Leveling off the Playing Field

Copyright © 2010 by Chester B. Cabalza. All Rights Reserved.

The Philippines’ Emerging Business Process Outsourcing (BPO)
Market and the Information Technology (IT) Parks

Background

Having the rise of globalization on the economic sphere, the business process outsourcing (BPO) has been one of its salient features. The BPO around the world began as early as 1990s. According to Filipino economists like Magtibay-Ramos, et. al., they confirm that it was only in the early part of the new millennium that outsourcing opportunities gained ground in the Philippines. From Php2 billion in 2000, investment in the BPO industry, it rose to Php11 billion in 2001, then settled to about Php5-7 billion annually in the next four years. The Philippine BPO sector is projected to provide 7-11 percent of the new jobs for the labor force entrants between 2007 and 2010. Meanwhile, it is also estimated that its total workforce size will reach 500,000 to 600,000 in 2010, which is considerable for a single economic activity.

With the influx of outsourcing and offshoring business investments in the Philippines, IT parks have been mushrooming. It is said that technology hubs situated around the globe has various tags attached to it. Some call it Techno Parks, Cyber Parks, or less Science Parks. However, by description, IT Parks foster new business development and technological innovation by leveraging synergies within the cluster environment. Its legal definition, penned by Philippine Economic Zone Authority (PEZA), is that IT Parks are areas developed into a complex that is capable of providing infrastructures and support facilities that are needed by the different IT-based industries.

Legal Bases

• R.A. No. 8749 “amending the Special Economic Zone Act by directly allocating to the municipality or city 2% (out of the 5%) gross tax to be collected from the establishments operating in the ecozone and providing for disturbance compensation for persons to be displaced or evicted by publicly-owned ecozone”
• R.A. No. 8756 “incentivizing the establishment of regional headquarters to encourage investment and operation of multinational companies in the country and to generate more jobs”
• PEZA Resolution No. 99-264 ‘guidelines for the establishing and operation of Information Technology (IT) Parks”

Key Terms

Special Economic Zone

Sec. 4(a), R.A. No. 7916 refers Special Economic Zone (SEZ) as the ECOZONES, which are selected areas with highly developed or which have the potential to be developed into agro-industrial, Industrial tourist/recreational. Commercial, banking, investment and financial centers. An ECOZONE may contain any or all of the following: Industrial Estates (IEs), Export Processing Zones (EPZs), Free Trade Zones, and Tourist/Recreational Centers.

Free Trade Zone

Sec. 4(d), R.A. No. 7916 defines Free Trade Zone as an isolated policed area adjacent to a port of entry (as a seaport) and/or airport where imported goods may be unloaded for immediate transshipment or stored, repacked, sorted, mixed or otherwise manipulated without being subject to import duties. However, movement of these imported goods from the free-trade area to a non-free-trade area in the country shall be subject to import duties.

Enterprises within the zone are granted preferential tax treatment and immigration laws are more lenient.

Business Process Outsourcing

There are seven types of BPO services identified by the Department of Trade and Industry (DTI), these are the following: Contact Center, Back Office, Data Transcription, Animation, Software Development, Engineering Development, and Digital Content. According to DTI (2006), Locsin (2006), and The Computer Language Company Inc. (2006), Contact Center consists of in-bound and outbound voice operation services for the purposes of sales, customer service, technical support, and others.

IT Parks

The IT Parks may be located in any suitable place. But those that are located inside the National Capital Region (NCR) will be restricted to serving only service type projects and no manufacturing operations.

Incentives to the IT Parks in the Country

According to the research paper by Batolata, Min Jeong Lao, et. al., they argue that IT Parks are capable of creating international economic relationships with other countries through foreign investments and outsourcing processes. It provides infrastructure and services for business, particularly in the Information, Communications and Technology (ICT) sectors. It also enables knowledge-transfer not only in the aspect of IT and management but also in cultural diversity.

The Philippines is a newly industrialized emerging economy, however, it is still considered a ‘developing’ country. Hence, cyberzones here, previously under the Export Processing Zone Authority (EPZA), are solely dependent on service sectors, rather than manufacturing and actual technological developments, which has been the turf of mature IT powerhouses in the world.

