INTERNATIONAL BUSINESS

RACHANA GADEKAR

2009
FACTOR MOBILITY THEORY IN INFORMATION TECHNOLOGY INDUSTRY AND THE RISE OF THE INDIAN SOFTWARE INDUSTRY

KJ SOMAIYA INSTITUTE OF MANAGEMENT STUDIES AND RESEARH Prepared By Rachana Gadekar PGDM-B , 110

Singapore and Ireland High-end telecom and infrastructure which is at par with global standards Strong quality orientation among players and their focus on measuring and monitoring quality targets Fast turnaround times and the ability to offer 24x7 services based on the country's unique geographic location that allows for leveraging time zone differences Proactive and positive policy environment which encourages ITES/BPO investments and simplifies rules and procedures A friendly tax structure.S. English-speaking manpower. 9. India has a competitive edge because of the following factors:y y y y y y Abundant. . What is India s competitive advantage in services? India ranks 27 in BCI (Business Competitive Index) and 43 in GCI(Global Competitive Index). 10. The factors that lend India its competitive edge are:1. Also because of the following regulations:y y 1994. 2. 3. Inexpensive labour Highly skilled workforce Acceptance of English among working classes Presence of clusters in Bangalore . which places the ITES/BPO industry on par with IT services companies. which is being harnessed even by ITES hubs such as U.µNew Telecom Policy¶ o Introduction of internet telephony o o Ended state monopoly on international calling facilities ushered in a slew of inbound call center/telemarketing services and data processing centers Some of the earliest players in the Indian outsourcing market were American Express. 8. 4. Gurgaon etc High level of importance given to education Giant international market The Indian diaspora Innovation and knowledge management Entrepreneurial skills Low political risk For the IT industry in particular. 5.liberalisation of teclecom sector ± important implication for BPO¶s 1999.Q1. GE Capital and British Airways. skilled. 7. 6.

electricity. Capital i Not very mobile i Level of consumer debt among the Latin American middle classes is much less than that of developed countries i Banking system can be regarded stronger and more stable i Seem to offer best conditions for a strong growth in VC 4. Mexico has close to 37 area universities that provide a good supply of technically sound professionals suitable for the IT industry Provide real time service to clients in U.S b.S) i Brazil. Latin America has supply of professional manpower at reasonable costs ± half of those in U. Labor/Human Resources i Young population ± (significant number between 15 & 39) i Low wage rate i Higher unemployment and lower attrition i Available work force i Available work force i Established BPO market 3. Location i Less travel time for U. e. Human Resources a. Quality of workforce Inadequate and inequitably skilled human resources 8. What are the factor conditions in Latin America? The factor conditions in Latin America are as follows:1. dining and other customs closely resemble i Amenities in Latin America comparable to those of NYC. 5.S based clients (UK too) i Similar time zones i Quicker implementation i Higher control over operations by clients i Ability to provide services in real time 9. Argentina and Uruguay have worked towards developing their infrastructure such as roads. How are Indian IT companies leveraging factor conditions in Latin America? 1. cost wise 2. Infrastructure i Favorable real estate rates (higher rates in Mexico but it is closese to the U. d. LA and Chicago Q3.Q2. Culture i Entertainment. c. Level of technology Use of technology and scientific research (R&D) is not very advanced 6.S Strengthens business continuity planning Reduces high rates for night shift in India . Land Real estate rates are comparatively low making it attractive. Kind of education Secondary school and higher education enrollment. teachnical education are major weaknesses 7. etc.

enables better interaction with their counterparts and helps them write manuals in Spanish b. Q4.S c. Complements the workforce in India which are not sufficient to meet industry requirements g. it should manufacture only those products it can produce more efficiently than other productsregardless of whether other countries can produce those products even more efficiently. Chile also has attracted considerable attention as an outsourcing center. Less travel time saves valuable business time spent in air Infrastructure a. Emphasis on education a. to China. Mexico is more cost-effective than as it is a part of NAFTA (North Atlantic Free Trade Agreement). It is in the same time zone as the U. which bring in a lot of direct and indirect benefits b. To what extent does the theory of comparative advantage explain the rise of the Indian software industry? THEORY OF COMPARATIVE ADVANTAGE :. Difference between the time zones of India and US.S. Physical proximity to the U. such as Mexico and Chile.2. have an advantage when seeking outsourcing clients. is another draw. 3. Countries that have a free trade agreement with the U. Similar cultures foster better understanding Political & Economic Environment a. including Nicaragua. from the U. Young workforce India is expected to be a young nation till 2050 5. Spanish & English are the prevalent languages.S. Middle class in India is highly educated A lot of emphasis on engineering education Level of productivity is high as compared to other countries 3. Low real estate rates make it an attractive destination for setting up industries Cultural & Linguistic Factor a. f. 5. Its network of free trade agreements with a number of countries. Lower attrition reduces cost of hiring and training new employees Location a. the countries that signed the Central American Free Trade Agreement. Language English is the business language in India 2. c. Skilled workforce 4.. Geography a. 4. b. Inexpensive labour Salaries for the software programmers is very low as compared to countries like US and UK 6.S. b. b. India has a comparative advantage in software industry because of the following factors:1. and more recently. Technology . Enables 24*7 support to clients by working in collaboration with the onshore team Advancement in the satellite communication enables code to be transported easily through countries 7.If a country has absolute advantage in all products.

