|
|
|
|
Internationalization of Indian Software
Industry Executive Overview This paper examines the rapid internationalization of Indian software industry. While there is no single factor which can explain the rapid internationalization and growth of Indian software industry. In this study various factors are examined. This paper examines the organization and size of Indian software industry, India’s competitive advantage, global demand for software talent, the influence of Indian diaspora and the emergence of born global firms. In the first glance Indian software industry is still in its infancy and its size is insignificant when compared to that of US. Further study reveals the true potential to be the world leader. Competitive advantage of Indian software industry stems mainly from its highly skilled workforce, low cost of skilled labor, and deep-rooted democratic institutions. India’s success can also be attributed to the global demand for software development service and shortage of skilled personnel abroad. Migration of highly educated Indians in early 1970’s and 1980’s had established an active and influential community that aided in rapid growth of Indian software industry. Pressure on global firms to lower costs and increase shareholder value in wake of the dot.com burst created a fertile environment for software outsourcing and creation of born global firms. In conclusion, it can be said that factors that caused the rapid growth of Indian software industry are still very relevant today and will propel India as a global power in the knowledge based world. Indian Software Industry Indian software industry had a very late start when
compared to US or Europe. Yet in the last decade, Indian software firms have
emerged as global powerhouse in computer software development. Indian firms have
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. According to New Delhi based
National Association of Software and Services Companies (NASSCOM), a software
industry promotion organization, Indian software industry had collective revenue
of Rs 79,337 Crores or $15.495 Billion in 2002-2003. In 1990, it was only about
US$ 150 million [1]. While this is relatively small when compared to that of US,
growth rate of Indian software industry has been tremendous. The compound annual
growth rate (CAGR) for India’s software export revenue over last five years
has been as high as 62.3%. Software exports revenue, according to NASSCOM
statistics, for the year 2003 is US$ 9.875 Billion. Market for Indian software
exports has been mainly in Northern America, Western Europe and Japan. Table
below shows the regional breakdown of Indian exports.
Classifying and organizing computer software
industry is difficult. The industry is not well defined and is rapidly changing.
As a result, the industry is classified according to “vertical” i.e.
classification of customer’s industry group. Table below breaks down the
Indian software export revenue based on vertical areas. This classification
helps to understand the expertise level and focus of Indian software companies.
Table –3: Industry classified
according to revenues
Source: NASSCOM and IDC Note: 1
US Dollar = Rs 45(approx) Internal Strengths “The real treasure of India is its intellectual capital. The real opportunity of India is its incredibly skilled work force. Raw talent here is like nowhere else in the world.” [2] - Jack Welsh, CEO, General Electric The above statement sums up India’s comparative competitive advantage in software exports. Contrary to general perception, India’s international competitive advantage lies not in low-cost labor-intensive services, but in skill intensive services as exemplified by the depth of software segments in table 2. India’s cost advantage
is an obvious factor but it is rapidly diminishing. The wage gap between Indian
software professionals and their counterparts’ in the developed world has
started to narrow. India’s comparative advantage lies in its abundance of
skilled professionals. Universities in India train and graduate world class
English speaking professionals. According to US census bureau 60,194 engineering
undergraduate degrees was granted in United States in 2003. In comparison Indian
universities granted 129,000 engineering undergraduate degrees in the same
period. [3] In addition Indian universities granted more than 250,000
undergraduate degrees in Science and Mathematics. The number of Indian graduates
emerging annually is growing at 20 to 30 percent. [4, 12] Several Fortune 500
companies’ have setup operations in India to tap into India’s enormous
talent pool. General Electric has invested over US$ 100 million in Bangalore to
build its largest R&D lab in the world. GE employs more than 2600 scientist
including more than 400 with Ph.D. degrees. [5] In the early years, Indian software firms sent
people to customer’s location abroad to do development work. This is called as
‘Body shopping’. The work done by Indian firms in the early part of 1990’s
was mainly simple coding and testing. As time progressed, Indian firms acquired
higher skills in software development and project management. High skill levels
allowed Indian software firms to rapidly move up the value chain from simple
coding to complete system design. As the reputation of the service firms grew,
more software development work is being done in India to take advantage of lower
costs. This is being called as ‘offshoring’ and will be discussed in detail
later. Political environment and
democracy has added to India’s competitive advantage. India’s deep-rooted
democratic institutions ensured political stability even when there had been
four general elections and six prime ministers in the last decade. Government
intervention in software industry has been minimal and almost negligible. The
industry has been driven by private sector firms that compete in global markets.
