India’s R&D policy and the growth of India’s R&D policy and the growth of software industry in comparison with Chinasoftware industry in comparison with China

Mohsin U. KhanMohsin U. Khan

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

Technology import policy of IndiaTechnology import policy of India

Period of liberalization until mid sixties.Period of liberalization until mid sixties. Period of tight regulations from then until the Period of tight regulations from then until the

end of seventies.end of seventies. Period of relaxation of regulations from then Period of relaxation of regulations from then

until the end of eighties.until the end of eighties. Regulations were then relaxed and th policy Regulations were then relaxed and th policy

became once again liberal.became once again liberal.

Industrial policy resolutionsIndustrial policy resolutions

1.1. Government of India adopted Industrial Policy Resolution Government of India adopted Industrial Policy Resolution Act. (April 1948)Act. (April 1948)

Private sector development of Industry.Private sector development of Industry. Reserve for development of exclusive industries in public Reserve for development of exclusive industries in public

sector. sector. (The manufacture of equipment viz telephones, telegraph and (The manufacture of equipment viz telephones, telegraph and wireless apparatus excluding radio receiver sets one of the six major wireless apparatus excluding radio receiver sets one of the six major areas of industrial activities so reserved) areas of industrial activities so reserved)

2.2. The Industries (Development and Regulation Act of 1951)The Industries (Development and Regulation Act of 1951)

3.3. In 1956 Parliament adopted Industrial Policy ResolutionIn 1956 Parliament adopted Industrial Policy Resolution

(IPR 56).(IPR 56).

Cont.//Cont.//

4.4. The Monopolies and Trade Restrictive Practices Act The Monopolies and Trade Restrictive Practices Act (MRTP Act) 1969.(MRTP Act) 1969.

(The industrial groups with assets of Rs 200 million and above (The industrial groups with assets of Rs 200 million and above would be allowed to undertake activity only in specific group of would be allowed to undertake activity only in specific group of industries)industries)

5.5. The Foreign Exchange and Regulation Act. (FERA) The Foreign Exchange and Regulation Act. (FERA) 1973.1973.

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

Cont.//Cont.//

6.6. Industrial policy as a whole was reviewed in 1973, 1977 and Industrial policy as a whole was reviewed in 1973, 1977 and 19811981(Industries with the investment of Rs 50 million now don’t need the (Industries with the investment of Rs 50 million now don’t need the license if their annual requirement of imported raw material does not license if their annual requirement of imported raw material does not exceed four million rupees or 15% of the production whichever is less.)exceed four million rupees or 15% of the production whichever is less.)

7.7. In 1983 government announced certain special tariff and In 1983 government announced certain special tariff and tax concessions for the electronics industry.tax concessions for the electronics industry.

8.8. In March 1984, the IPR 56 was amended.In March 1984, the IPR 56 was amended.

((The manufacture of Telecommunication equipments such as private The manufacture of Telecommunication equipments such as private automatic branch exchange (PABXs), telephone instruments, teleprinters automatic branch exchange (PABXs), telephone instruments, teleprinters and data communication equipments for installation. Also jointly with the and data communication equipments for installation. Also jointly with the public sector with 5% investment by the government the private sectors public sector with 5% investment by the government the private sectors now manufacture switching and transmission equipments).now manufacture switching and transmission equipments).

Technical knowledge acquiredTechnical knowledge acquired

A common view of this issue :A common view of this issue :

Indian firms have not acquired full depth and Indian firms have not acquired full depth and breadth of knowledge and information that breadth of knowledge and information that would enable them to master and assimilate the would enable them to master and assimilate the technology effectively.technology effectively.

Limited technological content of the Limited technological content of the collaboration results from the efforts of collaboration results from the efforts of suppliers firms to minimize the knowledge and suppliers firms to minimize the knowledge and expertise they make available. expertise they make available.

Technology policy statement of 1983, Technology policy statement of 1983, emphasized the need to plan collaboration emphasized the need to plan collaboration

agreements in ways that would ensure effective agreements in ways that would ensure effective transfer of basic knowledge, know-why transfer of basic knowledge, know-why

important inputs to the importing firms for important inputs to the importing firms for subsequent absorption, adaptation and up-subsequent absorption, adaptation and up-

gradation of the initially acquired knowledge.gradation of the initially acquired knowledge.

