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External Factors Influencing Globalization
of Indian Software Industry Executive Summary This article examines the external factors influencing globalization of Indian software industry. In the last decade, Indian software firms transformed from a modest coding and body shopping operations to become a global competitor in a leading edge sector. Indian IT consulting companies are now competing globally with the established industry giants. Success and rapid growth of Indian software firms can be attributed to its highly skilled work force. However, Global competitiveness of Indian firms can be attributed to prudent global expansion. This article examines the
major factors influencing foreign entry and expansion of operations by Indian
firms. A questionnaire proposing 60
different questions about external factors influencing global expansion was
prepared. The questionnaire was initially administered to upper-middle-level
mangers of nineteen major software-exporting firms. To elicit views from
marketing managers and technical managers, the survey was split between twenty
marketing managers and twenty technical managers. The entire survey was
administered in English, as all the respondents were fluent in English. In
addition to survey, twenty-two managers were interviewed for their in-depth
opinion on this issues used in the questionnaire. Background Indian IT sector is a globally competitive industry. In 2002, the net revenue of Indian IT sector stood at $20 Billion, two thirds of which was software and one third hardware[1]. Indian Software sector is predominantly export oriented with about two thirds of revenues coming from exports. IT sector witnessed rapid growth rates from 1980's, with growth rate averaging 43.7% [2]. Indian firms now hold 4% of global software services market. During 2001/02, India exported software services to 102 countries around the world of which exports to USA and Canada accounted for 62%, 24% to Europe and 4% to Japan.[3] Success of Indian IT industry has been unexpected given the low PC usage rate, i.e., number of personal computers per thousand populations, poor telecom infrastructure, and low Internet access rates. [4]. India's ranking in United Nations Development Program's (UNDP's) technology Achievement Index is a modest 63 and is not indicative of a country that has a globally competitive IT industry. Conventional explanations for
India's success in IT sector emphasis on comparative advantage of the
country.[5] Software sector uses
low cost highly skilled human resources in which India enjoys internationally
competitive advantage. About 16% of 340,000 global IT professionals are from
India.[6] Indian IT industry also had a benefit from the lack of state
intervention. Private sector firms
what compete in global markets without any intervention from the country’s
regulatory authorities drive the industry. The only form of state facilitation
of IT industry was with the creation of Software Technology Parks (STP) with the
latest data and telecommunication infrastructure. Government's investments in
education and R&D labs resulted in the creation of the valuable human
capital and infrastructure clusters. Six major IT clusters in India, Bangalore,
Chennai, Mumbai, New Delhi and Pune also had the highest concentration of public
sector R&D establishments and advanced educational institutions. This
enabled the clustering of IT infrastructure necessary for a globally competitive
IT industry.[7] Another dimension for Indian
IT industry's success is the reputation of Indian Diaspora especially in Silicon
Valley. Large number of Indian Diaspora working at global firms like GE, HP, IBM
etc played an important role in boosting the confidence of global firms in
Indian IT capability. The success and reputation of Indian Diaspora has created
a "brand name" wherein as Indian software programmer sends an ex
ante signal of quality just as "Made-in-Japan" label sends an
signal of quality in consumer goods. Indian Diaspora also had an network effect
in tying up Indian Entrepreneurs with global firms. According to one estimate,
71 out of 75 IT firms in Bangalore have established business contacts with
Indian Diaspora in US.[8] It should be emphasized that
the internal strengths of Indian IT industry principally comes from domestic
entrepreneurship and domestic capabilities. The role of Indian Diaspora and
networking with global firms are necessary to understand the growth and
performance of the IT sector. Research
Methodology The influence of external
factors on global success off Indian IT sector has not been studied and
published. To gain an in-depth knowledge on the role of external factors, it was
necessary to elicit manageress’s implicit theories and opinions on those
factors. A detailed questionnaire of 60 questions proposing the importance of
