CHAPTER 1

INTRODUCTION

1.0 Overview
In recent years, researchers have identified that the offshore outsourcing of services is starting to become a thriving business area, serves as a tool for maintaining and increasing the competitiveness and also an important asset of international growth strategies of many service firms.

Bryborn & Jantell (2005) states that every now and then there is a boom of interest in cutting operating costs and every time there is a different ways of how it is done. In the 1990’s, the trends used to cut costs were re-engineering of business processes. However, in the early 2000’s, after the economical downturn, there was a similar trend to reorganize business processes and the trend was called offshore outsourcing. The major driving force for offshore outsourcing are customers who wants more of everything for less money.

In MIDAS Bulletin Oct-Dec 2004 publication mentioned that, “ Malaysia is among the top three contenders for offshoring business in the world according to the 2004 Offshore Location Attractiveness Index compiled by the global management consulting firm A.T. Kearney, sources were quoted. Malaysia is ranked 3rd behind India (1st) and China (2nd) but ahead of Singapore (5th), Philippines (6th) and Thailand (13th). In its report, A.T. Kearney considers Malaysia a “ natural choice” for offshore services in view of its low costs, particularly for infrastructure, the most attractive business environment among emerging markets, strong global exposure of the workforce, and government support for the information and communications technology (ICT) sector. Other significant initiatives cited by A.T. Kearney include the government’s investments in infrastructure and developing the intelligent cities of Cyberjaya and Putrajaya as part of the Multimedia Super Corridor project. Thus, numerous companies – Motorola, Ericsson, IBM, Shell, DHL, HSBC and BMW- have located their regional offshore service centers in Cyberjaya.”

On April 16, 1994 Labuan was declared a Federal Territory and subsequently an integrated International Financial Centre (IOFC) on October 1, 1990. It offered a wide range of offshore products and services to customers worldwide, including banking and investment banking, insurance, captive insurance, trust and fiduciary services, fund management, investment holding and Islamic financing[1].

Labuan IOFC was established primarily to complement the development of Malaysia’s Federal Capital of Kuala Lumpur as a regional financial centre, and with the aim of competing with Singapore and Hong Kong for the international offshore business in the Asia Pacific region (Offshore News Digest, 2004). As global capital grows and become increasingly mobile and highly competitive, as the sophistication of financial products has led to the blurring of boundaries between onshore, offshore and near-shore (neighbouring countries), Offshore Financial Centres today differentiates themselves by narrowing in on geographical or instrument-specific markets (LOFSA publication, 2008).

Labuan needs to reposition itself by being flexible and have the capacity to benefit from the new opportunities to meet the challenges of the new emerging demands (Aziz, BNM 2008). In this regard, the major area of focus would be the further development of the trust companies services to tap the potential of the offshoring industry.

On 28 January 2008, the Labuan IOFC was renamed to Labuan International Business and Financial Centre (IBFC), the new visual identity is to reflect a more comprehensive representation of Labuan as an international business and financial centre, and its commitment to reposition and re-brand itself to take on the much broader and larger role in the globalised environment that is increasingly becoming dynamic and competitive (BNM Press Release, 2008).

1. Problem Statement
Although millions of Ringgit has been spent to develop infrastructures and promote Labuan overseas, yet many International business still do not know what Labuan has to offer as a tax haven, and it remains off the beaten track in the international offshore map (Offshore News Digest, 2004). According to Baba (2004), Hong Kong and Singapore by virtue of its track record and critical mass advantage has significant competitive advantage over Labuan IOFC. Within Malaysian shores alone, many Malaysian companies and industry players are still unaware and fuzzy about Labuan – intended to complement the onshore domestic financial system and enhance the country as an investment centre (Chin, 2005).

Furthermore, Labuan need to rapidly sculpts up a market identity of its own in the globalised offshore industry. Apart from creating a niche market in the Islamic banking and finance, it needs to look into other business opportunities to be able to state its position and capabilities to competitive advantage.

The Sultan of Brunei on the 15th July 2000 declared Brunei as an International Financial Centre encouraged by the success of Labuan IOFC. Still recovering from the Asian economic crisis in 1997, Brunei has begun to follow in the footsteps of Labuan in a move to kick-start its economy. With the development of Brunei into an International Financial Centre, Labuan, being an established offshore player, is likely to be challenged into differentiating itself by developing more innovative financial products and providing higher quality of services in order to maintain its competitive edge over Brunei[2].

The Labuan International Business and Financial Centre needs to have cost and differentiation advantages. Thus a shift in focus is imperative. Rather than promoting the law alone and concentrating on regulations, they have to promote services and products and encourage people to take advantage of the tax benefit. In other offshore jurisdictions, even the taxi drivers are able to tell what their jurisdictions are doing and offering (Chin, 2005).

2. Research Questions
The research questions in this study will adopt previous study done by Baba (2004), a study on analysis of the Labuan offshore banking industry in Labuan IOFC. The structure of questions in this research will be adopted based on his approach. As such a central question of this research as follows:

‘To what extent is Labuan from the trust companies perspective ready as an offshoring centre’

The data-gathering process of this study will be guided by the following questions: i) What are the activities of the Labuan trust companies? ii) To what extent is Labuan functioning as an offshoring centre? iii) What are the perceptions of the Labuan trust companies towards the current policies, rules and regulations? iv) To what extent is Labuan competitive compared to other international business centres in the region?

