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about 10,000 software engineers in 2003 but was growing at a 30% rate. Even more
enticing for developing nations, the promise of job creation in ITES is even greater.9
Importantly, the IT jobs created are higher skilled than those in most other sectors of
an economy. For example, more than 83% of the employees in Brazilian software com-
panies completed a secondary education, compared with 39% national average. The
number of employees in software organizations with a university degree is twice as
high as the national average.10 By providing interesting and rewarding opportunities to
the educated, the software export industry can retard, or stop, or even reverse the emi-
gration of highly skilled labor. There are several dramatic examples of this: in Ireland
in the 1990s, and in India and China in the early 2000s. Indians and Chinese working
in Silicon Valley are returning home to set up businesses. The brain drain gives way to
“brain circulation” and becomes a “brain gain” for the developing nation.
Revenue generation
Exporting software is a source of foreign currency revenues, and India is again a spec-
tacular example. We can mark the beginning of the Indian software export sector
in 1973, when Tata Consultancy Services (TCS) began exporting data services to
Burroughs. By 1983, the Indian software exports were estimated at a modest 18.2 million
USD.11 Some two decades later, in 2004, the value of the Indian exports increased to
12.5 billion USD. This seven hundredfold growth in 30 years is already responsible for
20% of India™s exports12 and projected to become India™s single largest export industry
within several years. An important part of the earnings, estimated at 55%, stays inside
India.13 The exports earnings of employees within the IT sector are also high. A soft-
ware programmer can generate more than 10 times foreign currency than an employee
working in the garments industry.

Improvements to the national business culture
One of the pleasing spillovers that are evident in India is the demonstration effect of its
successful software export industry. Firms outside the software industry are learning
and imitating the new business practices of the successful software ¬rms across many
dimensions: in working conditions, professionalization of HR practices, in new orga-
nizational structures, and in embrace of international standards.
Within India™s software industry the larger companies offer exemplary working
conditions in modern, air-conditioned of¬ces. Employees are pampered with bene¬ts
from meals to company-provided transportation. In a traditional country such as India,
distinctions based on religion, sex, or caste are less important in the merit-based soft-
ware industry than elsewhere in the country. Indian software organizations tend to be
¬‚atter with more employee participative decision-making. Additionally, professional
HR policies are instituted to hire and train labor. Staff retention policies were intro-
duced. Employee incentive plans, such as Employee Stock Option Plan (ESOP), pre-
viously unheard of, have become common. Some companies are adopting the P-CMM
quality model (People Capability Maturity Model), a framework for enhancing the
competencies of their staff.
209 Building software industries in developing nations


Companies are professionalizing in other respects, by adhering to a myriad of inter-
national standards: international accounting standards (GAAP), professional corporate
governance, professional marketing standards, and quality standards such as ISO
9000, the CMM, or Six Sigma. Indian software ¬rms practice some of these standards
with greater success than do most Western organizations, and with the rise of
IT-enabled services, Indian ¬rms have rushed to embrace its new standard COPC.
Most interesting is the impact on the “pop” business culture. A new class of heroes
is celebrated and imitated: they are the software entrepreneurs who have become rich
and created national wealth in the process. Azim Premji, the founder of Indian giant
Wipro, appears on the Forbes list of the 50 richest people on earth and is nicknamed
the “Indian Bill Gates.” He is an example of the growth of a technocratic innovation
and entrepreneurship model previously treated with some suspicion in India™s statist
culture. Such new heroes are also appearing elsewhere in East Asia.

