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Post-COVID-19 Challenges in the Indian IT Industry

Rohan Chinchwadkar (rohan@som.iitb.ac.in) and Vinish Kathuria (vinish@iitb.ac.in) are faculty members at the Shailesh J Mehta School of Management, Indian Institute of Technology Bombay, Mumbai.

The information technology industry has been the hallmark of the Indian growth story since the 1980s. The Indian IT sector has relied heavily on non-home markets for demand and resources and built deep global ties using co-location with clients, enabled by international travel and temporary on-site migration, acting as a key mechanism in developing “cognitive proximity.” However, the COVID-19 pandemic is expected to make international travel and migration more restrictive and costlier, maybe for a long time. The paradigm shift creates significant barriers for IT firms to be able to maintain cognitive proximity with its clients and could adversely impact their global competitiveness.

The COVID-19 pandemic has seve­rely disrupted economic activity, with the global gross domestic product (GDP) expected to shrink by over 3% in 2020, according to the International Monetary Fund (IMF 2020). If the estimate is realised, it will be the steepest slowdown since the Great Dep­ression of the 1930s and much worse than the 2008–09 global financial crisis. Restrictions on international travel, strict social distancing norms and ceasing of industrial activity can have a fatal impact on sectors like travel, tourism, oil, metals and restaurants, among others. Firms in several other sectors will have to rejig their business processes and practices to survive and thrive in the post-COVID-19 world.

Today, most of the discussion seems to be focused on the severe demand problems which firms will face in the short to medium term and what governments can do to ease the pain. However, it is inevitable that significant structural changes and new business models will emerge over the long term as the economy and society adjust to the paradigm shift. It is critical for countries and firms to understand these structural changes in order to compete effectively once the current crisis eases. For sectors contributing to the digital economy, the accepted narrative seems to be that there will be distress in the short term but firms will flourish over the long term with the acceleration of digital initiatives and adoption of cloud and automation services. While this is true, firms in the digital economy will also face several challenges as they adjust to a structurally altered “new normal.” This article presents one such challenge in the context of the Indian information technology (IT) industry which could have an impact on the long-term health of the sector and the Indian economy.

The Indian IT industry has been the hallmark of the Indian growth story since the late 1980s. An industry with less than $1 billion in revenues in 1990, generated a revenue of $180 billion in 2019, with nearly 75% of it coming through exports (Jaganmohan 2020). Initially facing a small and underdeveloped domestic market, IT firms concentrated primarily on export markets and international clients (Ethiraj et al 2005). Interestingly, while digital tools and technologies facilitated production and sales of software across geographies, physical interaction among players was still significant. The industry has built deep global ties with co-location, enabled by international travel and temporary on-site migration, acting as a key element to develop “cognitive proximity,” a factor which has played a critical role in its competitiveness. We analyse the case of the ­Indian IT industry to illustrate the important role which cognitive proximity has played in its growth, and how the COVID-19 pandemic creates long-term challenges for the industry to maintain its global competitiveness. This article also discusses potential res­ponses in ­order to thrive in the post-COVID-19 world.

Cognitive Proximity

The Indian IT industry has relied heavily on non-home markets for demand and resources. The competitiveness of the IT industry depends significantly on alternative characterisations to proximity ­beyond territorial explanations. It is now well-acknowledged by economic geo­gra­phers that mere co-locating and connecting with some high-growth indu­stries through different proximate ways does not warrant that proximity is the key reason for their growth (Martin and Sunley 2003; Lorentzen 2008). “Proxi­mity” is a relational concept symbolising the degree of closeness between players. Hence, new dimensions of proximity have emerged that personify cognitive, organisational, social and institutional proximity (Balland et al 2015; Boschma 2005). These dimensions confer compe­titive advantage to firms by coalescing actors within globally disaggregated value chains. One particular dimension of proximity, that is, the cognitive proxi­mity, has been the mainstay of the Indian IT industry. According to Nooteboom (1999), cognitive proximity is the degree to which two actors/players share a ­similar knowledge base. This implies that even if actors are geographically apart, similarity in their knowledge bases can make them cognitively proximate (Bos­chma 2005; Nooteboom 1999). In know­ledge-intensive industries, these cognitive connections are not only mobile, but also dynamic because know­ledge is continuously evolving (Ray et al 2020). This fits well with business-to-business (B2B) service-based industries, namely IT and software, where bulk of activities transpire in the so-called “slippery space” of global value chains (GVCs). Consequently, firms from developed economies pursue knowledge-based services, which are spatially mobile, from firms in developing countries (Ray et al 2017).

