Bengaluru's Rise as India's Leading IT Cluster

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IT CLUSTER - BENGALURU
IT CLUSTER OF INDIA
By
Phani Kumar Nelanuthula
Vineetha Yellimelli
Wen Juan Li
Yekatrina Panova
Yu Li

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Contents
1) History of Bengaluru
a) Geography
2) India
3) IT in India
a) History
4) IT cluster in Bengaluru
5) The Infosys Model
a) Use of IT models
6) Strategy & Rivalry
a) Rivalry
i) Other IT Hubs of India
ii) China & Philippines
b) Strategy
i) Partnership with other IT hubs of India
ii) Acquiring more Quantitative approach
iii) Improving skills & Technologies
iv) Developing Hardware in Bengaluru
v) Establishing more effective & efficient support Industries
vi) Acquiring more skilled labor from other states
7) Factor Conditions
a) Arbitrage of Cost
b) Favorable resource endowment
c) Lower infrastructure costs boosting entrepreneurship
d) Presence of Indian diaspora
e) MNC’s imparting positive externalities
f) Demand
8) Demand Conditions
9) Related and Supported Industries
10)Government
11)Challenges
12)Recommendations & Conclusion
13)Appendix
14)References

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History of Bengaluru
Bengaluru previously called as “Bendakaluru”
was founded by Kempe Gowda-I, a feudatory of
Vijaya Nagara Empire, in the year 1537AD. It
was also referred as “Gandu Bhoomi”, which
means “Land of Heroes”. Later it was under the
control of Mughals, Sultanates of Bijapur,
Maratha’s and Tipu Sultan. After which it
became a colony of the British empire. During
the Tipu Sultan’s Rule, Bengaluru was under the
state of Mysore with Wodeyars as the ruler of
Mysore state with Mysore as Capital.
After the independence of India in 1947,
Bengaluru continued to be part of Mysore State
with the neighboring Madras State. In 1956,
with the agitation for the formation of separate
states for native language speakers a state formed for Telugu speaking people called as
Andhra Pradesh by combining Telangana, parts of Madras state and Maharashtra, a state
formed for Tamil speaking people is formed called as Tamil Nadu and the Mysore state is
changed to Karnataka with the Kannada speaking people under one statehood and
Bengaluru is made capital of the Karnataka (named in 1973) from Mysore state.
Till 1980’s Bengaluru lied in an economic deficit. Faced huge rifts with natural resources
with the neighboring states. In late 1980’s to early 1990’s Bengaluru changed its strategy
in terms of development and due to which it found a huge raise in the real estate prices
and Bengaluru turned into a metropolitan city which became a favorable place for not
just Indians but also for many foreigners to prefer Bengaluru as a place to live.
Geography
Bengaluru is located in the Precambrian Deccan plateau at an average height of 920
meters from the sea level. It holds an area of 1741Km2 with a population of 8,971.800 as
on 2014. It is almost at equidistant from 4 other states capitals (Chennai, Trivandrum,
Hyderabad, Amaravati) and holds a proper transport connection for the same. Two rivers
are passing through Bengaluru, Arkavathi, and Vrishabhavathi, and “Cauvery” one the
national rivers, passes along nearby locality, which provides water for irrigation to the
farms at the outskirts and drinking water to the people living in Bengaluru. There are
about 12 forests around Bengaluru, due to which Bengaluru holds pleasant climatic
conditions. Bengaluru receives annually 2 monsoons, so it receives rain almost for 8
months in a year.
India
India is the 7th largest, 2nd most populated and 5th most advanced economy. India is rich
in natural resources, Vegetation, and cultural heritage. “Unity is diversity” is the motto of
India. After Independence from British Colonial rule. India started shaping itself by

