Volume 3, Issue 9 December 2010 Understanding the People Risks in BRIC (Part 1): The Risk Associated with Hiring People By Dr. Awie Foong, Research Manager, Global Research Center and Tabitha Lim, Research Assistant, Global Research Center A decade ago, when the BRIC acronym was coined, Brazil, Russia, India, and China were touted as the big four of the emerging markets, overtaking the G7 and shifting the economic power from the developed to the developing economies. Over the last decade, BRIC countries have indeed made their mark in the global economic landscape. BRIC s share of the world gross domestic product (GDP) has increased by 7.1% between 2000 and 2009 and IMF estimates put their share of world GDP at 29.1% in 2015. Their economic growth is further evidenced by the foreign direct investment (FDI) net inflows into these countries. What is it that drives economic growth and FDI? While there are many factors underpinning economic prosperity, the importance of human capital as a driver of economic growth is often overlooked. Empirical findings have shown that human capital is not just statistically significant, but rather is the most important determinant of FDI inflows to developing countries. An informative study by Professor Edward Glaeser and Filipe Campante of Harvard University highlights the strong linkage between educational investments and future economic growth. Growth potential is often accompanied by high risk; and investors attracted to BRIC countries may well have recognized the financial and political risks. However, considering the critical impact of human capital on economic success, companies should not overlook the human capital risks that these countries pose to their business. More specifically, the Aon Hewitt People Risk research points to three major human capital risks that are present at every stage of the employment cycle recruitment risk, employment risk, and redeployment risk. (Learn more about Aon Hewitt's People Risk Index here.) In this three-part series, we will discuss these three types of human capital risk in relation to the BRIC countries. In the first part of the series, the risk related to recruitment will be analyzed. Recruitment Risk The risk in recruiting people is primarily due to the lack of workforce and talent supply. As our People Risk research reveals, some locations have an oversupply of manual labor but a shortage of professional talents. Whereas some locations are faced with the inherent limitations of a small population, others are facing a shrinking workforce due to an ageing population. Among the eighteen BRIC cities analyzed in our research, the Russian cities present the highest overall risk compared to major cities in other BRIC countries. Figure 1 shows the overall recruitment risk for the major cities in each of the BRIC countries. Human Capital Aon Corporation 2010 1
Demographic Issues Workforce supply is important for companies in labor-intensive industries such as manufacturing, as they generally require a large proportion of labor to sustain their massive production numbers. Emerging markets, such as BRIC, have been a popular choice for businesses as their labor is generally cheaper than in the developed markets of their home countries. In the broadest sense, the availability of workforce supply can be determined by looking at the demographics of the country. In terms of the population in the metropolitan areas, the BRIC countries generally do not have a high risk, which indicates a big enough pool of human resources supply available. However, mobility and migration factors can affect the size of the local pool of human resources. After the Soviet Union collapsed, Russia faced a brain drain, the outflow of talent, when Russian professionals, such as scientists, moved to the West to seek better career development and opportunities. This was also the case in India when many Indian professionals left in the 1960s to seek better opportunities in the more industrially advanced Western countries, such as the United Kingdom. In our People Risk study, we found that Russia currently has the highest brain drain risk compared to the other three countries (see Figure 2). Aon Hewitt 2010 2
The issue of an ageing population is also an important factor for companies to consider as it can, and will, impact the company s workforce planning and costs in the future. Russia poses the highest risk of an ageing population, with close to 18% of its population above the age of 60, as compared to Brazil (9.9%), India (7.4%) and China (11.9%). The aforementioned factors of population size, brain drain and an ageing population all impact the available workforce supply. To further illustrate the risks of such a shortage, particularly in Russia, a joint study by the World Federation of People Management Associations (WFPMA) and The Boston Group has projected severe skill shortages in Russia across all industries for the next two decades. In comparison, skill shortages in India and China are limited to certain sectors such as manufacturing, construction and trade; and talent shortages are not yet a major concern in Brazil. Thus, companies should expect to face a big challenge in recruiting the right people in Russia, and to a lesser extent, China and India. Government Support Evidently, government support plays a vital role in reducing human capital risk (see Figure 3). Although it may be challenging to address the issues of an ageing population and a small population size, countries have embarked on initiatives to combat brain drain in a period when its economies are advancing and where talent is crucial in bringing more growth. Aon Hewitt 2010 3
