| Linking up with the global economy: A case study of the Bangalore software industry |
| Chapter 5: Bangalore at a Crossroads: Prospects and Dilemmas |
  
The story that has materialised out of the preceding pages reveals an intertwined process that has led to the emergence of Bangalore as a global centre for software development. Apart from the fact that Bangalore was a charming small town with a number of high-tech industries; a low cost, skilled workforce; and a mild climate, many factors can explain the success and distinction that Bangalore has achieved. These include changes in firm strategies in the industrial countries, such as the increased demand for software development and the decisions to outsource certain software activities. Changes in technology, such as improvements in telecommunications have also been important. In addition, the role of policy makers has been a factor. This is evidenced by the opening up of the Indian economy; the active role played by the DOE in encouraging software exports, and the active pursuit of foreign investment by the Karnataka government following the arrival and success of Texas Instruments.
With the process of globalization occurring at an increasingly rapid rate, there is growing concern about the precarious nature of capital flows and the impact of investment on any given location. A primary question for Bangalore is that of the sustainability of its software industry. Is the software industry in Bangalore geared up to consolidate its position in the global software industry? How can the Bangalore firms prepare for and respond to changes in the larger industry that they service? How can policy-makers adapt to provide support for the industry and extract the best for society? It is to these questions that the discussion now turns.
 5.1 The sustainability of the software industry in Bangalore
Although Bangalore continues to be an attractive location and has built up fairly strong capabilities in the software industry, there are other locations within India that have talented manpower and are beginning to become competitive. As costs rise in Bangalore, these other locations may gain the advantage. Examples are Pune, in Maharashtra, which has a large pool of skilled engineers due to the educational institutions based there, and so far has not been inundated by investment, so costs are lower and infrastructure is available. A $30 million Japanese software technology park that was originally supposed to be located in Bangalore, was later built in Gurgaon, Haryana, a town which by some accounts is much better organised and run, and has planned for the investment it is now attracting. Other smaller towns like Hyderabad and Ahmedabad were also mentioned as sites to be considered.
Firms in Bangalore are not only competing with firms in other developing country locations in attracting investments but also with firms in other cities in India. This should be seen as an opportunity rather than as a threat. Firms in other locations in India could benefit from the outsourcing of certain activities by Bangalore firms. Within the Indian software industry, Bangalore could be viewed as one of the poles, where the core software development activities occur. Other locations could be the ones to which non-core activities are decentralised or outsourced. This might provide existing and potential investors with a broader menu of options and enhance the advantages of locating software activities in India. There are signs that a few firms are beginning to explore these options, however, fear of competition holds back the majority of firms.
The potential for the upgrading of software activities given by the clustering of firms in Bangalore should also be explored. Due to the intense competition for clients and for attracting the best software engineers, many firms have come to regard the clustering of the software industry in Bangalore as a negative factor. Clustering has been held responsible for the high attrition rates and the increases in wages and costs. However, clustering also has its advantages. In order to be able to provide more sophisticated services, the larger, more established firms could outsource the lower value added or specialised tasks to other firms in Bangalore. This would free up manpower to take on the more complex projects and clients, including the higher value added ones. So far, competition rather than a mix of competition and cooperation has been the norm running Bangalore software firms, unlike other internationally successful specialised clusters.
Another crucial issue for Bangalore is infrastructure. With firms' operating costs rising so rapidly due to the need to compensate for the insufficiency of the current infrastructure, it is essential that the government invests in the basic infrastructure, improved road conditions, electricity and water. If the Karnataka government wants Bangalore to remain the "Silicon Valley of India", it has to make it worthwhile for firms to stay in Bangalore, and if not in Bangalore, in other locations in the State. But, without these basics, domestic and international firms may decide that it may not be economically viable to locate or expand operations in Bangalore, particularly when there are other locations that are able to provide these basics at lower costs.
5.2 General issues for the industry as a whole
At present, India benefits from the fact that it has large English-speaking, low-cost technical human resource brains. In the software industry, those characteristics have placed India amongst the top ranked locations for software development outsourcing.
There are two factors that could threaten this position in the long-run. One is increasing costs in India, due to rising salaries and rents. Another factor is the poor state of infrastructure and the lack of sufficient telecommunications facilities. As costs rise, other locations begin to become more attractive to foreign investors and foreign clients, especially if the type of work that is being done in India can easily be done in other locations. This is going to pose a serious problem for firms in India that export the lower value-added types of software development activities such as basic programming, coding and testing. There are other countries that are increasing their participation in these types of activities, such as Vietnam, China and the Philippines. Another threat to many Indian software firms is the automation of the process of programming and coding. Increasingly these activities are going to be undertaken on-site without requiring additional manpower and will not require outsourcing. As costs rise in India, there will be a further disincentive to outsourcing these activities to Indian companies.
