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Making Sense of Bangalore

Edward L. Glaeser

July 2010

Making Sense of Bangalore

Edward L. Glaeser * Havard University

* This research was funded by the Legatum Institute and I am grateful to Ryan Streeter at the Institute for his support. Kristina Tobio provided excellent research assistance. Lakshmi Iyer provided very helpful comments.

Copyright 2010 Legatum Limited All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means, electronic or mechanical including photocopying, recording or any information storage or retrieval system, without the prior written permission of the copyright holder. Please direct all enquiries to the publishers. Legatum Institute 11 Charles Street, Mayfair London, W1J 5DW United Kingdom T +44 (0)20 7148 5400 F +44 (0)20 7148 5401

Abstract Chapter 1 Chapter 2 Chapter 3 Chapter 4 Chapter 5 Conclusion References Introduction The Successes and Failures of Bangalore Understanding Bangalores Success The Roots of Bangalores Success: education, Infrastructure and Amenities Policy Lessons and Challenges 4 5 7 13 17 21 28 29


Bangalore is among the most successful cities in India and the developing world. Its population growth has been dramatic and it has generated vast amounts of wealth and prosperity. Bangalores economic success reflects the ability of cities to connect smart people who then work together and learn from one another. In the developing world, places like Bangalore also serve as conduits for knowledge and capital and services across continents. The vitality of Bangalore contrasts vividly with the continuing poverty of rural India. That contrast reminds us that cities are a crucial part of economic development. It makes far more sense to directly address the challenges of urban growth, such as unclean water and congestion, rather than to artificially constrain the expansion of mega-cities like Bangalore.

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Bangalore, today, appears to be the glittering example of Indian success in information technology. Bangalores success, symbolized by firms such as Wipro and Infosys, has reshaped western images of India, from a nation known for rural poverty to a place renowned for welltrained engineers who deliver high quality software at low costs. This shift in image reflects a robust reality, as Indian software exports now exceed 40 billion dollars, approximately twenty-three percent of the sub-continents total exports1. That industry is overwhelmingly located in a small number of large cities, and Bangalores region of Karnataka is responsible for a third of Indias total software exports.2 The rise of Bangalore as a software center has certainly created large financial benefits for many Indians. The city is now home to 10,000 millionaires and per capita income in the urban agglomeration is twice that of the Indian average.3 Yet the city

The talent in Bangalore is certainly first world, but the public infrastructure is not

certainly also faces major challenges. Parts of Bangalore do indeed feel like a prosperous Silicon Valley office park, but the city is still in India, and poor people will inevitably flock to an economic engine. one estimate suggests that almost twenty percent of people in Bangalore live below the poverty line.4 Bangalores poverty may be the inevitable result of being a productive city in a country with hundreds of millions of people and free migration, but the impact of all that migration is that public resources become enormously overtaxed. Water is rarely clean and sewage remains a challenge. Software companies cannot rely on the electricity grid and must depend on emergency generators. Traffic congestion is an enormous problem, with crosstown commutes often lasting above an hour. The talent in Bangalore is certainly first world, but the public infrastructure is not. After reviewing the available facts about Bangalore in Chapter 2 of this paper, I turn to an analysis of the sources of Bangalores success. While on one hand, Bangalore is a symbol

1 2 3 4;

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of the worlds flatness, the ease of communication across continents, the city should also be a symbol of the continuing importance of urban proximity. The software industry is so concentrated in Bangalore because ideas do not move effortlessly across space. Young software entrepreneurs come to Bangalore to learn the software skills that are critical to success. Concentrating all that talent in a single city makes it easier to coordinate face-toface meetings with foreign investors and clients. Bangalores eminence suggests that India is far more likely to succeed when its citizens are connected with each other and with the developing world in dense urban areas. In Chapter 4, I turn to the roots of Bangalores success. While it may have been inevitable that Indias growth would be concentrated in dense cities, it was certainly not inevitable that Bangalore would emerge as such a pre-eminent place. There are many factors that came together to make Bangalore such an information technology hub,

There is no future in rural poverty; developing countries that bet on their villages are missing the fact that the road to wealth comes from connection with the developed world and cities are the places that make those connections

including a long-standing commitment to new industries and a relatively pleasant climate, but engineering education played the primary role. The citys success has come from its human capital. After all, the urban advantage at sharing ideas is far more valuable when people have more ideas to share. Both Bangalores successes and failures suggest implications for policy both at the national and local level, in India and elsewhere. The enormous successes of Bangalore and other great Indian metropolises remind us that the present and future belong to cities.There is no future in rural poverty; developing countries that bet on their villages are missing the fact that the road to wealth comes from connection with the developed world and cities are

the places that make those connections. Moreover, the advantages of cities are tied closely to the amount of skills assembled in those urban areas. Investing in education may be the most important means of enabling city-led economic growth. Yet Bangalores growth also exposes the weaknesses of its public infrastructure, particularly in the areas of water, sewage and transportation. Bangalore faces a battle to retain talent, just like any other city, and quality of life factors matter in that fight. The citys long commutes suggest the value of congestion pricing, on at least some of its roads. The limitations on clean water cry out for more investment in health-related infrastructure. Bangalore is a model of connected entrepreneurship, but so far, its public sector has failed to deliver core urban services that match its private talent.

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Bangalore is, in many respects, the newest of Indias five largest cities. Delhi is an ancient Indian capital. Kolkata, Mumbai and Chennai, once Calcutta, Bombay and Madras respectively, were important ports in the 18th century and had all grown large by the start of the 20th century. In 1901, when Mumbai and Kolkata both had close to a million residents and Chennai had 500,000 people, there were only 160,000 people in the larger urban agglomeration of Bangalore.5 The city does have pre-modern history. It was allegedly laid out in the 16th century, and was an object of conflict between the British and Haidar Ali in the 1700s, but the citys rise to importance is a 20th century phenomenon. Figure 1 shows Bangalores population from 1901 to today.

