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  • 1. The Indian software industry and its prospects Ashish Arora Heinz School, Carnegie Mellon University The Software Industry Center at Carnegie Mellon University, and the Alfred P. Sloan Foundation provided support for this research.

2. Outline

  • The software industry an activity, not an industry
  • How did the underdog become a tiger?
  • Prospects: Moving up the value chain
  • Impact

3. Outline

  • The software industry an activity, not an industry
    • Most software workers do not work for IT firms
    • The software activities inside non-IT firms were main target of Indian SW exports
  • How did the underdog become a tiger?
  • Prospects: Moving up the value chain
  • Impact

4. Software is Ubiquitous :SW Employment as % of Total Employment by State, 2001 0-1% 1-2% 2-3% >3% Source: BLS, 2001 5. 66% of US software jobs are outside the IT industry Source: BLS, 2001 Software is both a technology and an industry 6. SW is both an activity and an industry, and US government statistics have not caught up

  • Salaries of temporary workers (~40%)
  • Embedded SW(~10-15%)
  • Sales to US MNC affiliate overseas
  • 4. US counts only unaffiliated imports

Source : GAO, Oct 2005 7. Source: www.nasscom.org Indian SW exports target the in-house SW activitiesof user firms: Offerbusiness services

  • Standardization and modularization of support functions inside large organization, which reduced (but not eliminated) the need for local presence
    • Demand-Supply mismatch in 1990s
    • Telecommunication advances
  • Much of globalization is
    • directed at in-house software systems,
    • throughoutsourcing ,
    • increasingly through longer term partnerships
    • US vendors are starting to increase offshore capabilities
    • US firms are starting offices and subsidiaries to provide business and IT service support

Indian IT software services and BPO (ITES) revenues: Vertical 100% 100% Total 21% 21% Others 5% 5% Healthcare 4% 4% Telecom service providers 1% 1% Transportation 3% 3% Utilities 5% 5% Retail 1% 1% Government 9% 9% Telecom equipment 12% 12% Manufacturing 40% 39% Banking, Financial Services & Insurance (BFSI) 2003-04 2002-03 ($ billion) 8. Outline

  • The software industry an activity, not an industry
  • How did the underdog become a tiger?
    • Human capital, bad economy, good luck
    • Benign neglect policy played a minor role
    • Bangalore ?
  • Prospects: Moving up the value chain
  • Impact

9. The SW industry in India has grown rapidly ~ 30% p.a. since 2001. Employment in the Indian Software andServices sector Indian IT Industry-Sector-wise break-up Source: Nasscom (IT factsheet),www.nasscom.org(accessed 18 Sept 2006) Chinese SW exports ~$3.5 B Projected to increase ~12 Bby 2012 415,000 316,000 253,000 ITES-BPO 878,000 741,000 614,000 IT Services 2006 2005 2004 Sector 36.3 28.4 21.6 Total IT Industry (including Hardware) 6.9 5.9 5.0 Hardware 23.4 17.7 12.9 29.5 22.6 16.7 Total Software and Services Revenues Of which, exports are 0.9 0.7 0.4 -Domestic 3.9 3.1 2.5 -Exports 4.8 3.9 2.9 Engineering Services and R&D, Software Products 0.9 0.6 0.3 -Domestic 6.3 4.6 3.1 -Exports 7.2 5.2 3.4 ITES-BPO4.3 3.5 3.1 -Domestic 13.2 10.0 7.3 -Exports 17.5 13.5 10.4 IT Services FY 2006E FY 2005 FY 2004 USD billion 10. How did the underdogs turn into tigers?

  • Economic Development with Unlimited Supplies of Labor
  • Abundant human capital supply
    • relative to domestic need
    • Ireland and Israel had poor growth in 1980s; Indian economy stagnated in 1970s
    • Supply elasticity high
  • Openness and links with export markets
    • Falling telecom costs
    • Expatriates
    • English language
    • MNC contacts (esp Ireland )
  • Good timing and luck
    • liberalizationwheneconomic boom and global IT skill shortage
  • Firm level
  • Strong entrepreneurial response and accommodating policy
    • High rates of entry
    • experimentation
      • market (geography)
      • market (product or service)
      • business model (e.g., service delivery)
    • learning and capability acquisition
  • Lack of organizational capabilityperhapswhy other English speaking, human capital abundant countries such as Philippines, Pakistan and Bangladesh did not make it.