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changing and experimenting with organizational structures in the government and in
demography. Today India is having a total of 29 states and 7 union territories with 22
official languages, 122 major languages, and 1599 other languages.
Population of India is 1,335,280,665 with an area – 3.287 Million Sq.Km.
As per 2015 Statistics, India holds:
Literacy Rate 72.23%
Female Literacy Rate 62.98%
Employment to population 49.9%
Global Competitiveness Rank 39
Global innovation Rank 66
Knowledge & Technology Output Rank 43
Business Sophistication Rank 57
IT in India
History
In early 1970’s, India faced its worst Famine following which India suffered with uncalled
for an emergency during 1975-77. Many lost their lives and livelihood. During this period,
in 1968 Tata group launched Tata Computer Centre with Mr. JRD Tata as its Chairman,
which became Tata consultancy services(TCS), the biggest IT firm in India. In the
beginning, it served its sister group Taiyuan Iron and steel company (TISCO), popularly
known as Tata steel, in its computing and statistics problems. In 1981, TCS established
its first R&D center known as Tata Research Development and Design Centre (TRDDC).
In the same year, 7 people (N. R. Narayana Murthy, Nandan Nilekani, N. S. Raghavan,
S.Gopala Krishnan, S. D. Shibulal, K. Dinesh, Ashok Arora) together started a firm in a
room in Pune, named it Infosys. It started a business with an outsourcing project in the
US for $250. In 1983 Infosys moved its headquarter to Bengaluru. IBM, Coca-cola, the
major foreign industries left India in 1977 due to environmental conditions and

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government policies. But Infosys and TCS established the beginning of IT in India. During
1980-1984, there was a global recession and soon the then Indian government realized,
liberalized Industrial the Industrial norms.
But the major roadblock was removed in 1991 when the doors were opened for the
foreign investors through foreign Direct Investment(FDI) policy. As a result, trading
started blooming in India, and the IT service sector led its way to the globalization. India
became a source of Intellectual labor, projects started routing towards India from various
countries like USA, Germany, UK etc. Different project functions like product
development, software services, maintenance, Testing, BPO, BPM, consultation etc. for
various sectors like finance, tourism, aviation, mobile, satellite communication etc. are all
addressed and served through Indian Outsourcing firm.
IT in India turned out to be a boon for Indian unemployed where it was hard to find
proper Jobs across the country. The Major sectors in India before IT expansion in India
were 1. Agriculture, 2. Textile 3. Transportation 4. Energy. IT helped in increasing the
production and consumption of these
sectors.
Employment in IT is nearly 3.5 Million
with 34% women employment. The
contribution of Indian IT to the world
(market share) 67% in 2015. Total 53
Software Technology Parks Centres are
in India of which 46 are tier 2 and tier 3
cities.
As per the National Association of
Software and Services Companies,
the above portrayed IT industry
snapshot with 56% of global
services, ranking no1 in the world,
amounting to USD 143 billion
contributions towards GDP and
employing 3.7 million. There are
more than 16000 Indian IT firms
registered at NASSCOM, of which
more than 80 companies have a
global presence. These IT
industries are employing around
3.4Million summing up to 6% of
employment only in IT and
supporting industries have almost
10 times the employment due to
these IT industries. The total IT contribution to GDP is around 9.3%.

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IT cluster in Bengaluru
Bengaluru is recognized as the most dynamic city in the world by World Economic Forum
in January 2017, moving ahead of cities like New York and London.
As per Government Statistics in the year 2014 Population of Bengaluru is nearly 1 million
less than the population of Hungary. Whereas area is 741 square kilometers which are
0.8% of Hungary,
These are the GDP numbers mentioned
on the screen. In Employment Bengaluru
stands at 40th rank in the world with 3.6M
employees of which 1 Million are Directly
employed in IT and very significant
number in supporting Industries.
There are more than 4500 Registered IT
companies in Bengaluru of which 3500
are Domestic, 750 are MNC’s and nearly
400 are in IT Research and Development.
All the major IT companies followed the
Infosys model and made themselves
more sustainable, profitable and
trustworthy.