IT Parks experience sweet successes in the Philippines primarily because investors in cyberparks enjoy substantial benefits offered by the government such as income tax holidays, tax incentives to for certain BPO buildings, granting of permanent resident status for foreign investors, and for those who holds ITH option could actually wave them to accept the immediate availment of 5% gross tax income tax incentive. In gist, the Philippines boosts its cost effectiveness or low labor.

Observations

• Whether the Philippines can sustain its momentum in BPO markets, thus, encouraging colleges and universities to impose English as a medium of instructions in schools.
• The Philippines should not only produce agents for the market but also position itself to manufacturing and production of IT-related softwares in which the country remains to be a laggard compared with India and other leading technological countries.
• The new playing field is hot and opens leverage for our country. We have a young and dynamic population, educated and technologically savvy for the knowledge economy. Hence, the current growth in BPO sector in the Philippines, that is largely driven by the contact or call center subsector has a large share in total BPO employment and revenue, thus is drawing positive economic climate in the country.
•India cannot be divorced from the topic when it comes to the BPO industry. The emerging economy of India is the role model in this kind of transborder industry. The surge in the BPO sector in India resulted to• the well-educated English-speaking students and a group of enterprising local citizens who capitalized on the global shortage of programmers and the high demand for business solutions occurring in the 1990s. Hence, Indian expatriate in the US, especially IT professionals in Silicon Valley, is providing a crucial role in the rapid development of the Indian BPO sector through their investment sectors, partnership with large US software firms which they later on convinced to set up operations in India.
• Apparently, BPO is highly concentrated in mostly urban cities around Makati, Libis Quezon City, Ortigas Center, Alabang, Baguio City, Subic and Clark, and Cebu City. Lately BPO investors realized expansion and plan to tap possible and prospective places from Tuguegarao City and Cabanatuan City in the north to Cagayan de Oro City and Davao City in the south to supply unbeatable talents for the growing worldwide demands.
• In terms of compensation among BPO industries in Asia, the Philippines pays in the middle with an entry level call center earning US$5,547 yearly only while an employee with higher expertise level such as team lead earns an average of $9,153 yearly only - offering the US a labor cost savings of over 80 percent. But salary levels in the Philippines is slightly higher than other Asian countries like India and China. On the other hand, Singapore as a high-end BPO destination, pays the highest in the region with an entry level four times higher than what call center agent working in the Philippines is receiving.
• Tax incentives are made available by the Philippine Board of Investments for certain building and special zones in Makati, Manila, Ortigas, and Fort Bonicacio. The government should help identify these tax incentives for certain buildings and even office units that reside in Special Economic Zones (PEZA) where businesses are allowed to avail special tax breaks in these various parts of the Philippines.
• For other benefits, cyberparks provide IT insfrastructure and manpower which is attractive (in terms of cost) to multinational companies. It generates employment and offer high level training to locals. It catalyzes the commercial and retails business in the surrounding areas. And it creates linkage opportunities in areas such as construction constracts, supplies, materials and food packaging supplies.
• The government allows 100 percent (100%) foreign ownership of firms in the Philippines, with regards to the IT industry, that makes the local investors underdogs, unless the company belongs to the “Big Four” , since it is not easy to penetrate or invest in IT Parks. Hence, it needs heavy investments, and building up of infrastructures and systems.
• More so, the true essence of IT Parks in the Philippines, serves as economic zones. The enterprises that are located inside these zones are required to 100% of its production, but PEZA approves only 30% of the production to be sold in the local market.
• Lastly, The BPO market and IT parks in the Philippines are generating dollar inflows through foreign investments and outsourcing made by the foreigners. This in favorable to the country's service sector industry and integral to economic security in the Philippine economy.

References:

Bartolata, Christine Kim, Min Jeong Lao, et. al., Analysis of Information technology (IT) Parks in the Philippines (Specifically, Exposition of Philippine IT Parks and their Economic Effects on the Philippines , httt://iskwiki.upd.edu.ph/index.ph/IT_Parks

Cabalza, Chester, The Boon of the Business Process Outsourcing in the (BPO) in the Philippines, http://cbclawmatters.blogspot.com/2009/10/boon-of-business-process-outsourcing.html

Magtibay-Ramos Nedelyn, Estrada Gemma, Felipe Jesus. (March 2005), An Analysis of the Philippine Business Process Outsourcing Industry, ERD Working Paper, Series No. 93, Asian Development Bank: Mandaluyong City, Philippines.