It is acknowledged amongst industry analysts and top level management that there was a need to start with the lower value-added activities and then move up. This was because of the need to establish the industry's reputation in the global market and to instil some international standards to the quality of work that was done in India. This, it is felt, was expedited by exposing Indian software professionals to international work environments through "body shopping". However, in order to maintain and increase market share, the software industry in India has to broaden its focus to provide higher value added services. This includes being able to design and manage entire projects and to move into software development in niche areas.
Firms in Bangalore recognise this and have begun to concentrate their efforts on providing a wider range of activities to their foreign clients. Some have also focused on banking and financial software, on educational software and in Tata Elxsi's case are pursuing areas of research, for example in video-conferencing software, virtual reality, in an effort to position themselves strategically when those markets open up. The foreign firms have also been using Indian engineers to do more sophisticated work, as the examples of Motorola and Texas Instruments suggest. On a recent visit to India Lewis E. Platt, the CEO of Hewlett-Packard, when asked what India lacked that China had, given HP's larger presence in China, said that "(HP's) Indian Software Operations....has connections with all divisions of HP. We have nothing like that in China. So it may not be huge but I think its strategic importance goes beyond anything" (Dataquest, March 31, 1996). When asked about expansion of operations in India, in terms of a world-scale manufacturing plant, he responded "(W)hat I think is more important, is that we build in places where we can take advantage of the intellectual capital. In the case of India that happens to be software. A world class software factory? We are in the process of building that right here" (Dataquest, March 31st, 1996, p. 72).
Another important issue for the sustainability of the Indian software industry is the opening up of the domestic market. India is in the interesting position of having a thriving software export business without having a strong domestic market for software. Although this has worked well so far, there are many possible benefits of a domestic market for software. It could allow a move to more sophisticated stages of production such as further expanding into the development of packaged software, which requires proximity to the final market as well as resources devoted to marketing. As the costs of market research and marketing in the foreign market are prohibitive for most Indian firms, the domestic market is the most logical place to start. This would also allow Indian firms to gain some independence and insulate themselves from the fluctuations in demand from the primarily United States clients it currently caters to. The potential in the domestic market is enormous. With foreign investment flowing steadily into India each year, there will be demand created by MNEs, which are heavily dependent on information technology. Furthermore, the banking sector has already started to invest in IT providing a market for the banking software that is produced in Bangalore and other cities in India.
A related issue is the need to shift way from the dependence on one export market. The industry has to diversify its final markets. Recent efforts, like the opening of 3SE, are taking steps towards that. Already Tata Elxsi's major market is Japan. In addition, the Tata-Singapore Technology Park will bring awareness in East Asia of Indian software skills.
Furthermore, the industry needs to find a way to hold on to its most valuable workers, those with experience and project management skills. Until there is a large pool of such people in India, it will be very difficult to take on larger and more complex projects. As it is, some firms have to turn away larger projects for lack of qualified and experienced manpower. Some firms have opted for profit sharing schemes, whereby the staff is given the opportunity to buy shares in the company. Other firms offer flexible working hours, on site gyms and recreation rooms, days off for birthdays and special recognition for excellence (interviews and Sareen, 1996, p. 5).
5.3 Policy issues
Despite the view that the nation-state is becoming less and less able to regulate the global economy, especially in terms of controlling and directing capital flows, governments can play a very powerful role. They can ensure that their countries or cities attract investment which becomes embedded in local economies and communities. Furthermore, they can ensure that the locations get the most out of participating in the global economy. There are many policy tools available for the Indian government and for the Karnataka government. The most obvious one given the discussion above is the provision of the basic infrastructure.
A vital component of software development is telecommunications. The Indian government has recently taken steps to allow some privatisation in the provision of telephone lines, a function that is too costly for the government to handle on its own. It is occurring quite slowly relative to the need. In a seminar held by the Computer Society of India in April 1996 on data networking, there were calls for the complete liberalisation of licensing and fees for the provision of the Internet and Electronic-mail services. There has recently been a significant increase in the number of Internet providers in India. This additional capacity would greatly enhance the sustainability of the software industry, as these services would allow even the smallest firms in the industry to access foreign markets and to market services and products more competitively. Furthermore, it will permit Indian software developers to get into the vast area of software development for the Internet. It is also important for India to increase the availability of satellite connectivity in the more remote areas as this would allow those areas to get involved in lower value added types of jobs in the software industry.