Political risks, Legal issues, Economic issues, Cultural issues, Customer demand
factors, and local business environment in a foreign country was prepared. A
five point liekert scale was attached to each question to record the
respondent's degree of agreement or disagreement with those statements. Owing to
the commonality of English language among managers, the questionnaire was
prepared in English only. The questionnaire was
initially sent out to more than seventy middle level managers and engineers in
twenty leading software firms, Of which only forty four managers responded. Four
of the responses were discarded for the analysis due to the incompleteness of
the responses to the questionnaire. The
questionnaire was administered to a group of twenty mid level marketing mangers
and twenty mid level technical managers working in India or in USA. The reason
to collect opinions from technical and marketing managers was to compare the
results. The differences in opinion between the two groups appeared to be so
great on many items on the questionnaire that they could not be ignored. The idea was simply to use the
recorded opinions of managers as inputs. The objective was to explore and
discuss the participant's opinions and theories of the influence of the external
factors on global expansion of Indian software companies. Although the results of the
survey were collected on a five point liekert scale (strongly agree, Agree,
neither agree nor disagree, Disagree and strongly disagree), for ease of reading
and interpretation, the results are presented in terms of fraction scores. Each
table thus represents the percentage of managers agreeing or disagreeing with
each statement. Results Political Factors Political factors influencing foreign entry and global
expansion decision are clustered in to four major categories: Political
stability, Legal issues, Economic issues and cultural issues. Political Stability Questions 43 to 45 addresses the main issue of political stability. The results from this study show that marketing managers are more sensitive to political stability than the technical managers. Marketing managers will be the first ones to consider a country for entry and they are more likely to reject unstable countries before technical manager’s opinion is considered. It should be noted that India’s diplomatic relations with foreign countries is important. This factor explains why Indian firms have not established major presence in Pakistan and China. China offers a huge market for software services yet expansion into China has been slow and very limited. Few managers in the interview explicitly stated that the lack of Indian government’s influence in China, Pakistan and Saudi Arabia inhibits expansion in those countries.
A restriction on trade does not seem to be of a major concern for technical and marketing managers. This indifference can be attributed to the fact that India had been subjected to a lot of technological embargo by USA. The fact that Indian firms have succeeded even with American embargo till 1980’s has led to an opinion that trade restrictions can be circumvented and does not pose a major entry barrier. [9] Legal Issues Legal issues were analyzed under two categories: Ease of
procuring Work Visa and impact of local rules and regulations in a foreign
country.
Indian software firms employ low cost highly skilled Indian labor and that is one of their competitive advantages. In addition, the nature of software exports and services require “hands-on” approach at the customer location. Since the software was developed in India, firms tend to send one the design engineers abroad for installation at client premises. To do this, Indian firms will need some form of temporary work visa in a foreign country. The results from the survey show that managers are concerned about the ease of travel and visa requirements. Software industry worldwide is
particularly sensitive to copyright issues and intellectual property protection
in foreign countries. Indian firms also have the same concerns and are very
protective about their intellectual property rights. Implementation of
trademark, copyright laws in accordance to WTO agreements in India has helped
Indian firms protect their Intellectual property abroad. Indian managers are very much
aware of differences in rules and regulations abroad when compared to their home
country. As a result, managers don’t consider differences in rules and
regulations to be a major factor affecting their global expansion. During the
interview, many managers said that they expect local rules, need for
documentation to differ from country to country and the companies have modified
their operations accordingly. Economic Issues Economic issues were analyzed
in three groups: WTO, Globalization and tariffs, foreign currency exchange risks
and Cost of capital.
