Emerging Destinations. for Indian IT / ITES Industry

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1 IT ADVISORY SERVICES Emerging Destinations for Indian IT / ITES Industry ADVISORY

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3 Foreword: The Indian IT/ITES industry is at an inflection point. Globally, India has garnered the reputation of being a premier offshore location. It has also earned some great customer references from across the world. In the last few years, there has been a paradigm shift in terms of size of deals, competitive landscape and client expectations. Now, the stakes are much higher and so are the risks geopolitical, operational, reputational, and so on -- that need to be managed with sophistication, and not temerity. Pradeep Udhas Global Partner-in-Charge Sourcing Advisory, KPMG The Indian service providers have grown their operations, but may still need to scale-up much more aggressively to compete with other giants from the U.S. and Europe. A possible scenario for the IT/ITES sector would be to follow the hub-and-spoke model. Indian companies, for instance, could scale up offshore centers in CEE, Central/South America, China, the Philippines and Canada. These countries are also keen to collaborate with India and offer a comprehensive and compelling value proposition. This makes it a win-win situation for both the Indian IT/ITES industry, as well as, for emerging global IT/ITES destinations. This discussion note prepared by KPMG and NASSCOM aims to illustrate some facts and provide key trends that would help build strategies for an enhanced service footprint. Kiran Karnik President NASSCOM Pradeep April 2007 Kiran

4 Table of Contents 1. Executive Summary 4 2. Central / Eastern Europe - Czech Republic 12 - Hungary 14 - Poland 16 - Romania 18 - Slovakia Latin America - Argentina 24 - Brazil 26 - Chile 28 - Mexico Asia Pacific - China 34 - Malaysia 36 - Philippines 38 - Vietnam North America - Canada IT/ITES Industry Destinations Global footprints of IT/ITES companies Conclusion Data Sources 51

5 Executive Summary Most companies and governments around the world now view sourcing as a global activity. The key aim of sourcing is to achieve business objectives. Thus, sourcing strategically identifies whether operations and processes should be offshore, near-shore or on-site. As the IT/ITES sector continues to grow in size, many large organizations have already made sourcing a core part of their business strategy. Thomas L Friedman in his book, The World is Flat, suggested that globalization, as seen by the number of companies that provide outsourced services, has become endemic. An increasing number of back-office services, such as payroll, HR and customer care are being transferred from developed to developing countries. This holds true not just for India, but also for other nations. Though outsourcing of services is not a new phenomenon, its global nature has changed significantly in the recent past. Companies are now increasingly outsourcing even those processes, which were once considered as core business activities like design and research. This will, therefore, increase the pressure to identify the best talent anywhere on the globe; mainly to service these core functions at the optimal cost. India has led the sourcing market from the time when offshoring to low-cost destinations was still in the early stages. The last few years, however, have seen new emerging destinations, with IT/ITES centers opening in Malaysia, China, Philippines, Central and Eastern Europe, Mexico and Brazil. This trend is soon catching on across many other countries, which are aspiring to become IT destinations, including the Bahamas! Indian IT/ITES companies are also opening centers in other countries. These movements clearly indicate that national boundaries are slowly becoming less and less relevant. In addition to this, geographical proximity and cultural similarities result in easier access and better communication. For instance, Latin America with its geographical proximity provides low cost Spanish capabilities to the U.S. These near-shore locations have closer cultural affinity with the Hispanic population in the U.S. Latin American countries such as Brazil, Mexico, Chile and Argentina, have competitive wages and a good educational system. Although, widely known, English is not the first language for most of the Latin American population. The Latin American countries primarily speak Spanish or Portuguese. This, however, works to the advantage of business processes that cater to the Spanish or Portugese speaking parts of the world. This market is estimated to be over 380-million people strong worldwide, with USA alone having a Spanish speaking population of 40 million!

6 Similarly, Eastern Europe plays a significant role as a near-shore outsourcing destination for Western Europe. Service providers in Eastern Europe enjoy the benefits of cultural and linguistic similarities combined with geographical proximity. This, coupled with the availability of a highly educated and low-cost workforce, makes Eastern Europe an attractive destination. Many Eastern European countries have recently joined the free-market global economy. They are fluent in languages such as German and French, which is beneficial for servicing the markets in Western European countries. Even though, the market for these languages is not as large or lucrative as that of English-speaking regions, it is substantial enough for organizations to want to cater to these markets. Further east, in the Philippines, the outsourcing industry is fuelled not just by traditional low-value-adding call centers, but by high-end outsourcing activities such as legal services, web design, medical transcription, software development, animation and shared services. Malaysia, for instance, is not new to the business of global services. This small country of 24 million people in Southeast Asia already plays host to dozens of multinational companies in energy, logistics and finance sectors through captive arrangements. Vietnam is, also, rapidly emerging as a viable offshore IT development location, offering competitive prices, low employee churn and greater stability. China s capability in sourcing is no secret and has time and again been discussed by media across the globe. Thus, when put into perspective in terms of low cost and quality of education of knowledge workers, the list of potential offshore destinations becomes considerably long. And, the number of new players keeps increasing with each passing year. There are some trends that emerge within the four regions, i.e. Central and Eastern Europe (CEE), Latin America (LatAm), Asia-Pacific (AsPac) and North America (NorAm), which have been reviewed in this document. Thus, taking into consideration the potential offered by these locations, these regions deserve a more detailed exploration.

7 6 Central and Eastern Europe (CEE) The countries reviewed in this region include the Czech Republic, Hungary, Poland, Romania and Slovakia (CEE5). Part of an extremely dynamic region, these countries are witnessing robust economic growth and investment. Together, they have received over USD 147 billion in FDI between 2002 and 2006, and over USD 47 billion in 2006 alone. This means each country received Foreign Direct Investment (FDI) close to USD 10 billion in 2006! With an average GDP growth of 6.2 percent in 2006, this region, which has some of the fastest growing countries like Slovakia (8.2 percent) and Romania (7.7 percent) is almost comparable to India and China (two of the fastest growing economies in the world). With well-managed inflation levels averaging around 3.7 percent (Poland being the lowest at 1 percent), it is no wonder that this region is attracting some significant investment. The working age population (between years of age) in this region was 59 percent in 2005 and is likely to come down to 54 percent by The average age of the population is 37.5 years, which means that in about 10 years time the region will see a significantly ageing population. This could affect skills availability and economic growth rates. But for now, the region seems to have an advantage in terms of literacy levels. At present, the current literacy rate is very high at 99 percent, as compared to 93 percent in LatAm4 and 90 percent in AsPac4. The number of students graduating from these regions is significant 1.8 million graduates per year, of which 235,000 are technical graduates. The nominal wages (i.e. actual wages paid, and not adjusted against Purchasing Power Parity) in the region rose from USD 6.5 per hour in 2005 to USD 7.2 per hour in 2006, varying from USD 9.7 in the Czech Republic to USD 3.4 in Romania. On an average, the IT wages are significantly higher at USD 9.1 per hour. In 2006, wages were are expetected to grow by 10 percent, varying from 8 percent in Poland (due to its high population) to 12 percent in Romania. This region is seeing volatile growth in wages. The cost advantage it offers, today, may not sustain over a long period of time. Hence, the quality arbitrage that this region offers over the other regions covered, could be a more sustainable model. The working hours in this region are moderate, at 40 hours per week, as compared to 42 hours in LatAm and 45 in AsPac. Culturally, the working environment is closer to those in Western Europe, i.e. high productivity with low working hours, but at lower costs. The average office rental rate is at USD 23.7 per sq mt and is highly uniform in the region, varying between 22.5 and 25 per sq mt. The price volatility is low and high-quality infrastructure is abundantly available. The size of the IT industry in this region is USD 11.3 billion, with the IT services market being at USD 4.3 billion. It has significant local consumption demand, which is largely being serviced by large foreign IT / ITES companies. To sum up, this region is very attractive and is already seeing some significant investments. The near-saturation level presence of foreign IT/ITES companies in this region shows that the Indian companies are on a back-foot. But, some major Indian companies seem to be building their presence in this region. The emergence of Slovakia illustrates that other countries in the region, too, could emerge as attractive investment destinations in the future.

8 7 Latin America (LatAm) In this region, the countries that are reviewed include: Mexico, Brazil, Chile and Argentina (LatAm4). Brazil has primarily led the robust economic growth in this region. The total FDI in this region between 2002 and 2006 was at USD billion, mainly due to Brazil and Mexico. While, Mexico and Argentina have not seen any significant growth in FDI, Chile witnessed FDI growth of over 50 percent from 2005 to In 2006, Mexico and Brazil (each) attracted FDI worth USD 20 billion. The average GDP growth in the region is 5.5 percent, due to the very low growth of 2.9 percent in Brazil (which is a major economy in the region); while Argentina has seen very brisk growth at 8.8 percent, although on a low base. This is a high-inflation zone, with inflation being at an average of 5.5 percent. Argentina, has seen the highest inflation at 10.9 percent. The working age population was around 52.5 percent in 2005 and is likely to go up to 56 percent by The reason being that the average age in this region is around 28.4 years (close to Indian levels). Hence, many more young people are likely to become part of the working population. This augurs well for sustained economic growth in the region, provided the political and social risks are managed well. Further, the literacy rate is a healthy 93 percent. The region produces almost a million graduates every year, although the number of technical graduates is proportionately much lower at 179,000. The region needs to develop its educational infrastructure in order to become a serious IT/ITES destination. The number of non-indigenous European languages spoken in LatAm4 is very high. These include Spanish, Portuguese, English, French, and even some German (in Argentina)! This allows these countries to be used as a base for servicing multi-lingual, non-english requirements for Western Europe. This makes the region one of the most suitable areas for non-english language voice and non-voice support in the world, both for the U.S. and Europe. Interestingly, many Japanese and Chinese migrated to Peru in the late nineteenth century as rural labourers, and now form an integrated part of Peruvian society. The nominal wages in the region are pretty low and rose from USD 2.8 per hour in 2005 to USD 3.2 per hour in 2006, with Brazil being the highest at USD 5.6 per hour. However, the IT wages are significantly higher at USD 8.7 per hour, with Chile and Mexico paying more than two times the rates paid in India. This shows that while the general manpower availability is high, access to skilled manpower is limited. The growth in wages is relatively high at 8.4 percent, with Argentina being the highest at 17.9 percent. Working hours in this region are moderately high, at 42 hours per week, but lower than those in the AsPac region. This region has lower productivity levels in comparison to the CEE region. Culturally, the region is closer to the U.S. and to southern European countries like Spain and Portugal, as compared to northern Europe. The average office rental rate is at USD 27.8 per sq mt, with Brazil being the highest at USD 42 per sq mt, which is higher than CEE and almost every country in AsPac. This is surprising as the overall quality of infrastructure in LatAm is not comparable with the other regions. There is not much information available on the size of the IT industry, but the size of the IT services market is around USD 8.8 billion. Brazil, itself, contributes almost USD 5 billion. This region, also, has significant domestic demand. In short, this is a high-risk, high-reward region. The average inflation rate of the region is almost two times the average GDP growth rate. The young population and the relatively large domestic market, thus, makes it an attractive destination. However, low English-speaking and managerial skills still pose a challenge. In this region, too, the presence of Indian companies is conspicuously low, as compared to foreign IT / ITES companies.