Figure 1: population of Bangalore (19012009)

7 6 5 Population (Millions) 4 3 2 1 0






1951 Year







Source: Census of India


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The citys relatively recent origin has costs: Bangalore certainly has a more limited architectural heritage than Mumbai or Delhi. But there are also benefits. The older port cities suffer from being hemmed in by water, which reduces the ability to build and to travel. The port cities can also suffer from excessive heat and humidity, while Bangalores location high on the Deccan plateau gives it a relatively mild climate. In a world in which population is mobile, a relatively benign climate is an asset that helps to attract human capital (glaeser, Kolko and Saiz, 2001). As Figure 1 illustrates, Bangalores growth became particularly dramatic after 1941. In that year, Bangalores population of 420,000 would have made it Americas 19th largest city, coming in after Newark and ahead of Kansas City. Today, Bangalore is, of course, larger than any American city other than New York.

Today, Bangalore is, of course, larger than any American city other than New York

Despite Bangalores modern association with software and information technology, it is worth remembering that the population of the city grew approximately four-fold between 1941 and 1971, to over 1.6 million, before there was any significant information technology in the place. 6 During these years, Bangalore became the capital of the state of Karnataka and an increasing hub for heavy industry, much of which was subsidized and protected by the government. For example, Hindustan Aircraft Limited, now Hindustan Aeronautics, National Aerospace Laboratories and Bharat electronics located in the city during the post-war period.7 But while these relatively high-tech industries seem important today because they appear to be pointing the way towards modern Bangalore, during most of the postwar period, textiles were Bangalores largest industry. Bangalore was a center of cotton production, including both domestic producers and foreign investors, such as the vast Binny Mills. The Bangalore region also had an older chemical industry which continued to be important in the 1950s. The dominance of textiles during the early post-war years is, in a sense, unsurprising. Producing cloth and clothing has been a primary business of urban areas for a millennium, because clothing is a basic human necessity and there are returns to scale associated with producing in a single location. Cotton has been grown in India for at least 5,000 years, and India remains the worlds second largest producer of raw cotton today.8 Cotton production, of course, was even more important in Mumbai and Chennai than it was in Bangalore The only reason why cotton production in post-war Bangalore is remotely surprising is that Karnataka, unlike Mumbais state of Maharashtra, is not itself a big cotton-producing region, and the city had not historically had a large role in that industry.9 Bangalores rise as a textile industry had more to do with water power than with cotton seeds. In 1906, Bangalore became the first significant Indian city with electric lights, thanks to the hydro-electric power created by the dam at Shivanasamudra. The Princely State of Mysore was well endowed with rivers, and the Maharajas and their Diwans invested heavily
6 7 8 9;; Karnataka, for example, produced less than 200,000 bales of cotton in 2007 (, which is less than one percent of Indias total output, by contrast Maharashtra produces more than one-fifth of Indias total output. The neighboring state of Andhra Pradesh, however, does produce very significant amounts of raw cotton.


Making Sense of Bangalore

in power production. A relative abundance of hydro-electric power would make Bangalore attractive both to textile mills and to heavy industry during the post-war period. Bangalores pre-1970 growth is deeply tied together with public interventions of three major forms: infrastructure, education and industrial policy. The development of physical infrastructure, such as hydro-electric power, was one major form of public support for industry in Bangalore. The government of Mysore played a direct role in contracting with general electric to develop hydropower, originally to help gold extraction from the Kolar mine. While many of Indias princely states had leaders who were known more for extravagant spending than good sense, the Maharajas of Mysore had a reputation for running the best administration in native India. With the aid of competent Dewans, such as Mizra Ismail and the remarkable Mokshagundam Visvesvaraya (Sir MV), Mysore invested relatively heavily in the dams and roads that would make Bangalore more appealing for industry. Bangalore certainly has significant problems in both transportation and electricity generation, but it was and remains more developed in these areas than much of India. I will focus on the crucial role that education policy continues to play in Bangalores success in Chapter 4 of this paper, but it is important to note that the regions commitment to human capital dates to the pre-Independence era. Mysore was the first princely state to establish compulsory education.The Maharajah donated the land in Bangalore for the Indian Institute of Science. Mysores Prime Minister, Sir MV, was himself an accomplished engineer and thought that education was critical for India to develop. He played a significant role in founding the University of Mysore, and the Maharaja was its first chancellor. Finally, and probably less successfully, the government engaged in a very active industrial policy starting under the Maharajahs. Indeed, it is hard to clearly distinguish between the Maharajah of Mysore as head of state and the Maharajah of Mysore as venture capitalist and entrepreneur. For example, the Maharajah was an early supporter of Hindustan Aeronautics. Certainly, his considerable wealth was built up, in part, by investing in nascent industries. After independence, Nehrus industrialization policies and protectionism strongly supported Bangalores heavy industry. After all, Nehru was certainly influenced by Sir MV and called Bangalore the city of the future. The regions supply of power and engineers put it into an ideal position to take advantage of public support for domestic technology firms. Before Bangalore became a software hub, it was already a center for Indian electronics and many of those electronics were public undertakings, sponsored by Nehru. For example, Indian Telephone Industries, which makes phone equipment and has more than 12,000 employees, was founded in Bangalore in 1948.10 Bharat electronics Limited was another public enterprise founded in the city in 1954.The Indian army is a major client of this 15,000 plus person firm.11 The Indian government exercised an enormous amount of control over economic development in first decades after independence, so it shouldnt be surprising

In 1906, Bangalore became the first significant Indian city with electric lights, thanks to the hydro-electric power created by the dam at Shivanasamudra

10 lephone+firm+hopes+to+ring+in+better+times&Category=Chunk-HT-UI-IndiaBudget09-Sectors 11


