Knowledge Connectivity in an Adverse Context: Global Value Chains and Pakistani Offshore Service Providers.

VerfasserSinkovics, Noemi
PostenRESEARCH ARTICLE - Report - Business case study

1 Introduction

The present paper sets out to investigate how 12 Pakistani offshore service providers (OSPs) linking into two distinct value chain configurations survive and grow despite their adverse home country context. Adverse economies are characterised by frequent violent episodes, terrorism and other forms of conflict threatening individuals' physical security (Bruck et al. 2011; Dai et al. 2013; Hiatt and Sine 2014; Wu and Chen 2014). Not only does Pakistan belong to the category of traditional emerging markets due to the low level of development of its factor markets and institutions (Bilgili et al. 2016; Hoskisson et al. 2013), but the uncertainty which stems from significant security threats additionally makes it an adverse environment. This heightened uncertainty and unpredictability creates fear and affects the way individuals and organisations make economic decisions and interact. For example, incumbent firms in such environments are expected to adopt a short-term focus and duplicative imitative learning strategies (Bilgili et al. 2016). As a consequence, the constraints imposed on incumbent firms by their adverse environment are far greater than those in mid-range or newly industrialised economies (Bilgili et al. 2016).

Jensen and Petersen (2013) emphasise the importance of management's comfort zone with respect to the nature of global sourcing decisions. They suggest that managers' risk perception, risk tolerance and ability to employ risk-reducing measures greatly influence their comfort zone. As a consequence, it can be expected that management will be less comfortable with entering sourcing relationships with suppliers from adverse economies than with those from mid-range emerging or newly industrialised economies. Industry data seem to support these propositions. In the wake of deadly terror attacks in Pakistan in 2008-2009, exports and foreign direct investment (FDI) inflows decreased significantly (Hussain 2011; Lopez-Calix and Touqeer 2013; Yousaf and Li 2015). Yet, the market bounced back from this shock. This raises the question of how Pakistani OSPs managed to address the constraints imposed by their adverse home country context. More specifically, what did they do to change the risk perceptions of their foreign clients?

To answer these research questions, we draw on concepts and frameworks from economic geography and global value chain (GVC) analysis. The importance of widening the analytical focus from 'location' to other aspects of space is increasingly being recognised in international business research (cf. Beugelsdijk and Mudambi 2013; Cook et al. 2018). Space here is understood as a multidimensional concept that, in addition to geographical distance, also includes structural, cognitive and relational aspects (Cano-Kollmann et al. 2016; Tornroos et al. 2017). By following Cano-Kollmann et al. (2016), we argue that understanding the nature and evolution of the connections between OSPs and their foreign clients will help answer our research questions. The central concept here is connectivity, that can be defined as the communication and interaction mechanisms and relational structures that support the back-and-forth flow of knowledge and ideas between two or more organisations (Cano-Kollmann et al. 2016). This is important, because the knowledge- and technology-intensive nature of the OSPs' service requires a higher level of connectivity than lower-skill, labour-intensive offerings that usually characterise traditional emerging economies (cf. Bilgili et al. 2016). As a consequence, in order to link into the value chains of their clients, the OSPs in our study had to first initiate and then gradually build and maintain connectivity. This was especially challenging due to the clients' negative risk perceptions about Pakistan, making the development of sophisticated boundary spanning capabilities extremely important (Schotter et al. 2017).

The structure of the paper is as follows. The next section offers a brief historical account of the Pakistani software industry to introduce the study context. Subsequently, the conceptual background section introduces the theoretical background to our analytical framework, and this is followed by the methods section. The findings part of the paper comprises two parts: First, we demonstrate how the Pakistani software industry fits into the offshore services GVC and how the local institutional setting shapes the conditions for and constraints on connectivity. The third part of the findings section presents the processes and actions OSPs used to bypass and/or alleviate those constraints.

