Malaysia's second smallest state, Penang, is located on the northwest coast of Peninsular Malaysia by the Strait of Malacca. This state, which is the third-largest economy amongst the states in the country, has been perceived as an emerging outsourcing destination.
 
Penang's strength lies in manufacturing, which contributed around 45.9 percent of states' GDP (2000).  The combined IT-BPO exports from the city were $564 million in 2007. Penang received $3 billion in investments last year out of which nearly half came in from domestic investment and the other half from FDI.

Penang is home to key IT-BPO companies, such as IBM (IT services), Ideal Capital (BPO services), Intel (Design center), Motorola (Research and development services), MoBif (BPO services), Citicorp (Transaction services), Agilent, JABIL Shared Service Center, DELL (BPO), Seagate (Shared Services), National Instruments (BPO), PMC Sierra (BPO).

Here, companies are predominantly engaged in enterprise application services. However, other services such as Internet surveillance, customer relationship management, animation and e-solutions, and pharmaceutical services are also provided from the city. There is a talent pool of skilled English speaking developers of many different nationalities available in Penang, making it suited for multi-lingual service delivery.

Penang has 33 universities and private colleges, including the Penang Medical College and the first (and largest) school of pharmacy in Malaysia and University of Science Malaysia (granted the APEX1 status in 2008). It was accorded the Multimedia Super Corridor Cyber City status, the first outside of Cyberjaya, with the aim of becoming a high-technology industrial park that conducts research.

Government policies in the city encourage outsourcing. Kumar Parakala, KPMG’s Global Head of Sourcing says, “MSC Malaysia Cybercity, Penang provides competitive financial incentives, including no income tax for up to 10 years or an investment tax allowance, and no duties on import of multimedia equipment for Malaysia Status Companies (MSC).”

“A company, which was granted Investment Tax Allowance, gets an allowance of 60 percent of qualifying capital expenditure incurred within 5 years from the date on which the first qualifying capital expenditure is incurred. Companies can offset this allowance against 70 percent of their statutory income in the year of assessment. Any unutilized allowance can be carried forward to subsequent years until fully utilized. The remaining 30 percent of statutory income is likely to be taxed at the prevailing company tax rate. Companies that receive MSC status also qualify for unrestricted employment of foreign knowledge workers,” he adds.

Still, Penang’s potential remains to be exploited much beyond. Penang does not boast of strong capabilities in call center and R&D at present and hence cities in India and China such as Bangalore, NCR and Ho Chi Minh City provide stiff competition to Penang and attract a larger piece of the outsourcing pie. In recent years, the state has already experienced a decline in FDI due to factors such as cheaper labour costs in China and India.

“Despite moments of economic uncertainty on the global scene, Penang seems to be going from strength to strength in the long run. The Government has a strong focus on promoting the IT-BPO industry in Penang through various initiatives. As the economy shows signs of revival, we can expect to see significant traction in the industry in terms of outsourcing and shared services,” Parakala says.
 
Penang faces two challenges: how to increase Penang’s attractiveness as a business process outsourcing center and how to nurture local outsourcing firms. Penang needs to re-create itself as an outsourcing hub just as it did for manufacturing, focus on certain niche areas, supported by strategic planning on the part of the government.

“In order to be a BPO hub, Penang needs to raise the competencies of its labor force through revisions in the education system and to attract outsourcing investors to the state, it would have to beef up its surveillance of software piracy activities. Penang has strong engineering and manufacturing base, which can be leveraged to offer services in these sectors,” he says.