It would be wrong to conclude that government has played no role in software
industry. The government’s foremost role was in creating a vast network of
educational institutions and investments in R&D. Investments in education,
especially in engineering, and R&D labs was important in creating human
capital and infrastructural clusters. The biggest IT clusters in India:
Bangalore, Chennai, Hyderabad, Mumbai, New Delhi, and Pune are also home to
R&D labs and publicly funded educational institutions. This is similar to
that of USA, where defense related R&D created IT clusters in Silicon
Valley, Boston, Dallas and Austin. Indian government has invested in development of
special software development parks called Software Technology Parks (STP) in
1989. This is similar to China’s Special Economic Zones (SEZ). Basic
infrastructure at these STPs are well developed with dedicated power plants,
Satellite communications, Internet connections etc. Software Technology Parks
are the ideal locations for software exporting firms. In 2001 STPs had
contributed to about 60% of Indian software exports. [6] Intense rivalry among Indian software exporters has
created a hyper competitive industry. Indian firms therefore have resorted to
differentiate themselves from their competition in terms of quality. Of the 26
CMM level-5 companies in the world, 19 are in India. About 108 Indian software
companies are ISO9000/1/2 certified. As a result, Indian firms are able to
compete and win cutting edge R&D projects from Fortune 500 companies. [7] India’s enhanced reputation and credibility in software has developed a spillover effect into Information Technology (IT) enabled services such as financial analysis, taxation services, health care, back-office, and entertainment. As mentioned earlier, the breath and depth of Indian knowledge base is developing new markets for export of software services or IT enabled services. [8] Global demand for Software Development Software development is a complex task involving applied research, design and prototyping new products or systems, testing, documenting, and maintaining this program. Unlike other industrial areas, software development is the actual production of the final product. Development of software products demands talented people. As the demand for software grows, the demand for talented personnel grows. Unfortunately in US the supply of the best talent is limited and the available pool is very small and there are no significant increases in the supply of talented people in near future. This has created a huge demand for Indian software in the US market. [9] India has a large pool of highly skilled English speaking engineers who can do software development. In 1996, US
industry spent US$ 170 Billion on software development.[10] The demand for
software is growing beyond what can be locally produced in USA and Western
Europe. The search for talent is driving companies to outsource their software
development. In many cases, outsourcing also reduces the cost of software
development. After the dot.com bubble burst and in the ensuing recession, US
firms were keen to reduce costs. Many US firms found a reliable, timely,
high-quality software development in Indian software firms. In early
1990’s, talented Indian programmers were available at 1/15th of the
US wages. US and European firms found that Indian firms were delivering good
software on time. Consequently, the demand for Indian software services went up.
This prompted increase in Indian wages rose to compensate for increased
productivity. Indian businesses reduced the discount they needed to offer to get
repeat business from customers and have grown their business by word-of-mouth
based on successful projects. In the long run, cost differential will no longer
be the motive for importing software from India. As one IT manager put it
“Worth any amount of money for reliable, timely, high-quality software”.
[10] Indian firms are able to increase exports and revenues by filling a growing
skill shortage in IT departments in the US, Japan and Europe. Effect of Indian Diaspora Firms from developing countries face reputation as a barrier to entry in export markets. Buyers abroad have limited information about quality and service reliability because they have little prior experience in dealing with these firms. Reputational barriers are especially higher in service sector such as software. Software being an intangible, determination of quality is consequently more difficult. To mitigate reputational barriers, Indian software exporters have adapted several strategies. One is to form joint ventures or strategic alliances with customer firms. Second is to open branches near customer locations. Third is to list in New York Stock Exchange (NYSE) or NASDAQ. Fifth – the more innovative and successful approach is to tie up with Indian Diaspora. Indian immigrants especially in IT sector in the US have developed excellent reputation for their skills and performance. Successful Indians in Silicon Valley such as Vinodh Dham, Vinodh Kohsla, Sabir Bathia, and others have established an embedded network into social and commercial institutions in the US. Publicly associating with a successful individual sends out positive signals to potential US customers and shaping a credible image for the Indian firm [11]. Indian Diaspora has played a major role in Indian software exports by providing market information and matching referral services. The network increases the informational intensity in international trade and boosting confidence of US buyers of Indian software services. Companies like IBM, Intel, TI, HP, GE and others opened R&D centers in India largely because of the confidence in many Indians working in their US operations. GE’s Indian Research center in Bangalore has filed 95 patents in the U.S since year 2000. [13] Table-4: Characteristics of Indian Diaspora
