ASEAN Outsourcing and Trade in Value-Added

gic and tactical positioning of ASEAN to be
Prepared by:
Mekong Economics Ltd.

May, 20149B Ngo Yen
The, Hanoi, Vietnam
www.mekongeconomics.com

9B Ngo Yen The, Hanoi, Vietnam
REGIONAL SUMMARY REPORT

This report analyses the Association of Southeast Asian Nations (ASEAN) relative
competitiveness in relation to the cross-border outsourcing of goods and services.
The report is strategic in its analysis and vision for ASEAN through understanding
and measuring outsourcing and the concept of competitiveness, and in doing so
gives some guidance for the post-2015 economic policies of ASEAN Member States
(AMS).
Globalisation and outsourcing are not new phenomena, but they are contemporary
terms to describe new trends in international trade and investment. These trends
include the rising importance of services, the increasing fragmentation of global
value chains (GVCs), and the overall rise in global competition and the pace of
structural change (creative destruction). The costs of protectionist policies have
never been higher, and in that regard we highlight the nature and potential
possibility of ASEAN suffering from some form of middle-income trap.
There is global evidence that as countries reach lower middle-income status, both
their agricultural and manufactured goods exports struggle to compete with those
from lower-income, lower-wage economies, slowing their export-driven growth. At
the same time they face difficulties moving towards higher-skill and higher valueadded activities dominated by more advanced nations, as they lack the human
resources and physical and digital infrastructure necessary to compete in these
emerging growth sectors. This can leave new middle-income countries facing
potential economic stagnation.
Some ASEAN Member States (AMS) such as Vietnam, Indonesia, Malaysia, the
Philippines and Thailand exhibited marked growth slowdowns after reaching middleincome status. Fortunately GDP growth rates remain above 5% per annum and most
of the slowdowns experienced can be convincingly explained by particular short-run
causal factors. The sustained underlying economic performance of AMS in recent
decades is directly related to increased foreign direct investment (FDI), and to the
rise of China and India as strong regional growth markets. The benefits of trade and
investment have been win-win, and ASEAN countries have found numerous
competitive niches in goods and services, including via outsourcing. AMS are
consequently well integrated into global value chains, and our analysis of
competitiveness indicators shows that ASEAN is a leading regional group in certain
categories. ASEAN is competing; the challenge is to maintain the momentum
beyond middle-income status.

Central to this challenge are the roles that outsourcing, offshoring and inward FDI
have in the development of productivity-based growth in ASEAN. Outsourcing
involves commissioning tasks (to transform goods or deliver services) from others
outside the firm, that could also be done, or used to be done, inside the firm and are
still needed as intermediate inputs in the overall production process. Outsourcing
involves business-to-business (B2B) transactions, which are internal to the overall
production process itself, rather than business to consumer transactions.
Meanwhile, offshoring is sometimes used to clarify that the outsourced tasks are
being commissioned from foreign enterprises. In the context of international trade,
this means the B2B commissioning of tasks across international borders. FDI comes
into play when the tasks are undertaken by companies based offshore but owned by
the lead firm.
This fragmentation of production into intermediate goods and services tasks has
resulted in the creation of production networks (20th century language) or value
chains (21st century language), with services activities such as transport, logistics,
and communications providing much of the glue between the various inter-linked
production processes. The set of activities comprising the value chain now crosses
borders, has become international, and is the manifestation of globalization. As
such, we can define a Global Value Chain (GVC) as a multi-country system of
organising people, technology, activities, information and resources to deliver a final
good or service to the final consumer. Global production chain networks refer to the
linkages within or among a group of firms or suppliers in a particular global value
chain for producing specific outputs. As the process of economic integration often
starts at the regional level, GVCs are often more regional than global.
The current focus on GVCs in global trade and investment discussions is raising
many different types of research and policy questions, including about the
motivation and operations of firms, the usefulness of industrial policies, the
implications of the increased role of services (including those closely related to
manufacturing, like logistics), the close link between investment and trade and the
influence of regional trade agreements (RTAs) and preferential rules of origin on
patterns of global and regional trade and investment. It is worth observing that
while the relentless push to operate more efficiently remains the driving force
behind outsourcing, it is also no longer the case that firms base their decision to
outsource tasks from their value chains purely on saving costs while minimizing
risks. Todays outsourcing initiatives are helping companies drive new revenue,
achieve innovation, quicken time to market, conserve capital for other investments
or improve product or service quality, obtain skills they cannot otherwise find or
afford as well as improve their organizations focus. This report contributes to the
growing body of literature by exploring many of these contemporary issues as they
relate to outsourcing,
In order to fully understand the contemporary issues, it is fundamental that we
discuss the effects of globalisation and how this phenomenon is bringing about a
similar transformation in cross-border trade in services as has taken place in
manufacturing. Traditionally, services providers were constrained by their inability
to capture, store and possess the value of the intangible. There were few
opportunities to create step-by-step pathways to market as services generally
needed to be produced, delivered and consumed simultaneously, limiting their B2B
and cross-border trade opportunities. But telecommunications reforms and the
application of digital technology to a widening range of business services are now
driving a rapid emergence of fragmentation of intermediate activities into GVCs in
services. There is now a constant quest in the services sector to outsource any
business function in the production process in which knowledge can be
commoditised and packaged as a product, ownership can be established,
production can be scaled up and trade can take place separately from production.
The consequence is that global services outsourcing has grown dramatically
recently, trebling in value during 2005-2010. The fastest growing six sectors
averaged annual growth rates ranging from 25-58%. Business Processing
Outsourcing (BPO) and Information Technology Outsourcing (ITO) continue to
dominate the industry, although new niche areas, grew fast, and Knowledge Process
Outsourcing (KPO) services the fastest.
The new OECD/WTO Trade in Value Added (TiVA) data has recently demonstrated
the importance of services also in goods production. Trade in Value-Added data is
relatively new and is exciting as it allows us to measure the extent of a countrys
participation in outsourcing activities by considering the value added by each
country in the production of goods and services that are consumed worldwide.
Indicators of TiVA are derived from national Input-Output Tables, which were
integrated into a global system combining additional information on Bilateral Trade
in goods by Industry and End-use (BTDIxE), International Trade in Services (TIS), and
Structural Analysis (STAN) industry databases. They contribute to a better overall
understanding of the link between trade and GDP and of the economy-wide role of
services by allowing us to measure the services share in goods being exported.
When broken down at industry level, the TiVA data shows, for example, that only
60% of Chinas gross exports of electronics are composed of local value-added, and
that over 70% of all Chinas imports of electronic components end up in exports.
They also show, for example, that services account for 39% of the total value added
of Cambodias gross exports of textiles.
This study has also constructed a new and informative statistical database, the
GVC Readiness Index, which is an equally weighted summation of eight clustered
groups taken from sixty five (65) indicators. This indicator data, in scores of 0 to 1 is
used to benchmark ASEAN against other regional trading blocs. Most AMS scored
most poorly (low) on Digital Infrastructure. For the indicator groups Physical
Infrastructure, Domestic Regulations, Ease of Trade, and Cost Competitiveness,
most AMS also scored low (with the exceptions of Singapore and Brunei). The
highest scores for each AMS are diverse, reflecting widely differing business and
political environments throughout ASEAN.
Some particular AMS scores may seem surprising, but the overall total indices are
not with Myanmar, Lao PDR and Cambodia being the lowest ranked (0.10 to 0.35),
Singapore, Malaysia and Brunei ranking highest (0.50 to 0.73), and the other four
AMS ranging from 0.42 to 0.47. Clarifications to the analysis emerged by averaging
the data into two ASEAN groupings: CMLV, and non-CMLV or what we call Rest of
ASEAN or ASEAN-6 (It can be argued that Vietnam (0.42) is on the brink of
graduating from CMLV status). The Rest of ASEAN (ASEAN 6) group is shown to be
more Cost Competitive than China, and roughly equally competitive in terms of
Digital Infrastructure, Innovation, and Supporting Institutions. The relative
weaknesses are in Human Capital (due to the size of Chinas labour force), Physical
Infrastructure, Domestic Regulations, and Ease of Trade. That non-CMLV ASEAN lag
on average behind China with respect to the indicators for Domestic Regulations
and Ease of Trade is a concern, and should signal priorities for government-led
reform to 2020.
The AMS are already competing effectively with China and India as outsourcing
destinations for both goods and services, but can they sustain their position and
indeed move up the value-added ladder? In the past, cost attractiveness and
scalability have been key drivers for lead multinationals to offshore manufacturing
assembly activities to China and the size and cost of the talent pool along with
digital infrastructure has driven India as a global services outsourcing destination.
India is a dualistic economy that displays a mix of generally uncompetitive business
environment (by global standards) with enclaves of services competitiveness. There
is some evidence that trends could shift favourably in ASEANs direction.
A
decrease in cost competitiveness as a result of inflationary pressures, a smaller
wage gap, less competitive exchange rates, and variable quality levels have
stifled the enthusiasm of lead firms to outsource business processes to these
countries. This could present (and already has presented) an opportunity for ASEAN
countries to specialize in higher-value activities, although many challenges remain.
One set of continuing concerns relates to ensuring initial access to participation in a
value chain, whilst another set of concerns rests on capturing value within the chain
and on how to climb it. Both of these paths could be useful for countries such as
Cambodia, Laos, Myanmar, and Vietnam, where they can initially attract investment
in low value-added jobs and subsequently move up the value-added ladder as they
become more integrated and confident of working with global and regional clients.
This kind of economic upgrading can be achieved by improving the efficiency of the
production processes (process upgrading); adding new product lines that are of
higher value-added because of improvements in designs or technical specifications
(product upgrading); increasing value addition by moving up the value chain and
taking on new functions which are of higher skills and knowledge intensity
(functional upgrading); or switching to a different sector which has final products
that are more technologically sophisticated and of higher value-added (intersectorial upgrading). Upgrading is not easy, yet it is happening everywhere and is
driven fundamentally by competitiveness policy changes (both at the border and
behind-the-border), and investments in physical and human capital.
Some AMS have already understood and embraced a more pro-competitiveness
mindset, and have benefited from adopting ensuing policies to facilitate this
economic upgrading.
In the early 1990s, countries in the region were
predominantly involved in midstream, low value-added goods production combined
with higher value-added services tasks within a diversity of industries, including
textiles and electronics, as well as services incidental to goods production, such as
maritime transport, logistics and financial services. However, over time the regions
intensified integration into GVCs has facilitated knowledge diffusion and learning as
firms located in AMS were able to access leading-edge technology and best-practice
management approaches, creating new opportunities, pressures and incentives for
them to upgrade their technological and management capabilities, as well as the
skill levels of their workers.
In the future, local companies will have to continuously redefine their strategies and
boundaries to make the most of their evolving competitive advantage, and ever
changing models of goods and services production. It is instructive, for example,
that as China has grown more prosperous, wages have risen, resulting in some lead
outsourcing companies ending their commercial relationships with Chinese partners
and outsourcing instead to lower cost locations in the region, such as Vietnam and
Cambodia. ASEAN presents an interesting and unique study in terms of evaluating

its Member States role in GVCs. The substantial variations across ASEAN in
economic and political environments mean that each Member State has its own
specific constraints and challenges that need to be addressed individually, in order
to maximize the potential gains from moving up value chains. Most of the AMS still
have room for improvement with respect to moving up GVCs, albeit some more than
others.
It is important to visualize the relevant industry chains in order to fully exploit such
opportunities, and to identify specific choke-points preventing access to value
chains and requiring policy attention in the AMS. It is necessary also to identify
which possible options exist for upgrading by moving up the value chain. There are
a variety of methods of visualizing chains, but the key is to pinpoint the pathway to
market and the levels of value-added at each step in the pathway. This report
contributes to the growing research which has mapped a number of specific
industry value chains, and then gone further and where individual countries firms
are located on these maps in value-added terms.
On the whole, the diversity of ASEAN suggests challenges in the process of
economic integration as well as in making ASEAN a more competitive trading bloc.
In general, however, ASEAN performs better than both India and China in a variety
of indicators, particularly the ASEAN-6 group, which are significantly more globally
competitive and well integrated into GVCs, and can set targets higher than other
middle-income countries. The ASEAN-6 group in general nevertheless needs to
address concerns in tertiary education, R&D, transport infrastructure, and
harmonisation with global markets if they wish to compete with the worlds three
wealthiest trading blocs. The North-East Asia group, which scores the highest in
the largest number of indicators, would be a suitable example to follow, although
improvements across many of the indicators will require immense dedicated
investments, time, and political will. But the time for such efforts is right. ASEAN is
gaining an increasing share of the market to supply an increasingly wealthy China.
This is not merely contributing to exports with final destinations in the EU or the US,
but also for the Chinese market itself. The next stage of development for China will
see a rapid expansion in domestic demand, and ASEAN is perfectly positioned to
satisfy much of Chinas growing demand for services (including education and
tourism) as well as goods.
Our analysis of the GVC Readiness Index and other related data leads us to the
following conclusions:

1.
There are vast differences between the CMLV and the ASEAN-6 group, and
when combined into one ASEAN-wide number it typically appears that ASEAN has
many weaknesses. If we look only at the ASEAN-6 group, the weaknesses mostly
fade away.
2.
The ASEAN-6 group is very competitive with China and India. Of the 65
indicators, ASEAN as a wole scores higher than both India and China in 34
indicators, and lower than both countries in just 13. The ASEAN-6 also score higher
than the Latin American group in 40 of the 65 indicators.
3.
The weakest areas for the ASEAN-6 group include tertiary education, R&D,
transport infrastructure, and harmonisation with global markets. Although the
ASEAN-6 average higher scores than China and India in tertiary education
enrolment, they rank on average well below the richest three trading blocs (EU,
NAFTA, NE Asia). Stronger human capital is the most important variable to ensure
moving up value chains and avoiding middle-income traps. R&D as a percentage of
GDP was markedly low for all AMS, despite a high percentage of high-technology
manufacturing exports, suggesting that the movement from assembly to innovation
is far from complete. The quality of transport infrastructure was one measure where
China has evidently advanced ahead of ASEAN.
4.
The North-East Asia group of countries (Japan, South Korea, Hong Kong,
Taiwan) is the best overall benchmark for ASEAN to be reaching towards. This group
scores highest on more indicators than any other group. Being in the same region,
ASEAN should be looking north to the example of these countries across many
indicators. Not all of the indicators require decades and massive investments; many
are system changes that can be achieved quickly given political will.
5.
The CMLV group score very weakly across almost all indicators. Vietnam is
clearly the most competitive of the four, and may be viewed as graduating by
2015. Yet as a group they are clearly very different economies to countries like
Singapore and Malaysia. They are viewed as a specific sub-group within ASEAN, and
as such are given some preferences (and delays to reach targets). We would argue
that much more should be done to integrate these countries into ASEAN as a whole.
This includes facilitating the movement of workers, and considering radical trade
reform options (e.g. duty-free trade between CMLV, Thailand and Malaysia). The
other six ASEAN countries should also fund development assistance projects to
support the CMLV group (not relying on external development assistance so much).

The heterogeneous mix of AMS, as noted above, makes it difficult to interpret

summary ASEAN data and indicators. The diversity of levels of development push us
towards analysing each country individually rather than as a group, or at least
separating the CMLV from the rest. The same problem arises when we come to
policy recommendations for GVC integration and outsourcing. The most important
factors and conditions for such integration differ by development stages and level of
technological sophistication: Singapores policy priorities are very different from
those of Myanmar. Myanmar is entering GVCs, so must focus on its basic
infrastructure, trading environment, and low cost labour skills.
As such, we present a set of specific proposals for actions at the ASEAN level. This
list comes from the insights obtained through our statistical and field work, from
interviews conducted for this assignment, as well as from international literature
including recent work in APEC. In all sectors of the economy, we see that attracting
foreign lead firms to purchase outsourced intermediates from local AMS suppliers is
about ensuring the competitiveness of AMS firms - and that this is highly dependent
on the local regulatory environment for doing business as well as on national and
regional connectedness (or absence of choke-points) with international markets. We
also see that it is about attracting local but even more importantly foreign financing
to support AMS inputs to global value chain activity.
For this reason, our
recommendations focus not only on trade policies at the border and on the
openness of investment and immigration regimes to foreign capital, talent and
ideas but also on ensuring the coherence and efficiency of domestic regulatory
regimes and on public/private dialogue with stakeholders in the conduct of any
regulatory reform process. Much has already been done in some of these areas, and
others have commitments pending, but it is useful to present a comprehensive list
of the key actions that could best support outsourcing, trade and investment. A
summary of our recommendations include the following:
There needs to be a major visible boost given in earnest to the attention

being given on every front to implementation of the AEC to allow freer
movement of goods and services and capital and people, by reducing
restrictions both at the border and behind-the-border. The importance of this
agenda is reinforced by the findings in the new TiVA data sets that imports of
intermediate goods and services are vitally important ingredients in export
growth performance.
Given the role of embodied services in adding value to exports from all
sectors of the economy, there needs to be more focused attention to ASEAN
competitiveness in services. In order both to promote increased ASEAN
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participation specifically in global cross-border services value chains, and to

ensure the talent pool of appropriate skills sets exist for higher value added
work in global goods value chains, we recommend that much greater priority
should be given to education and training generally and specifically to
educational, cultural and research exchanges, language training and
achieving international acknowledgement for ASEAN professional skills and
qualifications.
Much more rapid progress should be achieved in
implementation of the ASEAN MRAs in the professions. Greater efforts also
need to be made by all AMS to improve their innovation systems, including
protection of intellectual property rights .
Individual AMS should also be encouraged to consider creating a tripartite

whole-of-services coordinating body responsible for services sector growth
including the articulation of national development/competitiveness strategies
for services and formation of appropriate stakeholder consultation
mechanisms. This body would liaise with various otherwise uncoordinated
government agencies and departments in order to identify competitiveness
strengths and weaknesses to be addressed, including at the regulatory level.
There needs to be greater business stakeholder participation, ASEAN wide, in
drawing up an ASEAN roadmap to enhance competitiveness and boost ASEAN
participation in both goods and services GVCs. There are different ways of
achieving this, both nationally and ASEAN-wide. ASEAN could facilitate,
perhaps within the ASEAN Business Council, the creation of a new forum to
bring different business associations from the AMS together to foster a
region-wide GVC readiness business dialogue. This kind of stakeholder
engagement could promote the sharing of intelligence on standards and
business strategies, the regulatory environment, labour movements,
investment flows and the qualifications and skill-sets of human capital.
Ways also need to be found of engaging academic stakeholders in this
process. ASEC could perhaps provide a secretariat for the above-proposed
business stakeholder forum on GVCs, consolidating and analysing feedback
from business groups on identified regulatory inefficiencies and barriers to
connectedness. This reporting could be distributed to foster an ongoing
agenda of mapping of chokepoints and regulatory impacts (e.g. via surveys
or statistical analysis) both ASEAN wide and at national level. National
research processes need to be intensified to measure the costs of
chokepoints and collect the evidence base for reform. This research would
also analyse best practice models and test methodologies for wide
application, such as regulation review processes.
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Feedback about barriers to trade and the costs of regulations from business
groups should be consolidated and linked to independent research that
measures such costs, with a view to promoting an ASEAN-wide focus on the
importance of transparent and efficient domestic regulation. To combat
incoherent and inconsistent regulations impacting on cross-border business
and GVC connectedness, policy-makers need to come together with the
regulators as well as with business associations to share best practices and
discuss ways of easing the burden on industry. and to pilot programmes
across ASEAN. This could be facilitated by the establishment, perhaps under
the Investment Committee, of an ASEAN GVC Participation Taskforce charged
with an ongoing mandate in this area..
It is important to encourage more dedicated concerted use in all the above
processes of APEC-OECDs Integrated Checklist on Regulatory Reform,
which provides a self-assessment tool to analyse regulatory, competition, and
market openness policies, to facilitate business processes and increase
regulatory certainty and credibility across the AMS.. This checklist is simple
yet comprehensive in addressing regulatory frameworks, and could provide a
useful foundation from which AMS can develop specific policies for their own
contexts. Another associated tool is the World Banks Services Regulatory
Assessment Tool Kit, released in May 2014.
It would be important in development of any national strategy to ensure any
proposed reforms undergo thorough independent analysis of their costs and
benefits in terms of productivity and competitiveness. Transparency of
process is important as it boosts business confidence, and projects a
favourable image to potential foreign investors, both key ingredients in
boosting GVC participation.
These recommendations reflect current global thinking that in a world of global

value chains, firms will require imports from abroad and will need to offshore some
activities in order to remain competitive even in the home market. Recent OECD
work shows that outsourcing and off-shoring enhances the export competitiveness
of countries participating in GVCs, by providing access to cheaper, more
differentiated, and better quality inputs. Policies that focus exclusively on
manufacturing may ignore the growing importance of services for value creation in
GVCs, including for the production of manufactured goods themselves.
Manufacturing companies no longer sell only goods but instead sell bundles of
goods with both embodied and embedded services, including the design and
research that goes into the production of a product. It is apparent, therefore, that
promoting outsourcing is a broader issue than a discrete set of policies. In a world
12
of fragmented value chains and digital technology, it is making much more sense to
look at country and regional efficiency or more precisely, productivity - as a whole.
This means addressing the full gamut of policies that impact GVC Readiness and
global competitiveness, including within borders and in supporting services, rather
than trying to disaggregate and define policy sub-sets for foreign investment,
outsourcing, or trade.

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Table of Contents
1
2
3
4
Introduction....................................................................................................... 1
Context............................................................................................................. 3
2.1 Globalisation and Outsourcing: not new phenomena.....................................3
2.2
The ASEAN Challenge: The middle-income trap.............................................3
2.3
Six misconceptions about international trade, investment and outsourcing..6
Study Scope and Definitions...........................................................................11

Outsourcing and GVCs: Situation Analysis and Trends....................................13
4.1 The evolution and trends in outsourcing......................................................13
4.2
Recent trends in outsourcing.......................................................................14
4.3
Services Outsourcing................................................................................... 16
4.4
The benefits to ASEAN................................................................................. 24
4.5
The Philippines leading in ASEAN services outsourcing...............................26
The View from China and India.......................................................................33

5.1 Why China and India?..................................................................................33
5.2
Outsourcing in China and India....................................................................34
5.3
Current Trends and Developments...............................................................37
5.4
Views on selected ASEAN countries.............................................................39
6.1
Modern Global Value Chains............................................................................41

Understanding moving up GVCs...............................................................41
6.2
Examples of moving up value chains...........................................................41
6.3
How to move up GVCs................................................................................. 42
6.4
Concept of mapping value chains and relieving choke-points..................43
6.5 Specific costs relating to ASEAN countries and suggested preliminary

solutions................................................................................................................ 45
6.6
Insights from ASEAN Country Studies..........................................................46
6.7
Examples of value-chains across ASEAN......................................................50
6.8
Supporting Small-and-Medium Enterprises..................................................54
7.1
Measuring Competitiveness 1: Value-Added Trade Data.................................61

Conceptual basis for new trade data...........................................................61

14
7.2
Snapshot insight from the new trade data...................................................72
8.1
Measuring Competitiveness 2: GVC Readiness Index......................................82

Explaining the GVC Readiness Index............................................................82
8.2
ASEAN GVC Readiness.................................................................................83
8.3
ASEAN compared to other regional trading blocs........................................86
8.4
Decomposing ASEAN GVC Readiness...........................................................87
8.5
AMS Strengths and Weaknesses..................................................................91
8.6
Concluding remarks on ASEANs performance in the GVC Index.................93
9.1
Free Trade Agreements and Outsourcing........................................................97

Global integration and FDI drives growth.....................................................97
9.2
The WTO, the AEC and ASEAN-relevant FTAs...............................................99
9.3
ASEAN Policy Frameworks..........................................................................101
9.4
AEC progress report:.................................................................................. 102
10
Key Findings and Recommendations.............................................................105
10.1 The Strategic Positioning of ASEAN............................................................105
10.2 The role for proactive industry policies......................................................106
10.3 The role for proactive outsourcing policies................................................107
10.4 Towards a high-income globally competitive ASEAN..................................109
Bibliography........................................................................................................... 121
Appendix 1 Term of Reference................................................................................131
Appendix 2 GVC Methodology................................................................................ 139
Appendix 3 GVC Readiness Index...........................................................................156

15
Table of Figures and Tables

Figure 1.1 Summary of Outsourcing ASEAN research methodology...........................2
Figure 2.1 Stages of Development and the middle-income trap.............................4
Figure 2.2 Industrialisation for middle-income; Servicification for high income.. .7
Figure 3.1 Outsourcing, Off-shoring and Captive Outsourcing (Investment).............11
Figure 4.1 Fragmentation: Airplane production is increasingly globally outsourced. 14
Figure 4.2 Decomposition of services outsourcing....................................................18
Figure 4.3 Global demand and supply of offshore services.......................................18
Figure 4.4 Contribution of services to Value-Added in Goods Sectors (world
averages)................................................................................................................. 19
Figure 4.5 The Business Services Value Chain..........................................................21
Figure 4.6 Key impediments to services outsourcing destination choice..................22
Figure 4.7 Regional Hubs of Electronics Industry Intermediates Trade.....................24
Figure 4.8 Current investment in BPO industry of the Philippines, 2014...................28
Figure 4.9 Annual graduate pool by country, 2010...................................................30
Figure 6.1 The Smiley Face; The Role of Services in Manufacturing......................42
Figure 6.2 Integrated Goods and Services Value Chain Matrix.................................44
Figure 7.1 Double counting and bilateral bias in traditional trade statistics and how
TiVA data avoids them.............................................................................................. 62
Figure 7.2 Decomposition of gross exports into DVA and FVA intermediates............63
Figure 7.3 Aggregate DVA shares of total gross exports for various trading groups. 64
Figure 7.4 Selected countries domestic value added as a percentage of their gross
exports..................................................................................................................... 65
Figure 7.5 FVA content shares of Indonesia gross exports by sector.......................66
Figure 7.6 Average length of all industries GVCs.....................................................67
Figure 7.7 Countries relative position along East Asian regional supply chains.......68
Figure 7.8 Length of food products GVC by country.................................................69
Figure 7.9 Distance to final market for food products by country.............................70
Figure 7.10 East Asian countries GVC participation rates.........................................71
Figure 7.11 Bringing together all the TiVA indicators................................................72
Figure 7.12 The role of intermediate goods in global export flows (1990 to 2010)...73
Figure 7.13 Services account for half of world trade................................................74
Figure 7.14 Total manufactured exports and their foreign content...........................75
Figure 7.15 Services imports make exports..............................................................75
Figure 7.16 High service shares are correlated to high incomes..............................76
Figure 7.17 Not only wealthy countries have high services shares...........................77
Figure 7.18 Resizing of bilateral trade imbalances...................................................78

16
Figure 7.19 Origin of Imported Intermediates in Exports in the Motor Vehicle sector
................................................................................................................................. 79
Figure 7.20 Shifts in relative comparative advantage..............................................80
Figure 7.21 Investment is a key source of financing GVC participation....................80
Figure 8.1 The GVC Readiness Index correlated to the Doing Business Index..........82
Figure 8.2 ASEAN/CMLV GVC Readiness compared to China.....................................85
Figure 8.3 ASEAN GVC Readiness compared to India and China...............................86
Figure 8.4: ASEAN compared to global competitors.................................................87
Figure 9.1 Key value-added trade indicators, by quartile of inward FDI stock relative
to GDP, 2010............................................................................................................ 98
Figure 10.1 Changes in national investment policies, 2000-2012..........................108
Figure 10.2 Factors and conditions that facilitate climbing the GVC development
ladder..................................................................................................................... 110
Table 2.1 The middle income trap; (average annual GDP growth %)..........................5
Table 4.1 Bilateral GL inter-industry trade indices for Thailand and Vietnam...........25
Table 5.1 China summary SWOT...............................................................................35
Table 5.2 Locations of offshoring for IT and business process applications..............37
Table 5.3 Selected ASEAN Countries SWOT..............................................................39
Table 6.1 Some differing definitions of SMEs in South-East Asia...............................55
Table 6.2 Roles of SMEs and large firms in production networks..............................56
Table 6.3 Doing Business 2009: aggregate rankings for Asia-Pacific economies......58
Table 6.4 Perceived major or severe obstacles to conducting business in ASEAN
countries, SME firms (percent of SME firm)..............................................................59
Table 7.1 2009 United States trade balance in iPhones (USD million)......................78
Table 8.1 ASEAN country rankings across three main indexes.................................83
Table 8.2 Contents of the eight GVC Readiness sectors...........................................84
Table 8.3 ASEAN GVC Readiness by eight sectors....................................................84
Table 8.4 ASEAN indicators compared to other trading blocs...................................89
Table 8.5 Revealed AMS strengths and weaknesses.................................................91
Table 8.6 Identifying ASEAN strengths and weaknesses...........................................94

17
List of Abbreviations
ADB
AEC
AMS
ASEAN
B2B
BIT
BoP
BPO
BTDIxE
CBTA
CMLV
CMP
DVA
EPZs
EU
FDI
FTAAP
FVA
GDP
GL
GSLI
GTAP
GVCs
HDDs
IAI
ICT
IND
INSW
IP
IT
ITO
JETRO
KPO
MIDA
MP3EI
MRAs
NAFTA
Asian Development Bank

ASEAN Economic Community
ASEAN Member States
Association of Southeast Asian Nations
Business-to-Business
Bilateral Investment Treaty
Balance of Payments
Business Processing Operations/Outsourcing
Bilateral Trade in goods by Industry and End-use
Cross-Border Transit Agreements
Cambodia, Lao PDR, Myanmar and Vietnam
Cut-Make-Pack
Domestic Value-added
Export Processing Zones
Europe
Foreign Direct Investment
Free Trade Agreement of the Asia Pacific
Foreign Value-added
Gross Domestic Product
Grubel-Lloyd index
Global Services Location Index
Global Trade Analysis Project
Global Value Chains
Automatic Process Machines
ASEAN Integration
Information and Communications Technology
India
Indonesian National Single Window
Intellectual Property
Information Technology
Information Technology Outsourcing
Japan External Trade Organization
Knowledge Process Outsourcing
Malaysian Investment Development Authority
Indonesian governments development strategy framework
Mutual Recognition Agreements
North American Free Trade Agreement
18
NDG
NE-SW
NSTI
NW-SE
OECD
PA
PPP
PRC
R&D
RCEP
RMB
RoA
RTA
SEZs
SMEs
STAN
SWOT
TIS
TiVA
TNC
TPP
WTO
Narrowing the Development Gap

The North-East/South-West
National Science, Technology and Innovation Policy office
The North-West/South-East
The Organisation for Economic Co-operation and Development
Pacific Alliance
Per Capita Income
People's Republic of China
Research and Development
Regional Comprehensive Economic Partnership
The Renminbi
Rest of ASEAN
Regional Trade Agreements
Special Economic Zone
Small and Medium-sized Enterprises
Structural Analysis database
Strengths, Weaknesses, Opportunities and Threats
International Trade in Services database
Trade in Value-added
Trans-National Corporations
Trans Pacific Partnership
Word Trade Organization

19
Outsourcing ASEAN
Competitiveness Analysis
1 Introduction
This report analyses the Association of Southeast Asian Nations (ASEAN) relative
competitiveness in relation to the cross-border outsourcing of goods and services.
As is clear from the terms of reference (Annex 1), the report is to be strategic in its
analysis and visionary for ASEAN. It must also try to understand and measure the
concept of competitiveness, and in doing so give some guidance for the post2015 economic policies of ASEAN Member States (AMS).
We begin by establishing the context for understanding the research topic, and
therefore the need for policy action. Globalisation and outsourcing are not new
phenomena, but they are contemporary terms to describe new trends in
international trade and investment. These trends include the rising importance of
services, the increasing fragmentation of global value chains (GVCs), and the overall
rise in global competition and the pace of structural change (creative destruction).
The costs of protectionist policies have never been higher, and in that regard we
highlight the nature and possibility of ASEAN suffering from some form of middleincome trap. We conclude the context chapter by clarifying some misconceptions
about international trade, investment, and outsourcing. These include, for example,
the sense that ASEAN is not particularly competitive globally something that came
through from our field visits. In fact, however, ASEAN is already well integrated into
GVCs, and leading in some areas.
In Chapter 3 we briefly explain the technical terms and definitions used in this study.
This is important as outsourcing can mean different things to different people.
Chapter 4 presents an overview of outsourcing, trends in recent decades, and the
benefits to ASEAN. Particular attention is given to services outsourcing, and the
impressive performance of The Philippines is addressed.
Chapter 5 compliments the previous overview by reporting views about ASEAN from
multi-national corporations operating in China and India. This view from outside
draws upon one of the eleven background papers prepared for this report (the other
ten were Country Studies about each AMS). The chapter gives an insight into the
competitiveness of ASEAN viewed from its two main competitors and increasingly,
two key markets.
The next three chapters analyse the concept of competitiveness from three
approaches: Firstly, through an understanding of modern global value chains, and
how these reveal chokepoints in inter-connectedness. This chapter also summarises
the key value chain findings from fieldwork visits to each AMS for this report.
Secondly, in Chapter 7, we measure competitiveness by analyzing the recent valueadded trade database. This data allows us to see the foreign value-added in
exports, and the services share of goods exports. The nature and benefits of trade
and foreign investment become clearer through this data. Thirdly, competitiveness
is measured directly through a more conventional set of indicators. For this we have
constructed our own GVC Readiness Index (Chapter 8), which draws on numerous
data sources. The GVC Readiness Index allows us to compare ASEAN to other
trading groups, and to China and India. This gives us insights into ASEANs relative

1
Outsourcing ASEAN
strengths and weaknesses, through which we drill down to find specific weak
indicators and their policy implications.
The findings from the previous chapters are then discussed in the context of
ASEANs various bilateral and regional trade agreements, which have the potential
to lift ASEANs competitiveness in coming years. We review the status of relevant
ASEAN free-trade agreements, notably the ASEAN Economic Community (AEC), and
suggest how GVCs can be given more attention.
The final chapter lists our key findings and recommendations. After a discussion
about industry policy in general, we present ASEAN-wide ideas for strategic
directions and specific actions. We then list detailed recommendations, which are
mostly country-specific.
This report is a team effort by Mekong Economics and International Consultants 1.
The methodology followed three basic stages as detailed in Figure 1.1 below. The
first stage, meta-analysis, involved an extensive literature review, sourcing
secondary data and development of the GVC Readiness Index. Field research
followed, which included well-structured visits to nine AMS (not Brunei), in each of
which two value chains were selected for detailed study. A wide variety of
stakeholders were interviewed. Further research was led by Andrew Capon in China,
where he sought the external views of multinationals about ASEAN competitiveness.
The first two stages were completed after six months, leaving some months for
analysis and write up.
Figure 1.1: Summary of Outsourcing ASEAN research methodology
1 Team Members were consultants Lisa Barker, Jane Drake-Brockman, Adam

McCarty, Andrew Capon, Zohar Ianovici, Tom Berliner, and Greg Kannard; who were
supported by Will Haines, Alex Jaggard, Minh Cao, Thanh Do, and various inputs
from country-specific experts.
2
Outsourcing ASEAN
1. Meta
Analysis
The following
sourceswere
u lised:
2. Field
Research
Interviews
Ques onnaires
Respondents and participants

included:
Businessexecutives
Government officials
Academic papers
Thought leaders
ASEC, World Bank, ADBand
Donor officials
other institutions papers
World Bank, OECD, World
Economic Forum, WTO and
ITCdatabases

3
3. Develop
Recommenda ons
KeyFindings
Proposed PolicyOp ons
Outsourcing ASEAN
2 Context
2.1 Globalisation and Outsourcing: not new phenomena
International outsourcing is nothing new. Outsourcing has always been a
characteristic of international trade and investment, allowing private enterprises in
nations to exploit comparative advantages and to reap efficiency gains through
specialisation. The insights of David Ricardo and Adam Smith 2 continue to provide
profound explanations for why modern firms exploit new business opportunities
across international borders.
What is new is the pace of change. In more recent decades, the term globalisation
has been used to describe economic, social, and other consequences of the rapid
increase in the proportion of international transactions compared to domestic
exchanges, with most of that growth coming through the outsourcing of tasks.
Globalisation describes the sudden increase in recent decades in the exchange of
knowledge, trade and capital around the world.
The shift to international exchanges has been driven by waves of new technologies
that sharply reduce the time and cost of moving people, goods, information, and
ideas across borders. In the 20th century, the move from sail to steam underpinned
a first wave of globalisation, interrupted by two world wars. After the Second World
War, trade liberalisation, shipping containers, and planes were the foundation for a
second wave of global connectivity, as economic interdependence brought higher
living standards but also, arguably, increased risk and volatility. The third ongoing
wave is driven by information technologies.
It is now argued that we live in a flat world (or small planet) where, in economic
terms, time and space have shrunk. The benefits of being economically integrated
can no longer be denied. Conversely, the costs of protectionist policies have
increased. However these costs and benefits remain hard to measure precisely as
we apply static tools and thinking to interpret a dynamic process. Although we may
agree with the following observation of Charles Darwin, we still do not fully
appreciate the implications it has on policy making:
It is not the strongest of the species that survives, nor the most
intelligent that survives.
It is the one that is the most adaptable to change.
2See David Ricardo Theory of Comparative advantage: http://www.econlib.org/library/Enc/bios/Ricardo.html ;

Adam Smiths Wealth of Nations: http://www.adamsmith.org/wealth-of-nations

4
Outsourcing ASEAN
2.2 The ASEAN Challenge: The middle-income trap

A resolute focus on policies that generate productivity gains rather than policies
that delay structural change is especially important for ASEAN countries needing to
avoid the threat of the economic stagnation of the middle income trap. As of
2013, two of the AMS were high-income countries, three were low-income, and the
other five middle-income. Notably 87% of ASEAN citizens live in middle-income
economies. In this context of middle-income ASEAN, concerns are mounting that
recent falls in Gross Domestic Product (GDP) growth rates in some AMS might be
early signs of a sustained slowdown of growth.
There is global evidence that as countries reach lower middle-income status, both
their agricultural and manufactured goods exports struggle to compete with those
from lower-income, lower-wage economies, slowing their export-driven growth. At
the same time they face difficulties moving towards higher-skill and higher valueadded activities dominated by more advanced nations, as they lack the human
resources and physical and digital infrastructure necessary to compete in the new
sectors. This can leave new middle-income countries struggling to compete in both
low-value added resource-based growth and in higher value-added, productivitybased growth, resulting in potential economic stagnation. Figure 2.1 shows this
development path moving through four stages; as can be seen, with each new
stage comes an increase in the productivity of labour, capital, and land while the
services sector grows in relative importance.

