The rise of IT service clusters in India: Growth by replication rather than innovation?

June 6,2017
Read time: 4 mins

Photo: Siddharth Kankaria / Research Matters

The Indian IT services sector has grown from small beginnings, from being at the bottom of value creation to being a major performer in the global Information and Communication Technology (ICT) industry with a 55% share in the global market for IT services. Backing on this success, the key metros of India -- Bangalore, Delhi, Hyderabad, Chennai, Pune, Mumbai, and Kolkata -- have turned into major IT clusters, making India the premier choice not only for outsourcing IT services by the developed-world's multinational corporations (MNCs), but also for locating their own Global In-house Centres (GICs), which simultaneously compete and partner with local firms.

In the past few decades, what factors led to this phenomenal growth? And in an increasingly globalizing world, how does the future look for these IT clusters? In a recent case study, Prof. P.M. Rao from the College of Management, Long Island University, USA, and Prof. M.H. Bala Subrahmanya from the Department of Management Studies, Indian Institute of Science (IISc), Bangalore, have identified the various factors that have influenced the growth, innovation and the future prospect of these IT clusters.

A ‘cluster’ is defined as a geographic concentration of industries related by knowledge, skills, inputs, demand, and/or other linkages. India's IT services sector, being deeply entrenched in seven key metros, form such ‘IT clusters’ in and around these metros. Together, they account for a considerable proportion of products and services, employment and exports of the Indian IT industry. As per NASSCOM’s (National Association of Software and Service Companies) 2015 report, the export revenue for the year was over $98 billion, with the services sector employing about 32 lakh people.

The liberalized economy of the 1980s fuelled by easy import of computers and collaborations with foreign companies for software development, started the boom in the IT industry. The pleasant experience these foreign companies gained from such collaborations and the availability of a large pool of low-cost talent fluent in English, made India a very attractive destination for off-shoring, drawing the next phase of evolution in the IT services sector. Establishment of several State-run Software Technology Parks (STPs) helped large firms—domestic and foreign— serve their overseas clients and/or parents from their own premises without the need for employees to travel.

Today, the Information Technology enabled Services (ITeS), Business Process Management (BPM) and Engineering Research and Development (ER&D) sectors combined, is the largest private employer in India, with over 3 million ‘direct’ jobs and another 7 million ‘indirect’ jobs, accounting for 9.5% of GDP. But is this growth void of innovation? No, say the researchers, citing many factors that show Indian IT sector moving towards high-end value added services driven by innovation.

The large number of patents granted to top domestic Indian IT firms is a measure of innovation, say the researchers. Among the 76 firms considered in this case study, the top 15 had obtained a total of 602 US patents. This signifies a greater perceived quality of research and future market value, in spite of the fact that India still does not yet recognize software patents. Another factor is the raising revenues from high-end value added services, such as ER&D. Sales in the ER&D segment, which were not significant to be counted by NASSCOM prior to 2004, have now grown nearly nine times from about $3bn in 2003–04 to $25bn in 2015.

However, the IT sector's value proposition in terms of lower cost combined with large supply of high quality talent remains the single most compelling reason for the rise and growth of multiple IT clusters, prompting one to believe that this growth appears to be a case of growth by replication rather than innovation. “Replication is a good way of learning initially, as that will gradually allow us to innovate. Replication/imitation is a stepping stone to innovation”, says Prof. M.H.Bala Subrahmanya.

But can growth by replication last long and can it sustain the industry? “Continued replication will not be beneficial in the long run. It is crucial for Indian firms to transform themselves from being imitators to becoming innovators. Innovation alone will enable our firms to achieve self-sustainability in the long run”, points out Prof. M.H. Bala Subrahmanya on the need for innovation.

While the old adage, ‘people follow jobs’ still holds good for a large part of the labour force, the sprawling IT services clusters - with more to come in many cities – indicate that ‘jobs follow talent’ is still the case.