3. Objective of the Study
The objectives of this study are: i) To examine Labuan’s location attractiveness whether it is conducive to drive the offshoring services activities; ii) To examine the operations and activities of Labuan trust companies; and iii) To identify and highlight the existing benefits from utilizing the offshoring services provided by the Labuan trust companies.

4. Scope of Study
The total number of operational trust companies as of March 2008 is twenty one, of which seventeen are Malaysian trust companies, two are foreign trust companies and two are Malaysian managed trust companies.

The researcher will discuss on specific areas of offshoring, which is considered to have the potential for success. Focusing on offshoring services in accounting, administrative and legal services.

An offshore financial center must have attributes, they are, a liberal environment, strategic geographical location, stable political environment, stable economic performance, skilled workforces and a developed financial and physical infrastructures lead to the success of offshore financial center (Mohamad, 2007; Baba, 2004; Skully, 1995; Tan and Vertinsky, 1987; Jao, 1980). Previous research conducted was mainly to investigate the vaibility of Labuan as an offshore bank and an Islamic financial centre. However, this study will attempt to investigate whether the attributes are the same in the investigation of Labuan as an offshoring centre.

5. Significance of Study
Bank Negara’s ten-year Financial Sector Master Plan (BNM 2001) includes recommendations that covers three main areas for Labuan IBFC to develop and expand its activities in promoting and diversifying further as an international financial player; to promote the development of Islamic banking, and to develop and strengthen it’s capital market, e-commerce and ancillary activities (BNM, 2001). While studies on the offshore bank industry and Islamic banking had been done on the then known Labuan IOFC, a study on the issue of ancillary activities and offshoring services has yet to be done on Labuan IBFC (BNM, 2001). In going forward, LOFSA has set a new focus on holding company business. One of the main niche businesses for Labuan IBFC is to become a leading Holding Company Jurisdiction of Choice within the Asia region (LOFSA, 2008).

Offshoring is expected to grow 30 to 40 percent a year over the next 5 years and according to Forrester, a leading IT analyst, projects that the number of U.S. jobs offshored will grow from 400,000 to 3.3 million jobs by 2015 (McKinsey Global Institute, 2003).

Thus, this study is significance to investigate how the trust companies in Labuan would response to the opportunities and their preparations in terms of acquiring knowledge and expertise in adapting to the emergence of offshoring services.

This study would also enable the researcher to determine the relevance and feasibility of Labuan to further enhance the offshore business offering particularly in offshoring services.

6. Definition of Key Terms 1. Offshore The term refers to any business being conducted or operated in a country that is foreign to the nation that it serves.

2. Offshore Financial Centre (OFC) An OFC is a location, which may be small state or a jurisdiction separated from the main state by geography, and or by legislation, where international financial transactions take place with minimum or no restrictions (Baba, 2004).

3. Trust Companies Trust companies can be created by a will of other instrument of writing including a unilateral declaration of trust. The duration of an offshore trust shall not exceed 100 years unless otherwise provided in the terms of the trust. A foreign trust may be enforceable, recognized or registered in Labuan. Similarly, a Labuan offshore trust companies services can be transferred to another country.

4. Offshoring Refers to the development where companies relocate business activities, including jobs, to foreign locations.

5. Outsourcing Outsourcing always requires involvement of a third party and can be done on the local market as well.

7. Summary
Labuan IBFC has continued to receive strong support and commitment from the Government to succeed. Having developed positive attributes in offering a conducive, offshore business and financial services environment. The time is right for the local Government, LOFSA, the Association of Offshore Trust companies and other relevant authorities to leverage on Labuan excellent reputation, either to continue to differentiate itself against other offshore jurisdiction or jointly develop infrastructure and support each other for a ‘win-win’ situation to create a niche market for Labuan not only in the offshore bank and Islamic financial industry, but also into becoming a reputable services offshoring centre.

This study seeks to identify whether the Trust companies in Labuan are able to create and support a niche market of becoming Labuan into a services offshoring centre to service the global business community. Alternatively, the Trust companies are to assist in creating secondary domestic market for Offshoring supportive industries and other 3rd party service provider to further reduce administrative and operational cost in doing business in Labuan. More important, the offshoring services should have positive and direct impact on Labuan’s domestic economy where currently the offshore business and financial services activities not contributed directly.

CHAPTER 2

REVIEW OF LITERATURE

2. Introduction
This chapter will cover the literature for the study. The latest review material and study of market trends on offshoring have been obtained primarily from the Internet, business journals and magazines. Since the concept of offshoring is relatively new and limited, some materials had been extracted from similar studies for example migration of call centers to offshore locations, outsourcing of IT and manufacturing process.

The literature sources are aimed at incorporating the diverse body of definitions, views and opinions on offshoring and offshore outsourcing. The literature will consist of the following paramount subject areas: (a) what is an offshore financial centres, previous studies on Labuan IBFC and an overview of trust companies; (b) definition of offshoring and outsourcing services and the general idea and impact of offshoring services; (c) competitive advantage of offshoring; and (d) empirical studies on offshoring. The essence for the whole study is to identify the value propositions on the viability of Labuan as an offshoring centre from the perspective of the trust companies.