A mechanism that may help build up and maintain relational proximity is occasional co-location (Lorentzen 2008). In software development and IT services, co-located work, that involves international travel and temporary migration of employees to customer sites, has been sine qua non. IT services being a process of collective problem-solving requires cognitive proximity between organisations (Love et al 2010). In this context, it is suggested that such external linkages of firms, especially with clients, can easily augment service innovation performance (Love and Mansury 2007). The growth and practices of Indian IT giants —Tata Consultancy Services, Infosys, and Wipro—are a testimony to this cognitive proximity supplemented by co-­location. Wickham and Vecchi (2008) in their study of an Irish software cluster have found that small firms, which were lacking the home institutions’ support, tapped international markets through foreign travel. Travel to the on-site location ensured repeated customer interaction and helped leverage tacit knowledge of the customer’s business domain and operating routines in Indian IT cluster also (Ethiraj et al 2005). International business travel is thus linked to knowledge dispersion. Several studies have empirically shown the positive ­impact of business travel on firms’ ­exports and productivity (see, for example, Ray et al 2020; Hovhannisyan and Keller 2015). International travel and temporary migration have enabled ­Indian IT firms to build cognitive proximity and seize the local flavour of this tacit knowledge, thereby leading to their internationalisation.

Ray et al (2020) present a recent study on the role of cognitive proximity in the growth of the Indian IT industry. By adopting an evolutionary and interdisciplinary outlook, the study examines the internationalisation of 58 large Indian IT firms and their evolution from 1998 to 2012. It specifically draws from the spatially sticky location externalities, vis-à-vis, the spatially slippery network of cognitively and institutionally proximate actors and institutions. The study finds that firms in the Indian IT industry and their clients (may also be true for other knowledge-intensive industries like bio-technology) are connected, not on the basis of kilometres, but on the basis of cognitive proximity. In spite of the existence of regions with repositories of specialised knowledge bases, knowledge can be accessed by geographically distant firms provided they become “cognitively” proximate, since knowledge is a public good. Indian IT firms’ international competitiveness draws heavily on such cognitive proximity using international travel and temporary on-site mig­ration as key enabling mechanisms. This implies that any disruption in the cost, ease and outlook of international travel and migration could negatively affect cognitive proximity between Indian IT firms and their clients, which in turn would impact their international competitiveness over the long term.

One might be tempted to ask from the preceding discussion: What has led Indian IT firms to forge cognitive bonds with outside institutions? The answer would be a “weak local institutional set-up.” ­Inadequacy of local regional knowledge may have forced these firms to venture out to source extra-regional knowledge (Lorentzen 2008). Such connectivity ­often results in access to best practices, with significant potential for innovation and productivity. In the Indian IT industry, close interactions with foreign clients enabled firms to acquire precious knowledge of the global IT industry’s institutional requirements as well as best practices associated with cutting costs and raising productivity (Ray et al 2020).

Symbiotic Relationship

Global linkages play an important role in developing local ecosystems over time. It is well acknowledged that globalisation metamorphoses innovation into an acti­vity, which may be spread across multiple destinations, marshalling varied knowledge sources. While doing so, globalisation facilitates the institutionalisation of home-grown ecosystems through foreign direct investment and knowledge transfers. Once these institutions are in place, home-grown ecosystems attract more foreign firms, who eventually become aware of the rich knowledge bases. The local firms thus become the inter­mediary connecting local and global ecosystems and agent for regional up-gradation. Again, the role of Bengaluru as an IT hub is illustrative in this context. To give a simple example that when Texas Instruments initiated its operations in 1985 in that city, it had less than 100 engineers working for it. However, less than three decades later in 2012, benefitting from the local ecosystems, Texas Instruments India had nearly 1,500 engineers and was considered a global innovation hub, contributing to 450 patents (Ghosh 2012). Thus, when it comes to knowledge-based service industries, spatially proximate native ecosystems grow even in developing countries, to facilitate learning, transfer of knowledge and proprietary technology creation (Ray et al 2020). The IT cluster of Bengaluru, business process outsourcing (BPO) cluster of Gurugram and knowledge process outsourcing (KPO) clu­­ster of Noida are prominent examples.

