Innovation and the Competition for Talent in China and India

The Financial Times ran an article on July 20, 2006 headlined “Up to the job? How India and China risk being stifled by a skills squeeze” (registration required) looking at the growing competition for talent in these countries.

It’s interesting on a number of levels, but primarily because it underscores the danger of continuing to view India and China as offshoring locations offering simple wage rate arbitrage – a view that too many Western companies still hold. In the more developed cities like Bangalore and New Delhi and Shanghai and Shenzhen, competition for talent is intensifying, with predictable consequences for wage rates and employee turnover.

In the IT services industry in India for example, the article quotes Nasscom, an Indian trade association, as reporting that annual employee turnover rates are approaching 40 percent and pay inflation reaching 20 percent this year. As a result, according to the article, some Western companies like Apple and Powergen (a UK utility) have announced closure of support centers based in India.

Now, there are two ways to view this intensifying competition for talent.  Looked at through the narrow lens of wage arbitrage, this may be viewed as easing the pressure for Western companies to offshore their own operations and to compete with Chinese and Indian companies benefiting from lower wage rates in their home countries. So, perhaps this is good news for Western companies.  Maybe all this talk about the rise of China and India is just like the scare talk about Japan decades ago – remembers how the Japanese were going to buy up all our companies?

But wage arbitrage has always been much too narrow a lens for viewing offshoring and the changing shape of global competition. As JSB and I suggested in an oped piece in the Financial Times almost one year ago, a much more productive way to view these developments involves focusing on skill building arbitrage – the opportunity to participate in relationships and environments that can build capabilities more rapidly than would be possible elsewhere. This broader perspective begins to bring into sharper focus the significant management innovations that certain Chinese and Indian companies are pursuing to build capability more rapidly. In an earlier blog posting, I outlined three forms of management innovation that these companies are pioneering.

In this context, the intensifying competition for talent will only accelerate the management innovations that are already under way in these countries, making the companies even more formidable competitors or providers, depending on where you stand in the global value chain. In fact, from their earliest days, these companies have understood that their success depends upon attracting and retaining talent.  More importantly, they have discovered that if they develop their talent more rapidly than anyone else, they will also have an advantage in attracting and retaining talent, so that has been the focus of many of their management innovations.

They have also understood that not all talent needs to reside within their enterprise if they can collaborate effectively with a broad range of specialized companies, so another dimension of innovation has been the development of scalable process networks that bring together hundreds, and often thousands, of specialized business partners.

By the way, skill shortages and employee turnover are often signs of healthy local business ecosystems.  Here in Silicon Valley executives routinely complain about the limited supply of qualified engineers, escalating compensation packages and high turnover rates.  The 40% employee turnover rates reported by Nasscom are admittedly high, but those are averages and skewed by the large number of smaller offshoring service providers that have been most active in playing the wage arbitrage game.  These companies are losing talented or experienced employees to competitors willing to pay more while their clients suffer the consequences in terms of deteriorating performance. Leading firms like Infosys report turnover rates in the range of 10 – 15%, much more equivalent to what we experience in Silicon Valley.  In fact, as Annalee Saxenian reminded us in her insightful book, Regional Advantage, that kind of employee turnover is a key driver of innovation activity as companies routinely acquire new talent with a differ
ent set of experiences and perspectives.

While I’m at it, note the irony that the FT article is appropriately critical of the education systems in both China and India while at the same time many in the US focus on the deficiencies in our education system as a key factor in undermining our competitiveness in the global economy.  Without in any way diminishing the severe flaws that plague our public education system, too many people spend too much time focused on the deficiencies of education systems in shaping global competitiveness.

The economic growth of China and India only marginally depends on their formal education system – much more important has been the emergence of a set of innovative companies that have figured out how to access and develop talent much more rapidly than most Western companies. Both countries have also benefited from a flourishing (and admittedly very uneven) ecosystem of private training institutes and services that help to bridge the gap between what the public schools produce and what businesses require in terms of technical, language and management skills. Once again, a sense of urgency regarding talent development seems to matter much more than any objective measures of public education system performance. Young employees in entrepreneurial Chinese and Indian companies appear to have a much greater sense of urgency about their advancement than comparable employees in most US companies have.

The FT article quotes a McKinsey Global Institute study that has received a lot of attention regarding supply constraints on skilled labor in China and India. In fact, the FT gave this study a front page story under the headline “Foreign threat to service jobs overblown’” (registration required). The study is very useful in pointing out some of the challenges in these countries but, as I pointed out in a blog posting a while ago, the study is weak in terms of its methodology for projecting future skilled labor supply.  This is a rapidly changing environment where demand pull for talent already is leading to innovative approaches that have the potential to significantly reshape supply dynamics. 

Bottom line: the intensifying competition for talent in China and India will only increase the sense of urgency already felt by the leading companies in these countries in terms of the need to pursue management innovations that can accelerate talent development. In this context, the FT article quotes N. R. Naryana Murthy, one of the founders and the “chief mentor” at Infosys, warning about the growing competition from China’s IT industry: “China is running very fast to catch up with India. Chinese are much more determined than we are.” At the same time, Western companies reading the stats on rising wage rates and average employee turnover rates in China and India are likely to become more complacent about competition from companies in these countries.

Comments

[Sundar]

Realistic analysis and useful quotes. This gave me more information while searching for offshore information.

[thebizofknowledge]

I came across your blog as I was doing some online research on China and the global economy. As I have a keen interest in the offshore players I appreciate your comments and observations.

[neelakantan]

As you have rightly pointed out, India (and I know little about China)is not about labour wages arbitrage, though that does end up being part of the equation. There is still a lot of juice that can be extracted out of offshoring by offshoring end to end processes (rather than bits), focussing on building knowledge (rather than try and hire experts) and sort of mimic the big IT companies in their hiring model (broaden the pyramid by hiring freshers and training them). And these investments will pay back in the long run in terms of innovations etc.