India began opening up its market for foreign competition only in 1990’s and is not a member of any free trade area agreements. As a result, managers have a mixed opinion about the need to have free trade agreements or WTO membership for a foreign country. However all managers are of the opinion that globalization is beneficial for them and give importance to political views on globalization in foreign countries.[10] The impact of WTO and need for free trade areas can be observed by the fact that Indian firms have established operations in countries like Mauritius and Brazil while avoiding Eastern Europe. Vast majority of Indian
exports is conducted in US Dollar or Euro or Yen. Indian firms tend to avoid
transacting business in local currencies. This is partly because Indian Rupee
was not a free-floating currency prior to 1991 and Indian firms had to raise the
necessary foreign currency abroad to buy their computer hardware and software
from USA.[10] Global expansion of Indian
software firms is in part funded by international capital. Indian companies
raise a part of their capital requirement abroad via bank debts. This exposes
companies to vagaries of interest rate fluctuations and inflation rate changes.
The opinion of Indian managers seems to reflect these concerns and was noted in
this study. Cultural Issues Cultural differences do not seem to be of a major concern while making decisions for foreign entry and expansion. In this study, mangers were specifically asked for their opinion regarding cultural differences, importance of English language and Western way of life.
India, being a multi-cultural country, mangers are used to seeing different cultures, languages and different lifestyles. Both marketing and technical mangers seem to agree that cultural differences and the importance to English language do not play a major role in foreign entry decisions. Demand Factors All the managers involved in the survey were unanimous in identifying market demand. Market size and attractiveness as a major factor in deciding on foreign entry and global expansion.
Marketing managers and technical managers differed on the scale of their agreement but in general tended to agree on the importance market potential and market attractiveness as a major factor. All the Indian firms in the survey had operations in US, Canada and Europe, while 6 firms had operations in US, Canada, Europe and Japan, while only three firms had operations in other countries in addition to US, Canada, Europe and Japan. This indicates that the foreign operations are primarily demand driven. Expansion of software development centers abroad by Indian software firms is very limited and is mostly driven by labor costs. TCS and Infosys have setup development centers in China, Russia and Mauritius to take advantage of the local human capital available in those countries. Competition intensity Indian software firms are used to intense competition in US markets. Most companies compete only on price and have gained reputation as price warriors. [11] Intense domestic rivalry has led to oligopoly effects in most leading markets. Small Indian firms do not have the resources for an in-depth market research necessary to make entry decisions. Instead, they follow their competitors, Establish sales offices in foreign country before expanding other operations.
Note: Few managers did not answer to Oligopoly effects Local Adaptation Customization of software is nothing new to Indian firms. Indian firms primarily offer IT services and develop customized software for their clients. Roughly about two thirds of total software exports are customized solutions. [12] Our study confirmed that Indian managers do not consider the need to customize software solutions for a foreign country to be a major impediment for global expansion.
Technical Managers and
Marketing Managers differed on the need for local support available for the
client software systems. This is in part driven by their nature of work and
objectives. Indian IT services firms use standard business software and
customize it to meet client needs. As a result, the technical engineers often
feel the need for support for client software systems. While marketing managers
are driven by the need to create more sales opportunity, and see that the need
for support as source of revenue by selling maintenance services. Local Business Environment Local business environment in
foreign country is categorized into Local marketing environment, local telecom
infrastructure, local labor and educational standards and ease of transportation
to and from that foreign country. Local Marketing Environment Indian firms use direct marketing as preferred means of marketing. Marketing managers therefore gave a high importance to cost of local marketing and market promotion while making foreign entry decisions
Telecom & Internet Infrastructure Export of software and
software services is heavily dependent on telecommunication infrastructure.
However due to modern advances in Internet access and satellite communication
has enabled Indian software firms to connect and communicate with their foreign
operations. As a result the need for local communication infrastructure is not
seen as a critical factor affecting foreign entry decision.
Talent of Local Labor and Education standards Indian software firms tend to use Indians from their home country base in their operations abroad. As a result, Indian technical managers do tend to give a high importance to the technical qualifications and educational standard of labor abroad. But do not consider the talent of the labor force available abroad as a major requirement for foreign entry and expansion. Managers are concerned about the local health care costs and insurance costs. However this attitude may be changed as time progresses and the companies feel the need to hire more locals to run their operations abroad.