Once developed, a regional innovation network can be an effective channel of competitiveness because exclusive and inimitable knowledge resides inside and outside the organisations (Teece 2014). Local organisations involved in this process, being cognitively proximate, comprehend each other well. Firms outside the region lack institutional knowledge —about language, local laws, norms and rules—due to the “liability of outsidership,” a term given by Eriksson et al (1997). This liability makes it extremely difficult for an outsider to fathom the ­extent of the knowledge generated in a region, as it is entrenched in socially eng­ineered networks (Johansson and Vahlne 2009). There is sufficient evidence that the internationalisation of the semiconductor industry from Korea and Taiwan has happened because of their tacit knowledge linkages with government research institutions, business groups and of course, customers (Mathews 2006). The setting up of different parks (say biotechnology or IT or food techno­logy in India) is also to realise these linkages (Kathuria and Tewari 2007). This implies that leveraging tacit knowledge through cognitive proximity with important and relevant players in a regional ecosystem is also crucial to further the internationalisation of firms.

Post-COVID-19 World

In spite of the uncertainty surrounding the COVID-19 pandemic, one thing is clear: international travel will be restricted and costlier in the post-COVID-19 world, at least for the next few years. In the absence of a universal vaccination against the coronavirus, tighter constraints on human mobility will remain in place—perhaps for a long time (Johnson and Boone 2020). Apart from travel, COVID-19 related disruptions are likely to have a long-term impact on global ­migration (Yayboke 2020). Companies and countries which are currently friendly to migrant labour are prone to becoming risk averse and so are the ­migrants. The suspension of H1-B and L-1 visas by the United States (US) till Dec­ember 2020 is one such example of this risk-averseness to protect local jobs amidst the COVID-19 pandemic. This paradigm shift would adversely affect the key mechanism used by the IT industry to maintain cognitive proximity: co-location using international travel and on-site migration. IT companies could cut back on travel and migration due to increasing costs, greater hassles and substantial revenue loss caused by the pandemic. This would have a negative impact on their ability to maintain cognitive proximity with their clients, res­ulting in reduced competitiveness over the long term. Given the symbiotic relationship, disruption in global linkages will also affect the development of local ecosystems. Inflows of new know­ledge and foreign investments could decrease substantially leading to deterioration of local techno­logy clusters. Such disruptions could create cognitive distance bet­ween IT firms and their clients. Balland et al (2014) suggest that cognitive proximity (similarity of knowledge bases) is not a static construct. Cumulative learning processes continuously change the knowledge bases of professionals. In the fast-paced world of technology, being “out of the game” even for a few years can make for cognitive distance and obsolescence.

So, what can IT firms do to maintain cognitive proximity and linkages in the post-COVID-19 world? First, they should consider recruiting a few local professionals from client locations for on-site work, at least in the short term. With some training specific to the client, project and technology, local professionals can help IT firms maintain cognitive proximity with their clients in the abs­ence of travel and migration. Even though it could shoot up costs in the short term, we can expect long-term benefits to compensate for the rise in costs. Second, figure out a mechanism to continue the flow of knowledge and inve­stments into key technology clusters like Bengaluru and Pune. Central and state governments can play an important enabling role by providing incentives and protection to incoming intellectual property and capital. Third, it would be important to look carefully into the process of building cognitive proximity and think of alternate mechanisms which can be utilised in spite of geographical distance. One of the key ways to build cognitive proximity is to create a similarity of mental models, that is, closeness of world view and mindsets rooted in professional background and experience (Nooteboom 2000; Klimas 2017). Important tools and constructs which help in creating a convergence of mental models among geographically and technologically distant organisations are codes, jargon, operating procedures, professional world view and shared norms, values and goals (Wink 2008; Huber 2012; Molina-Morales et al 2014). It would be useful for IT firms to invest time and effort in certain client-development initiatives which were unnecessary in the past due to regular on-site client interactions. This implies developing a framework for communication tailored to client preferences, brainstorming sessions which create alignment in mental maps, and tasks that ­facilitate teams to apply and develop their knowledge bases together (Hautala 2011), and an explicit codification of a system of shared norms, values and goals. An inclusive and empowering managing style and a committed app­roach to knowledge management also goes a long way in building cognitive proximity (Hautala 2011).

A thriving IT sector is extremely important for the Indian economy going forward. In 2017, the IT industry contributed nearly 8% to India’s GDP besides providing direct employment to nearly four million people and indirect employment to nearly 10 million people (Jaganmohan 2020). The survival and success of the Indian IT industry in a post-­COVID-19 world depends, at least in part, on whether it is able to maintain cognitive proximity and linkages with international clients by adapting its business practices and processes to the new normal.

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Updated On : 20th Oct, 2020

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