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Cross-Country Comparisons of Software Growth

operate more efficiently. This resonates strongly with prescriptions that are part of Cross-Country Comparisons a post-Washington consensus which requires the state to play a supportive role for the market economy to function.


Cross-Country Comparisonsof Software Growth

The Software Industry in Emerging Markets

edited by Simon Commander; Edward Elgar, Cheltenham, UK, 2005; pp 256, £ 59.95.


wo recent trends in developmental policy-making render cross-country comparisons of sectoral growth highly relevant. Though there is an overarching neoliberal emphasis on market signals to propel growth, policy initiatives rely less on traditional macro-theoretic development models. They are more inspired by historical models of successful growth economies. The rise of south-east Asian economies, which promoted growth by hinging it to the growth of specific sectors, has inspired moves to comprehend the factors that hinder or enable the growth of certain sectors. An accompanying phenomenon has been the perceived significance of new information and communication based technologies (ICT hereafter) for current economic growth. The “informatisation” of societies is seen as an inevitable process to which these economies have to respond quickly if they are not to be “left behind”. These two trends constitute the contextual relevance for the book under review, which seeks to learn from the growth trajectories of the software sector in four countries: India, China, Israel and Brazil.

The least capital intensive of various segments of ICT, the software sector, suggests itself to be a relatively easy point of entry for capital scarce low income countries, especially for those with adequate supplies of skilled labour. The countries discussed in this book, India, China and Brazil have partially realised this promise, and at present, the “developing” world produces over 5 per cent of total global software sales despite its concentration in these few countries. The importance of understanding the nature of the sector’s growth in these countries and the possible limitations of its pattern are obviously significant for public policy initiatives in similar countries. Israel, despite belonging to the high-income group of countries, is included in this book due to its vibrant software sector, especially in the product segment which is a result of the combination of “openness to external markets and ideas, as well as supportive public policy.”

Commander locates these country level case studies in a larger comparative macroeconomic framework to derive possible links between macroeconomic parameters and sectoral outcomes. Nationalist and protectionist endeavours played an important role, albeit to varying degrees, in all these countries in creating a set of institutions that generate a critical pool of skilled labour. The domestic sector benefited from a set of tax and trade incentives as well. The similarities however seem to end here. For instance, while all four economies had a stable exchange rate regime and low inflation (at least in three of them), their growth rates differ considerably. There are also differences in the attributes of the software sector in these countries. While Israel and China concentrate on products (China to a much lesser extent though), India and Brazil have specialised in services and to add, face constraints in accessing the product market. India and Israel are into exports in a much bigger way compared to the other two. Also, Brazil and Israel, according to the author, have been able to attract FDI that is crucial to the development of the software sector primarily due to the stabilisation programmes undertaken in these countries. Merely sticking to the Washington consensus, according to him, is not sufficient. He calls for more active intervention by the state to “get institutions right” that will allow markets to operate more efficiently. This resonates strongly with prescriptions that are part of a post-Washington consensus which requires the state to play a supportive role for the market economy to function.

The subsequent chapters are case studies of the software sector in each of these countries. Ashok Desai, in his paper on India, seeks to “go beyond the received wisdom” by qualifying a few misconceptions about the factors enabling the sector’s growth such as low wage costs, familiarity with English, vast stock of human capital, its ability to provide services on a 24-hour basis by virtue of geographic location and Indian engineers in the US acting as conduits for market entry. What Desai actually does is to point to the extent to which these factors have played a role in growth and to highlight others, like the role of public policy in opening areas like skill development, transport and communications infrastructure development to private initiatives. He also highlights the industry’s response to the growing labour shortage – due to migration and increasing local demand – of raising wage levels for employees with scarce skill sets. Given the good body of literature on the growth of the Indian software sector, Desai’s paper, for most part, treads on familiar grounds. The creation of a supply of programmers with the exit of IBM, initial installation of capacity for data transmission and subsequent creation of software parks, movement from body shopping to offshore services, disjuncture between export and domestic markets, attempts by firms, albeit with limited success, to move into high end segment or into product markets, etc, form part of this narrative.