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that the growth of Bangalore during that time period was guided by government action. Moreover, it is hard to judge if these public enterprises are successes or failures since the government has been such a major client. Bangalores software industry, conversely, competes in a free market, although unquestionably the public sector has influenced the industrys development. While the rise of Bangalore at the worlds outsourcing capital is often associated with Texas Instruments decision to locate a plant there in 1985, the two largest Indian firms in the industry, Infosys and Wipro, had operations in Bangalore before that date. Wipros transition from edible oils into computer production came about when the Indian government pushed IBM out of the country. A Bangalore location was natural because of the abundance of scientific talent in the city. Wipro then moved into software, supported by massive tariffs on Western imports. During this early phase, it wasnt particularly obvious that Wipro could compete on a global stage making either personal computers or software without the support of protectionist policies. However, as India opened up, the firm became a software consultant selling the services of its talented engineers to the west.The consulting arrangement enabled Wipro to collaborate across continents, combining its skilled workers with the knowledge possessed elsewhere. This model was certainly better than trying to beat Silicon Valley single-handedly, and it illustrates the core of Bangalores modern success as a gateway where knowledge moves from east to west and back again. A recent survey of Indias computer companies illustrates that Wipros transition is the industry norm. As opposed to Chinese firms which make hardware and sell packaged software, Indian firms typically sell software services (gregory, Nollen and Tenev, 2008). Chinese software production caters strongly to a growing domestic market; Indian software services are exported. Indian profit margins are also much higher, at least as a share of sales. Their workers also typically earn more. The role of Bangalore as a gateway was further enhanced when western companies, like Texas Instruments, began setting up establishments in the city. In 1985,Texas Instruments opened the first multi-national software design center in the city. Foreign investment in Bangalore wasnt new, as the citys combination of skilled workers and relatively good infrastructure had long given it appeal. Yet Texas Instruments move had enormous symbolic importance. If an American company as successful and well-established at TI could write its software using lower cost Indian labor, then why couldnt everyone? And so, over the past 25 years, Bangalore has managed to sell Indian intelligence on the world market. Sometimes this has come through multi-national subsidiaries, like TI or Yahoo. Yet more often, the citys success has been developed by Indian entrepreneurs who combine engineering talent and knowledge of outside demand for that talent. The result is a place that has become a capital of the information age and a training ground for young talent. As Bangalores information technology sector has grown, the city has expanded dramatically and become much richer. Figure 2 shows the growth of Bangalore relative to India as a whole and relative to other major cities. Since 1970, only Delhi has expanded more rapidly, buoyed by the enormous advantage of being the seat of Indias government. Bangalore has expanded much more rapidly than Mumbai or Chennai or Calcutta or


Making Sense of Bangalore

erstwhile competitors in the information technology market (not shown) like Pune. That growth was heavily buoyed by software exports, which reached more than 13 billion dollars in the state of Karnataka in the 2007-2008 time period. 12

Figure 2: population Growth of Major cities (1971 2009)


3.5 Growth Index (1971=1)




Mumbai Calcutta India Chennai






1991 Year



Source: Census of India

As Table 1 shows, Bangalore has also become increasingly wealthy. Real incomes grew by 73% between 1998 and 2005. This growth was much faster than the growth of India as a whole. In 1998, Bangalore incomes were 24 percent higher than the Indian average. Today, Bangalore incomes are nearly seventy percent higher than the Indian average. The gap has been widening between incomes in Bangalore and those in the state of Karnataka, which surrounds it, as well as the gap between earnings in the city and the rest of the sub-continent.

table 1: per capita Income in India, Karnataka, and Bangalore

(real 2005 rs) Year 1998 99 1999 00 2000 01 2003 04 2004 05 all India 19,052 19,752 20,121 22,682 24,236 Karnataka 13,902 17,219 18,121 18,931 20,715 Bangalore 23,714 32,539 34,402 34,369 41,105 (real 2005 $s) all India 432 448 456 514 550 Karnataka 315 390 411 429 470 Bangalore 538 738 780 779 932

Notes: Karnataka and Bangalore income (in Rs) from Karnataka at a glance, Directorate of economics & Statistics, Karnataka government. India income (in Rs) from Directorate of economics and Statistics, Planning and Development. Income converted into real 2005 rupees using the CPI for all goods, from Ministry of Labour and employment, govt. of India. Income converted to dollars using exchange rate data from the Reserve Bank of India. All data found on



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Bangalore houses a large number of extremely wealthy Indians, and it is certainly a prosperous place relative to the rest of the sub-continent. Yet there are also plenty of poorer people in city. one estimate is that about 25 percent of Bangalores population lives in the citys official slums, and about 20 percent of the people living in Bangalore would be defined as poor.13 These numbers are low relative to other Indian cities such as Mumbai, but since the urban Indian poverty line for urban dwellers is about 11 dollars a month, they still imply a level of deprivation that is very high.14 Likewise, even though Bangalore has a remarkable concentration of highly educated people, more

even though Bangalore has a remarkable concentration of highly educated people, more than 15 percent of the citys population is illiterate

than 15 percent of the citys population is illiterate.15 While that figure is low by the standards of India and Karnataka, the fact that Bangalore is home to almost a million people who cannot read or write suggests that the city isnt just home to software engineers. That fact isnt surprising and it certainly isnt any sort of indictment of Bangalore. India is still a relatively poor country and there is free migration across cities and towns. Any successful

place is going to attract thousands of migrants and many of them are going to be poor. As such, the fact that there are hundreds of thousands of poor people in Bangalore is best seen as a reflection of the citys success and ability to provide opportunity for poor migrants.

13; /energy/water/paper/bangalore/TVR24_p11_Bangalore.pdf 14 15 (Indicus 2006)


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Bangalores success ultimately comes from its role as a conduit between India and the worlds wealthier nations. Like Silicon Valley, it specializes in connecting smart, young software entrepreneurs who hop from firm to firm.The skills that they acquire in Bangalore are, if anything, even more important than those that their U.S. equivalents learn in Santa Clara County, because those skills involve accessing markets on the other side of the world. Bangalore is ultimately a place where human capital is created that enables innate talent to find its niche in the global market. Cyber-seers have long suggested that information technology seemed likely to make cities obsolete. There is little evidence to support this view (glaeser and gaspar, 1998), and much evidence to support the alternative view that technological changes have made cities increasingly important. one of the most telling facts is that the center of new technologies, Silicon Valley, is also the leading modern example of geographic concentration of industry. If information technology made the need to meet face-to-face obsolete, then why would so many information technology firms cluster together in a dense, expensive area? The alternative view is that technological change has increased the returns to skill. This fact has been shown in scores of papers, which have illustrated the rise in returns to formal schooling (e.g. Katz and Murphy, 1992) and increasing returns to unmeasured skills (e.g. Juhn, Murphy and Pierce, 1993). New technologies are difficult and require training, but they also create more opportunities for people with skills. globalization has a similar effect. While competition with Japanese car manufacturers has caused a great deal of difficulty for the auto-makers of Detroit, global markets are a boon to the most skilled workers in Wall Street and Silicon Valley. Cities, like Bangalore, are in many ways like schools. Just as universities agglomerate talent and enable students to learn from each other and occasionally also from professors, cities also connect smart people who learn from one another. As the great english economist Alfred Marshall wrote more than 120 years ago, in dense agglomerations the mysteries of