9 8 Asia-Pacific (AsPac) The countries reviewed in this region include China, Vietnam, Malaysia and the Philippines (AsPac4). This is one of the most dynamic and fastest growing regions in the world. It is also the most challenging and difficult to understand and defies almost any kind of stereotypes and comparisons. The concept of averages does not hold much importance, as the differences and variations are very significant. For instance, although the average FDI in AsPac4 is USD 20 billion; China alone has attracted investment worth USD 70 billion, while the others vary between USD 2 to 4 billion. What is interesting in the region is that the growth is also robust in countries other than China. Vietnam, for instance, is growing at around 8 percent, while Malaysia and Philippines are just under 6 percent. Again, the average inflation (at 4.8 percent in 2006) does not give an accurate picture, as China and Malaysia have controlled it at 1.5 percent and 3 percent, respectively. On the other hand, the other two countries have inflation levels of over 6 percent. The working age population varies from 50 percent in Malaysia to 58 percent in China.The average age in China is high at 32.7 years and resultantly its working age population is likely to come down to 55 percent by The other countries are younger, varying from Philippines at 22 years to Vietnam at 26 years. These will remain productive for a much longer period of time, and will have the potential for sustained economic growth. The literacy rate is high at around 90 percent, although English language skills are a bit of a challenge. China has addressed this issue aggressively, especially as it prepares itself to host the Beijing Olympics in The Philippines historically have had a good English-speaking population, due to their colonial links with the U.S. Malaysia, too, has good language skills in the urban areas. Vietnam, though, has limited English-speaking skills. This region, except for the Philippines might be more suitable for non-voice transaction processing work. The number of graduate students is significant in the Philippines (380,000) and Vietnam (125,000), with around percent of them being technical graduates. The nominal wages in this region are very low. In 2005, it was estimated to be around USD 1.45 per hour and USD 1.61 per hour in The highest wages are in Malaysia, at USD 2.6 per hour. In 2006, the difference between the nominal wage and IT wage in China were not so significant with IT wages also at USD 1.35 per hour. However, the rates are significantly higher in other countries. It is around USD 5.9 per hour. The overall wages are the lowest in the Philippines. The wage growth in the region varies from 4 percent in Malaysia to 15 percent in China. The working hours in the region are the highest in the world, at around 44 hours. Culturally too, the working population is known to put in time much beyond the stipulated number of hours. Thus, the real working hours are considerably higher and can go up to 60 hours a week. However, when compared with the U.S. and Europe, the overall productivity in the region is lower. The average office rental (excluding China) is around USD 24 per square meter. The rentals are significantly lower in the Philippines, which is around USD 15 per sq meter. In China the rentals vary widely from USD 28 to 110 per square meter, given its continental proportions. The size of the IT or the IT Services market is not as significant as that in China, which has an IT Services market at around USD 7.7 billion. Indian companies have a significant presence in China and Malaysia. But, is less in the Philippines and none in Vietnam. To sum up, this region is a smorgasbord of opportunities and risks. Since the characteristics vary so significantly from country to country, strategizing for this region is complex, but is also imperative for any Indian company. The expansion of the Indian footprint in this region has begun, but still has a long way to go.

10 9 North America (NorAm) Canada is the only country that is reviewed in this region from the perspective of an IT/ITES destination. Canada is a significant recipient of FDI (over USD 131 billion between 2002 and 2006). It is also the only region, where almost all the Indian as well as Foreign companies reviewed have significant presence. This is the most convenient near-shore destination for the U.S. market, where the cultural and linguistic affinity is absolute. Canada is one of the most mature economies in this group of 14 countries, with GDP growth of around 3 percent and inflation at around 2 percent. Significantly, the working age population in Canada is set to rise from 52 percent at present to 59 percent by 2025, although a large proportion of this growth is through immigration. The average age in the country is high at Although skilled resources are available in plenty, in the long term the country might face scarcity, as the population ages. The nominal wages are high in Canada at USD 23.4 per hour. Companies do not choose to locate thier operations here for cost advantage, but because this is the most convenient near-shore location to service the U.S. market. The IT/ITES wage rates in Canada are lower than the nominal wage and vary between USD per hour. This is an interesting anomaly and needs to be studied further. Wage growth is low at around 2 percent per annum. Working hours per week are relatively low at around 36. The office rentals are comparable with other regions, at around USD 22.5 per square meter. To sum up, Canada is an important location for the IT world. However, it is unlikely to see significant growth in this respect, as the cost pressures on businesses increase, other low-cost destinations with a younger working population are likely to attract much more investment.

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13 12 Czech Republic Basic country information Size of the country 78, 866 km 2 Population million Capital Prague Currency Czech Koruna CZK/USD (2006 avg) Main macroeconomic indicators (2006): GDP in PPP: USD billion GDP per capita in PPP: USD 20,430 Consumer Price Inflation: 2.5 percent Unemployment rate: 8.1 percent FDI stock per capita USD 6,408 Political Structure The Czech Republic follows a parliamentary structure. The national legislature consists of the lower house, the Chamber of Deputies, which has 200 members and the upper house, the Senate, which has 81 members. The President is elected by the parliament for a five-year term. Some of the major political parties are: Czech Social Democratic Party (CSSD), Civic Democratic Party (ODS), Communist Party of Bohemia and Moravia (KSCM). In June 2006, the general election resulted in an evenly split parliament. In January 2007, Prime Minister Mirek Topolanek s (ODS) government won the parliamentary confidence vote (marginally) by On the political risk, Czech Republic scores an A from the Economist Intelligence Unit (EIU). Investment Climate Foreign Direct Investment (FDI) - In 2006, the country attracted FDI worth USD 6 billion, 40 percent lower compared to the record investments of USD 11 billion in During , the country attracted FDI worth USD 32.5 billion. GDP growth - In 2005, the real GDP grew by 6 percent and in 2006 EIU expected the country to post a 6 percent growth. In the medium term (till 2011), the economy is expected to grow by 4 percent; as per EIU estimates. Inflation - During inflation hovered around 2 percent. In 2005 inflation was 1.9 percent; marginally higher than the EU average of 1.6 percent.. Country Risk Ratings (Rating/Outlook) Standard and Poor s A / Positive Moody s Aaa Fitch A+ / Stable Direct and Indirect incentives by Government - The government provides incentive in terms of faster depreciation and direct subsidies on fulfillment of stipulated requirement related to investment and location. Currency Risks - EIU has rated the currency risk at BBB, based on country s sound economic fundamentals that keeps the Czech Koruna strong. Cultural Climate Working age population - The Czech Republic has a very young working population, with 59 percent of the population in the age group of years. By 2025, due to ageing the share of population in this age bracket is expected to come down to 54 percent. Languages spoken - The Czech is the national language and the mother tongue of 98 percent of the country s population. German, English and Russian are other widely spoken languages. Twenty-eight percent, 24 percent and 20 percent of the country s population can converse in these three languages, respectively. More than 61 percent of the population is able to converse in at least one language apart from Czech. Education - The Czech Republic has a high literacy rate of 99 percent. In 2004, the government spent 4.6 percent of its GDP on education. Primary, secondary and tertiary education levels are at 24 percent, 67 percent and 9 percent respectively. English and German are the dominant foreign languages taught in schools. English is taught in primary schools, while German is taught at secondary school levels. Quality of Higher education and approx. no of graduates - The Czech Republic has more than 60 higher education institutes and universities. Every year, over 52,000 technical students graduate from these institutes with the total number of students studying in these institutes being close to 300,000 (of which more than 26,000 are IT students). The Charles University in Prague is ranked at 204 in top 500 global universities and 81 amongst the top 125 universities in Europe. Note: Region includes Hungary, Poland, Slovakia, Romania and Czech Republic Hiring and firing of workers - Hiring of workers in Czech Republic is a relatively tougher task as compared to countries like Poland, Hungary and Slovakia. However, it scores much higher than these countries in terms of working hours flexibility and firing of workers.

14 13 Infrastructure Telephony In communication connectivity the Czech Republic scores the highest in the region. In 2005, the country had more than 3.6 million fixed line subscribers and more than 11.5 million mobile phone users. The tele density of 356 subscribers and 1,119 users per 1,000 for fixed lines and mobile phone users, respectively, is higher than the respective regional average of 298 and 856. Internet backbone In internet connectivity, the country scores the highest in the region. In 2005, the country had more than 3.9 million internet users and more than 0.4 million broadband connections. With a penetration of 385 users and 42 connection per 1,000 for internet users and broad band connections, respectively, it is higher than the regional average of 324 and 42. Transport infrastructure The transport connectivity is at par with countries like Hungary, Poland and Slovakia. The Czech Republic has 127,747 kms of road network, which connects to 70 percent of the country s area. The railways reach out to 12 percent of the country, with rail density being around 0.12 km/ km2. The regional average (excluding Romania) for roads and railways paving is around 79 percent and 8.8 percent, respectively. The country has three major airports: Decin, Prague and Usti nad Labem. The passenger traffic at major airports has doubled from 5 million passengers in 1999 to around 11.5 million passengers in Electricity The country has a sophisticated power system and is a major supplier of electricity to Central European countries like Austria, Slovakia and Germany. For the Czech Republic, the electricity export is an important source of foreign exchange. The electricity prices are amongst the lowest in the region with USD per unit; as against the regional average of USD per unit. Operational Costs Salaries Salaries prevailing in IT and ITES sectors are 15 to 20 percent lower than Hungary and Poland, but about 33 percent costlier than Romania and Slovakia. In comparison to India, the salary levels are almost double and the difference in salary rises with seniority. Nominal wages prevailing in the country are around USD 8.6 per hour and has been growing at around 6 percent per annum. Rentals The Central Business District (CBD) rentals of around USD 23 per sq. meter per month in Czech Republic are among the lowest in the region, with Slovakia being the cheapest. Current IT and ITES scenario The IT industry has grown from USD 1.9 billion in 2001 to USD 2.7 billion in IT services market has grown from USD 631 million in 2000 to USD 1 billion in Sixty-eight percent of total IT services represent services like systems integration, consulting and outsourcing. The government provides various incentives to software development center, call center and shared service center on fulfillment of the requisite criteria. Major IT companies like Logica CMG, SAP, EDS and Sun Microsystems have been operating in Czech Republic for almost a decade. The Czech center of these companies provides ADM, R&D and technical support to their global operations. In 2006, companies like Microsoft, Skype, CSC Corporation, Deutsche Borse and Red Hat started their software development and IT centers in the country. Infosys* has set up a centre in Brno in the Czech Republic to deliver its BPO solutions. At present, it has around 350 employees and provides operations in 11 European languages. It also performs Infosys BPO s transaction processing related applications for the non UK-based clients in Europe. Infosys is expected to double its staff-strength to provide other offerings in the PI, ADM and ITO space. * Source: Report on Software & IT Services (Europe) by Lehman Brothers, February 2007.

15 14 Hungary Basic country information Size of the country 93,030 km 2 Population million Capital Budapest Currency Hungarian Forint HUF/USD (2006 avg) Main macroeconomic indicators (2006): GDP in PPP: USD billion GDP per capita in PPP: USD 18,180 Consumer Price Inflation: 4 percent Unemployment rate: 7.5 percent FDI stock per capita USD 7,136 Country Risk Ratings (Rating/Outlook) Standard and Poor s Moody s Fitch BBB+ / Stable Aaa A- / Negative Note: Region includes Hungary, Poland, Slovakia, Romania and Czech Republic Political Structure The Republic of Hungarian follows a parliamentary structure and has a single-chamber national assembly. The Assembly consists of 386 members, of which 176 are elected from single-member constituencies. The President is elected by the Parliament for a five-year term period. Some of the major political parties are: Christian Democratic People's Party (KDNP), Fidesz-Hungarian Civic Union (Fidesz), Hungarian Democratic Forum (MDF), Hungarian Socialist Party (MSZP) and SZDSZ-Hungarian Liberal Party (SZDSZ). The centre-left majority coalition comprises the MSZP and the SZDSZ, led by Ferenc Gyurcsany, which runs the government. In June 2006, the coalition came into form in with 210 seats in the Parliament. On the political risk, Hungary scores an A from the Economist Intelligence Unit (EIU). Investment Climate Foreign Direct Investment (FDI) - In 2005, Hungary attracted FDI worth USD 7 billion; recording a 50 percent rise over the investment of USD 4.5 billion in During , Hungary attracted FDI worth USD 16.6 billion. GDP growth - In 2005, the real GDP grew by 4.2 percent. In 2006, the EIU had expected the economy to grow by 4 percent. In the medium run (till 2011), the economy is expected to grow by 3.5 percent; as per EIU estimates. Inflation - In 2005, inflation rates dropped to 3.6 percent from the 5.5 percent witnessed during This rate is still higher as compared to the EU average of 1.6 percent. Direct and Indirect incentives by Government - The government grants corporate tax benefits, faster depreciation and direct subsidies on fulfillment of stipulated requirement related to investment, job creation and location. Currency Risks - EIU has rated Hungary s currency risk at B based on weak economic fundamentals. Further, if the global liquidity conditions deteriorate, the Hungarian Forint is vulnerable to a downward correction. Cultural Climate Working age population - Hungary has a very young working population with 59 percent of the population in the age group of years. By 2025, due to ageing, the share of its population in this age bracket is expected to come down to 54 percent. Languages spoken - Hungarian (Magyar) is the national language and the mother tongue to the country s population. German and English are widely spoken languages in the country. About 25 percent and 23 percent of the population can converse in these languages, respectively. More than 42 percent of population is able to converse in at least one language apart from Hungarian. Education - The country has high a literacy rate of 99 percent. The government spends 6 percent of its GDP on education. Primary, secondary and tertiary education levels are at 39 percent, 50 percent and 11 percent, respectively. English (with 51 percent student enrollment) and German (with 27 percent student enrollment) are the dominant foreign languages taught in schools. Quality of Higher education and approx. no of graduates - Hungary has 138 higher education institutes and universities. Annually, over 53,000 students graduate from these institutes. The total number of students studying in these institutes is close to 421,500 with around 240,000 students studying at bachelor level and 138,000 doing master level courses. The country also produces more than 30,000 engineers every year. The University of Szeged is ranked 230 amongst the top 500 global universities and 119 amongst the top 125 universities in Europe. Hiring and firing of workers - For hiring and firing of workers, Hungary provides the highest flexibility in the region. However, it is the most rigid in terms of flexibility of working hours, which largely covers aspects like working during the weekend and/ or in the night.