Why India gone for liberalization in 1991Why India gone for liberalization in 1991

India’s economy grew at the rate of about 5% during India’s economy grew at the rate of about 5% during 1980s.1980s.

Domestic inflation gone up to 17% in 1991.Domestic inflation gone up to 17% in 1991. Foreign exchange reserves reduced to $ 1.2 billion Foreign exchange reserves reduced to $ 1.2 billion

barely sufficient to pay for two weeks imports. barely sufficient to pay for two weeks imports. Central government fiscal deficit as a percentage of Central government fiscal deficit as a percentage of

GDP touched the all time high of 8.4%.GDP touched the all time high of 8.4%. Current account deficit widened to $ 8 billion (2.6% Current account deficit widened to $ 8 billion (2.6%

of GDP)of GDP)

Policy changes since 1991Policy changes since 1991

Drastically reduced number of industries Drastically reduced number of industries reserved for public sector.reserved for public sector.

Abolished industrial licensing except for a Abolished industrial licensing except for a short list of industries related to security and short list of industries related to security and strategic concerns, hazardous chemicals.strategic concerns, hazardous chemicals.

The restrictions imposed by MRTP Act on The restrictions imposed by MRTP Act on large firms expansion, merger, amalgamation large firms expansion, merger, amalgamation and take over etc..have been abolished.and take over etc..have been abolished.

Cont.//Cont.//

The protection provided to the small firms The protection provided to the small firms being reduced. being reduced.

Now TNCs are free to decide whether they will Now TNCs are free to decide whether they will use imported or local raw material. use imported or local raw material.

Now TNCs are free to use their brand names.Now TNCs are free to use their brand names. Now TNCs can increase the permissible extent Now TNCs can increase the permissible extent

for foreign equity from 40 to 51 percent for foreign equity from 40 to 51 percent

Response of TNCsResponse of TNCs

Gross flow up Gross flow up

From Rs 5.3 billion in 1991 From Rs 5.3 billion in 1991

to Rs 38.9 billion in 1992to Rs 38.9 billion in 1992

to Rs 88.6 billion in 1993to Rs 88.6 billion in 1993

to Rs 141.9 billion in 1994to Rs 141.9 billion in 1994

to Rs 2.4 trillion in 2004 to Rs 2.4 trillion in 2004

Electronics policy measures (1981-1988)Electronics policy measures (1981-1988)

1.1. Policy on electronics components (1981).Policy on electronics components (1981).

2.2. Industrial and licensing policy for color television Industrial and licensing policy for color television receiver set (Feb. 1983).receiver set (Feb. 1983).

3.3. Measures to accelerate the rapid development of Measures to accelerate the rapid development of electronics (Feb. 1983). electronics (Feb. 1983).

4.4. New computer policy (1984).New computer policy (1984).

5.5. Integrated policy measures in electronics (1985).Integrated policy measures in electronics (1985).

6.6. Policy on software exports, software development Policy on software exports, software development and training. and training.

7.7. New computer policy (April 1988)New computer policy (April 1988)

Growth of electronics industryGrowth of electronics industry

Sixth Plan (1980-85)Sixth Plan (1980-85) 25%25% Seventh Plan (1985-90)Seventh Plan (1985-90) 30%30%

Software revenuesSoftware revenues

During 2003-04 the industry grew 28.2% During 2003-04 the industry grew 28.2% to touch $ 15.9 billion (12.5 billion to touch $ 15.9 billion (12.5 billion exports and $ 3.4 billion domestic exports and $ 3.4 billion domestic market). market).

Nasscom estimates software exports and Nasscom estimates software exports and ITES to grow at 30-32% in 2004-05. That ITES to grow at 30-32% in 2004-05. That would take the industry to would take the industry to $ 20 billion$ 20 billion mark, of which export will amount to mark, of which export will amount to 16.3 billion. 16.3 billion.

The money makers, Nasscom ranking The money makers, Nasscom ranking

as per revenueas per revenue RankRank CompanyCompany Exports in 2003-Exports in 2003-

0404

Rs in croreRs in crore

__________________________________________________________________________________________________

11 TCSTCS 5,963 ($ 1 billion)5,963 ($ 1 billion)

22 WiproWipro 5,881 ($ 1 billion)5,881 ($ 1 billion)

33 InfosysInfosys 4,761 ($ 1 billion)4,761 ($ 1 billion)

44 SatyamSatyam 2, 6232, 623

55 HClHCl 2,4002,400

Cont.//Cont.//

US continues to be major market for US continues to be major market for Indian software services with a share of Indian software services with a share of 70% while Europe accounted for 23.5% 70% while Europe accounted for 23.5% in 2003-04.in 2003-04.