5
Outsourcing ASEAN
Figure 2.2: Stages of Development and the middle-income trap
Adapted from Ohno (2014)
Latin America provides the most apparent example of falling into the middle
income trap illustrated in Figure 2.1. As a group, when these countries reached
middle-income status they grew at less than half the growth rates of the previous
ten years. The IMF has shown that the probability of a middle-income country (MIC)
experiencing a growth slowdown within a given five-year time span is about 1.5
times greater than for low or high-income countries, and increases the longer the
time horizon considered.3 This accounts for much of the lack of economic
convergence amongst nations during the 20th century 4. Out of 101 middle-income
economies in 1960, only 13 had attained the World Banks high-income status by
2008. 5
3 Ibid.
4 Gill and Kharas, 2007, p. 5
5 Bloomberg News, 2012
6
Outsourcing ASEAN
Table 2.1: The middle income trap; (average annual GDP growth %)
Country
Low Income*
Africa
The
Americas
Asia (rest
of)
ASEAN
Average
6.9
5.7
Lower Middle
Income
5.7
2.8
Upper Middle
Income
3.2
4.0
7.1
7.3
7.2
7.1
6.1
7.5
5.0
5.9
4.8
Africa: Botswana, Egypt, Ghana, Mozambique, South Africa, Tanzania, Tunisia and Morocco.
Amricas: Argentina, Venezuela, Bolivia, Brasil, Chile, Ecuador, Guatemala, Jamaica, Mxico and Per
ASEAN: Cambodia, Indonesia, Lao PDR, Singapore, Thailand, the Philippines, Vietnam
Asia (rest of): China, India, South Korea, Malaysia, Mongolia and Pakistan
* Note: Low income average growth rates are for the 10 years just before each country reached lower MIC status.
Source: World Bank, World Development Indicators
For Brazil, South Africa, and Mexico, GDP growth fluctuated markedly as they
transitioned from low-income to lower middle-income status; recessions were
frequent and progress to higher states of economic development were delayed.
South Korea, on the other hand, largely escaped the trend. Some economists see
the point of difficulty emerging when countries hit the USD 5,000-USD 10,000 per
capita income range6 ; there is also evidence that the period of unstable growth
starts earlier, at around USD 3,000 per capita.
Some ASEAN Member States (AMS) Vietnam, Indonesia, Malaysia, the Philippines
and Thailand exhibited marked growth slowdowns after reaching middle-income
status7. The question arises, therefore, whether some AMS are already in a middleincome trap? Fortunately, this does not appear to be the case; GDP growth rates
remain above 5% per annum and most of the slowdowns experienced can be
convincingly explained by particular short-run causal factors. Nevertheless, the AMS
must remain alert to the dangers. FIX SPACING
6 Spence, 2011
7 International Monetary Fund, 2013
7
Outsourcing ASEAN
2.3 Six misconceptions about international trade, investment

and outsourcing
2.3.1 ASEAN is not competitive
The fieldwork interviews for this Study revealed that ASEAN officials are defensive
about the economic capabilities of the AMS. ASEAN appears to be overwhelmed by
the economic might of China and India. Proximity to these two economic giants is
sometimes seen as more of a problem than an opportunity. ASEAN countries
therefore tend to believe that they need protection from cheap imports from China.
This Study suggests that that impression is incorrect. The strong economic
performance of AMS in recent decades is directly related to the rise of China and
India to middle-income status. The benefits of trade have been win-win, and ASEAN
countries have found numerous competitive niches in goods and services, as will be
explained later in this Report. AMS are well integrated into global value chains
(Chapter 6), and our analysis of competitiveness indicators (Chapter 8) shows that
ASEAN is a leading regional group in certain categories. ASEAN is competing; the
challenge, however, is to maintain the momentum beyond middle-income status.
2.3.2 Trade is goods
There is a traditional development bias whereby goods production is seen as more
important, and somehow more essential for development, than the production of
services. Several factors feed this bias: firstly some economies, such as Vietnam,
were recently centrally planned, where services were viewed as the nonproductive sector; secondly, trade statistics do a poor job of measuring services
exports and imports, leading to underestimates relative to goods; and thirdly, gross
trade data does not measure the services content of goods (but, as we shall see in
Chapter 7, value-added trade data does).
Policy makers in developing countries reveal a bias towards manufacturing of goods
when they talk of industrialization. There is no strategy for servicisation, and
this is despite the empirical fact that rich countries are service economies. Some
87% of ASEAN citizens live in middle-income economies, yet in the fervour to
industrialise many policy makers neglect the reality that a key characteristic of
high-income economies is a dominant service sector. Figure 2.2 shows structural
change in economies as they get richer. Industry as a share of GDP rises steadily to
high middle-income levels (about USD10,000 per capita), peaking at about 50% of
GDP. It then falls in high-income economies to under 30% of GDP (e.g. Japan and
Singapore).

8
Outsourcing ASEAN
Figure 2.3 Industrialisation for middle-income; Servicification for high

income.
Note:
2.
1. Size of circles present Countrys Size of population

Colours of circles present Regions
Red = East Asia & Pacific
Yellow = America
Orange = Europe % Central Asia
Light blue = South Asia
Dark blue = Sub-Saharan Africa
Light green = Middle East & North Africa
Source: Gapminder World8
2.3.3 Imports are bad and import substitution is good

We need imports to make exports, and new value-added trade data measures this
precisely (the foreign value-added share of exports). Moreover, the main reason
for exporting is to obtain the foreign exchange needed to pay for imports: Imports
are the net benefit gained from exporting.
One might still argue, however, that direct interventions to promote import
substitution will save foreign exchange, create jobs, and enable self-reliance. By
8 See http://www.gapminder.org/world
9
Outsourcing ASEAN
direct interventions we mean introducing protectionist measures (typically from

international competitors) and subsidies (e.g. cheap credit, land, or electricity).
Protectionism involves a cost, paid by either the government or consumers, and it is
important to understand the dynamics of these costs. By actively promoting an
import-substitution activity, resources such as labour, land, and capital are being
directed into an economic activity in which the economy has no obvious
comparative advantage. The activity is inefficient, and yet these resources will
remain locked in so long as the protectionist measures and subsidies continue.
The firms in that activity become beholden to those officials who maintain the levels
of protection and subsidies, instead of leaving it to the discipline of international
market forces. This slows the dynamic process of moving resources constantly from
lower to higher value-adding activities. Rather than moving up global value chains,
protection-dependent import-substituting industries become trapped at a selfreliant prescribed level of inadequate productivity.
However, as we discuss in Chapter 10, a
policies can be compatible with a proactive
there is a role for an active government to
human capital formation, in line with
advantages.
general aversion to import-substituting

industrialization strategy. We argue that
fund and nurture resources, particularly
existing and emerging comparative
2.3.4 Outsourcing is stealing jobs

Outsourcing typically involves moving jobs from one country to another, or even
moving jobs within a country. This is simply the process of increasing production
efficiency by exploiting different wage levels for the same service. As a result, firms
benefit from lower costs, consumers benefit from a lower price (ideally without a
compromise in quality). Thus total employment may not change, but some of the
jobs may indeed have moved overseas.
This would only be problematic, however, if it causes longterm unemployment. In
dynamic economies, near full employment levels are maintained by judicious
macroeconomic policies, and there is a constant Schumpeterian process of creative
destruction9 whereby people move from lower-paying (lower productivity) to
higher-paying employment. This is what moving up value chains involves. A
healthy economy requires the destruction as well as the creation of firms and jobs, a
process driven and guided by competitive markets.
2.3.5 Outsourcing is large-scale and cross-border
Several months of interviews across nine AMS, revealed many impressions of
stakeholder perceptions of outsourcing, and the variety of definitions and
interpretations it brings. In Indonesia it is recognized as a domestic policy concern,
9 Creative destruction refers to the process that incessantly revolutionizes the economic structure from within,
incessantly destroying the old one, incessantly creating a new one. - Joseph Schumpeter (1942, p83)

10
Outsourcing ASEAN
where the concern is that jobs are being shifted to service providers that are not
just lower-paid but also have lower standards of quality (e.g. such providers do not
strictly follow labour codes and environmental standards). This debate has given
outsourcing a negative connotation in Indonesia, has led to legislative restrictions
and, as with other policy arguments, it is used to restrict competitive pressures.
Most of those interviewed across the AMS, however, understood outsourcing as a
mainly international activity in goods or services. More than 50% of world trade is
now in intermediate goods (excluding oil and fuel), much of it involving outsourcing.
The impression was, therefore, that outsourcing involved large-scale transfers of
tasks, such as business processes, IT, or supply of intermediary goods in a global
value chain. In fact outsourcing is also small scale, and is increasing everywhere,
domestically and internationally. SMEs, and even individuals, are also outsourcing
certain tasks in order to increase efficiency and reduce costs. Individuals now travel
more frequently for value-for-money health and education services and more
permanently for retirement (see Box 2.1).
Box 2.1: Global sourcing options for care of the elderly
In traditional societies, care of the elderly was previously the responsibility of
immediate families and communities. As countries industrialised, the introduction of
national pension schemes and personal savings took much of the burden off
children. In more recent decades, the elderly and those providing for them have
also been exploring options beyond their borders.
Cost effective solutions include importing care workers, or for the elderly to move
overseas. In September 2013, 100 young Vietnamese went to Germany as part of a
new project to train geriatric nurses for work there. The trainees finished a sixmonth language and culture course in Hanoi, and spent the next two years in a
vocational training programme. If they passed the final exam, they would be able to
work in Germany as fully qualified geriatric nurses. 10 The 2011 movie The Best
Exotic Marigold Hotel is a story of British retirees who travel to India to take up
residence in their older years. Many others, of various nationalities, migrate to
southern France or Spain. These examples highlight differences in costs between
different countries, along with improvements in human capital and
telecommunications, that drive small-scale outsourcing by individuals, SMEs, and
multi-national corporations.
2.3.6 Outsourcing is services
The past two decades have seen a sharp rise in internet-enabled services
outsourcing, particularly in business processing operations (BPO), and information
10 See http://www.voanews.com/content/aging-nations-look-to-vietnam-to-fillnursing-gap/1746769.html
11
Outsourcing ASEAN
technology (IT). Much recent literature gives a reasonable definition of outsourcing,

but completely ignores the outsourcing of goods. This Report covers both goods and
services outsourcing.
As Richard Baldwin explains (see Box 2.2), the offshoring of manufacturing since
1988 has transformed the world economy, as well as the political economy of trade.
The outsourcing of services is something more recent, but also another technologydriven extension of global value chains (GVCs). His argument is that information and
communications technology (ICT) made it [the outsourcing of services] possible,
[and] wage differences made it profitable11.
11 Baldwin p.16
12
Outsourcing ASEAN
Box 2.2: Globalisations new phases

After rising since the steam revolution, the G7 nations share of world income
reached its peak of two-thirds in 1988. The second unbundling 12 reversed this. The
offshoring of labour-intensive stages of manufacturing and heightened international
mobility of technology produced spectacular growth in emerging markets whose
economic reforms fostered rapid industrialization.
The reversal has been remarkably fast. By 2010, the G7s share of world income fell
to half. This share is likely to continue to decline for decades, particularly as the G7
is home to only a tenth of the worlds people. De-industrialisation is a pervasive
trend among developed nations but the Souths rapid industrialisation has been
driven by the excellent performance of just a dozen nations all of them heavily
involved in international supply chains and most of them in Asia. The performance
of Chinese manufacturing alone accounts for much of the reversal.
Many pro-industrialization policies from the pre-ICT era import substitution
policies, FDI and local-content restrictions, state-owned enterprises, etc. turned
out to hinder the ability to join supply chains. As a result, many developing nations
dropped the old policies to attract offshored manufacturing jobs and investment.
This revolutionized the world of trade and investment policy.
Before the second unbundling, the political drive for trade liberalization required a
reciprocal opening of markets. After the second unbundling, the political economy
was more unilateral, adopting policies of open borders and reforms to attract
factories and jobs. Many emerging economies unilaterally liberalised tariffs and
embraced pro-business and pro-investor policies 13.
12 The second unbundling is a process of separating production into fragments that can be spread
geographically around the globe, triggered by the ICT revolution. See Richard Baldwin Trade and
Industrialization after Globalization's Second Unbundling: How Building and Joining a Supply Chain Are
Different and Why it Matters in Robert C. Feenstra and Alan M. Taylor (2014), Globalization in an Age
of Crisis: Multilateral Economic Cooperation in the Twenty-First Century.
13 See Richard Baldwin Global supply chains: why they emerged, why they matter, and where they
are going in Deborah K. Elms and Patrick Low (eds.) Global value chains in a changing world. pp.1361. Accessed via: http://www.cggc.duke.edu/pdfs/201307_Elms&Low_eds_GlobalValueChains_in_a_ChangingWorld_WTO.pdf

13
Outsourcing ASEAN
3
Study Scope and Definitions
Outsourcing is like delegating. It involves commissioning tasks (to transform

goods or deliver services) from others outside the firm, that could also be done, or
used to be done, inside the firm and are still needed as intermediate inputs in the
overall production process.
Outsourcing involves business-to-business (B2B)
transactions, which are internal to the overall production process itself, rather than
business to consumer transactions.
Offshoring is sometimes used to clarify that the outsourced tasks are being
commissioned from foreign enterprises. In the context of international trade, this
means the B2B commissioning of tasks across international borders. Figure 3.1
highlights the different definitions, and illustrates how the others could either be
separate foreign firms, or firms owned or partially owned and controlled by the lead
outsourcing firm via foreign direct investment (FDI).
Figure 3.4 Outsourcing, Off-shoring and Captive Outsourcing (Investment)
Source: UNCTAD 2012
A lead outsourcing firm might offshore a variety of tasks to firms in other countries,
generally to small and medium-sized enterprises (SMEs) in developing countries
where costs are lower. SMEs which conduct such tasks can then be described as
on-shoring tasks from a foreign firm or, more commonly, seen as entering or
participating in a global value chain (GVC)14.
14 If the relevant countries share a border, this process is sometimes described as near-shoring.
14
Outsourcing ASEAN
The lead outsourcing firm is generally located downstream in the production

process, meaning that they are close to the final consumer market and typically
reap the benefit of high value-added end activities such as marketing and
distribution. The lead outsourcing firm may also conduct its own R&D and own the
original product design, both high value-added upstream activities. Offshore
suppliers tend to be located at various stages upstream and mid-stream, providing
raw materials, processed inputs, assembly operations, packaging and other similar
requirements with lower value-added.
Tasks might be outsourced through contracts with one (single sourcing) or multiple
(multi-sourcing) third parties (third party outsourcing), or by firms establishing their
own operations overseas (captive outsourcing).
The relationships across borders vary from arms-length market transactions at one
end to an intra firm ownership structure, such as FDI-based relationships, on the
other. Most relationships fall in between these two, based on a wide variety of nonequity inter-firm linkages between lead firms and suppliers. Lead firms are
pivotal as they coordinate the chain and entry of other firms, and also have control
over the distribution of activities, value-addition and profits, and how activities are
allocated among different contributors to the chain.
Our Study adopts the definitions set out by the APEC Secretariat Policy Support Unit
(2012)15. In general, our use of the expression GVC refers to the full spectrum of
value-added activities required to bring a good or service from its conception,
through the design, sourcing and intermediate inputs, to the production, marketing,
distribution and sales support of the product, before bringing it to the final
consumers.16 The production of goods, and increasingly of services, now involves a
combination of intermediate B2B inputs and service activities, sourced globally, to
make up a finished output which is made in the world for the final consumer. 17
This fragmentation of production into goods and services tasks has resulted in the
creation of production networks (20th century language) or value chains (21st
century language), with service activities such as transport, logistics, and
communications providing much of the glue between its various production
15 Global Supply Chain is a system of organisation of people, technology, activities, information and
resources involved in moving a good or service from supplier to consumer. Global production
chain/network tends to refer to the linkages within or among a group of firms or suppliers in a
particular global value-chain for producing specific outputs.
16 Gereffi and Fernandez-Stark (2011) p. 4 define a GVC as the full range of activities that firms and
workers do to bring a product (good or service) from its conception to its end use and beyond.
17 The expression made in the world was coined by the WTO in 2011 in a groundbreaking
collaborative work IDE/JETRO on Trade in Tasks. See WTO-IDE/JETRO, 2011.

15
Outsourcing ASEAN
processes. The set of activities comprising the value chain now crosses borders, has
become international, and is the manifestation of globalization. However, as the
process of integration often starts at the regional level, GVCs are often more
regional than global.
The current focus on GVCs in global trade and investment discussions is raising
many different types of research and policy questions, including questions with
regards to the motivations and operations of firms, the usefulness of industrial
policies, the implications of the increased role of services (including logistics), the
close link between investment and trade and the influence of regional trade
agreements (RTAs), and preferential rules of origin on patterns of global and
regional trade. This Report explores many of these contemporary issues as they
relate to outsourcing.

16
Outsourcing ASEAN
4 Outsourcing and GVCs: Situation Analysis and Trends

4.1 The evolution and trends in outsourcing
Patterns of world trade and investment have witnessed remarkable transformations
in the transition to the 21st century. The forces of globalization and the process of
opening up to greater economic integration with the rest of the world, coupled with
lower trade costs and the revolution in information and communications technology
(ICT), technical and business process innovations and more widespread availability
of highly skilled workforces, are everywhere driving major adjustments in crossborder firm behaviour, generally described as outsourcing. As the World Economic
Forum has described it, GVCs have become the world economys backbone and
central nervous system.18
The reduction in trade costs has been especially important. Trade costs include the
whole range of expenses that companies outlay at different stages in cross-border
production and distribution. In the case of goods, trade costs include land transport
and port costs, freight and insurance costs, tariffs and duties, costs associated with
non-tariff measures, as well as mark-ups from importers, wholesalers, and retailers.
For services, transport costs are replaced by telecommunication costs, and trade
barriers include restrictive or burdensome regulatory requirements. Trade costs are
incurred in coordinating, or orchestrating activities disbursed geographically or
across time zones.
Trade costs for goods have significantly dropped with technological advances in
transportation such as containerization and the application of ICT to logistics
systems. Tariff reductions and reforms in investment regimes have also significantly
lowered the costs of trade in goods. Trade costs for services have dropped as
telecommunications reforms have generated new investment and greater reliability
of internet connections.
The rise of global value chains (GVCs) is not a new phenomenon, but it has evolved
through a number of complex different phases, giving rise to new conceptual and
policy challenges. Each phase of evolution has impacted in different ways on
ASEAN.
Following the emergence in the 1960s of vertically integrated national firms and
industries, the 1970s witnessed a wave of global dispersion of industrial activity
through investment in off-shoring by multinational corporations. The 1980s saw the
first evidence of both geographic and organizational change of the firm by way of
both outsourcing and off-shoring into regional and global value chains. The 1990s
18 See http://reports.weforum.org/global-agenda-council-2012/councils/the-global-trade-system/
17
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saw yet another evolution, with the rise of China and big new global suppliers. The
2000s saw the widespread application of digital technology, the beginning of
services off-shoring, global knowledge and innovation networks and the rise of
India. These waves of technology have pushed outsourcing into a mainstream
business activity, and have greatly increased both the efficiency and complexity of
production. Figure 4.1 illustrates the new complexity of modern fragmented GVCs.
This, in turn, is slowly leading to a reformulation of what is appropriate industry
policy, as the costs of any form of protectionism rise sharply.
Within this global supply chain growth, there has been an evident nesting of related
regional and more local supply chain corridors (such as within the Europe (EU)).
Indeed many commentators suggest that the operation of GVCs is more regional
in nature than global and focused on three hubs, North America, Europe and East
Asia (with ASEAN playing a vital part).
Figure 4.5 Fragmentation: Airplane production is increasingly globally
outsourced.
4.2 Recent trends in outsourcing

4.2.1 Changing drivers of outsourcing
Before considering the ASEAN experience, it is worth observing that while the
relentless push to operate more efficiently remains the driving force behind
outsourcing, it is also no longer the case that firms base their decision to outsource
tasks from their value chains purely on saving costs. In addition to reducing
expenses, todays outsourcing initiatives are helping companies drive new revenue,
achieve innovation, quicken time to market, conserve capital for other investments
18
Outsourcing ASEAN
or improve product or service quality, obtain skills they cannot otherwise find or
afford, as well as improve their organizations focus.
4.2.2 Limits to growth?
There is anecdotal evidence that some global companies, particularly ones with
their headquarters in the United States, are transferring the completion of some of
their value chain activities back home (re-shoring), or outsourcing tasks to countries
closer to home (near-shoring), such as Mexico and parts of Latin America.
One ADB study suggests that some of the reasons for this include narrowing wage
differentials, difficulties of managing complex value chains, volatile shipping costs
and the risks associated with supply chain disruption from natural disasters. 19 They
add that long delivery routes increase costs of holding inventories and leave firms
vulnerable to rapidly changing demand, such as for goods with development times
for new models that are short. By contrast, producing close to consumers allows for
faster turnaround time and greater flexibility in meeting demand.
Three forces slowing outsourcing:
1.The global labour arbitrage wage gap is declining. American real wages
have not risen much in recent decades, while those in China and India have
caught up. This is crucial, for as a recent review of literature noted: Despite
all the rhetoric of using outsourcing strategically, cost reduction has remained
an important driver for a majority of client firms. 20
2.Industrial automation decreases the numbers of workers needed, and the
relative importance of labour costs in overall costs.
3.
There was a degree of herd behavior in the wave of outsourcing
since the 1990s, and now that the real costs and benefits are better
understood, many firms find it less attractive. In 2005 Deloitte Consulting
looked at 25 big companies that had outsourced operations and found that
seven of them had soon brought them back in-house because they could do
the work themselves better and cheaper21.
One recent study observed that: Increasingly, clients recognize that cultural fit can
be more important than low cost. In competitive centres, costs might be
subordinate to longer-term indicators of success, with R&D expenditure, innovation
19 ADB, 2013,p.22
20 Lacity, Williams and Solomon, p.6
21 The Economist, Jan 19 2013
19
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and customer service levels as key signals. 22. This, indeed, is driving some Asian
firms to locate in America. Lenovo, for example, bought IBM and is reshoring making
PCs in America. A survey of big American manufacturers found that nearly two-fifths
of firms said that they were planning to move or thinking about moving production
facilities from China back to America. 23
The continued rapid growth of outsourced tasks, both in producing goods and
services, should not be taken for granted particularly where they are based on the
wage differentials of semi-skilled workers. There are limits to the global growth of
such outsourcing, and the nature of jobs continues to change. As the outsourcing
industry has developed, mass basic services are being replaced by more nuanced
and targeted assignments.
4.3 Services Outsourcing

Services outsourcing warrants separate mention as a recent and complex
phenomenon. Services remain hard to measure, and yet are increasingly coming to
dominate world trade and GDP. Further, new data allows us to measure services
better, including the services content in the value of goods produced, although
many services exports still elude trade data measures. So long as measurement
remains weak, the bias towards manufacturing will remain. Competitiveness in
services is also linked to specific drivers and impediments that foreign business
partners and investors take into consideration. We survey the above issues, and
then discuss the specific implications for ASEAN. ASEANs performance in embracing
services GVCs has been mixed, including recent impressive growth in Vietnam 24; but
the lead economy is The Philippines, which we study in greater detail.
4.3.1 The services phenomenon
It is a more recent phenomenon, but globalisation is bringing about a similar
transformation in cross-border trade in services as has taken place in
manufacturing. Traditionally, services providers were constrained by their inability
to capture, store and possess the value of the intangible. There were few
opportunities to create step-by-step pathways to market as services generally
22 Willcocks&Lacity,p.12
23 The Economist, Jan 19.2013
24 See http://www.prnewswire.com/news-releases/fpt-to-welcome-participants-exploring-vietnam---an-alternative-destination-for-application-outsourcing-needs-at-the-gartner-outsourcing--strategicpartnerships-summit-2013-224557201.html

20
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needed to be produced, delivered and consumed simultaneously, limiting their B2B

and cross-border trade opportunities. But telecommunications reforms and the
application of digital technology to a widening range of business services are now
driving a rapid emergence of fragmentation of intermediate activities into GVCs in
services.
There is now a constant quest in the services sector to outsource any business
function in the production process in which knowledge can be commoditised and
packaged as a product, ownership can be established, production can be scaled
up and trade can take place separately from production.
The process is happening so rapidly that services intermediates (generally
described as knowledge-intensive business services) have become the fastest
growing component of world trade, generating a shift in the composition of most
countries services exports, away from the traditional transport and travel sectors
towards greater sophistication and complexity. Business services intermediates
now account for nearly half of other commercial services trade, reflecting the
growth of services outsourcing and the emergence of services GVCs. 25 Services offshoring activities accounted in 2010 for US$252 billion in total global export
revenues and employed 4 million people globally 26.
The dramatic growth of global services outsourcing is illustrated in Figure 4.2, which
trebled in value during 2005-2010. The fastest growing six sectors averaged annual
growth rates ranging from 25-58%. BPO and ITO continue to dominate the industry,
although new niche areas, including engineering grew fast, and KPO services the
fastest. Despite the concerns noted above, notably the narrowing wage gap, most
forecasts are for continued strong growth rates to 2020.
Figure 4.6 Decomposition of services outsourcing
25 Drake-Brockman,2013
26 ITC 2014
21
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Figure 4.3 shows that India and The Philippines lead as mature suppliers, followed
by a large number of emerging suppliers, including eastern Europe and Malaysia
(we might add Vietnam). North America is the driving location of demand. Europe is
also important, and Japan less so although Japan largely outsources to Asia (given
time zone considerations).
Figure 4.7 Global demand and supply of offshore services
Thus services offshoring keeps growing, and the supplier pool is diversifying and
shifting somewhat towards Asia. AT Kearneys 2012 Global Services Location Index
(GSLI) lists 8 out of 10 the most attractive destination countries in Asia. India is in
22
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first place, followed by China and then Malaysia. Gartners Top 30 Countries for
Offshore Services 2010-2011 also has India leading, followed by China in terms of
potential scale.27
Becoming an emerging country for services outsourcing requires a conscious
policy effort, addressing largely within-border issues relating to services efficiency.
Malaysia and The Philippines have done so, the latter focusing on specific zones to
bypass wider inefficiency problems in the protected domestic economy. Most
notably, Indonesia, Thailand and Vietnam are yet to develop a systematic approach
to move them up as an emerging location (yellow on the above map). This is more
a country-specific issue, rather than ASEAN-wide, and it requires addressing the
criteria for competitiveness evaluated in this report.
4.3.2 Measuring services reveals their importance
Services are crucially important because they play an intrinsic role in the
orchestration and implementation of goods value chains. The traditional goods
chain both starts and ends with a series of pure services activities, from the original
product idea, R&D and design, to final distribution to the customer and after sales
service.
Further, embodied services are involved throughout the processing and
manufacturing steps in the goods chain (for example professional services, financial
services, marketing, logistics, and quality control). Increasingly services are also
embedded with goods at the point of sale, such as repair and maintenance services.
The new OECD/WTO Trade in Value Added (TiVA) data, explained in Chapter 7, has
recently clearly demonstrated the importance of services in goods production.
Figure 4.4 shows the services contributions to value-added, which range from 23%
to 35%, in a variety of manufacturing industries.
Figure 4.8 Contribution of services to Value-Added in Goods Sectors (world
averages)
27 Gartner, 2010
23
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Source: OECD Trade and Agriculture Directorate
The degree of services intensity in manufacturing is becoming very high in

advanced manufactures. More than 50% of the iPods value, for example, has
nothing to do with merchandise components and everything to do with the services
activities involved in conception, design, retail and distribution. The iPhone is an
even stronger example where merchandise components represent less than one
third of the total value of the final product. 28
This process, by which services make up an increasingly large component of the
final value of goods, is often referred to as servicification, a term coined by the
Swedish National Board of Trade. To illustrate the point, the Swedish National Board
of Trade has mapped the services needs of one manufacturing and one agri-food
company in Sweden. Both companies needed over 40 different services to sell and
ship their products. Both companies relied mainly on business, communication,
financial and transport services. Interestingly, the companies themselves also
offered 10-15 different services to their customers.
The clear conclusion is that for GVCs to function and be economically viable, firms
must have access to price-efficient quality services inputs. Breaking down GVC
production costs highlight the overall importance of services, often amounting from
two-thirds to four-fifths of the total value. High quality cost-effective services are at
the core of modern global competitiveness.
The key role of services in facilitating production, global value chains and trade,
calls for governments to work towards creating a services friendly business
environment. This includes both enabling firms to develop services supply
capabilities and ensuring effective services being available in the country.
Efficient logistics are linked to effective movement of goods and the ability to
coordinate production and GVC-participation. ICT services make other business
28 Economist Magazine, 2013
24
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services tradable, allowing them to be disaggregated and traded as separate tasks.

Financial services, not least insurance, are obviously essential.
As services have become more tradeable, it is important to recognize that services
inputs into goods GVCs can now be sourced from both the domestic services sector
and through imports from foreign services suppliers. This means that if the
domestic services sector is not efficient, and is prejudicing the competitiveness of
the other sectors, firms engaged in GVC activity will necessarily turn to foreign
service suppliers to keep their costs down and remain competitive in merchandise.
The process of servicification therefore has important policy implications. With
services having become so important as intermediates, efficiency in the services
sector has become the key to international competitiveness in every sector.
Governments wanting to increase the competitiveness of their manufacturers need
to work towards creating competitive services markets.
4.3.3 The Services GVC
Figure 4.5 illustrates the service industrys value chain, and highlights the main
categories of activities in each segment 29, according to the level of value added.
The first categorization in the diagram refers to the three broad types of general
business offshore services: (1) ITO, (2) BPO, and (3) KPO. The second categorization
refers to those industry-specific services. Within general business services, ITO
contains a full spectrum of low-, middle- and high-value activities of the offshore
services chain, BPO activities are in the low and middle segments, while KPO
activities are in the highest-value segment of the chain.
Industry-specific services range from low to high value-added activities and may
include (but are not limited to) ITO, BPO, and KPO activities. This diagram differs
significantly from the representations of the value chains of manufacturing activities
in which value added is measured through the analysis of inputs and outputs at
each stage, and the output of one stage generally becomes an input of the next. In
product-based industries, value is measured by the price of the inputs and outputs
at each stage of a products assembly. In contrast, in the offshore services industry,
certain segments (ITO, BPO, and vertical services) contain high-, medium-, and lowvalue activities, and measuring value is complicated by the lack of reliable
company-level data and trade statistics for services. 30
Figure 4.9 The Business Services Value Chain
29 Gereffi & Fernandez-Stark, 2010

30 Sturgeon & Gereffi, 2009
25
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Source: Gereffi & Fernandez-Stark, 2010
4.3.4 Impediments to services outsourcing

Competitiveness in services is less constrained by natural resource endowment or
proximity to market. It is also less about border policies and much more about
within-country constraints on doing business, including domestic regulatory
regimes. Most of the key factors driving services competitiveness are therefore
ones that governments can lever. This suggests that new competitive advantages
can be built around these factors, while avoiding the disadvantages of traditional
manufacturing subsidies.
Recent global supplier survey work has shown that in the services outsourcing
sector, the key policy supports are considered to be better market access,
investment incentives to ensure foreign investor participation and better access to
finance. Investment in communications infrastructure and labour force training
schemes are the other most frequently cited business needs.
Figure 4.6 below measures the four key areas that determine choice of country for
outsourcing activities. The average and relative size of these four varies by levels of
development. Market access is strongly negatively correlated to development (poor
countries are more protectionist). The business environment is also markedly better
in high-income economies.
Figure 4.10 Key impediments to services outsourcing destination choice

26
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Source: Marshall School of Business, University of Southern California, 2012
Behind the broad categories of Figure 4.6, we can identify problematic factors
consistently identified as the top barriers to trade in services:
standards & specifications

recognition of skills and qualifications
inconsistent regulations
regulatory transparency
inconsistent monitoring and enforcement
coordination among government agencies
regulatory instability
dispute resolution
government bureaucracy
language and culture
access to human capital
access to skilled talent
Many of these impediment areas involve variables that governments can change
quickly (e.g. regulatory reform, and some business environment aspects), while
others require more long-term attention to build infrastructure and human
capacities. There is certainly much scope for an active role by Government. The four
core competitiveness levers for Government are:
1. Human capital (talent, education, skills, ideas, culture of customer focus) is
fundamental for services. Creation of a positive human resource environment
and a critical mass of skilled personnel can be shaped by national
government policies that emphasize education and skills training.
2. Investment in intangible assets (corporate intellectual property including
business methodologies) is fundamental, and governments have a role to
play in facilitating collaborative industry/university linkages and a supportive
environment for innovation.
27
Outsourcing ASEAN
3. Provision of an enabling digital and other services infrastructure is

essential. Broadband internet availability, cost and reliability are paramount.
Global experience is that telecommunications reform and opening up is part
of ensuring the investment in supply capacity required. Ready access to
cross-border data flows is another key ingredient in services outsourcing.
4.
Transparency, efficiency and coherence of domestic regulation can
be a make or break issue for services competitiveness. Services activities,
such as telecommunications, financial services, professional services,
education and health services, are typically more highly regulated than other
industries for public policy purposes. The regulatory regimes involved have a
direct effect on commercial services firms, influencing their structure, where
they locate, whom they hire, and how they find markets and serve their
clients. Poorly designed regulatory practices can unnecessarily burden a
firms resources, raise the costs of market entry for newcomers, slow the rate
of innovation and deter investment, especially for SMEs. Conversely, well
designed regulatory environments can encourage and foster both innovation
and investment.
Global experience also suggests that services business stakeholder consultation and
public/private dialogue is helpful. Many developing countries lack well-developed
forums for services stakeholders to communicate with governments. Some new allof-services sector initiatives are underway, for example the Indonesian Services
Dialogue, to help facilitate more structured and regular interaction between private
sector stakeholders, trade officials, regulators and researchers; but there remains
much more to be done.
Ultimately the objective has to be a higher degree of policy focus and
mainstreaming of services thinking within overall Government economic and
development plans. Given the strong international evidence of links between
regulatory reform and productivity growth, especially in the services sector, there is
a global effort underway to expose services regulators more consistently to the
experience of other countries with respect to regulatory pitfalls and inefficiencies as
well as best regional practices (e.g. Regulation Review Boards).
4.4 The benefits to ASEAN

The ASEAN Member States have certainly felt the impact of GVCs and benefitted.
Over a period of twenty years or so, the AMS have participated increasingly in the
emerging regional production networks in both goods and services, enjoying
increasing levels of inward direct investment as they do so and increasing the
overall ASEAN share of world trade. Some other developing regions of the world
have been largely left out of the GVC picture for the time being, although new
opportunities are opening up now especially in services outsourcing.
Using new OECD/WTO Trade in Value-added data, which will be explained in Chapter
7, we can now picture ASEANs role in the GVC phenomenon more clearly. Figure 4.7
illustrates this for trade in intermediates in the electronics industry, with East Asian
28
Outsourcing ASEAN
economies shown in red. Note that the ASEAN countries surround a Japanese hub.
Outsourced tasks from north-east Asia (Japan, South Korea, Taiwan) have been the
crucial link for the rising competitiveness of ASEAN, in both goods and services. In
coming decades, China will become of growing importance in outsourcing tasks to
ASEAN manufacturing to poorer AMS, and services to the more developed AMS.
China, now seen largely as a competitor in final goods production, will increasingly
become a mix of competitor and business partner.
Figure 4.11 Regional Hubs of Electronics Industry Intermediates Trade
Source: Miradout 2013
Further, among developing countries, the AMS, along with other East Asian
economies, stand out as the major beneficiaries of the growing trend to South-South
trade. South-South exports31 accounted for nearly a quarter of world exports in
2011, compared with 13% in 200132. Developing Asia claimed as much as 77% of
these South-South exports. Driven by intensified participation in GVCs, as much as
40% of East Asian trade in 2011 is now South-South 33.
There has been, moreover, an evident shift within this trade from low value-added
manufactured goods to higher value added manufactured goods: non-fuel South31 i.e. exports among developing countries (UNCTAD 2013, see
http://unctad.org/en/pages/newsdetails.aspx?OriginalVersionID=673 )
32 UNCTAD South-South Trade Monitor 2013

33 Ibid.
29
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South exports are now dominated by manufactured goods with above average
intensity of skill and technology 34. This is an important finding, demonstrating
evidence of developing countries, especially in the Asian region, climbing the valueadded ladder.
Intra-ASEAN exports now account for 25% of ASEANs total exports, having steadily
increased from 20% in 1990. This is a much higher degree of intra-regional trade
than has been achieved by other developing country integration groupings. Also
noteworthy is the fact that intra-industry trade in goods is growing faster in ASEAN
than in other regional integration groupings among developing countries 35.
Table 4.1 shows the results of UNCTADs analysis of intra-industry for Thailand and
Vietnam within ASEAN using the Grubel-Lloyd (GL) index. This index varies between
0 (no intra-industry trade) to a ceiling of 1. The index only covers manufactured
goods at the HS 4 digit level and therefore is insufficiently disaggregated to pick up
all regional value chain activity within the ASEAN region. Nevertheless the results
are instructive. Bilateral GL indices among the original ASEAN-5 were all much
higher in 2010/11 than in 1990/1994 (although there is no clear trend during 20002011 for Thailand). In the early 1990s, there was low intra-industry trade among
only AMS, but this has expanded over time to include additional AMS 36. The data
shows Vietnam joining in the intra-industry trade network after 2000/2004, at which
point the GL indices were all less than 0.1, whereas by 2010/11 they has risen to
around 0.2.
Table 4.2 Bilateral GL inter-industry trade indices for Thailand and
Vietnam
Thaila
nd
Brune
i
Indonesi
a
Cambodi
a
Lao PDR
Myanm
ar
Malaysi
a
Philippine
s
Singapor
e
Vietna
m
1990-94
0.00
4
0.01
3
0.129
0.004
0.011
0.001
0.238
0.160
0.423
0.010
0.343
0.118
0.020
0.010
0.400
0.425
0.454
0.094
0.248
0.178
0.125
0.003
0.417
0.229
0.397
0.221
Vietna
m
Brune
i
Indonesi
a
Cambodi
a
Lao PDR
Myanm
ar
Malaysi
a
Philippine
s
Singapor
e
Thailan
d
1990-94
0.006
0.025
0.027
0.010
2000-04
2010-11
34 Ibid.
35 Ibid.
36 The UNCTAD study highlights the fact that this relatively inclusive pattern of intra-industry trade
inside ASEAN is quite different from that displayed within SAARC (which for trade in intermediates is a
hub and spoke arrangement around India or within Mercosur (where intra-industry trade is dominated
by bilateral flows between Argentina and Brazil).

30
Outsourcing ASEAN
0.00
0.099
0.060
0.028
0.042
7
0.00
2010-11
0.182
0.047
0.016
0.002
5
Source: UNCTAD SouthSouth Monitor No. 2, July 2013
2000-04
0.116
0.060
0.063
0.094
0.227
0.128
0.225
0.221
Integration and outsourcing into regional value chains is happening in ASEAN.

Integration is contributing to the increase in regional value chain activity and,
consistent with the AEC vision, broadening the GVC participation of new AMS.
ASEAN as a region is acting as a genuine hub for outsourcing activities and
participation in GVCs. There is clear evidence of trade in intermediates in all
industry sectors and in bilateral trade between all of the ASEAN-10, although
generally still at low levels with Myanmar, and in a limited range of industry sectors
with Brunei. Cambodia and Lao PDR already show signs of following Vietnams lead.
We need to be aware that participation in outsourcing activities is a two-way
process. There is evidence that the AMS are not only on-shoring (i.e. attracting
work onshore from global buyers), but also they are themselves outsourcing and offshoring to external suppliers, particularly within ASEAN.
4.5 The Philippines leading in ASEAN services outsourcing

The BPO industry has a long history in the Philippines; HSBC has outsourced to the
country since the 19th century and IBM since the 1950s. The early focus was on
data entry, especially accounting. In addition to low relative labour and land costs,
more recent liberalization of telecommunications turned out to play a critical
enabling role by lowering communication costs and allowing a shift to higher valueadded services. With improved global connectivity, call centres, followed by
software development and other back office functions, are now the industry leaders.
Rapid advancements in technology have seen other new BPO products enter the
market, including IT management, engineering and even R&D.
Despite the Global Financial Crisis, the Philippines reported a growth rate in BPO
employment of 19% in 2009. According to the Business Processing Association of
the Philippines, industry revenues have soared by nearly 400% over the past five
years, from USD1.5b in 2004 to USD7.2b in 2009. The industry had 515 IT-BPO firms
in 2009, including 279 foreign firms. Demand has expanded from the traditional US
market to Europe, Japan and South Korea.
Overall, in 2009 the Philippines
presented a higher industry revenue growth rate in total BPO services than India:
18% in the Philippines against 16% in India. Indias largest BPO companies are
themselves now demonstrating an interest in offshoring activities to the Philippines.
There are also signs of increasing value-added activities in the Philippines. During
the recession in 2009, the Knowledge Process Outsourcing (KPO) sector increased
by 35% and currently the Philippines is diversifying its offshoring sector to more
quality oriented industry-specific service activities. The global BPO market was

31
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estimated at USD120-150bn in 2005 with a current penetration rate of merely 8%.