At the same seminar it was suggested that the government can also play a vital role in increasing computer-usage in India by computerising some government services and functions, such as requiring that all manufactured goods that fall under an excise duty be bar-coded. This would have a number of outcomes. It would encourage computerisation, create demand in the area of computer coding and increase efficiency in tracing goods and preparing inventories. The government is the largest potential IT user in India. As it begins to integrate IT into its day-to-day functioning, the boost to the domestic software industry will be tremendous. This will be enhanced by the fact that businesses that deal with the government may also have to computerise.
Another area in which the government can play a role is the increased provision of financing for small software firms. Venture capitalism has given the industry a great boost in India. Because there is very little in software development that can serve as collateral, most banks are unwilling to lend money to new companies (Heeks, 1996, pp. 272-273). The Technology Development and Investment Corporation of India was created by the Industrial Credit and Investment Corporation of India in 1988 to "administer a United States Agency for International Development line of venture funding credit and to offer management assistance and technology counselling for small firms, including software producers" (Heeks, 1996, p. 277). The Indian EXIM bank has also been an important source of funding. By the mid-90s, eight venture capital companies were operational in India, and 10 per cent of available funds went to the software industry, (Heeks, 1996, p. 278). While TDICI has been cited as being an important source of funding, many small firms still find it difficult to access financing due to the lengthy processes involved in applying for loans (interviews). Furthermore, Heeks makes the point that with the exception of venture capital, most of the types of financing made available have added further incentive for the service side of the software industry activities, rather than for the development of software packages.
The primary concern and challenge for software companies in Bangalore and in India in the coming years is finding and holding on to well trained people. If the domestic market opens up, as it is poised to do, there will be a shortage of qualified manpower. This will exacerbate the already difficult problem of rising wage-related costs and high turnover rates. With the current curriculum at most of India's IITs and technical colleges, there is a large supply of raw talent. Moulding these young engineers into useful additions to the firms, through elaborate training schemes, has eaten into a large part of firms' profits. One way that the IITs can be made more effective in providing both talented and experienced engineers is by collaborating with software firms to understand what they need and update their computer technology on a regular basis to keep up with innovation. Firms could provide scholarships, sponsor courses or seminars and professorships, and make an effort to forge a joint strategy to improve India's position in this industry. Furthermore, what is most needed by Indian firms is experienced project managers, as these are often poached by the competition. It would be useful for engineering degrees to have as required coursework some management courses, so that the key concepts in project management are taught early on. These could be developed very easily once the engineers start work, so that what is gained in terms of skills is not then lost in inefficient project management. Many engineering courses in the United States and in Canada have such requirements. NASSCOM is working with the government on trying to increase the number of seats at the IITs and to make the curricula more effective. In addition, non-formal education, i.e. the small privately-run computer training facilities, ought to be standardised so as to ensure quality, through certification procedures.
Finally, the government has already gone a very long way in reducing restrictions on this industry. However, much needs to be done to ensure that all disincentives to developing software for the domestic market be removed, as should any restrictions on hardware and software imports. Information technology is vital to the development of any country. It should be used to make the Indian economy more efficient and more competitive. Policies that stand in the way of the widespread dissemination of information technology in India stand in the way of India's future in the global economy.
5.4 Conclusions
This report has highlighted some of the issues that govern Bangalore's position in the global production chain of the software industry. A combination of factors led to Bangalore evolving into a centre for software development, including the skilled local labour force, foreign demand for Indian software, the central government's push for software exports and the state government's push for foreign investment. The arrival of Texas Instruments heralded a new era for Bangalore: its establishment as an important player in the global software markets.
Participating in this chain has already influenced Bangalore and India. The diffusion of technology into some other industries, particularly the banking sector, and the diffusion of new management styles in the Indian context are already evident. In Bangalore, the influx of investment, both foreign and domestic, has contributed to the rapid growth of the city, demonstrating the inherent dilemmas of economic development. Infrastructure is the primary problem in the city and has to be urgently addressed, if the city is to sustain the software industry. Equally important is the establishment of efficient local systems to develop technical and managerial skills to support Bangalore firms in their effort to upgrade.
The Indian software industry should continue to grow at the same pace, if not faster in the next five years or so. This is because the worldwide demand for software services is growing steadily. India is currently competing with Ireland, Israel and Hungary for software contracts, and is at the moment the most cost-competitive. But other developing country locations are now becoming active in the software industry, particularly at the lower-end, and at much lower cost than India. The lower value added activities figure prominently in the industry in India, including in Bangalore, although there are some firms that have moved up the software value chain. In the longer-term, to avoid the danger that it may get trapped at the bottom end of the chain, where it will be less competitive, India will have to provide a wider and more sophisticated range of software services. This would be facilitated by an internal division of labour, whereby lower cost locations within the country compete for the lower value added activities, while higher cost locations such as Bangalore specialise in the higher end tasks. The great potential that exists as the domestic market opens up might also provide a stimulus to the development of a stronger software industry in India.
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