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the trade become no mystery but are, as it were, in the air.16 Some of this learning occurs within firms, but average tenure rates in the software industry are so low that much of the skills acquired by any given worker have been learned outside of his or her current employer. Statistically, this phenomenon shows up in the faster wage growth experienced by workers in large cities (glaeser and Mare, 2001). Certainly, my discussions with software workers in Bangalore confirmed the importance that they placed on connecting with one another to learn new skills and uncover new opportunities. That knowledge, which is a gift of the city, complements the skills that they learned in school. The advantage of proximity explains why three of Indias billionaires come from a single company: Infosys. People got enormously rich because they were part of a joint enterprise that became Bangalores second largest software giant. Infosys was founded in 1981, moved to Bangalore in 1983, and has been one of the areas great success stories since then. In the summer of 2008, the company had close to 100,000 professional employees and a market capitalization over 30 billion dollars.17 Today, the firm is a flat world phenomenon, with vast operations in software, banking services, and consulting. Its campus in Bangalore is technoluxurious, with plenty of lush gardening to remind you that you are in the tropics. Infosys is ultimately selling intelligence provided by humans or machines at lightning speed anywhere across the world. The company is regularly rated among Indias best employers, and it is right to treat its workers well. The companys strength is its human capital.The companys founder, Nagavara ramarao Narayana Murthy, once said: our assets walk out of the door each evening. We have to make sure that they come back the next morning.18 The company takes training seriously, formally training thousands of people each year in its 4,500 capacity training center in Mysore. In a typical year, less than 1 percent of Infosys job applicants get a place in that training center, making it more competitive than Harvard University.19 Infosys began in 1981 with seven software engineers, who were a lot less wealthy than they are today. The leader of that pack was N. R. Narayana Murthy, a Brahmin, born in 1946 during the last years of the Raj. He received engineering degrees from the University of Mysore and the Indian Institute of Technology at Kanpur. He spent the seventies working as a software engineer for Indias top business school, and then worked, briefly, for Patni computer systems, in the city of Pune. Patni was a bridge company an early connector between the U.S. and India. Its founders, Narendra and Poonam Patni, lived in the U.S. Narendra had gone to M.I.T. on a fellowship. His wife, Poonam, set up a back office in Pune which was one of the early examples of off-shoring software. The seven founders of Infosys were working together in Patnis Pune operation, where they had the opportunity to learn how to connect Indian talent with American markets. In 1981, those seven left Patni to found their own company selling software to American clients. Murthy borrowed 250 dollars from his wife to cover expenses. In 1982, they acquired their first foreign client Data-Basics, an American software company. In 1983,
16 17 18 19 (Marshall, 1920)


Making Sense of Bangalore

they moved to Bangalore to provide software for a big new client: spark plug producer MICo (Motor Industries, Co. Ltd.). MICos presence in Bangalore reiterates the point that the city connected east and west long before the rise of software. MICo is a subsidiary of the Bosch group, a vast industrial conglomerate founded by Stuttgart engineer, Robert Bosch, in 1886. 120 years later, Bosch continues to be among the most patent-intensive companies in the world. In 1954, the firm opened its Indian subsidiary in Bangalore, and german engineering know-how made its way to India. The importance of proximity to the spread of ideas explains why MICo wanted Infosys to relocate to Bangalore. Bangalore had other advantages. In those days, expenses were lower in Bangalore than in Pune or Mumbai. Most importantly, there were more engineering colleges in the South [i.e. near Bangalore] and their quality was better too. An abundance of

skilled engineers made Bangalore attractive to Bosch in the 1950s and Infosys thirty years later. over the past 25 years, Infosys has continued to expand as a conduit between Indian expertise and western markets. The firm has opened offices in the U.S., Canada Latin America and europe, yet it has remained rooted in its home city of Bangalore. It was one of the firms that worked to solve the Y2K problems that threatened the worlds computers. It has become a business consulting firm with more than four billion dollars worth of revenues. At Infosys, smart people in Bangalore get rich by solving

Cities, like Bangalore, are in many ways like schools. Just as universities agglomerate talent and enable students to learn from each other and occasionally also from professors, cities also connect smart people who learn from one another

the worlds software problems. In one sense, the company is a symbol of the worlds flatness. In another sense, it is a symbol of the importance of being in the right place a city that succeeds by making ideas. The Infosys story highlights the collective nature of Bangalores innovation and the role that cities play in connecting countries. At the beginning, MICo wanted Infosys to be in the same city, presumably to improve the information flows. Today, Infosys trains thousands of young software engineers, many of whom leave and start their own companies, often in Bangalore. Like Wipro, Indias other software giant, Infosys is a talent incubator that has helped to create a localized pool of talent. Bangalore has experienced a self-reinforcing virtuous circle where an initial advantage has spiraled into greater growth. An initial concentration of firms, such as Infosys and Texas Instruments, made the city an attractive place for young talent to migrate. As the talent came to Bangalore, firms also came, and the talent itself broke off and set up its own companies. A similar process, of course, occurred in Silicon Valley, where an initial firm (Shockley Semiconductor) first attracted talent and then let that talent go. A brilliant set of young entrepreneurs first moved collectively to Fairchild Semiconductor and then split off to form a number of strikingly successful Silicon Valley firms, such as Intel and Kleiner Perkins. The initial concentration of firms and talent then attracts further complementary inputs. For example, venture capitalists find it easier to come to an agglomeration of talent.