16 15 Infrastructure Telephony In communication connectivity, Hungary scores the second highest in the region after Czech Republic. In 2005, the country had more than 3.4 million fixed line subscribers and more than 9.2 million mobile phone users. The tele-density is 336 subscribers and 915 users per 1,000 for fixed lines and mobile phone users, respectively, as compared to the the respective regional average of 298 and 856. Internet backbone In internet connection, the country scores lower than Czech Republic and Slovakia. In 2005, Hungary had more than 3.7 million internet users and over 0.6 million broadband connections. The penetration of 365 users and 58 connection per 1,000 for internet users and broadband connections, respectively, is higher than the respective regional average of 324 and 42. Transport infrastructure In transport connectivity, Hungary is at par with Czech Republic, Poland and Slovakia. It has 159,568 kms of road network, which connects to 75 percent of the country s area. The railways reach out to 9 percent of the country with rail density of around 0.09 km/ km2. The regional average (excluding Romania) is around 79 percent and 8.8 percent for roads and railways paving, respectively. The country has six major airports: Budapest, Dunaujvaros, Gyor-Gonyu, Csepel, Baja and Mohacs. In 2006, the passenger traffic at major airports doubled to 8.3 million from 4 million passengers in Electricity Hungary is predominantly dependent on thermal and nuclear sources, which accounts for 94 percent of the installed capacity. The government is expected to close down or convert almost all of its coal-fired power plants to gas. Power generators and distributors in the country are largely foreign-owned. The electricity prices are the highest in the region with USD per unit, against the regional average of USD per unit. Operational Costs Salaries Hungary has the second costliest salary bracket in the region after Poland. Salaries in IT and ITES sectors are 25 to 50 percent higher than Czech Republic, Slovakia and Romania. In comparison to India, Hungary is two and half time costlier and the difference in salary rises with seniority. Rentals The Central Business District (CBD) rentals of around USD 25 per sq. meter per month in Budapest is at par with rentals in Warsaw-Poland. The rentals are, however, 10 percent costlier than the CBD of Prague (Czech) and Bucharest (Romania). Current IT and ITES scenario In 2005, the Information Technology (IT) industry in Hungary was around USD 2.4 billion, up 8.1 percent from the previous year. The main sub-sectors of the IT market include: computer hardware (USD 830 million), IT services (USD 762 million, export USD 150 million) and software products (USD 533 million). The top ranked multinational companies have their R&D hubs in Hungary. In early 2000, TCS* set up a GE Global Development Center in Budapest. The company currently employs 400 people, primarily supporting the ADM, ITO and ERP applications. TCS plans to hire 3,000-5,000 employees for its BPO operations. Satyam s unit* in Budapest has 45 employees. The company provides multilingual support to customers in similar time zones, predominantly in the ERP space. * Source: Report on Software & IT Services (Europe) by Lehman Brothers, February 2007.

17 16 Poland Basic country information Size of the country 311,904 km 2 Population 38.2 million Capital Warsaw Currency Polish Zloty PLN/USD (2006 avg) 3.06 Main macroeconomic indicators (2006): GDP in PPP: USD billion GDP per capita in PPP: USD 14,120 Consumer Price Inflation : 1 percent Unemployment rate: 16 percent FDI stock per capita USD 2,737 Political Structure Poland follows a parliamentary structure. The national assembly consists of Sejm (lower house), which has 460 members and Senate (upper house) with 100 members. The President is directly elected by citizens of the country for a five-year term. Some of the major political parties are Law and Justice (PiS), Civic Platform (PO), Polish Peasants' Party (PSL), Samoobrona (Self-Defence) and League of Polish Families (LPR). At present, the ruling government is made up of a three-party coalition the conservative PiS, Self-Defence and the LPR. Jaroslaw Kaczynski is the Prime Minister of Poland and the President is his twin brother Lech Kaczynski. On the political risk, Poland scores a BBB rating from the Economist Intelligence Unit (EIU). Investment Climate Foreign Direct Investment (FDI) - In 2006, Poland attracted FDI worth USD 14.7 billion, a 50 percent rise over investment of USD 9.6 billion in During , the country has attracted FDI worth USD 46 billion. GDP growth - In 2005, the real GDP grew by 3.5 percent. In 2006, EIU expected the economy to grow by 5.8 percent. In the medium run (till 2011), the economy is expected to grow by 4.5 percent, as per EIU estimates. Inflation - During , the inflation hovered around 2 percent. In 2006, the inflation dipped to 1 percent, as against the EU average of 1.6 percent. Country Risk Ratings (Rating/Outlook) Standard and Poor s A- / Stable Moody s Aaa Fitch A / Stable Direct and Indirect incentives by Government - The Polish government grants corporate tax benefits for entities located in the special economic zones. It also grants direct subsidies in the form of employment grants for creation of new jobs and so on. Currency Risks - EIU has rated the currency risk at BBB based on good economic fundamentals. As long as the economic growth remains balanced, the Polish Zloty is expected to remain strong. Cultural Climate Working age population - Poland has a very young working population with 59 percent of its population in the age group of years. By 2025, due to ageing, the share of population in this age bracket is expected to come down to 53 percent. Languages spoken - Polish is the national language and the mother tongue to 98 percent of population in Poland. English, Russian and German are the other widely spoken languages. About 29 percent, 26 percent and 19 percent of the population can converse in English, Russian and German, respectively. More than 57 percent of the population can converse in at least one language apart from Polish. Education - Poland has a high literacy rate of 99.8 percent. The government spends 5.8 percent of its GDP on education. Primary, secondary and tertiary education levels are at 33 percent, 58 percent and 9 percent, respectively. English, German and Russian are the dominant foreign languages taught in schools. Quality of Higher education and approx. no of graduates - Poland has over 400 higher education institutes and universities. Every year, over 380,000 students graduate from these institutes, with the total number of students enrolled in these institutes being close to 1.9 million. The country also produces more than 65,000 engineers, science and mathematics graduates every year. The Jagellonian University is ranked 319 in the top 500 global universities. Note: Region includes Hungary, Poland, Slovakia, Romania and Czech Republic Hiring and firing of workers - For hiring of workers, Poland provides the highest flexibility in the region. However, the country has extremely rigid regulations in terms of firing of workers and flexibility of working hours in terms of working during the weekend and/ or in the night.

18 17 Infrastructure Telephony Poland has the highest number of telephone and mobile subscribers. However, due to its large population base its average rating in the penetration level is lower than Czech Republic and Hungary. In 2005, the country had more than 13 million fixed line subscribers and more than 29.2 million mobile phone users. It has a tele-density of 342 subscribers and 766 users per 1,000 for fixed lines and mobile phone users, respectively, against the respective regional average of 298 and 856. Internet backbone The internet connectivity in Poland ranks lower than Czech and Hungary. The country, however, has better penetration of broadband in the region after Hungary. In 2005, the country had more than 11.8 million internet users and more than 1.8 million broadband connections with a penetration of 309 users and 47 connection per 1,000 for internet users and broadband connections, respectively, against the respective regional average of 324 and 42. Transport infrastructure Poland has 423,997 kms of road network which connects to 95 percent of the country s area. The railways reach out to 7.4 percent of the country with rail density of around 0.07 km/ km2. The regional average (excluding Romania) is around 79 percent and 8.8 percent for roads and railways paving, respectively. Poland has four major airports: Gdansk, Gdynia, Swinoujscie, and Szczecin. In 2006, the passenger traffic at major airports doubled to 8.1 million passengers from 4 million passengers in Electricity The Polish power generation sector is the largest in Central and Eastern Europe. It has an installed capacity of 35,348 mw, of which it exports a marginal amount of electricity. The electricity is available at USD per unit as against the regional average of USD per unit. Operational Costs Salaries In terms of salaries, Poland is the costliest location in the region. Salaries in IT and ITES sectors are 15 to 25 percent higher compared to Czech and Hungary. In comparison to India, Poland is three times costlier and the difference in salary rises with seniority. Rentals The Central Business District (CBD) rentals of around USD 25 per sq. meter per month in Warsaw is at par with the rentals in Budapest, Hungary. However, the rent is 10 percent costlier than Prague (Czech) and Bucharest (Romania). Current IT and ITES scenario In 2004, the Information Technology (IT) industry was at USD 4.3 billion, registering a growth of 14 percent over In the same year, IT services were estimated at USD 1.4 billion and grew by 20 percent over In May 2004, Poland was added to the EU, which gave the country access to various EU funding programmes for developing IT projects. The public sector, financial institutions and private companies in Poland are required to adhere to EU financial, legal and reporting requirements. The country allocates 2 percent of its GDP for IT investments. In 2004, over 1,500 companies offered computer products, software and services. Most of these were small businesses with approximately 50 employees and a turnover of around USD 30 million. In 2004, it was estimated that twenty of the largest IT service companies controlled over 60 percent of the local business. Systems integration, equipment installation, technical support, software installation and support services represent 54 percent of expenditures on all IT services. According to the IDC estimates, outsourcing represented 14 percent of the market in All major IT equipment and software companies have offices in Poland. Some major companies are Dell, Hewlett-Packard, IBM, Microsoft, Oracle and Sun Microsystems. These companies offer end-to-end IT solutions from core products to consultancy, system and application integration services, training and maintenance services.

19 18 Romania Basic country information Size of the country 238,391 km 2 Population 21.6 million Capital Bucharest Currency Romanian New Lei RON/USD (2006 avg) 2.84 Main macroeconomic indicators (2006): GDP in PPP: USD 210 billion GDP per capita in PPP: USD 9,680 Consumer Price Inflation: 6.6 percent Unemployment rate: 5.2 percent FDI stock per capita USD 1,728 Political Structure Romania follows a parliamentary structure. The bi-cameral parliament consists of the Senate (137 seats) and the Chamber of Deputies (332 seats). Both, the chambers are directly elected from 41 multimember constituencies, comprising 40 counties and the municipality of Bucharest. Traian Basescu is the President and the Prime Minister, Calin Popescu Tariceanu, is from the NLP. Some of the major political parties are: Conservative Party (CP), Democratic Party (DP), Greater Romania Party (GRP), Hungarian Democratic Union in Romania (HDUR), Liberal Democratic Party (LDP), National Liberal Party (NLP) and Social Democratic Party (SDP). In January 2007, Romania joined the EU. The next parliamentary and presidential elections are due in 2008 and 2009, respectively. On the political risk, Romania scores a BBB from the Economist Intelligence Unit (EIU). Investment Climate Foreign Direct Investment (FDI) - In 2005, the country attracted FDI worth USD 7.9 billion. The estimated investment in 2006 was worth USD 11.5 billion. GDP growth - The real GDP growth expectations of 6.1 percent in 2007 and 5.4 percent in 2008, are estimated following the growth of 7.7 percent in Inflation - Inflation has come down from the high of 22.5 percent in 2002 to 9.0 and 6.6 in 2005 and 2006, respectively. In the medium term (till 2011), it is expected to be in the region of 3-4 percent. Country Risk Ratings (Rating/Outlook) Standard and Poor s BBB/ Positive Moody s Aa3 Fitch BBB+/ Stable Direct and Indirect incentives by Government - The government provides incentives in terms of corporate income tax, fast depreciation and direct subsidies for qualifying categories. Currency Risks - EIU has rated the currency risk at BB. Large foreign capital inflows continue to put upward pressure on the exchange rate, presenting a dilemma for the Central Bank's monetary policy, which is based on an inflation targeting regime. Cultural Climate Working age population - Fifty-seven percent of the Romanian population is in the age group of years. By 2025, due to ageing, the share of population in this age bracket is expected to come down to 56 percent. Languages spoken - Romanian is the national language and the mother tongue of 95 percent of the country s population. English (29 percent), French (24 percent) and German (6 percent) are the other widely known languages. About 47 percent of the Romanian population can converse in at least one language other than their mother tongue. Education - Romania has high literacy rate of 98.4 percent. The government spends 3.6 percent of its GDP for education. Primary, secondary and tertiary education levels are at 8 percent, 80 percent and 12 percent, respectively. Quality of Higher education and approx. no of graduates - Romania has 122 higher education institutes and universities. It is estimated that annually 62,078 student graduate every year with science and engineering degree, with the total number of student studying in these institutes being close to 620,785. Romania has 976 researchers (per one million inhabitants) and the government expenditure on R&D is 0.4 percent of the GDP. Hiring and firing of workers - Hiring of workers is a relatively tougher task as compared to countries like Poland, Hungary and Slovakia. Romania scores lower than these countries in terms of flexibility in the work environment. The country has rigid regulations on dismissals, role of trade unions, re-employment and replacement rules. Note: Region includes Hungary, Poland, Slovakia, Romania and Czech Republic

