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  • 2. Establish that software jobs are distributed across geography and industry, not concentrated in the computer or software industries.
  • Economists have neglected the role of firms in economic growth – tend to be little more than black box. Hausman and Rodrik (2002), in an uncertain world, figuring out where and how to exploit a certain type of resource abundance is not straightforward. Labor intensive manufactures range from a range of textiles to diamond polishing. Even in textiles, it turns out that Bangladesh’s exports to the U.S. are narrowly concentrated in men’s cotton shirts and trousers and knitted hats. By contrast, Pakistan, with a similar resource endowment, exports bedsheets to the U.S. but few hats in textiles. This is not an isolated example. Hausman and Rodrik show that of the top 25 exports of each country, there are only six items in common. They find the same pattern for other pairs of comparable countries, such as Honduras and the Dominican Republic, and Taiwan and South Korea. For instance, the Honduras is a major exporter of ignition wiring sets but not the Dominican Republic. They conclude that in most developing economies, “industrial success entails concentration in a relatively narrow range of activities.” Countries have to learn what precise product lines and activities they will succeed at.

Transcript

  • 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 activities of user firms: Offer business 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,
      • through outsourcing ,
      • 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 and Services 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 B by 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-BPO 4.3 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
      • liberalization when economic 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 capability perhaps why 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 2 Yes 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 a result 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 and telecom sector, served by domestic software industry but very little by way of exports.
      • HW had ample protection and very little success
    • Israel has been more successful in network security
    • i-flex did succeed in leveraging domestic experience for exports
    “… (Our parent firm) … was the first firm to use IBM mainframes in India for a very long time … We have the most qualified experts on IBM mainframes. … (But) technology is not such a critical factor as compared to understanding business practices.”… Domestic expertise may be useful in gaining technical expertise such as in coding and project management. However domestic and export projects are two different ball games .” (Interviewed by the author in Bombay, 1997, quote extracted from Arora et al., 2001. Emphasis added.).
  • 18. Entrepreneurship and openness
    • “ When I was out there in 1991, the country was bankrupt. We had three governments in one year, an assassination of a prime minister, and we were hawking our gold. You know, selling overseas was not a piece of cake…. if I have to present ten slides, the first eight had to be to sell India and the ninth one would say we do have an IT industry in India and unless the guy bought those nine slides, your tenth one about your company was meaningless. Because who are you anyway? Fifty people -- its no big deal. So we were building up the (India) brand from day one”
    • (A founder-member of NASSCOM, interviewed by Suma Athreye, 2005, cited in Athreye and Hobday, 2006)
    • Comparative advantages is very broad.
    • Figuring out what will work under the given institutional realities is a hugely creative act (Hausman and Rodrik)
      • Product –service; prime-subcontracts; offshore-onsite; …
      • How to execute with 40% turnover of employees, capital constraints, poor brand image outside, need for close client interaction …
    • That there are successful Indian SW firms is noteworthy.
      • Otherwise Saudi Arabia should have the leading oil firms and UK should have had the leading organic chemical firms in the 19 th century
    • Indian SW firms have, after considerable experimentation and effort, developed the hybrid delivery model which uses talented but poorly trained and inexperienced workers.
