Navigating Political Risk in Offshore Location Decisions

ABSTRACT

In an era of changing geo-politics and populist challenges across political establishments, there is an increasing need to understand and navigate the new emerging political environment.

Social tensions, labour strikes, and a general reversal of the mechanisms of globalization is impacting on the underlying cost assumptions of the offshoring business model, in both host and buyer countries. In this new and more volatile political environment, this research provides the basis for developing a more relevant and weighted understanding of political risk exposure in offshore service outsourcing, supporting the outsourcing industry in making better risk-informed location decisions.

Key Findings:

• Home Country Risk: The analysis highlights that the single largest political risk concern emanates, not from the host country, but from the Home-country Political Risk in the form of fallout or change of home-country regulatory frameworks, like data privacy legislation, US H1B visas limitations and home land security restrictions, with implications for the offshoring business model. 

• Institutional Capacity of Host Country: The most profound host country risk is Institutional Capacity, with an emphasis on Host Country Bureaucracy and to some extent corruption, being the prominent concerns. Bureaucracy directly impacts on processing of host country visa applications, import/export clearances, management of license regimes and other delaying approval processes.

• Legal Predictability: Another key risk is Loss of IP and Contract Enforcement & Legal Transparency risks. Loss of IP risks is most prominent for KPO engagements and concerns with reverse engineering, changing IP policy framework and the lack of IP legal enforcement. Another key concern is lack of institutional capacity, or political will, to enforce contracts, sovereign immunities and general Lack of Transparency in legal frameworks.

• Policy Predictability: Another important host country risk is Policy Predictability, including change of industry/data management regulatory frameworks and Predictability of Labor Regulations. Companies struggle with the disruption and cost implications of changing rules and regulations on for example, regulations on data storage, HR regulations, minimum wages, unstable labour laws and practices. 

• Political, Socio-economic and Macro-economic Instability: Finally, there are prominent concerns with Currency Fluctuations and Wage Inflation, plus Social Unrest and Government Stability in the form of direct or indirect labor strikes, political/parliamentary unrest and implications of elections. 

The research findings provide the basis for developing better tools to improve identification of emerging risks and determine diversified firm and industry specific political risk impact across global service offshoring. The findings provide differentiated political risk typologies that capture the nuances of external risks in offshoring, allowing for more accurate risk assessment of offshore location decisions.

Similarly, the research findings provide a guide for governments to develop targeted strategies for attracting offshore investments, by understanding the underlying concerns of the industry, and the potential pull effects of different policy initiatives. The findings further allow for targeting certain types of offshoring, for example some countries are keen on attracting KPO activities, or certain types of ITO and BPO engagements. The granularity of the research findings allows for a more detailed industry hosting strategy that match the development agenda of host countries.