2.1 Offshore Financial Centres (OFC): Definition
An OFC is a centre that hosts financial activities that are separated from major regulating units or states by geography and/or by legislation. This may be a physical separation, as in an island territory for example Labuan, or within a city such as London or the New York International Banking Facilities (Daniels et. al., 2007; Baba, 2004; and Griffin & Pustay, 2003). The literature survey also defines that International financial centers are distinguished from their domestic counterparts by three important attributes. First, international financial centers deal in external currencies, which are not the currency of the country where the center is located. Second, offshore centers are generally free of the taxes and exchange controls that are imposed on domestic financial markets. Third, offshore financial centers are primarily but not exclusively for nonresident clients (Hampton M., 1998 and Park Y. S., 1989 cited in Mohamad, 2007 and Baba, 2004).

Figure 2.1 Offshore Financial Centres: Default Definition

(Source: Rose & Spiegel, 2006)

[pic] Note: Labuan IBFC is under East Asia, Malaysia

According to the International Monetary fund, an OFC is a jurisdiction that has a large number of financial institutions, most transactions are initiated abroad, most institutions are controlled by non-residents, have assets and liabilities out of proportion to the domestic economy and has low or zero taxation, moderate or light financial regulation and bank secrecy. OFC’s are attractive to international business as they facilitate international business and trade (Hejazi, 2007).

2. Success of Offshore Financial Centre
The success of an Offshore Financial Centre requires this attributes to enable them to attract and compete with other offshore financial jurisdictions. Studies done by Baba (2004) and Mohamad (2007) with support from previous studies done by Felmingham and Dean (1998), Tan (1997), Skully (1995), Tan and Vertinsky (1998) and Jao (1998) indicate that the Offshore Financial Centre need the criteria as follows for competitive advantage:- a) Stable political environment; b) Liberal environment c) A developed Financial and Physical Infrastructure d) Strategic geographical location; and e) Quality labor force.

1. Stable Political Environment
This is crucial for the success of offshore financial jurisdictions because it ensures the impetus for development and growth as well as to convince foreign investors about the safety of their investments and location. With the breakout of the Lebanese civil war, Beirut’s position as a financial centre came to an end, thus contributing the emergence of Bahrain a newly financial centre to the Middle East Region (Mohamad, 2007; Baba, 2004; Jones, 1992). The critical factors which determine the successfulness of establishment and the existence of an International Offshore Financial Centre also lies on the political stability of the country (Tan & Vertinsky, 1987).

2. Liberal Environment
This is one of the key factors in determining the success of an OFC whereby flexibility of government and financial regulations exist. According to Mohamad (2007) and Baba (2004), the flexible banking law and financial regulations, no limits on currency conversion, plus lower or no domestic taxes are characterized as liberal environment. In Labuan, the enhancements are being made to the legislation to create a more facilitative and flexible regulatory environment to ensure that Labuan IBFC remains competitive in the evolving global market landscape in addition to allowing for new opportunities and activities to be tapped in Labuan IBFC (LOFSA, 2008).

2.2.3 A Developed Financial and Physical Infrastructure
A developed financial infrastructure refers to a developed financial system and a strict legal and regulatory procedures, whereas a developed physical infrastructure refers to physical presence requirement, good telecommunication services, frequent air services, tourism center. Labuan has excellent internet, IT, cable and telecommunications infrastructure. The local presence of many of the world’s leading bank’s offshore offices, as well as leading insurance and international accounting firms, means that issues pertaining to accounts, taxation and money movements can be securely arranged in cooperation with the client’s preferred international financial institution (www.ectrustco.com).

4. Strategic Geographical Location
Location plays an important role by attracting offshore financial players from various countries coming in to Labuan to do business transactions. Mr Peter Kent Searle, an Australian barrister, the Managing Director of EC Trust, said that one of the major factors that convinced him to set up an offshore company in Labuan is that it is geographically placed at the epicenter of the surging economic growth that is occurring in the Asia-Pacific region. He further states that indeed geography plays an important role for Labuan, especially with respect to its time zone. It is perfectly placed at the front of the zones, opening not long after the major far Eastern markets; it is merely two hours behind Sydney, an hour behind Tokyo and in the same time zone as Singapore and Hong Kong (www.ectrustco.com).

5. Quality Labor Force
Baba (2004) said that experts who work in international financial institutions in Singapore have helped to upgrade the banking skills of the local workforce. Labuan is able to offer a conducive business environment in that the workforce is well-educated, multi-lingual and low overheads. LOFSA is hoping to have a center of educational excellence by working with the local university where currently the university is working on a program on international finance.

2.3 Studies on Labuan IBFC
Since its establishment and inauguration in October 1990, among the first to study Labuan IBFC was Skully in 1995, who examined the operations of Labuan IBFC and concluded that while Labuan has made considerable progress in improving its competitive edge with more investment was still required (Baba, 2004).

Five years after its inception, Sarver (1998) evaluated the development of Labuan IBFC and discovered that Labuan pursued well-thought-out strategies, and at the same time benefits from being in the high growth Southeast Asian region. He further states that Labuan had the advantage where the population spoke English and adhered to British business practice, accounting and legal standards.