20 19 Infrastructure Telephony In 2005, the country had more than 4.4 million fixed line subscribers and over 13.3 million mobile phone users. While the tele-density is 204 subscribers and 618 users per 1,000 for fixed lines and mobile phone users, respectively, as compared to the respective regional average of 298 and 858. The leading mobile phone maker, Nokia, has signed a preliminary agreement to invest approximately USD 81 million to set up a research and production centre in Cluj. Nokia and its suppliers expect to create 15,000 jobs by Internet backbone In 2005, the country had more than 4.7 million internet users and more than million broadband connections; with a penetration of 217 users and 35 connections per 1,000 for internet users and broadband connections, respectively. The penetration figure is lower than the respective regional average of 324 and 42. Transport infrastructure Romania is poor in terms of transport infrastructure as compared to five other countries in the region. It has 60,043 kms of road network, which connects to 25.3 percent of the country s area. The railways reach out to 12 percent of the country with a rail density of around 0.05 km/ km2. The country has four major ports: Braila, Constanta, Galati and Tulcea. In 2005, the passenger traffic at major airports of the country was around 3.05 million. Electricity Romania is a member of the Union for the Co-ordination of Transmission of Electricity (UCTE). In 2006, the electricity consumption per head was 2,398 kwh. Operational Costs Salaries Salaries prevailing in IT and ITES sectors in Romania are the lowest in comparison to countries like Poland, Czech Republic, Hungary and Slovakia. The salaries are over 40 percent lower than the average salaries in the IT/ITES sectors in Poland. In comparison to India, the average Romania salary is about 40 percent more expensive and the difference in salary rises with seniority. The nominal wages prevailing in the country is around USD 7.30 per hour and it has been growing at approximately 17 percent. Rentals The Central Business District (CBD) rentals of around USD 23 per sq. meter per month, equal to the rentals in Czech Republic. Current IT and ITES scenario In 2005, the total Information Technology (IT) spending was USD billion and IT services export amounted to USD 1 billion. The Information And Communications Technology brochure published by the Ministry of Public Information states that more than 4,800 firms are currently active in software industry. These firms employ over 25,000 people in the software and services area. The Government of Romania along with the World Bank has initiated a project entitled Knowledge-Based Economy. The project entails an initial investment of USD 2 million for building local community networks interconnected within local communities. The aim is to provide access to Internet and communications. In the past few years, the IT services market has grown in Romania as many technology companies such as SAP, Cisco, Microsoft, Dell, MGI Metro Group and Alcatel have set up their captive sites in the region. Also, multinational vendors such as EDS, HP, Genpact, Wipro BPO have their operations in the country. U.S.-based Accenture, after winning the USD 100 million deal to provide BPO services to insurance giant AIG Europe, operates the business from its center in Bucharest. Hewlett Packard, has announced plans to employ 1,200 people at its outsourcing centre in Romania to serve customers in Europe, the Middle East and Africa. Oracle has opened three service and technology centers in the Bucharest s Financial Plaza to provide services to its clients in Europe.

21 20 Slovakia Basic country information Size of the country 49, 035 km 2 Population 5.4 million Capital Bratislava Currency Slovak Koruna SKK/USD (2006 avg) Main macroeconomic indicators (2006): GDP in PPP: USD 96.4 billion GDP per capita in PPP: USD 17,680 Consumer Price Inflation: 4.5 percent Unemployment rate: 10.4 percent FDI stock per capita USD 3,451 Political Structure The Republic of Slovak follows a parliamentary structure. The national legislature has 150 members. The President of the Republic is elected directly by the people. Ivan Gasparovic, Slovakia s President was elected on April 17, The ruling parties are: Smer-Social Democracy (Smer-SD), Slovak National Party (SNS) and People's Party-Movement for a Democratic Slovakia (LS-HZDS). Some of the main opposition parties are: Slovak Democratic and Christian Union-Democratic Party (SDKU-DS), Hungarian Coalition Party (SMK) and Christian Democratic Movement (KDH). In June 2006, the legislative election was won by the coalition government. The coalition party head Robert Fico was sworn in as the Prime Minister on July 5th The next presidential elections are due in 2009 and legislative in On the political risk, Slovak Republic scores an A from the Economist Intelligence Unit (EIU). Investment Climate Foreign Direct Investment (FDI) - In 2005, the country attracted FDI worth USD 1.9 billion and it was estimated to escalate to USD 3.9 billion in GDP growth - According to an estimate released by Slovak Statistical Office, the real GDP growth was 9.5 percent in the fourth quarter of 2006, bringing the full-year growth to 8.2 percent (a record high). The GDP for 2007 is, thus, expected to rise to 7 percent. Country Risk Ratings (Rating/Outlook) Standard and Poor s Not available Moody s Aaa Fitch A+/ Stable Inflation - After peaking at 8.6 percent in 2003, the inflation decreased to 4.5 percent in The average inflation in is estimated to be around of percent. Direct and Indirect incentives by Government - The government provides incentives in terms of corporate income tax, fast depreciation, direct subsidies (linked to fixed assets and labor). Currency Risks - EIU has rated the currency risk at a BBB. However, political uncertainty and worsening emerging market sentiment could cause volatility in the Slovakian Koruna's exchange rate. Cultural Climate Working age population - Slovakia has a very young working population with 59 percent of its population in the age group of years. By 2025, the share of population in this age bracket is expected to come down to 55 percent. Languages spoken - Slovak is the national language and the mother tongue of 88 percent of the population. English and German (32 percent), Russian (29 percent) and Czech (25 percent) are the other widely known languages. Ninety-seven percent of the Slovakian population can converse in at least one language other than their mother tongue. Education - Slovakia has high a literacy rate of 99.6 percent. The government spends 13.8 percent of its funds on education. Thirty-six percent of the population is enrolled in tertiary education. Quality of Higher education and approx. no of graduates - Slovakia has 25 higher education institutes and universities. Every year, over 29,833 engineering and science students graduate from these institutes, with the total number of students being close to 148,262. Slovakia has 1,984 researchers (per one million inhabitants) and the government expenditure on R&D is 0.5 percent of the GDP. Note: Region includes Hungary, Poland, Slovakia, Romania and Czech Republic Hiring and firing of workers - Hiring of workers is flexible in Slovakia than countries like Romania and Czech Republic. It is also fairly flexible in terms of working hours flexibility. However, the regulations concerning firing of workers are as rigid, as those in Romania and Poland.

22 21 Infrastructure Telephony In 2005, Slovakia had 1.36 million fixed line subscribers and more than 4.5 million mobile phone users. The country has a tele-density of 250 subscribers and 834 users per 1,000 for fixed lines and mobile phone users, respectively, compared to the respective regional average of 298 and 858. Internet backbone The country has approximately 1.9 million internet users and more than million broadband connections. The penetration is of 343 users and 14 connection per 1,000 for internet users and broadband connections, respectively, compared to the respective regional average of 324 and 42. Transport infrastructure In transport connectivity, Slovakia is at par with Hungary, Poland and Czech. It has 37,533 kms of road network which connects to 75.8 percent of the country s area. The railways are not that well developed and reach out only to 7.5 percent of the country with rail density of around 0.07 km/ km2. The regional average (excluding Romania) is around 79 percent and 8.8 percent for roads and railways paving, respectively. The country has two major ports: Bratislava and Komarno. In 2006, the passenger traffic at the country s major airports was around1.93 million passengers. Electricity In 2006, the electricity consumption per head was 4,717 KWh. The electricity prices are at USD per unit, as against the regional average of USD per unit. Operational Costs Salaries Salaries in the IT and ITES sectors in Slovakia are lower than countries like Poland, Czech Republic and Hungary. They are nearly 40 percent lower compared to Poland. In comparison to India, the salary is about 50 percent higher and the difference in salary rises with seniority. Nominal wages in the country are around USD 7.80 per hour and is growing at around 9 percent. Annual working hours in major metropolitan areas are 1,760 hours, in line with regional average 1,783 hours. Rentals The Central Business District (CBD) rentals of around USD 22.6 per sq. meter per month are the lowest in the region. Current IT and ITES scenario In 2005, the Information Technology (IT) industry of Slovakia was around USD 938 million. The fastest developing segment of the market is services, which is estimated at USD 295 million and hardware at USD 482 million. The major growth areas include software, IT and telecommunications service segments. In 2005, the number of personal computers per 1,000 population was at 378. In 2006, the packaged software sales were estimated at USD 329 million.

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25 24 Argentina Basic country information (2006): Size of the country 2,737,000 km 2 Population 39 million Capital Buenos Aires Currency Argentine Peso ARS/USD (2006 avg) 3.06 Main macroeconomic indicators (2006): GDP in PPP: USD billion GGDP per capita in PPP: USD 16,442 Consumer Price Inflation: 10.9 percent Unemployment rate: 10.2 percent FDI stock per capita USD 1523 Political Structure Argentina follows a parliamentary structure. The national legislature consists of a lower house, the Chamber of Deputies, which has 257 members and an upper house, the Senate, which has 72 members. The President is elected by the parliament for a four-year term. Partido Justicialista (PJ, the Peronist Party); Unión Cívica Radical (UCR), Frente del País Solidario (Frepaso) are some of the major political parties. In October 2005, one third of the upper house and half of the lower house were elected and Néstor Kirchner of the Partido Justicialista (PJ, or Peronists) was appointed as the President. The President is the head of the state and commander-in-chief of the armed forces. On the political risk, Argentina scores a B from the Economist Intelligence Unit (EIU) Investment Climate Foreign Direct Investment (FDI) - In 2006, the country was estimated to attract FDI of USD 4.8 billion, which was 4 percent lower than the investment of USD 5 billion in During , Argentina attracted FDI worth USD 18.2 billion. GDP growth - In 2006, the real GDP growth was expected to decline by 0.7 percent; from 9.2 percent to 8.5 percent. In the medium run (till 2011), EIU expects Argentinean economy to growth by 5 percent annually. Country Risk Ratings (Rating/Outlook) Standard and Poor s B+ / Stable Moody s Ba1 Fitch B / Not rated Inflation - Post 2004, inflation has cooled from the high of 25.9 percent in 2002 to 10.9 percent in In medium term. inflation is expected to hover around 9 percent. Direct and Indirect incentives by Government - The government provides incentive for the software industry, which began in 2005 and is expected to last for a total of 10 years. Also for exported software, tax relief of 60 percent is provided on income tax in each tax period. Currency Risks - EIU has rated Argentina s currency risk at BB, based on its accumulated reserves and strong forecast inflows of foreign exchange, which are keeping the Argentinean Peso stable. Cultural Climate Working age population - Argentina has 52 percent of its population in the age group of years. By 2025, the country will have higher number of employable people as both country s population and people belonging in the age group of years (58 percent of the population) are expected to increase. Languages spoken - The official language of Argentina is Spanish and is the mother tongue of the country s population. The other major languages spoken are English, Italian, German and French. Education - Argentina has the highest literacy rates, for both men and women, in the region (97.1 percent). The Argentinean government spends 3.5 percent of its GDP on education. The education level among employed people to have completed tertiary education is 13.7 percent and 42.3 percent have received secondary education. The student enrollment for tertiary education is 63 percent, which is the highest in the region. Quality of Higher education and approx. no of graduates - Every year, over 17,000 technical students graduate from universities in Argentina from over 2 million enrollments. Argentina is ranked 50 th, globally, in the education system. In 2006, the University of Buenos Aires was ranked amongst the top 200 universities in the world. Hiring and firing of workers - Hiring of workers is a relatively tougher task than countries like Chile and Mexico. However, it scores much higher than these countries in terms of working hours flexibility and firing of workers. In Argentina, the unemployment rate has decreased over the years. It dropped to 10.6 percent in 2005 from 19.6 percent in 2001.

