Topic: Does EU accession mean higher wage inflation in Eastern Europe?

Outsourcing to Central and Eastern Europe (CEE) has grown rapidly in the last four to five years with both buyers and suppliers exploring low-cost locations to host their service delivery centers. In addition to cultural similarity with source countries (such as France and Germany), the EU accession of a number of CEE countries led to their increased acceptance from a business environment and regulatory point of view.

In the recent past, there has been increasing concern about the potential inflationary impact of EU accession due to increased outward migration from CEE countries, as well as wage parity resulting from the free-market movements. However, our analysis indicates that these fears may be misplaced.

An analysis of wage trends in the Czech Republic (one of the earliest EU accession countries) shows little or no correlation with EU accession.

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Exhibit: Wage inflation in Czech Republic

Key location developments

Market activity

Recent months have seen a lot of expansion activity by the Indian players, both within as well as outside of the Asia region

• Wipro expands its Malaysian operations in Cyberjaya to provide IT services and multi-lingual technical support to its clients across ASEAN region
• Satyam sets up a 350-seater delivery centre in Hyderabad for Microsoft
• TCS launches its biggest IT facility in Synergy Park, an approved SEZ in Hyderabad city with a capacity of 8,000 people
• WNS sets up a multi-lingual F&A and CC services delivery center in Bucharest, Romania with a seating capacity of 150 people
• Infosys sets up its first Latin America unit in Monterrey, Mexico providing business consulting and information technology services

Also, suppliers from other regions are now expanding their operations in Asia

• Softtek expands operations in Beijing, China by setting up another Global Delivery Center that will offer employment opportunities to 200 new associates by end 2008

Location promotion initiatives

Countries continue to refine their investment strategy to attract investors and address the challenges of the growing outsourcing industry

• Business Processing Association Philippines (BPAP) signs an agreement with the Technical Education and Skills Development Authority (TESDA) for the distribution of government funded US$8.5 million worth of training grants
• NIIT, a leading talent development corporation and China government form an alliance to set up IT training centers and offer training programs in Wuxi province of China
• Slovak Republic launches a new investment aid act from Jan 2008. The new act extends incentives to the outsourcing sector and also simplifies the process for obtaining aid

Overview of Location Optimization

Everest Research Institute provides actionable insight and visionary research on a wide range of offshoring issues through its Location Optimization practice (LO). Our Location Optimization research covers multiple regions and issues relating to offshoring locations, with a focus on helping companies assess the trade-offs of choosing between alternative locations. Our Location Optimization team combines deep subject matter expertise with broad analytical skills and insight into the global sourcing market, all of which are based on years of experience working in the offshoring industry.

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