In order to be competitive, an offshore financial center must have the “necessary” characteristics such as a liberal environment, strategic geographic location, stable political environment, stable economic performance, the presence of international banks, quality labor force, a developed financial and physical infrastructure and the assurance of confidentiality and secrecy (cited in Baba 2004 (Felmingham & Dean 1998; Tan & Vertinsky, 1988; Jao 1980). Labuan’s competitive edge in the region entails comparing IBFC to Singapore, Hong Kong, Bangkok International Banking Facility, Brunei International Financial Centre and Manila Offshore Banking Unit (Baba, 2004). The above is further supported by an observation study done on Labuan conducted by Aralas et. al. (2000) which attempted to identify the characteristics that contributed to Labuan as an IBFC, where the study concluded that Labuan had all the attributes of a successful offshore financial center.

According to Bayoud, 2002 on his survey to look for a suitable location for an Asian base, their list was narrowed down to Singapore and Hong Kong but with some reservations. He found that Singapore was very expensive to operate from and was over regulated, which suited the old established but restricted access to new, more dynamic funds. Hong Kong was also expensive to operate from but it was more flexible in regulatory controls. Labuan met the full requirements based on their evaluations on the criteria cost of operation, central location, stable government and regulatory controls, access to suitable staff, secure financial exchange and transactions, safety and lifestyles and tax and company structures.

Baba (2004) did an empirical study to examine the business of offshore banking in Labuan and at the same time determining the reasons why the industry has not developed as anticipated. He concluded that the 1997-1998 Asian Crisis has done some serious damage to the rising offshore center. Nevertheless this was only partly to be blamed, as a more disturbing aspect of Labuan’s predicaments is its lack of competitive advantages compared to Hong Kong and Singapore, its two major competitor in the region. However these problems he said can be overcome by formulation of proactive strategies that is concept of ‘twinning’ Labuan with the Multimedia Super Corridor where this strategy would enable Labuan to capitalize on the attributes and strength of Kuala Lumpur as a ‘national’ financial center. Baba further states that the ‘twinning’ concept has already been used in Islamic banking that is Labuan with Bahrain.

Expanding on the work of Baba (2004), Mohamad (2007) conducted an empirical study of the viability of Islamic insurance and reinsurance i.e. takaful and retakaful as a niche for the Federal Territory of Labuan as a premier International Offshore Financial Center (IOFC) in the Asia Pacific region. His findings concluded that overall all insurance and insurance-related entities conside Labuan is a suitable jurisdiction as an offshore financial center and concur with government objectives to establish Labuan as an Islamic financial hub in Southeast Asia region. This has been further strengthened with the launch of Malaysian Islamic Financial Center to integrate of the key structural components of the Islamic financial system.

2.4 Offshore Trust
2.4.1 The Industry
Essentially a trust is an instrument, which allows a person to divest himself of assets by giving them over to a trustee to hold for the benefit of persons (including himself), charities, or other entities known as beneficiaries. Trusts are used to avoid certain taxes, to set up a “bolt hole” in case a destination should be needed for flight capital, and also to avoid certain inheritance laws or to cut out lengthy probate proceedings (Roberts, 1986).

The use of trusts in offshore jurisdictions by people from both common law and civil law jurisdictions has grown extensively during recent years as tax planners and other professionals come to realize the benefits that can be gained by setting up an offshore trust. In tandem with this growth has been the emergence of number of offshore jurisdictions, which have either passed legislation to attract trust business or amended existing laws to make them more users friendly. They have also come to realise the importance of having trust business in their jurisdiction and the added value it can bring to other sectors of their finance industry.

2. The Labuan Trust
The above means a company registered under the Labuan Trust Companies Act 1990 (LTCA) to carry on business as a trust company business. Any company that is incorporated or registered under Offshore Companies Act 1990 (OCA) may apply for registration as a trust company. A trust company may also apply to be registered as a managed trust company. This is a trust company registered under the LCTA, but is managed by a fully operational trust company in Labuan. Furthermore companies established under OCA, a registered trust company in other jurisdictions is eligible to register as a managed trust company in Labuan1.

Previously, trust companies in Labuan were incorporated under the regular Companies Act unlike other offshore entities, which are, incorporated under the Offshore Companies Act 1990 which meant that the trust companies paid higher taxes. By being offshore companies the trust firms are able to enjoy a more attractive tax structure, having to pay only a 3 per cent tax of their net audited profit or a fixed sum or RM20,000 upon election (Lowtax.net, 2008).

The total number of trust companies registered in Labuan IBFC in 2007 remained at 21. In terms of industry performance, trust companies continued to record an encouraging increase in their aggregate operating income for the fifth consecutive year. In 2007, more Labuan trust companies provided business process outsourcing services to their global operations. With the improvement and expansion in business performance of trust companies, the number of employees in the industry correspondingly increased by 18.0%, from 229 in 2006 to 270 (LOFSA, 2008).

The concept of the trusts in Labuan is Anglo-Saxon in origin. It is said that the Anglo-Saxon concept of trust started during the days of the Crusades when men before embarking on their Crusades entrusted their wealth or assets to a trusted friend or relative who would upon the Crusader’s demise, distribute the trust assets to persons according to the Crusader’s wishes. This Anglo-Saxon concept has been seen as an advantage to Labuan as this concept is familiar to trust-users especially from common-law jurisdictions. The trusts rules in Labuan are sufficiently flexible and they can accommodate alternative Islamic trusts or `amanah’. The conventional charitable trusts, for example, run quite parallel with the Islamic concept of `wakaf’ (Labuan Digest, 2001).