11. Human capital is key Entry of first private engineering college

  • Up to late 1970s most of colleges in public sector
  • Now very large share of private self-financed institutions
  • Undergraduate engineering capacity has grown seven-fold between 1990 and 2003
  • Large inter-state variation in intake capacity
  • Vast bulk of capacity differences is due to private, non-funded, colleges

SW exports 2003 SW exports 1990 12. Difference in state education capacity predates the rise of SW exports. State Share of Private Non Granted College in Sanctioned Engineering Baccalaureate Capability Source: My calculations based on AICTE data on sanctioned capacity Source: Arora & Bagde, 2006 10,758 32,886 Diff 12647 42,144 2003 1,889 9,258 1991 Late Adopters Early Adopters Avg. Engineering College Capacity 9,772 39,080 Diff 9,874 39,682 2003 102 602 1991 Avg. Software Exports in millions of Rupees, 1993-94 prices 13. States that allowed private engineering colleges early likely to emerge as SW hubs Dependent variable: Annual change in SW exports Dependent variable: SW exports 2003 SW exports 1990 Source: Arora and Bagde, 2006 No. of obs. 14. 0.90 R 2 6096 (4956) Constant -0.56 (0.15) Lagged Industrial Output 1987 0.97 (0.50) Electronics Production 1990 5.96 (1.00)Eng. College Capacity 1987 22981 (11914) -371 (1308) Constant Note: Cluster corrected std. errors in parenthesis. No. of obs. 182. 0.54 0.49 R 2Yes Yes Year effects Yes Yes State fixed effects -0.28 (0.16) Population -0.55 (0.61) per capita income (-1 yr) 0.007 (0.023) industrial output (-1 yr) 0.40 (0.24) electronics production (-1 yr) 0.20 (0.07) 0.34 (0.1) Eng. college capacity (-4 yr) 14. Results survive controlling for reverse causality

  • Instrument for eng. college capacity
  • Mean of neighboring states education policy
    • education policy for a state is dummy variable = 1 when first self-financing college starts and stays 1 thereafter
    • In 1991 only 6 out of 14 states had self-financing colleges
    • By 1998, all 14 states allow
  • Shows the benefits of decentralization

0.54 Yes Yes 22981 (11914) -0.28 (0.16) -0.55 (0.61) 0.007 (0.023) 0.40 (0.24) 0.20(0.07) SW exports OLS Note: Cluster corrected std. errors in parenthesis. No. of obs. 182. 0.44 0.45 R 2 Yes Yes Year-fixed effects Yes Yes State-fixed effects 9397 (11527) -4773 (4489) Constant -0.15 (0.14) Population (-1) -0.67 (0.67) Per Capita Income (-1) -0.03 (0.05) Industrial Output (-1) 0.21 (0.23) Electronics Production (-1) 0.74 (0.50) 0.62 (0.36) Eng. College Capacity (-4) SW exports 2SLS (2) SW exports 2SLS 15. Public Policy?

  • Liberalization very helpful
  • Fiscal other benefits useful
  • Human capital investments were not intended to foster SW
  • Comparative advantage as much aresult of poor economic growth as high human capital
  • Affirmative, sector specific policies unimportant
    • Policy changes inconsistent
  • SW flew under the radar
    • Naturally exempted from many labor and industrial regulations
  • Hardware, the focus of much policy attention (till SW succeeded!) has very little to show

16. Bangalore was not the past of the Indian SW industry, though it may be the future Entry dates and the regional location of firms, 2001 Source: Arora and Bagde, 2006 Source: Athreye, 2005 Little merit in claims that Public Sector R&D labs (in Bangalore) explain the growth of the Indian SW industry 8 29 6 1 Hyderabad /Secundrabad 17 (4) (2) 63 (18) (9) 25 (6) (1) 4 (1) 5 Delhi: of which (Noida) (Gurgaon) 6 34 9 5 3 Chennai 8 (2) 63 (17) 32 (8) 11 (0) 9 (1) Mumbai/Pune (Pune) 15 50 19 3 3 Bangalore 2000 -01 1992-99 1985-91 1981-84 Pre-1980 Location 17. Learning and the domestic market?

  • Not important
    • Exports were different in nature technical sophistication was of limited value
    • Brazil has a very sophisticated domestic banking an