Huge additional untapped potential awaits.
4.5.1 The state of BPO industry in the Philippines
Predominant investor and customer make-up of BPO in the Philippines
Figure 4.8 illustrates information on the current investment climate in the BPO
industry of the Philippines. It can be seen that foreign investors, predominantly
from Europe and the USA, make up 93.2% of all investment in the BPO industry
given that this is where most capital originates from, compared to 6.8% of domestic
investors. In terms of foreign investors in the BPO industry, Europe and USA are the
largest capital investors with 43.1% and 35.9% respectively. While European
countries primarily invest in software development, USA in contact centres, Japan in
animation, domestic investors mostly invest in BPO services with a very modest
proportion of 6.8%.
The main customer base of BPO services in the Philippines, represented by the
green section in Figure 4.8, is the USA with 70.6% of the market, made up
predominantly of contact centres. Transcription services serve Europe (10%) and
animation serves other Asian countries, while domestic users comprise 7.6% to the
market. In addition, Australian, New Zealand, Japanese, Chinese and other Asian
companies also commonly use BPO services.
Figure 4.8 also reveals the turnover of equity, and which sectors generate the most
revenue: transcription services are the most efficient with every USD1 of capital
generating USD2.55 of revenue, followed by contact centres (or call centres) which
generates USD2.01 revenue. Animation is the least efficient sector, generating
USD0.58 revenue per dollar invested, although together with software development
it is considered a higher-value BPO service, and as such could be a potential area
to present higher value-chains.
Figure 4.12: Current investment in BPO industry of the Philippines, 2014.

32
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Source: Bangko Sentral ng Pilipinas Survey of IT-BPO Industry, 2011 37
It can be suggested that the BPO industry is dominated by numerous international

BPO firms that established operations in The Philippines to serve the USA, Europe,
Asian and Australian markets. Typical investments include: Sitel, which was
operating seven major call centres in the country; Teleperformance, which offered
7,000 seats across six centres; and Convergys, which had 2,041 seat centre and
3,000 workers in April 2009.
4.5.2 Human resource challenges
Compared to leading BPO markets such as India, where labour has become
relatively more expensive, the Philippines offers lower labour costs in combination
with relatively good infrastructure. Other conditions for a robust investment climate,
including a large market, skilled human capital, youthful population, and strategic
location that connects population centres across Asia, make the Philippines an
attractive location for companies to locate.
According to the recent data, the BPO industry in the Philippines provided
employment for 525,000 people in the Philippines, significantly contributing and
creating jobs in the domestic market. One of the main strengths of the labour force
in the national BPO industry is the large labour pool of college graduates with a
37 See http://www.jumbodumbothoughts.com/2014/02/philippine-it-bpo-industry.html
33
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good command of English. The Philippines is also the country which has the third
largest annual graduate pool among the worlds top BPO service centres, after India
and China and leading Poland, Mexico, Egypt and Malaysia as illustrated in Figure
4.9 below:
Figure 4.13 Annual graduate pool by country, 2010
Source: Information Technology and Business Process Association of the Philippines IBPAP, 2011
The Economist (2012), however, has quoted the results of a survey conducted over
an 18-month period during 2009 and 2010, of nearly 24,000 establishments,
regarding the countrys labour shortfalls and skills gap that on top of the list is the
huge demand for customer service representatives or call-centre agents (40,564) in
the BPO industry, in particular staff of highly specialised sectors such as
healthcare, engineering, animation, and accounting suggesting a demand for
nurses, animators, game developers, accountants and engineers.
Mitra (2011) also agreed that the main factors constraining the BPO industrys
growth in The Philippines include the access to and quality of human resources, and
34
Outsourcing ASEAN
whether it includes technical and managerial staff or entrepreneurs. Given the

speed at which the industry has developed, it is increasingly facing human resource
constraints. BPO companies are suffering from low recruitment yields, high attrition,
poaching and shortages of the qualified applications, especially at the higher end of
BPO and IT services. Human resource development is indeed a principal challenge
for the BPO sector.
Another issue that the Philippines must address is the need to deepen the pool of
trained staff working in the sector. The industry has a high turnover of employees,
with some estimates putting the rate at close to 50% per year. Even considering
BPAPs low-end projected annual growth rate of 15% for the sector, this translates
into hundreds of thousands of new personnel required each year 38.
4.5.3 Recommendations
First, it is recommended that the Philippines reduce protectionist trade
policies and open its economy more for foreign investment.
Although the Philippines has improved its investment climate, as explained above,
foreign ownership of property remains capped at 40%, as defined under Article XII in
the Philippine Constitution (1987), with exemptions for retail trade enterprises and
export businesses, including BPO and call centres (Dayanan, 2014). 39 The rationale
behind this law was to protect and encourage domestic industries. The repercussion
however has been that in 2012, The Philippines attracted less than USD 3bn in FDI,
compared to China which attracted USD 254bn and lagging behind other regional
companies (Tacujan, 2013).40 By removing this particular clause altogether and
allowing more foreign-owned businesses to operate, this would result in an increase
in FDI. As the flourishing BPO and call centre industries prove, opening up to foreign
investment by removing such legislation will send a positive signal to foreign
investors, and will allow the Philippines to exploit its inherent positive investment
climate to move further up value-chains.
Second, the Philippines should expand the scale and scope of its BPO
industry.
There are major opportunities for rapid expansion of BPO services as external
demand outlook remains positive which points to opportunities to expand the
offshoring and outsourcing business, and the domestic market is poised to expand
38 Seehttp://www.ibpap.org/media-room/214-the-phil-better-business-process-outsourcing
39 See http://www.dayananconsulting.com/foreign-ownership-corporations-philippines/
40See http://www.philstar.com/business/2013/06/03/949375/protectionist-clauses-philippineconstitution-restrict-flow-foreign

35
Outsourcing ASEAN
in the long term. Consequently, the main factor determining the rates of expansion
of the BPO industry in the Philippines rests on the ability to expand the scale and
scope of service offerings. Strategies may include the development of new business
niches, as well as ensuring the continued enhancement of service delivery models
and productivity. Furthermore, there is a need to develop export opportunities in a
wider range of geographies in Asia, Europe and elsewhere, and hence reducing the
currently high dependence on the United States 41.
There is considerable scope to expand the scale and scope of non-voice BPO as well
as IT services at both the lower and higher ends of the value added chain, as well as
through vertical integration processes, which focus on both exports and the
domestic market. This would further benefit from developing stronger synergies
within and across different parts of the ICT sector, that is, IT-BPO services as well as
telecom, broadcasting and media services and some parts of the electronics
industry42.
Thirdly, there is a paramount need to respond to human resources
challenges.
Substantive efforts are needed to expand the scale, relevance and quality of
education and training covering both managerial and non managerial
requirements for potentially fast growing software development and services at low
as well as high end industry segments, and across a wide range of verticals. This
entails a need to expand and improve the quality of education and training provided
in-house as well as outside the firm and widening of the recruitment base across
different geographies and social groups (that is, including smaller towns, rural
communities, middle as well as low income communities). (Mitra, 2011).
Furthermore, the government should also work with the private sector to create
better, tailor-made training programmes that meet the needs of industry, to enable
the sector to achieve the desired ambitious goals. In the IT-BPO industry, the
government is working closely with the Information Technology and Business
Process Association of the Philippines (IBPAP) to find solutions to shortages in skilled
labour by allowing the industry to outline its requirements and build a special
curriculum. Public-private partnerships assist in removing hurdles and gaining the
significant benefits of foreign investment. Though the global IT-BPO is relatively
small when compared to other GVCs, it has been growing at double-digits figures
and its limitations are still not fully known.
If The Philippines can advance into higher value activities such as IT services,
animation, or design, then IT-BPO has the potential to attract home-grown talent
41 Mitra, 2001
42 Ibid.
36
Outsourcing ASEAN
that originally emigrated to other countries, and reverse the brain-drain flow. This
could be achieved through, as the first recommendation points out, increasing the
flow of FDI into the country. By nurturing a more competitive work environment and
utilising imported foreign expertise and technology, this would ultimately raise the
bar of professional work in the country, which would then spill-over various other
sectors and benefit the economy in general.

37
Outsourcing ASEAN
5
The View from China and India
This chapter examines the current environments in two of ASEANs main

competitors: China, and India. It draws from supplementary fieldwork and a report
drafted for this study: The View from the Outside: China and India. This
supplementary report studies outsourcing/offshoring in China and India, and the
developments and trends in those countries as well as surveying business
perceptions in Hong Kong and Beijing about ASEAN as an outsourcing destination.
Selected respondents were international and Chinese companies with trade or
services operations in China and Hong Kong.
5.1 Why China and India?

Both China and India have been popular destinations for multinational companies
seeking a destination to outsource their production or business processes. In
general, the types of offshoring to China are generally related to manufacturing,
whilst India is chosen more as a destination for service-type products,
predominantly in the IT sector but also in BPO, defined as the export of routine work
such as customer care or insurance-claims processing.
Most of the Business Perception Survey respondents commented that they had
generally only considered China in their initial outsourcing decision. One of the key
attractions was the implementation of a bold set of economic reforming policies in
1978 to attract FDI with the establishment of Special Economic Zone (SEZs) being
the fundamental initiative. Shenzhen was the most successful of the five SEZs.
Foreign investors in the Shenzhen SEZ benefited from accessibility to higher level
planning units (i.e. avoiding some layers of bureaucracy), tax rebates, reduced
duties on imported machinery, flexibility on hiring and firing workers, subsidized or
rent free accommodation and income tax exemption for foreigners working in the
SEZ43. Furthermore, over the 20 year period from 1978, labour cost in China was
also much cheaper in relative to US and European markets. In the first 20 years of
this growth period the average salary of the urban worker in China increased by less
than 1% per year (from $1,004 to $1,026), much slower than real GDP growth. From
1982 through 1997, labour productivity grew almost 3 times faster than real wage
growth, making Chinese labour cheaper. This situation, however, began to reverse
subsequently in the 1990s, as explained further in the next sub-section 44.
Meanwhile Indias outsourcing boom started in early the 1990s when the country
opened up to foreign investment and, to help this, reduced its tariffs. Different from
43 Yeung et al., 2009
44 Hongbin et al., 2012

38
Outsourcing ASEAN
China, Indias major attraction to outsourcers was in business process outsourcing

(BPO). Key attractions for US and European companies were the IT skills of Indias
university graduates, coupled with a low cost workforce with good English language
skills. Furthermore, the Government offered incentives to its nascent IT outsourcing
industry, with a rebate of 50% of the normal tax rate, i.e. from 20% to 10%. As BPO
outsourcing developed, a number of national champions emerged with multibillion
USD revenues, such as Infosys and Tata Consultancy Services.
As demand for services in traditional customer bases declines, suppliers in countries
such as India and China are changing their direction and adopting relevant
strategies. For example, a range of providers in India are expanding their regional
presence and leveraging their near-shore capabilities, thus growing their presence
in other larger ASEAN markets like Singapore and Malaysia and challenging the
traditional multinational corporation (MNC) application service providers in these
markets (Gartner, 2014). Furthermore, since the 2008 global financial crisis, Indias
outsourcing vendors have been handling more difficult tasks for multinationals in
many fields, such as testing new products, design and complex analysis. One such
example includes the Tata Consulting Group, based in Mumbai, which now tests
thousands of engine components and suggests design improvements using
computer models, which are much higher value added tasks than the very basic
work that was its only responsibility ten years ago 45.
Meanwhile China has recognized the potential in expanding its services capabilities
as an outsourcing destination to complement its dominance in manufacturing. In
2007 the State Council of China issued the Guidelines for Speeding up the
Development of the Service Industry aimed at encouraging the strategic
development of a service sector to boost Chinas position amongst global value
chains and foreign trade links. Particular emphasis was placed on offshore services
using policies such as international standard certificates and labeling cities as
outsourcing development bases46. Moreover, there are suggestions that China
seeks not just to remain as a world factory, but also to challenge India as a hub
for IT innovations, and thus position itself as a potential innovation outsourcing
supplier as offshore outsourcing is increasingly considered an opportunity for
innovation47. However some challenges exist, not least that Chinas software service
outsourcing firms are not comparable to those in India.
45 The Economist, 2013

46 Zheng et al., 2010
47 Ibid.
39
Outsourcing ASEAN
5.2 Outsourcing in China and India

Historically, cost attractiveness, quality of service and scalability were key drivers
for using countries like China and India as an offshore outsourcing destination.
However, there is the possibility that these trends will expire soon. A decrease in
cost competitiveness as a result of inflationary pressures, less competitive currency
exchange rates, and dropping quality levels have stifled the enthusiasm for Western
companies to outsource their business processes in these countries.
5.2.1 The China experience Survey feedback
Respondents identified a number of positive and negative points about their
company experience in China. The perceived strengths, weaknesses, opportunities
and threats (SWOT) to Chinas experiences are summarized in Table 5.1 below:
Table 5.3 China summary SWOT

Strengths
Supply chain
Labour skills reliability
Entrepreneurial, flexible culture
Government support
International standards compliance
Business establishment efficiency
Weaknesses
Labour costs
Renminbi appreciation
Import duties
Factory service reliability
IPR Infringements and other scams
Guanxi48 and corruption
5.2.1.1China Strengths
Supply chain: Despite less competitive labour costs, China is still ranked highly
due to the unrivalled quality of its supply chain. One observer said Chinas strength
is supply chain and the network of contacts and resourcefulness of the best factory
managers enables them to procure items and solutions very quickly. This is of
particular importance for industries with more complex sourcing needs and has
resulted in many companies relocating to cheaper areas of China for more reliable
and shorter production time, rather than moving out to ASEAN or elsewhere.
Labour skills and reliability: China is also well rated for the skills, hard work and
reliability of its labour. The general response was that Chinese workers are skilled,
good at copying designs and able to produce at a high quality level relative to most
competitor countries such that they were able to move up the value chain by
learning how to produce the more specialized and high value added items.
Conversely, countries such as Vietnam and the Philippines often experience
problems with labour, including pressure from labour unions or poor work ethic,
which acts as a deterrent for FDI.
48 i.e the practice of networking with decision makers and people of influence
40
Outsourcing ASEAN
Entrepreneurial, flexible culture: one commentator referred to the Chinese

strength of flexibility and thinking on their feet and a strong entrepreneurial spirit.
One example is of two women who have established a vertically integrated sports
shoe manufacturing plant in China to offer contract manufacturing services to
secure business with some of the leading global brands. A supply chain director in
logistics was impressed by the China ports proactive response to the 2007 financial
crisis; he said that Shanghai had reduced its fees in order to keep business moving
and keep a good market share amidst sharply falling shipping volumes.
Government support: the success of China was founded on strong, supportive
policies from the Government which successfully started in 1978 and the active
support
that
followed,
for
example
the
Go West" strategy, officially called the Western Development Program,
which started in 2000. The objective was to open up West China by creating more
attractive business and investment conditions for both foreign and Chinese
companies, which have already relocated or which are intending to relocate to the
region. This would thereby rebalance the disproportionate economic activity in the
coastal provinces and stop companies from relocating to ASEAN and other
countries. The Chinese Government also invested heavily in infrastructure for roads,
ports, airports and logistical infrastructure, first for opening areas in the South, such
as Shenzhen and East Coast, such as Shanghai, and then later in the West, such as
Chengdu and Chongqing.
International standards compliance As shared by some respondents in some
sensitive industries such as pharmaceuticals and toys, factory managers in China
tend to be more knowledgeable about international regulations and can manage
better the audit/quality control aspects to provide compliant factories.
Business establishment efficiency: According to one respondent, the 6 months it
takes to establish a business in China is much quicker than in Vietnam (10 months)
and Indonesia (18 months).
5.2.2
China Weaknesses
Labour costs: Since 1997 labour costs in China have increased sharply as a result
of a market-based pricing approach from the increasing influence of private versus
state businesses, as well as a set of new labour laws enacted in 2008 and also the
fall in migrant workers and working population. Moreover, there are significant
regional variations across China; for example, labour costs in Ningbo can be more
than 20% lower than in Guangzhou. The average annual growth rate of real wages
has been in double digits, an increase that is a much faster rate than productivity,
which means unit labour costs have been increasing and now are at a monthly level
of RMB 4,000 (approximately USD650), higher than some AMS (e.g. Vietnam).

41
Outsourcing ASEAN
Currency appreciation: Since 2005 the Renminbi has appreciated by over 30%
against the US dollar (6.1RMB to 1 US dollar currently), increasing production costs
in US dollars terms for foreign companies.
Import duties: Chinas import duty of 12% in textiles makes it less competitive
than countries with 0% import duty, such as Myanmar.
Factory service reliability: One Hong Kong company said that factory service and
reliability standards are falling. According to one toy company, it is now getting
much harder in China to procure overtime and weekend work when fast orders are
needed. Another factory service problem is quality variability. One automotive
participant said some of his suppliers can be unreliable, sometimes using lower
quality raw materials after contract signing. However, Chinese factories are still
generally considered favourably compared to other Asian factories.
IPR Infringements and other scams: China does not score well on the criteria of
intangible assets. Copying was identified as a major problem by several companies
and well known IPR copying cases have been publicised. Furthermore, local
suppliers often trick foreign companies into giving an advanced payment of USD
50,000 or more and then disappear without supplying the contracted goods. The
foreign companies may appoint a local law firm to help to recover the stolen
money, but this is often unsuccessful.
Guanxi: the practice of guanxi or networking with decision makers and people of
influence is still an important part of business in China, and commission payments
or other types of bribery are said to be still common: a respondent said the
domestic market needs to become fairer and more transparent to attract a larger
number of foreign companies.
5.2.3 The India experience developments since 1990
In just over a decade, the Indian BPO industry has grown to reach over USD 11
billion in export revenues, employs more than 700,000 people, and accounts for
more than 35 percent of the worldwide BPO market. As previously mentioned, India
is a world leader in offshoring for the service sector: six of the ten leading cities for
offshoring are in India, a phenomenon helped by its supply of IT and engineering
graduates and its English-language skills 49. In 2006 India, held 69% of all offshored
IT work (see Table 5.2), far ahead of China and other Asian countries 50. In 2008, this
figure decreased to 65% of all offshored IT work and 43% of offshored businessprocess work, but was still far ahead of other countries51.
49 Oshri et al., 2009

50 Ibid.
42
Outsourcing ASEAN
Table 5.4 Locations of offshoring for IT and business process applications
Source: Oshri et al. (2009)
The main segments are Customer Interaction and Support, Finance & Accounting,
Human Resources, Procurement Services, and Knowledge Services, which account
for more than 70 percent of the Indian BPO industry. These are higher margin
activities than call centres, many of which have migrated to The Philippines where
English language strengths have helped it achieve a strong position.
Indias dominance has been due to capturing global outsourcing demand. More
recently India has started to focus on servicing the growing needs of domestic
companies, and look at regional neighbours such as Malaysia and Singapore.
5.3 Current Trends and Developments

5.3.1 Relocating from high labour cost areas
5.3.1.1Relocating Inside China and India
Chinas uncompetitive labour costs provide an incentive to relocate to lower cost
countries. However, Chinas strong supply chain has led most Chinese companies
and many international companies to relocate inside rather than outside China. The
relocation of factories has been mainly from Guangdong to Western region
(Chengdu, Chongqing), drawn by the Government incentives, and to middle China
(provinces such as Henan, Guangxi), which coincides with migrant workers growing
preference to work closer their hometowns.
Staying in China is therefore mainly influenced by operational imperatives of supply
chain efficiencies, positive Government policy incentives, as well as the rising
commercial attraction of China as a consumer market for sales, and no longer solely
as a cheap production base. Meanwhile in India the traditional major cities for IT
outsourcing, such as Bangalore, have seen costs grow and the trend is now to
51 The Economist, 2013
43
Outsourcing ASEAN
increase the location of centres in Tier 2 and Tier 3 cities, such as Jaipur and Kochi,
where cost savings of 20% to 30% are available.
Further analysis on competitiveness, and its measurement, are discussed in Chapter
8, which investigates ASEANs readiness with respect to global value-chains, and
how the AMS compare to other countries and trade blocs including China and India.
5.3.1.2Reshoring and nearshoring
As China is no longer a cheap destination for outsourcing and there are clear
benefits in being closer to the end customer, US reshoring has been an increasing
trend for some prominent US companies (e.g General Electric), which has gained
much political support and media attention. With the labour cost gap closing
between the US and China, some firms in sectors such as electronics are planning to
return some manufacturing capacity to US.
Alternatively, Nearshoring is also becoming more favorable as US companies
increasingly outsource to Mexico. The benefits are labour rates 70% lower than in
US, skilled labour with good engineering abilities, a common time zone and better
logistics. Also known as proximity shoring, nearshoring is now a driver in the
apparel industry. This is particularly so in the mid-level, where speed to market is
crucial and explains growing interest in East Europe for sourcing apparel. However
for low end apparel, cost weighs more heavily in the sourcing decision. Such trends
correlate and complement neatly with free-trade agreements and outsourcing,
which is analysed in depth in Chapter 9 of this Report.
5.3.2 Other trends
Local procurement of materials and parts: In terms of general industry trends,
a survey by Japan External Trade Organization (JETRO) of Japanese companies views
on Asia indicated that production costs consist mostly of material costs (average
63.3%). Trends in shifting to local procurement to reduce costs are accelerating,
especially in China, Taiwan and Thailand. According to the survey, more than 75% of
firms intend to increase their local procurement rates in the future, 52presenting an
opportunity for local suppliers.
Moving up the value chain: Companies in China are keeping higher value added
activities such as R&D and relocating lower value activities to ASEAN and other
countries. Wintek, a supplier of panels to Apple, set up several factories in Vietnam
in 2011, attracted by its lower labour cost, approximately 40% of Chinas. In turn
this shows some moving up the value chain for Vietnam, from lower value sectors
such as textiles and footwear to increasing electronics activities, as does also the
arrival of Japanese electronics firms such as Panasonic. Modern global value-chains
52 Survey of Japanese -Affiliated Companies in Asia and Oceania (FY 2012 Survey)

44
Outsourcing ASEAN
and mapping chokepoints within them, i.e. how to access and move up certain
value-chains, are explored in more depth in Chapter 6.
From outsourcing to insourcing: In certain industries, which tend to be the high
value added, there is a trend away from outsourcing to insourcing to have more
control over process reliability, cost and quality control. For example, companies in
the toy industry which used to outsource their parts are now making their own
springs, screws, and doing the die cutting and gluing.
5.4 Views on selected ASEAN countries

A summary of Survey feedback on ASEAN countries is presented in table 5.3 below.
It can be seen that respondents had practical outsourcing experience or knowledge
of only a few ASEAN countries and this summary is therefore based on those. More
details on specific recommendations for AMS, drawn from the results of the
Business Perception Survey in China are incorporated into Chapters 10 and 11 of
this Report.
Table 5.5 Selected ASEAN Countries SWOT
ASEAN
Country
Strengths
Consumer companies attracted by
largest consumer population in
ASEAN.
Relatively low import duties
Indonesia
Weaknesses
Long business set up time
Labour restrictions make it more
difficult when starting factories e.g.
one footwear company needed 2
fatwas to support their production
process, one to allow workers to
touch pigskin used in the shoes, the
second to allow employees to drink
water during Ramadan.
Sharp labour cost increase in 2012
was unexpected
Some comments that labour less
reliable due to labour laws
Infrastructure poor
Foreign companies attracted by

English language skills, hence
success in BPO industry
Philippines Some consider factory there to sell
into local market, large population
and food habits relatively
westernised
Moving up value chain e.g.
Factory labour supply reducing
technology endorsed by FDI by
pushes up wages and labour unrest
global players, Intel, Nokia, Wintek.
increases
Vietnam
Political stability compared e.g. with Corruption
Infrastructure
Thailand

45
Outsourcing ASEAN
Thailand
Some toys such are made in

Thailand and artistic skills of Thai
labour are good
Good expertise for automotive and
track record
Costs are relatively high and there
was a promise made in 2013 for a
30% labour rates increase
Has suffered from periods of political
instability, increases risk perception
Flood problem, in 2011 created bad
publicity, which led to world
shortages of electronics and carparts
The perceived advantages and disadvantages of locating and conducting

businesses in each country, and why certain companies choose a particular country
to locate or offshore certain business activities, differ greatly between China, India,
and AMS. Traditionally, China and India were both seen as key locations for MNCs to
offshore and also outsource their business activities, particularly in the
manufacturing and IT services sector. However as the relative costs of locating in
these countries have increased and companies are looking for alternatives, the AMS
are becoming ever more attractive. This could present (and already has presented)
an opportunity for these countries to specialize in higher-value production methods,
although some challenges still remain, as Chapter 6 explain.

46
Outsourcing ASEAN
6 Modern Global Value Chains

6.1 Understanding moving up GVCs
As mentioned above, moving up GVCs is an excellent way to generate more
productive modes of employment. Governments in developing economies
sometimes express concerns about how to derive the full benefits of participating in
GVCs. This section shows that taking on more productive roles, further up the value
chain, is the key to gaining the rewards of higher growth rates, higher productivity
and greater learning, all on offer in GVCs, following the recent UNCTAD report 53.
The famous Smiley Face diagram, created by Stan Shih of Acer Computers (see
Figure 6.1), is a simple user-friendly model which helps to understand the notion of
value-added and the desirability of climbing the value-added ladder. Shih noted
that, in the personal computer industry, both ends of the value chain have much
higher value-added roles in the production of a product than the middle part of the
value chain. If represented on a diagram with an X and Y axis, the resulting curve
would look like a smile.
Value added is higher in upstream and downstream activities, such as R&D and
innovation, logistics, and marketing (all service activities). It is lower in midstream
manufacturing processes centered on assembly. Firms therefore have a clear
interest in increasing their participation in services in order to achieve higher valueadded sales.
6.1.1 Examples of moving up value chains
One such example of a firm moving from the manufacturing side (i.e. the middle of
the smile curve) to the left of the curve (R&D and innovation) is IBM. Having
traditionally manufactured computers and related hardware, they sold this business
branch to Lenovo in 2005 and now focus on the development and research stages
for other innovative computer products and services.
Li and Fung, meanwhile, present a good example of a firm moving to the right of the
curve (logistics and marketing) in order to increase their value added. Although
they originally focused on exporting goods from Hong Kong to international
destinations, since the 1970s they have focused on global sourcing and supply
chain management, overseeing the GVCs of suppliers in the garments industry and
providing time-sensitive logistics services for global retailers.
53 UNCTAD (2013), Global Value Chains and Development: Investment and Value-Added Trade in the
Global Economy

47
Outsourcing ASEAN
Smiley Face: conceptual model of the shift to a high

value
globally
services
economy
Figure 6.14
Theadded,
Smiley
Face -integrated,
The Role of
Services
in Manufacturing
Added
Value
R&D/Innovation
Centre
High Value-Added
Product and
Service Centre
Higher Added-value
and Lower
Replacement
Standardisation
Global Logistics
Center
Brand
Innovation
Marketing
Value Creation
R&D
Logistics
Design
Manufacture Assembly
Value-added process
Source: Business Week International (2005)
6.2 How to move up GVCs

Countries must be concerned with ensuring initial access to participation in a value
chain, whilst also assessing how to capture value within that chain and climb up it
(to the extreme ends of the smile curve in Figure 6.1). The likes of Cambodia,
Laos, Myanmar, and Vietnam, should consider how to initially attract low valueadded jobs and subsequently move up the value-added ladder as they become
more integrated and confident of working with global and regional clients.
Economic upgrading can be achieved through a number of methods. These include
Improving the efficiency of the production processes (process upgrading); adding
new product lines that are of higher value-added because of improvements in
designs or technical specifications (product upgrading); increasing value addition by
moving up the value chain and taking on new functions which are of higher skills
and knowledge intensity (functional upgrading); and switching to a different sector
whose final products are more technologically sophisticated and of higher valueadded (inter-sectorial upgrading). Upgrading is not easy, yet it is happening
everywhere and is driven fundamentally by competitiveness policy changes (across
borders and within-borders), and investments in physical and human capital.

48
Outsourcing ASEAN
ASEAN member states have already benefited from such trends. Initially, countries
in the region were predominantly involved in midstream, low value-added
production and higher value-added services tasks in a diverse range of industries,
including textiles and electronics, and services incidental to goods production, such
as maritime transport, logistics and financial services. However, over time the
regions integration into GVCs facilitated knowledge diffusion and learning as firms
located in AMSs were able to access leading-edge technology and best-practice
management approaches, creating new opportunities and pressures and incentives
for them to upgrade their technological and management capabilities and skill
levels of their workers.54
In the future, companies will have to continuously redefine their strategies and
boundaries to make the most of their evolving competitive advantage, and ever
changing models of goods and services production. For example, as China has
grown more prosperous, wages have risen, resulting in some lead outsourcing
companies ending their commercial relationships with the country and outsourcing
instead to lower cost locations in the region, such as Vietnam and Cambodia.
Indeed, China is well known as an assembly point for many labour-intensive
consumer electronics, which is a relatively low value-added activity, but it is
increasingly moving into other parts of the value chain, including in some cases
design or R&D. Although such changes inevitably take place at different paces in
different countries, opportunities are nevertheless available for sustained
productivity growth through moving up value chains.
6.3 Concept of mapping value chains and relieving chokepoints

In order to fully exploit such opportunities, it is necessary to identify specific chokepoints preventing access to value chains and requiring policy attention, from which
possible options for moving up value chains are identified. There are lots of
different ways of doing this, but the key is to pinpoint the pathway to market and
the levels of value-added at each step in the pathway. Some research has mapped
a number of specific industry value chains and shown where individual countries
firms are located on these maps in value-added terms. Microeconomic work of this
nature is helpful in identifying chokepoints in cross-border production, but very little
such work has been undertaken for ASEAN. Work of this nature requires use of firm
level data and input/output tables, rather than traditional balance of payments
statistics.
For trade in intermediates to thrive, it is vitally important to continue the process of
reducing trade costs.
Global value chains can only operate efficiently if the
business and trade environment they face enable them to do so.
Despite the
54 Ernst and Kim (2002)
49
Outsourcing ASEAN
huge reductions over recent decades, which have generated GVC activity, a recent
study by the World Bank has shown that the absolute level of trade costs can add
more than 100% to costs of manufactured goods-exports and over 200% on
average to the costs of agricultural goods-exports. 55
In 2011 the APEC Business Advisory Group submitted to APEC Leaders an integrated
mapping for both goods and services supply chains, which also identified relevant
policy issues to relieving choke points along the chains in both goods and services
sectors. This integrated framework is illustrated in Figure 6.2 below, and provides a
good first draft guide to drawing individual industry value-chains for both goods and
services industries. It also alludes, via its action agenda, to potential policy-related
choke points that might require attention.
Figure 6.15 Integrated Goods and Services Value Chain Matrix
Source: Marshall School of Business, University of Southern California, 2012
55 Trade Costs in the Developing World, 1995-2010, World Bank 2013

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6.4 Specific costs relating to ASEAN countries and suggested

preliminary solutions
6.4.1 Transport and distribution
The transport sector is often seen as a primary key to efforts to move up the value
chain in other traded goods sectors. As the manufacturing process becomes more
complex, it becomes even more important to be able to move both inputs and
outputs across borders rapidly, at low cost, and with as little risk as possible. Such
operations are only possible in an environment where the transport sector exhibits
high performance.
UNCTADs Liner Shipping Connectivity Matrix has shown however that only 13% of
developing country bilateral pairs are directly connected by liner shipping and 90%
of them have no more than 3 transhipment points. This is important because while
there is a negative correlation between maritime distance and export volumes, the
negative correlation between the number of transhipment points and exports is
more significant. Recent UNCTAD estimates suggest that export values between
countries are 45-55% lower if an economy is not directly connected to the
destination, and more so when that destination is considered a global hub. 56 The
study has shown that large discrepancies exist within ASEAN: Singapore, along with
China and Hong Kong, ranks in the top 10 globally in terms of maritime connectivity,
while Myanmar is in the bottom 10 of all ranked countries.
6.4.2 Logistics
Logistics, combined with fast and reliable telecommunications and efficient border
control operations and facilities, help enable and contribute to global supply chain
performances.
Such logistical and telecommunication services include ICT,
automation in customs clearance procedures, inventory cost systems and cargo
handling. Firms in countries with inefficient logistics and related infrastructure will
struggle to participate in such networks. Indeed, according to the World Banks
Enabling Trade report in 2013, logistics barriers impede global trade flows much
more than tariffs do, and reducing supply chain barriers could increase world GDP
six times more than if all tariffs were removed (World Bank, 2013) 57. Furthermore,
reducing supply chain barriers to halfway global best practice could potentially
increase world GDP by nearly 5% and trade by 15%. 58
56 Marco Fugazzo, UNCTAD 2014
57 Enabling Trade: Valuing Growth Opportunities WEF-WB Report 2013
58 Ibid.
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Outsourcing ASEAN
6.4.3 Services infrastructure

Service activities require a whole set of related supporting infrastructure. To
participate in service GVC activity, businesses must move people and data.
Businesses need to be able to obtain visas and ensure the movement of employees
is hassle-free. This in order to gain access to markets and necessary skills, to attract
the necessary staff who can carry out knowledge-intensive work, to deliver services
to customers and deliver other high-quality service activity. Meanwhile, free
movement of data is needed by companies as part of their business offers and as
part of internal processes; barriers could, for example, reduce the efficiency of a
firms operations by hampering the ability to trade and use cloud solutions. As
such, developing countries should ensure that they address any restrictions in the
movement of services, people and data in order to make them competitive and
participate in GVCs.
6.4.4 Compatibility of technical and professional services standards
Related to the free movement of data, the connectivity and compatibility of
technical and professional services standards, including efforts towards mutual
recognition, is also necessary in improving the efficacy of supply chain
management. Any disconnect at technical level will badly disrupt the ready
functioning of GVCs by making it difficult for international firms to collaborate and
work together.
6.4.5 Inward foreign direct investment and trade financing
Constraints on inward foreign direct investment can also hinder potential GVC
activity in developing countries, as the absence of foreign investment trade
partners means that trade financing needs often go unmet. Some estimates put the
global gap in unmet trade financing needs as high as US$1.6 trillion, US$425 billion
of which is in developing Asia59. This underscores the importance for developing
countries to fast track FDI processes including policies such as the establishment of
Special Economic Zones.
6.4.6 Protection and Restrictions in the service sector
Given how important efficient services inputs are (both domestic and imported) for
effective participation of local SMEs in GVCs, it is important to draw attention to the
relatively high levels of protection which persist in the services sectors, and which in
some countries, in some sectors, continue to increase. Such barriers can increase
operating costs and capital expenditures, and create and exacerbate delays faced
by businesses. This can result in reduced trade activity and increase the risks and
unpredictability of the associated business environment. 60 In order for businesses in
developing countries to increase their involvement in GVCs and capture greater
59 Beck et al., 2013

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value-added, addressing issues on protectionism and restrictive policies is a

necessary prerequisite.
6.5 Insights from ASEAN Country Studies

ASEAN presents an interesting and unique study in terms of evaluating its member
states roles in GVCs. The substantial differences in its economic and political
environments mean that each country has their own specific constraints and
challenges that they should address individually, in order to maximize the potential
gains from moving up value chains. Most of the ASEAN countries still have room for
improvement with respect to moving up GVCs, albeit some more than others.
6.5.1 Transport and distribution
In terms of transport and distribution, countries such as Singapore, Malaysia and
Thailand have excellent infrastructure; home to some of the worlds busiest ports
(e.g. Singapore port, Port Klang, Laem Chabang) and international airports (Changi,
KLIA, and Survanabhumi international airports).
In addition, these countries
understand the importance of ensuring that these transport hubs have substantial
capacities to facilitate trade flows in and out of the country. In Thailand the Port of
Ranong, the principal Indian Ocean port for the country and the gateway to trade
flows across the Andaman Sea, was expanded in 2006 to further strengthen trade
routes with countries in South Asia, Middle East, Europe and Africa. 61 Singapore is
planning to invest US$8bn to double its container port capacity in a move to
stimulate economic revival in the country by better competing with neighbouring
ports and to cope with congestion in the area. 62 Meanwhile Port Klang in Malaysia,
the second busiest container port in ASEAN countries and the 16 th busiest in the
world63, has taken large steps in improving its infrastructure by tackling the areas
financial mismanagement and corruption through various initiatives.
This
complements its impressive network of connectivity between the port with Kuala
Lumpur and Putrajaya, as well as the Port Klang Free Zone.
60 World Economic Forum, Global Enabling Trade Report, 2012 (Taken from FOCUSING ON LOGISTICS:
AN ENABLING APPROACH TO TRADE?, USAID presentation, Sherry Stephenson, USAID SEADI Project,
Jakarta, Indonesia, February 20, 2013)
61 See http://www.rnp.port.co.th/eng/dataset1/data1.html
62 See http://www.ship-technology.com/news/newssingapore-plans-8bn-investment-in-ports
63 AAPA, 2011, See http://aapa.files.cms-plus.com/PDFs/WORLD%20PORT%20RANKINGS
%202011.pdf

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These transport and distribution hubs, which facilitate the flow of imports and
exports from other countries, have helped catapult industries in these countries to
move up the value chain and exploit any competitive advantage they may have.
These countries have recognized this, and have continued to invest in maintaining
and maximising the advantages these connection points provide. It is no accident
that these countries score more highly on certain GVC indicators (see the respective
country reports).
This may serve as a lesson for other ASEAN member states, such as Myanmar and
Laos, both of whom have poor quality transport infrastructure. In Myanmar, the
grossly inadequate road network means that products must still be shipped by sea,
even to border markets. Road density, for example, is about 2km per 1,000 people
against an ASEAN average of 11km per 1,000 (ADB, 2012) 64. More problematically,
addressing such issues may be difficult as transport planning is particularly complex
and fragmented in Myanmar, with transport-related issues managed by six
ministries and several city development committees. Along with problems regarding
customs and border procedures these problems helped to place Myanmar 129 th out
of 155 in the World Banks Logistics Performance Index in 2012 65.
More promisingly, Laos has made significant recent progress through customs
automation and trade facilitation reform, reducing the cost and time associated with
clearing cargo at the border, especially for major exports and their imported inputs.
Such improvements are reflected in progressive improvements in the World Banks
Logistics Performance Index. However, as Laos is landlocked and has no major
railway routes, trade out of the country relies on roads, despite Laos having some of
the highest fuel costs in Asia. Furthermore, the roads that do exist are often unable
to withstand heavy international-standard trucks; just 13.7% of the total road
network was paved in 2009 and the paved stretches serve only urban areas,
affecting linkages between the domestic and regional road transport systems 66.
This adds to the costs that GVC actors face, which is further exacerbated by delays
to the Greater Mekong Sub-region Cross-Border Transit Agreements (CBTA), an ADBfinanced project which will cover cross-border transport facilitation (including singlestop and single-window customs inspection systems, movement of persons and
transit traffic regimes) and facilitate the transportation of goods quickly over land to
other major production (and consumption) locations. However, Laos position could
64 ADB (2012) - Myanmar in Transition: Opportunities and Challenges, Asian
Development Bank, Manila
65 See http://siteresources.worldbank.org/TRADE/Resources/2390701336654966193/LPI_2012_rankings.pdf
66 OECD, 2013
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still be strengthened given that it is located between five international markets

(Myanmar, China, Thailand, Vietnam, and Cambodia), and could be the base for
production networks or as a transportation hub between these countries.
6.5.2 Border crossing supply chains and trading costs
Transport, distribution and logistical networks can only be effective, however, if the
relevant countries have border controls and customs that are not prohibitive or
discourage trade flows. The efficiency of new physical infrastructure to promote
trade, including ports, roads, airports and other similar regional trade-enhancing
projects, will only be maximised if the complementary border controls and customs
allow sufficiently free cross-border movements of goods and services.
One example can be seen in the Asian Development Banks Great Mekong
Subregion: East-West Corridor Project, an all-weather road connecting Mawlamyiang
in Myanmar to Danang in Vietnam, aimed at expanding the market for transit and
bilateral aid amongst the countries through which the road would pass 67. Indeed, in
their assessment of the benefits that would be accrued to landlocked Laos, the ADB
suggested that complementary investments and capacity development are needed
in the Lao PDR to transform the EWC into an economic corridor, as the trade
facilitation component was less effective in achieving its intended outcome of
mitigating nonphysical barriers to cross-border movement 68. Since the roads
construction, the number of border-crossings made by vehicles has not risen
substantially, with the number of vehicles crossing the border daily (i.e., 150
vehicles) only marginally higher than number of vehicles that passed through in
2000 (about 131 vehicles) (ibid.). However, border facilities provided by the GMS
project have contributed to transport facilitation and enhanced trade, resulting in
savings in custom and immigration processing times at the border crossing and, in
the case of the Lao Bao-Dansavanh border crossing, increasing the average trade
value by 34% from 2000 to 200769. The new Cross-Border Transport Agreement
(CBTA) has yet to be wholly implemented, which is expected to further improve
cross-border movements, between Laos and Vietnam, and help fully develop
bilateral trade ties between Laos and Thailand. Should the CBTA directly result in a
substantial increase in border crossings, as is expected to happen, this would
illustrate the importance of complementing the construction of physical
infrastructure with streamlined border control processes, in order to facilitate trade
and transport flows.
67 ADB, 2008
68 ibid.
69 Ibid.
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Outsourcing ASEAN
Such a story could create a trend which other countries could follow. According to
the World Banks Doing Business indicator for Ease of Trading Across Borders,
ASEAN countries have widespread and varied performances. Singapore (1 st) and
Malaysia (5th), both require few documents to import and export and have some of
the lowest costs in the world with respect to the procedures required to import and
export goods70. Meanwhile, Myanmar (113th), Cambodia (114th), and Lao PDR (161st)
all score poorly, let down by the costs of importing and exporting 71. Countries such
as the Philippines (42nd), Indonesia (54th), Vietnam (65th) all scored similarly across
the indicators.
Complementing these statistics with our GVC Readiness Index rankings, we can see
that some countries have much room for improvement. The Philippines, for
example, scores quite low in terms of trading costs, which measures the direct
tariffs on imports as well as corruption levels at border controls, and indirect tariffs
on imports (see complementary country report on the Philippines). Addressing
these logistical issues this could allow for easier and more efficient customs
controls, and thus improve and streamline trade flows into and out of the country.
Indonesia could also improve its ranking in our Ease of Trade category (see
complementary country report on Indonesia), particularly with respect to trade
logistics and customs burdens. Whilst the Indonesian governments development
strategy framework (MP3EI) emphasizes investments in hard infrastructure,
Indonesias enhanced participation in global value chains will also depend on the
countrys ability to provide the necessary soft infrastructure - improving the
operational efficiency of the national logistics system. For firms participating in
GVCs that demand the timely sourcing and delivery of components, such as in the
textiles and automotive sectors, an efficient logistics environment is crucial to their
success. As a result, the recent implementation of 24-hour port operations, and the
Indonesian National Single Window (INSW) for border clearances, is a good step
forward by the Government. In the short-term, this could include the development
of GVC-oriented Special Economic Zones (SEZ) that provide better infrastructure, as
well as their own special customs facilities to ease the process and lower the costs
of importing and exporting products.
6.5.3 Openness to foreign investment
A countrys integration in the global economy is nowadays more accurately
represented by its participation in GVCs than by traditional trade measures of
exports and imports. Increasing the amount of foreign investment in a country is
70 See http://www.doingbusiness.org/data/exploretopics/trading-across-borders
71 According to the World Banks Doing Business indicators, these procedures analyse the duration
and cost of documents preparation, customs clearance and technical control, ports and terminal
handling, and inland transportation and handling.

