Transcript 연구용역사업_입찰_공모(5차). - Keun Lee : homepage

India Economy and IT
service:
Another Leapfrogging?
KEUN LEE
India Economy
Share in GDP (%)
70.0%
60.0%
50.0%
40.0%
30.0%
20.0%
10.0%
0.0%
Primary
Secondary
Services
Decoupling with the Manufacturing
Growth rates by sectors, 5개년 이동평균
12%
10%
8%
6%
4%
2%
0%
-2%
Primary
Secondary
Services
1951-1970 1970-1990
1990-2009
제2차산업 연평균 성장률
5.8%
5.2%
5.9%
서비스 연평균 성장률
4.6%
5.0%
7.7%
상관계수
0.587
0.553
0.386
Several Hypotheses on Indian service
 Higher Income elasticity of Demand for service (Fisher,
1935; Clark, 1940):
rich -> more service
 Productivity (Baumol, 1967) :
low productivity- thus demand more labor
 Service as an intermediate goods
(Francois, 1990; Pilat, 2000) :
 Informal sector (Dasgupta and Singh, 2005, 2006) :
in many LDCs
Critique on the hypotheses
They all assumed that :
 Manufacturing -> service
higher productivity in manufacturing
 One country assumption
why other countries with comp. advantage with labor
did not promote service
why India did not do in manufacturing
Leapfrogging hypotheses
(Perez and Soete, 1988 K. Lee )
 India: without developing fully manufacturing;
rather skipped it;
 then leapfrogged into service
Three Patterns of Technological Catch-up (Lee & Lim 2001)
Path of the Forerunner : stage A --> stage B --> stage C --> stage D
Path-Following Catch-up : stage A --> stage B --> stage C --> stage D
eg. PC, some consumer goods, and Machine Tools
Stage-skipping Catch-up (leap-frogging I) :
stage A ---------------> stage C --> stage D
eg. Hyunda's fuel-injection engine development (cf. carburetor
engine)
Samsung' 64 K D-Ram production technology; 256 K D-ram
design technology
Digital automatic telephone switch developed by indigenous
firms in China
Path-Creating Catch-up (leap-frogging II)
Sage A --> stage B --> stage C' --> stage D'
eg. CDMA development, digital TV
( Notes: C and C', represent competing technologies7.)
Why Leapfrogging with IT service possible?
Entry costs
Entry costs by
latecomer
Sector-specific
Economy of
scale
Low
No large investment
required at early stage
Skill and
experience
Low
Different skill from
manufacturing
Rich human resource
•English speaking
• engineering and math
Scientific
knowledge
High
More science based
Overseas Indian scientist
and engineers
Access
High
more accessible
Communication skill
stage-skipping/ path creating possible
India specific
Share of Service in GDP .
100
90
80
서비스 산업의 비중 (%)
70
60
india
Korea
50
40
30
y = 5.6723x + 11.459
R² = 0.3366
20
10
0
4
5
6
7
8
ln(1인당 GDP), 2005
9
10
11
12
Contribution to GDP growth
200%
150%
China
100%
싱가폴
Serivce
India
베트남
말레이시아
한국
50%
태국
라오스
y = 1.0099x + 0.2378
R² = 0.4513
인도네시아
0%
-20%
0%
20%
40%
60%
80%
100%
120%
-50%
Manufacturing 제조업 경제성장기여도 (% 포인트), 1990-2005
140%
Low in India, high in other asians
Correlation with manufacturing growth1.00
25000
0.86
0.79
0.80
0.82
20000
0.71
0.69
0.61
0.63
0.60
0.55
0.51
15000
0.46
0.40
10000
0.20
-0.09
5000
0.00
인도
중국
인도네시아
필리핀
태국
말레이시아
한국
싱가포르
이탈리아
독일
-0.20
영국
0
상관계수 (왼쪽 축)
1990년 1인당 GDP (오른쪽 축, 달러표시 2000년 고정가격)
Higher productivity in Service than in manufacturing
3.00
China
2.55
2.50
2.00
2.12
2.10
Asia
1.63
1.45
1.50
1.14
1.01
0.96
1.00
0.50
0.00
아시아
ASEAN-4
제2차 산업
중국
서비스업
인도
India
Service as Export Industry 80.0%
18.0%
70.0%
16.0%
14.0%
60.0%
12.0%
50.0%
10.0%
40.0%
30.0%
8.0%
클라이언트서버
시스템으로
전환
6.0%
20.0%
전략적, 조직적
혁신
Y2K
10.0%
0.0%
4.0%
2.0%
0.0%
상업서비스 수출에서 정보통신관련 서비스의 비중 (%), 왼쪽 축
서비스 (수출/부가가치) 비중 (%), 오론쪽 축
Export/V-added in service
Summary: Catch-up by Indian Service
Different from Other Asia
Stage-skipping Or path-creating ;
OEM– ODM – OBM: Taiwan
OEM – OBM – ODM: Korea
Mixed : China
Bodyshop -> Offshoring -> GDM : India
(*OEM/ODM/Obm =own equipment/design/brand
manuf)
Catching-up or Leapfrogging in Indian IT Service:
Windows of Opportunity, Path-Creating
and Moving Up the Value-Chain
in TCS, Infosys, and Wipro
Developed for Insert
Client Logo Here
Background
 Now, Indian IT service firms are comparable with
advanced IT service firms, Accenture, IBM, and HP
Enterprise Service (EDS) as well as caught up them
In 2008, 20% of world market size of IT service, $64
B., was being provided by Indian IT service firms.