Some observations would have been more persuasive if they had been backed by better evidence. For instance, Desai says that firms relied on contract labour to overcome rigidities of the labour market. The magnitude of this phenomenon is of extreme interest as this practice militates against the need to maintain secrecy and quality. He regrets the inability of the state to remove such market rigidities or find funds for investment in this sector by cutting down on subsidies. He calls for a “walking on two legs” strategy, with the experience in domestic markets being leveraged by a move into high-end

Economic and Political Weekly April 8, 2006 segments in the export market and even suggests the need to subsidise this process.

China is a case where the state has aggressively promoted the software sector in an economy that has been extremely buoyant in the last two decades, a period that has also witnessed market reforms of one kind. The reforms do not imply a reduction in the role of the state or in the traditional patron client networks established between the party and the bureaucracy. Instead, we witness the reinforcement of such networks and the rise of competition between different state enterprises. Access to resources is critically conditioned by access to such networks. The primary argument that Saxenian and Quan make in their study is that the industry faces a number of barriers to innovation due to the lack of an appropriate competitive environment. What the government has sought to do is to promote competition without placing enough emphasis on privatisation or putting in place appropriate institutions for the functioning of markets. Competition is primarily between local state firms that are promoted by local political elite, whose growth is dependent upon the success of these firms.

A feature that marks out the sector in China is its near exclusive focus on the domestic market. The authors contend that since firms are protected from competition in this market, it prevents them from developing a “proper” sector of the kind that has developed in the US or Israel. Firms here are characterised by much less division of labour, with software development being undertaken largely by firms that also produce hardware or telecom equipment. Even large manufacturing firms undertake IT development in-house rather than outsource it to specialist firms. Firms therefore fail to benefit from scale economies, and this experience is also juxtaposed against the Indian software sector to highlight its limitations. Nevertheless, China has made tremendous strides in the area of hardware production and is at present the third biggest producer after the US and Japan. The authors argue that public procurement, wherein the government acts as a market, has prevented capability acquisition in the software sector. However, the same cannot be said of the hardware sector, and in India, public procurement has been used effectively to build up technological capability in the telecom equipment manufacturing sector. The conditions under which public procurement may not play a positive role needs further elaboration. What is also not adequately addressed is the gains of a heavily subsidised state software sector that is embedded in a vibrant economy. Even if it is true that diffusion of software use has slacked due to the absence of an understanding of its needs and uses, because of the lack of adequate exposure, the sector has grown consistently at over 30 per cent per annum for over a decade. The extent to which it has enabled the competitiveness of user firms is not clear from their case study.

The authors also point to a lack of institutional infrastructure that enables firms to protect their intellectual property rights. This has been another barrier to firms wanting to invest, as piracy is extremely rampant. While this deters local firms from developing products, it also prevents foreign investment. One common feature to both the countries is the movement of skilled personnel not only to other countries, but also from firms producing for the domestic market to multinational firms or exporting firms on account of higher salaries. While there may be a few positive linkages generated on account of brain circulation in the former instance that the authors do mention, the latter does not augur well for an embedded development of the sector.

While firms have managed to cater to over 50 per cent of the domestic product market, the authors contend that the products are inferior in comparison to other firms’ products and sell primarily because they cost less and are hence easily affordable by local firms. The key difference, though not stated in the book, is the nature of linkages that the software sector in China seems to have established with the rest of the economy and the attendant benefits that it is likely to bring. This is quite unlike the Indian sector where the linkages are hardly evident.

Israel’s Experience

Israel seems to be set up as a model against which the experiences of other countries are compared. It is a case in which, the author Khavul points out, both the financial and the real economy are well integrated with the global market. With the highest per capita engineers and scientists in the world and a very limited domestic market, Israel is an outlier in terms of its size, income and literacy levels, but shares a few common features with India and China with regard to availability of skilled labour through active intervention by the state and a network that a section of this pool established with the US market. In addition to technological flows, these networks also facilitate critical financial flows into this sector through venture capital funds. The Israeli sector is also markedly different in its ability to cater to the global high-end product market. Most firms are small and specialise in niche areas of the software product market, with enterprise solutions and information security being the dominant niches. Corporate firms constitute such markets and given their size, seldom manage to break into consumer markets that require intense marketing efforts. But there are a few firms, especially one in the chat segment that has done well in the consumer market too. The firms by and large, given their size, are undercapitalised and as a result, are not attractive enough for take-overs with obvious advantages. At the same time, the smaller size has prevented the sector from benefiting from scale economies critical to marketing and succeeding in the final consumer market. A distinctive characteristic however is the acute inter-firm division of labour and firm specialisation unlike any of the other three low-income countries studied.