The number of 500 companies that have The number of 500 companies that have been outsourcing their requirements has been outsourcing their requirements has also been steadily growing with as many also been steadily growing with as many as 254 outsourcing their requirements as 254 outsourcing their requirements from India.from India.

Cont.//Cont.//

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

Cont.//Cont.// One of the major reasons that Indian software exports One of the major reasons that Indian software exports

is gaining recognition across the world is because of is gaining recognition across the world is because of quality certification. Out of 23 quality certification. Out of 23 SEI-CMM level 5 SEI-CMM level 5 certified companies world over, 15 are from India. This certified companies world over, 15 are from India. This number is expected to grow as there are several number is expected to grow as there are several

companies that have already reached to level 4companies that have already reached to level 4.. Another encouraging sign is that small office segment Another encouraging sign is that small office segment

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

Cont.//Cont.// The number of software exporting The number of software exporting

companies has grown to a record. At companies has grown to a record. At present it is 1,250 and expected to grow present it is 1,250 and expected to grow to 1660 mark next year.to 1660 mark next year.

Number of software companies logging Number of software companies logging exports to Rs 100 crore now stands at 37. exports to Rs 100 crore now stands at 37. The top 25 exporters accounted for 61% The top 25 exporters accounted for 61% of the export resources in 2003-04of the export resources in 2003-04

Projections for India’s IT industryProjections for India’s IT industry

According to Nasscom-McKinsey reportAccording to Nasscom-McKinsey report Annual revenue for IT industry in 2008 will be around Annual revenue for IT industry in 2008 will be around

US $ 50 billion.US $ 50 billion.

Thus a number of opportunities to be createdThus a number of opportunities to be created Potential for 2.2 million jobs in IT by 2008.Potential for 2.2 million jobs in IT by 2008. IT will attract Foreign Direct Investment (FDI) of US $ IT will attract Foreign Direct Investment (FDI) of US $

4-5 billion. 4-5 billion.

China Vs India China Vs India

AttributeAttribute China China India India ______________________________________________________________________________________________Population (in billion) Population (in billion) 1.31.3 1.031.03literacy rateliteracy rate 82%82% 54%54%AreaArea 9.6 bn sq km9.6 bn sq km 3.3 bn sq km3.3 bn sq kmTotal GDPTotal GDP $ 1 trillion$ 1 trillion 500 bn500 bnGDP growth (CAGR)GDP growth (CAGR) 10%10% 6%6%Per capita GDPPer capita GDP $ 735$ 735 $ 495$ 495Total exports (in bn)Total exports (in bn) $ 249$ 249 $47$47Share in world tradeShare in world trade 3.4%3.4% 0.8%0.8%

China Vs IndiaChina Vs India

IT industry figuresIT industry figures Calendar Calendar 20012001 20012001__________________________________________________________________________________________________________IT spending as % of GDPIT spending as % of GDP 1.10%1.10% 1.68%1.68%IT industry turnover IT industry turnover $46.1 bn$46.1 bn $ 12 bn$ 12 bnHardware exports Hardware exports $ 26.4 bn$ 26.4 bn $ 0.4bn$ 0.4bnSoftware exports Software exports $ 1.2bn$ 1.2bn $6 bn$6 bnInstalled PC base Installed PC base 22 million 22 million 7 million7 millionPC Penetration/1000PC Penetration/1000 13.213.2 3.53.5Internet user base Internet user base 22.5 million 22.5 million 3.5 million3.5 millionInternational Bandwidth International Bandwidth 7.5 Gbps7.5 Gbps 1 Gbps1 GbpsTelephone lines Telephone lines 175 million 175 million 34.5 million34.5 millionTelephone lines/100Telephone lines/100 8.68.6 3.43.4Mobile phones Mobile phones 136 million136 million 5.7 million5.7 million

China’s economic policy reformsChina’s economic policy reforms China’s economic reforms started a full 25 years ago China’s economic reforms started a full 25 years ago

while in India they started a decade later in 1991.while in India they started a decade later in 1991. Deng Xioping kicked off economic reforms when he Deng Xioping kicked off economic reforms when he

suggested that tens of thousands of small and medium suggested that tens of thousands of small and medium enterprises be thrown in private waters to swim or sink enterprises be thrown in private waters to swim or sink

For most of the last two decades China’s economy has For most of the last two decades China’s economy has grown double digit growth with an average CAGR grown double digit growth with an average CAGR (Compound Aggregate Growth Ratio) of 10% in the last (Compound Aggregate Growth Ratio) of 10% in the last decades. decades.