In 2009, TCS, Wipro, and Infosys was ranked the 4th ,
5th, and 9th among best outsourcing service providers,
respectively.

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Three Research Questions
1) How can we explain the success of Indian IT service firms?
-> What were their windows of opportunity
2) Are they catching-up with the Western model or
leapfrogging with a new path?
- -> re-creation of off-shoring leading to a new path (GDM)
 From Catching-up to Leapfrogging
3) Do they remain at low-value-added to moving up to highvalue-added?
OEM
-> ODM -> OBM : analogy with the
manufacturing sector ?
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3 IT Service Firms in India
Classification
TCS
Infosys
Wipro
Established
1968
1981
Early 1990s
Head Office
Employees
Sales (US$B)
Market Value
Mumbai
111,407 (2008/3)
5.1 (2008/3)
Bangalore
91,187 (2008/3)
4.2 (2008/3)
Bangalore
82,122 (2008/3)
3.4 (2008/3)
19.8 (2008/3)
20.5 (2008/3)
19 (2008/3)
Nat’Stock Exchange
Nat’ Stock Exch.
Bombay Stock Exch
Bombay Stock Ex.
NASDAQ
NYSE
(US$B)
Listed on
Major
Shareholders
Na’l Stock Exchange
Bombay Stock Exc.
Founder 17%
Tata Sons 75%
External Investor
64%
Azim Premji
79.45%
Literature Review
 Literatures on Indian IT service firms’ success


Most of literatures are performed at the industry or national level
 The availability of large pool of English speaking and technically
qualified professionals at low costs.
 Indian government’s strong supports for fostering IT service
industry.
 Establishment of clusters or local innovation systems associated
with IT service industry.
 The national association or consortia like NASSCOM.
 The availability of 24-hour communication with customers in the
US.
There are rare literatures performed at the firm level
 Although Mizuho Coporate Bank (2008) studied at the firm level, it
also has the limitation that is too much descriptive and lacks
theoretical perspective.
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Our Approach :
Neo-Schumpeterian Theory of Catch-up

Combination of Three:
Windows of Opportunity (Perez & Soete 1988)
+ Catch-up Patterns (Lee and Lim 2001)
+ Analogy with OEM-ODM-OBM (Hobday 2005)
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Four Windows of Opportunity
1) New Techno-Economic Paradigm (Perez & Soete 1988): Lee,
Lim & Song (2005): Korean digital TV
2) Business cycles: Mathews (2005)
3) Change in or Segmentation in
Demand/ Market Conditions and Consumer preference
4) Change in Government Regulations and Promotion Policies:
Sharma (2009) Indian pharmaceutical industry;
Lee, Mani and Mu (2009): Telecom in China, India, Brazil and
Korea
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Main Arguments/Hypotheses
1) The first window was the arrival of new techno-economic
paradigm rather than industry cycle, and the second was the
government intervention in changing policies regarding the
foreign firms.
2) Indian firms have partially created the offshoring model and later
the GDM (global delivery model) which became the industry
standard globally.  Path-creating /leapfrogging
3) There is similarity between the three stages in manufacturing of
the OEM-ODM-OBM (Hobday 2003, 2005) and the three stages
of Body shop Model-Offshoring-GDM went through by the
Indian firms.
-> they are moving up the value-chain: from low to high.
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IT Service Value Chain
 Consulting & Planning: a process to deliver
High
business consulting, strategy consulting,
technical consulting, and solution consulting
related to IT service
Consulting & Planning
 System Integration: a process to construct
information system as a whole through using
H/W, S/W, network, solution, and other
equipments
System Integration
Value added
 Application design, development, and
Application design, development,
and maintenance
maintenance: a process to offer the design
and development of new application features
at a reduced cost, and to maintain the
application
 Programming (coding): a work to write, test,
debug, and maintain the source code of
computer programs
Programming (coding)
Low
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Findings
:Windows of Opportunity for Indian IT Service Firms
 The change of techno-economic paradigm

Hardware technology shifts from mainframe to client-server
 Need a large number of consultants to help this technology transition.
 Indian firms like TCS became a natural source of qualified software manpower for these
consultants .

