Indias R&D policy and the growth of software industry in comparison with China Mohsin U.

Khan
National Institute of Science Technology and Development Studies, New Delhi-110012

Technology import policy of India

Period of liberalization until mid sixties. Period of tight regulations from then until the end of seventies. Period of relaxation of regulations from then until the end of eighties. Regulations were then relaxed and th policy became once again liberal.

Industrial policy resolutions

1.

Government of India adopted Industrial Policy Resolution Act. (April 1948) Private sector development of Industry. Reserve for development of exclusive industries in public sector. (The manufacture of equipment viz telephones, telegraph and
wireless apparatus excluding radio receiver sets one of the six major areas of industrial activities so reserved)

2.

3.

The Industries (Development and Regulation Act of 1951) In 1956 Parliament adopted Industrial Policy Resolution (IPR 56).

Cont.//
4.

The Monopolies and Trade Restrictive Practices Act (MRTP Act) 1969.
(The industrial groups with assets of Rs 200 million and above would be allowed to undertake activity only in specific group of industries)

5.

The Foreign Exchange and Regulation Act. (FERA) 1973.

(Restricts the Indian activities of the companies having more than 40% foreign equity to the same group of industries as the MRTP houses. Net payment in foreign exchange increased from Rs 412 million in 1977-78 to Rs 1848 million in 1980-81)

Cont.//
6.

Industrial policy as a whole was reviewed in 1973, 1977 and 1981

(Industries with the investment of Rs 50 million now dont need the license if their annual requirement of imported raw material does not exceed four million rupees or 15% of the production whichever is less.)

7.

8.

In 1983 government announced certain special tariff and tax concessions for the electronics industry. In March 1984, the IPR 56 was amended.
(The manufacture of Telecommunication equipments such as private automatic branch exchange (PABXs), telephone instruments, teleprinters and data communication equipments for installation. Also jointly with the public sector with 5% investment by the government the private sectors now manufacture switching and transmission equipments).

Technical knowledge acquired

A common view of this issue :

Indian firms have not acquired full depth and breadth of knowledge and information that would enable them to master and assimilate the technology effectively. Limited technological content of the collaboration results from the efforts of suppliers firms to minimize the knowledge and expertise they make available.

Technology policy statement of 1983, emphasized the need to plan collaboration agreements in ways that would ensure effective transfer of basic knowledge, know-why important inputs to the importing firms for subsequent absorption, adaptation and upgradation of the initially acquired knowledge.

Why India gone for liberalization in 1991

Indias economy grew at the rate of about 5% during 1980s. Domestic inflation gone up to 17% in 1991. Foreign exchange reserves reduced to $ 1.2 billion barely sufficient to pay for two weeks imports. Central government fiscal deficit as a percentage of GDP touched the all time high of 8.4%. Current account deficit widened to $ 8 billion (2.6% of GDP)

Policy changes since 1991

Drastically reduced number of industries reserved for public sector. Abolished industrial licensing except for a short list of industries related to security and strategic concerns, hazardous chemicals. The restrictions imposed by MRTP Act on large firms expansion, merger, amalgamation and take over etc..have been abolished.

Cont.//

The protection provided to the small firms being reduced. Now TNCs are free to decide whether they will use imported or local raw material. Now TNCs are free to use their brand names. Now TNCs can increase the permissible extent for foreign equity from 40 to 51 percent

Response of TNCs
Gross flow up From Rs 5.3 billion in 1991 to Rs 38.9 billion in 1992 to Rs 88.6 billion in 1993 to Rs 141.9 billion in 1994 to Rs 2.4 trillion in 2004

Electronics policy measures (1981-1988)

1. 2.

3.

4.
5. 6.

7.

Policy on electronics components (1981). Industrial and licensing policy for color television receiver set (Feb. 1983). Measures to accelerate the rapid development of electronics (Feb. 1983). New computer policy (1984). Integrated policy measures in electronics (1985). Policy on software exports, software development and training. New computer policy (April 1988)

Growth of electronics industry

Sixth Plan (1980-85) Seventh Plan (1985-90)

25% 30%

Software revenues
During 2003-04 the industry grew 28.2% to touch $ 15.9 billion (12.5 billion exports and $ 3.4 billion domestic market). Nasscom estimates software exports and ITES to grow at 30-32% in 2004-05. That would take the industry to $ 20 billion mark, of which export will amount to 16.3 billion.

The money makers, Nasscom ranking as per revenue

Rank Company Exports in 2003-04 Rs in crore _________________________________________________ 1 TCS 5,963 ($ 1 billion) 2 Wipro 5,881 ($ 1 billion) 3 Infosys 4,761 ($ 1 billion) 4 Satyam 2, 623 5 HCl 2,400

Cont.//
US continues to be major market for Indian software services with a share of 70% while Europe accounted for 23.5% in 2003-04. The number of 500 companies that have been outsourcing their requirements has also been steadily growing with as many as 254 outsourcing their requirements from India.