Presence of skilled workforce and software professionals along with . To what extent does the Heckscher-Ohlin theory explain the rise of the Indian software industry? HECKSCHER-OHLIN THEORY/ FACTOR PROPORTIONS THEORY :. 4. Use Michael Porter¶s diamond to analyse the rise of the Indian software industry. software parks.Differences in countries¶ endowments of labor compared to their endowments of land or capital explains the differences in cost of production factors. Labor is inexpensive Highly skilled and talented pool of individuals World renowned institutes like IIT¶s. 2. 5. Factor conditions: The factor conditions in India have been favorable for the rise of the software industry.Q5. 3. Theory explains rise of Indian software industry with the helpof the following factors:- 1. One of the main reasons was the low cost of the same. We have a high availability of inexpensive and skilled labor force which has helped in increasing the demand for the Indian softwares. software cities etc (Bangalore and Gurgaon are major hubs) High emphasis on education amongst middle class Q6. PORTER¶s DIAMOND MODEL We can use this model to show the rise of Indian software industry y y Demand conditions: There has been a great demand from the US and other countries in the west for the software products in India. NIT etc which produce world class engineers Formation of clusters.

All these have contributed to the growth of the industry. Related and Supporting Industries: India has been benefited from the excellent satellite connectivity and presence of telecom infrastructure. Increasing large number of IT/BPO companies are present in the market and thus make the market competitive. entry barriers are almost nil in the software industry. structure and rivalry: Due to liberalized Government policies. Indian Universities are producing a high number of engineers every year. There has been a great emphasis on engineering education in India. Firm strategy. This has contributed to a large number of software professionals in India. Internet penetration and usage has increased manifold in the last 10 years. Also the large number of English speaking professional has helped in rising the Indian software industry. Companies improve people. . Since the software programs are coded in the form of zero and one they can be easily transferred across locations. This has led to an increase in the number of firms operating in this field.y y moderate capital requirement and operational costs has been an advantage for the industry. process and technology all the time to have a competitive advantage over other players.

Heckscher-Ohlin or Porter¶sgives the best explanation of the rise of the Indian software industry? Since the labor is so much cheaper in India than it is in the United States. more and more software industries move their companies over seas. and capital.Q7. Heckscher-Ohlin theory believes that the comparative advantage depends on the resources the country has. For example in the year 2002 work done in India for U. The comparative advantage theory explains the rise of Indian software industry to the fullest. and it makes a lot of sense why they grew so much over the past decade. compared to $75 to $100 per hour for software development done in the United states. meaning land. they do not need many resources to make it and they get the people to do it. Which of the above theories. labor.S. India has a comparative advantage over software because they specialized in this field.comparative advantage. software companies amounted to $25 to $35 an hour. Because of this they can export their product to other countries and buy some other product which they do not make. This is the extent to which Indian software industry . It is also very easy to transfer software from one continent onto another due to today's technology.

The liberalized policies of government have also helped in the growth of this industry.goes. . They have very good resources and mostly important they have a cheap labor. The factors conditions also have helped in India in gaining competitive advantage over other countries. United States could use these strategies too and probably not achieve the same goal as Indians nation does. Porter believes that the reason industries do so well is because of the well skilled labor. In my opinion Porter's diamond does not apply to Indian's software industry at all. The software industry flourished in India due to the high demand of the softwares across the globe. The Porters theory explains the four conditions which are important for competitive advantage of any country. The availability of inexpensive labor. home demand. The large number of English speaking workforce has also helped in the growth of Indian software industry. Even up gradation in the satellite communication and telecom infrastructure has helped in the rise of Indian software industry. Engineers do get paid a lot but labor force has a very low income. land and high-end technology has helped the Indian software industry to flourish. Porter s theory gives the best explanation for the rise of Indian software industry. Porter's Diamond goes in a different direction than Heckscher-Ohlin theory does. The availability of the inexpensive and the skilled labor force in India led to a less cost for development of the softwares and also the maintenance of the already made software in comparison to other countries. and the firm's strategy which is really important. but in the Indian industry case does not resolve the question really.

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