Origins and Growth of the Software Industry in India

AbstractThe paper explains the evolution of India’s software industry. Domestic entrepreneurship emerges as the key factor for origination, survival and innovation in a hostile industrial policy environment. The maturing of the industry required a shift to a supportive government policy; maturation was also critically enabled by the modularization of the programming function through new technologies.

These changes favored domestic firms that provided programming services. Later policy and technological changes induced transnational entry and led to higher value-added output. The paper shows that technologically sophisticated industries can develop even when many conditions typically present elsewhere are missing. We provide conditions under which this may happen and show their effect on subsequent developments.

Key words: India, software, services, transnational corporations, software industrial policy.

1. Introduction

India’s software exporting industry is one of the world’s successful information technology industries. Begun in 1974, it employed 345,000 persons in 2004 and earned revenue of $12.2 bn, equal to 3.3% of global software services spending.

This paper’s object is to explain the industry’s origins, growth and sustainability. As we shall show, the industry originated under untypical conditions. Local markets were absent and government policy toward private enterprise was hostile.

These conditions influenced the industry’s origins. The industry was begun by Bombay-based conglomerates which entered the business by supplying global IT firms located overseas with programmers. Their success owed to the innovative exploitation of a new global market opportunity and protection from transnational corporations and startups by policy.

The explanation on origins is the same as used to explain industry origin in countries such as Korea and Japan (see, for example, Dicken (2003)) – with the difference that while government policy favored large domestic firms and discouraged TNCs and small firms in those countries, in India, government policy disfavored all types but was least hostile to large, domestic firms. In economic terms, the effect was the same as the more typical protectionist policy.

The protected environment restricted the growth of project management and domain skills so that, despite access to a large pool of programmers, the industry could not grow in value-addition.

3  A decade later, mainframe-based programming and manufacturer-specific operating systems and languages gave way to workstation-based programming and standard operating systems and high-level languages. These changes modularized the programming function, i.e., programming could henceforth be done independently of the hardware platform and from the other functions ofcreating software, such as system design. This, along with policy reforms that reduced costs of imported hardware and software, caused the Indian software industry to shift from supplying programmers to supplying software programs.

As work moved to India,

infrastructural costs increased as a proportion of total costs. This caused the industry to relocate from Bombay to Bangalore.

During the early years of the industry’s third decade, beginning in the mid-1990s, the establishment of the Internet facilitated the separation of services, such as software maintenance and email management, from the site where the software was located. Following telecommunications policy reforms in 1999, this opened new opportunities for domestic firms.

In 2000, reforms in foreign ownership rules, intellectual property protection and venture capital policy induced TNC, diaspora and foreign venture capital entry. The traditional software services industry, dominated by large local firms, has subsequently competed with firms with superior domain skills and access to finance. In consequence, the industry as a whole is seeing new leadership, more product development and higher value-addition.

4  The paper is organized as follows. Key global events that influenced the Indian software industry are reviewed in Section 2. In Section 3, the Indian software industry’s evolution is explained. Section 4 provides a concluding discussion that reviews the contribution of the paper to the literature on industrial organization and change.

Section 2.


The global software services industry


Software is usually classified by type of use and by customization.

Types of software by usage:

  1. System-level software: programs that manage the internal operations of the

computer, such as operating system software, driver software, virus scan software and utilities.

2. Tools software: programs that help applications to work better, such as

database management software.

3. Applications: programs that deliver solutions to the end-user, such as word-

processing software and financial accounting software.

Types of software by customization:

5  Software is either (1) written for general use and replicated in its original form across many users, or, (2) written for a specific user. The former is termed a software product or package. It may be shrink-wrapped and transported physically or over the Internet. The latter is termed custom software. Being made-to-order, custom software is more geographically constrained that products, i.e., proximity to the user is more important. Because of this, software products are more readily exportable than custom software.

System-level software is the most complex as it manages the interfaces with both hardware and higher level software; applications software is the least complex. Nowadays, all system level software are products. The more varied an end-user’s needs from another end-user, the more likely is the software to be customized. Since variations in needs appear most at the stage of applications, most customized software is applications software. These attributes are summarized in the table below.

Table 1: Software types and programs usedProduct software used by:Operating SystemAll usersToolsMost usersApplicationsSmall and large usersSource: Author’s compilation

Custom software used by:NoneSome usersLarge users

Custom software is part of a larger category called software services. Software services are described by type and size in the table below.Table 2: Global software services spending by categories of work, 2003, and India’s market share.

6  ConsultingApplications DevelopmentSystem Integration:Hardware and SoftwareDeployment and SupportSystem Integration:Applications, tools and O/SIT education and trainingManaged servicesTotal

Globalsoftwareservicesspending ($ bn)41.518.491.7

India’s globalmarket share(%)

U.S. Wagerate ($/hour)