The role of a trust company in Labuan is to ensure that Labuan is not used as a centre for illicit or illegal activities that will tarnish the reputation of Labuan as an IBFC. Under the Labuan Trust Companies Act (LTCA), every Labuan offshore company must employ the services of a trust company to lodge documents and discharge its statutory obligations. Trust companies play the role of ensuring that offshore companies and offshore trusts are in fact offshore and remain offshore (IBBM, 2003).

A Labuan trust company may act as trustee, agent, executor or administrator pursuant to its memorandum, and may provide share registration services, administer, manage or otherwise deal with property as an agent or trustee, maintain an office, agency or branch for another company, provide management and accounting services, directors, secretaries and registered offices of offshore companies, and incorporate and register offshore companies (LOFSA, 2004).

New measures which include making changes to the regulatory framework, enhancing the use of information technology and the launching of key initiatives was introduced to expand the scope of existing offshore activities.

4. Offshoring Services: Definition
Offshoring generally refers to a company’s purchases from abroad (imports) or goods or services that were previously produced domestically. A company may offshore services either by purchasing services from another company based overseas or by obtaining services in-house through an affiliate located overseas. For example, a U.S.-based company may stop producing parts of its accounting and payroll services in-house and instead outsource them to a foreign-based company (Nilsen, 2005).

Another definition of offshoring, it is the process by which a corporation retains a business function within their corporation but locates the function in an offshore location within their organization (Bryborn & Jantell, 2005). Outsourcing simply means that a corporation has chosen to purchase from a third party a business function that it once conducted in-house. The third party can be located domestically or internationally (Bryboen & Jantell, 2005).

Offshoring and outsourcing are sometimes treated identically as companies seem to choose them for similar reasons, such as to focus on core competencies, to increase flexibility and to realize cost savings. However, offshoring cannot be regarded as purely interchangeable with outsourcing. There are some important differences between these two phenomena (Gorp, 2005). Gord (2005) defined offshoring as the relocation of business activities to a foreign location under direct control of the firm (captive offshoring) or via a foreign third party (offshore outsourcing).

The term “offshoring” also means when a firm moves jobs from a branch or subsidiary in its home country (Eg. India) to a lower cost nation (Eg. Labuan). Offshoring is relatively new trend, but in a sense, it is already about to catch up. Dell had moved its help-desk jobs from the USA to its offices in Mexico. Google has opened an Research & Development centre in Bangalore, India (Babcock, 2004).

5. Services Offshoring: General Idea and Impact
Firms have been offshoring long before the recent trend in services offshoring. In previous decades, U.S. manufacturing companies were motivated to offshore because of low costs and availability of skilled labor, production and supply networks in some developing countries, and reductions in cost of transporting goods (Nilsen, 2005).

Offshoring has recently expanded into services due to three key factors. First, technological advances, such as advances in telecommunications and the emergence of the Internet, have enabled workers in different locations in the world to communicate and be connected electronically and has also facilitated the digitization and standardization of activities needed to complete business processes. Thus, in many cases, the offshoring of services constitutes an outgrowth of outsourcing business functions. Second, countries such as India, China, Russia and much of Eastern Europe have increasingly opened their borders to the global economy. Third, other countries have highly educated populations with the technical skills for performing services and technology-related work (Nilsen, 2005).

Offshoring has emerged as one of the major trends in international business, and has recently become one of the most vigorously debated topics in management and in broader discussions about the future of the global political-economy. Offshore investment has also become important to the economic growth and the development of the “white collar” services economy in countries such as India, Ireland, the Philippines, Jamaica and others (Bunyaratavej, Hahn and Doh, 2007).

According to Reh (2008), outsourcing work to companies that can do it more efficiently and less expensively makes sense, provided that it is actually less expensive at the bottom line, and not just for the department that wants to outsource. If the marketing department wanted to save mailing costs by having every employee of the company hand carry a marketing piece to everyone in their neighborhood. The cost savings to the Marketing Departments budget would be more than eaten up by the additional costs to the company for replacing employee who quit because they didn’t feel they were hired to do deliveries. Offshoring makes sense only if it truly saves money at the bottom line.

2.7 Offshoring: Competitive Advantage
Offshoring and outsourcing are headline news today. Finance and accounting offshoring is growing 30% annually (Purkayastha, 2007). Embracing offshoring creates profit in the short run as well as the long run. The offshore accounting provider has significantly larger scale as it allows them to invest in process improvements, systematic staff recruiting and training.

An offshore operation also gives financial services companies a foothold in new and emerging markets where revenue opportunities may be significantly more lucrative than in mature markets back home (Ribeiro, 2007).

2.8 Previous Empirical Research on Offshoring Services and Offshore Outsourcing
On a study done by Amiti and Wei, 2006 on the service offshoring and productivity with evidence from the United States (US) where according to them the sourcing service inputs from overseas suppliers has been growing in response to new technologies that have made it possible to trade in some business and computing services that were previously considered non-tradable. The study found that service offshoring has a significant positive effect on productivity in the US, accounting for around 10 percent of labor productivity growth during this period. Offshoring material inputs also have a positive effect on productivity, but the magnitude is smaller accounting for approximately 5 percent of productivity growth.

Financial services survey conducted by A.T. Kearney 93% of global financial services executives are interested in offshore outsourcing to reduce cost by migrating approximately 500,000 jobs offshore (Kaplan-Leiserson, 2004). Increasingly, firms are offshoring activities to foreign affiliates or third party service providers in order to protect or advance their competitiveness through cost reduction, quality improvement and market growth (Selvadurai, 2006). Selvaduraj’s study explained the relationship between the types of service activities offshored, business drivers for offshoring service activities, locational determinants for offshoring and the suitability of available human capital to meet offshoring requirements.