Other economic and social impacts
Software export success has a positive effect on the domestic software sector. Working
on offshore projects is a form of knowledge transfer from the wealthy nations to the
developing world: the technical and domain knowledge gained through working for
foreign clients can be re-channeled and used for domestic projects.
The software export industry also induces investment in infrastructure. It spurs
investments to re-haul developing nations™ antiquated communications infrastructure,
which bene¬ts other economic sectors. In addition, the software industry creates
demand in various services, such as transport, construction, accounting, hospitality,
and legal. Demand for software skills generates investments in general education,
higher education, and specialized training institutes.
The wealth created by the software industry can make some locations more attractive
by spurring arts and entertainment to ¬‚ourish “ these are improvements in the quality of
life. Some of the industry wealth is also channeled for social philanthropy. Indian exam-
ples are the Infosys Foundation, which is active in areas such as learning, rural devel-
opment and health care; TCS has an Adult Literacy Program. The founders of Baan set
up a school near Hyderabad, where the company had a development center.

Impact on the digital divide
In poor societies millions of citizens are further marginalized by having no access to
computing. Unfortunately, a successful software export industry will not automatically
diminish this digital divide. The impact of the export industry is often limited to a
small sector of the economy. In India most software development takes place in only
a handful of metropolitan areas, not touching the country™s vast underclass. There is a
danger that an export sector will be an enclave in the economy with limited forward
and backward linkages. The discontent with the (digital) divide was exempli¬ed in the
surprising loss of India™s ruling party in the 2004 national elections. In spite of all the
wealth created by the new digital elite, the majority rejected the status quo.
210 Other stakeholders




Principal success factors

Given the numerous advantages of a booming software export industry, it is under-
standable that government of¬cials and industry leaders in developing countries have
been trying to create their own successful industries and to emulate the Indian success
story. What, then, is the secret recipe? What has brought about the success of some
countries in software exports? And, what factors are likely to foretell success in others?
Simply copying the success of others is not possible, but policy-makers can learn
from others™ experiences and assess their own strengths and weaknesses. When one
examines the range of nations exporting software, eight principal factors surface which
explain national success in this industry. These eight factors make up the “Oval Model”,
¬rst described by Carmel,14 and labeled oval because of the shape of the national
boundary depicted in Figure 10.2. This model can be used in order to look back and




Nat
ary Linkages i on
und al b
o
lb ou
na nd
tio
ar
Na




y



Wages Human
and costs capital




Government
The Quality
vision
industry of life
and policy




Technological
Capital infra-
structure




Figure 10.2 The “Oval Model” depicting success factors for a national software export industry.
211 Building software industries in developing nations


explain the success of those nations that have already made achievements in exporting
software. It can also be used as a framework for prescriptive policies and strategies.
The eight factors in the Oval Model are not independent of one another and tend to
in¬‚uence and interact with each other. Perhaps most important to note is that not all the
Oval Model factors need to be present to achieve some success; in fact in India, during
its industry™s formative period of growth, several of the factors were absent or weak.


Government vision and policy
Governments in dozens of nations as diverse as Costa Rica, Iran, Indonesia,
Bangladesh, Vietnam, and China are taking concrete policy steps to promote their soft-
ware export industry. In Jordan, King Abdullah was personally involved in the 1999
launching of national plans for its software industry setting very ambitious goals.15
Thus, government is often a major actor and a major success factor. It can play either
a proactive kingpin role, or an enabling role, or both. Of course, the government has
in¬‚uence on every one of the other factors in the Oval Model.
National visions for software, or computing, have changed over the years. In the 1980s
the fashion was to protect the industry as much as possible from international competi-
tion, rather than opening it up. Brazil protected its computer industry for a decade, as did
India. In India these swadeshi, or self-reliance policies, had some positive impacts on the
largely homegrown nature of the industry, since foreign IT companies were kept away
(IBM even left the country). On the other hand, the severe restrictions on inward foreign
investment and the high-import tariffs on equipment had a negative effect on the indus-
try™s growth. Later, the economic reforms in 1985 and 1991 coincided with the dramatic
growth of the software export sector. The form and content of state intervention changed
into that of a facilitator of private sector initiatives. The Indian government™s role is pri-
marily about providing an enabling environment through supportive regulations, incen-
tives and strategic investments, and promotional programs.
Government actions are most effective in areas where markets are “inef¬cient,” such
as education. Investing in human capital, described further below, is government™s key
long-term role for the software export industry. Government can also play a facilitator
role by encouraging ties between universities and the IT industry. In addition, govern-
ments can take a customer-centered approach by reducing the bureaucratic hurdles
required to start a local company or in attracting a foreign company. Governments can
establish a “one-stop service” for international customers, or give tax incentives favor-
able for software companies.
The government can build and guide national infrastructure in two vital areas: tech-
nology parks and telecommunications. For example, technocrats in the Indian govern-
ment had the foresight way back in 1986 to make a set of recommendations captured in
a report titled ˜Software Policy on Computer Software Exports, Software Development
and Training.™ The report contained a set of actions that were targeted speci¬cally at the
212 Other stakeholders