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paramount for moving up the value-chains. It can help to introduce better

equipment and infrastructure into the country and can become a valuable source of
funds and investment to promote certain industries. However, in order to facilitate
this, it is imperative that an economy is open and welcoming to foreign companies,
with appropriate domestic customs that makes it easier for such firms to establish a
base there and conduct their business with relative ease.
Despite the possible challenges mentioned above, Laos presents an interesting
example as it is an increasingly open market that is welcoming to foreign business
activity and easy to navigate for outsiders, should they make the necessary efforts
to understand the economy and legislative framework. The Investment Promotion
Law of 2009 is encouraging to foreign investors and provides an attractive range of
investment incentives, particularly if related to a promoted sector (currently
agriculture, industry, handicrafts and services) or an underdeveloped promoted
zone, through tax exemptions on profits and import/export duties. This is vital for
taking part in global value-chain activity, easing the importation of foreign valueadded and conditions for exporting in to value-chains. The recently passed FDI Law
is also designed to incentivise foreign investment through tax holidays and
exemptions. Foreign firms in Laos in our research also report a generally friendly
and welcoming atmosphere in the business world and countrywide.
Meanwhile, as GVCs have proliferated, trade in intermediate goods and services in
Indonesia have overtaken trade in final goods and services. The country already
participates in the GVCs of a number of sectors, having introduced policies during
the 1980s to promote foreign investment into the country. However, there remains
significant scope for attracting increased amounts of outsourced tasks to the
country, and at higher levels of value added on GVCs.
For example, in our analysis of Indonesias GVC Readiness Index (see country
report), Indonesia performs well in terms of cost competitiveness, as well as in
trading costs including in the tariffs sub-category. This is primarily because of the
very low costs involved in importing and exporting containers in and out of the
country, but also as a result of the low complexity and rates of its tariffs. Having
freed up their trade environment, Indonesia has been able to import the machinery
and knowledge to help maximize and facilitate its transition in moving up valuechains in certain sectors. However, the countrys rigid labour restrictions enforce
relatively high severance pay, whilst the recent trend of high annual increases in
the minimum wage is also having a negative effect in relation to the countrys cost
competitiveness, which could mean that foreign firms will locate elsewhere to save
on labour costs, potentially reducing its ability to continue this upwards trend in
GVCs. Indonesia could look at the example of China in how to mitigate or stave off
this problem (see page 40 of this report).

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6.6 Examples of value-chains across ASEAN

6.6.1 Garments
The garments industry is typically one of the largest manufacturing industries in
various ASEAN member states, contributing 40% of export value from Myanmar,
and a staggering 80% in Cambodia (see respective country reports).
6.6.1.1Myanmar
The specific garments activity being carried out in Myanmar is Cut-Make-Pack
(CMP) whereby materials and fabrics are imported from abroad and cut, tailored
and fitted to the specified design, before being packaged and sent for export,
usually straight to the final retail destination. Notably, this represents a very small
value within the final retail price of a clothing item (i.e. at the bottom of the
Smiling curve).
Myanmar has many specific advantages which lend itself to a role in global value
chains for the garments sector. It has an abundant supply of labour, with a young
emerging population, and wages levels are lower than in rival garment-producing
countries. Furthermore, with the ending of sanctions from markets such as the USA
and the EU, Myanmar is now able to benefit from preferential treatment from these
countries under their respective (but differing) trade initiatives. This should mean
duty-free and quota-free access to the two most lucrative garments markets in the
world for CMP products emerging from Myanmar-based factories. This is spurring
the interest of EU and American buyers and brands who now work with
manufacturers in East and South-East Asia to identify low-cost factories in Myanmar
for their CMP work. The Myanmar garments industry has significant potential for
expansion and this increased market access is being heavily celebrated.
Interest in Myanmar is set to continue. A recent survey by McKinsey of EU-based
textile sourcing decision makers placed Myanmar joint 3rd amongst respondents as
a hot-spot for garments sourcing over the next 5 years. This is a very impressive
result, placing it behind Bangladesh and Vietnam but ahead of Cambodia and
Indonesia and even China (Berg et. al, 2013). Furthermore, 72% of textile-related
firms planned to decrease sourcing from China over the next 5 years (Ibid.).
Myanmar, if it continues its wider economic reforms and maintains political stability,
could be a major beneficiary of this exodus.
However, some caveats remain regarding Myanmars potential move up the valuechain for garments. Currently, Myanmar firms lack of involvement in design,
branding, managing relationships with brands & buyers means that it only retains a
very small minority share of the lucrative global garments value-chain. Trying to
overcome this may be difficult, given the countrys poor physical and nonphysical
infrastructures, characterized by frequent power shortages and insufficient
transport networks. In terms of logistics and transport, shipments from Myanmar
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Outsourcing ASEAN
are subject to higher transportation costs, logistics costs and delays than from
neighbouring countries. This hampers the enthusiasm of the industry players to
outsource other elements of the value chain to Myanmar.
6.6.1.2Cambodia
Similar problems can be seen in Cambodia, another home of CMP garments work..
In an industry with globally-dispersed production chains, offering limited time-lags
and low transaction costs for importing inputs exports is crucial to attracting valuechain activity. Cambodia unfortunately is unable to make these offers to outsourcing
firms.
However, significant progress is being made within the country. A National Single
Window is in being formulated, an ASEAN-wide policy development, which will
streamline paperwork for moving goods across borders. In collaboration with the
World Bank, OECD and WTO, the national General Department of Customs and
Excise has also worked to install appropriate IT systems at borders, provided
technical assistance to improve efficiency and conducted capacity building for
increased private sector investment in infrastructure as well as increasing security
arrangements at borders. Such reforms will help to improve logistics and trading
capabilities for the garments industry.
Cambodia though is still losing ground to other prominent CMP garments industries,
particularly in the amount of value-added captured within these economies. The
likes of Bangladesh and Malaysia have been able to add value domestically in
recent years, taking on higher-value activities. These activities include more
complex stitch work as well as the development of textile mills to produce fabric
locally At the same time Cambodia has lost value as the cost of imported fabric for
the CMP process has dramatically risen (see country report). Positive investment in
garment industries in these countries has allowed firms to engage in these
additional, higher value-chain activities, bringing more of the value chain within
their borders. No such investment has taken place in Cambodia.
The reasons for this are numerous but a major factor is the make-up of garments
players within Cambodia. There is a lack of available capital and investment
potential amongst domestic producers i.e. those firms that may be more inclined to
bring higher value-added activities to the country. Foreign firms represent the vast
majority of the industry, and though they possess greater capital for investment are
less inclined to add value to their Cambodian operations. The international
garments producers are notoriously footloose and have little incentive to invest in
new or extra value-chain activities in-country when they can simply invest or
relocate elsewhere. Foreign firms in Cambodia have been known to often only stay
within the country for the duration of their entry-based tax and duty incentives. The
government, whilst keen to invest in programmes like quality-based vocational
training for garments workers, is aware that such a policy, only bearing fruit many

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years after the initial funding, may be in vain if locally-based international firms
have already relocated.
Aside from a relative lack of available investment capital, domestic garments
producers face other specific obstacles to growth. Unlike large, export-oriented
international firms, who may import tax-free into Cambodia, emerging domestic
firms, initially focusing on the domestic market, face import tariffs on their fabric.
Further high costs from transport fees and an electricity pricing mechanism that
penalises greater use of electricity around Phnom Penh mean that domestic firms
find it hard to achieve economies of scale and are often outcompeted by cheaper
Chinese imports.
In conclusion, both Myanmar and Cambodia are currently involved in low-value
production methods within the garments industry (as does Laos), as exemplified by
its abundant supply of labour and lower costs of production. As garment producers
are looking for alternatives to Chinas increasing costs, these countries as well as
Laos and Vietnam should take advantage of its garments industry characteristics
and use it to attract higher value-added activities. Such a strategy could help
catapult these countries from low-value added activities to higher value-added.
Nevertheless, certain challenges, including protective trade regimes, poor physical
infrastructure, and a lack of foreign investment, mean that considerable effort is
needed in order to help these countries move up the value-chains and ultimately
generate more added-value in the production processes of the garments industry.
6.6.2 Electronics
Another industry with scope for ASEAN countries to move up the value-chains is the
electronics sector, which has already played a pivotal role in the industrialisation
processes of Thailand and, to a lesser extent, Indonesia.
6.6.2.1Thailand
Thailand is a leading manufacturer of several appliances and electronic products,
including automatic process machines (HDDs), air-conditioners and refrigerators.
Indeed, the production of HDDs has been booming in the past decade and has
contributed most to the growth of high-skilled exports (see Thailand country report
for further information).
However, a lack of domestic research and development (R&D) is repeatedly
sounded as an obstacle for Thailand to advance into higher value activities in the
electronics industry. The government of Thailand has tried to address this issue by
establishing the National Science, Technology and Innovation Policy office (NSTI) as
a primary strategic act to identify shortcomings in this industry, and has come up
with a 2012-2021 plan to address this issue. Targets include investing 2% of GDP in
R&D by 2021 (in 2012 it was just 0.24%), and increasing the number of personnel
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involved in R&D from 9 to 25 per 10,000 people by 2021 (NSTI, 2013) 72. It seems
that Thailand is on the right track, as recent increases in R&D investment have
come about as a result of the governments initiatives to stimulate R&D in the
private sector by launching support measures including tax breaks for imported
equipment and machinery, a 200% tax deduction for R&D budgets, grants for R&D
activities and the establishment of R&D facilities at Science Park in Pathum Thani 73
(Bangkok Post, 2014).
However, other challenges stand in the way for the electronics industry to move up
the value-chains in Thailand. Currently, the industry is heavily skewed towards HDD
production. Developing expertise in a growing industry is very beneficial but,
although Thailand has prospered from this tactic, it is possible that investing heavily
in one particular segment might present problems in the future. Such problems
include a fall in the price of electronics (in this case, of HDD), or more generally, the
industry just subsiding. Thailand could benefit from reducing its dependency on the
HDD industry by expanding its expertise to other viable industries, and rising up
value-chains in other similar sectors.
6.6.2.2Indonesia
The presence and growing potential of computer service and software outsourcing is
of increasing importance in Indonesia, which is already participating in GVCs, albeit
at a very nascent stage. Already, a small number of companies have outsourced
software development tasks for clients overseas. For example, Dutch software
company UNIT4 has recently opened an office in Jakarta which will deliver finance
and business solutions to its 500 plus customers in a diverse range of sectors,
including high growth industries such as mining, plantations, services, and food and
beverages, across South East Asia. The company wanted to be close geographically
to their customers, so Indonesia was important to their strategy for growth in the
region. Indeed, the countrys geographical location is favourable as a base from
which to serve clients across wider Asia.
While the chances of a software outsourcing revolution, at least in the short-term,
are remote, there are a number of chokepoints that can be removed by the
Indonesian government in order to attract greater numbers of higher-valued
outsourced tasks from overseas. Perhaps, the most important next step is to
address the current lack of intellectual property (IP) protection of its entrepreneurs.
Indonesia has one of the highest software piracy rates in the world, with the WEFs
72 Ms. Kanchana Wanichkorn (2013) Investment, Innovation and Technology for Development:
Thailand's Experiences Investment, Enterprise and Development Commission, 5 th Session in Geneva
73 Bangkok Post, 2014

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Networked Readiness Index 2013 ranking the country at 97 out of 114, and
recording a software piracy rate of 86 percent of software installed 74. The
Government, through its Directorate General of Intellectual Property under the
Ministry of Justice, however, has set policy goals to tackle this, although many
problems still exist, especially in relation to enforcement against infringement. In
conjunction with increasing IP protection, it is also important to inform those
involved in the computer service and software sub-sector, particularly SMEs, who
often have limited time and resources, about how IPs can be valuable to their
businesses, including how IP infringements can lead to loss of business, revenue,
reputation, and competitive advantage.
Mr. Frederic Giron, Forresters Researchs Vice President and Principal Analyst, said
that there was no strong national government policy that relates to software
development, and much less support for the Indonesia software outsourcing
industry than there should be, especially in relation to human resource
development. Generally speaking, there are not enough software professionals with
the required level of skills, while the universities are still producing graduates that
are not job ready, meaning many companies have to put their new employees
through their own training courses in order to bring them up to a sufficient
standard. Mr. Giron also argued that the level of English language proficiency also
needed to improve, as there are almost no software applications available in the
Indonesian language.
In addition to IP protection and human resources, Indonesias IT infrastructure
provides another chokepoint, with the countrys internet penetration rate standing
at a mere 18 percent, and the internal internet bandwidth at just 7.2kb/s per user 75.
Simatupang et al. (2012)76 noted that another challenge that needs to be addressed
is the current lack of entrepreneurs in the creative industry, more generally, that are
familiar with business, law and finance. They argued that it is not enough for people
merely to be creative, but, rather, they need to have the capacity and skills required
to convey their creative ideas in marketable products.
6.6.2.3Malaysia
Malaysia is also keen on maximizing its value-chain in high-tech manufacturing.
Indeed, the Malaysian Investment Development Authority (MIDA) has sought to
leverage and strengthen Malaysias assets and capabilities, such as an educated
74 WEF, 2013
75 WEF, 2013, p. 199
76 Simatupang et al., 2012, p. 175
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workforce and strong governmental support, in order to become a global

outsourcing hub for high-tech manufacturing value chains. Other advantages which
could help boost Malaysia include their developed physical and transport
infrastructure and logistical networks, as well as strong investor and IP protection
backed by a robust rule of law. Naturally, targeting and promoting these skills and
strategies will benefit not just the high-tech manufacturing sector, but will also help
upgrade and encourage participation in other key value-chains. By identifying
Malaysias strengths and weaknesses, MIDA has analysed how to be a part of and
manage the entire value-chain process, including logistics, warehousing, R&D,
testing, and certifying, and thus broadening the countrys involvement in valuechains more than if it were just a base for manufacturing tasks 77.
In this manner, Malaysia aims to use its existing competitive position as an
outsourcing destination for multinational companies in the electronics, automotive,
machinery manufacturing, and oil and gas industries, as the foundations on which
to strengthen and become a key player in the aerospace, medical, defense and
photovoltaic industries78.
6.7 Supporting Small-and-Medium Enterprises

In developing and transitional economies, the SME sector is seen as a key element
of employment, income generation, poverty alleviation, and economic growth.
Evidence from the APEC region shows that SMEs account for over 90% of all
registered enterprises and thus helps create over 50% of the employment in these
countries79. It is believed that SMEs are more innovative than larger enterprises,
which can help promote competition and a culture of entrepreneurship and in turn
form the catalysts of transforming developing economies in several methods,
including advances up the value chains.
Numerous problems exist however, not least in ascertaining the true definition of an
SME. Such definitions vary between countries and are based on various criteria such
as number of employees, maximum levels of capital, assets, or sales, which can
also vary among sectors. For example, some countries simply use the criteria of the
number of employees to distinguish between SMEs and larger firms, such as
Indonesia. The OECD (1997) also defines SMEs as enterprises with fewer than 100
employees. Table 6.1 below provides various definitions of an SME in several ASEAN
members, highlighting the different uses of employee numbers and fixed assets:
Table 6.6 Some differing definitions of SMEs in South-East Asia
77 UNCTAD, 2013
78 Ibid.
79 SMEs Participation in Global Production Chains, APEC, 2013
63
Outsourcing ASEAN
Countr
y
Definition
Cambod
ia
Firms that employ between 11 and 50 employees and have fixed assets of USD 50,000
to USD 250,000 are categorized as small. Firms with 51-200 employees and fixed assets
of USD 250,000 to USD 500,000 are medium-sized. Source: SME Development
Framework of 2005.
Indones
ia
Lao
People
s
Democr
atic
Republi
c
Malaysi
a
Fewer than 100 employees

Small enterprises are those having an annual average number of employees not
exceeding 19 persons or total assets not exceeding two hundred and fifty million kip
(about USD 31,000) or an annual turnover not exceeding four hundred million kip
(about USD 50,000). Medium sized enterprises are those having an annual average
number of employees not exceeding 99 persons or total assets not exceeding one
billion two hundred million kip (about USD 150,000) or an annual turnover not
exceeding one 1 billion kip (about USD 125,000).
Depends on the business sector. Different criteria, based on the number of employees
and annual sales turnover. For details, see
www.smeinfo.com.my/pdf/sme_definitions_ENGLISH.pdf.
Philippi Fewer than 200 employees, and less than PHP 40 million (about USD 1 million) in
assets.
nes
Source: UNESCAP, 2009
SMEs can become part of GVCs in three typical ways80:

1
2
3
direct exporting or importing (which is usually the most frequent type of

international activity);
indirect exporting as subcontractors to large firms or input suppliers (which is
somewhat common); and
foreign direct investment in overseas locations by SMEs (which is more risky
than home market production or trade).
However, compared with large enterprises, the participation of SMEs in the global
production value chains is generally limited in all the aforementioned ways as they
face more resource constraints in terms of finance, market information,
management capacity, and technological capability than larger firms which can
exploit their economies of scale to greater effect. Wignaraja (2012) found that out of
5,900 enterprises in five ASEAN economies (including Malaysia, Thailand, Indonesia,
Philippines, and Vietnam) large firms dominated the production networks with a
participation rate of 72.1 percent, whilst only 22 percent of SMEs 81 participated in
production networks through direct and/or indirect exporting. Furthermore, SME
participation rates vary considerably across ASEAN countries; SMEs in Malaysia and
Thailand engage in production networks with relatively high participation ratios in
comparison with other countries, whilst Indonesia seems to be an outlier with only
6.3 per cent of all SMEs involved in production networks.
80 OECD, 1997; Hollenstein, 2005
81 Wignaraja uses the OECDs definition of an SME, defined as enterprises with less than 100
employees.

64
Outsourcing ASEAN
Table 6.7 Roles of SMEs and large firms in production networks
Number of firms in Production

networks
Production network firms as a
percentage of all firms, %
SMEs in Production networks (199
employees) as a percentage of all
SMEs, %
Large firms in Production networks
as a percentage of all large firms, %
Source: Wignaraja (2012)
All 5
countri
es
Malay
sia
Thaila
nd
Philippi
nes
Indone
sia
Vietn
am
2,203
646
619
352
206
380
37.3
59.7
59.3
26.9
14.5
36.4
22.0
46.2
29.6
20.1
6.3
21.4
77.1
82.4
91.1
51.1
52.0
64.6
Regarding the shares in total exports, SMEs make a smaller contribution to total
exports in all five countries (23 percent) compared with large establishments (77
percent). Nevertheless, the available information also suggests that the percentage
of SME exports in ASEAN economies slightly increased between the late 1990s and
the late 2000s, implying a modest increase in the participation of SMEs in these
countries in the global production networks. Countries with higher involvement in
production networks including Malaysia and Thailand have a higher share of SME
exports than other ASEAN members, as illustrated in Table 6.2 above.
The participation of SMEs in global production networks is determined by the
following variables:
6.7.1 Firm size
The size of the firm generally increases the probability of SMEs participating in
production networks. It is suggested that large firms may have lower average and
marginal costs than small and medium ones through exploiting economies of scale,
which would offer them more advantages in participating production networks.
Moreover, large firms have more resources such as market information and
marketing expenses to meet the fixed costs of entering into the production
networks.
6.7.2 Foreign ownership
An SME with foreign ownership, including those in joint ventures with foreign
firms or a 100 percent foreign invested firm, can benefit from the accumulated
learning experience of export production, advanced technologies, and management
expertise of its foreign parent companies. Furthermore, access to the superior
marketing connections and expertise of the local business environment can enable
direct and indirect exporting.
6.7.3 Human Capital
Human capital is another determinant of SME participation in GVCs. Higher levels
of human capital, particularly literate secondary-level educated workers and
65
Outsourcing ASEAN
experienced CEOs, are generally linked with the development of more effective
business and production strategies and more rapid technology transfer that can
make SMEs more competitive and thus become more effectively involved in
production networks.
6.7.4 Technological Capabilities
SMEs, which have acquired higher levels of technological capabilities, are more
likely to perform well in the production network. Building technological capabilities
in developing-country firms, particularly SMEs, involves a range of activities such as
importing new technology through foreign licenses, applying international quality
standards like ISO certification and developing new products with protected patents.
These will help enable SMEs to participate in GVCs.
6.7.5 Access to credit
Another factor that positively affects the ability of SMEs participating in GVCs is
access to commercial bank credit. This suggests that well-organized SMEs with
collateral and an established record with commercial banks are more likely to join
production networks.
6.7.6 Age of the firm
On the other hand, younger firms are more likely to be proactive in learning new
market and technological techniques and are more flexible in combining internal
and external knowledge in an efficient manner. This could consequently give them a
competitive advantage when trying to compete within GVCs.
The overall business environment in which SMEs are obliged to operate significantly
influences SMEs development and, more particularly, their likelihood of joining
GVCs. Business conditions can be measured by various global indices and indicators
such as the World Banks annual aggregate Doing Business rankings, the Economic
Freedom of the World (copublished by the Cato Institute and Fraser Institute), and
the World Economic forum Global Competitiveness Index. These indices and
indicators measure a wide range of issues covering trade policies, custom
regulations, business start-up regulations, and export promotion initiatives that are
pertinent to the SME sector. For instance, the Doing Business exercise ranks the
ease of conducting business in different countries based on 10 components: (a)
starting a business; (b) dealing with construction permits; (c) employing workers;
(d) registering property; (e) getting credit; (f) protecting investors; (g) paying taxes;
(h) trading across borders; (i) enforcing contracts; and (j) closing a business. Table
6.3 shows the aggregate Doing Business 2009 rankings for Asia-Pacific economies.
As can be seen, rankings for the ASEAN countries (highlighted in red) vary wildly,
with Singapore, Thailand, and Malaysia ranking very high whilst Indonesia,
Cambodia, Lao PDR and Myanmar all rank poorly. Malaysia and the Philippines have
made remarkable improvements since 2009, jumping from 20 th to 6th place and

66
Outsourcing ASEAN
140th to 108th respectively, with the latter country improving in its rankings on
dealing with business permits.
Table 6.8 Doing Business 2014: aggregate rankings for Asia-Pacific
economies
Ran
k
1
Economy
Singapore
Hong Kong, China
New Zealand
Malaysia
Republic of Korea
Australia
Taiwan, Province of China
Thailand
Japan
Kazakhstan
Brunei
Samoa
Fiji
Kyrgyz Republic
Vanuatu
Mongolia
Sri Lanka
Maldives
China
Bangladesh
2
3
6
7
11
16
18
27
50
59
61
62
68
74
76
85
95
96
130
Economy
Solomon Islands
Viet Nam
Palau
Nepal
Philippines
Pakistan
Papua New Guinea
Marshall Islands
Indonesia
Kiribati
India
Cambodia
Bhutan
Tajikistan
Uzbekistan
Micronesia, Federated States
Lao, Peoples Democratic
Republic
Afghanistan
Timor-Leste
Myanmar
Ran
k
97
99
100
105
108
110
113
114
120
122
134
137
141
143
146
156
159
164
172
182
Source: World Bank, Doing Business 2009
SMEs encounter a number of obstacles from policy regimes of the economies in

which they operate to join the GVCs. In ASEAN economies, the practices of
competitors in informal sectors, including a variety of negative activities including
smuggling of goods and inputs, price fixing and other anti-competitive practices, are
considered the most important obstacle, as exemplified in Table 6.4. This highlights
the low degree of trust that SMEs have in establishing themselves and investing in
the region, and the kind of challenges that could inhibit the development of an
efficient value chain with increasing participation of SMEs.
Table 6.9 Perceived major or severe obstacles to conducting business in
ASEAN countries, SME firms (percent of SME firm)
All 5
countri
es
Malay
sia
Thaila
nd
Philippi
nes
Indone
sia
Vietna
m
31.9
26.7
31.1
24.0
54.8
49.6
42.9
34.2
14.3
13.3
16.5
12.4
Incentives
Tax rates
Tax administration

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Outsourcing ASEAN
Customs and trade regulations

Business licensing and permits
Political instability/ economic
uncertainty
Supply
side
20.0
16.7
34.7
20.1
16.4
28.8
41.0
25.4
84.0
18.0
22.1
28.9
12.5
16.5
29.5
8.7
2.8
2.3
Transport
Electricity
Telecommunication
Access to finance/credit
Inadequately-educated labor force
Labor regulations
Access to land
23.8
29.6
10.4
34.6
28.0
17.4
16.0
11.3
17.9
9.3
22.1
24.1
17.2
11.1
33.6
42.4
24.5
44.3
60.2
35.2
11.7
26.5
30.6
7.6
28.5
16.8
15.5
9.6
23.2
30.2
6.6
38.6
15.4
11.3
19.2
24.2
26.7
3.8
39.4
23.7
8.0
28.3
24.5
30.1
38.6
25.3
20.6
20.7
53.7
59.7
55.9
16.5
37.4
44.5
21.4
23.4
36.6
5.8
9.5
35.3
Other
Crime, theft and disorder
Corruption
Practices of competitors in
informal
sector
Source: Wignaraja
(2012)
In addition to the practices of informal competitors, a variety of supply-side factors

are seen as impediments particularly to SMEs, including access to finance, high
electricity costs, low quality transportation systems (roads, rail and ports), and an
inadequately educated labour force. Larger firms would have more ability to absorb
these costs, or work around this system. Specifically, a lack of financing in terms of
high costs of borrowing and the limited availability of commercial banks credit are
generally considered to be the biggest obstacles, meaning that SMEs face more
difficulties in investing in new and advanced equipment, technologies and
marketing methods which could propel them to join and move up the GVCs.
Meanwhile, on the government policy and incentive side, taxes and economic
uncertainty are considered as major obstacles by SMEs. High corporation tax rates
directly affect SME profitability and the incentive of being involved in GVCs, while
economic uncertainty has severe impacts on every business activities of the firms.
Larger firms have the capacity to absorb and mitigate for such costs, whilst SMEs do
not necessarily have this luxury. Corruption is also another important challenge
facing SMEs in their development and participation in the production networks.
Political instability is perceived to be a particularly large problem in Thailand, and
almost negligible in Vietnam. This serves to highlight the widespread differences
that SMEs in each country face; it is difficult to pinpoint one specific problem that
SMEs face in all ASEAN countries.
Nevertheless, policies aimed at supporting SMEs must overcome country-specific
challenges to help SMEs achieve their potential position in the GVCS. For example,
according to UNESCAP (2009), policies should focus on the effective implementation
and enforcement of:
strong property rights protection and contract enforcement;

a stable macroeconomic and financial environment, with low inflation and
currency convertibility;

68
Outsourcing ASEAN
a competition policy that allows everyone to pursue business opportunities;

socio-political stability;
regulatory and policy consistency, and an avoidance of shocks;
tax rates that are not too burdensome;
good governance and transparency, including low corruption levels; and
robust and competent state-level institutions.
Such interventions at local as well as regional levels inevitably not only help SME
development, but spillover effects (or positive externalities) would upgrade the
business environment for all firms in general.

69
Outsourcing ASEAN
7 Measuring Competitiveness 1: Value-Added Trade Data

Trade in Value-Added (TiVA) data is relatively new and is exciting as it allows us to
measure the contribution of trade to GDP by considering the value added by each
country in the production of goods and services that are consumed worldwide.
Indicators of TiVA are derived from OECD Input-Output Tables, which were
integrated into a global system using additional information on Bilateral Trade in
goods by Industry and End-use (BTDIxE), International Trade in Services (TIS), and
Structural Analysis (STAN) industry databases. They, therefore, also contribute to a
better overall understanding of the link between trade and GDP, including the role
of services in production by allowing us to measure the services shares in goods
being exported. TiVA indicators are designed to consequently better inform policy
makers by providing new insights into the commercial relations between nations.
TiVA data is currently available for 57 countries, including eight AMS (not Lao PDR or
Myanmar).
7.1 Conceptual basis for new trade data

There is an evident need to adapt more traditionally used trade statistics to better
measure the present day realities of international trade, as described in Chapter 1,
particularly the emerging dominance of outsourcing and trade in intermediates in
more recent times. Whilst traditional Balance of Payments (BoP) trade statistics
have undeniable value in understanding trade from a macroeconomic perspective,
because they attribute the full commercial value of a good or service entirely to the
last country of export, they overstate the commercial importance of the final
producer in the value chain. In addition, since they do not account for the actual
chains of cross-border production taking place, nor the value-added inputs that are
contributed in countries upstream of the final assembly and export point for the
consumer market, BoP statistics involve both double counting and a distortion in the
measure of bilateral trade balances.
The problems identified above, however, are starting to be resolved via new trade
data sets currently coming on stream, which include estimations based on both
traditional trade statistics and national input/output tables. 82 In particular, the WTO
and OECD have jointly undertaken an effort to produce international trade statistics
on a value-added basis,83 so as to be able to disaggregate the value which is added
at each stage of the production chain, and measure the contribution made by each
trading partner.84
82 Input/output tables are matrices used to compile the National Accounts; they show the
interdependencies between different parts of the economy, as outputs from one industry may become
an input to another industry.

70
Outsourcing ASEAN
Figure 7.1 represents a useful means of illustrating both the double counting effect
and bilateral imbalance bias involved in BoP statistics, as well as how the new TiVA
data avoids them.
Figure 7.16 Double counting and bilateral bias in traditional trade
statistics and how TiVA data avoids them
Source: Hummels, Ishii and Yi, 2001
In BoP statistics, total exports would be measured as $150 million i.e., $50 million
from Country 1 (i.e., $50 million parts) plus $100 million from Country 2 ($150
million computers minus $50 million domestic sales). The new TiVA data, however,
would record total exports as $100 million, as it would consider Country 1s exports
as value-added in the form of $50 million parts in the $100 million exports of
Country 2. In relation to Country 3, the BoP statistics would measure imports of
bilateral origin Country 2 computers as $100 million, whereas the TiVA data would
83 Value-added is a concept defined in the 2008 System of National Accounts (SNA) as the difference
between output and intermediate consumption. The 2008 SNA further defines intermediate
consumption as "the value of goods and services consumed as inputs by a process of production. The
goods or services may be either transformed or used up by the production process".
84 Not all countries have input/output tables, so the new trade data is incomplete. For example, there
is no TiVA data available for Lao PDR and Myanmar.

71
Outsourcing ASEAN
record imports of $50 million origin from Country 1 and $50 million origin from
Country 2.
These new TiVA statistics, first published in January 2013 and updated in May 2013,
are built on a long-standing OECD work programme on input/output analysis, and
allow for a much better understanding of outsourcing and GVCs because they
explicitly aim to investigate inter-industry linkages and the role of trade (the
external sector) within the domestic industrial network. The concepts behind the
new data sets (which are drawn not only from trade theory, but also microeconomic
theory of the firm), and the resulting statistical indices, are still unfamiliar to many
researchers and policy makers. The concepts involved are innovative, and the
resulting insights and findings can seem quite radical, so a quick explanation is
required.
7.1.1 Domestic value-added and foreign value-added
The central element is an estimated decomposition of gross exports into Domestic
Value Added (DVA) and Foreign Value Added (FVA). FVA is a fairly straightforward
concept; it is essentially imports i.e., other countries DVA imported as
intermediates into domestic production.
DVA is more complex to compute,
involving four components as shown in Figure 7.2 below.
Figure 7.17 Decomposition of gross exports into DVA and FVA
intermediates
Source: WTO Secretariat

72
Outsourcing ASEAN
These include direct value added exports (i.e., exports of final goods and services
plus exports of intermediates which are absorbed by the importing country) and
indirect value added exports (i.e., exports of intermediates which are re-exported
to third countries). The fourth component is exports of intermediates that return
home. In the TiVA data, the decomposition of gross exports is divided into networks
of second tier suppliers, first tier suppliers and country of final production.
Figure 7.3 shows the aggregate DVA shares for the eight AMS and various other
groups of global trading partners. The data show that DVA shares have fallen for all
groups since 1995 (except Developed Asian). That is, FVA has been
proportionately increasing globally over the past 15 years. For the ASEAN8 85, DVA
has decreased only a few percentage points since 1995, but it still remains lower
than all but China. The dramatic increase in Chinas (and Indias) FVA reflects its
integration to GVCs since 1995: the workshop of the world.
Figure 7.18 Aggregate DVA shares of total gross exports for various
trading groups86
Source: OECD/WTO Trade in Value Added data
85 ASEAN Member States, excluding Lao PDR and Myanmar

86 Countries in each trading group include: ASEAN8 (Brunei Darussalam, Cambodia,
Indonesia, Malaysia, Philippines, Singapore, Thailand, Vietnam); India (India); China (China);
Latin America (Argentina, Chile, Brazil); Developed Asian Countries (Chinese Taipei, Japan,
South Korea); NAFTA (Canada, Mexico, United States); EU26 (Austria, Belgium, Bulgaria,
Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece,

Hungary, Ireland, Italy, Latvia, Lithuania, Luxemburg, Malta, Netherlands, Poland,
Portugal, Romania, Slovakia, Slovenia, Spain, Sweden ).
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Outsourcing ASEAN
Figure 7.4 presents the same data for a set of the larger TiVA countries (32). The
remarkable feature is that most of the countries left of centre (i.e., those with the
lowest DVA shares in 2009) had notably higher DVA shares in 1995, while those
right of centre have generally retained the same DVA shares. Most AMS are left of
centre (except Brunei and Indonesia). The data is displayed from lowest to highest
DVA in 2009, and we can see that there is a mix of poor and wealthier economies
left to right. It seems that those with high DVA shares seem to retain them with the
rise of GVCs and the fragmentation of production networks.

74
Outsourcing ASEAN
Figure 7.19 Selected countries domestic value added as a percentage of

their gross exports
100
90
80
70
60
50
40
30
20
10
0
2009
1995
So, is a falling DVA share a problem? The answer depends on the relationship
between DVA and the growth of gross exports as a whole. A protectionist trade
policy regime may restrict foreign investment and, hence, the FVA share of exports,
yet while also being a drag on the overall growth of gross exports. A declining DVA
share may, alternatively, be a driver of growth as economies better integrate into
GVCs and exploit comparative advantages. Indeed, it may be argued that an
increasing FVA share has been a factor behind the impressive economic and trade
growth performances of China and India since 1995, not to mention AMS Vietnam.
Vietnam has been one of the worlds great development success stories in more
recent times, with its Doi Moi economic reforms of the late 1980s beginning the
countrys transformation from a nation ravaged by war in the 1970s to an economy
that since 1986 has posted per capita growth of well over 5 percent, during which
time total export and import turnover has also grown rapidly. As can be seen in
Figure 7.4, however, the DVA of its gross exports decreased quite significantly (by
over 12 percent) between 1995 and 2009. Generally speaking, Vietnams decision
to open itself up to the global economy, particularly by joining the WTO in 2007, but
also through normalising trade relations with the United States back in 2001, has
resulted in increasing inflows of FDI, and the country integrating much more deeply
into GVCs. Export growth has been significant, and their structure has also changed.
Whereas before Doi Moi, Vietnams exports primarily consisted of largely
unprocessed agricultural, fishery and forestry products, as well as some minerals
and crude oil, the period since as seen this shift towards the processing and
assembly of manufactured products, including textiles, footwear and electronics
appliances, which incorporate significantly more FVA, imported in the form of
intermediate goods and services.