  • 19. Openness and Entrepreneurship
    • PLUS
    • IBM,
    • Accenture
    • HP
    • Syntell
    • Inteligroup
    • Kanbay
    • Ireland: 75% firms had a founder who had worked broad (Sands, 2005)
    • Israel: 40% of managers of listed firms had US degrees
    • India: 1/3 firms by MNC or diaspora
    NASSCOM Top 20 SW Exporters
    • Diaspora brokers supply and demand
    • TI and Citi pioneer offshore model
    Diaspora (CBSL) Entrepreneur (US based) 1985 Covansys India HCL spawned Entrepreneur 1981  NIIT (Hughes Software) - Diaspora MNC 1991 Flextronics Diaspora Entrepreneur (US based) 1993 IGate MNC - Diaspora Spawn (GE) 1997 Genpact MNC Siemens Diaspora Spin-off (Citibank) 1992 Mphasis BFL Entrepreneurial 1982 Mastek (Venture funded) Entrepreneurial 1989 Hexaware Entrepreneurial 1993 Polaris Business House 1996 L&T Infotech (earlier joint venture with HCL) MNC 1996 Perot Systems Business house 1988 Tech Mahindra MNC spawned Spawn (Citibank) 1989 I-flex Diaspora Entrepreneur 1978 Patni Entrepreneur 1991 HCL Founder US educated Business house 1987 Satyam Spin-off (Patni) 1981 Infosys Business house 1980 Wipro Founder US educated Business house 1968 TCS Notes Origin/type of firm Year Est. Name of firm
  • 20. Outline
    • The software industry – an activity, not an industry
    • How did the underdog become a tiger?
    • Prospects: Moving up the value chain
      • For established firms: Move up the value chain but not the technology ladder
      • For India as a place to develop software: Move up the technology ladder
        • Products
        • R&D
        • Engineering Services
        • Threat of automation: SOA, SW as a service …
    • Impact
  • 21. U.S. continues to lead in SW research and innovation Source: ACM Report on Globalization and Offshoring of Software P Presentation made to the STEP Board of the National Academy of Sciences, Arora, Forman and Yoon
  • 22. Israel, Korea and Taiwan lead among emerging
    • Most Indian invented patents are assigned to US firms but S. Korean and Taiwanese firms for patents invented in those countries
    • MNCs are organizing SW innovation in India but not in the Asian Tigers
    Source: USPTO and author calculations. Presentation made to the STEP Board of the National Academy of Sciences, Arora, Forman and Yoon
  • 23. Table 11: Leading BPO Firms in India Patenting Activities of Leading Software Firms in India, USPTO patents invented in India by type of assignee Panel B: Indian SW patenting firms Source: DQ estimates     All figures represent US patents filed by the Indian R&D facilities of these MNCs in all fields, not just software patents *Adobe's patents represent the total number of patents filed since start of India operations Panel A: MNCs patents invented in India Inventive activity from India is growing but dominated by MNCs, and in areas such as semiconductors - - 10 35 Texas Instrument - -- 5 1 Cadence 1 4 1 2 Flextronics 4 16 - 10 Freescale - 32* - 10 Adobe 14 37 32 62 ST Micro 16 57 43 47 Symantec - 70 - 40 Microsoft Granted Filed Granted Filed 2005-06 2004-05 Company - 2 - - Subex - 2 - 1 Mindtree 5 5 - 5 Sasken 4 13 5 16 TCS - 16 - 16 Ramco - 20 - - Infosys Granted Filed Granted Filed 2005-06 2004-05 Company
  • 24. Summary of evidence on innovation and R&D
    • Current evidence suggests that North America continues to play to predominant role in software innovation
    • A key reason for the US dominance is that the US is home to most of the lead users of SW
      • Most SW is used to run businesses, not to do technical things.
      • Being a talent magnet also helps
    • India will be a good place to locate some R&D functions, particularly those that do not need tight integration with other user facing functions
        • Most still from multinational firms
        • More upstream technology – semiconductor, device driver, embedded SW
    Leading Indian Engineering and R&D Service Companies 0.9 0.7 0.4 -Domestic 3.9 3.1 2.5 -Exports 4.8 3.9 2.9 FY 2006E FY 2005 FY 2004 USD billion 40 8 Neilsoft   40 15 Quest   30 31 Rolta India 53 82 Satyam 62 196 TCS 40 222 HCL Technologies Growth (%) Revenue (2005-06) $ million Company R&D, Engineering Services and SW Products Revenues
  • 25. Is products the way to move up the value chain? Academics and Industry leaders united in this opinion ' Focus on IT Products, Not Outsourcing‘ Indian software entrepreneurs would need to focus more on innovation of new IT products rather than on services or outsourcing if India had to be at the forefront of the IT revolution and transform itself into a software powerhouse, according to founder of Hotmail, Sabeer Bhatia . (15 July 2005, Bangalore, The Economic Times) Onsite working increases the opportunities for a ‘brain drain’ of talent, … and may also leave the Indian industry unable to move significantly to a different form of exports, such as package exports. ( Heeks, 1998, India's Uneven Software Exports, Working Paper, IDPM, Univ of Manchester ) Leading software product companies and software product revenues, $ million. Leading Indian software firms earn less than 2% from software products 485.2 388.5 Total 15.4 24.6 Polaris 23.8 14.8 Flextronics 24.4 13.1 Subex 28.5 47.7 Tally 32.9 25.8 Ramco 34.2 27.9 Cranes 40.6 26.9 3i Infotech 53.5 41.0 TCS 74.2 44.4 Infosys 157.7 122.3 i-flex 2005-06 2004-05
  • 26.