26 25 Infrastructure Telephony In the past few years, Argentina s telecommunications market was seen as the fastest growing sector in Latin America. It is the second highest in the region after Chile; in terms of mobile subscribers being over 30 million. In 2006, the country had more than 9 million fixed line subscribers. The tele-density is 235 subscribers and 780 users per 1,000 for fixed lines and mobile phone users, respectively. The mobile telephony is expected to grow from an estimated 57 percent in 2005 to 93 percent by 2011 to 38 million subscribers. Internet backbone In 2005, the country had around 10 million internet users and 0.9 million broadband connections. The penetration was at 259 users and 23 connections per 1,000 for internet users and broadband connections, respectively. The personal computer (PC) ownership is 190 PCs per 1,000 people, which is higher than Chile. Transport infrastructure Argentina has over 35,000 km of rail network, which is the largest in Latin America. It is the only country in the region after Mexico to have over 30 percent of its road network paved. In 2003, the air traffic increased by 30 percent due to the deregulation of the industry, attracting many private airlines. Argentina has eight ports and the one at Buenos Aires is the largest in the region. Electricity The demand for energy has increased steadily in the 1990s, and is in line with economic growth. Supply, on the other hand, is in accordance with the start up and expansion of thermal plants and new hydroelectric power-generating stations. In , the electricity generation increased at an average annual rate of 7 percent to reach 96.9 million MWH in Operational Costs Salaries Salaries prevailing in Argentina s IT and ITES sectors are the lowest in the region and 54 percent cheaper than Mexico. In comparison with India, the salary level is 50 percent higher at project manager and above levels. Rentals The Central Business District (CBD) rentals of around USD 25 per sq. meter per month are amongst the lowest in the region after Chile. Low supply and increasing demand has seen a rise in the rental level, as a result many companies are occupying Grade B space. In 2006, the rental prices were expected to grow by 20 percent. Current IT and ITES scenario The IT services spending is USD 592 million and is growing at the rate of 11.2 percent per annum. The packaged software exports are at USD 386 million and are growing at the rate of 9.2 percent per annum. In September 2004, the National Congress of Argentina ruling passed law No , known as the Software Industry Promotion Act to strengthen and promote the national software industry in the country. As per the law, to qualify for the financial incentives and benefits companies must have at least 50 percent of their activities dedicated to software development and computer services. Also, firms exceeding 80 percent of these activities can earn additional benefits. Argentina has a thriving call center market. Call-centers in Buenos Aires include EDS, TeleTech, and Teleperformance. In 2002, Teleperformance employed 1,200 people to service U.S. and European customers in both English and Spanish. It services Motorola and Microsoft among other big companies. ICICI OneSource has opened a 400-seat facility in Buenos Aires, Argentina. Its South American operation is expected to add Spanish language capabilities to their service offering. It will provide one of its U.S.-based telecom clients with a variety of back office transaction processing functions from this center.

27 26 Brazil Basic country information Size of the country 8,547,403 km 2 Population 184 million Capital Brasilia Currency Brazilian Real BRL/USD (2006 avg) 2.25 Main macroeconomic indicators (2006): GDP in PPP: USD 1,706 billion GDP per capita in PPP: USD 9,130 Consumer Price Inflation: 4.2 percent Unemployment rate: 10 percent FDI stock per capita: USD 1045 Political Structure Brazil follows a parliamentary structure. The National legislature consists of an upper house, the 81-seat Senate with representatives of 26 states, the federal district of Brasilia and Chamber of Deputies, the lower house, which has 513 members. The President is elected by parliament for a four-year term. The presidential, municipal, congressional and state elections are held every four years. The President, Luiz Inácio Lula da Silva, was sworn in for the second term in January Each state has its own judicial system; the country has a system of courts for dealing with disputes between states and matters outside the jurisdiction of state courts. Investment Climate Foreign Direct Investment (FDI) - In 2005, (FDI was worth USD billion. The largest source of FDI was from the U.S., Netherlands and Mexico. Services, retail and food and beverage received the highest inflow of investments. GDP growth - The GDP grew by 2.9 and 3.7 percent, respectively in 2005 and During , it is estimated to grow by 3.6 percent annually. Inflation - Till 2005, inflation was over 6 percent. In 2006, it dropped down to 4.2 percent and in medium term is expected to be around 3.8 percent. Country Risk Ratings (Rating/Outlook) Standard and Poor s BB+ /Positive Moody s A1 Fitch BB / Positive Direct and Indirect incentives by Government - Government offers incentives for acquisition of capital goods, exemption from contribution towards social security and accelerated depreciation for software development and IT service companies on fulfillment of certain conditions. Currency Risks - The Economist Intelligence Unit has rated the currency risk at BBB and has stated that the risk is stable. In the event of global financial market turbulence, there will be volatility in the Brazilian Real. However, overshooting is unlikely due to strong policy framework and high real interest rates. Cultural Climate Working age population - Brazil has 56 percent of its population in the age group of years. By 2025, it is estimated to increase by 2 percent taking population in age group to 58 percent of the total population. Languages spoken - The official language and mother tongue of the population is Portuguese. English, Spanish and French are the other major languages spoken in Brazil. Education - Brazil has the lowest literacy rates in the Latin American region at 86.4 percent. The government allocates 4.1 percent of the GDP for developing the educational system. Education level amongst the employed people is lowest in the Latin American region and only 8.2 percent have completed higher education. Quality of Higher education and approx. no of graduates - Every year, over 420,000 graduates pass out, of which around 25,000 are engineers and around 30,000 science graduates. The University of Sao Paulo is ranked amongst the top 150 universities on the global scale of 500 universities. Hiring and firing of workers - Due to the rigid regulatory system in Brazil, hiring of workers is the most difficult in the region. However, firing of workers much easier than other Latin American countries, as there is little interference from trade unions. The unemployment rate has remained stable over the years and stands at 9 percent, but the labour force keeps rising year-on-year by 1.3 percent.

28 27 Infrastructure Telephony Mobile telephony dominates the landscape with the growing subscriber base over fixed line services. Voice over Internet Protocol (VoIP) is also growing rapidly and is offered by a large number of service providers, including foreign companies. In 2006, the number of mobile subscribers was estimated to surpass the 100-million mark and fixed line will shrunk to 35.4 million users. The penetration per 1,000 people stands at 541 and 190 for mobile and fixed line users, respectively. Internet backbone Brazil is the largest market for internet services in Latin America in terms of number of users. In 2006, it was estimated that internet subscribers would be over 30 million people and the country would have about 5 million broadband connections. The penetration per 1,000 people stands at 160 and 27 for internet and broadband users, respectively. Transport infrastructure Brazil has the largest road network in Latin America, of which 60 percent of freight is transported by road. At present, only 20 percent of the country is connected through roads, of which 72 percent of the roads are in poor state. The rail network, which covers 30,000 kms is in a very poor condition. However, it is getting a facelift from private contractors. Brazil has access to one of the most potential waterways, but has not yet used it to its maximum capacity. Brazil has 46 ports, with Santos being the largest in the country. Electricity Brazil is the largest producers of hydropower across the globe. It is the world's largest producer (and exporter) of ethanol, which is used by new cars in a ethanol gasoline mixture. Brazil is amongst the only two countries in Latin America to have nuclear power plants. Operational Costs Salaries Salaries of IT and ITES professionals in Brazil are second lowest in the region with a CAGR of 5.6 percent. In comparison to India, salaries in Brazil are 50 percent higher for IT and ITES processionals. Rentals The Central Business District (CBD) rentals of around USD 42 per sq. meter per month are the highest in the region. Sao Paulo is the most expensive place to rent in South America. The annual growth in rental rates is 4.2 percent. Current IT and ITES scenario The IT services spending is at USD 5.1 billion and growing at the rate of 13.5 percent per annum. The IT industry in Brazil employs over 300,000 people. There are approximately 5,400 software companies in Brazil. The software industry of Brazil contributes 0.71 percent to the country s GDP. The software exports increased from USD 100 million in 2002 to USD 314 million in But, the internal market is estimated to be around USD 2.1 billion. Majority of the IT companies are located in São Paulo, Campinas and Rio de Janeiro. Londrina IT cluster is also an upcoming destination. HSBC and IBM have set up their technology centers in Brazil. Indian IT giant TCS operates out of the three global delivery centers in Sao Paulo and Brasilia which employs over 700 people. The center has the capability to provide multilingual services in Portuguese, English and Spanish.

29 28 Chile Basic country information Size of the country 756,950 km 2 Population 15 million Capital Santiago Currency Chilean Peso CLP/USD (2006 avg) Main macroeconomic indicators (2006): GDP in PPP: USD 206 billion GDP per capita in PPP: USD 12,540 Consumer Price Inflation: 3.4 percent Unemployment rate: 8 percent FDI stock per capita: USD 5,317 Political Structure Chile follows presidential system, based on the 1980 constitution. Michelle Bachelet of the centre-left Concertación Democrática (Concertación) coalition heads the government. The Congress has a Senate (the upper house) comprising 38 members, elected for a period of eight years and partly renewed every four years; and a Chamber of Deputies (the lower house), with 120 members who are all elected every four years. Concertación Democrática coalition (Concertación), comprises the Partido Demócrata Cristiano (PDC), the Partido Radical Social Demócrata (PRSD), the Partido Socialista (PS) and the Partido por la Democracia (PPD). On the political risk, the Chilean Republic scores an AA from the Economist Intelligence Unit (EIU). Investment Climate Foreign Direct Investment (FDI) - In 2005, the country attracted FDI worth USD 6.7 billion, a dip of 7 percent compared to the previous year. During , the country attracted total investment of USD 20.8 billion. GDP growth - In 2006, the real GDP was estimated to grow by 4.2 percent. In 2005 and 2004, it grew by 6.3 and 6.2 percent, respectively. It is further expected to pick up in 2007, led by healthy exports. Till 2011, the GDP is expected to grow by 5.5 percent annually. Country Risk Ratings (Rating/Outlook) Standard and Poor s AA / Stable Moody s Aaa Fitch A+/ Stable Inflation - In 2006, inflation hovered around 2-4 percent (set by the Central Bank). It is expected to stay around 2.1 percent for Direct and Indirect incentives by Government - The Chilean government offers co-funding for pre-investment studies, feasibility studies, start up expenses, investments in fixed assets and grants for development of human resources to call centers, shared services high-technology and information technology projects on investment of USD 1 million. Currency Risks - EIU has rated Chile s currency risk at A, indicating a stable Peso and sound economic fundamentals. Cultural Climate Working age population - Chile has 54 percent of its population in the working age group of years. In 2025, the percentage of population in this age bracket will remain the same. But due to growth in population, the number of people in this age group is expected to be higher. Languages spoken - Spanish is the national language and mother tongue of majority of the population. Government policies stress on achieving fluency in English, which is seen as the primary language for business. Education - Chile has a literacy rate of 96.2 percent. The government spends 3.7 percent of GDP on education. Primary, secondary and tertiary education levels amongst the employed population are 11.4 percent, 61.8 percent and 13.1 percent, respectively. Quality of Higher education and approx. no of graduates - More than 65,000 graduates pass out every year, of which around 5,000 are engineers and around 6,600 science graduates. These numbers are significantly lesser than other LATAM countries. The average TOEFL score for Chile is 236, indicating a fairly good knowledge of English amongst graduates. The University of Chile figures in the American top 200 universities and top Global 500. Hiring and firing of workers - Hiring of workers is relatively easier than the other Latin American countries. However, firing of workers is a relatively tougher task as compared to Brazil, but more flexible than Mexico. Chile is very attractive in terms of flexible working hours, extension of workday to 12 hours and night working regulations.