75
Outsourcing ASEAN
A breakdown of FVA by sectors provides further insight. The stable aggregate FVA
share of Indonesia, for example, belies sectoral changes (see Figure 7.5). FVA shares
have fallen in 7 of 17 sectors since 1995, predominantly in minerals, metals,
equipment and manufacturing, and risen in wood, transport and services. FVA
shares, as one might expect, are highest in the exports of machinery, electrical
equipment, and textiles and apparel. These GVCs can have their production
relatively easily sliced up into multiple stages, and be produced, transported and
assembled, each in different locations. The sectors that contribute most to
Indonesias overall exports, however, such as mining and food products, have seen
very little change in their FVA content of gross exports since 1995, which is
generally very small anyway due to the lower degree of fragmentation in their
production processes.
Figure 7.20 FVA content shares of Indonesia gross exports by sector
45
40
35
30
25
20
15
10
5
0
2009
1995
7.1.2 Length of the value chain and distance from market

Two additional concepts essential to comprehending the TiVA data set include the
length of any specific value chain, namely the number of discrete processes or
tasks that production can be broken into and the position of a country along that
chain in terms of distance from final demand, namely upstreamness or
downstreamness.
First, it is important to note that different industries are characterized by value
chains of different lengths, as shown in Figure 7.6, and typically a chunk of that
length represents activities undertaken chiefly domestically, so the length for
each industry can be broken down into a domestic and foreign segment.
Unsurprisingly, all the non-manufacturing industries have shorter chain lengths

76
Outsourcing ASEAN
i.e., from construction on in the figure below due to the less segmented nature of
their production.
Knowledge of the length of the specific chain, and the nature and degree of valueadded associated with the different tasks in each link in the chain, is essential
before making any firm judgements as to whether a country, or a firm, is
participating at a relatively low or high value added position along a specific
industry chain.87 It is, therefore, important to map the specific industry value
chain under consideration before coming to any such conclusions. Mapping of value
chains is a specific art and will be discussed further below.
Figure 7.21 Average length of all industries GVCs
S
ource: OECD Trade and Agricultural Directorate. The minimum value of the index is 1 when no
intermediate inputs are used to produce a final good or service.
The position of countries or firms along the GVC is determined by distance from final
market, with upstreamness referring to activities at the early stages of production,
such as the production of raw materials or intangibles (e.g., research and design),
87 It is important to take into account that the length of the chain may not in fact
be static. Most international goods value chains are actually growing in length, as
technology and business process innovation allow firms to focus increasingly on
core competence and save resources by outsourcing other activities. So how a
country shifts towards a more up or downstream position can be affected not only
by success in moving up the value chain into new tasks, but also by a lengthening
of the chain. In other words, a country might, for example, climb up the value chain
into higher value-added activities, and yet, move further away from the final
market, simply because the chain has lengthened.
77
Outsourcing ASEAN
and downstreamness referring to activities closer to final delivery, including the

assembly of processed products, as well as higher valued tasks like logistics,
marketing and branding. The positioning upstream or downstream in the chain can
have implications for the type of benefits realized. Generally speaking, greater
benefits are obtained with increasing upstreamness and downstreamness, with the
middle sections of GVCs providing lower value for their participants. But again, no
clear judgements on this can be made until the specific value chain is mapped, and
the low and high value added activities identified along it.
Figure 7.7 plots the movement of different countries forward (vertical axis) and
backwards (horizontal axis) average propagation length (APL) the weighted
average of the number of production stages from one industry to another, using the
relative importance of each path as a weight within the East Asian regional supply
chain from 1985 to 2005. The north-east/south-west (NE-SW) diagonal of the figure
plots the length of the supply chains in which countries participate. The northwest/south-east (NW-SE) diagonal shows the relative position of each economy
within the regional supply chain.
The NE corner of the figure shows those countries which participate in industries
with typically longer supply chains, such as Japan, Korea and China. An arrow
pointing in the direction of the NE-SW diagonal highlights countries that over the
last two decades have transitioned into industries with longer supply chains. This is
dramatically the case for China, both in terms of domestic and international supply
chains. The Philippines and Malaysia have moved similarly in that direction, though
they continue to operate in industries with nevertheless substantially shorter supply
chains than is the case for China. It is also true for Indonesia and for Singapore;
both these countries are still typically participating in trade in intermediates
destined for industries with relatively shorter supply chains, as is Thailand.
Figure 7.22 Countries relative position along East Asian regional supply
chains

78
Outsourcing ASEAN
APL = Average Propagation Length

Source: Escaith and Inomata (2013)88
The NW corner of the figure shows those countries positioned relatively upstream
i.e., where either the ideas/technology or the natural resources originate, such as
the United States and Japan, who are both losing competitiveness in upstream
activities vis--vis Korea, and also Indonesia and Malaysia. The Philippines and
Singapore are on balance positioned roughly half way along the chain. With the
exception of Thailand, which has shifted dramatically into assembly activities, the
other ASEAN countries are chiefly producing intermediate components. Thailand
has shifted increasingly downstream into assembly activities. China has stayed put
in the final assembly zone.
The TiVA data on length of chain and on distance from market are available for each
industry category in the data set and for each country. The Figures (7.8 and 7.9)
below illustrate the richness of the data for further research. Taken together, these
figures offer many insights. For example, looking at Malaysia and Korea, both of
which participate in relatively long i.e., relatively highly segmented value chains in
food products, we see that Korea is considerably further downstream in terms of
distance to market, and that Malaysian products are being exported with many
more stages of production ahead of them offshore. It is typically the case with the
TiVA data, as in this example, that all of the indices need to be consulted and crossreferenced in order to unravel the full story in any particular sector.
Figure 7.23 Length of food products GVC by country
88 Escaith, H. and Inomata, S. 2013, Geometry of Global Value Chains in East Asia:
The Role of Industrial Networks and Trade Policies, In Global Value Chains in a
Changing World, edited by Elms, D.K. and Low, P., World Trade Organisation (WTO),
Geneva.
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3.0
2.8
2.6
2.4
2.2
2.0
1.8
1.6
1.4
1.2
1.0
International
Domestic
Korea MalaysiaSingapore China Viet Nam

Chinese Taipei
CambodiaThailand
Philippines
Indonesia
Source: De Backer and Miroudot, 2013
Figure 7.24 Distance to final market for food products by country

2.80
2.60
2.40
2.20
2.00
1.80Distance to final demand (international)
Distance to final demand (domestic)
1.60
1.40
1.20
1.00
Viet Nam
Cambodia
Indonesia
Thailand
MalaysiaChinaSingaporeKorea JapanPhilippines
Chinese Taipei
Source: De Backer and Miroudot, 2013
7.1.3 Forward and backward linkages

The TiVA data set includes a GVC participation rate, which is the percentage of a
countrys exports that are part of a GVC. The rank identifies two components within
exports, namely backward and forward linkages. In the context of GVC participation,
backward linkages refer to the case where a countrys exports contain value-added
content that was previously imported from elsewhere. Forward linkages refer to
cases where exports are destined to be re-exported onwards following further valueadding by the immediate importing country. Again, this information is invaluable in
helping consideration of issues related to climbing the value-added ladder. Figure
7.10 shows sample results for some East Asian countries, including a number of
AMS.
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Outsourcing ASEAN
Figure 7.25 East Asian countries GVC participation rates

80.0%
70.0%
60.0%
50.0%
40.0%
Forward
Backward
30.0%
20.0%
10.0%
0.0%
Singapore
Philippines
Malaysia Korea Thailand
Viet Nam Japan
ChinaIndonesia
As can be seen, Indonesias participation in GVCs through exports, for example, is

mainly driven by forward linkages. The overall import content of the countrys
exports is a mere 14.4 percent, whereas 29.3 percent of exports have further value
added to them before being re-export by the immediate importing country.
Indonesias high degree of forwards participation is closely linked to the countrys
large exports of natural resources and raw materials, which are used as
intermediate inputs in a range of GVCs, but have little FVA to them prior to their
initial export.
All these concepts are essential pieces in the conceptual framework behind the new
TiVA data and are brought together and illustrated in Figure 7.11 below. (Maybe
want to explain this figure more)
Figure 7.26 Bringing together all the TiVA indicators

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Source: Backer and Miroudot 2013
Finally, it is important to recognize that the TiVA data is a work in progress. 89 In

addition to the work of the OECD/WTO, new value-added indicators have been
published by UNCTAD. This new EORA database initiative 90 is designed to provide
new perspectives on trade links between economies in the trade-investment nexus.
The eventual publication of trade statistics on a regular basis not only in gross
terms, but also in value-added terms, will contribute importantly to understanding
of the new business patterns emerging. But this process is only just beginning, and
this study is among the first to specifically focus on an analysis of the new data.
Before turning to our results with respect to the ASEAN region, it is important to be
aware of the main OECD/WTO and UNCTAD findings to date at the global level.
89 The OECD/WTO TiVA data released in 2013 covers 57 countries from OECD and emerging
economies over the period 1995 to 2009, in 18 highly aggregated data sets of goods and services.
Ongoing statistical improvements will be undertaken by the WTO-OECD at two levels: first to improve
world input-output tables; and, second, at the level of the firm, to match firm-level data with the world
input-output data base. Other statistical efforts on trade in value-added are being carried out by the
U.S. International Trade Commission, The World Bank and the IMF in working with the Global Trade
Analysis Project (GTAP) database.
90 The UNCTAD-EORA GVC Database is part of UNCTADs FDI-TNC-GVC Information System, focusing
on how global investment drives patterns of value-added trade.

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7.2 Snapshot insight from the new trade data

The results of analysis undertaken using the new data sets are powerful, indeed,
transformative of traditional trade and investment policy thinking. Six key findings
are presented here by way of simple stylized facts.
7.2.1 Trade in intermediates is more important than trade in final products
The TiVA data clearly shows the increasing dominance of trade in intermediates and
the associated increase in global interdependence. Trade in intermediates
represents more than half of OECD countries imports and close to three-fourths of
the imports of large developing economies, such as China and Brazil. 91 For the G20
countries, on average between 30% and 60% of exports are now comprised of
imported inputs or destined to be used as inputs by others. Intermediates now
totally dominate world non-fuel merchandise exports, as can be seen in Figure 7.12,
which shows that trade in intermediate goods is twice as large as trade in
consumption goods.
Figure 7.27 The role of intermediate goods in global export flows (1990 to
2010)
Source: OECD Trade and Agriculture Directorate
7.2.2 Services share of world exports doubles to 45%

As shown in Figure 7.13, services represent nearly half of the value of world trade
when measured in value added terms, 92 compared with less than a quarter in BoP
statistics. This is because, generally speaking, the value added by services is much
higher in manufacturing GVCs than during the production process.
91 Ali, S. and Dadush, U. (2011), Carnegie Endowment International Economics Bulletin, Washington
DC.

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Indeed, manufacturing now involves more than just the pure production of goods,
with the services sector contributing key inputs to all value chains, including
upstream and downstream along value chains, as well as linking up the different
stages of production processes. For example, manufacturing companies increasingly
use logistics, and communication and business services, etc, to facilitate the
efficient functioning of the GVC that they own, while additional services, including
design, development, marketing, warranties, and after-sales care, etc., are used to
differentiate, customize and upgrade products, enabling firms to capture more
value.
Figure 7.28 Services account for half of world trade
Source: Escaith, WTO 201393
7.2.3 Imports, especially of services, generate export growth

Figure 7.14 identifies a general relationship between increased levels of
manufactured exports, and the foreign content of Exports. Indonesia (INO) is
included in this data, but shows a much less marked correlation than the global
average. This is most likely due to the dominance of resource-based exports in more
92 Ongoing statistical improvements to capture the reality of GVCs will continue to be undertaken by
the WTO-OECD at two levels: first, to improve world input-output tables; and second, at the level of the
firm, to match firm-level data with the world input-output data base. Other statistical efforts that are
being taken to capture the way in which contributions to trade are made up through value-added are
being carried out by the U.S. International Trade Commission, The World Bank and the IMF working
with the Global Trade Analysis Project (GTAP) database.
93 Escaith, H. 2013, Measuring trade in goods and services, International Trade Forum,
Issue 1: Employment and Entrepreneurship, 2013.
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recent times, and the corresponding decline in the competitiveness of its exportdriven manufacturing sectors in comparison to other East Asian countries, such as
China (PRC), which shows a much more marked correlation than the global average.
Figure 7.29 Total manufactured exports and their foreign content
Figure 7.15 shows an even stronger correlation exists between the level of
manufactured exports and imported foreign services value added. These results are
striking testimony to the importance of minimizing restrictions on imports, in the
interests of improved export performance.
TiVA data also enables us to measure and understand the contribution of the
services sectors to the production of exported goods.
Figure 7.30 Services imports make exports

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Source: Jose Rizal Damuri (CSIS, Indonesia)
Services tend to be high value-added activities. Figure 7.16 shows the service
shares in the exports of 32 countries, ranked from lowest to highest shares in 2009.
With some exceptions, high-income countries are right-of-centre. Singapore, as may
be expected, has a high services share, and Brunei low (crude oil exports).
Cambodia and the Philippines have relatively high services shares (with high FVA
shares in services). Indonesia, Vietnam and Thailand, however, are notable for their
low relative service shares and for those shares to have fallen since 1995. (We need
to know if Figure 7.16 shows services content of all exports or just services content
of manufacturing exports).
Figure 7.31 High service shares are correlated to high incomes
It seems, as with DVA shares in Figure 7.16 above, those that began with high
shares in 1995 had increased them by 2009 (with the exception of Vietnam), and
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Outsourcing ASEAN
low 1995 shares were even lower by 2009. In 1995, the total services share of
ASEAN8 gross exports was 40% - the same as for the OECD (averages weighted by
GDP). By 2009, however, the ASEAN8 share had fallen marginally to 37%, while the
OECD share rose to 50%. Moreover, almost half of the 2009 ASEAN8 services
exports were FVA, compared to less than 20% of OECD services exports. The FVA
share in services also varies markedly across countries and their income levels: it is
high in both Singapore and Vietnam and low in both Indonesia and Japan.
Generally speaking, the services content more generally, and the FVA by services in
particular, in gross exports is heavily influenced by countries economic structure
and export models. Singapore, for example, has significant shares of entrept trade,
which already incorporates high shares of FVA by services in the immediate goods it
imports, before it contributes more DVA by services prior to re-export. Vietnam also
imports significant intermediate goods, which already incorporate significant FVA by
services, but most of its DVA to gross exports is by manufacturing. Therefore, like
Singapore, it has high FVA by services as a percentage of the total services share,
but much lower services content of its gross exports. Indonesia has both low
services content in its gross export and low FVA by services shares. This would likely
be strongly influenced by Indonesias high degree of specialization in activities that
typically have low services content more generally, such as the primary product
sectors, as well as the countrys high degree of backwards participation in these
GVCs, with the overall import content of its exports, whether it from FVA by services
or manufacturing, relatively low.
As can be seen in Figure 7.17, compared to other trade groups, the ASEAN8 has
seen a fall in its services share of gross exports since 1995 although still notably
higher than NAFTA or China. The services share in India was high in 1995 and
highest in 2005 but stayed low and stable in China. The ASEAN8 are also notable
for their high FVA share in the services content of gross exports. The Latin American
group has a very low FVA share, suggesting protectionist policies.
Figure 7.32 Not only wealthy countries have high services shares

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7.2.4 Bilateral trade imbalances are resized

The new TiVA data considerably readjusts the picture on countries bilateral trade
data. Figure 7.18 shows the bilateral trade imbalance between a variety of
countries and China PRC, and compares the size of the surplus/deficit as measured
with gross trade statistics and value-added trade data. The results are enlightening.
Vietnams trade deficit with China is roughly halved, for example, when the value of
non-Chinese content in Chinas exports is taken into account. Thailands trade
surplus with China disappears completely, as does Japans.
Figure 7.33 Resizing of bilateral trade imbalances
Escaith, WTO 2013
These adjustments are explained in Table 7.1, which illustrates the point by
reassigning the data on US imports of iPhones to show where the value-added is
actually being imported from. In the case of iPhone imports into the US, the new
data shrinks the size of the US-China trade imbalance from nearly US$2 billion to
US$75 million.
For any pair of countries, the greater the distance between them, as measured not
in geographic distance, but in production stages along the value chain, the more
likely it is that gross trade statistics will over estimate the imbalance in their
bilateral trade relationship.
Table 7.10 2009 United States trade balance in iPhones (USD million)
China
Traditional
measure
Value added
measure
1,901.
2
-73.5
Japa
n
0
Rep. of
Korea
0
Germa
ny
0
Rest of
world
0
684.8
-259.4
-340.7
-542.8
World
1,901.
2
1,901.
2
Source: Miroudot, S., Global Forum on Trade Statistics, 2-4 April, 2011, based on Xing and Detert
(2010)

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When broken down at industry level, the TiVA data is often striking. It shows that as
much as 40% of Chinas gross exports of electronics are composed of foreign valueadded, and that over 70% of all Chinas intermediate imports of electronic
components end up in exports. Similarly, more than 33% of Germanys gross
exports of transport equipment is composed of foreign value-added, and fewer than
70% of intermediate imports of transport equipment end up in exports.
The motor vehicle sector generates interesting data also. For all the ASEAN
countries, as shown in Figure 7.19, imported intermediates are shown to make a
sizeable value-added contribution to exports in this sector (Singapore 54%, Malaysia
49%, Thailand 45%, Cambodia 41%, Vietnam 41%, Philippines 35%, and Indonesia
17%). For China the figure is 43%, Germany 34%, Korea 32% and Japan 14%. Asian
content is dominant in most of the ASEAN countries, reflecting their geographic
location, though intermediate imports are nevertheless sourced also from Europe,
NAFTA and the rest of the world.
Figure 7.34 Origin of Imported Intermediates in Exports in the Motor
Vehicle sector
Source: De Backer and Miroudot 2013
7.2.5 New competiveness strengths and weaknesses are revealed

The TiVA data generates measured shifts in countries revealed comparative
advantage. This shows clearly that a countrys competitiveness in any industry
depends: (1) on the competitiveness of other domestic sectors; and, (2) on inputs
imported into the country. The new data shows China to have considerably less
overall revealed comparative advantage than the BoP statistics suggests; the same
is true for Mexico and India. Japan, Korea and Chinese Taipei, on the other hand, all
register improvements in their revealed comparative advantage.
Indonesia
experiences no overall shift in position. The new data covers each of the 18
aggregated industry sectors, showing the various adjustments involved and
providing powerful potential insights to policy makers.

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Figure 7.35 Shifts in relative comparative advantage
7.2.6 FDI enhances GVC participation

As outlined in the opening paragraph of this report on terminology associated with
the outsourcing literature, FDI is a fundamental component of the financing and
governance of outsourcing activities, often described as captive outsourcing
captive implying potentially less footloose or more sticky. The UNCTAD data is
clear; participating in GVCs generally requires investment regimes that allow lead
foreign firms to establish in-country.
Figure 7.36 Investment is a key source of financing GVC participation

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Source: UNCTAD (2013)
Importantly, the new TiVA data set also provides important information on the role
played by foreign affiliates in generating total exports. In Ireland, for example, the
new data shows that, in 2009, as much as 50% of export value-added was
generated by foreign-owned firms. As much as a third of the value of Irelands
exports of pharmaceuticals and of ICT was generated by United States-owned
foreign affiliates established in Ireland.

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8 Measuring Competitiveness 2: GVC Readiness Index

8.1 Explaining the GVC Readiness Index
For this research assignment, we have constructed an index from a variety of
sources that measures what we perceive as readiness (or competitiveness) for
countries to participate in GVCs. In Annex 2 we explain the composition and
construction of the GVC Index in detail. The Index is built from a total of 177
indicators, which are sorted into eight groups. The Index draws heavily on the World
Bank Doing Business Survey, and the WEF Global Competitiveness Index, as well as
using indicators from six other sources. The GVC Readiness Index is therefore
concerned with both within-border and border variables, and it measures many of
the impediments identified throughout this report. Certain sets of variables,
however, are distinctively different from the alternative indexes. Digital
infrastructure and language skills are weighted highly from an outsourcing
perspective, as is human capital in general. In human capital, as well as quality
measures, we have included a volume measure, which captures the outsourcing
advantages of countries that already have a large and diverse workforce. That does
not stop Singapore from becoming a financial services hub, but a small absolute
workforce does make it hard for countries like Laos and Cambodia to follow the
outsourcing models of India or The Philippines.
Figure 8.37 The GVC Readiness Index correlated to the Doing Business
Index

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Data source: World Bank Doing Business Survey (2014)
Table 8.1 presents the basic results of the GVC Readiness Index for the ASEAN
countries. The Frontier is a perfect score on every indicator, which would produce
a summary result of 1.0. It can be seen that the GVC Index is positively correlated
to the World Bank Doing Business Index, but far from perfectly. The Figure shows
data for the 51 countries covered by the TiVA data (chapter 7), and we use the
same groups of countries for comparative analysis. Singapore gets closest of all 144
countries in our database, scoring 0.73: so best, but not perfect. Myanmar comes
last, with the other eight AMS spread fairly evenly from rank 22 to 101. Of the
remaining eight AMS, six score relatively higher in the GVC Readiness Index than in
the Doing Business Index. The richest ten countries (marked with an X) are all
clustered in the top right corner, although the poorest ten countries are more
dispersed amongst the middle group of 31 countries. These figures are also
represented in Table 8.1 below.
Table 8.11 ASEAN country rankings across three main indexes
Country
GVC Readiness Index

93
WEF GCI
WB DB
Outsourcing ASEAN
name
Distance
to Frontier
ASEAN
Ranking
World
Ranking/14
4 countries
(2013-2014)
Ranking/148
countries
Singapor
e
Malaysia
Brunei
Indonesia
Philippine
s
Vietnam
Thailand
Cambodia
Laos
Myanmar
0.73
Survey
(2014)
Ranking/18
9 countries
1
0.55
0.50
0.47
0.43
2
3
4
5
22
33
41
54
24
26
38
59
6
59
120
108
0.42
0.42
0.35
0.32
0.10
6
7
8
9
10
60
62
90
101
144
70
37
88
81
139
99
18
137
159
182
Data source: World Economic Forum Global Competitiveness Index 2013-2014; World Bank Doing
Business Survey (2014)
8.2 ASEAN GVC Readiness

The GVC Readiness Index is an equally weighted summation of eight groups of
indicators (Table 8.2). Most AMSs scored most poorly on Digital Infrastructure (Table
8.3). For Singapore, the lowest was human capital; but that is because one-third of
the index is a weighting of the size of the labour force (so Indonesia scored highest).
The highest scores for each AMS is a more diverse group: Physical infrastructure,
domestic regulations, ease of trade, and cost competitiveness. Some particular
sector scores may seem surprising, but overall totals are not with Myanmar, Laos
and Cambodia being the lowest scorers (0.10 to 0.35), Singapore, Malaysia and
Brunei doing best (0.50 to 0.73), and the other four AMS ranging from 0.42 to 0.47.
It can be argued that Vietnam (0.42) is on the brink of graduating from CMLV
status94 within ASEAN. We will look at some more generalized results across these
eight groups before turning to a disaggregated analysis of the specific indicators
behind the results.
Table 8.12 Contents of the eight GVC Readiness sectors
Human Capital
Education and Skills
Labour Productivity
Size of Labour Force
Domestic Regulations
Ease of Navigating Regulatory
Practices
Employing Labour
94 CMLV = the group of AMSs in the nascent stages of development: Cambodia,

Myanmar, Laos, and Vietnam.
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Micro-level Corruption
Innovation and R&D
Legal, Governmental & Institutional
Support
Innovation Capacity (Private Sector)
Innovation Output
Digital Infrastructure
Telephone Communications
Internet Capabilities (Business)
Internet Usage (General Population)
Physical Infrastructure
Electrical Supply
Domestic Trade Capacities
Domestic Transport Infrastructure
Ease of Trade
Trade Logistics Performance
Customs Burden
Harmonisation with Global Markets
Cost Competitiveness
Salaries
Taxes
Trading costs (incl. tariffs)
Quality of Supporting Institutions
Security
Finance Landscape
Government Support
Legal Framework & Implementation
Corruption
Innovation and
R&D
Digital
Infrastructure
Physical
Infrastructure
Quality of
Supporting
Institutions
Domestic
Regulations
Ease of Trade
0.27
0.1
8
0.35
0.39
0.39
0.61
0.56
0.1
7
0.56
0.37
0.33
0.49
0.2
1
0.5
6
0.43
0.33
0.5
8
0.43
0.55
Cost
Competitiveness
INDEX OVERALL
(DTF)
0.6
2
0.3
5
0.57
0.1
2
0.48
0.31

95
0.4
2
Myanmar
0.41
Laos
0.56
Brunei
Philippines
0.37
Thailand
Indonesia
0.25
Singapore
Vietnam
Human capital
Malaysia
Cambodia
Table 8.13 ASEAN GVC Readiness by eight sectors
0.41
0.5
0
0.76
0.34
0.37
0.24
0.13
0.37
0.25
0.02
0.3
6
0.6
8
0.60
0.63
0.65
0.0
3
0.5
4
0.43
0.0
03
0.09
0.73
0.2
5
0.6
3
0.40
0.3
3
0.37
0.48
0.60
0.75
0.44
0.61
0.50
0.19
0.42
0.40
0.57
0.47
0.53
0.16
0.08
0.5
8
0.4
7
0.54
0.59
0.8
7
0.78
0.45
0.37
0.4
3
0.5
5
0.7
3
0.4
2
0.6
9
0.5
0
0.2
4
0.1
0
0.82
0.42
0.3
2
0.05
Outsourcing ASEAN
In Figure 8.2 we can see that the CMLV sub-group performs distinctly poorly in all
but the Cost Competitiveness indicator. Thus, when we compare the remaining six
AMS to China, we see both strengths and weaknesses. Non-CMVL ASEAN is more
cost competitive than China, and about the same in terms of digital infrastructure,
innovation, and supporting institutions. The relative weaknesses are in human
capital (due to the size of Chinas labour force), physical infrastructure, domestic
regulations, and ease of trade. That non-CMLV ASEAN lags China in domestic
regulations and ease of trade is a concern, and should be priorities for governmentled reform to 2020.
Figure 8.38 ASEAN/CMLV GVC Readiness compared to China
Figure 8.3 compares all ten AMSs with China and India (for more analysis, see
chapter 5). ASEAN, however, looks very competitive compared to India (except
again, in human capital as volume scores). Surprisingly, India scores very low on
digital Infrastructure. This data reveals the dualistic nature of the Indian economy:
large areas of underdevelopment amidst pockets of modernity. The literacy rate in
India in 2011 was only 74% (compared to over 90% for all AMS, except Cambodia
and Lao PDR). The competitive Indian services outsourcing industry is centered
around a small cluster of areas, where infrastructure and other variables (e.g. a
skilled literate workforce) are much stronger than the nationwide averages. The
general Indian economy remains markedly protectionist, with poor supporting
institutions and barriers to trade and investment. In a generally uncompetitive
environment, however, this enclave approach can make sense to achieve quick
results. It is something that The Philippines has adopted, and in goods trade all AMS
have developed special economic zones to varying degrees.
96
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Figure 8.39 ASEAN GVC Readiness compared to India and China
8.3 ASEAN compared to other regional trading blocs

That ASEAN is competitive to India in terms of GVC Readiness is a less satisfactory
result when we compare ASEAN across the world. The comparison groups are the
same 51 countries as specified in Chapter 7 above. In Figures 8.4 to 8.8 we have
split ASEAN into CMLV and Rest of ASEAN (RoA), and we can see that across the
four indicator groups the Rest of ASEAN scores well. These six AMS should aspire,
however, to be more like the North-East Asia group, which led even NAFTA and the
EU.
India and the CMLV are clearly the poor performers, although protectionist Latin
America scores below even CMLV for Domestic Regulations. It is a peculiar reality
that, in areas where government could take relatively quick action (e.g. domestic
regulations and ease of trade), it is the poorer countries most in need of trade and
investment that have the most restrictive policy regimes. The luxury (and costs)
of protection (or at least of not making trade incredibly easy) are indulged in by
developed economies in some sectors (e.g. agriculture), but in developing countries
they continue to embrace broader restrictions and controls either not understanding
the costs, or thinking that integration is some form of unfair exploitation.

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Figure 8.40: ASEAN compared to global competitors
8.4 Decomposing ASEAN GVC Readiness

Table 8.4 shows data for 36 of the 65 indicators that make up the GVC Readiness
Index (the full table is in Annex 3). The data for every indicator has been converted
into a result ranging from zero to 1, where 1 is always the best possible result.
The results lead us to five broad conclusions:
1. There are vast differences between the CMLV and Rest of ASEAN groups, and
when combined into one ASEAN-wide number it typically appears that ASEAN
has many weaknesses. If we look only, however, at the Rest of ASEAN group
(6 AMSs), the weaknesses mostly fade away.
2. The RoA group is very competitive with China and India. India, as discussed
above, is a dualistic economy that mixes a generally uncompetitive
environment (by global standards) with enclaves of services competitiveness.
Of the 65 indicators, ASEAN scores higher than both India and China in 34
indicators, and lower than both countries in just 13 (lower than China but
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Outsourcing ASEAN
higher than India = 14 indicators; lower than India but higher than China = 4
indicators). The RoA also score higher than the Latin American group in 40 of
the 65 indicators. The RoA group is globally competitive and well integrated
into GVCs, and can set its targets higher than other middle-income countries.
3. The weakest areas of Rest of ASEAN are tertiary education, R&D, transport
infrastructure, and harmonisation with global markets. Although the RoA
scores higher than China and India in tertiary education enrolment, the
number (0.35) is well below that of the richest three trading blocs (EU, NAFTA,
NEAsia), which range from 0.58 to 0.79. Stronger human capital is the most
important variable to ensure moving up value chains and avoiding middleincome traps. R&D as a percentage of GDP was markedly low for ASEAN,
despite a high percentage of high-technology manufacturing exports. It could
be that the movement from assembly to innovation is far from complete. The
quality of transport infrastructure was one measure where China seems to
advanced ahead of ASEAN.
4. The North-East Asia group of countries (Japan, S.Korea, Hong Kong, Taiwan)
are the best overall benchmark for ASEAN to be reaching towards. This group
score highest on more indicators than any other group. Being in the same
region ASEAN should be looking north to the example of these countries
across many indicators. Not all of the indicators require decades and massive
investments; many are system changes that can be achieved quickly given
political will.
5. The CMLV group score very weakly across almost all indicators. Vietnam is
clearly the most competitive of the four, and may be viewed as graduating
by 2015. Yet as a group they are clearly very different economies to countries
like Singapore and Malaysia. They are viewed as a specific sub-group within
ASEAN, and as such are given some preferences (and delays to reach
targets). We would argue that much more should be done to integrate these
countries into ASEAN as a whole. This includes facilitating the movement of
unskilled workers, and considering radical trade reform options (e.g. duty-free
trade between CMLV, Thailand and Malaysia). The other six ASEAN countries
should also fund development assistance projects to support the CMLV group
(not relying on external development assistance so much).
In terms of Human Capital indicators, the Rest of ASEAN scores well compared to
India and China, and other groups, although tertiary education enrollment is notably
lower than the three richest country groups at the end of the table (EU, NAFTA,
NEAsia). Innovation and R&D data presents a more mixed picture, with RoA strong
in intellectual property protection, yet with a low percentage of GDP devoted to R&D
although FDI and technology transfer is high. These data point to ASEAN still
catching up to the other groups, so absorbing existing technologies rather than
inventing them.
Digital infrastructure data shows RoA to be competitive. Business-to-business (B2B)
internet usage is high, with numbers similar to Chinas, although once again notably
lower than the three wealthier trading blocs. China scores markedly higher in
transport infrastructure, however. Networked Readiness is crucial to exploit
ASEANs relatively young population for services outsourcing. Meanwhile, out of the
100
Outsourcing ASEAN
10 AMSs, only Malaysia and Singapore appear to score relatively high in Physical
Infrastructure, with Singapore even outperforms the other developed groups. CMLV,
again, pulls down the overall score of ASEAN as they score very low on Domestic
Trade Capacities and Domestic Transport Infrastructure indicators.
RoA score particularly strong in Quality of Supporting Institutions and Domestic
Regulations, even against the wealthier trade blocs. The RoA countries are globally
competitive on these criteria, although it is also clear that the CMLV are not. The
CMLV score a rare win against RoA in redundancy costs (weeks of salary), but
NAFTA leads. Measures of corruption score CMLV poorly, while the RoA have a lower
corruption perceptions that either China or India, yet scores worse than both
according to the World Banks bribery depth measure.
RoA however, are not as competitive against the selected blocs in terms of Ease of
Trade indicators though the overall score is better than that of India and Latin
America. Generally, the weak indicators that affect ASEAN scores on Ease of Trade is
Services Trade Restrictiveness and Margin of preference in destination markets. The
CMLV group also faces relatively large customs burden due the complicated
customs procedures and possibility of irregular payments in exports and imports
expected to boost the process.
The Cost Competitiveness data shows ASEANs wage competitiveness (wrt. Valueadded per worker), although this is also an even stronger advantage of China and
NEAsia. It is this wage price competitiveness that has driven outsourcing in recent
decades (the EU and NAFTA score lowest). RoA (and China) tariff regimes remain far
too complex by modern global standards, and container costs are high. Such
problems undermine wages competitiveness.
EU26
NAFTA
INNOVATION R&D
6
PC Software piracy rate

101
East North
India
Business Impact of Malaria,

Tuberculosis and HIV/AIDS
Total Labor force
America Latin
China
10 ASEAN
0.1
4
0.2
3
0.2
4
0.2
8
0.1
5
0.3
5
0.6
2
0.5
5
0.5
1
0.2
2
0.2
4
0.4
2
0.3
9
0.3
8
0.1
8
0.5
4
0.6
6
0.6
6
0.7
3
0.2
8
0.2
3
0.4
2
0.4
6
0.5
8
1.0
1
0.1
4
0.6
9
0.2
2
0.4
4
1.0
1
0.6
5
0.6
1
0.8
1
0.5
7
0.0
8
0.5
8
0.7
3
0.8
2
0.6
1
0.4
8
0.74
0.1
4
0.3
6
0.2
5
0.4
0
0.1
7
0.3
7
0.7
0
0.7
8
0.77
CMLV
HUMAN CAPITAL
1
Tertiary education
enrollment, gross
2
Quality of management
schools
3
Education Index
ASEAN Rest of
Table 8.14 ASEAN indicators compared to other trading blocs
0.59
0.63
0.53
0.17
Outsourcing ASEAN

102
India
EU26
NAFTA
East North
China
America Latin
Scientific and technical

journal articles/Population,
total
8
Research and development
expenditure (% of GDP)
9
Availability of latest
technologies
1
Firm-level technology
0
absorption
DIGITAL
INFRASTRUCTU
RE
1
Secure Internet servers (per
1
1 million people)
1
Business-to-business Internet
2
use
1
Intl Internet bandwidth, kb/s
3
per user
1
Percentage of Individuals
4
using the Internet
PHYSICAL INFRASTUCTURE
1
Duration of a typical
5
electrical outage (hours)
1
Quality of transport
6
Infrastructure (overall)
QUALITY OF SUPPORTING
INSTITUTIONS
1
Losses due to theft and
7
vandalism against the firm
(% of annual sales)
1
Soundness of banks
8
1
Percent of firms with an
9
annual financial statement
reviewed by external
auditors
2
Strength of auditing and
0
reporting standards
2
Public trust in politicians
1
2
Transparency of government
2
policymaking
DOMESTIC REGULATIONS
2
No. days to start a business
3
2
Ethical behavior of firms
4
10 ASEAN
0.0
0
0.1
3
0.0
7
0.0
7
0.0
5
0.0
1
0.4
1
0.4
3
0.17
0.0
2
0.1
8
0.1
7
0.1
2
0.6
3
0.6
1
0.0
7
0.4
1
0.3
9
0.1
5
0.4
9
0.4
1
0.3
8
0.3
0
0.3
9
0.1
6
0.5
6
0.5
3
0.4
0
0.7
1
0.5
9
0.3
8
0.7
9
0.6
7
0.45
0.0
01
0.2
7
0.0
1
0.1
3
0.0
4
0.5
5
0.0
5
0.4
7
0.0
2
0.4
0
0.0
3
0.3
1
0.0
2
0.5
7
0.0
3
0.5
7
0.0
01
0.3
5
0.0
03
0.4
3
0.0
01
0.5
0
0.0
1
0.1
1
0.2
4
0.6
5
0.1
0
0.7
6
0.2
9
0.6
5
0.0
4
0.7
1
0.33
0.5
1
0.1
9
0.7
7
0.4
8
0.6
1
0.3
3
0.9
1
0.4
9
0.9
5
0.7
3
0.6
6
0.4
1
0.8
8
0.6
5
0.8
4
0.7
7
0.93
0.6
5
0.6
6
0.6
0
0.6
9
0.9
7
0.5
2
0.1
9
0.25
0.2
5
0.1
5
0.7
0
0.7
6
0.4
8
0.4
7
0.7
0
0.3
4
0.5
0
0.5
7
0.6
4
0
0.4
6
0.4
9
0.7
7
0.5
6
0.64
0.1
3
0.3
7
0.1
5
0.6
0
0.4
7
0.5
0
0.3
7
0.3
9
0.3
3
0.4
5
0.1
6
0.3
0
0.3
9
0.5
1
0.4
5
0.5
1
0.0
9
0.3
9
0.5
4
0.3
3
0.4
3
0.6
4
0.3
6
0.5
0
0.63
0.1
7
0.2
0
0.6
1
0.4
8
0.3
9
0.3
4
0.5
5
0.2
7
0.6
4
0.3
3
0.7
0
0.2
1
0.8
6
0.4
7
0.9
4
0.5
0
0.89
CMLV
7
ASEAN Rest of
0.83
0.85
0.86
0.27
0.81
0.86
0.66
0.42
0.62
0.58
Outsourcing ASEAN
India
EU26
NAFTA
East North
China
America Latin
10 ASEAN
0.2
4
0.0
6
0.5
7
0.4
2
0.4
0
0.2
5
0.8
9
0.4
4
0.8
0
0.2
8
0.6
6
0.2
4
0.7
4
0.6
1
0.7
1
0.6
3
0.66
0.0
3
0.1
9
0.2
2
0.1
2
0.1
2
0.2
8
0.4
3
0.5
2
0.2
6
0.3
8
0.2
8
0.5
7
0.2
5
0.3
5
0.2
2
0.2
5
0.1
9
0.4
1
0.4
3
0.3
3
0.6
9
0.4
6
0.3
4
0.5
5
0.3
9
0.6
0
0.3
6
0.9
0
0
0.1
9
0.3
7
0
0.5
7
0.6
2
0.6
5
0.6
6
0.3
0
0.6
9
0.74
0.4
8
0.0
6
0.3
7
0.6
0
0.5
9
0.7
4
0.7
6
0.0
9
0.5
5
0.1
3
0.4
0
0.4
0
0.4
2
0.6
4
0.6
1
0.8
7
0.8
8
0.4
0
0.4
8
0.6
2
0.6
3
0.2
1
0.7
8
0.3
3
0.3
3
0.6
4
0.3
0
0.2
8
0.2
0
0.8
5
0.0
3
0.6
1
0.5
6
0.6
0
0.4
8
0.4
5
0.5
5
0.55
CMLV
2
Bribery depth
5
2
Corruption Perception Index
6
Score 2012
EASE OF TRADE
2
Irregular payments in
7
exports and imports
2
Customs
8
2
Services Trade
9
Restrictiveness Index Overall
3
Openness to multilateral
0
trade rules
3
Margin of preference in
1
destination markets
3
Prevalence of foreign
2
ownership
COST COMPETITIVENESS
3
Tariff rate, %
3
3
Complexity of tariffs
4
3
Cost to import, US$ per
5
container
3
Cost to export, US$ per
6
container
ASEAN Rest of
0.3
9
0.8
2
0.9
4
0.9
6
0.68
0.78
0.69
0.31
0.00
4
0.63
0.63
0.43
0.35
8.5 AMS Strengths and Weaknesses

The problem with analysing ASEAN as a group of ten countries is their economic
diversity. Table 8.4 and others above have revealed vast differences between the
CMLV group and the Rest of ASEAN, yet even within this latter group there are
marked differences between countries. It is therefore important that we turn now to
consider these same indicators as they are measured across each AMS 95. For
example, the relatively low tertiary enrolment for RoA (0.35) is a result of low
numbers for The Philippines, Indonesia and Brunei (it misses those studying
overseas), although Singapores was score higher than the EUs. Thus, by getting
behind the averages to individual AMS do we find precise strengths and
weaknesses. Thus, for example, the quality of business schools is a weakness
relative to other AMS and globally, while Vietnamese business-to-business internet
use is an apparent strength.
95 For the full list of indicators per country, please refer to Annex 3.
103
Outsourcing ASEAN
In contrast to Table 8.4, Table 8.5. below draws upon selected data from Annex 3
(see Table 8.6. at the end of the chapter for a comparison of selected indicators)
and presents the strengths and weaknesses of each AMS (rather than each trading
bloc), and highlights the unique differences within the RoA and CMLV groups.
Table 8.15 Revealed AMS strengths and weaknesses
AMS
Myanmar
Strengths
Lao PDR
Soundness of banks; Public trust

in politicians;
Cambodia
Complexity of tariffs; Services

Trade Restrictiveness; Margin of
preference
in
destination
markets
Vietnam
Business-to-business
internet
use; Percentage of Individuals
using the Internet; No. days to
start a business
Indonesia
Total Labor force; Complexity of

tariffs; Tariff rate
The
Philippines
Quality of management schools;

