can better support the expansion of the IT outsourcing
industry. In addition to supporting software development, Arangkada Philippines (2010) found high
broadband connections provides benefits in costs reductions thus allowing the Philippine economy to
become more competitive.
In a more favorable view, the increasing number of local firms such as PointWest Technologies, Orange
& Bronze Software Labs, BlastAsia Inc, Seer Technologies, Exist and CPI continue to diversify the services
provided from iOS, Javascript Server-Side to Cloud and mobile solutions for ISV's and SaaS has had a
crucial and beneficial impact on the pace at which the industry evolves.
The Philippines culture is identical to the western culture, as it was occupied by the United
States in 1899-1946. The Filipinos can adapt quickly which puts Philippines in lead in offshoring
and and outsourcing industries.
The country is very low cost compared to other Southeast Asian countries with salaries set at a
minimum wage of $7 a day. It also has low exchange rates and low cost of living which makes it
favourable for US companies to set up base in the Philippines.
There is a lot of government support in the BPO sector as it is the fastest growing sector with 5%
contribution to GDP
US based legal system, with better defined labour laws as well as a liberarlised financial system.
Offers a free-trade environment through ASEAN Free Trade Agreement (AFTA) with main
exports of electronics (above ideas from: PlanBPO, 2012)
Competitive advantage of a firm can increase when the location advantages of a country are improved.
This is because, if a country is able to provide a stable legal system and businesses with communication
and labor resources locational attractions are increased as foreign firms have more experience in
providing goods and services (Dunning, 2001). Dunning (1995) also suggested that whenever locational
advantages were greater in a foreign location, then firms would export goods and services from their
home country.
5. Conclusion
To conclude the findings of this report have identified why the Philippines has become the base for
software development. Using the comparative advantage theory it was identified that countries can
benefit from trading with other countries. In addition the comparative advantages of the country can
attempt to understand why specifically the Philippines have been chosen. Using Porters framework, it
has been identified that competitive advantage is brought about through the availability of highly skilled
cheap labor. Other key factors that contribute to the attractiveness of the Philippines include an
adequate infrastructure, similar cultures, support for industry which facilitates software development
activities, government support for education and legislation which has enabled growth in the IT industry.
*IT-Business Process Association of Philippines
Using the OLI theory, the findings conclude there are a number of location advantages that contribute to
the attractiveness of the Philippines for software development. Although there is a risk of piracy, the
government has put in place procedures to curb such issues.
6. References
Agence France-Presse, (2013). Booming Philippine outsourcing industry faces worker shortage, [Online],
s.l:s.n,
Available
from:
http://phys.org/news/2013-10-booming-philippine-outsourcing-industry-
(2013),
United
States
Profile,
[Online],
London:
BBC
News,
Available
from:
st
Dunning J.H, (1995), Whats Wrong and Right With Trade Theory, International Trade Journal, 9(2),
pp.153-202.
DTI, (2008), Business in the Philippines, [Online], Makati: Dept. of Trade and Industry, Available from:
http://www.dti.gov.ph/dti/index.php?p=137, [Accessed: 26th November 2013]
DTI,
(n.d.),
Incentives
for
Investors,
[Online],
s.l:s.n,
Available
from:
rd
Hill, Charles.W.L., 2013. International Business: competing in the global market. 9th ed. USA: McGrawHill/Irwin
Ivant (2013) What you need to do know about Philippine Software Industry? Available from:
http://www.ivant.com/journal.do?id=1466, [Accessed: 12th November 2013]
Miel, L.C, (2013), Philippine Economy at Risk of Overheating, [Online], Philippines: Interaksyon, Available
from:
http://www.interaksyon.com/business/52409/philippine-economy-at-risk-of-overheating-saysdeutsche-bank, [Accessed: 25th November 2013].
Mogato, M. (2013), Key Political Risks to Watch in the Philippines, [Online], s.l: Reuters, Available from:
http://www.abs-cbnnews.com/focus/02/20/13/key-political-risks-watch-philippines, [Accessed: 15th
November 2013].