Limitations of the findings The three major factors reported in the survey represents one attempt to capture and understand the external factors influencing the Indian IT firms. This study elicits opinions of technical managers and marketing managers. The diversity in the nature of their jobs have an enormous impact on their opinions. This diversity poses a challenge in preparing questions that elicits true opinions without the influence from the nature of their job. This study has important limitations: Firstly, the study excluded
Multinational fims and joint ventures with multinational firms. Multinational
corporations are driven by a different set of needs and business motives
therefore it was felt that MNC's will have a different set of factors which
influence their global expansion when compared to Indian firms. Secondly, the study excluded
Information Technology Enabled Service (ITES) and Business Process Outsourcing (BPO)
companies. Though ITES and BPO companies are classified as IT services export
firms, the study excluded these companies as their operations was primarly in
India and only services from India are exported. The absense of international
operations changes the nature of these businesses and factors influencing ITES
and BPO companies are substantially different from that of software companies. Thirdly, the study did not
consider the influence of entrepreneur-diaspora networks on global expansion.
Managers who answered the survey were not the founders of the company. Moreover
technical managers had little exposure to entrepreneur-diaspora networks to form
an opinion. The impact of entrepreneur-diaspora network on globalization of
Indian software firms requires further study with inputs from entrepreneurs and
Indian diaspora. Lastly, the study was conducted by an Indian and all the managers were Indian nationals working in India or in USA. The lack of cultural diversity among the managers who took part in the survey could have impacted the study. It is felt that foreign nationals who are managers in Indian firms should be included in future studies to accurately capture the cultural factors influencing the Indian IT companies. Conclusions The findings of this study can
conclusively say that global expansion of Indian software firms is primarily
driven demand factors: market size, market attractiveness and competition
intensity. Political risk factors are considered before entering a foreign
country. Political stability and diplomatic relation of that country with India
play a role in evaluating the political risk factors. Surprisingly cultural
differences do not seem to weigh much in global expansion plans. Indian software
firms utilize programmers from India more than hiring locals from a foreign
country. This tend explains the importance to legal hurdles regarding visa
procedure and the cultural insensitivity at these companies. Finally, the
availability of telecommunication infrastructure is considered to be of moderate
importance. The universal nature of Internet and satellite communication
capability provided by Indian government has mitigated the importance of
telecommunication infrastructure. It may be noted that Indian
software companies are fairly new when it comes to global operations. The
opinions of managers on global expansion might change with greater experience in
running a global firm. 1. National Association of Software and Service Companies (NASSCOM) www.nasscom.org/it-industry/indic-statistics 2. World Bank, “Global Economic prospects and Developing Countries” World Bank 2002 3. C. Chakraborthy, C. Jayachandran, “ Indian Software industry: Structure, Trends and constrains”, Journal of Services Research, Volume 1, Number 2,October, 2001 4. Taylor, P “India’s Software Industry” Financial Times Review of Information Technology, November 1996 5. D. Kapur and R. Ramamurthi, "India's Emerging Competitive Advantage in Services". Academy of Management Executive 15, no 2 2001. 6. Nagesh Kumar, "Indian Software Industry Development. International and National Perspective", Economic and Political Weekly, November 2001. 7. D. Kapur, "The Causes and Consequences of India's IT Boom". India Review Vol. 1, no. 2, April 2002 8. Anna Lee Saxenian, Silicon Valley's Immigrant Entrepreneurs Public Policy Institute of California 1999. 9.
C. Chakraborthy, C. Jayachandran, “ Indian Software industry:
Structure, Trends and constrains”, Journal
of Services Research, Volume 1, Number 2,October, 2001 10. S.C.Batnagar, Sharin Madon, “ The Indian Software Industry: moving towards maturity”, Journal of information technology Volume 12 1997. 11. Ravi Ramamurthi, “Wipro’s Azim Premji on building a world class Indian Company” Academy of Management Executive 15, no 2 2001.
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