2 A Brief History of Pakistan's Software Industry

Before the 1980s, software service outsourcing was limited to large domestic firms in developed countries. In the 1990s, the need for cost reduction became more pressing, leading to greater demand for low-wage service labour to work in globally standardised IT services in developing countries (Currie and Seltsikas 2001; Lee et al. 2014). These events coincided with the liberalisation process in Pakistan (Lodhi 2011b; Zaidi 2015). From the 1990s onwards, a number of liberal policies were introduced in the country, including the elimination of import restrictions and the creation of public and private associations. However, local conditions, particularly the political environment, did not support the early evolution of the industry (Bokhari 2000). Political instability, economic recession, and international sanctions were major inhibitors of growth. Efforts to promote the software industry in international markets through the Pakistan Software House Association (PASHA) and the Pakistan Software Export Board (PSEB) brought limited success. This was mostly due to weak institutional support that failed to adequately foster trust or improve the quality of either education or the ease of gaining access to financing. By early 2000, Pakistan's software exports remained at $30m in comparison to the $3.9bn of neighbouring India (Christophe 2015; Hassan 2000; Khan 2014).

In 2001, the challenges for Pakistan were further exacerbated after the 9/11 terrorist attacks. There was a general distrust towards Pakistan in the US. This stifled the inflow of foreign investment. Pakistan became a 'no go' zone for a number of countries (Zaidi 2015). The increasingly negative perception of Pakistan in the world led to the relocation of many software projects to other countries (Carroll 2002; Kessler 2001), and software exports had plummeted to $16m-$18m by the end of 2001 (Jamal 2003; Khan 2001). However, once the country became a frontline supporter of the 'War on Terror' agenda, the US lifted its sanctions and provided support through a significant amount of financial aid (Ahmed 2011; Hussain 2011; Khan 2014). From 2002 onwards, the software industry became more vibrant again, a pattern accelerated by the increase in the demand for international outsourcing (Dalesio 2001), improving economic conditions in Pakistan (Lodhi 2011a) and increasing government support (Khozem 2001). From 2002 to 2006, the industry experienced a growth of 50% per annum. The software exports increased from $20m during 2002-2003 (Jamal 2003) to $72m during 2006-2007 (Khan and Lew 2018; SBP 2007).

In 2007, the political environment became hostile once again (Lodhi 2011a, b). Events such as the lawyers' movement, the state of emergency, the Lal-Masjid massacre, the assassination of politician Benazir Bhutto and deteriorating security conditions led to the eventual demise of General Musharraf's government (Christophe 2015; Zaidi 2015). Pakistan's support for the 'War on Terror', poor policies under Musharraf's government and political instability led to the rise of terrorism within the country. This became further evident under the new, democratically elected government of Pakistan's People Party (PPP) (Yusuf 2013). Between 2008 and 2009, the terrorist organisation Tehreek-e-Taliban launched deadly attacks throughout the country, resulting in the death of 3000 civilians (Christophe 2015; Yusuf 2013; Zaidi 2015). As the security conditions in Pakistan deteriorated, western countries imposed a travel ban, preventing their citizens from visiting the country. This led to decreases in both exports and inflows of FDI, as well as damage to the nation's reputation (Hussain 2011; Lopez-Calix and Touqeer 2013; Yousaf and Li 2015).

In the face of this deterioration in its business environment, the software industry could not maintain its pre-2007 growth. Software export growth slowed down significantly between 2007 and 2010. It declined from 50 to 40% during 2007-2008 ($101m), further to 20% during 2008-2009 ($121m), and to just 2.5% during 2009-2010 ($124m) (SBP 2007, 2008, 2009, 2010, 2011). The industry started to bounce back following this nadir, regaining a growth rate of 40-50% per annum. Exports reached $204m during 2011-2012 and $458m during 2015-2016 according to State Bank of Pakistan calculations (Altaian 2015; Khan 2011; Khan and Lew 2018).

3 Conceptual Background

In this section we provide an overview of the theoretical thinking that guided our analytical operationalisations. Jensen and Petersen (2013) provide a valuable integrative theoretical framework that offers important insights into management's strategic choice on the tactical versus strategic/transformational global sourcing continuum. Tactical sourcing decisions are mostly driven by cost-saving aspirations. They tend to manifest as arms-length relationships between the sourcing firm and its partners. Strategic/transformational sourcing, on the other hand, is primarily motivated by the sourcing firm's need for talented and innovative human capital. The emphasis is on value enhancement rather than cost reduction. However, this framework does not view tactical and transformational sourcing as dichotomous. Instead, it allows us to look at global sourcing as a combination of defining features that...

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