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Emerging Markets Changing the World: Fund Firms Urged to Go Truly Global

WASHINGTON-The offshoring of complex, "knowledge-based" functions, coupled with the explosion of wealth and urbanization in emerging markets, demands that fund companies go truly global. That means not only increasing outsourcing but also offering products in the far reaches of the globe.

"Emerging markets are deeply integrated into the global economy," said Jeffrey Garten, professor of international trade, finance and business at the Yale School of Management and former undersecretary of commerce for international trade under the Clinton administration.

Garten, speaking at the Investment Company Institute's 2007 Operations and Technology Conference, said the continuing decline of the U.S. dollar will push a lot of U.S. companies abroad and will encourage foreign investments in U.S. assets.

The rise of countries such as China, India, Brazil, Poland, South Korea, Mexico, Russia and South Africa is fraught with both opportunity and risk, he said. These emerging economies will fuel global trade and investment, presenting companies and investors with growing markets and supplying an increasing amount of productive talent, he said.

"The amount of Chinese investment in the U.S. could explode," Garten said.

However, he cautioned, some of the world's wealthiest regions are places the United States worries about the most politically, like the Persian Gulf and China. Should investors in such nations take sizeable stakes in U.S. defense, telecommunications and media companies, that could raise a lot of sensitive political implications, he said.

As U.S. companies expand globally, they will need to find new ways to cooperate with foreign regulators, Garten said.

"We are looking at a world where growth and investment opportunities are spreading widely and rapidly," he said.

"Outsourcing is a subtext of globalization," Garten added. "Companies in India are starting to outsource to Vietnam," and the United States is sure to follow soon.

"We have been the beneficiary of very low wages in China and India, but wage rates are moving up faster than most people realize."

Mark Bourgeois, Jr., senior director of the Corporate Executive Board, said many companies that have been outsourcing low-skill jobs to India are now considering outsourcing high-skill jobs, as well.

In fact, a survey of U.S. information technology executives found that 41% plan to offshore high-skill activities by 2008, but only 22% plan to offshore low-skill activities. As far as where knowledge-based jobs are going, 75% are farmed out to India, 11% to the Philippines, 7% to Malaysia and 7% to other nations.

"Many of us are feeling the pain of low-skill offshoring," Bourgeois said, noting that employee attrition rates in India are now at 50%, and wages are soaring.

Many call centers that outsourced work to India are now trying to figure out how to retain employees when they can walk across the street and get a higher-paying job at another call center, Bourgeois said.

"Offshoring a low-skill activity will limit your gains to arbitrage only," he said. "Wage inflation and turnover erode those gains. We don't think of it as being a sustainable business strategy."

Bourgeois said sending high-skill jobs to educated, low-cost workforces can be a potentially higher-return, cost-saving strategy, but that strategy also has risks.

Many companies underestimate the challenge and difficulty in executing a successful transfer and often make the mistake of applying a low-skill plan to high-skill field, he said. Companies need to do a better job of training local talent, including giving them three-month stints onshore, and of giving them a clear and rapid career path along with a real sense of contributing and bringing innovation to the parent company, Bourgeois said.

Ghassan Hakim, senior vice president at Franklin Templeton Investments, said that knowledge-based offshoring can have hidden costs, if not done properly. High-skill jobs often require interpretation and analysis, but offshore employees often are not properly trained and have no incentives to succeed, he said.

"We expect more from our offshore staff than our onshore staff," Hakim said. "A company needs to have global standards that everybody adheres to. Employers need to train both onshore and offshore offices on how to deal with each other."

Hakim said live testing grounds, where offshore employees are trained onshore, are very expensive, but it's a question of "pay now or pay later."

Bourgeois and Hakim said they chose India as an example of a place to find workers, but countries in Europe and other areas also apply. Considering that the U.S. will have a huge percentage of workers retiring in the next few years, companies will need to find employees somewhere.

"You have to reach out to where that labor force is," Hakim said.

More than just sending work overseas, U.S. companies will need to attract and retain employees who can bridge functions and operate across different disciplines and cultures.

"You need to figure out ways to build your brand and attract and retain these folks," said Jesse H. Cole, managing director at Goldman Sachs. "We need to make India more than a place we move work to. It's about finding the right people, building your brand and making sure the infrastructure is in place."

Cole said a global company can leverage its operations early on by integrating the complexities of the laws and regulations of its different countries.

"The world is much more complicated," said Alan Greene, executive vice president at State Street Corp.

"We have to have the mindset to think about other countries," Garten agreed. "The challenge is how to get the right people into the right organization. Talent is a prerequisite to executing the vision. What is the talent you're looking for?"

(c) 2007 Money Management Executive and SourceMedia, Inc. All Rights Reserved.