30 29 Infrastructure Telephony The telecommunication costs are higher in Chile in comparison to the LATAM average. In terms of connectivity, it is above the LATAM average with estimated 3.4 million fixed lines and 12.1 million mobile subscribers in 2006.; resulting in penetration of 209 fixed telephone lines and 737 mobile phone subscribers per 1,000 of the population. Internet backbone Internet connectivity is the best in the region. Chile ranks 34th in the EIU e-readiness survey conducted among 68 countries. In 2006 the country had more than 5.6 million internet users and over 1 million broadband connections. The PC penetration is 160 PCs per 1,000 of population. Transport infrastructure Chile has good transport infrastructure built through privatization of construction and maintenance of commercially viable roads. Motorway network between La Serena and Puerto Montt areas, where over 90 percent of Chileans reside, has been well developed. It aims to increase the network of paved roads to 25,000 km by In 1999, operations of four larger ports were privatized, resulting in efficiency and reduction in port tariff rates by 30 percent. Electricity The country has a sophisticated power system with 40 percent hydro-electric and 60 percent thermoelectric. Electricity tariffs have risen since 2001 forcing companies to invest in new capacities. LNG is considered as an alternative energy source. A LNG port terminal near Santiago will become operational by Operational Costs Salaries Chile has the highest salaries prevailing in the IT and ITES sectors among LATAM countries, but lesser than Mexico. In comparison to India, the salary level are almost double and the difference in salary rises with seniority. However, the expected salary rise will be at 4.7 percent annually, marginally lower than other LATAM countries. Rentals The Central Business District (CBD) in Santiago offers office premises at rentals of around USD 18.4 per sq. meter per month, among the lowest in the region. Good amount of quality office space is being added, thus resulting in lower rates. Current IT and ITES scenario Chile s information technology (IT) industry is considered as the most advanced sector in LATAM. The IT services spending in 2006 was worth 631 million, growing at CAGR of 12.4 percent. The packaged software market was worth USD 234 million at CAGR of 8.9 percent. Chile is viewed as a potential hub to cater to the Latin American markets and also acts as a near shoring destination for the U.S. As per the PTA signed with India in 2004, the country offers exclusive concessions for IT and ITES investments from India. Indian IT companies like i-flex and TCS have set up their base in Chile. ITES companies like Evalueserve are betting big on Chile s ITES attractiveness. Many companies are building a strong customer base in Chile in the areas of consulting, information technology and telecom services, healthcare, e-governance, e-education and e-commerce.

31 30 Mexico Basic country information Size of the country 1,964,375 km 2 Population million Capital Mexico City Currency Mexican Peso MXN/USD (2006 avg) Main macroeconomic indicators (2006): GDP in PPP: USD 1162 billion GDP per capita in PPP: USD 10,820 Consumer Price Inflation: 3.6 percent Unemployment rate: 3.6 percent FDI stock per capita: USD 2,127 Political Structure Mexico follows a presidential democracy with a constitutionally strong Congress system. Felipe Calderón of the centre-right Partido Acción Nacional (PAN), heads the minority government. The Congress has 128-member Senate, elected for a six-year term; 64 seats are elected on first-past-the-post basis, 32 using the first minority principle and 32 by proportional representation; 500-member Chamber of Deputies, elected for a three-year term. Some of the major political organizations are Partido de la Revolución Democrática (PRD), Partido Revolucionario Institucional (PRI), Partido Verde Ecologista de México (PVEM), Convergencia, Partido del Trabajo (PT), Partido Nueva Alianza (Panal), Alternativa. On the political risk Mexico scores a BB from the Economist Intelligence Unit (EIU), indicating not so stable political environment. Investment Climate Foreign Direct Investment (FDI) - Mexico is second to Brazil in terms of foreign direct investment (FDI) inflows in Latin America. In 2005, FDI was around USD 19 billion and the manufacturing sector received the highest investment. During , the country attracted FDI worth USD 75.8 billion. GDP growth - In 2006, the real GDP grew by 4.8 percent. Between , it is expected to grow by 3.5 percent annually. Country Risk Ratings (Rating/Outlook) Standard and Poor s A / Stable Moody s Aaa Inflation - In 2006, inflation was at 3.6 percent. To control inflation in the 2-4 percent bracket is a priority for the Central Bank. Direct and Indirect incentives by Government - Accelerated depreciation is available on investment in new fixed assets. Further, tax incentives are available on technological research and development. Maquila companies (export-oriented companies) are entitled to zero duty on imports and zero rated VAT. Fitch BBB+/ Positive Currency Risks - EIU has rated Mexico s currency risk at BBB. Strong reserve backing will contain the risk of any major adjustments. Cultural Climate Working age population - Mexico has 51 percent of population in the working age group of years. It is moving towards a younger population, as the age bracket is expected to constitute 55 percent of Mexico s population by Languages spoken - The national language, Spanish, is spoken by 99 percent of the country s population. Over 60 other languages are also spoken in Mexico. The major ones being Náhuatl (1.2 million speakers), Maya (714,000), Mixtec (387,000) and Zapotec (403,000). Education - Mexico has an adult literacy rate of 92.2 percent among both male and female. The government spends 5.8 percent of the GDP on education. Of this around 70 percent is spent on primary and secondary education. Amongst the employed population, primary, secondary and tertiary education levels are 53 percent, 31 percent and 16 percent, respectively. Quality of Higher education and approx. no of graduates - Of the total graduates passing out every year, 17 percent are engineering graduates totaling to 58,000; and 11 percent are science graduates, with a total no of 37,000. These numbers are highest among the LATAM countries. The University Nacl Autonoma, Mexico is among the top 200 globally and figures in American top 100 universities. Hiring and firing of workers - Hiring of workers is easier than the other Latin countries. Mexico has very strict policies regarding firing of workers due to strong trade unionism. Mexico is attractive in terms of flexible working hours, extension of workday to 12 hours and night working regulations.

32 31 Infrastructure Telephony The telecommunication cost in Mexico is 0.04 USD/min, lowest in the LATAM region. It has a strongly developed telecom market with good penetration. In 2005, the country had 181 fixed telephone lines and 439 mobile phone subscribers per 1,000 of population. Mexico has over 19.2 million fixed lines and 46.6 million mobile subscribers. The telecom sector is liberalized and is expected to touch 740 mobile subscribers per 1,000 population by Internet backbone In 2005, it was estimated that there would be more than 18 million internet users and 1.7 million broadband connections, resulting in penetration of 170 and 16 internet users and broadband subscribers, respectively, per 1,000 people. Transport infrastructure In 2004, Mexico s road network was extended to 352,072 kms. The share of roads render in good or acceptable condition rose from 60 percent in 2000 to 72 percent in Over 50 percent of the country s cargo is transported by road. The remaining 35 percent of cargo is handled by 108 ports. The railways are privatized and play a minor role in the country s transport infrastructure. Electricity The demand for power is expected to grow by 5.6 percent till 2012 and is expected to put pressure on the energy infrastructure. The sector needs new investments of USD 54 billion, which is possible through privatization. Mexico is the world s fifth-largest oil producer, with an average output of 3.3 mbd. Operational Costs Salaries Mexico has the highest salaries across entry, middle and senior level in IT and ITES sectors amongst LATAM countries. In comparison to India, the salary level are almost 2.5 times higher. Salaries are expected to rise by 5 percent annually. Rentals The Central Business District (CBD) in Monterrey are at USD 25.6 per sq. meter per month, while in Mexico City the rentals are around USD Mexico rentals are at percent lower than CBD rental in Brazil. In the past two years, the rentals are showing a falling trend. Current IT and ITES scenario In 2006, IT services spending was around USD 2.5 billion, growing at CAGR of 8 percent. The packaged software sales were around USD 1.5 billion in the same year, growing at CAGR of 7.4 percent. Mexico has the lowest operational costs in North America and is an attractive near shoring market for the U.S. companies. There are 1,500 IT services companies, which handle 90 percent of the internal market. PROSOFT, the government s software development programme, has set an ambitious target of USD 5 billion for software products sale by PROSOFT aims to position the country as a global centre for software manufacturing and to promote greater economic competitiveness.

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35 34 China Basic country information Size of the country 9,561,000 km 2 Population 1,3 billion Capital Beijing Currency Renminbi Yuan/USD (2006 avg) 7.95 Main macroeconomic indicators (2006): GDP in PPP: USD 9,901 billion GDP per capita in PPP: USD 7,530 Consumer Price Inflation: 1.7 percent Unemployment rate: 9.8 percent FDI stock per capita USD Political Structure The country falls under the Constitution of the People's Republic of China (PRC). It is mainly run by the Communist Party of China (CPC), but other political parties in PRC, known as "democratic parties", participate in the People's Political Consultative Conference and the National People's Congress. Hu Jintao is the General Secretary of the CPC, the state President and the Chairman of the Central Military Commission, which controls the armed forces. Wen Jiabao leads the government as the Premier. Investment Climate Foreign Direct Investment (FDI) - In 2005, FDI was USD 79.1 billion. It was estimated that FDI for 2006 would be around USD 81.1 billion. During , PRC attracted FDI worth USD billion. GDP growth - China s GDP has been growing at a healthy rate, post 2003 it has crossed the 10-percent mark. In 2006, it grew by In the medium run ( ), it is projected to grow more than 8 percent. Inflation - In , inflation remained stable at 2 percent and the Economist Intelligence Unit (EIU) expects it to rise to 2.8 in medium term. Country Risk Ratings (Rating/Outlook) Standard and Poor s A / Stable Moody s A2 Fitch A+ / Positive Direct and Indirect incentives by Government - Software companies setting up their businesses here or located in economic and development zones, receive preferential income tax, customs duty and import VAT exemptions on fulfilling certain requirements. Currency Risks - EIU has rated the currency risk at BBB as a sudden revaluation of the Renminbi remains unlikely; despite the recent increase in the exchange rate volatility. However, China's high current account and capital account surpluses suggest that the Renminbi's appreciation will be faster in than in Cultural Climate Working age population - China has 58.2 percent of its population in the age group of years. By 2025, the share of population in this age bracket is expected to move down to 55.6 percent. Languages spoken - The official languages spoken in China are standard Mandarin and Cantonese. Mandarin is spoken by about 800 million people, followed by Wu (about 90 million) and Cantonese (about 80 million). It is still a challenge to find English speaking workers. Education - China has a high literacy rate of 91 percent. The government spends 2.1 percent of the GDP on education. Primary, secondary and tertiary education levels are 34 percent, 6 percent and 21 percent, respectively. Quality of Higher education and approx. no of graduates - The number of students enrollment for higher education has risen more than five folds in , from 2.9 to 15.6 million (including 5.5 million studying engineering alone). However, questions have emerged about the quality and employability, due to poor knowledge of English and the education system, which is essentially theory-based. Hiring and firing of workers - The hiring conditions are easier in China compared to other nations in the Asia Pacific region. However, the labour laws are more rigid in China when it comes to firing of workers. In addition to this, the cost of firing an employee is higher than other nations in the Asia Pacific region.

36 35 Infrastructure Telephony PRC continues to develop its telecommunications infrastructure and is partnering with foreign providers to expand its global reach. Mobile cellular subscribers has increased rapidly in the last few years. In 2005, the country had more than 350 million fixed line subscribers and over 393 million mobile subscribers, resulting in penetration of 268 and 301users, respectively, per 1,000 people. Internet backbone In 2005, the country had over 111 million internet users and over 37.5 million broadband connections, resulting in penetration of 85 and 29 users, respectively, per 1,000 people. Transport infrastructure China is connected internally with a fairly strong transportation network. The country is connected internally by 1,870,661 kms of roadways, 74,408 kms of rail transport, 123,964 kms of water transport. Electricity Prior to 2005, many Chinese cities suffered from acute power shortages. The government aims to add fresh capacities to meet the growing demand of power in China. In 2006, it was estimated that China would add 81 GW of new capacity, with a further 30 GW in Over the next five years, the government plans to invest USD 75 billion in capacity addition. Operational Costs Salaries The average IT salaries in China are around USD 10,000 per annum and the average BPO salary is around USD 7,634 per annum. The salaries are close to the Indian average salary of USD 9,867 and USD 7,779 per annum in IT and BPO sector, respectively. A relatively small supply of IT professionals with English language proficiency allows these employees to command higher salaries. The rapid growth in China s IT industry has pushed the salary levels above other industries in PRC. Rentals The average corporate rental varies anywhere between USD per sq. meter per month. Rents have increased, particularly in Shanghai, where the vacancy rate is very low for Grade A space. Strong demand for quality office space in cities like Beijing and Shanghai is driven by sectors like banking and finance, professional services and technology. Current IT and ITES scenario In 2006, Chinese IT services market reached a size of USD 7.7 billion, with a growth rate of 17.8 percent over the previous year. Japan, which has a decade long outsourcing relationship with China, still accounts for the majority of China's contracts. In addition to this, orders from Europe and the U.S. have increased and now accounts for about 23 percent of the market. The high-tech industry comprises the lion's share of China's software outsourcing market, followed by consumer electronics, telecom and finance industries. In terms of specific sectors, the IT consulting market is benefited from various IT consulting projects of the telecommunication industry. The Beijing 2008 Olympics project has further helped the system integration market to garner a high-speed growth.