20 The quotation is from Barthi (2008).


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American and european clients find it easier to come to a single city rather than travel across all of India. Yes, it is possible to run a call center off in the middle of nowhere, but high skilled innovative work functions best in a single dense locale. In India, Bangalore is the biggest example of such a locale. Today, the talent pool trained by Infosys is itself an attraction for yet other firms. When Infosys opened an office in the Kerala Technopark, this was seen as a draw for other enterprises.21 Successful firms, like Infosys and Wipro, also train workers who eventually become entrepreneurs themselves creating yet more employment in Bangalore.

21 Iyer, Lakshmi (2008) Punjab and Kerala: Regional Development in India, Harvard Business School Case 9-707-008.


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Asia is full of cities. What forces determine which of these places explode as engines of economic growth? Hong Kong and Nagasaki were fated for their roles by acts of government. The Tokugawa forbade europeans from going anywhere else but Nagasaki.The British protected Hong Kong. But what magic made Bangalore into Indias information technology capital? Bangalores backers will argue that Bangalores climate is more temperate than that of much of India and surely that is a help. After all, Shockley himself was drawn to Silicon Valley by its temperate Mediterranean climate (as well as the presence of his mother). Moreover, for more than a century Bangalore has tried to have technology-friendly infrastructure, such as its early hydroelectric dam, although most entrepreneurs I spoke to were less than enthusiastic about the quality of that infrastructure. The industrial clusters, like the electronics City assembled by KeoNICS were surely helpful in providing relatively good infrastructure. These office parks may create some agglomeration benefits, but even more importantly, they provided self-contained urban units with access to modern public services. Yet, comparing Bangalore with other developed, and even many developing places, suggests that it is the human capital, not the climate or infrastructure that is unusually good. Indeed, it can certainly be argued that one of the key reasons why Bangalore specializes in software is that software requires much less infrastructure than traditional manufacturing. Roads are less important. Communications technology is provided privately; Texas Instruments went so far as to use its own satellite dish to move software back and forth between the U.S. and India in the early days. one of

one of the key reasons why Bangalore specializes in software is that software requires much less infrastructure than traditional manufacturing. Roads are less important


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the attractive things about software in a developing country is that the ephemeral nature of the product makes it less vulnerable to public sector failures. Skills are the bedrock on which Bangalores growth rests. Cities that thrive as centers for idea creation succeed by connecting smart people. An initial kernel of engineering expertise attracted firms, like Infosys, which then started a virtuous circle where smart companies and smart workers come to a city to be close to one another. In the U.S, we see this process in the strong connection between skills and city growth shown in Figure 1. Across Indian regions, Arora and Bagde (2006) show a strong connection between engineering students in 1988 and the growth of the software industry between 1990 and today.22 Just as skills predict the success of American cities in the information age, skills explain which Indian cities have managed to succeed in software. I have already discussed the early roots of human capital investment in Bangalore. Compulsory education came early to the state and the Maharajahs, along with Sir MV, strongly supported schooling. Sir MVs motto was industrialize or perish, but instead of just pushing big infrastructure, he emphasized the education needed to build those projects efficiently.23 In the U.S. and europe, education was rarely linked to industrialization. After all, one of the big points of textile mills and assembly plants is that they could use ordinary people, not skilled artisans. The American high school movement began in wealthy, rural Iowa, not industrial Chicago. But for Sir MV, industrialization meant training the engineers who would know how to import technology from the west. Since schools were a necessary ingredient in his plan to industrialize India, he founded both the University of Mysore and Bangalores engineering college, which now bears his name.Those schools were the starting point for the cluster of educated engineers that persists to this day. Today, there is an astonishing density of engineering students in the areas around Bangalore. Fifteen percent of Bangalore has some form of post-secondary degree, which is about double the rate for Karnataka and India as a whole.24 In 2004 2005, there were 750,000 engineering and technical students in India. of these, 97,000 were in Karnataka and 170,000 were in neighboring Tamil Nadu.25 These two states, which together have about 10 percent of Indias total population, have more than 35 percent of the countrys engineering students. The human capital of Bangalore is not just a product of formal education, but also of skills learned outside of school. Today, the skills of the software industry are acquired by working in that industry, but some of Bangalores early edge in human capital came from its role as a center for other forms of high tech industry, like Hindustan Aeronautics. These original high tech employers helped attract a critical mass of engineers to Bangalore, which then became a self-reinforcing process since human capital-intensive firms, like Wipro, Texas Instruments and Infosys, came for the workers and more workers came for access to those firms.
22 23 24 25 Census of India, 2001.

Skills are the bedrock on which Bangalores growth rests. Cities that thrive as centers for idea creation succeed by connecting smart people


Making Sense of Bangalore

The importance of skills is shown in the connection between skills and city growth in developing countries and the connection between skills and the software industry in India. The importance is also shown by the fact that workers earn more money when they labor around skilled people. Today, holding an individuals own years of schooling constant, that persons income goes up by eight percent, on average, as the share of college graduates in that persons metropolitan area rises by 10 percent (Moretti, 2004). Thus, the expected income for someone with exactly 16 years of schooling is predicted to be about 24 percent higher if that person works in a city, like Minneapolis, where 41.4 percent years of adults have college degrees, than in Cleveland, where 12.5 percent of adults have college degrees. These human capital externalities take many forms, and they are at work in Bangalore. one reason for human capital externalities is that people learn from each other and become more skilled through proximity to people with skills. In Bangalore, this shows up in the young software engineers who acquire skills working at firms like Infosys or MindTree. A second reason for human capital externalities is that the products involve joint production, and so one persons output may be compromised if he or she is working with less-qualified partners.The extreme of this phenomenon occurred in the faulty o-rings that brought down the space shuttle; getting one minor part wrong was enough to scuttle a huge enterprise (Kremer, 1993). In the case of Bangalore, software engineers work with each other to produce code, and one glitch can compromise an entire program. The heart of Bangalore is its software industry, but that industry itself only employs a modest number of the areas employees. In an interview, one information company leader estimated that each one of his workers is responsible for providing eight more jobs in the region. Though there is no way to verify this number, it would be far higher than any equivalent U.S. number. Thus it highlights a way in which Bangalore is quite different from Silicon Valley. Santa Clara County, California, is a rich place, where high housing costs make it extremely inaccessible to poorer Americans. As a result the software millionaires in Silicon Valley may buy expensive cars and houses, but they, generally, do not employ vast amounts of lowskilled labor, either at the company or at home. Bangalore is different. India has vast numbers of the poor, and Bangalores own land use restrictions do more to hinder the construction of buildings for the prosperous than dwellings for the poor. Poorer Indian urbanites often reside in extraordinarily dense, extra-legal dwellings. Since the government is not capable, or interested, in enforcing its land use regulations on Indias slums, those slums can house vast numbers of Indians, giving them access to the economic opportunities of growing urban areas like Bangalore. The presence of the multitudes of poorer workers creates tremendous challenges for the city, which I will discuss in the next chapter, but also helps define Bangalores economy. While Silicon Valley is something of a millionaires enclave, Bangalore is not. The Indian city is a very mixed city with vast numbers of poorer Indians who work, particularly, in personal service jobs. While it isnt obvious that a poor American could come to Palo Alto and find opportunity, the mixed jobs of Bangalore appear to create much more of a ladder for rural-