Quality
of
transport
Infrastructure;
Soundness
of
banks; Strength of auditing and
reporting standards; Complexity
of tariffs
Soundness of banks; Prevalence
of foreign ownership; Quality of
transport Infrastructure
Prevalence of foreign ownership
Availability
of
latest
technologies;
Firm-level
technology absorption
Openness to multilateral trade
rules; Margin of preference in
destination markets
Quality
of
transport
Infrastructure;
Soundness
of
Thailand
Malaysia
Brunei
Singapore

104
Weaknesses
Quality of transport Infrastructure;
Soundness of banks; Ethical behavior
of firms; Prevalence of foreign
ownership
Percentage of Individuals using the
Internet;
Tertiary
education
enrollment;
Quality
of
transport
Infrastructure
Research
and
development
expenditure (% of GDP); Percentage of
Individuals using the Internet; Tertiary
education enrollment; Quality of
transport Infrastructure
Quality of Management Schools;
Research
and
development
expenditure (% of GDP); Strength of
auditing and reporting standards; PC
Software piracy rate
Internet; PC Software piracy rate;
Research
and
development
expenditure (% of GDP); Intl Internet
bandwidth
Research
and
development
expenditure (% of GDP); Secure
Internet servers (per 1 million people);
Irregular payments in exports and
imports; Public trust in politicians
Public trust in politicians; Services
Trade Restrictiveness; Complexity of
tariffs
Total Labor force; Margin of preference
in destination markets; Complexity of
tariffs
Quality of transport Infrastructure;
Total Labor force; Margin of preference
in destination markets
Outsourcing ASEAN
banks; Quality of management

schools; Availability of latest
technologies; Ethical behavior of
firms
We can clearly see that Singapore, Brunei, and Malaysia have relatively few
weaknesses and score highly across many indicators, while Myanmar, as the worst
performer of the entire index, has few perceived strengths. Indeed, the only
indicator that Myanmar scores slightly better out of the 65 indicators that we
selected to show relative weaknesses and strenghts of AMSs and ASEAN against
other country blocs is Public trust in politicians, which is higher than the
Philippines and Thailand and about the same score as Cambodia, Vietnam and
Indonesia. Myanmar also have a relative advantage over some other members
(Laos, Cambodia, Singapore and Malaysia) in terms of the total size of labour force,
however, other indicators in the category show very poor quality of the workforce.
Typical weaknesses of Myanmar are also those that related to the countrys
infrastructure, including both physical and digital infrastructure. Nonetheless, it
should be noted that one of the main reasons for the low performance of Myanmar
is the unavailability of data for more than half of the list of 177 indicators that were
used to construct the GVC Readiness Index. The same can also be said for Laos,
which also performs poorly in the index.
In general, the weakest areas of the CMLV sub-group are Human Capital, Innovation
and R&D, and Digital Infrastructure, which show the lack of strength in intangible
assets. CMLV though perform slightly better in Physical Infrastructure still have very
poor quality of domestic transport infrastructure comparing to the RoA. These two
aspects together are clearly a deterent to the outsourcing decision of foreigners.
Despite performing better than CMLV overall, many differences exist within RoA as
well. Comparing to Singapore, Malaysia and Brunei, the three that are relatively
more competitive, the remaning countires of the sub-group (Thailand, Indonesia,
and the Philippines) seem to have less sound and supportive environment for
outsourcing activities. For example, low scores in Diversion of public funds and
Burden of government regulation show lack of Government support in the
Philippines whereas Thailand experience a high level of corruption both at macro
and micro level, which is the worst among the RoA sub-group and even worse than
Laos and Vietnam. Singapore and Malaysia are the more rounded ones who score
relatively higher than other AMSs in most categories, except for instance, score
lower than Indonesia in Human Capital due to the Size of labour force indicator.
Malaysia though performs better still appears to have a weak area that needs to be
improved, particularly, in Digital Infrastructure, Malaysia score does not show great
difference from others in the RoA sub-group. From the GVC Readiness Index, such a
weak score is the result of the low scores of Malaysia for theSecure internet servers
and International internet bandwidth indicators.
105
Outsourcing ASEAN
8.6 Concluding remarks on ASEANs performance in the GVC

Index
On the whole, the diversity of ASEAN suggests challenges in the process of
economic intergration as well as in making ASEAN a more competitive trading bloc.
In general, however, ASEAN generally performs better than both India and China in
a variety of indicators, particularly the RoA group which are much more globally
competitive and well integrated into GVCs, and can set its targets higher than other
middle-income countries. The RoA group in general need to address concerns in
tertiary education, R&D, transport infrastructure, and harmonisation with global
markets if they wish to compete with the three wealthiest trading blocs. The NorthEast Asia group, which scores the highest in the most number of indicators, would
be a suitable example to follow, although improvements across many of the
indicators will require immense dedicated investments, time, and political will.
However, while the RoA group is performing promisingly, the CMLV group still has
many issues to address. While Vietnam is hoping to graduate from this group of
weaker economies by 2015, we argue that more should be done to better integrate
the economies of these countries as whole into the ASEAN bloc. Such policies could
include facilitate free movement of labour and trade, and through development
assistance from the RoA group.
As such, while each of the ASEAN Member State has their own unique difficulties to
address, the entire community should work together and support and facilitate the
weaker members so that all problem areas can be resolved. Specific
reccomendations for ASEAN as a whole will be discussed in more details in the
subsequent chapter.

106
Outsourcing ASEAN
Table 8.16 Identifying ASEAN strengths and weaknesses
0.21
0.33
0.24
0.14
0.36
0.28
0.02
0.33
0.15
0.1
5
0
0.15
0.11
0.14
0.00
2
0.00
3
0.00
2
0.30
Business Impact of Malaria, Tuberculosis and

HIV/AIDS
Total Labor force
0.38
0.05
INNOVATION R&D
0.15
Scientific and technical journal articles/Population,

total
0.00
2
Average
0.1
3
0.2
4
0.2
1
Education Index
Thailand
0.23
Singapore
0.19
0.29
Philippines
0.42
Quality of management schools
0.25
0.6
9
0.9
0
0.7
2
0.4
8
0.0
2
0.4
3
0.5
3
0.4
2
0.6
1
0.2
5
0.3
5
0.6
2
0.5
5
0.5
1
0.2
2
0.2
4
0.4
2
0.3
9
0.3
8
0.1
8
0.8
0
0.6
9
0.2
4
0.0
3
0.3
6
0.1
3
0.2
5
0.0
7
Malaysia
0.21
Indonesia
Vietnam
0.14
0.21
0.3
9
0.6
4
0.6
1
0.5
9
0.0
8
0.4
8
0.0
4
0.27
Brunei
Laos
0.1
1
0
Average
Myanmar
0.11
HUMAN CAPITAL
Tertiary education enrollment, gross

Rest of ASEAN
Cambodia
CMLV
Average ASEAN 10
ASEAN Member States
0.14
0.1
6
0.5
3
0.6
5
0.7
1
0
0.3
1
0.0
2
0.04
0.52
0.39
0.20
0.75
0.00
0.61
0.54
0.47
0.26
0.00
2
107
Outsourcing ASEAN
0.08
0.18
0.55
Firm-level technology absorption
0.35
0.31
0.03
0.17
0.5
8
0.4
3
0.00
2
0.75
0.00
Business-to-business Internet use
0.00
1
0.35
0.00
1
0.30
Intl Internet bandwidth, kb/s per user
0.04
0.01
0.01
Percentage of Individuals using the Internet
0.03
0.09
0.40
0.13
0.0
4
0.5
3
0.0
3
0.6
2
Duration of a typical electrical outage (hours)
0.71
0.70
0.63
0.51
0.90
Quality of transport Infrastructure (overall)
0.13
0.0
9
0.21
0.33
0.19
0.3
3
0.1
3
DIGITAL INFRASTRUCTURE
Secure Internet servers (per 1 million people)

0.27
Average
0.23
Thailand
Brunei
0
Singapore
Average
0.02
Philippines
Vietnam
0.03
0.02
0.5
5
0.9
0
0.8
4
0.0
4
0.4
6
0.5
2
0.1
2
0.6
3
0.6
1
0.0
7
0.4
1
0.3
9
0.2
0
0.8
7
0.2
2
0.7
7
0.0
1
0.3
2
0.0
1
0.2
6
0.0
4
0.5
5
0.0
5
0.4
7
0.0
2
0.4
0
0.0
3
0.3
1
0.9
0
0.9
5
0.7
9
0.5
0
0.7
7
0.4
8
0.6
1
0.3
3
Malaysia
Laos
0.0
3
0
Availability of latest technologies
0.00
2
0.41
Research and development expenditure (% of GDP)
Indonesia
Myanmar
Rest of ASEAN
Cambodia
CMLV
Average ASEAN 10
ASEAN Member States
0.01
0.1
4
0.7
2
0.6
9
0.0
2
0.7
1
0.0
1
0.6
8
0.00
3
0.55
0.7
4
0.6
5
0.95
0.55
0.00
3
0.14
0.27
0.60
0.60
0.01
0.36
0.38
108
Outsourcing ASEAN
0.25
0.43
0.17
0.15
0.7
0
0.7
0
0.6
6
0.6
5
0.5
8
0.6
4
0.67
0.71
0.16
0.9
5
0.6
6
0.8
6
1
0.28
0.9
4
0.5
6
0.6
6
0.60
0.9
8
0.9
3
0.6
6
Percent of firms with an annual financial statement

reviewed by external auditors
Strength of auditing and reporting standards
0.01
0.0
3
0
0.23
0.18
0.09
0.13
0.30
0.54
0.36
0.37
Transparency of government policymaking
0.20
0.3
0
0
0.24
0.18
0.15
0.04
0.62
0.17
0.48
0.23
0.0
9
0
0.30
0.20
0.20
0.29
0.53
0.44
0.24
0.5
6
0.9
4
Bribery depth

0.50
0.66
0.43
0.33
0.38
0.53
0.89
0.59
0.27
0.66
Average
0.13
0.88
Thailand
0.43
0.7
6
0.6
5
0.6
6
0.5
3
0.7
1
0.4
4
Singapore
0.43
0.65
Philippines
0.91
Malaysia
0.82
Indonesia
Vietnam
Brunei
Laos
0.88
Average
Myanmar
QUALITY OF SUPPORTING INSTITUTIONS

Losses due to theft and vandalism against the firm
(% of annual sales)
Soundness of banks
Rest of ASEAN
Cambodia
CMLV
Average ASEAN 10
ASEAN Member States
0.9
7
0.7
1
1.0
0
0.5
5
0.0
5
0.2
8
0.6
6
0.7
0
0.7
6
0.6
0
0.4
7
0.5
0
0.6
0
0.4
8
0.4
7
0.3
7
0.3
9
0.3
3
0.6
8
0.2
7
0
0.6
1
0.4
8
0.5
7
0.3
9
0.3
4
0.4
0
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Outsourcing ASEAN
Myanmar
Laos
Vietnam
Average
Brunei
Indonesia
Malaysia
Philippines
Singapore
Thailand
Average
Rest of ASEAN
Cambodia
CMLV
Average ASEAN 10
ASEAN Member States
Corruption Perception Index Score 2012
0.04
0.17
0.06
0.5
1
0.18
0.4
2
0.21
0.9
6
0.2
5
0.4
2
0.2
5
EASE OF TRADE
Irregular payments in exports and imports
0.04
0.06
0.03
0.18
0.2
0.15
0.19
0.31
0.19
0.30
0.5
Services Trade Restrictiveness Index Overall
0.63
0.1
2
0
0.25
0.22
0.8
0.1
Openness to multilateral trade rules
0.25
0.22
0.12
0.41
0.5
0.2
Margin of preference in destination markets
0.37
0.10
0.12
0.20
0.2
0.3
0.47
0.0
3
0.28
0.34
0.28
0.5
3
0.6
1
0.1
5
0.2
4
0.1
4
0.6
1
0.02
Customs
0.7
3
0.4
8
0.5
0
0.8
5
0.7
9
0.4
0
0.52
0.9
0.5
0.4
3
0.5
2
0.2
6
0.3
8
0.2
8
0.5
7
0.2
5
0.3
5
0.2
2
0.2
5
0.1
9
0.4
1
0.2
0.33
0.13
0.60
0.4
0.68
0.40
0.4
8
0.3
5
0.64
0.90
0.6
9
0.6
3
0.82
0.1
0.6
4
0.6
1
0.4
0
0.4
8
Tariff rate, %

0.26
0.07
0.10
0.10
0.47
0.78
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0.40
Cost to export, US$ per container
0.79
0.90
0.42
0.7
3
0.6
7

Average
0.86
Thailand
Brunei
Singapore
Average
Philippines
Vietnam
0.75
Malaysia
Laos
Cost to import, US$ per container
Indonesia
Myanmar
Rest of ASEAN
Cambodia
CMLV
Average ASEAN 10
ASEAN Member States
0.87
0.83
0.8
0.86
0.87
0.9
0.8
7
0.8
8
111
0.6
2
0.6
3
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9 Free Trade Agreements and Outsourcing

In this chapter we summarise the key findings about GVCs, trade and foreign direct investment, before analyzing the
main regional trade agreements that impact some or many AMS and the pending ASEAN Economic Community
(AEC). These findings draw upon the analysis of previous chapters, and are the foundation for leading to
recommended directions for FTAs that conclude this chapter.
9.1 Global integration and FDI drives growth

Development is a process of continual change, of moving from lower to higher value-added activities, or of moving
up value chains by continually improving total factor productivity 96. The core implication is that the development
process involves continually closing as well as opening businesses. Recessions, closures and restructuring can be, in
a sense, as important for long-term growth as periods of high growth and new business creation. Development is, as
the economist Joseph Schumpeter described, a process of creative destruction. Governments must be both tough
in letting inefficient businesses close, and encourage and support new entrants to come into existence and grow.
One important role of government is to maximise the pace of that creative destruction development process i.e. to
make the country economically rich as quickly as possible. Governments do this in three important ways: they use
macroeconomic policies to keep the factors of production fully employed; they provide the enabling environment for
businesses; and they promote competition.
Governments are nevertheless also under local pressure to control or reduce business competition, particularly
competition from firms in other countries. With very few exceptions, steps in that direction slow the pace of
economic development. Governments also face local political pressures form vested interests to prevent inefficient
firms from going out of business. While modest support may save jobs in the very short term, stopping or
delaying the process of destruction damages the process of creation because those workers stay employed in
low-productivity jobs instead of moving on and up value-chains. Furthermore, in the medium term, the opening up to
international trade evidently creates jobs.
96 Total Factor Productivity (TFP) is the portion of output not explained by the amountof inputs used in production. The following definition
describes the measurement and
importance of TFP for growth, uctuations and development as well as likely future
directions of research. Comin D. (2008). Accessed via: http://www.people.hbs.edu/dcomin/def.pdf

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Based on new Trade in value-added (TiVA) data, the OECD estimates jobs sustained by final foreign demand at 16%
of employment for Indonesia in 2008, at 17% for Russia, 19% for India, 22% for China, 24% for Korea, and 36% for
Chinese Taipei. This can be compared with 9% for Brazil, which is a relatively more closed economy and a less
significant player in GVCs.
Nevertheless most governments in every country, developing or developed, attempt to reduce competition for
selected firms or industries in various ways. All of them require a price to be paid, normally borne by the consumers.
Higher taxes are needed to pay for financial subsidies (tax breaks, free land, cheap credit or electricity) to make
chosen firms more competitive; and consumers pay higher prices for goods if trade barriers are used to force the
price of imported goods up. Taxing consumers reduces aggregate demand and savings, thereby slowing economic
growth.
In a business sense, subsidies and protection mean helping firms that cannot compete on a level playing field.
Typically, these firms operate inefficiently and struggle to move up value chains. Firms that are exporting typically
do not need protection from trade and, usually, are not recipients of subsidies. Firms that are aid recipients very
rarely become globally competitive exporters that no longer need to remain a tax burden on their countrys
consumers.
In addition to reducing the pressures for industry subsidies and protection, which slow the rate of development,
there are two other core benefits from opening an economy to greater economic integration with the rest of the
world.
1. Firstly, it allows for firms to specialise in production. By opening up to international trade increases productivity
through encouraging vertical specialisation in industry, and outsourcing is an essential aspect of that.
2. Secondly it quickens the pace of knowledge and technology transfer. International trade and investment both
promote technology transfer, which is essential for developing country firms as they try to emulate better ways to
make goods or deliver services from global best practice high-productivity firms. This is necessary to invent and
promote new or specific techniques to increase their productivity, which is why developed countries typically grow
slower than developing ones. Figure 9.1 shows a virtuous circle whereby countries that are open and attract
substantial FDI see that this causes, and eventually becomes the result of, increasing GVC participation and valueadded trade volumes.
Figure 9.41 Key value-added trade indicators, by quartile of inward FDI stock relative to GDP, 2010.

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Source: UNCTAD World Investment Review 2013, page 23.
Given the globalized nature of production, investment and trade in the 21 st-century, governments must continually
ask themselves what kind of policies facilitate or inhibit participation in GVCs, especially for SMEs. The cost of
protectionist measures undertaken in a globalized context can be higher than originally anticipated because of its
impacts on intermediate components of production elsewhere, as well as the final goods themselves, which mean
that tariffs accumulate on each component at each border and magnify their overall negative effect.
For multinational and SME firms participating in GVCs and trying to remain competitive, lower barriers for imports
have become nearly as important as access to export markets. It is important, against that background, to keep the
productivity gains from trade in mind. Trade policy by itself cannot achieve everything. In a globalised world where
trade is no longer only about goods but also about services and other less tangible products, such as ideas and data,
trade policy needs to be seen as part of a broader package of policies and regulations with investment and
innovation.

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9.2 The WTO, the AEC and ASEAN-relevant FTAs

The trade environment affecting ASEAN Member States includes an array of complex relationships.
They are
affected by WTO Agreements and negotiations, and a number of Regional Trade Agreements, either in existence or
under active negotiation. They are also all parties to the ASEAN Free Trade Agreement (AFTA) and a variety of trade
agreements between themselves and other economies. Many are also Members of Asia Pacific Economic
Cooperation (APEC) agreements.
ASEANs central vision for the region has been to create an ASEAN Economic Community (AEC), integrating all
ASEAN Members States (AMS) as a single market and production base by 2015.
The ASEAN Blueprint states the goal as:
Transform ASEAN into a single market and production base, a highly competitive economic region, a region of
equitable economic development and a region fully integrated into the global economy.
In 2007 when deciding to hasten the program of integration from its original deadline of 2020, it was agreed to
transform ASEAN into a region with free movement of goods, services, investment, skilled labour, and freer ow of
capital.
The multilateral negotiations of the World Trade Organisation (WTO), were revived as a central focus of world
trade policy development, at least in a limited sense, in December 2013 at the Bali Ministerial Meeting. Following
years of little progress, agreements were reached on a limited range of areas, most particularly from a GVC
perspective, focused on trade facilitation including ports and customs.
In recent years, while WTO negotiations had apparently stalled, attention had reverted to the short term wins of
bilateral agreements, and economies in the Asia Pacific Region have been active in that engagement.
ASEAN
Members States are party to a number of these agreements.
Also prompted by the state of play with the WTO and with the recognition that the existence of trade blocs in other
parts of the world held substantial benefits for their members, and not wanting to be excluded from possible gains,
there has also been new and concerted attention to regional trade groupings in the Asia Pacific. The growth of
emerging economies, most particularly China and India, the US declaration that it is pivoting to Asia and the
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attention of the world on this region as the future engine room of the global economy, provide insight into the
prevailing trade agenda.
The Trans Pacific Partnership (TPP), which is currently under active negotiation, emerged from a smaller
grouping of APEC economies, and gained substantial momentum when the USA joined the negotiations. It now has a
membership of 12 countries, including several ASEAN Member States and major trading partners of ASEAN. 97
The TPP agenda is ambitious, as it seeks to tackle a broad range of issues including intellectual property rights,
competition regulation, environmental and labour issues, investment and financial services and rules of origin. Many
of these will present significant hurdles for some economies. Most importantly from a GVC participation perspective,
there is a greater attempt to influence behind the border regulatory practices of parties, recognizing new trade
imperatives. The emphasis has shifted from pure market access to greater market integration.
Japans decision to join the TPP table in mid-2013 was enthusiastically welcomed by existing participants, but also
with concern that the process would be slowed and agreements already met would be revisited. Domestic political
hurdles in relation to sensitive areas, such as agricultural market access and reforms, are having repercussions on
the progress of the TPP negotiations.
Meanwhile, the Republic of Korea, China and Chineses Taipei have all indicated an interest in joining the TPP in the
future. Should these economies join a first wave of acceding signatories post completion of the agreement, other
regional economies may also seek to join. A TPP with both China and the US as members would be of enormous
significance as a trade bloc.
The outcome of the current battle in the US to secure a Trade Promotion Authority for the Executive is also a
significant concern for countries negotiating the TPP and other trade deals with the US. The possibility that the
individual terms of agreements reached may require Congressional passage will produce a reluctance to offer
sensitive concessions, and could risk derailing the TPP altogether.
97 APEC members include Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore,
USA, and Vietnam.
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The TPP did not meet its deadline for conclusion by the end of 2013. Many chapters have been closed, but some of
the more problematic issues remain to be solved. These include market access issues, intellectual property, investor
state dispute settlement, and state owned enterprises and environmental issues. Indications are that if market
access issues could be agreed between the US and Japan, resolution of these other issues would be found. The
negotiations are conducted in confidence, however it is hoped that an agreement will be reached in the first half of
2014.
In 2012, ASEAN opened negotiations on the Regional Comprehensive Economic Partnership (RCEP) in
Cambodia, in part growing out of the AEC goal and in part a response to the TPP negotiations. The members of the
RCEP are all ASEAN economies and economies with which ASEAN has existing Free Trade Agreements, being 16 in
total. These are the AMS of Indonesia, Malaysia, Philippines, Singapore, Thailand, Brunei, Myanmar, Cambodia, Lao
PDR, Vietnam as well as Australia, New Zealand, the Peoples Republic of China, India, Japan, and the Republic of
Korea.
The RCEP is different in style and arguably less ambitious than the TPP, and negotiations are not as advanced.
However it is seen as a very significant proposal, not least because of its size in economic terms. It would create the
worlds largest free trade bloc, given that RCEP would account for around half of the worlds population, while its
combined GDP of about USD 17 trillion would be 30% of the worlds total GDP and 40% of its trade. The potential
benefits of the RCEP are particularly significant given that some of its participants have among the highest
protectionist measures and relatively few concluded FTAs. The RCEP is due for conclusion by 2015, in line with
creation of the AEC.
Several economies are participating in both the TPP and the RCEP; these are Australia, Brunei, Japan, New Zealand,
Malaysia, Vietnam, Singapore. Both the TPP and the RCEP tracks will ideally be negotiated in substantially
complimentary terms, as both are seen as pathways to an eventual Free Trade Agreement of the Asia Pacific
(FTAAP), covering not only their own Members but also Latin American economies 98 which have recently concluded
the Pacific Alliance (PA), an agreement expressly focused on trade with the Asia Pacific. The APEC Business
Advisory Council has made pursuit of a FTAAP a core priority for 2014.
98The members of the Pacific Alliance (PA) are Chile, Peru, Colombia and Mexico.
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Like ASEAN, APEC has focused attention on the role of GVCs and supply chain connectivity in regional growth and
prosperity, also articulated in its 2014 priorities. Specific reference is made to information sharing and policy
dialogues, economic and technical cooperation and capacity building for developing countries. Other relevant topics
include SME participation and identifying chokepoints in joining GVCs.
Preparations for an AEC assist towards the completion of these mega regional agreements, and ultimately an AEC
would yield significant growth opportunities for the region. Meanwhile the potential for participation in global and
regional value chains by all AMS must significantly improve, should any of these agreements eventuate in the near
future. Similarly, the existence of the agreements should assist in movement toward the AEC.
The dominance of trade in intermediates and the prevalence of the GVC phenomena have led to calls in a number of
quarters for a shift in the multilateral trade negotiating agenda in order to specifically address GVCs. For example,
Baldwin99 argues that the NAFTA style approach to RTA negotiation is, in fact, part of a GVC agenda and that the US
in particular has pursued the bilateral approach out of frustration that the WTO does not cover a series of issues
relevant to GVCs, such as investment or domestic regulatory regimes for services. Japans approach to bilateral RTAs
has similarly been described as based around an agenda designed to foster global and regional production networks.
Japanese commentators have started to request the WTO for a plurilateral agreement on GVCs. 100
9.3 ASEAN Policy Frameworks

ASEAN and individual AMS have extensive policy frameworks in place that address the desirability of greater
participation in GVCs to attract economic prosperity to the region.
In addition to the AEC Blueprint which importantly gives priority to regional connectivity issues, there are a range
of relevant investment policies and a large array of sectoral policies. Not all these policies can be discussed within
the constraints of this study, but they are referred to where appropriate in discussing the AEC goal.
99 See Baldwin 2013 WTO 2.0

100 See Nakatomi 2013
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Section 10 of the AEC Blueprint notes that A single market for goods (and services) will also facilitate the
development of production networks in the region and enhance ASEANs capacity to serve as a global production
centre or as part of the global supply chain.
Meanwhile, section 17 explicitly seeks to Establish ASEAN customs systems dealing with special customs regimes
such as Temporary Admission, Outward Processing and Inward Processing with a view to facilitate integration of
production and supply chains. Other sections call for the elimination of tariffs and non-tariff barriers, more effort in
trade facilitation, an ASEAN Single Window for customs, standards and technical barriers to trade, as well as the free
flow of services, investment, skilled labour and freer movement of capital.
The AEC Blueprint is comprehensive in covering competition policy, consumer protection, intellectual property
rights, infrastructure development, taxation, e commerce and SME development, all of which impact upon GVC
participation.
In addressing the goal of integration into the global economy, the AEC Blueprint specifically calls for the
development of a coherent approach towards external relations and enhanced participation in global supply
networks. Such actions and approaches that aim to foster further participation in GVCs should include the adoption
of international best practices and standards in the production, distribution, and development of a technical
assistance package. This will enable the less developed AMS to upgrade industrial capability and productivity in
order to enhance participation in regional and global integration initiatives.
The extent and pace to which the AMS can achieve progress towards these various goals will naturally impact on the
degree of ASEAN participation in the outsourcing and GVC phenomenon, and will be critical to the continued efforts
in achieving effective internationalization of ASEAN industries. Over time ASEAN will need to strategically position
itself in order to compete for the onshoring of higher value-added tasks in both goods and services. New
opportunities continue to open up as global businesses focus more and more on their core competencies and
outsource all other peripheral tasks in an effort both to reduce costs and to shift to higher value-added activities.
However, competition from outside the region is strong and growing, especially in China, South Asia, and also Africa.
There is an urgent need in ASEAN to better understand and take more seriously the business opportunities available
and the means to access them. It is vital for ASEAN to position itself strategically to take advantage of new
opportunities in global and regional outsourcing.
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9.4 AEC progress report:

ASEANs central vision for the region has been to create an economic community, the AEC, integrating all AMS into a
single market and production base by 2015.
The AEC vision has four pillars, aiming to achieve a regulatory framework that allows the free movement of goods,
services, investment and skilled labour among member countries as well as freer movement of capital. These pillars
include:
1. a single market and production base;
2. a highly competitive economic position;
3. equitable economic development; and
4. full integration into the global economy..
Integral to this vision is a reduction in poverty and socio economic disparities. The aim is to address the
development divide and accelerate the integration of Cambodia, Lao PDR, Myanmar and Vietnam (CLMV) through
initiatives such as Narrowing the Development Gap (NDG) and the Initiative for ASEAN Integration (IAI). There are
twelve priority integration sectors, in addition to food, agriculture and forestry, which importantly includes logistics.
However the 2015 target has many challenges to overcome. The Mid-Term Review of Implementation of the AEC
Blueprint in 2012 drew attention to the difficulties and proposed a variety of areas where action would need to be
implemented on an explicitly delayed timetable beyond 2015. These include standards and conformance, capital
market development and financial market integration, Mutual Recognition Agreements (MRAs) on professional
services and labour mobility, ICT, energy, intellectual property, competition policy, agriculture and a number of other
issues such as consumer protection and taxation. It is likely, therefore, that the AEC will remain a work in progress
after 2015.

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Another analysis undertaken in 2013101 reached more harsh conclusions, claiming that ASEAN has no prospect of
coming close to [a] single market by the AECs 2015 deadline or even by 2020 or 2025. 102 A survey of business
decision-makers reports low awareness of AEC 2015, reflecting very low utilisation rates of AFTA or other
preferences103 and the failure to progress toward a single investment area.
Clearly it is important for ASEAN for more evident progress to be made in all areas covered under the AEC Blueprint.
Of special interest, from the perspective of outsourcing, are the specified areas of AEC cooperation which include:
human resources development; capacity building; recognition of professional qualifications; closer consultation on
macroeconomic and financial policies; trade financing measures; enhanced infrastructure and communications
connectivity; development of electronic transactions through e-ASEAN; integrating industries across the region to
promote regional sourcing; and enhancing private sector involvement in the building of the AEC.
Incorporation of the following in the eventual AEC agreements, the TPP and the RCEP would improve regional
economic performance:
1. Placing more focus on the barriers behind the border. Reducing barriers that inhibit access to markets,
though essential for cross-border trade development, does not provide a comprehensive solution for
eliminating impediments to regional trade in services. Regulatory and business environment barriers are of
significant importance.
2. Expand the scope of agreements. Many services sectors, specifically financial, medical and transportation
sectors, have not received appropriate attention in bilateral and multilateral free trade commitments. Services
Mode 4 (movement of people) could also be covered more extensively.
3. Promote multilateral agreements. The multilateral framework is more beneficial in creating robust
services markets in the Region because it promotes competition among services providers from several
economies. It also allows developing and integrating collective approaches to trade negotiations with third
101 ISEAS 2013
102 ibid p. 325
103 IEAS p.14
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parties, and can thus, reducing heterogeneity in services regulations and help unifying the level of
commitment to economic liberalization in the Region.
4. Improve and unify the structure of agreement. Different formats and agreement structures, and
allocating provisions on services to different chapters will be inefficient and economically disruptive as it
would only reduce transparency and create confusion among businesses.
5. Promote negative list approach. This approach widens the scope of an FTA and facilitates trade for
emerging services sectors.
6. Introduce clear future commitments.
Such commitments should state specific liberalization
commitments with hard deadlines, which will bring more tangible results.

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10 Key Findings and Recommendations

In this chapter we develop broad recommendations for the strategic positioning of ASEAN as a whole vis--vis
other regional trading blocs and countries. We also specify many specific actions that AMS could take, unilaterally
or collectively to promote outsourcing and integration into GVCs. Before these specific recommendations, however,
we first explain our view on the role of government in promoting industry and outsourcing.
10.1 The Strategic Positioning of ASEAN

In a recent study, Hubert Escaith and Satoshi Inomata 104, trace the changing pattern of value-added trade across ten
countries, including five AMS, during 1985-2005.105 They show that only Japan was a regional hub until 1995, when
the United States joined by importing Japanese goods via Singapore and Malaysia. Ten years later, the picture is
radically different:
By 2005, the centre of the network had completely shifted to China, pushing the United States and Japan to
the periphery. China became the core market for the products of the region from which final consumption
goods were produced for export to the US and European markets. Also of note is the nature of the supply
chains that China developed with others. The notable length of the arrows surrounding China indicates that
the supply chains towards China are characterized by a high degree of fragmentation and sophistication,
incorporating substantial amounts of value added from each country involved in the production networks. The
competitiveness of Chinese exports, therefore, is not only attributable to its cheap labour force but also to the
sophisticated intermediate products that the country receives from other East Asian economies, as embedded
in goods [ultimately] labeled Made in China. (p.142) 106
104 Geometry of Global Value Chains in East Asia: The Role of Industrial Networks and Trade Policies, Escaith, H.
and Inomata S. (2013)
105 China(C), Indonesia (I), Japan (J), Republic of Korea (K), Malaysia (M), Philippines (P), Singapore (S), Thailand (T),
Chinese Taipei (N) and United States (U).
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Thus ASEAN is gaining an increasing share of the market to supply an increasingly wealthy China. This is not merely
contributing to exports with final destinations in the EU or the US, but also for the Chinese market itself. The next
stage of development for China will see a rapid expansion in domestic demand, and ASEAN is perfectly positioned to
supply many of the services (including education and tourism) and goods.
By 2015 the economic fate of ASEAN will rest with China. In 2012, China had a (PPP) per capita income of US$9,033,
Thailand had slightly higher, and of course Malaysia, Brunei and Singapore much higher per capita incomes. The
other six AMS had lower per capita incomes (and most of the ASEAN population), including Indonesia (US$4,876),
Vietnam (US$3,787), and Myanmar (US$1,740). These latter countries are already attractive outsourcing
manufacturing destinations for Chinese firms, and for international firms looking to move out of - or diversify from China. The richer AMS are increasingly providing the services for these linkages to China.
ASEAN should not fear the economic size of China. Trade is not about size, but comparative advantage (relative
prices) and efficiency. The size of China is a huge opportunity for rapid economic development in ASEAN; by
exploiting cultural similarities, time zone advantages, and the mix of high and low-end services and goods that a
truly integrated AEC could deliver. In our view, the purpose of economic integration across the AMS is to increase the
overall attractiveness and efficiency of ASEAN to exploit Chinese markets: to offer China the full package of goods
and services in one region for GVC integration. Establishing the AEC to create a protected regional market is very
much secondary and has limited long-term benefit. ASEANs collective population is less than half that of Chinas
and, more importantly, its average per capita income is just over one-third of Chinas: the ASEAN market is onesixth the size of Chinas.
10.2 The role for proactive industry policies

In Chapter 2 above we argued against explicit import-substitution policies based on protection and subsidies. Yet
many commentators still prescribe this as The Asian Way to development. In fact, their arguments often confuse
import-substitution with the export-competitions promoted amongst large private corporations in countries like
Japan and South Korea (which were sometimes financed by extracting monopoly rents from protected domestic
markets). The arguments about the net impact of these proactive industry policies remain unresolved.
106 Escaith, H. and Inomata S., 2013, p.142
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Professor Kenichi Ohno, in his recent book 107, is a typical advocate of the more interventionist approach. He bemoans
the inability nowadays for poor countries to pursue many of the restrictive trade and investment policies of previous
decades. He also rails against the suppressive effects of free trade, unequal commercial treaties 108, and indeed a
generally evil world109: globalization erects barriers to catch-up industrialization by late-comers and tends to
perpetuate income polarization between the rich and poor countries 110.
His solution is to build a technocratic elite that can rise above the petty politics of protectionist rent seekers. For this,
governments need policy capacity 111 and a national leader with strong will and clear vision 112. We do not share
pessimism about free trade, or his optimism about how to make industry-specific subsidies efficient, but we do agree
with him on two strategic observations:
1.Human capital is the key resource, and that has a strong role for government leadership.
The crucial factor that divides winners from losers is the amount of skills, technology, and knowledge
accumulated in their citizens rather than the initial endowment of natural resources or the amount of foreign
107 Learning to industrialise: from given growth to policy aided value creation, Ohno, K., 2013
108 Ohno, K., 2013, p.5
109 Ohno, K., 2013, p.29
110 Ohno, K., 2013, p.29
111 Ohno, K., 2013, p.34
112 Ohno, K., 2013, p.60
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funds received a continued march to high income becomes possible only when the country establishes a
national mechanism for constant upgrading of human capital. 113
2.Industry policy should support existing or emerging comparative advantage.
This includes new industries and products [which] are expected to emerge in a way consistent with the
historical path and existing factor endowments of the country in question, 114
The leapfrogging approach, where entirely new industries, products, and actors are targeted rather than
building on the existing industrial base, is risky because the possibility of success for each project starting
from scratch is usually slim and the gestation period is long even if it is successful. 115
Industrial policies can play a useful role, but they can also be expensive and have many unintended consequences if
implemented poorly in support of vested interests. Industry policy is most effective in enhancing GVC activity when
explicitly focused on people: on encouraging innovation, know-how and intellectual property and the ongoing
implicit transfer of technology through FDI (tacit knowledge). In considering industrial policies, it is vital that
countries understand the full extent - downstream and upstream - of the GVCs that are critical to their economy. This
knowledge is needed to identify what is most important so that they situate their operations on the GVC, and then
design policies to foster innovation in order to move up the value chain.
By way of summary, industrial policies play a positive role when they are designed on the basis of comparative
advantage, prioritize the removal of distortions, promote competition, and support investment in infrastructure and
education, provision of trade intelligence, and export financing mechanisms for SMEs.
Industry policy also includes consideration of free trade zones for both goods and services. Export Processing Zones
113 Ohno, K., 2013, p.xi
114 Ohno, K., 2013, p.35
115 Ohno, K., 2013, p.239
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(EPZs) have become significant GVC hubs for goods by offering benefits to trans-national corporations and suppliers
in GVCs. Similar policies are now being experimented with for services. Policymakers are increasingly setting up
relevant supporting physical and digital infrastructure, including technical assistance for certification and reporting,
support on occupational safety and health issues, education and training, incubation for innovation, financing and
recycling or alternative energy facilities, transforming EPZs into centres of excellence for sustainable business.
International organizations can help through the establishment of benchmarks, exchanges of best practices and
capacity-building programmes.
10.3 The role for proactive outsourcing policies

