The role of FDI in the development of a high-tech industry in a developing economy : the case of the sotfware industry in Bangalore, India
Graduate School of International Studies Korea University
sotfware industry FDI high-tech industry;
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Technological revolutions sometimes bring unexpected opportunities for counties, India, a relative laggard among developing countries in terms of economic growth, seems to have fond such an opportunity in the Information Technology revolution as an increasingly favored location for customized software development. India's success at software has led to speculations about whether other developing countries can emulate its example, as well as whether this constitutes a competitive challenge to software industries in the developed world. This paper analyzes the role of foreign direct investment (FDI) in the development of the software industry in India, particularly in Bangalore. The southern Indian city of Bangalore, also known as the 'Silicon Valley of India' is placed on a shared fourth place in terms of the most advanced technology hubs in the world (UNDP 2001). Out of the fifty-five software firms that are at level five in the globally acknowledged quality certification, Capability Maturity Model for software(CMM), twenty two are located in Bangalore. During the last fifteen years Bangalore has grown rapidly and has become established as a hotspot on the global software map. The city has drawn a lot of attention as a successful knowledge-oriented hub in a developing country. However, a special feature of this developing software industry in Bangalore is its heavy dependence on the United States market. Linkages with United States, via its expatriate communities working in leading Silicon Valley companies and financial institutions, has promoted the inflows of capital, ideas, business models, and technologies into not only this city, but the rest of India as well. This paper examines the extent to which foreign direct investment and multinational corporation spillovers and their linkages with domestic software firms have played a role in the evolution and further development of the industry in Bangalore. In precise terms, this paper tries to answer whether or not foreign direct investment represents 'an engine of software growth' in the case of Bangalore. At the same time it must be kept in mind that this preliminary examination of the role of foreign direct investment in Bangalore is intended to be merely an introduction and not an in-depth study. Section One dissects the ground realities and tries to provide the basis for understanding the nature of the business now and the entrepreneurial spark that got the process started in the first place. It also gives a rough idea of the extent to which multinational corporations are present in the industry. The theoretical background (Section Two) invoked provides a first hand idea of the various ways in which transnational companies can affect the development of a cluster and the different end results reached in each case. In examining the theoretical works it is hoped that they serve as tools by which certain aspects of the development the software industry in Bangalore may be examined. Section Three talks about the various factors which helped Bangalore, a city in third world country like India, in attracting foreign capital to its software industry The latter part of this section measures the extent to which this foreign capital has directly, as well as indirectly, contributed towards the development of this industry. The last section (Section Four) winds up the paper by summarizing the conclusions reached in the previous sections, briefly discussing the future outlook of this industry in Bangalore and exploring the policy implications of this Indian experience for other developing countries that are in a similar attempt to develop their high tech industries. This final section limits itself to only the lessons other developing economies might learn from Bangalore, not delving into question of what they should do in order to develop their industries (which would have been beyond the capacity of this masters level paper).