The presence of the multitudes of poorer workers creates tremendous challenges for the city


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urban migrants. Bangalore is full of small entrepreneurs who either amassed capital through early wage-earning or through their families, and are gradually rising by running small shops or restaurants. Ultimately this economy is buoyed by the highly skilled engineers dealing with the outside world, but there is plenty of internal entrepreneurship as well.


chaptEr 5


Bangalores success touches on four different policy spheres. First, the role of KeoNICS raises the question of industrial policy. Did the government choose software and did that choice make Bangalore? Second, the growth of the city leads to questions about urbanization in the developing world. Should cities be encouraged or restricted? Finally, the very success of the city and the vast flow of migrants create challenges in providing basic urban functions such as fast commutes and clean water. I will address these three policy areas in turn.

Bangalore, Industrial Policy and education

Bangalore is certainly a success, and the natural reaction to such a success is to try to use it as a model for other cities. But this would be a mistake since many of Bangalores attributes have had little to do with its success. At the ridiculous extreme, no one could claim that Bangalores congested roads played some magical role in making the city succeed. Surely, the opposite is true, and Bangalore succeeds despite its congestion, not because of it. It is only when the example of Bangalore can be combined with knowledge gleaned from urban development elsewhere that reliable lessons can be drawn. For example, the connection between education and Bangalores success is backed by cross-state statistical work in India and elsewhere.The strong statistical connection between engineers and growth in the software industry across states supports the importance of this channel.The fact that education is strongly associated with urban success and innovation in other countries further buttresses this interpretation of Bangalores achievements. Finally, the cross-country work on education and economic growth provides a last bit of support for the education interpretation of Bangalore.26 There is, however, less evidence supporting the view that Indian industrial policy played a major role in Bangalores role as a software capital. For example, the same statistical



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work that confirmed the importance of education found a negative correlation between software growth and lagged industrial output.27 electronics production in 1990 had only a marginal impact on subsequent expansion in the software industry. These results should make us wary about attributing Bangalores current success to the post-war public sector development of heavy industry and electronics in Bangalore. Moreover, there is an abundance of data suggesting the problems with state led industrial development. India itself, which stagnated for decades before economic liberalization, has often been a primary example of the costs of trying to micro-manage the growth process. even in Japan, where industrial policy at least seemed to be more successful, the best evidence showed that state planners got things wrong. Beason and Weinstein (1996) document that Japans vaunted Ministry of International Trade and Industry (MITI) generally picked losers. In Bangalore as well, at least since 1980, the growth engine has been led by private entrepreneurs not publicly supported enterprises. While it is hard to find good arguments for old style industrial policy, the case for public support of industrial parks, like KeoNICS electronics city, is more debatable. on one level, the familiar arguments resurface. Will the government actually be any good at picking winners? Wont public officials just go after the latest fad, whether or not their region has any comparative advantage in the activity? Can the public sector really micro-manage the unpredictable interactions that make urban agglomerations special? on the other hand, if the public sector cant provide decent infrastructure everywhere, and if there is clearly private demand for a small island of good services dedicated toward a particular industry, then there is more of a case for such parks.28 There may be agglomeration benefits, but even more importantly, such centers may provide the only chance of providing cutting edge firms with decent infrastructure.The second argument is stronger than the first because it isnt obvious that concentrating firms is the right strategy, even when such firms generate lots of geographically concentrated spillovers. If the firms all locate together then it is more difficult for them to learn from and teach other industries.

Across countries there is an almost perfect relationship between increasing wealth and living in cities

The process of India becoming wealthy will invariably involve the continuing growth of large cities like Bangalore

The presence of agglomeration economies doesnt imply that the benefits that come from concentrating firms outweigh the benefits of dispersal (glaeser and gottlieb, 2008). However, the benefits of having at least somewhere where the roads are paved and electricity runs seem clearer. Since different industries need different public services, it may be appropriate to have industrially specialized geographic regions that deliver the

services needed by particular firms. of course, this argument doesnt suggest the need for subsidy. If these firms are really productive then they should be able to pay for the services. But it does suggest that when governments cant provide everything everywhere, then industrial parks may be a way of providing something somewhere.

27 28 Laura Alfaro and Lakshmi Iyer (2009) Special economic Zones in India: Public Purpose and Private Property Harvard Business School Case 9-709-027.


Making Sense of Bangalore

This is the relatively benign interpretation I would put on the Bangalore industrial centers and suggest that they can be a model as long as they are given a limited interpretation. Since so many cities in the developing world lack widespread, high quality infrastructure, it may be appropriate to develop specialized areas that cater to firms that need that infrastructure. But those areas should be self-financing, and, as in the case of electronics City, they will probably function best if they are privately managed.

Bangalore and Urbanization

Bangalores success also sheds light on why development and urbanization are so closely linked. Historically, too many Indian policymakers have accepted gandhis line that If India is to attain true freedom and through India the world also, then sooner or later the fact must be recognized that people will have to live in villages, not in towns, in huts, not in palaces.

As Figure 3 illustrates, across countries there is an almost perfect relationship between

increasing wealth and living in cities. Within countries as well, the correlation between citysize and incomes is extremely robust, particularly in the developing world.