The spreading of global division of labor
 Right on time, India opened its economy after crisis of foreign exchange and it could be a
member of global division of labor network.

Y2K problem and Dotcome Boom
 Both gave Indian firms extremely a number of clients.
 The change of regulation

The age of Regulation (Nehru-Mahalanobis Model)
 Foreign Exchange Regulation Act (1973) made IBM leave from India
 IBM’s exit strengthened the relationship between Indian firms and two foreign companies,
Burroughs and ICL who helped Indian firms build their technical capabilities and improve
their skill.
 Various capabilities of India-IBM acquired by Indian government might be transferred to
many Indian firms and finally to TCS.

The age of De-regulation (Rao-Manmohan Model)
 Since the de-regulation, there were various type of entrants as well as multinational firms
into India for utilizing Indian cheap labor.
 Indian government’s strong supports facilitated business activity of Indian IT service firms.
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Findings:
Analogy with the OEM-ODM-OBM: Bodyshop-Offshoring-GDM
 Typical catch-up process of latecomers in manufacturing industries –OEM-
ODM-OBM- similarly happened to latecomers in Indian IT service industry
Asian Manufacture Industry
Catch-up
stages
60’s~70’s
OEM
Characteristics
• OEM firms had simple job of
assembly production offered by
multinational firms
• Multinational firms worked on
production design, marketing,
distribution and brand
Indian IT Service Industry
Catch-up
stages
The late of
60’s~70’s
Body shop
Characteristics
•Only dispatching the labors of Indian
firms to clients
•A subcontractors of multinational IT
firms
•Performing a simple job, like a coding
•Depending on multinational firms for
marketing, sales (brand), and managing
labors
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Findings:
Analogy with the OEM-ODM-OBM: Bodyshop-Offshoring-GDM
Asian Manufacture Industry
Indian IT Service Industry
Catch-up
stages
Characteristics
Catch-up
stages
Characteristics
80’s
ODM
•ODM firms extended their jobs into
production process and product design
•Multinational firms worked on
marketing, distribution, and brand
80’s~the
mid of 90’s
Offshore
•Managing and controlling the labors of
Indian firms by themselves
•Prime subcontractor of multinational IT
firms
•Extending their service into ADM and
developing their own S/W
•Depending on multinational firms for
marketing, and sales (brand)
90’
OBM
•OBM firms had whole process from
production, design to R&D
The mid of
90’s~now
GDM
•Combining onsite, offshore, and
nearshore at the appropriate ratio
•No more depending on multinational IT
firms (Independent firms)
•Delivering a full range of IT service
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Findings:
Leapfrogging by Path Creating
 Indian IT service firms enabled the offshorings, which was a new
production unit of MNCs for cost reduction, to be a “service”

The concept of offshoring was not new because MNCs often used the offshoring model
as their captive development center.
 Indian IT service firms, especially, Infosys had been watching the captive center of TI
(Texas Instrument) and tried to look for their niches. Finally, they found out their
niches, which deal with all things on behalf of MNCs offshoirng subsidiaries in order to
mitigate MNCs’ suffering from setting up and operation them.
 Until before the appearance of Indian offshore model, most of all advanced IT service
firms used “onsite model” delivering their services only on site of clients.
 Gradually, the advanced IT service firms started copying Indian offshore model and the
model became a dominant business model among IT service firms.
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Findings:
Moving toward high-value added services

Indian IT service firms moved toward high-value added
services as well as completed the process of path-creating
started with offshoring through the GDM (Global Delivery
Model)
 GDM maximize efficiency and cost reduction of clients by combining onsite, offshore, and
nearshore at the proper ratio.


The processes leading to and enhancing of The GDM

Expansion of domain knowledge through M&A and alliance

OJT and Education

Diversification of the customer base
In the beginning, Indian IT service firms mainly served lowvalue added services, ADM and testing, but they are now
moving up the high-value added services, consulting and
system integration
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Summary and Concluding Remarks
 Summary
 Indian IT service firms experienced two types of “window of opportunity” .

–
First, the arrival of new techno-economic paradigm.
–
Second, the government intervention in changing policies regarding the foreign firms.
Indian IT service firms went through a similar steps (OEM-ODM-OBM) of the latecomers in
manufacturing as they progressed from body-shop model to the offshoring and the finally GDM .
 Indian IT service firms caught up or leapfrogged by creating their path, the offshoring model
and later the GDM, which became the industry standard globally.
 Also Indian IT service firms moved up on the value chain.
 Contribution
 First, this study explained success story of Indian IT service at the firm level, in detail with
theoretical perspectives.
 Second, this study confirmed that the catch-up up in IT service industry can be also explained in
terms of the catch-up framework applied in manufacturing industry
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Thank You!
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