In the last decade China has paid special interest to high In the last decade China has paid special interest to high technology industries. technology industries.

From exporting toys and textiles, China has today grown From exporting toys and textiles, China has today grown to be major exporter of IT hardware, overtook Taiwan in to be major exporter of IT hardware, overtook Taiwan in 2000.2000.

China’s software storyChina’s software story

China’s software growth is currently hampered by China’s software growth is currently hampered by number of factors: number of factors:

China Media Intelligence (CMI) estimates that out of China Media Intelligence (CMI) estimates that out of 5,000 software companies 55% of them have less than 50 5,000 software companies 55% of them have less than 50 people. Another 42% employ 50-100 people and there are people. Another 42% employ 50-100 people and there are only a handful of companies with an employee strength only a handful of companies with an employee strength of 1000 people. of 1000 people.

CMI says Yongyou the largest domestic player in CMI says Yongyou the largest domestic player in software development. The country’s largest company software development. The country’s largest company Oriental Software has a little over 1300 people compare Oriental Software has a little over 1300 people compare

that to 26,000 at Infosys and 24,000 at TCS. that to 26,000 at Infosys and 24,000 at TCS.

Cont.//Cont.// Some of the top companies had obtained CMM Some of the top companies had obtained CMM

certification, a large number of middle level companies certification, a large number of middle level companies had not even heard it. had not even heard it.

Lack of comfort with English language and the cultural Lack of comfort with English language and the cultural confusion that comes with it made China’s software confusion that comes with it made China’s software industry immature.industry immature.

India has at least five year lead in software outsourcing. India has at least five year lead in software outsourcing. India has surpassed Ireland as the prime outsourcing India has surpassed Ireland as the prime outsourcing destination of the world. The Indian companies have won destination of the world. The Indian companies have won a reputation of low cost high quality software delivery. a reputation of low cost high quality software delivery.

Dynamic techno-management Dynamic techno-management capabilitiescapabilities

Resource exploitation capabilitiesResource exploitation capabilities Technological learning Technological learning Outside technological sourcingOutside technological sourcing Human resource exploitationHuman resource exploitation Resource focusing for the targetResource focusing for the target

Managerial integrating capabilitiesManagerial integrating capabilities Task force team integration between R&D and productionTask force team integration between R&D and production Concurrent development system : Managing multifaceted activitiesConcurrent development system : Managing multifaceted activities Production technology management Production technology management Interfaces and consensus building among functional departmentInterfaces and consensus building among functional department Top management leadership and involvementTop management leadership and involvement

Cont.//Cont.//

Path navigating capabilityPath navigating capability Planned management Planned management Fitting into changes in environmentFitting into changes in environment Joint R&D activitiesJoint R&D activities

Korean electronics export growthKorean electronics export growth

From meager of $ 89 million in 1971 to $ 20.638 From meager of $ 89 million in 1971 to $ 20.638 billion in 1992 an increase by a factor of 232 billion in 1992 an increase by a factor of 232

Between 1988 and 1992 Korean market share Between 1988 and 1992 Korean market share increased :increased :

From 7.5% to 17.7% in USFrom 7.5% to 17.7% in US

From 7.8% to 18.1% in Europe and From 7.8% to 18.1% in Europe and

From 23.6% to 33.7% in East AsiaFrom 23.6% to 33.7% in East Asia

(Exclusive of Japan) (Exclusive of Japan)

Cont.//Cont.//

Semiconductor export is the largest item in Semiconductor export is the largest item in electronics exportelectronics export

From $ 7.8 billion in 1993 to $ 11 billion in1994From $ 7.8 billion in 1993 to $ 11 billion in1994 During the seventies electronics exportsDuring the seventies electronics exports

CAAGR was 43% while for other sectors CAAGR was 43% while for other sectors

CAAGR Was 35.6% CAAGR Was 35.6%