Figure 3: relationship Between Increasing Wealth and Living in cities

100 Percent of Population Living in Urban Areas, 1998 90 80 70 60 50 40 30 20 10 0
Austria Chile Armenia Central African Republic Comoros Bulgaria Aruba Australia Bangladesh Azerbaijan Argentina Burkina Faso Botswana Barbados Canada Chad Angola Congo, Rep. Cambodia China Colombia

Channel Islands Belarus Brazil Bhutan Belize

Cape Verde Albania




Bosnia and Herzegovina



Log of Gross Product per Capita, 1998

These facts do not mean that rural farmers such be forced to move to cities or that the government should artificially inflate the size of cities, but it does imply that the process of India becoming wealthy will invariably involve the continuing growth of large cities like Bangalore. After all, the connection between economic development and urbanization is not just a statistical regularity, but also a matter of basic economics. one reason for the association between urban growth and development is that improvements in agricultural technology are generally labor-saving, and as a result, workers leave the farms as countries become more developed. The second reason is that development

29 From a letter from gandhi to Prime Minister Jawaharlal Nehru on october 5th, 1945.


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involves the switch of labor to goods, in which cities have a comparative advantage in both production and distribution. Bangalore illustrates this claim. The citys older industries exploited traditional urban advantages, like the ability to exploit returns to scale in large factories. Bangalores Binny Mills was one of a long series of large textile producing companies. Big cities were natural places to put these factories both because cities had the labor force to man them, but also because cities had other inputs. In the case of Bangalore and textiles, electricity was critical. Cities have also typically sat at the center of transport networks which made it easy to import inputs and export the finished goods. While many prognosticators thought that the switch to information-intensive services would eliminate the advantages of cities, Bangalore illustrates that these sectors are particularly prone to locate in dense urban areas. It is true that the traditional transportation infrastructure is relatively unimportant in the case of software. Bales of cotton are not being shipped in, and reams of cloth are not being shipped out. Perhaps the most important transportation-related advantage that Bangalore enjoys is its airport, with direct access to airports throughout the world that enables clients and investors to come to Bangalore. The airport is important, but the most important reason why the software industry is so concentrated in places like Silicon Valley and Bangalore is that the industry is enormously collaborative.The production of ideas always is, because the ability to learn from one another may be humanitys greatest asset. Certainly, it is possible to write code on an isolated hill-top, but the writer doesnt learn much in isolation. Instead, ingenuity is maximized is by working together and then bringing the knowledge of one company to a new employer. In some cases, like the googleplex, many of these intellectual collaborations can be fostered within a firm, but as Saxenians (1996) analysis of Silicon Valley and Bostons technology cluster on Route 128 makes clear, many of the most important advantages occur across firms. Concentration enhances productivity because it increases the flow of ideas. The worlds output is likely to become more information intensive over time and that will only make cities more important. It is easier to connect over long distances, but there will always be a slight edge associated with meeting in person. After all, human beings have evolved to acquire a great deal of information from face-to-face meetings. As long as meeting in person gives some edge, then the most information intensive firms will continue to be drawn to urban agglomerations like Bangalore. In the case of the developing world, the advantages of urbanization are even greater because cities are the places that connect poor and rich countries. Indias software industry is particularly information intensive, which makes it so naturally urban, but even in goodsproducing sectors in the developing world, cities create advantages because they are the entry points for foreigners. While mature industries will always leave cities and move to lower cost areas, the cutting edge of industry will depend on the newest ideas and those are easier to access in urban areas. gandhis vision of India was extremely static. He envisioned a land of independent farmers, spinning their own thread. While there may be spiritual beauty in that vision, it

In the case of the developing world, the advantages of urbanization are even greater because cities are the places that connect poor and rich countries


Making Sense of Bangalore

is not a recipe for economic development and the benefits, such as health and longevity, which come with that development. Connection and knowledge are the harbingers of development and cities make those things possible.

Bangalore and City Services

As such, I see little to like in policies that artificially limit the growth of Indias cities. Yet the continuing growth of Indias mega-cities, like Bangalore, will continue to create their own problems. given all the economic advantages of urban concentration, it is more sensible to address those problems directly rather than to try to solve the problems by limiting growth. When poor farmers come to cities, they have a better chance of becoming prosperous, but great migration flows do crowd urban infrastructure, causing deterioration in water quality, congestion and limits on housing. The true urban agenda is to improve the public sectors performance in these areas. The need for a capable public sector increases dramatically when large numbers of people crowd into a small land area. Human beings impact one another, both positively and negatively, when they live in close quarters. Some of those interactions are benign, but others are less so, such as the impact that one persons refuse has on the quality of someone elses drinking water or the impact that one persons driving has on the traffic times of everyone else on the road. In cities, people generate negative externalities towards one another and these require some form of public management. In many cities, crime provides a particularly obvious example of adverse interpersonal interactions, and no one would doubt the need for a competent public sector to protect life and limb. Indias cities are relatively safe, which may reflect well-functioning social groups more than the police. Whatever the reason, crime is not the great problem of urbanization in India. Perhaps the most pressing public sector problem in Bangalore and other Indian cities is the provision of decent sewage and clean water. The limitations of the water system are illustrated by the large numbers of people in Bangalore who use ground water (one estimate is 30 percent), which is extremely polluted.30 Bangalore does have access to nearby rivers, but the water that is piped in is often also of low quality. The public health consequences of water-borne diseases make this a pressing problem for Bangalore and much of urban India. The problems of water are, of course, linked to limitations of the sewage system. In many developing countries, sewage pipes intermingle with the water supply spreading disease. In other cases, toilets are so limited that people often just defecate on the ground. In one study from the 1990s, 100,000 residents of Bangalore were found to be sharing 19 public toilets.31 Providing decent sewers and clean water is expensive and difficult, but it may be the most important task facing rapidly urbanizing areas.
30 31

gandhis vision of India was extremely static. He envisioned a land of independent farmers, spinning their own thread. While there may be spiritual beauty in that vision, it is not a recipe for economic development