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The Infosys Model
Infosys recognized the opportunity in the IT services, has observed the requirement of
skilled labor in IT. So it established an IT training center and collaborated with the
universities to address the future requirements. And soon there were many IT training
centers established all over major cities of India, turning itself into an Industry. Infosys
gives training to all its newly hired employees in the Mysore branch not far from
Bengaluru. The government supported Infosys by giving lands for lease and had helped
it in running the business. As a
result, Infosys took the
responsibility of addressing the
problems in India and
empowering the youngsters. At
every Infosys campus, an IT park
is established. Companies felt
those are the ideal locations to
work. In Bengaluru, the first such
park is known as the “Electronic
City”.
Infosys is not just a leading IT
company in business, it’s ethics,
values, and culture is also
exemplary. These quality made
Infosys a USD 250 company to
USD 10 Billion company (by Jan
2017).
Use of IT models
Most of the state governments in India felt this as a right approach and started
establishing IT Parks, each of these IT parks are employing minimum 0.1Million
employees. This trend is found even in very backward states like Bihar, Orissa, Haryana
and became the source of education over that region. Every state established a relation
with the corporate sector and on the same note, Real estate, education, transport, banking
sectors are transformed into the digital systems.
Under the leadership of the great scientist and the former president of India Dr. APJ Abdul
Kalam, India has seen the golden phase of development. Pioneers like N.R Narayan
Murthy the then CEO of Infosys, Ratan Tata CEO of TCS, Azim Premji director of Wipro
became architects of Digital India. Their advice was taken into account under every major
decision. Companies like Microsoft, Google, Cisco also expanded their branches in India.
And for all the Technology companies Bengaluru became the first choice. Even the
electronics sales and services also increased at a rampant speed in the past two decades.
For women, IT sector turned out to be boon for empowering themselves. In India, there
are nearly 1000 Engineering and Industrial training colleges, but the engineering courses

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are not encouraged for women by their families due to the physical effort required in
them. In IT women employees are taken as the first choice for their commitment to the
company as well as persistence in the company. Girls are encouraged and educated by
their family and supported by the government to enter into the IT industry, where they
are secured and can earn income for them and for their family.
Strategy & Rivalry
Rivalry:
Bengaluru IT cluster is having two major rivals
Other IT Hubs of India:
Considering Bengaluru as the model other states have selected a non-capital city and
started developing that city more suitable for IT companies. Many of the companies which
are established by people from those states are shifting the companies. Since many of
those states are near to national capital. Many of the outsourcing companies are
approaching these IT parks for ease of transport and low-cost labor.
China & Philippines targeting IT growth & outsourcing:
China which is already ruling the world in Silicon board manufacturing and electronic
goods is now expanding its stake in Software Industry by entering the outsourcing. Since
India is mainly depending on outsourcing industry, It is a serious threat for Bengaluru IT
cluster in terms of maintaining and sustaining the business. As all the developed
countries can get the fully finished product from one country without negotiating with
multiple countries IT companies.
Also as Philippines is now swiftly growing in BPO and IT services, it is trending towards
becoming a competitor by the factor of cheap labor and cheap establishment costs.
Strategy
Partnership with other IT hubs of India
This is the way Bengaluru IT cluster can address the rivalry issue of other Indian IT hubs.
Bengaluru companies if can expand the work and create opportunities in other IT hubs.
The contracts that are taken by Bengaluru can be fulfilled by branches across the country
at much cheaper price. These companies can afford much more Projects, Employees and
simplify the effort. With this Bengaluru can earn more revenue.
Acquiring more Qualitative approach
The way Bengaluru can outrun the foreign competition is through supplying more
Qualitative products. Throughout India, Bengaluru is having the best infrastructure
suitable for IT companies. And it holds the Best minds in IT industry who have become
CEO’s of many Multinational companies today. If it remains persistent in delivering the
best Quality of Product and services providing. It can become the IT capital of the world.
Improving skills and Technologies
Since the world is changing at a faster pace in terms of Technology. Bengaluru IT
companies need more skilled labor who can learn adopt technologies. So there should be
a continuous process of acquiring and improving new skills among the employees.