software industry, including the creation of Software Technology Parks (STPs) that were
to offer reliable electric power and adequate international telecommunications links. By
1990, three STPs were established in Pune, Bangalore, and Bhubaneshwar, growing to
18 STPs by the early 2000s. The STP companies account for 68% of India™s software
exports.16 Spurred by demand of its already-booming software industry, the Indian gov-
ernment woke up in 1999 to the need to reform its inef¬cient monopoly telecommunica-
tions system. A large number of private providers were allowed to enter the business.
Results were dramatic. In the major cities, the quality and the cost levels of the telecom-
munication networks are now approaching the levels of industrialized nations.


Human capital
Human capital is a nation™s key resource. The term human capital is used to connote
the knowledge and capabilities of the nation™s workforce. Nations with poor educa-
tional systems and lacking in effective organizations and institutions (in which its citi-
zens learn to work) may have many workers, but little human capital. The nations that
invested in their citizens many years ago, by building strong universities, polytechnics,
and vocational schools are now reaping the bene¬ts from this investment. We see the
human capital success factor in software exports as having three pillars: science and
technology human capital, organizational human capital, and linguistic human capital.
We discuss each of these below.
The workforce in the software export industry come from a variety of disciplines.
Some are trained speci¬cally in IT (in computer science, software engineering, and
other related disciplines), but many come from engineering, physics, mathematics, or
even chemistry. Therefore, it is the broad expanse of human capital in science and
technology that is a nation™s success factor in software exports. Table 10.1 displays
some estimates of the size of the IT-related workforce pipeline. Interestingly, in the
offshore era a number of small nations with weak educational systems have tried to
import human capital. For example, some Jamaican ¬rms recruited programmers from
India to conduct export-oriented projects, with limited success: the well-quali¬ed
Indian recruits could not be retained and left after a short period for the US.17

Table 10.1 A sample of the workforce pipeline of IT graduates26

99,000 (2004)18
India
70,000 (2002)19
China
17,000 (2001)20
Philippines
15,000 (2002)21
Iran
14,000 (1999)22
Brazil
5000 (2002)23
Indonesia
3500 (2003)24
Vietnam
3000 (2002)25
Bangladesh
213 Building software industries in developing nations


The second pillar of human capital is organizational capital. This is the skill of man-
agers to execute and implement coupled with the skill of staff to operate effectively
within teams and organizations. Organizational capital is acquired slowly over many
years through relevant experience. In part it can be learned. The part that is learned is
called managerial skills and can be learned in management and administration schools.
The boom in business schools around the world will improve organizational capital in
many countries. In the software industry, managerial experience is most acutely miss-
ing at the mid-level for project managers. This is even a challenge for India, which pos-
sesses many people with technical skills, but far fewer experienced project managers.
Finally, we come to the third pillar of human capital, linguistic capital, the ability to
speak the language of your client. The dominance of the English language places soft-
ware producers in non-English-speaking countries at a disadvantage in the global mar-
ket. As we described in Chapter 3, English language skills are one of the criteria used
by clients to select an offshore destination. Countries with an historical relationship
to the UK or the US, such as India, Pakistan, Bangladesh, or the Philippines, enjoy
advantages in this regard. Others, such as China, Indonesia, or Vietnam, have language
dif¬culties and lose opportunities as a result. These nations are investing in language
skills for their younger citizens. In the shorter term, software companies are trying to
¬ll the gaps by investing, by themselves, in internal language training for their staff.