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Bangalore also faces a terrible congestion problem, which itself, of course, can be understood as the natural result of too many people trying to use too little road space. one source estimates average commute times at around 40 minutes, which is less than Mumbai but still longer than any American city. 32 The relatively dispersed nature of employment in the city means that it can take an hour or more to get from one technology firm to another. These high time costs are not as threatening as water-borne diseases, but they are a serious urban disamenity. The city is currently building a train system, but it seems unlikely that this system will alleviate the citys congestion problem. After all, Bangalore is likely to continue growing and millions of people will still use the roads. Moreover, trains are an extremely expensive means of providing public transportation, and they will have difficulty connecting the dispersed web of firms within the city. Improved management of Bangalores roads is certainly needed. The most cost effective means of reducing congestion is to make better use of the existing roads infrastructure, which would require combining better bus service with a congestion charge. Congestion charges ensure that the users of public roads recognize the social costs of their actions. Singapore instituted such a charge in 1975, when it was no more developed than Bangalore is today, using a simple non-electronic system. London has achieved impressive results with its congestion charging system as well. The great advantage of congestion charging is that it has the capacity to directly impact the cause of the problem: overuse of roads. Subsidizing alternative means of travel, like trains, is at best an indirect and expensive means of achieving the same ends. one problem with congestion pricing in Bangalore is that a reasonable charge will make the roads too expensive for many poorer residents of the city. The best way to solve this problem is to use the congestion charge revenues to increase bus service, as London has done. By crowding more people onto large buses, the roads will

If Bangalores streets become too impenetrable or if disease becomes too problematic, then skilled people will leave. In a sense, quality of life policies are really better seen as economic development policies

be used more efficiently without the enormous expense of a rail system. Bangalore is competing not only with other Indian cities but also with places throughout the world. Many of Bangalores most impressive entrepreneurs could easily move to Silicon Valley. The economic opportunities in Bangalore help keep them in India, but quality of life matters too. If Bangalores streets become too impenetrable or if disease becomes too problematic, then skilled people will leave. In a sense, quality of life policies are really better seen as economic development policies. A final major area is housing. The attractiveness of Bangalore also depends on the quality and affordability of its housing stock.

Housing is best provided by the private sector, but inevitably the government plays a major role, often creating regulations that reduce housing supply and increase prices. Mumbai, for example, suffers enormously from an absurdly draconian land use system that radically reduces heights in central areas. Bangalores rules are not nearly as bad as those in Mumbai,



Making Sense of Bangalore

but the city still could do more to improve its land use planning and especially to permit the development of more districts marked with higher buildings. going up is a good substitute for going out, and the elevator can be a faster form of transportation than the car. As a concluding thought, it is worthwhile asking whether Indias governmental system is well suited to the challenges facing its cities. Much of the public power over Bangalore is lodged in the hands of the Karnataka state government. That governments primary constituents are still rural. As a result, the government may be less likely to put the needs of its cities first. The situation has been exacerbated by the delay in redistricting which caused state legislatures to under-represent their growing cities for many years. There is at least a case for considering more devolution of power in India to its large cities. Many Indians will argue that Delhi is now a more pleasant place because the city has more direct control over its public services.

Providing decent sewers and clean water is expensive and difficult, but it may be the most important task facing rapidly urbanizing areas



Bangalore is an extraordinary place that has done as much as anything to change the western image of India. It is a city built on knowledge and human capital. Its dense labor markets connect smart workers to smart firms. Ideas flow readily both across entrepreneurs and across software writers. The city also provides opportunity to

Bangalore is a model of how an urban agglomeration can bring prosperity to a poor country

less skilled workers who are able to supply services for the areas primary export industries. In a sense, Bangalore is a model of how an urban agglomeration can bring prosperity to a poor country. The city connects India with the outside world, and it is a central conduit for the flow of knowledge. The density of the city then enables that knowledge

to flow across workers. Its strength lies in a highly competitive, highly educated, highly entrepreneurial workforce that has been given access to each other and to the outside world in that city. Bangalores success does not reflect the industrial policy of the post-war era. The subsidization of heavy industry in the city certainly boosted its population for a while, but the recent growth of the city has private roots. The primary public contribution to Bangalores success is investment in education. The advantages of cities become greater when their inhabitants are skilled and have more to learn from one another. Bangalores success should remind us that education is the most important economic development policy. Yet the quality of life problems in Bangalore also remind us that Indias public sector has a long way to go to make it the equal of the countrys private sector. Clean water, better sewage and less congested roads are all major objectives. Perhaps these goals can be achieved with the current governmental system, but it may also make sense to consider a greater decentralization of public power to make local governments more accountable to their systems and to allow more innovation in the public sector.



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Kremer, Michael. 1993. The o-Ring Theory of economic Development. Quarterly Journal of Economics 108(3): 551 576. Manor, James. 1975. Princely Mysore before the Storm: The State-level Political System of Indias Model State 1920 1936. Modern Asian Studies 9(1): 3158. Marshall, Alfred, Principles of economics (London, UK: MacMillan and Co., 1920). Moretti, enrico. 2004. estimating the Social Return to Higher education: evidence from Longitudinal and Repeated Cross-Sectional Data. Journal of Econometrics 121(12): 175212. Saxenian AnnaLee. 1996. Inside-out: Regional Networks and Industrial Adaptation in Silicon Valley and Route 128. Cityscape 2(2): 4160. Sudhira, H.S. Ramachandra, T.V. Subrahmanya, M.H. Bala. 2007. City Profile: Bangalore. Cites: The International Journal of Urban Policy and Planning September: 379390.


Bangalore is a model of how an urban agglomeration can bring prosperity to a poor country.
The Legatum Institute is proud to publish this insightful study about one of Indias most distinguished cities. Harvard Universitys Edward Glaeser, a well-known commentator on urban issues, considers the historical path that brought this city from a small urban agglomeration during the 1900s to the bustling centre of industry and commerce that it is today. Through its careful analysis of the key drivers of Bangalores success, Making Sense of Bangalore draws important conclusions about the citys future and lessons for other metropolitan areas in todays rapidly urbanising world.
Legatum Institute, 11 Charles Street, Mayfair, London, W1J 5DW, United Kingdom Telephone +44 (0)20 7148 5400, Facsimile +44 (0)20 7148 5401, Copyright 2010 Legatum Limited

ISBN 978-1-907409-05-9

ISBN 978-1-907409-05-9

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