In a study done by Bunyaratavej, Hahn and Doh (2007), where to locate offshore facilities is an important yet complex one that has substantial implications for both investing firm and host country. The research suggests that the location decision is an important one for firms and these companies can make better decisions by capitalizing on a better understanding of the countries relative strengths and weaknesses. Gorp (2005) stated that in a research study by The Nyenrode Institute for Competition in focusing on the consequences and the resultant effects of offshoring on the service sector. In order to be an attractive for location for captive offshoring activities, countries will have to compete on the quality of work, availability of qualified employees and favorable rules and regulations for foreign direct investments. Gorp further states that developed countries in Western Europe to date are leading in attracting captive offshoring activities. Its main competitors in the future will be especially South/Eastern Asia and Central Europe. In order to attract offshore outsourcing activities of service firms, countries will have to compete on costs. Although Western European countries still appear in the top ten preferred offshore locations for this type of offshoring countries such as China, India together with the US, Romania and Poland are also in this premier league of the offshoring playing field.

CHAPTER 3

RESEARCH METHODOLOGY AND FRAMEWORK

3. Introduction
This chapter elaborates on the methods and techniques on the development of research design in which that would later be adopted and to come out with the strategy used in the research. Also in this chapter research framework will be explained together with the definition of the key variables involved. Hypothesis and details will also be covered throughout this chapter. Next the determination of sampling size, instrument design, data collection and data analysis methods would also be touched and details further explained.

3.1 Theoretical Framework
Research framework is the principles on which the entire project will be based on. Literatures reviewed in previous chapter had characterized the factors that influenced the growth and development of a small island OFC are: (1) political stability (2) liberal environment 3) developed financial / physical infrastructure 4) location 5) quality labor force

| |Independent Variables | |Dependent Variable |

| |INTERNAL FACTORS | |
| |- Government / LOFSA | |
| |Political Stability | |
| |Liberal Environment | |
| |Developed Financial / Physical Infrastructure | |
| | | |

| |EXTERNAL FACTORS | |
| |Location | |
| |Quality Labor Force | |
| | | |

Source: Conceptual Framework adapted from studies by Baba (2004) and Mohamad (2007)

Figure 3.1 Conceptual Framework on the Viability of Labuan as an Offshoring Services Centre

The independent variables in the study were derived from previous study done by Baba (2004) and Mohamad (2007). The core of this study focused on two major independent variables that are location and quality labor force. The rationale behind this choice was based on study done by Baba (2004). Factors such as political stability, liberal environment and financial and physical infrastructure are internal variables, which could be controlled by the government or regulator (LOFSA). Location and quality labor force are external factors, which is beyond the government influence. Quality labor force can also be directly influenced by the government from the training or seminars that is conducted to improve the labor skill in that particular industry.

Location plays an important role in attracting the offshore investors from various countries coming in to do business transactions. Depending on what companies prioritize they should select a country that fits their demand best and also what kind of process they are considering offshoring plays a big part in the selection of offshoring location (Bryborn & Jantell, 2005). Personnel or workforce is one major issue that a company is prioritising for the offshoring decision. Labuan must understand that it has to leverage its relevant skilled manpower by working closely with universities and conducting internal programmes.

2. Research Hypothesis
The aim is to demonstrate the factors on the viability of Labuan as an offshoring centre. According to Baba (2004), for an offshore financial centre to be successful it must have the necessary conditions. These are political stability, liberal environment, developed financial and physical infrastructure, strategic location and the availability of quality labor force. The model underlying this research is depicted in Figure 3.1.

Based on the conceptual framework, the following hypotheses are generated:- H1 There is a relationship between Political Stability and the viability of Labuan as an offshoring centre;

H2 There is a relationship between Liberal Environment and the viability of Labuan as an offshoring centre;

H3 There is a relationship between Developed Financial and Physical Infrastructure and the viability of Labuan as an offshoring centre;

H4 There is a relationship between Location and the viability of Labuan as an offshoring centre; and

H5 There is a relationship between Quality Labor Force and the viability of Labuan as an offshoring centre.

3.3 Research Approach
The research approach in this study will be mainly adopted from previous empirical study done by Baba (2004) and Mohamad (2007), a study on offshore and Islamic banking and insurance and reinsurance sectors in Labuan IBFC.

The survey will be conducted by sending via e-mail to each prospective respondent. This design will be based on the choice of sampling frame and availability of sources for the research. The survey may also involve personal meeting the few principles officers if applicable.

4. Sampling and Sample Size
The survey used will be the whole population of the trust companies, which will enable the researcher to ignore the problems of bias in sampling. The total number of operational trust companies as of March 2008 is 21, of which 17 are Malaysian trust companies, 2 are foreign trust companies and 2 managed trust companies. This study had distributed sixty-five sets of questionnaire to the respective trust companies via e-mail. A total of fifty-five were returned but only forty-five were useable and therefore the response rate is 69.2%.