    • The North American Dominance of the SW Product Market is Remarkable
    • Over 35% of exports and over 50% in sales!
    • Substantial high end human capital moving to the US.
    • Large fraction of engineering grad students from overseas.
    • US remains major market. New product development needs to be close to market and to lead users
    • Institutions for supporting innovation
    • Successful product innovators from India, Ireland, Israel … move to the US (Talisma, Checkpoint, Baltimore)
    Percentage of Total 2002 Software Product Exports and Imports by OECD Country Source: OECD Source: OECD (2002) using IDC data. Reported in Thoma and Torrisi (2006). Packaged Software Sales by Region, 1990-2001 (US Dollars)
  • 27. ORACLE : Income statement TCS Income Statement Very similar overall margins (24% v 21%)! Products are not a panacea. 2,307 2,681 NET INCOME 6,035 6,292 Total Expenses 441 561 G&A 1,180 1,278 R&D 1,868 1,770 Cost of services 474 547 License updates and prod support 2,072 2,136 Sales & Market Operating Expenses 9,475 10,156 Total rev 2,276 2,086 Services 7,199 8,070 Software 3,929 4,529 License updates 3,270 3,541 New license 2003 2004 REVENUES 443 314 Selling, general and administrative expenses 513 405 Net income 7 7 R&D 111 97 Cost of equipment and software licenses 1087 760 Cost of services Operating expenses: 2162 1583 Total revenues 20 13 Other revenues 118 108 Sale of equipment and software licenses 2023 1461 Consultancy services 2005 2004 REVENUES :
  • 28. 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 may be the future, not the past of Indian software exports
    • Prospects: Moving up the value chain
      • For established firms: Move up the value chain but not the technology ladder
      • For India as a place to develop software: Move up the technology ladder
        • Products
        • R&D
        • Engineering Servicesl
    • Impact
      • Now and future
      • Employment?
      • Intangibles: catalyst, exemplar and legitimizer
  • 29. Examples of large contracts obtained by Indian SW firms Table 11: Leading BPO Firms in India Source: The list of BPO firms and their size is from Dataquest magazine, the origins are based on information available from company websites Leading Indian firms are moving up the value chain, but not necessarily the technology ladder, AND this is OK. $70 (3 years) Outsourcing Lattice Group ( US) Wipro July 2001 $100-120 ( 2 yrs) ‘ Take or pay’ model, GE medical TCS Jan 2002 $50-70 IT outsourcing Lehmann Bros. TCS & Wipro Nov 2002 - Technical services with main marketing by Boeing (50% of revenues for each ) Aloha Airlines (US) Ramco- Boeing Mar 2003 $35 ( 7 years) Gap analysis and implementation. Guardian Life (US) Patni r Mar 2003 - ( 5years) Second service provider for BPO services BT group (UK) Infosys April 2003 $ 160 (5 years) Business telemarketing, billing conferencing B T group (UK) HCL April 2003 - Embedded SW Airbus HCL Jun 2003 $15 (9 months) Implement supply chain solution. Certain Teed (USA) Satyam Aug 2003 $70-90 (3-5 yrs)   Motorola L&T Aug 2003 $140 SW Dev, maintenance ABN Infosys Sep 2005 $260 SW Dev ABN TCS Sep 2005 $27-$300   GM Wipro 2006 Value (million) ( period) Contract type Client Indian firm Date
  • 30. Prospects : Rosy (or at least not bleak)
    • Established firms move up the value chain but not the technology ladder
      • Become more like EDS or Accenture
      • No Microsofts or Oracles or Googles in the offing – but that is nothing to be ashamed of either.
