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Industry Case Study the Indian IT Services Industry in 2007

Industry Case Study the Indian IT Services Industry in 2007

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Published by Bastiaan van de Loo
Industry Case Study the Indian IT Services Industry in 2007
Industry Case Study the Indian IT Services Industry in 2007

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Published by: Bastiaan van de Loo on Apr 04, 2012
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11/14/2014

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Industry Case Study The Indian IT Services Industry in 2007Porter's seminal work on competitiveness was written when the Iron-Curtain had fallen and when Fukuyamaand Huntington still had to publish their views on the changing world. Porter's writing was also written prior to Japan's Last Decade (1991-2000) which is important as in his work he often lauds the ability of Japanese businesses to adapt to changing circumstances by innovating and creating "sustainable advantages". Nonetheless, Porter's emphasis that improving competiveness is essential for a nation (macro-economic level)and the private sector (micro-economic level) continues to be valid these days. For countries to survive in the'arms-race' of competitiveness, governments play an important role and a 'sit back and relax' business/industrial policy would not suffice. Governments need to create an environment in which companiesnot only can but have to do their part in creating a highly productive, competitive and sustainable economy.Ghemawat's emphasis that we are currently living in a semi-globalized state of the world places a fewquestion marks at Porter's almost religious focus on competitiveness. Were we to strictly follow Porter then acountry that does not continuously keeps innovating and ensuring a high level of intra and internationalcompetitiveness is doomed. The underlying assumption here is also that technological innovation is endlessand that there are basically no limits to growth. Ghemawat's thesis in a sense mellows down a bit Porter's strictemphasis on competitiveness in an ideal state of the world (truly globalized) by showing that "
borderscontinue to matter 
". These borders are as Ghemawat shows not strictly geographic but include other importantfactors that are ignored in Porter's analysis.Ghemawat's observation that factors such as cultural and political similarities play an important role correctly point out that in explaining a country's/company's ability to be competitive one should not solely look atunilateral attributes but also at bilateral attributes. So even though a country has all ingredients to be on top of the world when it comes to productivity and has well established local clusters it is not per se a guarantee of success or survival. To be successful in expanding their business abroad factors such as linguistic and culturaldistances and the ability to overcome them are essential.
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These factors interplay with facilitating and potentially constraining factors such geographic distance, the presence/absence of a common currency and being part or not part of a regional unity (such as EU, NAFTA,
Mercosur,
or in the past
Comecon
).Ghemawat's CAGE's Distance Framework and Porter's Diamond of National Advantage are not mutuallyexclusive but actually mutually reinforcing. A country benefits from increasing its internal competitivenessand by stimulating the presence of certain clusters a country would be more likely to have the presence of continuously innovating and thus competitive companies. Ghemawat's framework kicks in when companies
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Ghemawat uses KFC's success in China as KFC's ability to adjust to local needs. He however forgets to mention that it was able to do so by making a team of Taiwanese managers with years experience in the Taiwanese fastfood world in charge and from the start building a local pool of fastfood talent. McDonaldshowever flew in an American management team from its headquarters in Illinois who basically was in no position to break the cultural and linguistic differencewhich hindered McDonalds in adjusting itself to local tastes and the local political and business environment.Warren Liu, KFC in China: Secret Recipe for Success , John Wiley & Sons Singapore, 2008
 
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want to start expanding beyond their own borders. The CAGE Distance Framework makes clear that having acompetitive advantage in being productive and innovative by themselves are not sufficient ingredients to staycompetitive and to expand beyond one's home-market. Instead companies and countries need to take intoaccount (and reduce) cultural, administrative, economic and geographic bottlenecks.A good case-study of how both frameworks are at play has been outsourcing. The success of countries such asIndia and the Philippines in the Business Process Outsourcing sector cannot solely be explained by their initialrelative inexpensive operational and labor costs. The success of India's IT-sector, which in 2007 contributed alittle over 5% to India's GDP, can be explained from the two above mentioned frameworks which actuallyhave been reinforcing and stimulating each other. In line with Porter's advice, the Indian Governmentstimulated the growth of the IT-sector by providing tax holidays and invested in the infrastructure of certaindesignated areas. By doing so the Government enabled the mushrooming of geographic investment pockets(clusters) where foreign and local companies would congregate. Domestic rivalry went beyond the rivalry between companies but also between Indian States. The competition between states 'forced' different locationsto offer attractive packages (e.g. tax exemption).
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 The demand that spurred the growth of India's IT-sector was not as Porter had identified driven by home-market demand. Instead the demand came primarily from abroad starting in the early 1980s and fully kickingoff in the 1990s. The window of opportunity to expand the Indian IT-sector was further helped by hugeinvestments in the IT-sector late 1990s which significantly reduced the distance between countries, companiesand people. To further explain the growth of India's IT-sector since the late 1990s one has to look beyond theavailability of the labor, the infrastructure and the government's supportive measures.Ghemawat's CAGE framework here helps to shine a light on why it actually ended up working so well for western out-sourcing companies (reduced costs) and the Indian IT-sector. As mentioned above the presence of an abundance of skilled labor played an important role. Though technical expertise is the most importantcriteria to select IT vendors, other factors such as ability to build relationships played a significant role. Thestrengthening of these relationships has been building since India IT-firms started to export its trained programmes to these countries in the 1980s and 1990s. With a growing highly educated Indian Diaspora incountries such as the US, Canada and the UK the relationship and connections have been strengthened over the years.
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Because of this, the cultural distance has been shrinking. The relative administrative (democracy, plural society, and use of common-law) also contributed to fostering the relationship between outsourcingcompanies and the Indian IT-Sector.
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The competition between engineering schools and business schools were also contributing which 'forced' the suppliers of labor to compete with each other andthus continuously looked for ways of improving the quality of their end-product which functioned as the input for the IT-sector.
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Ghemawat mentions that over a third of the work force in Silicon Valley is from Indian descent and according to the 2010 US Census Indians living in Americasignificantly higher educated (71% with BA or higher vs 28% of total US population) and better paid than the average American.

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