5. Questionnaire
For this study, the questionnaire (Appendix 1) was adopted from Baba (2004) and Mohamad (2007) with minor changes with addition in questions to emphasize on the offshore outsourcing of services. There was also information obtained from informal interviews with the principal officers of the trust companies. The questionnaire would comprise of four major sections. The first section is designed to gather information about the respondent’s nature of business, operations, products and services offered. The second section is designed to gather information with relation to the existing policies, rules and regulation, while the third section on Labuan’s competitive advantages and organizational strategies prior and post to the rebranding strategy and lastly the fourth section is to gather information on the competitiveness of Labuan IBFC, its major competitors in the Asia Pacific region and its viability as an offshoring services centre in the region.

6. Data Collection Method
Due to the small number of trust companies operating in Labuan, the questionnaires will be sent to all trust companies in Labuan listed with the Labuan Offshore Financial Services Authority’s (LOFSA). Of the 21 trust companies in the list, two are managed trust. The questionnaires will be addressed to the Chief Operating Officer, General Manager and Human Resources Manager or depending on the titles of the principal officers responsible for the overall affairs of the trust companies.

7. Data and Statistical Analysis
Data collected through the questionnaire will be analyzed using the Statistical Package for Social Science (SPSS) software, version 13 for Windows. The analysis and presentation will be categorized in four areas set out in the questionnaire, nature of business operations, policies, rules and regulations, business prior and post to the rebranding strategy and lastly competitiveness of Labuan IBFC.

Descriptive statistics was performed to obtain the means, modes, medians and standard deviations to show the central tendency of responses. Cronbach alpha inter-item correlation was performed to test the general reliability of the research instrument used. Correlation analysis was conducted to test relationship between variables. It is a calculated as a number ranging between -1.00 and +1.00. A measure of +/- 1.00 represents a perfect positive or negative correlation, indicating that the two sets of numbers form an identical pattern. A measure of -1.00 represents perfect negative correlation, indicating that the two sets of numbers form a perfect inverse relationship. A correlation of 0.00 means there is no relationship whatever between the variables (Savannah State University, 2002).

A summary of the proposed statistical methods for hypothesis testing is presented in table 3.2.

Table 3.2: hypotheses testing and the statistical tools
|No |Description |Statistical Tools |
|1. |To investigate the reliability |- Reliability analysis |
| | | (Cronbach’s Alpha) |
| | | |
|2. |List Respondents and Profile |- Descriptive statistics |
| | |Frequency |
| | |Percentage |
| | |Mean |
| | | |
|3. |Relationship between |- Correlation analysis |
| |dependent and | |
| |Independent variables | |
| |(internal factors) | |
| | | |
|4. |Relationship between |- Correlation analysis |
| |dependent and | |
| |Independent variables | |
| |(external factors) | |
| | | |

CHAPTER 4

RESULTS

4. Introduction
A total of sixty-five sets of questionnaire were distributed via e-mail to the twenty-one trust companies in Labuan. The respondents in this survey were principal and trust officers of trust companies as they were in the best position to provide all the information required. There were forty-five respondents out of sixty-five or 69.2% from total number of the target respondents. Information had been gathered from seventeen Malaysian companies, two non-Malaysian companies and two managed trust companies. A Malaysian owned trust companies is managing the two managed trust companies.

The survey instrument was a user-friendly e-questionnaire, which requires the respondents to furnish information by ticking the desired answers as well as to insert additional comments if necessary. All questionnaires were distributed via electronic mail, and all records containing personal information were treated as private and confidential. The results of the survey were summarized under the following headings: profile of respondents, policies and regulations, feasibility of Labuan as an offshoring centre and competitiveness of Labuan IBFC as an offshoring centre.

The questionnaires were then analyzed using SPSS program version thirteen. The results of the statistical analysis are presented below. A sample of the research questionnaire is attached in appendix A.

1. Profile of Respondents
From the table 4.1, these are the profile of the twenty-one trust companies in Labuan in terms of the types of services provided and whether they are currently providing any offshore outsourcing services. For those who do not provide any offshore outsourcing services they are to indicate whether in future they will consider providing offshore outsourcing of services. From the SPSS output the missing number exists due to the deletion of the response coming from the same trust companies. Out of the 21 trust companies, 10 currently provide offshore outsourcing services while 11 does not provide such services. Those that answered “no” were further asked to specify whether they would consider in the near future providing offshore outsourcing services all answered “not at all”. Most of the trust companies commented on the lack of quality labor force, unreliable communications and power supply. The services was categorised into four main services that is formation or incorporation of companies, bookkeeping or accounting services, secretarial or administration services and other services for example acting as trustee, registration and management of private and public funds. The result was 17 trust companies provided formation of companies, bookkeeping and other services while 10 companies provided secretarial services. For detailed information on the descriptive statistics of the respondent’s profile, please refer to appendix B.

Table 4.1: Profile of Respondents

| |
|Types of Services Provided |
| | | | |
| |Frequency |Percent |Mean |
|Formation of Companies |17 |81.0 |1.19 |
|Bookkeeping |17 |81.0 |1.19 |
|Secretarial |10 |47.6 |1.52 |
|Other Services |17 |81.0 |1.19 |

N = 21 Trust Companies

| | | | | |
| services? | | | | | | | | | |
| | | | |No | | | |11 |52.4 |
| | | | |Total | | | |21 |100.0 |
| | | | | |
| near future providing offshore outsourcing services? | | | | |
| | | | | | | | | | |
| | | | |Yes | | | | | |
| | | | |No | | | | | |
| | | | |Not At All | | |11 |100.0 |
| | | | |Total | | | |11 |100.0 |

2. Reliability Measure
The Cronbach’s Alpha reliability coefficients for all variables were obtained to ensure the measurements used in the questionnaire were standardized. The closer the reliability coefficient values to 1.0, the better the variables (Sekaran, 2003). Sekaran and Hair et. al. (2003) stated that reliabilities that is less than 0.60 are considered to be poor, those with 0.70 range is acceptable, and those over 0.80 are good.

