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Industry Case Study The Indian IT Services Industry in 2007 Porter's seminal work on competitiveness was written when

the Iron-Curtain had fallen and when Fukuyama and 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 companies not 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 few question marks at Porter's almost religious focus on competitiveness. Were we to strictly follow Porter then a country that does not continuously keeps innovating and ensuring a high level of intra and international competitiveness is doomed. The underlying assumption here is also that technological innovation is endless and that there are basically no limits to growth. Ghemawat's thesis in a sense mellows down a bit Porter's strict emphasis on competitiveness in an ideal state of the world (truly globalized) by showing that "borders continue to matter". These borders are as Ghemawat shows not strictly geographic but include other important factors 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 at unilateral 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 cultural distances and the ability to overcome them are essential.1 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 mutually exclusive but actually mutually reinforcing. A country benefits from increasing its internal competitiveness and 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
1 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. McDonalds however flew in an American management team from its headquarters in Illinois who basically was in no position to break the cultural and linguistic difference which 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


want to start expanding beyond their own borders. The CAGE Distance Framework makes clear that having a competitive advantage in being productive and innovative by themselves are not sufficient ingredients to stay competitive and to expand beyond one's home-market. Instead companies and countries need to take into account (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 as India and the Philippines in the Business Process Outsourcing sector cannot solely be explained by their initial relative inexpensive operational and labor costs. The success of India's IT-sector, which in 2007 contributed a little over 5% to India's GDP, can be explained from the two above mentioned frameworks which actually have been reinforcing and stimulating each other. In line with Porter's advice, the Indian Government stimulated the growth of the IT-sector by providing tax holidays and invested in the infrastructure of certain designated 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 locations to offer attractive packages (e.g. tax exemption).2

The demand that spurred the growth of India's IT-sector was not as Porter had identified driven by homemarket demand. Instead the demand came primarily from abroad starting in the early 1980s and fully kicking off in the 1990s. The window of opportunity to expand the Indian IT-sector was further helped by huge investments in the IT-sector late 1990s which significantly reduced the distance between countries, companies and people. To further explain the growth of India's IT-sector since the late 1990s one has to look beyond the availability 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 important criteria to select IT vendors, other factors such as ability to build relationships played a significant role. The strengthening 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 in countries such as the US, Canada and the UK the relationship and connections have been strengthened over the years.3 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 outsourcing companies and the Indian IT-Sector.

The competition between engineering schools and business schools were also contributing which 'forced' the suppliers of labor to compete with each other and thus continuously looked for ways of improving the quality of their end-product which functioned as the input for the IT-sector. 3 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 America significantly higher educated (71% with BA or higher vs 28% of total US population) and better paid than the average American.


So the success of India's IT-sector cannot solely be explained from either of the frameworks. Both frameworks contributed and reinforced each other. Without India's opening of selective parts of its economy (and reducing for example barriers on the import of essential IT-hardware) and establishing special economic zones the threshold for Indian and foreign companies such as Accenture to set-up IT-business in India would have been a lot higher. The presence of a highly educated work-force formed another comparative advantage India had over for example a country such as Nigeria. The relative political stability and competition among Indian States to attract business were also instrumental as it enabled new players to arrive at the scene. This has resulted in a highly competitive IT Service Vendors market where the market leader (IBM) has just 7.5% of the market share. Cultural factors such as language, the ever-growing and well-placed Indian Diaspora, administrative familiarity and above-mentioned economic attraction (specialized labor and tax-holidays) were all instrumental in the development and impressive growth of India's IT-sector.

Using both frameworks to predict the future of the Indian IT-sector is slightly problematic. Porter's framework assumes continuous productivity improvement but at a certain moment the contribution of IT in improving efficiency will reach its limit. Moreover, other countries such as China are also producing thousands of engineers each year and their ability to participate in the global and regional economic integration is bound to grow over the years.

So what matters at the end of the day? A country's ability to create an environment in which companies are innovative and competitive? Or is it so that distance still matters? Finally, at the end of the day what matters is the bottom-line and as long as Indian labor cost continue to rise there will be a moment in time when it will no longer be cheaper to outsource. India can also not continue to keep giving tax-holidays as it essentially means it is subsidizing an already highly profitable business. So can other English-speaking countries copy India's model? Can Dhaka and who knows Yangon become the next Bangalore by copying India's model? This is highly unlikely as the unique ingredients India possessed were able to flourish through the above mentioned mix of factors. However, Governments in these countries can do their part in establishing the external factors that would attract foreign direct investment in the IT. It would however take years as it, beyond having a proper IT-infrastructure in place, needs to have an oversupply of young, ambitious, highly educated and lowly paid laborers. And even if they would have this, cultural and administrative factors come in play that make it very unlikely to result in anything beyond a supplier of cheap-labor instead of becoming what in my view Bill Gates correctly predicted for India namely the next software superpower.