Many governments are looking for new ways to position economic activities in global networks of production, while
safeguarding growth and employment at home. Many policy analysts feel that the GVC agenda is primarily a
domestic one, calling for a new approach to industrial policy, especially to assist local firms in climbing the value
added ladder and attracting increasingly knowledge-intensive tasks onshore. They argue that the focus should be on
improving the efficiency of aspects of production that are sticky and less likely to cross borders. This includes
investment in education and skills of all kinds, financing of infrastructure, provision of trade finance, facilitation of
R&D and innovation systems to encourage industry-university collaboration and related efforts to attract foreign
investment partners.
The expectation is that as economic activities become more mobile, co-location and clustering effects will become
more important for competitiveness. Firms will want to locate in a country where they can readily engage with other
actors and benefit from proximity.
The interaction of different activities in a value chain is often important in this respect. The flip side of this is that
concerns are beginning to be expressed in many OECD countries that the continued loss of certain manufacturing
activities to offshore locations could result in a loss for them also of the associated R&D and design capabilities. One
response has been a call for industrial policies, often with a strong focus, despite all the new opportunities in
services, on traditional manufacturing. In some cases, such policies explicitly discourage manufacturers from
relocating activities abroad. In others, they give implicit support to the manufacturing sector. Yet these defensive
policies aimed at propping up manufacturing ignore the realities of today's global economy. Relocating some
activities abroad leads to important productivity increases at home that enhance competitiveness and support job
creation throughout the local economy. Thus, despite the higher penalties for protectionism in a world of GVCs,
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UNCTAD
report
policies across the
restrictive
during
is not a trend for
middle-income
groups
in
our
imperative
that
AEC as soon as
Figure 10.42: Changes in national investment

policies, 2000-2012
that
national
investment
world have become more
2000-2012 (Figure 10.1). This
ASEAN to embrace; as a low
region (the poorest of all the
above
analysis)
it
is
ASEAN fully implement the
possible.
In a world of global
value
chains,
firms
will
require
imports
from abroad and will need to
offshore
some
activities in order to remain
competitive even
in the home market. Recent
OECD work shows
that outsourcing and offshoring enhances
the export competitiveness of
countries in GVCs,
by
providing
access
to
Source: UNCTAD World Investment Report 2013, page 19. differentiated,
cheaper,
more
and
better
quality
inputs.
Policies that focus exclusively
on manufacturing may ignore the growing importance of services for value creation in GVCs, including for the
production of manufactured goods themselves. Manufacturing companies no longer sell only goods but instead sell
bundles of goods with both embodied and embedded services, including design, development, marketing,
warranties and after-sales care. Rolls Royce, for example, no longer focuses on selling aircraft engines and cars but
on solutions, outcomes or experiences.
It is apparent that promoting outsourcing is a broader issue than some discrete set of policies. In a world of
fragmented value chains and digital technology, it is making much more sense to look at country and regional
efficiency or more precisely, productivity - as a whole: holistically. This means addressing the full gamit of policies
that impact GVC Readiness and global competitiveness, including within borders and in supporting services, rather
than trying to disaggregate and define policy sub-sets for foreign investment, outsourcing, or trade.
UNCTAD also emphasise this holistic approach to policy formulation: Trade and investment policies often work in
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silos. In the context of GVCs they can have unintended and counterproductive reciprocal effects. To avoid this,
policymakers where necessary, with the help of international organizations should carefully review those policy
instruments that simultaneously affect investment and trade in GVCs; i.e. trade measures affecting investment and
investment measures affecting trade. (UNCTAD, 2013, p.xi)116. At the institutional level, this implies closer
coordination and collaboration between trade and investment promotion agencies.
UNCTAD also promote the idea of Regional industrial development compacts. They argue, and we agree, that the
relevance of regional value chains underscores the importance of regional cooperation. Consequently, regional
industrial development compacts could encompass integrated regional trade and investment agreements focusing
on liberalization and facilitation, and establishing joint trade and investment promotion mechanisms and institutions.
They could also aim to create cross-border industrial clusters through joint financing for GVC-enabling infrastructure
and joint productive capacity-building. Some of this is already being done in ASEAN, but to be truly effective this
approach needs to be more fully embraced such that ASEAN-wide policies override domestic policies without
delays and exceptions. At present there are aspects of regional cooperation between AMS, but it still remains far
from a single market trade and investment regime.
10.4 Towards a high-income globally competitive ASEAN

This section summarises the main findings and recommendations of this report. The first section identifies the
general supply-chain barriers, with specific mention of rules of origin and logistics. We then specifically address
actions to promote services trade, given its increasing importance particularly for outsourcing. Then we present
some ideas for reinvigorating the AEC, which is clearly going to be less than was hoped in 2015. Finally, we
present a set of detailed policy recommendations under the general heading of avoiding the middle-income trap.
10.4.1
Addressing supply-chain barriers
The heterogeneous mix of AMS, as noted above, makes it difficult to interpret summary ASEAN data and indicators.
The diversity of levels of development push us towards analyzing each country individually rather than as a group,
or at least separating the CMLV from the rest. The same problem arises when we come to policy recommendations
for GVC integration and outsourcing. Figure 10.2 below shows that the most important factors and conditions for
116 UNCTAD World Investment Report 2013
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such integration differ by development stages and level of technological sophistication: Singapores policy priorities
are very different from those of Myanmar. Myanmar is entering GVCs (bottom left of Figure 10.2), so must focus on
its basic infrastructure, trading environment, and providing low-cost workers. Singapore has upgraded and moved
into knowledge-based services, which requires highly trained workers, R&D policies and intellectual property rules.
Figure 10.43 Factors and conditions that facilitate climbing the GVC development ladder
Source: UNCTAD analysis
Nevertheless, while specific policies may differ, all AMS are in the process of removing supply chain barriers. These
barriers impose higher operating costs and capital expenditures; they cause delays and increase the uncertainty of

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doing business and making shipments; and, in general, increase risks and reduce trade activity. These encompass
within and border policies.
Globally, and for ASEAN, the biggest deterrents to trade and outsourcing are inadequate infrastructure, inefficient
border policies and regulatory regimes, and weak services and supporting institutions. These may be addressed
under four policy areas:
1. Market Access
This can be enhanced by removing or reducing the costs of quota schemes, licencing arrangements, tariffs,
localisation requirements, rules of origin, and technical, sanitary and phytosanitary measures as well as opening up
investment and immigration regimes. Concerning rules of origin for goods, ASEAN will need to consider harmonizing
CEPT rules with the methods used by its major trading partners, which are tending increasingly to the change of
tariff classification method rather than the percentage of value added approach.
For services, the newly commenced negotiations for the ASEAN Trade in Services Agreement (ATISA) reopen
discussion about the best approach to denial of benefits, taking into account the emergence of global services value
chains and the new opportunities opening up for the AMS.
2. Border Administration
This can be enhanced by removing or reducing the costs of customs administration, import-export procedures, and
the transparency of border administration including by moving to paperless procedures and adopting a single
window. This includes better coordination between border agencies and reducing the administrative burden of
complying with standards. In particular, we would emphasise removing country-and-product-specific import rules,
which are sometimes consciously applied as a barrier to trade.
3. Telecommunications and Transportation Infrastructure
This can be enhanced by improving or reducing the costs of transport infrastructure and services, and information
and communication technologies. ASEAN should redesign and reinvigorate its program to reduce logistics barriers to
trade, especially those that can be addressed by policy making (clearance processes at customs, transport,

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infrastructure). ASEAN should also consider creating an agency or an inter-ministerial committee that focuses on
logistics performance, linked to a working group that incorporates the private sector into these discussions.
4. Business Environment
This can be enhanced by making the regulatory environment more transparent, simpler, less risky, less duplicative
and less burdensome for business and by reducing the costs of making investments, hiring foreign and local
workers, locating access to finance, and achieving physical security.
10.4.2
A focus on services
Making services competitive is essential not just for achieving market share in services outsourcing, but also for
supporting GVC integration in general. In this regard we have seven key findings in relation to ASEAN:
1. The most important market access barriers at the border are associated with restrictions on inward FDI
such as foreign equity limits or restrictions on nationality or residency of Boards of Directors and
restrictions on visas and absence of recognition of professional qualifications. Market access barriers also
exist behind-the-border, chiefly in licensing arrangements which affect foreign firms scope of business.
Behind the border domestic regulations are very significant problems for trade in services. Domestic
regulations and efficiency of government agencies with services sector oversight have larger impacts on
trade in services than is the case in other sectors.
2.
3. ASEAN economies differ significantly in their openness to trade in services. Singapore is the most open
while Indonesia, The Philippines, and the CMLV are much less open. This is despite the niche in services
outsourcing exports carved out by The Philippines.
4. Given its percentage of total GDP and employment, services are not receiving adequate attention in trade
negotiations. In relative terms, there are far fewer preferential trade outcomes achieved for services
compared to goods. This presents ASEAN with an opportunity to seek higher levels of commitments from
member economies to move forward in a collective and inclusive way by realizing the opportunities of
creating a region wide trade in services framework.
5. Domestic services sector regulations, industry standards, and professional requirements act as non-tariff
barriers to(NTBs) in trade in services. Economyspecific regulations discriminate against foreign services
providers by either raising transaction costs or by requiring domestic presence.

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6. Differences in service sector regulations across economies raises transaction costs for firms seeking to
export to multiple markets. This is a disproportionally larger problem for SMEs and services firms in
developing economies.
7. Service provisions within FTAs lack sufficient scope: Most service provisions focus on market access
barriers while few focus on behind the border issues.
8. Factors inhibiting competitiveness in trade in services include: disconnects in standards & specifications,
burdensomeness of domestic regulation, lack of regulatory transparency, consistency or stability,
inconsistent monitoring and enforcement, poor coordination among government agencies, differences in
language and culture across destination markets, access to human capital especially skilled talent.
There is great scope for rapid achievements in services sector competitiveness. There are many enabling factors
which governments can lever. Human capital is at the top of the list (nurturing talent, skills, ideas, culture of
customer focus, etc.). Digital infrastructure must also be of world quality, which can be achieved more easily
perhaps than other forms of infrastructure. ASEAN governments can encourage investments in intangible assets
(copyright, business methodologies, brands, etc.), as part of an overall effort to promote innovation and R&D. Finally
the efficiency and scope of domestic regulations need to be constantly measured, monitored and improved.
10.4.3
Reinvigorating the AEC
The vision for the AEC is commendable, but there is an urgent need for more substantial outcomes. By 2015, a short
list of actual achievements will have eventuated. There is still no more than talk of such easy wins as a single
ASEAN tourist visa. Movement of people and professionals, like many other prioritized dialogue areas, remain
bogged down in details. The AEC Progress Scorecards were reportedly so poor that they were not shared with the
public. The AEC is increasingly lagging in relevance as other bilateral and regional trade agreements move forward.
ASEAN Leaders, at the highest level, need to reaffirm their commitment to an AEC and to commit anew to a specific
list of high level outcomes. In the interests of increasing ASEAN participation in global and regional outsourcing
activities in both goods and services, one such possibility would be a high profile Competitiveness Report Card
or GVC Readiness Report Card, for each AMS and for ASEAN as a whole, that is calculated annually and publicly
reviewed. This document could be based on the index created for ASEAN with this report. It would benchmark
ASEAN to the rest of the world, and be tabled for discussion at high-level meetings. The above initiative would serve

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not only to measure ASEAN progress in this fundamental area but it would also quickly improve the accountability
and transparency of the effort to move towards an AEC.
10.4.4
ASEAN participating in outsourcing and avoiding the middle-income trap
By way of a conclusion, we present a set of specific proposals for actions. This list comes from the analysis
undertaken and presented in the above chapters, from interviews conducted for this assignment, as well as from
international literature including recent work in APEC.
In all sectors of the economy, we see that attracting foreign lead firms to purchase outsourced intermediates from
local AMS suppliers is about ensuring the competitiveness of AMS firms - and that this is highly dependent on the
local regulatory environment for doing business as well as on national and regional connectedness (or absence of
choke-points) with international markets. We also see that it is about attracting local but even more importantly
foreign financing to support AMS inputs to global value chain activity. For this reason, our recommendations focus
not only on trade policies at the border and on the openness of investment and immigration regimes to foreign
capital, talent and idea but also on ensuring the coherence and efficiency of domestic regulatory regimes and on
public/private dialogue with stakeholders in the conduct of any regulatory reform process.
Much has already been done in some of these areas, and others have commitments pending, but it is useful to
present a comprehensive list of the key actions that could best support outsourcing, trade and investment.

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1. Implementation of the AEC

There needs to be a major visible boost given in earnest to the attention being given on every front to
implementation of the AEC to allow freer movement of goods and services and capital and people, by reducing
restrictions both at the border and behind-the-border and making a greater effort to harmonise and achieve mutual
recognition of standards and specifications.
We consider that deeper progress with the existing comprehensive AEC agenda is of overwhelming importance to
ASEAN competitiveness and to sustaining and growing ASEANs integration into global and regional outsourcing
activities. The importance of this agenda is reinforced by the findings in the new TiVA data sets that imports of
intermediate goods and services are vitally important ingredients in export growth performance.
2. Lever competitiveness in services
Given the major role of embodied services in adding value to exports from all sectors of the economy, there needs
to be more focussed attention to ASEAN-wide competitiveness in services. This will help both to promote increased
ASEAN participation specifically in global cross-border services value chains, and also to ensure the talent pool of
appropriate skills sets exist to enable climbing the ladder to higher value added work in global goods value chains.
Talent, ideas and information really matter for services competitiveness. In the context of this imperative, we
recommend that much greater priority should be given to education and training generally, not only higher
education but also language and vocational training. There is room for a bigger effort to establish ASEAN regional
educational, cultural and research exchanges. Language and cultural barriers are a continuing issue in the modern
business environment and can potentially present stumbling blocks to future cooperation.
Much more rapid progress needs similarly to be achieved in actual implementation of the ASEAN MRAs in the
professions. And beyond the professions, ways need to be found to facilitate more general intra-ASEAN people
mobility. Efforts are also needed on the part of all AMS to improve digital infrastructure and to nourish their
innovation systems, including tonsure appropriate levels of intellectual property rights protection.

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Individual AMS should be encouraged to consider creating a tripartite whole-of-services coordinating body
responsible for services sector growth including the articulation of national development/competitiveness strategies
for services and formation of appropriate stakeholder consultation mechanisms. This body would liaise with various
otherwise uncoordinated government agencies and departments in order to identify competitiveness strengths and
weaknesses to be addressed, including at the regulatory level.
3. Focus on Education and Human Capital

Access to human capital and skilled talent impacts firms at all levels. Access to the largest pool of talented
employees is essential to encourage businesses to develop, and stimulate the economy in general. A lack of
domestic human capital can be mitigated in creative cross-border supply chains, which opens up access to foreign
talent.
The tailoring of the educational system to create the talent pipeline for emerging industries. This can be encouraged
through promoting apprenticeships, through developing public-private partnerships to promote training and
education, or through providing grants to encourage particular industries. Strategic skills planning should be used to
assess current and anticipate future skills shortages.
Access to loans and grants for continuing tertiary education should be made more widely available and easier to
access, which would encourage more people to study and increase their employability and skills-set.
Greater cultural, educational, and linguistic ties for future generations can also be encouraged through exchange
programmes for students. By conducting some of their studies in another country, students can learn and
understand cultural norms and differences, which can help eventually help employers conduct business across
borders. Such a programme can be modelled on Europes popular Erasmus programme, while an ASEAN-India
student programme started in 2011 has already proven to be very successful. Specifically for ASEAN, students from
other AMS should have their visas automatically converted into limited work visas after they have graduated.
4. Institutionalise GVC dialogue with regional business and other stakeholders

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There needs to be greater business stakeholder participation, ASEAN wide, in drawing up an ASEAN roadmap to
boost GVC Readiness. A key objective is to help each AMS get its domestic regulatory house in order.
Regulatory transparency and predictability are mandatory conditions for firms to make long-term FDI investments.
Opaqueness in regulation makes conducting business much more difficult, and undermines the prestige and
credibility of a countrys economy. Inconsistent regulations are often unintentional but likewise increase the costs
incurred by businesses, potentially driving them away to locate in other regions. It is therefore extremely important
that there be a high degree of coordination across government agencies and departments.
There are different ways of achieving these objectives, both nationally and ASEAN-wide.
ASEAN could facilitate, perhaps within the ASEAN Business Council, the creation of a new forum to bring different
business associations from the AMS together to foster a region-wide GVC Readiness Business Dialogue. This kind of
stakeholder engagement could promote the sharing of intelligence on business strategies, the regulatory
environment, labour movements, investment flows, standards, qualifications and skill-sets.
Ways also need to be found of engaging academic stakeholders in a similar process. ASEC could perhaps provide a
secretariat for the above-proposed business stakeholder forum on GVCs, consolidating and analysing feedback from
business groups on identified regulatory inefficiencies and barriers to connectedness. This reporting could be
distributed to foster an ongoing national and collaborative regional research agenda to map GVC chokepoints (e.g.
via surveys or statistical analysis). National research processes need to be intensified to measure the costs of
regulatory disconnects and collect the evidence base for reform. This research would also analyse best practice
models and test methodologies for regulatory review processes.
Consolidated business feedback on impediments to trade and investment and the costs of regulatory inefficiencies,
linked to an independent research effort, would provide a strong basis for promoting an ASEAN-wide focus on the
importance of transparent and efficient domestic regulation.
To combat incoherence, inconsistency and instability in regulatory regimes impacting on cross-border business and
GVC connectedness, policy-makers need to come together together not only with the business community but also
with the regulators, to share best practice experiences, discuss ways of easing the burden on industry and to pilot
coordinated programmes across ASEAN.
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These various strands could be facilitated by the establishment, perhaps under the Investment Committee, of an
ASEAN GVC Participation Taskforce charged with oversighting an ongoing mandate in this area.
It is important to encourage, in all the above processes, a more dedicated concerted use of APEC-OECDs
Integrated Checklist on Regulatory Reform. This is a soft self-assessment tool which is simple yet comprehensive
and could be used to guide the process of increasing regulatory certainty and credibility across the AMS. Another
associated tool is the World Banks Services Regulatory Assessment Tool Kit, released in May 2014.
It is also important in development of any regulatory reform strategy to ensure that proposed reforms undergo
thorough independent analysis in terms of their costs and benefits from the perspective of productivity and
competitiveness. Transparency of process is important as it boosts business confidence, and projects a favourable
image to potential foreign investors, both key ingredients in building GVC participation.

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Appendix 1 Methodology for the GVC Readiness Index
1. Background
The project team decided to construct a quantitative index that would show country-attractiveness for carrying out
global value-chains (GVCs). This was a major task involving the collection of over 150 indicators for an eventual 144
countries, subsequent computations and rigorous final analysis.
It was felt that to do the topic of GVCs and outsourcing justice, alongside a theoretical explanation and analysis of
the current distribution of GVC activities, there should be a suitable quantitative method for analysing the reasons
for the current distribution and predicting the future spread of GVCs. However, no one quantitative measurement or
set of quantitative indicators can accurately explain a countrys suitability for carrying out GVCs. The characteristics
of an economy that need to be fulfilled to make it an ideal GVC location are numerous and wide-ranging.
This is why a composite index was created, attempting to comprehensively compile the available data that best
describes a countrys readiness for GVCs. The composite index would provide a quantitative scoring system, giving
scores for countries, as a whole as well as for their key characteristics for attracting GVC activities.
Over 150 quantitative indicators are grouped in to sub-categories and categories that reflect 8 key characteristics
that have been deemed essential for providing a platform for GVC activities. The process of deciding upon these
characteristics, as well as for selecting included indicators is discussed below.
Beyond the need to make quantitative assessments, the project team realised the value to be gained in
benchmarking through indexes, for generating the interest of policymakers and other readers of the study. Given the
limited attention this field has had from policymakers in the region, the GVC Readiness Index can be an important
catalyst for raising the profile of outsourcing as a central theme and driver of a countrys investment, infrastructure
and regulatory policy. The rankings could prove effective in moving issues of outsourcing- performance to the centre
of policy discussion.
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By capturing complex, multidimensional concerns into a simple quantified framework the rankings help to facilitate
easy communication between different stakeholders. International comparisons in country performance are made
simple, and this can help raise the accountability of political actors.
The category-level rankings and scores help to pinpoint areas of concern for countries, whilst the distance-tofrontier structure (discussed below) helps to identify outstanding performers and their best practices. This can help
facilitate the debate around ways in which to improve outsourcing attractiveness within-country and foster increased
interaction with those countries outperforming others in specific areas.
The overall country index helps to combine a wealth of information, providing a summary socre and allows
governments to benchmark their performance with other countries.
The title of the GVC Readiness Index is carefully worded. The index is not intended to show the current likelihood of
GVC activities taking place in a country. This is done through extensive analysis of the WTO-OECD TiVA data,
elsewhere in this study. Rather, it is constructed to indicate the current readiness of each country to attract and
carry out GVC activities to their shores. This is both in terms of facilitating foreign firms to use countries as GVC
locations as well as for countries domestic firms to be able to successfully attract GVC activities.
Certain countries may have conditions within their economy that are much more or much less suitable for housing
GVC activities than their current engagement suggests. For instance, certain emerging economies may have yet to
exploit outsourcing opportunities theyd be suited for, perhaps because sourcing firms previously considered their
activities to be too advanced to be carried out there. At the same time, certain countries with a strong history of low
or high value outsourcing may have been caught up by other countries in providing an attractive environment for
outsourcing and may need to respond proactively to their index scores. As such, the GVC Readiness index may give
an indication of the extent of current GVC-activity, but is better at explaining a countrys readiness to involve itself
in current and future value-chain activities.
2. Why construct a brand new composite index?

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No other similar indexes adequately address the issue of outsourcing and GVCs as a whole. Example indexes include
USC Marshalls Trade in Services Outsourcing Suitability Index and Sourcinglines Outsourcing Location Index.
However, aside from being unable to explore the methodology and construction of each, both indexes look only at
services outsourcing. The project team wanted to look at characteristics for all GVCs, high and low in value, covering
goods and services.
It was also necessary to have an available index that would look at as many countries as possible across the globe.
The indexes above only look at a very limited range of countries - mostly advanced economies or well-known
outsourcing locations. The assessment of all 10 ASEAN Member States would look at countries with a limited
experience of outsourcing and GVCs. It was therefore necessary to compare them against comparator countries
across the world and not just more successful economies.
Two major global economic indexes, applied to a healthy number of countries, are the World Economic Forums
Global Competitiveness Index and the World Banks Doing Business project. These currently assess 148 and 189
countries respectively.
Both indexes are internationally renowned, meticulously planned and constructed and are incredibly valuable tools
for assessing the health of economies around the world. However, both are insufficient for the task of highlighting
the key strengths and weaknesses of countries for outsourcing.
World Bank Ease of Doing Business Index: Produced by the World Bank annually, the Doing Business project
seeks to provide objective measures of business regulations and their enforcement across economies. It encourages
countries to compete towards more efficient regulation and offers measurable benchmarks for reform. Governments
around the world have readily adopted it as a tool for target-setting in their efforts to improve their countrys
regulatory environment.
Many of the Doing Business measures are included as indicators in the GVC Readiness Index. They are amongst the
best sources of information on country-comparative business regulatory conditions.
The Doing Business index itself is not a sufficient tool for assessing outsourcing suitability as it only assesses one
important area of the business environment that of regulation. In the words of its own authors (World Bank, 2013):

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The ease of doing business is limited in scope. It does not account for an economys proximity to large markets, the
quality of its infrastructure services.the security of property from theft and looting, macroeconomic conditions or
the strength of underlying institutions
The project team identified many other areas it does not cover in relation to outsourcing, such as cost
competitiveness, tariff rates, labour productivity and capacity for innovation.
The limited ability for regulatory frameworks to explain outsourcing and trade is demonstrated here. The project
team correlated two key indicators from the World Bank Enterprise Surveys the percent of firms exporting directly
& the percent of firms identifying customs and trade regulations as a major constraint. The proportion of a
countrys firms exporting is taken here as a proxy for their engagement in GVC activity. One might expect that these
two indicators would be more heavily negatively correlated than if looking at all domestic regulations (as in the
Doing Business project) as key trading customs are being assessed here. However, Figure 1, below, shows almost
no relationship between the proportion of firms engaging in export activity and the proportion complaining about
customs and trade regulations. The correlation is in fact slightly positive (though negligible) at 0.07.
Figure 1: No correlation between trade regulations and the proportion of firms engaging with GVCs

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80
70
60
50
Percent of firms exporting directly
40
30
20
10
Percent of firms identifying customs and trade regulations as a major constraint
Source: World Bank Enterprise Survey
This shows that to provide an attractive environment for GVC activity, many more qualities are required than just
attractive or well-thought out regulations. Productive capacities need to be in place. Human and physical capital
must be present, trade logistics must be sufficient, and the country should not offer an overly costly environment for
exporters. This shows the value of producing an index, such as the GVC Readiness Index, that can more
comprehensively assess the qualities required for carrying out GVC activity.
Strong performance in the Ease of Doing Business index therefore does not necessarily show the readiness of a
country for outsourcing. Countries doing well on the Doing Business rankings may though be more likely to be active
in GVCs as their performance suggests more effective governance, which is likely to be applied in other areas of the
economy related to outsourcing.
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Figure 2: Wide disparities between GVC Readiness rankings and Doing Business rankings for many
countries*
GVC Readiness Ranking
Doing Business Ranking
* Rankings exclude countries not participating in the GVC Readiness Index

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Figure 3: Wide disparities between GVC Readiness rankings and Ease of Doing Business rankings for
many countries*
60
40
20
Difference in Country Ranking from GVC Readiness Index
0
-20
-40
-60
When the results of the GVC Readiness Index and Ease of Doing Business index are compared, it is clear that a
country s success in one does not necessarily lead to success in the other. Figure 2, and Figure 3, above, show
that many countries perform much better or worse in our index than they have done in the 2013-2014 Doing
Business index. Table 1 shows a positive correlation between the indexes, which is understandable for the reason
provided above. Clearly though performance in one index does not accurately predict performance in the other.
World Economic Forums Global Competitiveness Index: The Global Competitiveness Index (GCI) is closer to
the GVC Readiness Index in its content and intentions. It assesses the competitiveness landscape of 148
economies, assessing the drivers of productivity and prosperity (WEF, 2013). The index is arguably the most
comprehensive assessment of national competitiveness worldwide.
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Table 1: Varying performances by AMS across global indexes

Singapore
Malaysia
Brunei
Indonesia
Thailand
Philippines
Vietnam
Cambodia
Laos
Burma
GVC Readiness Ranking

1
22
33
41
62
54
60
90
101
144
WEF GCI Ranking*

2
23
25
37
36
57
68
85
78
135
WB DB Ranking*
1
6
58
97
18
87
82
113
127
143
The Executive Opinion Survey, whose survey questions make up two-thirds of the GCI, is used extensively across the
specific categories of the GVC Readiness Index. The survey is a representative sample of business leaders in each
country, gathering opinion on key competitiveness issues. Other World Economic Forum surveys or datasets are
used in our index, such as those from the Enabling Trade Index and Networked Readiness Index (assessing digital
infrastructure).
The GCI, whilst effective and well-constructed, still remains an insufficient tool for looking at outsourcing and GVCs.
It considers many areas of country-competitiveness including the quality of institutions, physical infrastructure,
economic stability, labour markets and productivity and innovation. This still leaves out a number of key concerns
related to outsourcing, which are either not included or not explored in enough depth. These include trade issues
(trade logistics, tariffs and customs) cost-effectiveness (criteria such as wages and tax rates), labour supply and the
ease of navigating domestic regulations. These areas are included and given greater weighting in the GVC Readiness
Index, to reflect their importance in global outsourcing decisions (the criteria for indicator selection is explained
below).
Figure 4: Reduced disparities between GVC Readiness rankings and GCI rankings, in comparison to the
Doing Business index*

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40
30
20
10
0
Difference in country ranking from GVC Readiness Index
-10
-20
-30
-40
-50
-60
Figure 4, above, shows that, despite much of the GVC Readiness Index being constituted by data also included in
the GCI, the unique categorisation and inclusion of other factors of outsourcing-competitiveness has led to great
discrepancies between certain the two indexes. These differences are fewer and less pronounced than those
differences between Doing Business rankings and the GVC Readiness Index. However, they are still notable, with
many countries of the 144 GVC-assessed countries over 20 places higher or lower in the GCI rankings. This is after
removing those countries in the GCI index not participating in the GVC Readiness index, providing more accurate
comparisons.
3. Attempting to Quantify the Indexs Effectiveness

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In order to determine the explanatory strength of the GVC Readiness Index in relation to country GVC participation
rates, it could be useful to correlate the Index to a quantitative figure for total GVC participation in each country.
However, this is not entirely practical for a number of reasons:
1) As explained above, the GVC Readiness Index is intended to describe country readiness for carrying out
outsourcing and GVC activities. It is not intended to explicitly explain the current distribution of GVC
participation across countries. Nor is it intended to act as a proxy or predictive score for estimating existing
GVC participation rates across countries. As a multidimensional picture of a countrys attractiveness for GVCs,
it is meant to show the countrys suitability for GVCs This further informs policymakers and private sector
decision-makers who, in the absence of a quantitative index on the overall topic of global outsourcing, may
have yet to enact policy and business decisions that reflect the realities highlighted by the index data. The
index is thus more predictive about future outsourcing than it is for current outsourcing.
2) If the index is to be correlated against current GVC activity, it might be suggested that the WTO-OECD TiVA
data, assessed extensively in this study, should be able to provide the quantitative measure of country and
regional GVC participation. However, no one TiVA dataset can provide an overall quantification of GVC
participation. Rather, the TiVA dataset provides only a set of indicators that together provide a picture of GVC
participation. Assessments of value-added-origin within country-exports do not indicate total GVC
participation as neither higher levels of foreign nor domestic value-added in exports are a greater indication
of participating in GVCs. Additionally, backward and forward linkage statistics, provided in the TiVA data,
though showing key elements of GVC activity, do not completely describe GVC participation in a country. They
do not account for outsourcing involving just two countries. They would also understate the extent of GVC
participation for countries where much of their value-chains have taken place domestically.
3) As a proxy statistic, total country export figures could be used to suggest GVC participation. However, not all
exports are generally seen as part of a GVC. Exports of wholly-domestic value-added final products for retail
abroad, where there is limited or no retail value retained in the importing country, would not usually be seen
as GVC activity. There may still be a strong correlation from GVC to exports though. However, total export
figures are obviously highly affected by the size of each country and its economy. Correcting for this would
involve assessments of the proportion of an economy dedicated to export, or the proportion of firms
products exported. However, this would be highly determined by the nature of an economy and the differing
incentives to engage in international trade that smaller and larger countries have. For example, smaller

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countries are more likely to need to import value-added for production, and to export abroad, needing to find
demand for their goods. This is vice-versa for larger countries.
It may be useful though to correlate the GVC Readiness Index against data showing the proportion of firms who at
least engage with exports at all. This would show the confidence of firms in each country to at least compete
internationally and join up with or expand the reach of their value-chains. It would not look at the reliance firms have
on export activity, which is heavily determined by the size of the domestic market the firm is in. Using this over
measures of the proportion of firms goods exported would therefore exclude some of the determining power that a
countrys size has on export figures.
Figure 5: GVC Readiness Index is positively correlated with export activity within-country

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Outsourcing ASEAN
70
60
50
Percent of firms exporting directly (at leas t 1% of s ales )
40
30
20
Linear (Percent of firms exporting directly (at leas t 1% of s ales ))
10
0
GVC Readines s DTF S core
Source: World Bank Enterprise Surveys
Figure 5, above, uses data from available World Bank Enterprise Surveys, specifically assessing results for the
Percent of firms exporting directly or indirectly (at least 1% of sales). This is placed against results for the GVC
Readiness Index. Both foreign and domestic-owned firms were sampled in the World Bank surveys. Unfortunately the
Enterprise Surveys only have data for 104 of the 144 countries in our index. This still provides enough data to carry
out analysis of a basic correlation of the two sets of data.
The correlation coefficient - between countries overall Index scores and their proportion of firms exporting directly is 0.48. Given the differing incentives firms in large and small markets have to export, this is a relatively strong
correlation. As can be seen above, as index scores increase, the more likely it is that a higher proportion of a
countrys firms will be exporting.
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Outsourcing ASEAN
There are some notable exceptions, lessening the overall correlation. For example, Lebanon, Slovenia and Serbia all
have a higher number of firms exporting than their GVC Readiness score might suggest. However, as small countries
with small domestic markets, it is very likely that firms there must look to foreign markets to find sufficient demand
for their products. They have a greater need to export, but it is still likely that value-chain competitiveness issues
hold them back from succeeding in all global value-chains they seek to secure for their exports.
In general, the chart shows that the GVC Readiness Index is well constructed to explain even some current export
and GVC participation. The qualities assessed by the Indexs categories and sub-categories are those which are vital
for making an economy competitive in export-activity, feeding down to its firms (foreign and domestic-owned) who
seek to secure their place on value-chains. As repeatedly suggested above though, the Index is intended more as an
indication of readiness for GVCs and is more appropriate for predicting future country-success.
4. Constructing the Index

4.1 Selecting Content
The choice of categories and their indicators, was a collective process involving the entire project team.
The following sources were explored by the project team, alongside wider reading around the topic of GVCs, to feed
in to the decision-making process on the content of the index:
-
Secondary literature:
o Similar indexes produced by AT Kearney, Sourcingline
o UNCTAD, World Investment Report 2013: Global Value Chains: Investment and Trade for Development,
Geneva, 2013
o USC Marshall School of Business, Trade in Services in the APEC Region: Challenges and Opportunities
for Improvement, Los Angeles, 2012,
o Low and Elms (eds.), Global value chains in a changing world, WTO, Geneva, 2013
o OECD, InterconnectedEconomies: Benefiting from Global Value Chains, Paris, 2013
Field Research:

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o
Interviews conducted with policymakers, business leaders, government and donor officials. Opinions
were gathered on the factors deemed most important for outsourcing decisions.
The learnings and understandings gained were then used to identify eight appropriate overall qualities that defined
modern GVC readiness. These became categories within the index:
Box 1: Index Categories

Human Capital
Innovation and R&D
Quality of Supporting
Institutions
Box 2: Sources of Data for the GVC Readiness Index

-
OECD
World Economic Forum*
World Bank*
UNDP
KPMG
Transparency International
Heritage Foundation
Business Software Alliance^
NetIndex^
International
Telecommunications Union ^
Ease of Trade
Box 2 notes:

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*Data was extracted from multiple World Bank and World Economic Forum publications. This included the World Banks World Development
Indicators, Enterprise Surveys, Logistics Performance Index, Services Restrictions Index and the Doing Business project. Data from the World
Economic Forums Enabling Trade Index, Networked Readiness Index and Executive Opinion Survey was also used.
^ Used less frequently than other sources. Mainly for ICT and communication-related statistics
Appropriate data-sets then had to be identified that would constitute the categories (and eventually sub-categories).
Data was identified, rejected and selected from a range of sources. The eventual index includes data from the
following sources (Box 2).
Final selection of indicators, aside from concerns over reliability and relevance, was decided, in part, based on the
global coverage of each data-set. Essentially, there needed to be enough countries included in each data-set to
warrant its selection in the index, given that the index aimed to cover the majority of the worlds countries. At the
same time, the limited presence of certain countries across the range of useful and revealing data-sets meant that
the number of countries included in the index eventually fell to 144. This was necessary to safeguard the validity of
the index, ensuring that participating countries had their GVC Index performance based on available, reliable data.
At the same time, given the inclusion of such a wide range of data-sets from a wide range of sources, there was still
some discrepancy, with some Index countries not in appearing in some of the data-sets. This meant there were
missing data-points for individual countries when indicators were compiled. The way in which this was addressed is
detailed below when discussing the Distance to Frontier method.
The final indicators that fell in to the categories were grouped together to produce sub-categories. These subcategories were largely pre-defined by the project team but were also detrermined in part by the availability of data.
Table 2: Sub-categories within the GVC Readiness Index
Human Capital
Education and Skills

Labour Productivity
Size of Labour Force
Ease
of
Navigating
Practices
Employing Labour

Regulatory
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Innovation and R&D
Legal, Governmental & Institutional
Support
Innovation Capacity (Private Sector)
Innovation Output
Electrical Supply
Micro-level Corruption
Ease of Trade
Trade Logistics Performance
Customs Burden
Harmonisation with Global Markets
Salaries
Taxes
Quality of Supporting Institutions
Security
Finance Landscape
Government Support
Legal Framework & Implementation
Corruption
4.2 Explaining the Distance to Frontier Method

The GVC Readiness Index uses the distance-to-frontier (DTF) method for scoring countries performance in each
indicator, each sub-category and category and in their eventual overall score. This is similar to the method adopted
by the World Bank in their annual Doing Business project.
Box 1 Types of indicators and the difficulties of aggregation

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Dealing with Indicators of varying metrics &
varying topics:
E.g:
Ease of Trade Customs Burden:
(Number of) Customs documents to

complete for export (WEF Enabling
Trade Index)
(% of Respondents) who report Customs
and
trade
regulations
as
major
constraint (WB Enterprise Survey)
(Score out of 7) amongst survey
respondents on the burden of Customs
procedures in-country (WEF Enabling
Trade Index)
The Index is made up of a very large range of indicators from
multiple sources. These come in varying metrics and types and
cover varying topics. To be able to aggregate performances
across all these quantitative indicators, the distance to frontier
method is used.
The DTF benchmarks economies in relation to the frontier
performance the leading performance of any country in each
indicator. The leading country is allocated a DTF of 1. Countryscores in each indicator are given a score from 0 1 based on
how far they sit, proportionally from the top-score, as well as the
bottom-score. All indicators thus have their data converted in to
one unified scoring format.
The bottom-score is not the lowest score of all participating

countries. To mitigate the effects of extreme outliers in global
(Number of) Graduates in Science
indicators data, the bottom position was adjudged to be the 95th
percentile of the data for all economies for each indicator.
Human Capital Education and Skills:
The 95th percentile does not simply remove the bottom 5% of countries participating in the indicator. This measure
removes all the poor country-performances that are in the bottom 5% of the distribution of scores per indicator.
These are likely to be very poor outliers. This may mean that 1, 5, 7 or 15 countries fall in to the bottom 5%,
depending on the distribution of data in that indicator. These countries receive a score of 0 in their DTF score.
For all other countries in the distribution, the distance to the frontier is calculated by expressing each economys
score as a percentage of the distance between the best and worst performances in the data-set (displayed as scores
between 0 and 1).
Each DTF is collated to make sub-category, category and overall country distance to frontier scores. The simple
average weighting system used is described below. Additionally, simple rankings of countries for each sub-category,
category and overall score are also provided.

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For example: RUN THROUGH ONE COUNTRYS PERFORMANCE ACROSS THE INDEX.
Missing Data-Points: In a number of data-sets used for indicators, some country figures were not available. As
stated above, data used for the indexs indicators were chosen in part based on having comprehensive global
coverage. However, almost all global data-sets covering social, economic, environmental and political concerns will be
unable to include some countries for varying reasons.
In some cases, efforts were made to fill in missing data-points with approximate figures based on further research.
This approach is similarly carried out by the World Economic Forum in their Global Competitiveness Index.
Certain data-sets either did not cover advanced or did not cover less-advanced economies. Examples are the World
Bank Enterprise Survey data-sets used, which did not cover most advanced economies, or certain education & skills
based data which did not look at many less-advanced economies. In these cases, a blanket approach had to be taken,
where all advanced or less-advanced economics were given a similar score based on the scores of available countries
and a prediction of that groups relative performance. This would be a conservative estimate that would not overestimate the performance of the advanced or less-advanced economies.
For example:
-
World Bank Enterprise Survey: Percent of firms identifying electricity as a major constraint:
o Score given to most advanced economies with missing country data points - DTF 0.9
World Bank Enterprise Survey: Percent of firms with an annual financial statement reviewed by external
auditors:
o Score given to most advanced economies with missing country data points DTF 0.66
In some cases, for ASEAN member states, field research - be they statistics identified or learnings gained - were
used to fill in missing country data points.
Weaker economies were more likely to be absent from certain indicators. For both economic and political reasons,
they may not participate in certain data collection activities. In many cases, missing very-weak economies were
given a DTF of 0 for an indicator. This reflected a confidence that that economy would register in the bottom 5%
percentile of global score, were it to have accurate data included.