Source:
Kapur & Ramamurti “India’s emerging competitive advantage in services Indian diaspora in the US and Europe are well
represented in knowledge based services such as health care, education, finance,
software, R&D and management consulting. Few have held top management
positions in Fortune 500 firms such as McKinsey, PepsiCo, Computer Associates,
United Airlines, Intel, IBM and P&G. Indian diaspora have helped diffusion of knowledge
to Indian software firms through a variety if mechanisms. Either via starting
their own firms in India or by consulting/advising them or by returning to
India. India’s success in software exports is in part explained by the
extensive, strategic, informational and reputational role-played by Indian
diaspora. Software Outsourcing Outsourcing of software development to subcontractors in India is relatively
a new development. [14] Ten years ago, most of the software development was done
in the US at customer’s location. Indian engineers had to come over to the
client site to do the development work. This reduced risks and simplified
project management. But as the reputation and capability of Indian software
developers grew, more work was sent off shore i.e. to India. Outsourcing
software development work reduces uncertainty, lowers cost and speed up
development. [15] Outsourcing of software development has registered an average annual growth rate of more than 40 percent over the last decade. [16]. According to a study done by Dr Eric T.G. Wang, outsourcing is growing in importance to non-IT companies. Four main benefits of outsourcing are: Reduction in uncertainty, Asset flexibility, Reputation enhancement and speedup innovation. Reduction in uncertainty: Outsourcing software development reduces uncertainty regarding, project costs, schedule overruns and functional failure. Contracts for outsourcing can be framed in ways that all uncertainty regarding the software development is transferred to the subcontractor who is providing the service. Asset flexibility: Software development is complex and need different skills for different types of projects. Subcontracted supplier will have a wider range of skills and knowledge in IT systems. As result, customer can gain flexibility on its outsourced assets to deliver different types of software for different applications without having to hire or retrain internal staff. Reputation enhancement: Outsourcing development work to a subcontractor depends on the reputation of the supplier i.e., subcontractor. Firms that outsource software development is able to lower costs and speedup development have seen that its reputation in Wall Street go up. With the right suppliers both the firms, the customer and the supplier, will win by outsourcing development work. Speeding up Innovation: Firms outsource development work to complement their in-house capability if developers in India working for the subcontractor have the necessary skills for innovation. Outsourced services act as extended resources for the customer. In a world of ever decreasing product lead times; reducing development time is a major benefit. India offers a time zone advantage. India is twelve
time zones ahead of the US and five hours ahead of Europe. This time difference
allows development work to go on uninterrupted on a 24-hour development schedule
for teams working in the US and in India. Modern telecommunication technology
allows transfer of information instantly to all development centers. Thus
allowing part development in the US or Europe and part in India to speed up
innovation or software development. Born Global Firms In last few
years, world has seen the emergence of a new transnational firms called “born
Global firms”. According to a study by Dr. S. Tamer Cavusgil at Michigan State University
[17], Born global firms exhibit international business expertise and
superior performance. Emergence of born global firms
in India is due to embedded network of Indian diaspora, Indian entrepreneurs and
venture capitalists. The Indus Entrepreneurs (TiE) is one such networked
organization which brings together venture capitalists from the US and
entrepreneurs. Born global firms such as
Andale Inc, Moschip Inc, Covansys etc have operations in the US and India. In
2000, Indian immigrants in US founded 972 companies and most of them had
operations in India since inception. [18] This phenomenon is also fueled by
reverse migration of skilled Indian developers who migrated back to India and
stated their new enterprises. Born global companies from
India and the US have dual advantages of reputation and access to capital by
operating from the US and benefit of tapping into skilled talent in India. This
new business model presents an enormous opportunity for Indian companies to
increase their global exports. Currently
there is no reliable information on the export revenues of the born global
companies. Conclusion In
last few years, the world saw the emergence of India as a leading software
exporter leading to internationalization of Indian software Industry. Initial
general opinion on India’s success in software was attributed to low cost
skilled labor available in India. This paper shows that low cost is just one of
the factors and cost advantages are diminishing rapidly. The main factors
driving internationalization or globalization of Indian software industry can be
split into two groups: Internal factors such as – Availability of skilled,
reliable and knowledgeable workforce, stable political system and governmental
assistance, and External Factors such as demand for software development in the
US and Europe, influence of Indian diaspora, popularity of software outsourcing
and emergence of born global firms. References
Home Resume White Papers Presentations
|