37 36 Malaysia Basic country information Size of the country 330,113 km 2 Population 26.1 million Capital Kuala Lumpur Currency Malaysian Ringgit MYR/USD (2006 avg) 3.65 Main macroeconomic indicators (2006): GDP in PPP: USD billion GDP per capita in PPP: USD 11,340 Consumer Price Inflation: 3.6 percent Unemployment rate: 3.7 percent FDI stock per capita: USD 2839 Political Structure The federation of Malaysia follows the constitutional monarchy, which is also termed as Bicameral federal parliament. The Senate (Dewan Negara, the upper house) has 69 members of which 26 are elected from the state legislatures and 43 are appointed by the King. The House of Representatives (Dewan Rakyat, the lower house) has 219 directly elected members. The Senate serves a six-year term of office and the House of Representatives a five-year term. There are state governments in each of the 13 states. The hereditary ruler heads nine of these 13 states. Each state has its own constitution, a council of state or cabinet with executive authority, and a legislature that deals with matters, which are not reserved for the federal Parliament. Malaysia also has three federal territories: Kuala Lumpur, Labuan and Putrajaya. Investment Climate Foreign Direct Investment (FDI) - In 2005, the FDI decreased by USD 600 million year-on-year to USD 4 billion. The top sources of foreign investment in 2005 were the U.S., Japan, Singapore, Netherlands and South Korea. Over two-thirds of the total amount of foreign investment, was in the electronics sector. During , Malaysia attracted FDI worth USD 14.3 billion. GDP growth - During , the GDP grew at an average of 5.5 percent. During , the GDP is projected to maintain a growth rate of around 5.6 percent. Country Risk Ratings (Rating/Outlook) Standard and Poor s A+/ Stable Inflation - Inflation doubled from an average of 1.5 percent in to approximately 3.3 percent in As per the Economist Intelligence estimates in near-to-medium term, it will hover around 2.5 percent. Moody s Fitch Aa2 A+/ Stable Direct and Indirect incentives by Government - The government offers incentive and grants to companies on fulfillment of pre-requisite conditions related to the scale of operations, industry linkages and promotion of bumiputra participation. Currency Risks - EIU has currently rated the Ringgit at BBB. EIU expects the Malaysian Ringgit to remain underpinned, on account of healthy inflows of foreign direct investment and a strong current account surplus. Cultural Climate Working age population - Malaysia has 50 percent of its population in the age group of years (approximately 11 million). By 2025, due to the growing trend in the population, the share of population in this age bracket is expected to move up to 60 percent. Languages spoken - Bahasa Melayu (official) is the official language of Malaysia. It is expected that the country will have young, expanding and racially diverse, well educated workforce with good English language skills in the near future. Education - Malaysia has a literacy rate of 88 percent. Malaysia s five-year development plans has placed education on a high priority list with about 15 percent of total public development expenditure allocated for this purpose. Quality of Higher education and approx. no of graduates - The Malaysian government spends about 8 percent of its GDP and 28 percent of the Government expenditure on education. There are 18 public and 15 private universities and colleges and polytechnics and industrial training institutes that offer certificate, diploma, degree and post-graduate degree qualifications. Hiring and firing of workers - In comparison with other countries in the Asia Pacific region, hiring and firing of workers is the easiest in Malaysia.

38 37 Infrastructure Telephony In 2005, the country had over 4.3 million internet users and over 19.5 million broadband connections, resulting in penetration of 166 and 747 users, respectively, per 1,000 people. Internet backbone In 2005, the country had over 11 million internet users and over 0.6 million broadband connections, resulting in penetration of 422 and 24 users, respectively, per 1,000 people. Transport infrastructure Malaysia's drive to develop and upgrade its infrastructure has resulted in it being one of the most developed infrastructure amongst the new industrialized countries in Asia. The country has 98,721 kms of road network, which connects to all other major cities and a total of around 1,890 kms of rail transport. Malaysia has five international airports. The biggest airport, the KLIA, has a capacity of 25 million passengers and 650,000 tonnes of cargo per year. Electricity Malaysia produces an approximate billion kwh, with an average consumption of around billion kwh. It also exports around 50 million KWH of power. Operational Costs Salaries The average IT salaries in Malaysia is around USD 22,000 per annum while the average BPO salaries is USD 17,000 per annum. The salaries are lower than Singapore, but higher than that of India and Philippines. One of the reason for the high wage rate is the small population of the country, which makes it difficult to hire skilled workers. Rentals In 2005, the average rent hovered around USD 24 per sq. meter per month. The demand for quality buildings in the Central Business District (CBD) and suburban areas combined with low level of new developments has pushed the rentals upwards. Current IT and ITES scenario In 2006, the IT service segment garnered a revenue of approximately USD 1 billion, registering a 14 percent growth over the revenue of USD 896 million in The USD 1 billion revenue consists of a 40 percent contribution from consulting and systems integration (SI) services, 29 percent from outsourcing services and the remaining 31 percent from support and training services.

39 38 Philippines Basic country information Size of the country 300,179 km 2 Population 87.9 million Capital Manila Currency Philippine Peso PHP/USD (2006 avg) Main macroeconomic indicators (2006): GDP in PPP: USD billion GDP per capita in PPP: USD 4,937 Consumer Price Inflation: 6.3 percent Unemployment rate: 7.9 percent FDI stock per capita : USD Political Structure The political system in the Philippines follows an organized framework of a presidential, representative, and democratic republic whereby, the president is both, the head of state and the head of government within a pluriform multi-party system. He is also the commander-in-chief of the armed forces. The executive power is exercised by the government under the leadership of the President. The Legislative power is vested in, both, the government and the two-chamber congres,the Senate (the upper chamber) and the House of Representatives (the lower chamber). At present, Gloria Macapagal-Arroyo is the president of the Philippines with Noli de Castro as the Vice-President. Investment Climate Foreign Direct Investment (FDI) - In 2006, the FDI was estimated around USD 2.3 billion, a 100 percent growth over investment of USD 1.1 billion in During , the country has attracted FDI of USD 3.8 billion. GDP growth - In 2006, the country s GDP grew by 5.4 percent, up by 0.4 percent from the previous year. In medium term ( ), the country s GDP growth rate will be around percent. Country Risk Ratings (Rating/Outlook) Standard and Poor s BB+ / Stable Moody s A1 Fitch BB+ / Stable Inflation - Post 2003, Philippines s economy is experiencing inflation over 6 percent. In 2006, it was 6.3 percent. EIU expects inflation to come down to 3.5 percent in 2007 and remain at the same level in medium term. Direct and Indirect incentives by Government - The government grants tax incentives to foreign investors, mainly for export oriented businesses and for activities that qualify under the government s annual Investments Priorities Plan. Currency Risks - EIU has rated the currency risk at BB with a stable outlook. EIU forecasts appreciation in the currency on account of improving fiscal position of the Philippines. Cultural Climate Working age population - The Philippines has 56 percent of its population in the age group of years. By 2025, due to growing population, the share of population in this age bracket is expected to marginally rise to 58 percent. Languages spoken - Filipino and English are the official languages. The other major dialects are Tagalog, Ilocano, Cebuano, Hiligaynon or Ilonggo, Bicol, Waray, Pampango, and Pangasinan. Education - The Philippines has a literacy rate of 92.6 percent among both male and female. The government spends 3.2 percent of GDP on education. Primary, secondary and tertiary education levels are 59 percent, 27 percent and 14 percent, respectively. Quality of Higher education and approx. no of graduates - In 2005, of the total students graduating, 10 percent were technical graduates comprising engineers and science majors. The Philippines has over 1,600 higher education institutions with enrollment of over 2.3 million students. The government allocated USD 285 million in academic year for State Universities and Colleges. Hiring and firing of workers - Hiring is not easy in the Philippines, due to rigid regulations. There are many restrictions on contracting and expanding the number of working hours as well. It is relatively easier to dismiss a worker as compared to Vietnam and China.

40 39 Infrastructure Telephony The deregulation of the telecommunications sector in 1993 has improved the telecom infrastructure in the Philippines. Mobile communication is expanding at a rapid pace. In 2005, the country had more than 3.4 million fixed line subscribers and over 34.4 million mobile subscribers; resulting in penetration of 38 and 391users, respectively, per 1,000 people. Internet backbone In 2005, the country had over 4 million internet users and over 0.2 million broadband connections; resulting in penetration of 47 and 3 users, respectively, per 1,000 people. Transport infrastructure The Philippines has inadequate transport infrastructure, due to underinvestment. The system is essentially bimodal, with roads carrying 60 percent of freight and 80 percent of passenger traffic and balance by water transport. The air transport is oriented towards carrying passengers on journeys between islands. The rail network is minimal. The total road network is 200,000 kms. and only 10 percent of the road network is paved. There are seven major ports, namely Cagayan de Oro, Cebu, Davao, Iligan, Iloilo, Manila, Surigao and over 50 airports. Electricity The Philippines uses natural gas as the main source of power generation. The government plans to make 60 percent of the Philippines energy independent by They are the world s second largest producer of geothermal power after the U.S. The country is also promoting the use of solar power and other renewable sources of energy to produce electricity for remote communities far from the main electricity grid. Operational Costs Salaries Despite a relatively high unemployment rate of about 8 percent, the ITO and BPO firms in the Philippines find it difficult to recruit English speaking employees. An entry level call center employee earns an average of USD 5,457 (yearly), while an employee with higher expertise level such as a team lead earns an average of USD 9,153 (yearly), which is 80 percent lower than the U.S. salary level. But, salary levels in the Philippines are still competitive with other Asia Pacific countries, though slightly higher than China and India. Rentals The office space rent in the Central Business District (CBD) of Makati is around USD 18.5 per sq meter per month. The vacancy rate has been reduced considerably in the last 12 months, particularly for quality office stock. In addition to this, the level of new developments was low and there were no major projects due for completion in Current IT and ITES scenario The IT industry has grown fast in last few years, contributing significantly to the Philippines exports. The BPO boom in the Philippines is currently led by the demand for offshore call centers. In 2006, the Philippines earned USD 2.1 billion in offshore services. It was estimated that over 200,000 people would be employed in 120 BPOs (mostly in contact centers). The overall Philippine BPO industry is projected to earn USD 11 billion and employ over 900,000 people by The recent growth spurt in the outsourcing industry in the Philippines has been fuelled by higher-end outsourcing, such as legal services, web design, medical transcription, software development, animation and shared services. Majority of the BPO facilities are located in Manila, although other regional areas such as Baguio City, Bacolod City, Cagayan de Oro, Cebu City, Clark (Angeles City), Dagupan City, Davao City, Dumaguete City, Lipa City and Iloilo City are now being promoted and developed for offshore operations. To achieve and sustain rapid growth, the Philippine government has offered significant fiscal and non-fiscal incentives. As part of the 2006 Investment Priorities Plan, it aims to attract foreign direct investment in the information technology industry.