Case Study of Brazil

Brazil is another big low-income economy with a fairly vibrant manufacturing sector and a good communications network. Again, buoyed by a phase of technonationalism that supported the growth of the domestic IT sector through import protection and incentives, Brazil has developed a software sector that caters to the domestic market through both products and services. The key feature that Behrens, the author of the case study, points out is that despite tremendous scope, this capability has not translated itself into success in the export front. He cites lack of skilled labour and links with the main global markets as the impeding factors. To cite, through intense networking, both the government and other players like banks offer a number of services over the internet. E-commerce is well developed in the country, and this coupled with an uncertain macroeconomic regime has led to the development of highly robust banking automation capabilities. But these have hardly converted into successful ventures in the global market. A point of contrast, not made by the author however, is the ability of the Indian firm iFlex, once the in-house IT division of Citibank, to come out with a couple of successful banking products from a similar experience.

Economic and Political Weekly April 8, 2006

The book’s definite strength is its detailed empirical mapping of the evolution of the IT sector in these four countries, with due attention paid to the extent and modes of state intervention. It makes a few stylised observations from the rich material it lays out: (a) All these countries have gained from a degree of protection; (b) But the very same protectionist tendencies have come in the way of catering to and innovating in the global market; (c) Government intervention is essential, but should be limited to, (i) creation of hard infrastructure like telecommunications networks, and (ii) soft ones like a set of technical and communication skills required to produce for the global market (read US); (d) Openness has brought in technological dynamism in varying degrees; (e) But distortionary policies have come in the way of taking advantage of such new market opportunities; (f) Distortions include labour market rigidities, lack of intellectual property right protection and excessive protection from global players. Other barriers include access to global financial capital and marketing economies to compete in product markets.

The book seemingly avoids bringing in facts to confirm existing theories of economic growth. Policy lessons that the book offers are, however, not particularly unique. It talks about the need to remove distortionary barriers like labour market rigidities, enforce property right regimes and link up better with global markets. It does therefore toe a neoliberal line, a definitely more nuanced one than that of the Washington consensus kind. This is clearer from the book’s silences on a few important issues. It is silent on the question as to whether it is more important to export competitively, irrespective of embeddedness in the domestic market. Again, while it discusses the possibilities of brain drain and circulation due inter-country migration, there is little that we know so far of what happens when the export sector attracts scarce skilled labour on account of higher salaries. Does it drain skilled labour from the domestic market sector? Or does it create positive spillovers through wage hikes throughout the economy? There was a phase in Israel, when a mild stagnation and unemployment paralleled the vibrancy in the software export sector. In India, studies hint at the absence of adequate linkages with the rest of the economy and even the possibility of a Dutch disease like situation, wherein resource flowing into a high growth sector may deprive other sectors of similar resources.

Another important issue is the adoption of standards and the role of public policy in this regard. China has invested considerably in using its huge domestic market to build its own standards, and uses these standards to protect the sector from international competition. Even if foreign firms were to compete, they can do so only using the dominant standards. India, on the other hand, has not been successful at all in this regard and even now we find intense competition in both the software and telecom segments. Further, all these countries have gone through a phase of technonationalism that has indirectly helped the growth of the sector. Is it possible at this current stage of global integration for low-income economies to pursue a strategy of that kind? To that extent, the macroeconomic implications of the sectoral experience has not been analysed adequately. Studying a sector’s growth pattern without embedding its growth process in a paradigm of macroeconomic change and nature of state intervention can be limiting. The author does make only a thin case for some of the potential benefits accruing to the sector due to neoliberal reforms.



Economic and Political Weekly April 8, 2006

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