Cont.// The IT industry added over 100,000 jobs in 2003-04, taking total employees in the sector 810,000. Last fiscal, ITES-BPO added 65,000 jobs and software and allied services created 40,000 jobs.

Cont.//

One of the major reasons that Indian software exports is gaining recognition across the world is because of quality certification. Out of 23 SEI-CMM level 5 certified companies world over, 15 are from India. This number is expected to grow as there are several companies that have already reached to level 4.

Another encouraging sign is that small office segment of the market has grown by 70% in 2003-04. Besides large corporate market like ERP segment grew by 23%,e-commerce solutions by 300% CAD/CAM market 41% and banking by 70%.

Cont.//
The number of software exporting companies has grown to a record. At present it is 1,250 and expected to grow to 1660 mark next year. Number of software companies logging exports to Rs 100 crore now stands at 37. The top 25 exporters accounted for 61% of the export resources in 2003-04

Projections for Indias IT industry

According to Nasscom-McKinsey report
Annual revenue for IT industry in 2008 will be around US $ 50 billion. Thus a number of opportunities to be created Potential for 2.2 million jobs in IT by 2008. IT will attract Foreign Direct Investment (FDI) of US $ 4-5 billion.

China Vs India
Attribute China India _______________________________________________ Population (in billion) 1.3 1.03 literacy rate 82% 54% Area 9.6 bn sq km 3.3 bn sq km Total GDP $ 1 trillion 500 bn GDP growth (CAGR) 10% 6% Per capita GDP $ 735 $ 495 Total exports (in bn) $ 249 $47 Share in world trade 3.4% 0.8%

China Vs India
IT industry figures Calendar 2001 2001 _____________________________________________________ IT spending as % of GDP 1.10% 1.68% IT industry turnover $46.1 bn $ 12 bn Hardware exports $ 26.4 bn $ 0.4bn Software exports $ 1.2bn $6 bn Installed PC base 22 million 7 million PC Penetration/1000 13.2 3.5 Internet user base 22.5 million 3.5 million International Bandwidth 7.5 Gbps 1 Gbps Telephone lines 175 million 34.5 million Telephone lines/100 8.6 3.4 Mobile phones 136 million 5.7 million

Chinas economic policy reforms

Chinas economic reforms started a full 25 years ago while in India they started a decade later in 1991. Deng Xioping kicked off economic reforms when he suggested that tens of thousands of small and medium enterprises be thrown in private waters to swim or sink For most of the last two decades Chinas economy has grown double digit growth with an average CAGR (Compound Aggregate Growth Ratio) of 10% in the last decades. In the last decade China has paid special interest to high technology industries. From exporting toys and textiles, China has today grown to be major exporter of IT hardware, overtook Taiwan in 2000.

Chinas software story

Chinas software growth is currently hampered by number of factors:

China Media Intelligence (CMI) estimates that out of 5,000 software companies 55% of them have less than 50 people. Another 42% employ 50-100 people and there are only a handful of companies with an employee strength of 1000 people. CMI says Yongyou the largest domestic player in software development. The countrys largest company Oriental Software has a little over 1300 people compare that to 26,000 at Infosys and 24,000 at TCS.

Cont.//

Some of the top companies had obtained CMM certification, a large number of middle level companies had not even heard it. Lack of comfort with English language and the cultural confusion that comes with it made Chinas software industry immature. India has at least five year lead in software outsourcing. India has surpassed Ireland as the prime outsourcing destination of the world. The Indian companies have won a reputation of low cost high quality software delivery.

Dynamic techno-management capabilities

Resource exploitation capabilities

Technological learning Outside technological sourcing Human resource exploitation Resource focusing for the target Task force team integration between R&D and production Concurrent development system : Managing multifaceted activities Production technology management Interfaces and consensus building among functional department Top management leadership and involvement

Managerial integrating capabilities

Cont.//
Path navigating capability

Planned management Fitting into changes in environment Joint R&D activities

Korean electronics export growth

From meager of $ 89 million in 1971 to $ 20.638 billion in 1992 an increase by a factor of 232 Between 1988 and 1992 Korean market share increased : From 7.5% to 17.7% in US From 7.8% to 18.1% in Europe and From 23.6% to 33.7% in East Asia (Exclusive of Japan)

Cont.//
Semiconductor export is the largest item in electronics export From $ 7.8 billion in 1993 to $ 11 billion in1994 During the seventies electronics exports CAAGR was 43% while for other sectors CAAGR Was 35.6%