41 40 Vietnam Basic country information Size of the country 330,363 km 2 Population 82 million Capital Hanoi Currency Vietnamese Dong VND/USD (2006 avg) Main macroeconomic indicators (2006): GDP in PPP: USD billion GDP per capita in PPP: USD 3,310 Consumer Price Inflation: 7.4 percent Unemployment rate: 2.1 percent FDI stock per capita: USD Political Structure Vietnam is one of the few communist countries to follow the traditional Leninist lines. There exists a unicameral legislature, which has a 498-member Quoc Hoi (National Assembly), meeting biannually. The presidential election takes place once every five years. The Assembly appoints the President and the Cabinet. The president is Nguyen Minh Triet. The main political parties in Vietnam are: The Communist Party of Vietnam and the Vietnam Fatherland Front Investment Climate Foreign Direct Investment (FDI) - In 2005, Vietnam attracted FDI worth USD 1.95 billion; 20 percent over the investment of USD 1.61 billion in During , the country attracted total FDI of around USD 6.4 billion. GDP growth - In 2005, the GDP grew by 8.4 percent and was expected to grow by 8.2 percent in During , the economy is expected to grow at a fairly rapid pace, averaging around 7.9 percent a year in real terms. Inflation - In 2006, the average rate of inflation was estimated to be around 7.4 percent. This was largely driven by rising food and fuel prices. Inflation is expected to drop to 6.7 percent in 2007 and 5.7 percent in Country Risk Ratings (Rating/Outlook) Direct and Indirect incentives by Government - The Vietnamese government does not provide any subsidies. It, however, provides some incentives in terms of waivers on land-lease payments. Standard and Poor s Moody s Fitch BB+/ Stable Ba1 BB / Stable Currency Risks - The State Bank of Vietnam (the Central Bank) is steadily introducing greater flexibility into its management of the exchange rate. The Economist Intelligence Unit (EIU) has rated the currency risk at BB. Cultural Climate Working age population - Vietnam has 54 percent of its population in the age group of years, approximately 40 million people. By 2025, the share of population in this age bracket is expected to move up to 58 percent. Languages spoken - Vietnamese is spoken by about 90 percent of the population and is the official language of the country. English is the second most popular language in Vietnam. Some minority languages spoken in the rural areas are Hmong, Thai and Khmer. The other popularly spoken languages are French and Russian. Education - In 2004, adult literacy rate was at 90 percent and the youth literacy rate (15-24 yrs) was around 94 percent. The share of government s current spending allocated to education and training has been rising steadily. It has increased from just under 5 percent in 1989 to over 16 percent in 1999 and 23 percent in Quality of Higher education and approx. no of graduates - In 2003, the total number of students enrolled for higher or tertiary education was around 797,086. In 2003, 125,611 students graduated, of which 15 percent were engineering graduates. Only 18.5 percent of the adult (15 or above) population has completed (upper) secondary school or higher education. And, four-fifths of the labor force is considered to be unskilled. Skilled workers are disproportionately concentrated in and around the capital, Hanoi (the Red River Delta region) and Ho Chi Minh City (in the South East). Hiring and firing of workers - Vietnam offers the most flexibility for hiring people with respect to term contracts, which can be used for any task, duration and minimum wages. There seems to be rigid regulations on dismissals, re-employment and replacement and a lot of interference from trade unions make it difficult to fire people.

42 41 Infrastructure Telephony In 2005, the country had around 5.6 million land line users and around 8.4 million mobile phone users, leading to penetration of 68 and 100 users for landline and mobile, respectively, per 1,000 people. Internet backbone In 2005, the country had around 6.5 million internet users and 0.2 million broadband subscribers, resulting in penetration of 78 and three subscribers for internet and broadband, respectively, per 1,000 people. Transport infrastructure The country has 329,560 kms of road network, which connects to all the major cities. In the aviation industry, the state-owned company has the maximum market share of around 80 percent. Electricity The state-owned Electricity of Vietnam retains its monopoly only over power transmission and construction of plants of more than 100 MW. In March 2006, Electricity of Vietnam (EVN) was forced to backtrack on an announced 14.1 percent increase in electricity rates. The inter-ministerial task-force reduced the increment to 8.8 percent, despite protests from EVN authorities regarding the amount being insufficient to cover the rising costs. Operational Costs Salaries Salaries of information technology professionals in Vietnam are lowest in the Asia Pacific region. It is around 40 percent lower than China and India and about 86 percent lower than Singapore. An expected shortage of qualified software engineers indicates a hike in the average salaries in the future. Rentals The rental rates are at USD 23.5 per sq. meter per month in Ho-Chi-Minh City (HCMC). The vacancy rates in HCMC are at 2 per cent, but are expected to remain constant in the future. However, the rental rates are slated to increase over the next few years. Current IT and ITES scenario In 2006, Vietnam's software and IT exports were estimated at USD 70 million. Vietnam has eight operational software parks, of which three are in HCMC and the rest are in Hanoi, Haiphong, Can Tho, Danang and Hue.

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45 44 Canada Basic country information Size of the country 9,093,507 km 2 Population 32.6 million Capital Ottawa Currency Canadian Dollar CAD/USD (2006 avg) Main macroeconomic indicators (2006): GDP in PPP: USD 1,118 billion GDP per capita in PPP: USD 34,279 Consumer Price Inflation: 2.0 percent Unemployment rate: 6.3 percent FDI stock per capita: USD 10,601 Political Structure Canada follows a constitutional monarchy. The national legislature has a bicameral federal parliament comprising House of Commons with 308 members elected from individual constituencies and Senate with 105 members appointed by the Prime Minister. The Prime Minister is elected by the Parliament for a period of five years. Some of the major political parties are: Conservative Party, Liberal Party, Bloc Québécois and New Democratic Party. The Cabinet is headed by the Prime Minister and is usually appointed from the House of Commons. The Conservatives, led by Stephen Harper, ended nearly 13 years of Liberal government by winning the general election in On political risk, Canada scores an AAA from the Economist Intelligence Unit (EIU) Investment Climate Foreign Direct Investment (FDI) - In 2005, Canada attracted FDI worth USD 34 billion; rise from USD 1.5 billion and USD 7.6 billion investment in 2004 and 2003, respectively. GDP growth - In 2005, the country s GDP grew by 2.9 percent and for 2006 it was projected to grow by 2.7 percent. It is estimated that Canada s annual GDP would grow at an average of 2.8 percent per year in Inflation - During , inflation hovered around 2 percent. In medium term ( ), the inflation is projected to remain at this level. Country Risk Ratings (Rating/Outlook) Standard and Poor s AAA/ Stable Moody s Aaa Fitch AAA/ Stable Direct and Indirect incentives by Government - The government provides incentive in terms of faster depreciation and direct subsidies on fulfillment of stipulated requirement related to investment and location. Currency Risks - EIU has rated the currency risk at AA with the stable outlook. However, if the commodity prices fall substantially there would be a risk of sharper currency depreciation. Cultural Climate Working age population - Fifty-two percent of Canada s population is in the age group of years. However, due to growing population, the share of population in this age bracket is expected to move up to 59 percent by Languages spoken - English is the national language and mother tongue of 85.2 percent of the country s population. French, the other widely known language, is spoken by around 31 percent of the population. Education - Canada has an adult literacy rate of 99 percent among both male and female. The government spends 5.2 percent of the GDP on education. As per PISA survey, Canada, Cuba, Korea and Finland have achieved high quality education standards. English and French are the dominant foreign languages taught in school. Quality of Higher education and approx. no of graduates - The University of Toronto is ranked amongst the top 25 universities in the world, by The Institute of Higher Education. In 2004, over 800,000 students were enrolled in Canadian universities for higher education. Around 30,000 students completed their masters programme and over 4,000 students have doctoral degrees. The expenditure on R&D in higher education institutions increased from USD 8.1 billion in 2004 to USD 9 billion in 2005, an increase of 10.5 percent. Hiring and firing of workers - In Canada, hiring of workers is easier than most Organisation for Economic Co-operation and Development (OECD) countries. There are no restrictions on expanding or reducing the number of working hours. In addition to this, there is no difficulty or any expense incurred on dismissing a worker.

46 45 Infrastructure Telephony In communication connectivity, Canada scores highest in the region. In 2005, the country had over million fixed line subscribers and over 16.2 million mobile phone users; resulting in the penetration of 566 and 503 users, respectively, per 1,000 people. Internet backbone In internet connectivity, it scores highest in the region. In 2005 the country had over 24 million internet users and over 8 million broadband connections, resulting in the penetration of 744 and 250 users, respectively, per 1,000 people. Transport infrastructure Canada's railway system is the third largest amongst OECD countries after the U.S. and Australia. The deregulation of transport has increased competition between rail and road for the movement of manufactured goods, although rail remains the primary means of shipping agricultural and natural-resource commodities. In 2005, total air passenger traffic at Canadian airports reached 93.9 million, up by seven percent from Toronto's airport is the busiest and accounts for almost one-third of all traffic, followed by Vancouver and Calgary. Electricity Canada is a major producer of electricity with an installed capacity of about 115 GW. About 60 percent of Canada s electricity output comes from hydroelectric facilities. Canada and the U.S. have closely linked electricity grids. In June 2003, part of Canada and U.S. faced a massive power failure. This made the Canadian government unveil a 20 year plan to improve electricity facilities in the country. The new plan includes refurbishing of nuclear plants and increasing its renewable energy capacity to 15,700 MW by Operational Costs Salaries Salaries prevailing in IT and ITES sectors are around USD 38,000 per annum. The nominal wage prevailing in the country is around USD 17.8 per hour and has been growing at 2-4 percent annually. The average salary at the project manager level is around 45 percent, lower than that in the U.S. An expected shortage of IT graduates may move the salaries upward in the near future. Rentals The average rentals in Canada is around USD 22.4 per sq. meter per month. Due to limited fresh supply and healthy demand, rents are expected to rise in the short term. It is expected that rentals will rise at an average of around 5.4 percent per annum. Current IT and ITES scenario In 2005, IT outsourcing market was at USD 28.6 billion with 253,600 software workers. Seventy-three percent of Canadian software revenues come from foreign sources. Canadian firms invest over USD 728 million on annual R&D. Canada is home to companies like CGI Group, a Canadian product company, which has more than 11,000 people around the globe. Cognos, the world s second largest business intelligence firm, has 50 offices worldwide. Hummingbird, one of the largest document and content management solutions, serves more than 90 percent of the Fortune 500 companies and over 5 million users.

47 IT / ITES Industry Destinations Current Priorities Aspiring Countries Longer-Term Prospects Current: Already established Aspiring: Currently aspiring Source: Gartner & KPMG Research Long-term: Likely to emerge over next 3-4 years

48 Global footprint of IT / ITES Companies Central & Eastern Europe Latin America Asia Pacific North America Companies Czech Republic Hungary Poland Romania Slovakia Argentina Brazil Chile Mexico China Malaysia Philippines Vietnam Canada Accenture ACS Atos Origin Capgemini CSC EDS HP IBM Logica CMG Microsoft Oracle SAP Sun Microsystems Cognizant Genpact HCL Infosys Patni Satyam TCS Wipro Sources: Company web sites, Software and IT Services (Europe), February Lehmann Brothers, and CZECHINVEST. Indian IT / ITeS Companies Foriegn IT / ITeS Companies

49 Conclusion The strategies and experiences of the foreign and Indian IT/ITES companies reviewed in the note have each been unique in these regions: CEE, LatAm and AsPac. We have reviewed five countries in CEE (CEE5) and four each in the other regions (LatAm4 and AsPac4). The footprint of IT / ITeS companies in these regions shows some interesting trends. Most foreign companies have a significant presence in all of these three regions. On an average, they are present in more than three countries in each of CEE5, LatAm4 and AsPac4. Indian companies have a varying and thin presence. While, they are present in less than one of CEE5 and LatAm4, they have centers in more than one of AsPac4 (mainly in China). Almost all IT / ITES companies have a presence in Canada. This skew in the footprint of Indian companies shows a fixation on the U.S. market (on-site), Canada for near-shore and AsPac as a low cost destination. Interestingly, the primary focus for Indian companies tends to remain on their local presence in India (off-shore). The largest presence in terms of number of employees outside India continues to be in AsPac, and again mainly China, as it emerges as a low-cost destination for IT/ITES services. The presence in LatAm and CEE is also not very significant, with the average employee strength being in the vicinity of 250. This, when compared with the strong and balanced presence of foreign companies in these three regions, indicates that the steps taken by Indian companies towards globalization of operations are still unsure and tentative. For robust expansion, Indian companies need to pursue a more aggressive strategy. Only then, would these companies be able to exploit the emerging opportunities in destinations such as Russia, Vietnam, Slovakia, Sri Lanka, South Africa, Ghana, Uruguay, Tunisia, Serbia, Egypt and Morocco (for France). There also exist niche opportunities in countries like Latvia and Estonia for high-end programming skills. Without a paradigm shift in thinking, exploiting these opportunities would remain a challenge. Indian companies score lead points in areas such as project management, customer relationship management, transitioning and security & risk management. However, to provide end-to-end solutions and service emerging customer needs, Indian companies will need to focus on areas that offer the requisite language, transaction processing, high-end programming and knowledge processing skills. This implies that the footprint has to expand significantly, quickly, and also at a much larger scale. The ability to move into new destinations, before foreign companies, is also crucial (the first mover race for Vietnam has already been lost). We are likely to see the emergence of newer IT destinations going forward, as governments take steps to position their countries to take advantage of the growing IT sector. They are initiating actions to improve educational, IT and social infrastructure to attract the peripatetic IT/ITES industry. These governments see in this revolution, a way to put their countries onto the path of consumption-led growth. If Indian IT/ITES companies do not become peripatetic-enough, catching up with the global IT giants in terms of world-wide presence and scale, would be difficult. This document has attempted to provide a better understanding of 14 countries across four regions. We hope that this discussion note has provided food for thought, which could lead to a further strategic expansion of the Indian IT footprint.