Which countries should foreign companies locate their offshore operations? 

A new report released by A.T. Kearney examines the changing face of offshoring. The report, Global Services Location Index 2016, maps the offshoring landscape in 55 countries across three major categories: financial attractiveness, people skills and availability, and business environment. 

There are no clear winners or losers. Some countries gain advantage from stronger business process or soft skills.  Others are cities with cutting-edge innovation hubs that attracts entrepreneurs.

Two points stand out in the report. First India and China continues to lead. Not surprising.

Ranked number one, India’s key attractor is its talent and large pool of engineers. Five Chinese handset manufacturers have announced plans to establish R&D centres in India. Huawei, the world’s fourth-largest smartphone vendor, with an overseas R&D centre in Bangalore, announced plans to invest $170 million in a new campus, which will see it increase the number of engineers from 2,700 to 5,000. Just recently, Apple announced plans to open a new development centre in Hyderabad with over 150 employees.

China is not far behind. Education skills and cultural adaptability gave it major gains. The Recent drop in the value of the renminbi against the U.S. dollar also helped. Improving governance and financial market loosening will help improve China’s position. But a weak enforcement of intellectual property (IP) rights and pollution remain impediments.

Second is the emergence of tier 3 cities. Though China ranks second, India and the Philippines remains ‘top of mind’ for offshoring. Cities such as Surat, Nagpur and Lucknow in India and Bacolod and Iloilo City in the Philippines, are drawing attention.  Lower cost of talent, cheaper real estate and facilities, supported by huge government investments in infrastructure, education and special economic zones are playing stronger roles in decisions.

Report: A.T.Kearney, 2016, Global Services Location Index – On the eve of disruption: A new business model threatens established concepts of offshoring and expands the market.