Wages and costs
Clearly, it is low wages that are a key factor in offshore nations™ success. This assertion
is exempli¬ed by the shift of work away from offshore nations that have become rela-
tively expensive. The key “offshore” nations of the 1990s, Ireland, and Israel, can no
longer compete on costs. In a different vein, is the current shift of work from India.
Even in India, where a heated market is pushing up wages, pushing work to lower-wage
nations, such as Vietnam and China. More than a dozen of the largest Indian IT ven-
dors have set up development centers in China.
In the long run, the only way for a nation to escape this cost-driven spiral is to dif-
ferentiate its IT work. Clients will return because of factors other than costs, such as
knowledge, specialization, and excellent service. In the short term, in order to com-
pensate for rising wages, other cost-related factors can be manipulated in order to
lower the overall costs for the offshore client. Such factors include taxes, cost of of¬ce
space, cost of infrastructure, and cost of training. Governments have the power to help
reduce these costs to compensate, at least in part, for rising software wages.

The industry
The software industry is a collection of individual ¬rms that have certain characteristics
that they share as a group. These characteristics can make for a successful-exporting
industry. We call them the three “Cs”: concentrate, compete, and cooperate.
214 Other stakeholders


A concentration of ¬rms is called a cluster and is quite familiar from Silicon Valley.
In a cluster software organizations are close to one another, perhaps in a technology
park, perhaps on the same edge of a metropolitan area, near universities or research
institutes. Successful software ¬rms are often found in regions where many other soft-
ware companies are also located. If there are universities close by, then these are usu-
ally the source of skilled employees. Some clusters are government policy initiatives,
such as the Multimedia Super Corridor in Malaysia, but other successful clusters seem
to arise organically, without much government action, such as Silicon Valley.
Cluster effects have a positive bene¬t on each individual ¬rm in the cluster, inde-
pendent of any other strength or weakness of each ¬rm. The labor mobility within a
cluster enhances the exchange of (tacit) knowledge. Clustering creates competition,
which spurs companies to innovate, to increase productivity, and to differentiate. It
also fosters cooperation, which spurs growth and facilitates the sharing of knowledge.
For example, in China, the Nanjing Software Export alliance was set up by local com-
panies and has been helpful to increase exports.27
Many of the dynamic clusters are now in Asia. Major Chinese software clusters are
located in Beijing, Shanghai, Shenzhen, and Nanjing, mostly in technology parks.
Such large clusters function as a one-stop shopping location for international cus-
tomers. The Indian software industry started in Bangalore, and other clusters devel-
oped later in Mumbai (e.g. Santa Cruz Export Processing Zone), Hyderabad, Chennai,
and Delhi-Gurgaon. A cluster can acquire a strong reputation in and of itself, and
becomes a geographic brand and gives international credibility, as in the examples of
Hyderabad (“Cyberabad”) and Bangalore (“the Indian Silicon Valley”). Bangalore is
now home to more than 1400 software organizations and employs 150,000 software
engineers, which is more than Silicon Valley with 120,000.28
A nation™s software export industry cannot succeed without a critical mass of com-
panies. A critical mass may be 10, or 50, or 100 ¬rms. This number will vary by nation.
We also contend that at least a handful of companies be of some signi¬cant size. In
Bangladesh or Nepal, companies of 100 people are considered large: this implies that
their software export industries will not grow very much. Small ¬rms cannot win large
contracts. In terms of sheer size, for example, the top three Indian providers, all are at
30,000“40,000 employees. These Indian enterprises act as a nucleus around which
smaller software ¬rms pollinate. Ex-employees of these companies have become
active entrepreneurs and set up new software companies.
Companies can cooperate in a number of ways, but most importantly, at the early
stages of a software-exporting industry, is to cooperate in an effective national association.
This is the organization that promotes the nation™s industry abroad, which is a topic
that we will return to in Chapter 11. A national software association can also provide
services back to its member ¬rms, such as supplying information about local and
foreign software markets. NASSCOM has been very successful in branding India as
215 Building software industries in developing nations