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Developing Hardware in Bengaluru.
Karnataka State government is initiating a plan for Silicon Fab City in Bengaluru. By
developing own Silicon circuits and processors, Bengaluru can reduce the dependency on
China and South Korea for hardware.
Establishing more effective and efficient Support Industries
In India, the development of supporting industries is not at the same speed as the
development of IT. Being a metropolitan city Bengaluru is more advanced in this issue,
but the establishment is not yet streamlined properly. So there is a requirement of
development in these sectors in a more effective and efficient way.
Acquiring more skilled Labour from other States
There are still many states in India which did not have IT parks or established IT cluster.
If Bengaluru can acquire the intelligent people from these states and train them in IT
sector, it will benefit Bengaluru IT with much cheaper and highly skilled labor.
Factors Conditions
As per Porter, the factors are classified into four categories:
 Namely basic
 Advanced
 Generalized
 Specialized
The key factors for competitive advantage are the efficient and effective development of
these specialized factors. The detailed enumeration factors are as follows:
Arbitrage of Cost
Bangalore has abundant availability of resources of low-cost skilled labor which is most
important factor for competitive advantage. Indian software professionals enjoy good
wages than any other sector of labor. They get paid fairly and less about 1/3 to 1/5 level
when compared to their counterparts in the US and Europe. The cost is unchanged even
today though there is wage inflation due to decline in billing rates. Indian software
manpower is technically trained and proficiency in English which sets them apart from
rest of the competitive world. With these advantages and availability of quality
professional, a significant amount of software is being outsourced to India. The cost
advantage is the only reason for competitive advantage for software outsourcing to India.
Due to the availability of lack of infrastructure in India to accommodate the IT jobs, many
entrepreneurs are showing interest in investing in this sector. The competitive advantage
of the nation’s ability depends on continuous up-gradation and increase its productivity
over time. The IT industry in Bangalore had made a noticeable inroad in rendering
higher-end services in IT consulting and significantly moved up the value -chain to retain
its competitive edge.

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Favorable resource endowment in Bengaluru
Indian workforce is very adaptive to the changing industrial needs with respect to skill
sets, quality of education, exposure to frontier technologies, English language skills.
There are a number of socio-cultural factors that influence the software industry
including the historical prevalence of hierarchical structure of society and their
disciplined and structured approach to work, analysis, design and project management
skills. Western countries have increased the working hours of their workforces
effectively by outsourcing their jobs to India.
Many young workforces are getting attracted to IT due to the career progression based
on meritocracy, opportunities, skills, financial independence, career development and
other perks and privileges were given. The government is also working towards the
improvement of the infrastructure and intend to double the spending further
encouraging the private and public-private partnership model. Such measures will fortify
the prospects of the industry by imparting positive externalities.
Lower infrastructure costs boosting entrepreneurship
To setup, a software unit is very low in India as the internet, computers, office space are
cheap and there are low entry barriers. As software industry is a profitable business due
to its low investment cost and also due to the lower tax and tariff from government
initiatives. Therefore, the majority of the entrepreneurs are the return migrants of the
brain drain of the 1960s and 1970s. These skilled migrants accumulated savings overseas
and set up their own firms in Bangalore these include, Infosys, Wipro, Mahindra Satyam,
Polaris etc.
Presence of Indian diaspora
The Indian diaspora present in Silicon Valley, US has acted as reputational and credibility
intermediaries and brought back the substantial business opportunities to India. Some of
these diasporas have business contacts in India and few had invested in some start-up
companies in India. This, in turn, intensified the reverse migration to India strengthening
the software industry.
MNCs imparting positive externalities
In 1980, entry of MNCs influenced the business model of firms operating domestically.
Texas Instruments whose nosiness model rested on communication on one hand and on
another hand high – end offshore R & D activities influenced major IT industries
operation strategy. In Bangalore, 230 MNCs invested in R&D in telecommunications and
chip design, notable among them being TI, Intel, ST Microelectronics, Cisco Systems, SAP,
and Oracle.
Demand
The success of Indian IT-ITeS industry is crafted by only external demand. The dynamics
of these and exports have received foremost attention neglecting the domestic demand
dynamics. Since 2000 this significantly reversed the pattern of domestic demand helping
the IT industry to retain its competitive advantage though there is a decline in foreign