China and India have developed schemes to reverse the outflow of talent. China launched the thousand talent program in 2008, aimed at attracting overseas Chinese and foreign academics from the world s best institutions. This year, China released an outline on talent development for the medium- and long-term to underscore the country s drive to increase its talent pool, enabling the country s transition from a labor-intensive to a talent-driven nation. Similarly, the Non-Resident Indian (NRI) Institute aims to keep Indians well informed about the achievements and problems of NRIs as well as to promote NRI investment in India. Annual gatherings are also organized by the Ministry of Overseas Indians which tries to foster loyalty to the home country and encourage people of Indian origin to contribute to the economy. Although it may not be as orchestrated an effort as in China, these initiatives seek to connect India with its diaspora. In comparison, Russia seems to have lagged behind in its reverse brain drain efforts. The Russian government has only recently announced that it is ready to implement policies to attract more qualified professionals from abroad. Education System Having ample workforce supply, though, does not necessarily mean that a company can easily find a suitable candidate from the local talent pool. To a large extent, the quality of the workforce depends on the formal education system in a country. As shown in Figure 4, the overall education risk is highest for India and lowest for Russia. This can be partially explained by the amount of investment in education made by the government. With more investments in the education system, one can expect to have better talent quality as the education will have the capacity to provide for sufficient skilled workers. Among the BRIC, Russia is doing relatively well in this aspect as it has the highest education spending per capita, an education system that has the highest capacity to supply skilled workers and therefore, the lowest overall education risk. Nevertheless, a general perception is that the quality of the Russian education system is declining; so this could become a major source of risk in the near future. Aon Hewitt 2010 4
In China, the education system has, in the past, overemphasized the study of theoretical concepts, while neglecting practical skills training. This limited the number of qualified talents despite producing large numbers of university graduates. On the other hand, India s education system is one of elitism, where a few world-class universities coexist with a large illiterate population. India s adult literacy rate of 66% is one of the lowest in the world, and is substantially lower than in the other BRIC countries. Brazil s education system, too, faces the problem of providing an insufficient supply of skilled workers. A decentralized structure with many educational units that is mostly run by the states and municipalities is both expensive and inefficient. A study by the Economist Intelligence Unit pointed out the waste in Brazilian schools, such as the large number of students who repeat whole school years time after time before dropping out. Teachers are also poorly trained and teacher absenteeism can reach 30%, at its worst. In addition, Brazil channels much of its expenditure to its universities, rather than toward the lower rungs of the education system. Yet it is the people at these levels that generally make up a large part of the workforce. As such, the education expenditure by the federal government does not trickle down to the students who should most benefit from it. The poor education system directly affects both the quantity and quality of talent in the country. Educational deficiencies present in Brazil threaten to hamper its growth -- more than 22% of people available to join the workforce are not considered to be qualified. Finding people with basic skills for low-skilled jobs is proving to be a challenge in Brazil, let alone finding people for higher-skilled jobs. The suitability of available candidates in China and India also did not fare better. A study by the Mckinsey Global Institute showed that for an engineering position, only 10% of Chinese and Russian, 13% of Brazil, and 25% of Indian graduates with the correct degree are deemed qualified to be employed. This lack of qualified and suitable candidates in BRIC countries indicates a mismatch between the talent pool available and companies' recruitment needs. Companies cannot assume that a large talent pool in BRIC countries will render their recruitment efforts smooth sailing. Facing a depletion of talent, it is no wonder that even a Nobel prize failed to bring a smile to Russian President Dmitry Medvedev. Instead, he responded to the recent win by two Russian scientists who Aon Hewitt 2010 5
left Russia and are now based out of the UK, by criticizing the lack of governmental efforts to improve the retention of Russian talent at home. This says a lot about a country that was once hailed as the pinnacle of scientific training. Companies should always keep the people risks associated with hiring the right people in Russia and the other BRIC countries. Contact Dr. Awie Foong, Research Manager with Aon Hewitt s Global Research Center, can be reached at awie.foong@aon.com. Tabitha Lim is a Research Assistant with Aon Hewitt s Global Research Center. She can be reached at Tabitha.lim@aon.com. Coming up: In Part 2 of of our series on Understanding People Risk in the BRIC countries, we will examine the risk factors related to employing and redeploying people in these countries. These include the risk of maintaining productivity and efficiency due to high employee turnover, the risk related to labor relations and the uncertainty in dealing government agencies. Reference: 1. Brazil s Poor Schools: Still a lot to learn. Jun 4th 2009. The Economist. 2. Creating People Advantage 2010. Boston Group and the World Federation of People Management Association. 3. Glaeser, E. & Campante, F. (2009). Yet Another Tale of Two Cities: Buenos Aires and Chicago. National Bureau of Economic Research, Working Paper 15104. 4. Noorbakhsh, F., Paloni, A. & Youssef, A. (2001). Human Capital and FDI Inflows to Developing Countries: New Empirical Evidence. World Development, 29, 1593 1610. 5. The Emerging Global Labor Market: Part II The Supply of Offshore Talent in Services. McKinsey Global Institute. 6. World Development Indicators. World Bank. http://data.worldbank.org/indicator. Last accessed on 30 Nov 2010. Aon Hewitt 2010 6