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4.2.1 The Benefits of the Distance-to-Frontier Method

The GVC Readiness Index could have relied on simple rankings or percentile rankings for aggregating indicators and
categories. This at least allows for easy comparison between countries. However, rankings cannot accurately reflect
the performance of economies. Rankings only show countries performance in relation to others. They cannot tell
you how far apart the performance between the No. 5 and No. 6 ranked-countries may be.
Rankings also do not have any ability to show the global scale of performance in an indicator or category. If countries
were to be ranked, say from 1 to 144, this does not give any indication on the difference in performances from the
top and the bottom placed countries, in indicators or categories.
The DTF method, by providing a percentage (displayed as 0-1) score to each country for each indicator/subcategory/category and the overall score, accurately shows the relative performance of individual countries. This is in
relation to other individual nations and to the world at large. It also shows the scale of differing performances
amongst best-performing and worst-performing economies.
In the case of the GVC Readiness Index, it allows stakeholders to identify the scale of improvement needed for an
individual country, in each area of GVC readiness. It also offers policymakers or business leaders, concerned with
the global or regional distribution of GVC suitability, the ability to view areas of regional inequality and potential in
GVC readiness.
The DTF allows us to compare ASEANs relative distance from the global top performances. It can be used to show
how a group of countries, though ranked together, may actually be far behind other groups or individual countries in
real competitiveness for attracting outsourcing firms.
A final benefit is the statement made to each country by the DTF score. Every country is shown to have a degree of
progress to make to travel to the top their distance to travel to the frontier. Only those countries right at the top
of the world in an indicator are shown to have achieved a perfect score of 1. In sub-categories and categories,
even the most successful countries, given the averaging of DTF scores across indicators, are shown to have a degree
of progress that can be made.
Singapore finished 1st in the Quality of Supporting Institutions category, but it only achieved a 0.73 DTF. And whereas
Qatar finished 1st in the Government Support sub-category within, it only achieved a 0.96 DTF, indicating to Qatar

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that further progress can still be made in this area. The scoring system thus provides a potential tool for
policymakers, who can seek to climb in DTF scores for each sub-category and category.
4.2.2 Weighting
The GVC Readiness Index uses a simple average weighting system, across the index.
Almost all indicators within each sub-category are weighted equally to form the indicator score. Each countrys
indicator-DTF is collated to form the average DTF the sub-category score. The exception is in Salaries within Cost
Competitiveness, where the minimum wage indicator is doubly-weighted as the other salary elements, such as
severance pay, are less consequential in affecting a firms salary expenditure. Additionally, Size of Labour Force
within Human Capital is made up of just one indicator total labour force from the World Banks databank.
Each sub-category score is averaged out to make the respective category score.
The eight categories are averaged out to make each countrys overall score. This comes in the form of a DTF score
from 0 1.
Each sub-category, category and overall score is also supplemented by a simple ranking for each country to provide
further context.
More complex aggregation and weighting methods such as principal components analysis were not used. In part this
was because a lack of data for GVC participation. Carrying out regressions analysis provides different scores and
models depending on which factors are chosen to be made more important in the index. The empirical models to
make such assumptions are completely lacking in regards to outsourcing and GVC participation.
The World Banks Doing Business and UNDPs Human Development Index similarly use a simple average system
given the problems of regressions without reliable outcome data for their indexes.
The WEF Global Competitiveness Index features weighting that is dependent on each countrys developmental
stages. The index could have attempted to place different weights on categories depending on each countrys stage
in attracting GVCs. For instance, countrys Index scores could have been dependent on whether they were deemed

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to be chasing high-value or low-value outsourcing. This would then place higher or lower weights on certain factors
deemed more relevant to this kind of outsourcing.
This was deemed decidedly inappropriate, given the intentions of the Index. This study stresses that, although
certain countries are likely to be more suited to attracting some GVC activities than others, the nature of production
chains and technological advancements today means that countries should not rule themselves out from taking part
in certain outsourced activities. It is shown in this study that even less-advanced economies can attract high-value
outsourcing. The cases of digital animation and ICT outsourcing in Cambodia and Myanmar are great examples.
It was decided that the index should consider all aspects of modern outsourcing evaluating all countries equally
across all categories of outsourcing capability. Dissecting performance in specific categories and sub-categories still
allow readers to evaluate countries against certain specific criteria.
A simple average-weighting is ideally suited to the index. The Index is improved for readers as a simple average has
simplicity, transparency and ease of comprehension. Additionally, by giving all sub-categories and categories the
same weight, the Index implicitly encourages policymakers and other readers to consider all aspects of modern
outsourcing, as a whole, insisting on the importance of all factors that provide for a suitable climate for GVC
participation in each country.
5. Limitations of the Index

Also show shortcomings are addressed or why they are less consequential than they may appear.
-
Tracking over time: At present, the index cant be used to track country-progress over time. Numerous data
sets have been sourced from different organisations. In each case the latest available data has been used but the
year each data-set relates to differs. Some indicators would feature data that will be regularly updated, yearly.
Some indicators are less regularly updated and may frequently update some country-scores and not others. This
would make it difficult to include a time-progression element for the Index.
Tracking absolute progress: Using a relative scoring system like the DTF may mask absolute improvements
in country performances, if the index was to be tracked over time. The DTF works by comparing country
performances in each indicator to the global set of performances. If top and bottom results in an indicator shift

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upwards one year, whilst the individual countrys result shifts upwards as well, this will not be reflected as an
improvement for the country. They would receive a similar DTF score that year. However, the rationale of
outsourcing is such that this is not necessarily a problem. A country is largely made attractive for outsourcing
by being more prepared than its competitors in crucial factors. Therefore tracking relative improvement is
arguably more important for showing the attractiveness of an economy for outsourcing.
Missing Data: It is unfortunate that certain countries would not have data present in some of our indicators.
Many global indexes have to contend with this problem, including the WEFs Global Competitiveness Index.
However, as stated above, certain measures were adopted to address this problem, similar to those made by
other indexes. These included further research for certain countries, providing approximate figures and basing
some data on field research.
Within-country differences: Country scores relate to a country as a whole. They may downplay regional
discrepancies regarding certain factors. It is true that GVC actors may be more interested in the fortunes of
certain sites or regions within a country for locating their production facilities. The example of Metro Manila in
Philippines as a major outsourcing centre, despite the uncongenial nature of other parts of the country for
outsourcing is a case in point. Unfortunately, there was no possible method to correct for this within the
limitations of a country index.
Selection of Index Content: Whilst a rigorous process took place to decide upon the key eight categoryqualities for modern outsourcing-readiness, as well as the eventual chosen indicators, confidence in the indexs
content is still limited by a number of factors. As discussed above, there is no proper quantitative measure of
GVC participation per country. This prevents us from correlating the GVC Readiness Index to any outcome score
for GVCs, to test its explanatory strength. This is not a major problem though, as neither the Global
Competitiveness Index or Doing Business project attempt to correlate their scores with real-world outcomes.
But the selection of content has also been dictated by the project teams understandings current trends in
academia and policy circles. Such discourse may change over time. Perceptions of the importance of cost
competitiveness may fade in place of insistence from GVC actors on the necessity of innovation and skills factors
within economies. Emerging trends of reshoring of GVC activities to be nearer to the value-chain owners
suggests the growing importance of high-tech facilities for modern production-location choices. It may be the
case that increasing or decreasing reliance on certain factors for outsourcing decisions may make placing
increased weights on certain indicators to be a more accurate method for constructing such indexes in the future.
However, such problems only refer to any future index-building. The project team is confident that the current
content of the GVC Readiness Index is relevant for explaining outsourcing suitability today.

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-
Intangible Factors: There are some factors important for determining outsourcing readiness that cant be (or
havent yet been) quantified numerically. This prevents them from being included in our GVC Readiness Index.
This includes the promotion-work currently being done, either by governments, chambers of commerce or
individual firms, to promote their nations reputation for outsourcing overseas. Such efforts have had great
success in luring outsourcing firms to certain locations. Allied to this, there is no way of truly measuring the
brand surrounding a country. Many surveys have been conducted with private sector decision-makers to gain
their perception of individual aspects of countries economies (used extensively in our index). But there is very
little ability to track the general brand of a country, that which leads firms to automatically think of certain
countries to locate their business in, based on its history, cultural product, its economic promotion efforts and its
links to the wider world. Additionally, it is well known that diaspora communities can help a country win GVC
clients or even encourage firms to locate their production facilities in their countries or origin. It is not currently
possible to include this in our index.
Credits
The following people have contributed to the development of the GVC Readiness Index:
Roberto Crotti - Quantitative Economist - Global Competitiveness and Benchmarking Network - World Economic
Forum
Will Haines MSc student Economics The University of Sydney.
Additionally, many thanks are given to Tom Berliner and Minh Cao, members of the project team, who worked
tirelessly to produce the final GVC Readiness Index.
Appendix 2: GVC Readiness Index

Table of 65 indicators ASEAN Member States

173
Outsourcing ASEAN

Average
0.1
4
0.4
2
0.2
1
0.1
3
0.2
1
0.1
9
0.3
3
0
0.1
4
0.2
3
0.2
4
0.0
6
0.1
6
0.5
3
0.6
5
0.3
6
0.2
1
0.5
2
0.3
9
0.3
9
0.3
9
0.6
4
0.6
1
0.7
7
0.2
5
0.6
1
0.5
4
0.4
1
0.
69
0.
90
0.
72
0
0.
43
0.
53
0.
42
0
0.
35
0.
62
0.
55
0.
32
0.2
4
0.4
2
0.3
9
0.2
0
0.1
4
0
0.3
6
0.3
0
0.2
8
0.1
2
0.7
1
0.0
2
0.2
0
0.4
0
0.5
9
0.6
4
0.4
7
0.1
3
0.
48
0.
80
0.
61
0.
22
0.
51
0.
37
0.3
8
0.2
5
Laos
0.2
4
0.0
7
Thailand
WB Enterprise
Survey
0.3
8
0.1
3
e Singapor

Percent of firms identifying an
inadequately educated
workforce as a major
es Philippin
Labour
Productivity
WEF GCI
% of total population
successfully completed the
final year of a level or sublevel
of education in science and
engineering
Malaysia
UNDP
International
HDI
a Indonesi
0.1
3
0
Brunei
UNDP HDI
0.1
1
0
Average
0.1
1
0.2
9
0.3
0
0.1
2
Vietnam
WEF GCI
Myanmar
Tertiary education enrollment,

gross
Quality of management
schools
Education Index
a Cambodi
HUMAN
CAPITAL
Education and
skills
WEF GCI
Average ASEAN 10
ASEAN Member States

Rest of ASEAN
CMLV
174
Outsourcing ASEAN

Average
Brunei
a Indonesi
Malaysia
es Philippin
e Singapor
Thailand
Average
1
0
1
1
Vietnam
INNOVATION
R&D
Legal, Governmental & Institutional support
WEF GCI
Intellectual property
protection
Business
Alliance
Software Piracy Study
2012
Innovation Capacity (Private sector)
WEF GCI
Availability of scientists and
engineers
WB WDI
Scientific and technical
journal articles/Population,
Laos
Total Labor force
Myanmar
Size of Labour
force
WB Databank
a Cambodi
constraint
Average ASEAN 10
ASEAN Member States

Rest of ASEAN
CMLV
0.0
5
0.2
1
0.0
2
0.3
3
0.1
5
0.7
5
0.0
8
0.2
6
0.
02
0.
25
0.
22
0.1
8
0.2
2
0.1
5
0.1
0
0.1
5
0.3
71
0.1
5
0.1
39
0.1
1
0.2
1
0.1
4
0.5
3
0.3
1
0.4
0
0.0
4
0.6
4
0.4
8
0.3
2
0.2
7
0.
97
0.
80
0.
21
0.
24
0.
51
0.
36
0.3
5
0.2
5
0.1
6
0.0
02
0.0
7
0
0.0
4
0.0
02
0.2
8
0.0
03
0.1
4
0.0
02
0.2
8
0.0
2
0.4
7
0.0
0
0.5
9
0.0
4
0.2
8
0.0
02
0.
63
0.
69
0.
43
0.
03
0.
45
0.
13
0.2
9
0.0
7
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Outsourcing ASEAN

Thailand
Average
e Singapor
0.0
5
es Philippin
1
8

WEF GET Index Government Online Service
Index
Malaysia
1
7
WEF Executive
Fixed telephone lines/100
Opinion survey
pop.
0.4
1
0.3
5
0.5
0
a Indonesi
WEF GCI
0.0
9
0.0
1
0.1
2
0.1
4
0.6
0
0.0
2
0.6
5
0.
55
0.
63
0.
04
0.
29
0.
12
0.
40
0.0
7
0.2
3
0.1
8
0.1
7
0.3
2
0.5
8
0.4
3
0.1
4
0.5
5
0.5
5
0.5
3
0.7
2
0.6
9
0.6
4
0.6
0
0.6
0
0.5
1
0.
90
0.
84
0.
82
0.
46
0.
52
0.
53
0.
63
0.
61
0.
53
0.4
1
0.3
9
0.4
0
0.1
6
0.0
6
0.2
5
0.2
2
0.2
2
0.0
5
0.
55
0.
13
0.
24
0.1
5
0.2
9
0.0
7
0.5
0
0.3
8
0.7
4
0.3
8
1.
00
0.
39
0.
57
0.3
3
0.0
3
0.1
2
0.0
2
0.0
3
0.2
3
0.3
1
0.5
1
0.0
8
0.0
3
0.2
3
0.0
2
0
0
Laos
Brunei
WEF GCI
Availability of latest
technologies
Firm-level technology
absorption
FDI and technology transfer
0.0
3
0
Average
Innovation Output
WEF GCI
0.0
02
0
Vietnam
WB WDI
Myanmar
1
4
1
5
1
6
WB WDI
a Cambodi
1
2
1
3
total
High-technology exports (% of
manufactured exports)
Average ASEAN 10
ASEAN Member States

Rest of ASEAN
CMLV
176
Outsourcing ASEAN
2
1
Networked
Readiness
Index 2013
Intl Internet bandwidth, kb/s

per user
0.0
4
0.0
1
0.0
3
0.1
0
2
2
2
3
2
4

WEF GET Index Broadband Internet
subscriptions/100 pop.
International
Percentage of Individuals
Telecommunica using the Internet
tions Union ICT
facts
Networked
E-Participation Index
Readiness
Index 2013
Electrical
Supply

Average ASEAN 10
Average
0.3
5
Thailand
Business-to-business Internet
use
e Singapor
Networked
Readiness
Index 2013
es Philippin
Malaysia
0.
01
0.
32
0.
04
0.
55
0.0
2
0.4
0
0.
22
0.
01
0.
05
0.0
3
0.0
5
0.3
6
0.
65
0.
77
0.
12
0.
26
0.
27
0.
47
0.1
6
0.3
1
0.1
7
0.
68
0.
07
0.
31
0.1
8
Brunei
0.0
01
Average
Secure Internet servers (per 1

million people)
Vietnam
Laos
Netcraft.com &
World Bank
a Cambodi
Myanmar
1
9
2
0
a Indonesi
ASEAN Member States

Rest of ASEAN
CMLV
0.0
02
0.0
4
0.0
01
0.0
2
0.0
03
0.
20
0.7
5
0.0
0
0.2
7
0.5
3
0.3
0
0.7
1
0.5
5
0.
87
0.0
1
0.0
1
0.0
3
0.0
03
0.0
1
0.0
1
0.0
9
0.1
1
0.4
0
0.0
3
0.1
3
0.5
8
0.6
2
0.0
2
0.1
4
0.1
9
0.6
8
0.0
7
0.0
4
0.1
6
0.1
2
0.6
5
177
Outsourcing ASEAN
2
9
3
0
3
1

Thailand
Average
0.6
3
0.5
1
0.3
3
0.9
0
0.7
4
0.9
5
0.
90
0.
79
0.
77
0.6
1
0.1
3
0.0
9
0.2
1
0.3
3
0.1
9
0.1
3
0.2
7
0.6
5
0.3
8
0.
95
0.
50
0.
48
0.3
3
0.3
3
0.1
3
0.4
7
0
0.2
2
0.3
0
0.2
5
0.1
2
0.6
4
0.0
2
0.3
6
0.4
0
0.7
3
0.6
4
0.3
0
0.1
3
0.
94
0.
80
0.
49
0.
22
0.
58
0.
37
0.4
1
0.2
5
0.0
7
e Singapor
Brunei
0.7
0
es Philippin
Average
Malaysia
Vietnam
0.7
1
a Indonesi
Laos
2
7
2
8
Myanmar
2
6
WB Enterprise
Duration of a typical electrical
Survey
outage (hours)
WB LPI
Quality of transport
Infrastructure (overall)
WEF GCI
Quality of overall
infrastructure
WEF GCI
Quality of railroad
infrastructure
Security
WB Enterprise
Losses due to theft and
Survey
vandalism against the firm (%
of annual sales)
Finance
Landscape
WEF GCI
Availability of financial
services
WEF GCI
Soundness of banks
a Cambodi
2
5
Average ASEAN 10
ASEAN Member States

Rest of ASEAN
CMLV
0.8
8
0.8
2
0.9
1
0.6
5
0.7
6
0.8
8
0.7
0
0.6
7
0.
97
0.
66
0.6
0
0.3
8
0.4
3
0.4
0
0.4
3
0.2
9
0.1
3
0.2
7
0.2
5
0.5
2
0.6
5
0.5
5
0.5
0
0.7
4
0.7
0
0.6
0
0.7
1
0.
92
0.
95
0.
69
0.
71
0.
67
0.
70
0.4
6
0.4
8
0.0
3
178
Outsourcing ASEAN
3
8
3
9

Thailand
Average
0.1
7
0.1
5
0.6
6
0.6
6
0.6
6
0.8
9
0.
66
1.
00
0.
76
0.4
7
0.5
9
0.2
4
0.0
6
0.2
2
0.7
6
0.2
9
0.4
1
0.4
7
0.
76
0.
35
0.
51
0.3
6
0.4
3
0.1
4
0.1
4
0.5
7
0.4
3
0.4
3
0.4
3
0.
86
0.
71
0.
57
0.3
6
0.2
3
0.3
0
0.3
4
0.1
8
0.3
6
0
0.0
9
0.1
4
0
0.1
3
0.2
0
0.0
9
0.5
3
0.5
3
0.2
5
0.4
3
0.4
8
0.4
5
0.6
5
0.6
6
0.8
5
0.5
9
0.4
7
0.1
9
0.
86
0.
74
0.
94
0.
55
0.
54
0.
70
0.
60
0.
57
0.
56
0.3
7
0.3
8
0.3
4
0.0
03
0
e Singapor
0.4
3
es Philippin
Malaysia
0.0
1
a Indonesi
Brunei
3
5
3
6
3
7
Average
3
4
Vietnam
Heritage Index
of Economic
Freedom
Heritage Index
Financial Freedom
of Economic
Freedom
Legal Framework and Implementation
WEF GCI
Strength of auditing and
reporting standards
WEF GCI
Protection of minority
shareholders interests
WEF GCI
Strength of investor
protection
Macro-level Corruption
Heritage Index
Freedom from Corruption
of Economic
Freedom
WEF GCI
Laos
3
3
Percent of firms with an

annual financial statement
reviewed by external auditors
Investment Freedom
Myanmar
WB Enterprise
Survey
a Cambodi
3
2
Average ASEAN 10
ASEAN Member States

Rest of ASEAN
CMLV
0.0
3
0.0
4
0.1
3
0.0
5
0.6
7
0.1
4
0.3
2
0.0
9
0.
96
0.
20
0.
40
0.2
3
0.3
0
0.3
0
0.5
4
0.3
6
0.3
7
0.7
1
0.3
3
0.5
8
0.1
6
0.
05
0.
47
0.3
9
179
Outsourcing ASEAN

0.1
9
0.8
5
0.7
8
0.7
2
0.1
0
0.2
0
0.2
9
0.2
4
0.1
6
0.1
8
0.1
4
0.1
5
0.7
8
0.4
4
0.2
1
0.3
8
0.5
3
0.6
4
0.1
8
0.3
3
0.0
4
0.4
8
0.2
2
0.1
4
0
0.3
4
0.4
6
0.2
5
0.6
2
0.3
4
0.3
8
0.2
6
0.2
9
0.1
7
0.4
6
0.2
4
0.0
7
0
0.2
5
0.5
8
0
0.3
2
0.3
3
0.4
8
0.0
0
0.2
4
0.7
1
0.8
3
0.9
4
0.3
6
0.6
8
0
0.9
2
0.5
0
Average
0.2
2
Thailand
0.4
7
e Singapor
es Philippin
Malaysia
Heritage Index
of Economic
Freedom
Redundancy costs, weeks of

salary
Regulatory Efficiency
0.0
9
a Indonesi
WEF GCI
Brunei
policymaking
Ease of Navigating regulatory Practices
WB DB Survey
Procedures needed to enforce
2014
contracts (number)
WEF GCI
No. procedures to start a
business
WEF GCI
Average
4
3
4
4
4
5
4
6
4
7
WEF GCI
Vietnam
WEF GCI
Laos
4
1
4
2
Percent of firms expected to

give gifts to public officials "to
get things done"
Irregular payments and bribes
Myanmar
WB Enterprise
Survey
a Cambodi
4
0
Average ASEAN 10
ASEAN Member States

Rest of ASEAN
CMLV
0.
39
0.2
8
0.2
1
0.2
8
0.
96
1
0.
31
0.
28
0.
50
0.
50
0.3
2
0.3
3
0.4
3
0.0
0
0.6
0
0.2
7
0.2
7
0.
46
0.
75
0.
68
0.
04
0.
54
0.
50
0.
46
0.
61
0.
42
0.
53
0.3
7
0.3
6
0.3
9
0.3
9
0.3
8
0.
83
0.
98
0.
92
0.
98
180
Outsourcing ASEAN
5
2
5
3
5
Corruption Perception Index

Score 2012
0.0
4
0.1
7
0.2
1
0.0
1
0.1
4
0.5
9
0.2
4
0.5
12
0.5
72
0.7
09
0.4
02
0.
6
0.
63
0.4
3
0.0
4
0.1
0
0.1
0.0
3
0.1
0.7
3
0.4
0.1
8
0.2
0.5
3
0.6
0.0
2
0.3
0.1
0.0
6
0.3
0.
2
0.
0.
43
0.
0.2
5
0.3
EASE OF
TRADE
Trade logistics performance
WB
Timeliness
International
LPI
Customs
burden
WEF GET Index Irregular payments in exports
and imports
WB
Customs

Laos
Vietnam
Average
Brunei
Thailand
Average
e Singapor
Transparency
International
0.2
0
0.2
4
0.0
6
es Philippin
Bribery depth
0.0
9
0
Percent of firms identifying

labor regulations as a major
constraint
Micro-level/Regulatory Corruption
WEF GCI
Malaysia
WB Enterprise
Survey
0.2
3
0
WB Enterprise
Survey
a Indonesi
Myanmar
4
9
5
0
5
1
a Cambodi
4
8
Average ASEAN 10
ASEAN Member States

Rest of ASEAN
CMLV
0.8
8
0.9
6
0.9
7
0.7
0
0.4
8
0.9
2
0.5
3
0.8
3
0.
00
0.
27
0.
50
0.5
3
0.3
0
0.5
3
0.2
0
0.4
4
0.5
6
0.9
4
0.2
9
0.5
3
0.5
6
0.6
6
0.2
7
0.6
6
0.
93
0.
66
0.
27
0
0.5
1
0.1
8
0.4
2
0.2
1
0.
96
0.
25
0.
48
0.
57
0.
42
0.3
4
0.4
0
0.2
5
181
Outsourcing ASEAN

0.6
3
0.2
5
0.2
2
0.2
5
0.3
7
0.4
7
0.0
3
0.2
8
0.2
2
0.1
0
0.3
4
0.4
0.9
5
0.4
7
0.9
2
0.6
0.5
Average
Thailand
e Singapor
es Philippin
52
0.
8
0.
1
0.
26
0.2
2
0.4
1
0.2
0
0.5
2
0.
5
0.
2
0.
9
0.
2
0.
3
0.
5
0.
38
0.
28
0.
57
0.2
5
0.1
9
0.4
1
0.1
8
0.7
8
0.7
1
0.7
6
0.
4
0.
7
0.
32
0.
84
0.3
0
0.8
0
0.4
0.2
0.
0.3
Malaysia
Brunei
a Indonesi
Average
Vietnam
5
9
6
0
Laos
5
6
5
7
5
8
Myanmar
5
5
International
LPI
Harmonisation with Global markets
WB Services
Overall
Trade
Restrictions
Index
WEF GET Index Openess to multilateral trade
rules
WEF GET Index Margin of preference in
destination mkts
WEF GCI
Prevalence of foreign
ownership
Salaries
WB DB Survey
Ratio of minimum wage to
2014
value added per worker
WB DB Survey
Minimum wage for a 19-year
2014
old worker or an apprentice
(US$/month)
WB DB Survey
Severance pay for redundancy
a Cambodi
0.5
0
0.0
7
0.1
5
0.1
2
0.1
2
0.2
8
0.8
5
0.7
9
0.4
0
0.1
0
0.1
0
0.4
7
0.2
4
0.1
4
0.6
1
0.4
8
0.9
2
0.3
4
0.9
5
0.5
8
0.7
5
0.2
0.3
Average ASEAN 10
ASEAN Member States

Rest of ASEAN
CMLV
182
Outsourcing ASEAN
Note
0.6
9
0.6
3
0.7
3
0.6
7
0.6
0
0.7
8
0.8
7
0.8
6
0.4
8
0.3
5
1
1
Average
ASEAN 10
0.6
4
0.8
2
0.8
3
0.8
7
0.
4
0.
1
0.
8
0.
9
1
1
1
Average
0.1
3
0.4
0
0.4
0
0.4
2
Thailand
0.3
3
0.6
8
0.8
6
0.9
0
e Singapor
0.9
0
0.7
5
0.7
9
Laos
0
es Philippin
WEF GET Index
0.2
Malaysia
Cost to import, US$ per

container
Cost to export, US$ per
container
a Indonesi
WEF GET Index
Average
Vietnam
WEF GET Index
Myanmar
6
2
6
3
6
4
6
5
2014
dismissal
WEF GET Index Tariff rate, %
a Cambodi
Brunei
ASEAN Member States

Rest of ASEAN
CMLV
46
0.
64
0.
61
0.
87
0.
88
0.4
0
0.4
8
0.6
2
0.6
3
3. Education Index - based on Mean years of schooling (of adults) and Expected years of schooling (of children)
5. Business Impact of Malaria, Tuberculosis and HIV/AIDS - Average WEF GCI score of Business Impact of Malaria;
Business Impact of Tuberculosis; Business Impact of HIV/AIDS
33. Investment Freedom - restrictions imposed on investment

183
Outsourcing ASEAN
34. Financial Freedom - banking efficiency and a measure of independence from gov. control and interference in the
financial sector
38. Freedom from Corruption - derived from Corruption perception index
47. Regulatory Efficiency (Average of business freedom, labor freedom, monetary freedom)
50. Bribery depth (% of public transactions where a gift or informal payment was requested)
51. Corruption Perception Index Score (0 means that a country is perceived as highly corrupt and 100 means it is
perceived as very clean)
61. Severance pay for redundancy dismissal (average for workers with 1, 5 and 10 years of tenure, in salary weeks)
Abbreviation
WB DB Survey
2014
World Bank Doing Business Survey 2014
WB International
LPI
World Bank International Logistics Performance Index
WEF GCI
World Economic Forum Global Competitiveness Index

184
Outsourcing ASEAN
WEF GET Index
World Economic Forum Global Enabling Trade Index

185
Outsourcing ASEAN
0.54
0.23
WEF GCI
Quality of management schools
0.23
0.62
0.42
0.66
0.42
0.69
UNDP HDI
Education Index
0.24
0.55
0.39
0.66
0.46
0.22
UNDP International
HDI
% of total population successfully

completed the final year of a level or
sublevel of education in science and
engineering
0.06
0.32
0.20
0.20
0.57

Percent of firms identifying an
inadequately educated workforce as a
major constraint
0.28
0.51
0.38
0.73
0.58
0.44
0.12
0.37
0.25
0.13
0.62
0.63
Total Labor force
0.15
0.22
0.18
0.28
1.01
0.20
7
0.51
0.35
0.23
0.41
CMLV
5
6
Labour Productivity
WEF GCI
WB Enterprise
Survey
Size of Labour force

WB Databank
INNOVATION
R&D
Legal, Governmental & Institutional support
WEF GCI
Intellectual property protection

North
East Asia
0.24
NAFTA
0.35
EU26
China
0.14
India
America Latin
Tertiary education enrollment, gross
Table of 65 indicators ASEAN and other trading blocs
ASEAN Rest of
HUMAN CAPITAL
Education and skills
WEF GCI
10 ASEAN
0.14
0.6
5
0.6
1
0.8
1
0.3
4
0.5
8
0.7
3
0.8
2
0.3
3
0.74
0.5
7
0.5
4
0.6
1
0.5
3
0.53
1.01
0.0
8
0.4
8
0.17
0.35
0.5
6
0.6
3
0.73
0.59
0.63
0.41
0.72
186
Outsourcing ASEAN
9
1
0
1
1
1
2
1
3
1
4
1
5
1
6
1
7
1
8
1
9
2
0
Business Alliance
Software - Piracy
Study 2012
0.14
0.36
0.25
0.40
0.17
0.37
0.7
0
0.7
8
0.77
Innovation Capacity (Private sector)

WEF GCI
Availability of scientists and engineers
0.14
0.45
0.29
0.33
0.46
0.63
Scientific and technical journal

articles/Population, total
High-technology exports (% of
manufactured exports)
0.00
0.13
0.07
0.07
0.05
0.01
0.02
0.12
0.07
0.15
0.38
0.16
0.03
0.40
0.23
0.10
0.36
0.09
0.5
8
0.4
3
0.3
8
0.2
2
0.61
WB WDI
0.5
0
0.4
1
0.4
0
0.1
7
Innovation Output
WEF GCI
Availability of latest technologies
0.18
0.63
0.41
0.49
0.30
0.56
Firm-level technology absorption
0.17
0.61
0.39
0.41
0.39
0.53
WEF GCI
FDI and technology transfer
0.32
0.53
0.40
0.40
0.38
0.55
0.7
9
0.6
7
0.5
3
0.83
WEF GCI
0.7
1
0.5
9
0.4
6
0.06
0.24
0.15
0.31
0.30
0.03
0.5
2
0.5
5
0.88

WEF GET Index
Government Online Service Index
0.07
0.57
0.33
0.57
0.42
0.43
Secure Internet servers (per 1 million

people)
0.00
1
0.04
0.02
0.02
0.00
1
0.00
1
0.8
4
0.2
9
0.46
Netcraft.com &
World Bank
0.6
2
0.2
4
Networked
Readiness Index
2013
Business-to-business Internet use
0.27
0.55
0.40
0.57
0.35
0.50
0.6
5
0.6
5
0.86
WB WDI
WB WDI
WEF Executive
Fixed telephone lines/100 pop.
Opinion survey

0.17
0.45
0.20
0.85
0.51
0.33
187
Outsourcing ASEAN
2
1
2
2
2
3
2
4
2
5
2
6
2
7
2
8
2
9
3
0
3
Networked
Readiness Index
2013
Intl Internet bandwidth, kb/s per user

WEF GET Index
Broadband Internet subscriptions/100
pop.
International
Telecommunications Internet
Union ICT facts
Networked
Readiness Index
2013
E-Participation Index
Electrical Supply
WB Enterprise
Duration of a typical electrical outage
Survey
(hours)
WB LPI
Quality of transport Infrastructure
(overall)
WEF GCI
Quality of overall infrastructure
WEF GCI
Quality of railroad infrastructure

Security
WB Enterprise
Losses due to theft and vandalism
Survey
against the firm (% of annual sales)
0.01
0.05
0.03
0.03
0.00
3
0.01
0.1
0
0.0
4
0.27
0.03
0.27
0.16
0.23
0.25
0.02
0.47
0.31
0.57
0.43
0.11
0.5
9
0.7
1
0.76
0.13
0.6
1
0.7
6
0.04
0.31
0.18
0.27
0.36
0.19
0.3
9
0.6
1
0.51
0.51
0.77
0.61
0.91
0.95
0.66
0.8
8
0.8
4
0.93
0.19
0.48
0.33
0.49
0.73
0.41
0.6
5
0.7
7
0.86
0.25
0.58
0.41
0.33
0.43
0.34
0.37
0.25
0.13
0.62
0.63
0.6
8
0.5
3
0.83
0.12
0.6
5
0.5
4
0.65
0.66
0.60
0.69
0.97
0.5
2
0.1
9
0.25
0.5
9
0.4
0.7
5
0.7
0.66
Finance Landscape
WEF GCI
Availability of financial services
0.27
0.67
0.46
0.49
0.43
0.58
WEF GCI
Soundness of banks
0.25
0.70
0.48
0.70
0.50
0.64

0.81
0.89
0.64
188
Outsourcing ASEAN
1
3
2
3
3
3
4
3
5
3
6
3
7
3
8
3
9
4
0
4
1
4
2
4
3
4
4
4
WB Enterprise
Survey
6
0.4
9
7
0.5
6
Percent of firms with an annual

financial statement reviewed by
external auditors
Investment Freedom
0.15
0.76
0.47
0.34
0.57
0.22
0.51
0.36
0.57
0.18
0.29
0.7
7
0.7
3
0.72
Financial Freedom
0.14
0.57
0.36
0.48
0.14
0.29
0.6
8
0.7
1
0.64
0.13
0.60
0.37
0.45
0.39
0.51
0.57
0.38
0.39
0.34
0.45
0.09
0.56
0.34
0.36
0.30
0.45
0.6
4
0.5
7
0.7
0
0.63
0.20
0.5
4
0.4
4
0.4
3
Macro-level Corruption
Heritage Index of
Freedom from Corruption
Economic Freedom
0.05
0.40
0.23
0.36
0.22
0.16
0.5
6
0.5
7
0.67
WEF GCI
0.37
0.47
0.39
0.16
0.51
0.09
Percent of firms expected to give gifts

to public officials "to get things done"
0.19
0.39
0.28
0.85
0.84
0.29
0.3
6
0.2
8
0.42
WB Enterprise
Survey
0.3
3
0.4
3
WEF GCI
Irregular payments and bribes
0.14
0.50
0.32
0.40
0.37
0.19
0.15
0.50
0.33
0.30
0.45
0.39
0.5
5
0.5
0
0.70
policymaking
Ease of Navigating regulatory Practices
WB DB Survey 2014 Procedures needed to enforce
contracts (number)
WEF GCI
No. procedures to start a business
0.6
0
0.4
3
0.26
0.50
0.37
0.37
0.43
0.11
0.46
0.36
0.17
0.08
WEF GCI
0.17
0.61
0.39
0.55
0.64
0.70
0.4
9
0.7
2
0.9
0.54
0.29
0.6
0
0.6
0
0.8
Heritage Index of
Economic Freedom
Heritage Index of
Economic Freedom
Legal Framework and Implementation

WEF GCI
Strength of auditing and reporting
standards
WEF GCI
Protection of minority shareholders
interests
WEF GCI
Strength of investor protection
WEF GCI

0.66
0.56
0.61
0.20
0.62
0.69
0.89
189
Outsourcing ASEAN
5
4
6
4
7
4
8
4
9
5
0
5
1
5
2
5
3
5
4
5
5
5
6
5
7
5
8
6
0.6
3
0.5
7
4
0.7
1
0.7
6
WEF GCI
Redundancy costs, weeks of salary
0.46
0.42
0.39
0.35
0.27
0.58
Heritage Index of
Economic Freedom
Regulatory Efficiency
0.24
0.53
0.38
0.37
0.28
0.23
WB Enterprise
Survey
Percent of firms identifying labor

regulations as a major constraint
0.70
0.50
0.53
0.00
0.96
0.68
0.3
2
0.1
4
0.22
0.20
0.48
0.34
0.27
0.33
0.21
0.4
7
0.7
4
0.5
0
0.7
1
0.58
Micro-level/Regulatory Corruption
WEF GCI
0.60
0.76
WB Enterprise
Survey
Bribery depth
0.24
0.57
0.40
0.89
0.80
0.66
Transparency
International
Corruption Perception Index Score

2012
0.06
0.42
0.25
0.44
0.28
0.24
0.6
1
0.6
3
0.68
0.24
0.63
0.43
0.47
0.68
0.56
0.6
8
0.7
8
0.87
0.03
0.43
0.25
0.43
0.39
0.19
0.52
0.35
0.33
0.60
0.37
0.5
7
0.6
2
0.74
0.19
0.6
0
0.5
9
0.22
0.26
0.22
0.69
0.36
0.7
4
0.6
5
0.69
0.12
0.38
0.25
0.46
0.90
0.48
0.28
0.19
0.34
0.06
0.28
0.57
0.41
0.55
0.39
0.37
0.6
6
0.3
0
0.6
9
0.31
0.12
0.7
6
0.0
9
0.5
5
EASE OF TRADE
Trade logistics performance
WB International
Timeliness
LPI
Customs burden
WEF GET Index
Irregular payments in exports and
imports
WB International
Customs
LPI
Harmonisation with Global markets
WB Services Trade
Overall
Restrictiveness
Index
WEF GET Index
Openness to multilateral trade rules
WEF GET Index
WEF GCI
Margin of preference in destination

markets

0.66
0.78
0.00
4
0.63
190
Outsourcing ASEAN
5
9
6
0
6
1
6
2
6
3
6
4
6
5
Salaries
WB DB Survey 2014 Ratio of minimum wage to value added
per worker
WB DB Survey 2014 Minimum wage for a 19-year old
worker or an apprentice (US$/month)
0.34
0.32
0.30
0.30
0.40
0.37
0.95
0.84
0.80
0.46
0.74
WB DB Survey 2014
Severance pay for redundancy

dismissal
WEF GET Index
Tariff rate, %
0.34
0.46
0.37
0.42
0.27
0.13
0.64
0.40
0.21
WEF GET Index
0.40
0.61
0.48
WEF GET Index
Cost to import, US$ per container
0.40
0.87
WEF GET Index
Cost to export, US$ per container
0.42
0.88

0.2
6
0.2
9
0.2
5
0.5
9
0.35
0.7
7
0.8
5
0.89
0.64
0.82
0.30
0.62
0.33
0.94
0.28
0.63
0.33
0.96
0.20
0.6
0
0.4
8
0.4
5
0.5
5
0.55
0.78
0.8
5
0.0
3
0.6
1
0.5
6
0.72
0.63
0.43
0.35
191

ASEAN Outsourcing and Trade in Value-Added

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gic and tactical positioning of ASEAN to be

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REGIONAL SUMMARY REPORT

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Cambodia. ASEAN presents an interesting and unique study in terms of evaluating

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The heterogeneous mix of AMS, as noted above, makes it difficult to interpret

There needs to be a major visible boost given in earnest to the attention

participation specifically in global cross-border services value chains, and to

Individual AMS should also be encouraged to consider creating a tripartite

These recommendations reflect current global thinking that in a world of global

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The ASEAN Challenge: The middle-income trap.............................................3

Six misconceptions about international trade, investment and outsourcing..6

Study Scope and Definitions...........................................................................11

Recent trends in outsourcing.......................................................................14

The benefits to ASEAN................................................................................. 24

The Philippines leading in ASEAN services outsourcing...............................26

The View from China and India.......................................................................33

Outsourcing in China and India....................................................................34

Current Trends and Developments...............................................................37

Views on selected ASEAN countries.............................................................39

Modern Global Value Chains............................................................................41

Examples of moving up value chains...........................................................41

How to move up GVCs................................................................................. 42

Concept of mapping value chains and relieving choke-points..................43

6.5 Specific costs relating to ASEAN countries and suggested preliminary

Insights from ASEAN Country Studies..........................................................46

Examples of value-chains across ASEAN......................................................50

Supporting Small-and-Medium Enterprises..................................................54

Measuring Competitiveness 1: Value-Added Trade Data.................................61

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Snapshot insight from the new trade data...................................................72

Measuring Competitiveness 2: GVC Readiness Index......................................82

ASEAN GVC Readiness.................................................................................83

ASEAN compared to other regional trading blocs........................................86

Decomposing ASEAN GVC Readiness...........................................................87

AMS Strengths and Weaknesses..................................................................91

Concluding remarks on ASEANs performance in the GVC Index.................93

Free Trade Agreements and Outsourcing........................................................97

The WTO, the AEC and ASEAN-relevant FTAs...............................................99

ASEAN Policy Frameworks..........................................................................101

AEC progress report:.................................................................................. 102

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Table of Figures and Tables

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Asian Development Bank

Narrowing the Development Gap

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1 Team Members were consultants Lisa Barker, Jane Drake-Brockman, Adam

Respondents and participants

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2See David Ricardo Theory of Comparative advantage: http://www.econlib.org/library/Enc/bios/Ricardo.html ;

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2.2 The ASEAN Challenge: The middle-income trap

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Figure 2.2: Stages of Development and the middle-income trap

Adapted from Ohno (2014)

Source: World Bank, World Development Indicators

2.3 Six misconceptions about international trade, investment