NEDA (2011). The Philippine Development Plan (PDP) 2011-2016: Social Contract with Whom? [Online],
Manila: NEDA. Available from: http://www.neda.gov.ph/PDP/2011-2016/ [Accessed on: 25 November
2013]
PlanBPO,
(2012),
Philippine
Advantage,
[Online],
s.l:
s.n,
Available
from:
th
SelectUSA, (n.d.), The Software and Information Technology Services Industry in the United States,
[Online], USA: Commerce.Gov, Available from: http://selectusa.commerce.gov/industrysnapshots/software-and-information-technology-services-industry-united-states, [Accessed: 22nd
November 2013].
Schwab, F., (2013), The Global Competitiveness Report 2013-2014, [Online], s.l:s.n, Available from:
http://www.investphilippines.info/arangkada/ph-jumps-to-59th-in-competitiveness-index/, [Accessed:
30th November 2013]
Sicat, G.P. (2012), The Philippine economy (V) revitalizing the economy with FDI, [Online], s.l: s.n,
Available from: http://www.econ.upd.edu.ph/perse/?p=971 , [Accessed: 23rd November 2013]
Submarine Cable Networks, (2011), Stations in the Philippines. [Online], s.l:Submarine Networks,
Available from: http://submarinenetworks.com/stations/asia/philippines. [Accessed 28 November 2013]
Vilavicencio, P. (2012), Software Outsourcing Industry brings $1b to PH Economy in 2011, [Online],
Philippines: Interaksyon, Available from: http://www.interaksyon.com/infotech/software-outsourcingbrings-1b-to-ph-economy-in-2011, [Accessed: 24th November 2013]
Wang, T. Lee, Hsin-Ying. Zamora, E.A. Talisayon, S.D. Supangco, V.T. Gutierrez, B. and Patalinghug E. .
(2004). Asia Pacific Management Review. A Research Framework for Evaluating the Competitiveness of
Developing Countries: An Example of the Philippines. 9 (2), 301-321.
7. Appendices
Appendix A Foreign Direct Investment Policies
Many policies in developing countries are liberalized in order to attract FDI, where governments will
compete in different incentive offerings in order to influence the hosts location decisions. The
investment incentives are fiscal incentives such as reduced tax, tax holidays and import/export duty
exemptions and non-fiscal incentives such as employing foreign nationals. FI policy in the Philippines has
been developed with several laws being passed to attract and promote investment from foreign
countries. Philippines have used incentives to attract FDI, where the government has increased the
investment on infrastructure which will allow for greater FDI flows into the country (Barlow, 2013)
- Liberalized export incentives where the opening of export processing zones has allowed
100% foreign enterprises to be set up whereas before the Philippines use d the 60/40
rule in which 60% had to be owned by Filipino nationals and 40% foreign nationals.
- Wholly owned call centers and other BPO operations by foreign nationals have been
allowed
Investment improvements in the domestic market thus allowing for competition that
will raise efficiency and increase profitability for firms
- Increased investments including frameworks to allow set-up of industry projects
- investment incentives - implementation of Public-Private participation projects are
being encouraged by the government
- firms based in free trade zones and economic zones also known as Ecozones allow for
imports of products that are free of import duties, custom duties and tax
(above ideas have been generated from: Sicat, 2012)
*IT-Business Process Association of Philippines
Projects can be registered with the Board of Investment in order to receive incentives
Fiscal incentives: Income Tax Holiday: 100% exemption from corporate income
Tax up to 8 years, exempt from taxes and duties on imported goods
Non-Fiscal Incentives: Employment of foreign nationals, Simplified customs process,
Philippine Economic Zone Authority (PEZA) PEZA, an attached to the Department of
Trade and Industry, is the Philippine government agency tasked to promote investments,
extend assistance, register, grant incentives to and facilitate the business operations of
investors in export-oriented manufacturing and service facilities inside selected areas
throughout the country proclaimed by the President of the Philippines as PEZA Special
Economic Zones
(above ideas have been generated from: DTI, n.d)