Table 4.2 presents the Cronbach’s Alpha for measurement of reliability coefficients for main variables in this research. All the variables showed an acceptable Cronbach’s Alpha of greater than 0.6.

Table 4.2: Cronbach’s Alpha for Variables

|Variables |Cronbach’s Alpha Coefficient |Number of Items |
|Policies Rules and Regulations | | |
| |0.677 |5 |
|Competitiveness |0.748 |8 |
|Viability |0.729 |2 |
|Competitive |0.744 |9 |
|Internal Factors |0.854 |3 |
|Political Stability |0.730 | |
|Liberal Environment |0.843 | |
|Developed Financial/ Physical | | |
|Infrastructure |0.799 | |
| | | |
|External Factors |0.958 |2 |
|Location |0.969 | |
|Quality Labor Force |0.932 | |
| | | |

3. Mean and Standard Deviation for Variables Studied
The descriptive statistics in Table 4.3 presents the scores of the independent and dependent variables of the research.

Table 4.3: Descriptive Statistics of Independent and Dependent Variables

| | | | | |
|Variables |Min. |Max. |Mean |Standard Deviation |
|Internal Factors | | | | |
|Political Stability |3.0000 |5.0000 |4.3926 |0.54258 |
|Liberal Environment |3.2000 |4.8000 |4.0889 |0.46232 |
|Developed Financial / Physical |3.0000 |5.0000 |4.4815 |0.48490 |
|Infrastructure | | | | |
|External Factors | | | | |
|Location |2.1700 |4.1700 |3.5296 |0.52499 |
|Quality Labor Force |2.2500 |4.2500 |3.7167 |0.5129 |

From the result (table 4.3), it can be seen that the mean on political stability is (4.3926 on 5 point scale), as for the mean on liberal environment (4.0889 on 5 point scale) and the mean for developed financial/physical infrastructure (4.4815 on 5 point scale). It indicates that most of the respondents agree that Labuan has such features resulting in them choosing to establish in Labuan. Location (3.5296 on 5 point scale) and quality labor force (3.7167 on 5 point scale). This indicates that location and quality labor force is important in selecting a destination to establish their business.

4. Policies and Regulations
This was to investigate the perceptions of the trust companies towards the existing policies, rules and regulations focusing on the government original objective of establishing Labuan as an International Offshore Financial Centre. The Malaysian government’s objectives of setting up the IOFC were:

i) To complement the onshore financial system centered in Kuala Lumpur; ii) To strengthen the contribution of the financial sector towards the Gross National Product of Malaysia; iii) To enhance the attractiveness of Malaysia as an investment centre; and iv) To promote the economic development of Labuan and its vicinity.

To gain insight into the trust companies perceptions towards the government policies on the viability of Labuan as an offshoring centre, the respondents were asked to rank the objectives in term of “not at all important” (1), “somewhat important” (2), “important” (3), “very important” (4), and “extremely important” (5). The findings are shown in Table 4.4. Based on a five-point scale the objective to promote the economic development of Labuan and its vicinity was perceived as very important (mean = 4.78). The mean of 3.89 for “to enhance the attractiveness of Malaysia as an investment centre” is also above average and considered very important by the respondents. The mean of 3.24 for “to complement the onshore financial system centered in Kuala Lumpur” is also above average, and so was “to strengthen the GNP contribution” (mean = 3.02).

The findings indicated that only two of the objectives, to promote economic and vicinity and to enhance attractiveness as investment centre were considered important and should become the government top priority. The other two, to complement Kuala Lumpur and strengthen GNP contribution were important but not considered a priority item. In other words the government policies should be therefore focused on promoting the economic development and vicinity of Labuan and also to enhance the attractiveness of Malaysia as an investment centre.

These finding concurred with Mohammad (2007) to promote the economic development of Labuan and its vicinity. While these finding concurred with Baba (2004) to enhance the attractiveness of Malaysia as an investment centre.

Table 4.4: Objectives to Establish the Labuan IOFC

| |Extremely |Very |Important |Somewhat |Not at |Mean |
| | | | | |all | |
|Viable | | | |Viable | |Deviation |
|No |% |No |% |No |
| | | | |Yes | | | |43 |95.60 |
| | | | |No | | | |2 |4.40 |
| | | | |Total | | | |45 |100.00 |

In the survey, the respondents were further required to rank the competitive advantages of Labuan against other offshore outsourcing services providers on a five-point Likert-styled scale being 5 “most competitive”, 4 “very competitive”, 3 “competitive”, 2 “somewhat competitive” and 1 “least competitive”.

Table 4.9: Competitive Advantages of Labuan over other offshore outsourcing provider
| |Most |
|VLOC |Pearson Correlation |.750(**) |
| |Sig. (2-tailed) |.000 |
| |N |45 |

** Correlation is significant at the 0.01 level (2-tailed).

In the table 4.10, the significance correlation coefficient value is 0.75 (0.75, p