a software destination and other industry associations are attempting to emulate this
success. The Indian association has also been instrumental in lobbying the Indian
government for favorable tax and regulatory changes. Many developing countries do
not yet have effective industry associations.



Capital
A software export industry needs capital in order to grow. Most companies in develop-
ing nations grow using their own capital, or stated differently, they are self-¬nanced.
But this restricts their ability to grow and prosper. Outside capital for growth can come
from either foreign or domestic sources. Domestic sources include government funds,
bank loans, venture capital, investment capital, and equity offerings. Sources of
foreign capital are foreign loans, venture capital, investment capital (FDI), foreign equity
offerings, and foreign aid.
The large Indian providers have no more problems raising capital. They are traded
at stock exchanges, both in India and abroad (e.g. the American NASDAQ). But
smaller and younger offshore ¬rms do not have such access to capital. Only the Israeli
software ¬rms, during the 1990s, were able to fund young ¬rms, rather than established
¬rms, from foreign risk and equity sources. However, for most software ¬rms in devel-
oping countries, the dif¬culty of obtaining ¬nancing is a major obstacle. Unless there
is substantial collateral to secure loans, software ¬rms have little access to funds from
conventional ¬nancial institutions. In sum, software ¬rms do not have adequate access
to capital and must rely on their own working capital.
National governments can play a role in a number of ways: they can provide ¬nan-
cial assistance through grants and loans, they can guarantee loans, they can seed risk
funds (venture funds). They can also fund international marketing efforts. Separately,
they can build technology parks and subsidize rents for promising software companies.
Some international organizations provide funding that targets high-tech growth. The
World Bank invests in offshore service providers through its International Finance
Corporation (IFC) program and has provided equity investment to such companies
as Systems Ltd. from Pakistan, Glass Egg from Vietnam, and IT Worx from Egypt.
The Netherlands Development Finance Corporation invested in Eastern Software
Systems from India.



Technological infrastructure
In much of the developing world electrical stoppages are a daily occurrence, requiring
generators. In quite a few developing countries the telecommunication structure is still
outdated and the costs of communications remain high.
216 Other stakeholders


Of course, small software ¬rms can tough it out and operate with poor infrastruc-
ture, but the industry will never thrive under such conditions. Firms need reliable con-
nectivity and it must be affordable compared to international levels. For example, in
the case of call centers, telecommunication costs can represent up to 40% of the total
costs. Access to ¬ber-optic links is important for countries that seek to attract call-
center activities.
Most governments have already acted to upgrade their telecommunications, though
some have not moved fast enough or moved to aid the software industry speci¬cally. In
situations where the infrastructure is absent on a national basis, technology parks or
high-tech of¬ce centers are alternatives. Technology parks can now be found in devel-
oping countries around the world. An example is Mauritius, a small island nation in the
Indian Ocean. It is creating the new Ebene CyberCity, a combination of commercial,
residential and enterprise infrastructure. The heart of the new city is a 12-storey Cyber
Tower. With this center, the island is successfully attracting foreign IT investments.
Infosys of India is in the process of setting up a disaster recovery center on the island.


Linkages
Linkages (also known as bonds, or connections, or ties) are a vital part of doing inter-
national business. They facilitate the early getting-to-know you stages and, equally
important, they ease the day-to-day problems of communication and coordination.

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