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demand due to the downturn of US economy. The emerging domestic market had aided
firms in carving a niche for themselves in the global market by delivering both global
solutions as well as solutions for emerging markets.
Demand Conditions
In terms of demand factors of IT industry in Indian, the external demand is the most
important factor as the core business of IT in India is outsourcing, which means India
depends heavily on exporting IT and IT related products or services. IT business in India
was established in the middle of last century, at that time, the domestic economic
development level was not so high and industrial structure was imbalanced, especially
the manufacturing industry was very undeveloped, resulting that domestic economy had
very low demand for IT, however, at the same time, IT business was highly active in more
developed countries such as US, Germany, and Japan due to the high demand from
domestic economic development need. In order to reduce costs, these developed
countries started outsourcing IT from India. The huge difference lies with the labor cost,
for example, estimated wage costs for IT professionals in India is 1997 were about 1/3 to
1/5 of the US levels for comparable work until today the cost arbitrage remains
unchanged (IIMB Management Review, 2015).
Among the main trading partners, US is the most important client for IT outsourcing
from India all the time, in 2003, US absorbed about two third of all of Indian IT exports,
Japan also accounted for three percent, and most Fortune 500 companies outsource some
of their software related work from India as well. (International Journal of Economic
Policy in Emerging Economies, 2014)
However, since early 2000, there has been significant reversals in the pattern of demand
which has helped the industry retain its competitiveness advantages amidst a decline in
foreign demand on account of the downturn in the US economy. The gap is filled by more
and more domestic demand. In general, there are two main reasons. Firstly, many more
user industries such as early IT adopters banking, financial services, telecom, and
insurances are high on the maturity curve, it means they need more and better IT
services, on the other side, the emerging industries such as retail, healthcare, and
government also lead higher demand for IT to focus on their core business and improve
operational efficiency.
The second reason is related to IT industrial structure in India, there are more than
15,000 IT and ITES firms in India, which exhibits a pyramidal structure with only a
handful of big firms on the top, as a result, the competition within IT industry is super
fierce, but it helps bring higher quality of IT products and services on one hand and lower
prices on the other, which stimulate more demand for the whole industry (IIMB
Management Review, 2015).
Related and Supporting Industries
Related and supported industry helps the growth of IT industry by providing high quality
and low-cost inputs. The presence also helps in solving joint problems and stimulating

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innovation. For IT the most important related industry are educational institutions,
software training centers, hardware, networking, skilled based training. And there are
ample of these institutions in Bangalore and Hyderabad and many major cities which
keep the workforce up- to- date with latest technology and skills by constantly training
them. Below mentioned are few Supporting industries and major related Industries.
The presence of related and supporting industries, if internationally competitive, helps
the growth of the industry by providing high-quality low-cost inputs. It also helps
industries in a less formal way through joint problem solving on one hand and stimulating
innovation on the other. For the IT-ITeS sector, the most important supplier or related
industry would be education institutions and hardware.
Government
Both Indian Government and Karnataka Government is playing the most important role
in IT cluster development of Bengaluru, Government is regularly monitoring the
Industrial and Trading Policies and is updating them in favor of Business growth.
Governments have introduced the single window policy to reduce the burden in
registering a new firm or in the expansion of existing firm.
The Cashless Economy Drive is in favor of financial institutes to collaborate more with IT
industries and contribute more to the GDP growth of the country.
Tax Benefits and start up policies are made more favorable in Bengaluru compared to
other cities of the world to run the IT business. In Addition, the government initiatives
like Make in India, Start-up India, Digital India is creating a platform for more investors
to identify the potential and invest in the IT sector.
The political system is diversified in India particularly in Bengaluru. This is creating a
competition between politicians to contribute more in development.
Karnataka Government proposed projects - Bangalore IT park and a Hardware Park at
Devanahalli, Export Promotion Industrial Park (EPIP) Park at Dakshina Kannada District,
IT SEZ at Mangalore, Aryabhata Park at Hubli.