    • Product development will be controlled by US firms
      • Captive development
      • Outsourcing
    • Smaller and newer firms will try for innovation and products
    • Threats?
    • Supply of human capital?
      • Talent is plentiful, skills can be scarce
      • Probably not a very serious constraint because very responsive supply side
    • Urban infrastructure?
      • Will likely be available
    • Competition from US incumbents?
      • Matters for firms, not country
    • Automation: Rise of service oriented architectures (SOA), virutalized applications, utility computing …
      • Do not host the software and therefore do not maintain it and upgrade it
      • Instead rely upon infrastructure providers such as IBM, HP and Oracle to offer the services of the software applications
      • No need for in-house software workers NOR for Indian software firms.
    • Lack of hardware and integration capability will hurt Indian firms
      • Even if this were to happen, it will take time.
      • India will remain a good place to develop software
  • 31. Outline
    • The software industry – an activity, not an industry
    • How did the underdog become a tiger?
    • Prospects: Moving up the value chain
    • Impact
      • Now and future
      • Employment?
      • Intangibles: catalyst, exemplar and legitimizer
  • 32. Impact
    • Direct Impacts Modest
    • Employment ~ 1 million
    • 35% of exports
    • IT + BPO ~ 7% of GDP by 2008
    • Clearly such growth in the future is unsustainable but no reason for a crash in the near future
    • Indirect Impacts more important
    • Legitimizer
      • Brand India
      • Helps other industries such as semiconductors, BPO, engineering services ..
    • Catalyst
      • Changes in corporate governance
      • Capital market listing requirements
    • Exemplar
      • Get rich honestly
      • Do not require connections or privileges to succeed
      • Are not inferior
    “ software was virtually the first instance where wealth was created honestly and legally, and more important, visibly so. Before this, wealth came either from breaking laws or at least bending them to one’s convenience, using existing political and economic power. Hitherto commercial success had invited envy, cynicism and even outright hostility, and only rarely, admiration. While envy and hostility are by no means gone, there is much more of admiration, and more importantly, a desire for imitation.” Conclusion: From Underdogs to Tigers 2005
  • 33. Origins of leading BPO firms: (Domestic SW origins highlighted) Table 11: Leading BPO Firms in India Source: The list of BPO firms and their size is from Dataquest magazine, the origins are based on information available from company websites Dataquest top BPO firms, 2005 Source: The list of BPO firms and their size is from Dataquest magazine, the origins are based on information available from company websites MNC Efunds 1988 Techbooks Yes 1991 1125 Datamatics 1999 1700 GTL Business House (Birla) 1999 2235 Transworks MNC 2000 3000 Sitel India Start up – Diaspora 1999 3000 Vcustomer Startup-Diaspora 1999 3200 Efore Yes ? 5000 TCS Startup – Diaspora 2000 7000 24/7 Yes 2002 7000 Progeon (infosys) Start up – Diaspora 1999 7300 EYesL 2001 7300 ICIC One-Source Business House 2001 7500 Hinduja TMT MNC 1986 8000 Sutherland Business House (Essar) 2004 8000 Aegis Spin-off (Citibank) Yes 1999 8300 Mphasis Startup – HDFC 2000 9500 Intelnet Yes 2001 10000 HCL BPO MNC ? 10000 Convergys Start up – Diaspora 1996 10000 WNS (Acquired Spectramind, a startup) Yes 2000 16000 Wipro Yes 2000 18000 IBM Daksh Spin-off (GE) 1997 26000 Genpact Origin SW Start Year Empl
  • 34. Thank You