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CDAC – center for development of advanced computing is one of the government funded
institutions is helping in improving skills of Job seekers and Job holders. The Indian
government is funding the IT development in the range of elementary school Tablets to
Aeronautics for education. Many Institutions like Indian institute of Technology and
Indian Institute of Management were spread across the country and are nourishing the
Skills of young who contribute a lot in the IT sector.
Challenges
The following are the challenges faced by IT Bengaluru Cluster in the past.
 Establishment issues
 Connectivity issues in terms of Internet, Telecom and Transportation etc.
 Lack of In-state Projects
 Less Product Based Industries and more Service Based industries
 Service Based projects are all from Developed Countries. The cost of acquiring a
project is very high when compared to an instate project.
 Competing IT Hubs like Hyderabad and Pune gave so much flexibility for the IT
companies in establishments.
 Lack of IT, computers based education Institutions and Technically skilled labor
 Infrastructure & Real estate facilities were very poor
 Resistance to Change by the local government and people.
The following are the challenges for the IT cluster of Bengaluru in present and future.
 The government is depending on taxes of incoming technology and remittances,
due to which it is becoming hard for getting more advanced products. Normally
the average duration required between the product launch in the USA to the
product reach India for sale is 9 months.
 There are many cheap quality electronic goods are sold in India. Due to which the
Quantity is driving out Quality.
 Infrastructure deficiency
 Local Contingencies (Nationalism issue): the influence of political parties in
restricting goods and services only for Indian markets.
 Controlling Change: Government and Establishment are unable to strategize the
adoption of upgrading technology.
 Over Control of Change: forcing the technologies without proper analysis & R&D,
whether feasible for product or not
 Lack of Skilled Labour

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 Increase in number of IT hubs in India
 Migration of skilled labor to other countries
 Uncontrolled raise in Real estate price.
 Kaveri River/ drinking water/ sewage water issues
 Establishment of Other supporting and related industries.
Recommendations & Conclusion
You can hear a lot of stories on why India is so successful in IT outsourcing. The success
comes from Its favorable work conditions, technology updates, emerging new business
models, strong macroeconomic conditions and supporting government policies to
develop IT are helping in exploring new opportunities. India the global outsourcing
leader, accounts only 10% of the global IT spend as per NASSCOM,2013 this implies that
India can contribute more and there is still there is large untapped marketing offers and
enormous growth opportunities to be explored.
Almost half of all the Fortune 500 companies choose India for outsourcing though there
are many major competitors exists. This is because India has favorable government
policies, fast developing infrastructure, talented and enthusiastic workforce.
Why is India leading?
1. It has the largest professional and talented people in the world.
2. Offers flexible pricing options
3. Provides high quality of outsourcing services
4. Best Infrastructure and technological capabilities
5. Stable government and attractive IT policies
6. International quality standards
7. Assured data security
8. Focus extra time on core competencies
India can help any company to achieve more with less
India can give you access to smart, intelligent and educated professional with skill sets
India can help a company to become more scalable
Outsourcing to India can help you to focus on your core business
Outsourcing to India is easy and effective.
Bangalore had to explore more innovative, creative ways to get things done to keep
running in the competition race.
Many new and upcoming Entrepreneurs should invest in IT to reap more profits and take
India ahead. New companies will give new job opportunities to youth and in this way, we
can reduce the unemployment problem.

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Companies should invest in flexible workforce models which are more innovative, cost-
effective way to manage their workforces so that more people are employed and software
professionals will have a work life and personal life balance in a way contributing to more
effective and innovative thinking and ideas.
Companies should continuously evaluate and elevate their expertise on industrial and
functional knowledge so that they will grab the new opportunities better than others.
Outsourcing is a tool and global platform to build multi-cultural relations to promote each
other’s culture worldwide and spread the word of peace.
Outsourcing to India is not only cost saving and high quality but it also bolsters employer
branding and builds the strong brand image in public for the entrepreneurs.
IT companies can show case their talent, past experiences and analyze the performance
data of their satisfied outsourcing clients and can fetch new opportunities.
India is also famous for its Time zone and workaholic professionals. India can fill the time
gap between the US and Europe by working continuously and delivering on time.

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Appendix

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(world Bank: 2015 India GDP per Capital, and also countries in the same region)

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(source: World Bank)

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