The book addresses a puzzle that remains of abiding interest. Why has India excelled in software but failed in IT hardware, and conversely, why has China excelled in hardware but made no mark in software exports?
The authors of the book, jointly published by the World Bank and the Stanford University Press, among themselves have strong academic credentials and links with multilateral financial institutions. They have subjected to rigorous analysis both existing data, from World Bank surveys of investment climates in different countries, as also the results of a survey done for this book — by Bank affiliate International Finance Corporation — of senior managers from the software and hardware industries of the two countries. Hence, the conclusions that emerge, even though not all new, bear the hallmark of rigorous testing.
The broad conclusions, which will be of great interest to other developing countries, are three-fold. First, the two countries began from different places and followed different paths but may end up roughly at the same place. This leads to the second conclusion that there is no one silver bullet to economic success. The third is that countries need not wait for perfect business conditions to stimulate growth and can work with second-best institutions. Laissez faire will not do and pro-growth government policies are needed to create the right short-term micro-climates for individual industries.
As the IFC data analysed relates to 2004, the book constantly uses later data plus, in its last chapter, looks at emerging trends in India and China in the two industries. It finds a new momentum in hardware in India which it attributes to three developments. Tariffs and cost of capital are down and domestic demand for hardware is up. But what has not changed is the regulatory overload and the poor state of the infrastructure. It sees Indian software going into high value-added segments even as skills shortage, rising wage costs and lower demand growth in the US lead to a slower pace of growth for Indian software.
On the other hand, Chinese software is seeing substantial investment from India majors as well as global IT incumbents. China is also increasingly becoming a base for software exports to Japan. As for Chinese hardware, its export competitiveness is being adversely affected by the hardening of the renminbi and inflation leading to higher wage costs. If you put all of this together it points to the convergence referred to earlier.
An important conclusion of the book is that it is not so much low-cost skills that helped Indian software forward but its superior management. Their ability to get more out of labour, their project management skills and pursuit of quality certification to get over older perceptions about India, all helped. The national culture of India, a questioning attitude, also helped in software success.
On the other hand, Chinese national attitudes helped in success in hardware manufacturing which requires discipline and order. Just as India went after quality certification in software, the Chinese did the same for hardware. They were also helped by the flexibility in labour policies that the Chinese system allowed, particularly in the special economic zones which became important clusters for hardware component manufacturing.
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What won the day for Chinese hardware was access to technology. First, Chinese hardware firms spent way more on R&D than Indian hardware firms did and second, China allowed more foreign direct investment which brought in technology. The Indian preference for portfolio investment had no positive technological fallout.
China helped its hardware industry by adopting several national programmes to boost technological capabilities. A case in point is the support given to the semiconductor industry, including public investment. In contrast, a similar plan in India is yet to take off. China also is very liberal in letting its researchers in government labs and state universities gain financially from the fruits of their research. Kapil Sibal’s plans to offer similar incentives to Indian researchers have till now come to naught.
The book usefully dwells on how the Chinese have done far better in software products than India has. These are mostly in the areas of systems and supporting software. But these are more in the nature of “adaptive” software, based on what is globally available. The Chinese spend more on R&D but their non-compliance on intellectual property rights is also far higher than in the case of Indian firms. It seems that the Chinese have done a lot of reverse engineering in software products as Indian firms did prior to 1991 with machines and components when importing was difficult.
The book could have paid adequate attention to one aspect of Indian software services which it says is mostly a low-skills business. Quite so but there is a lot happening in engineering and R&D services, led by firms like TCS and Wipro, which requires high skill levels. India, and in particular Bangalore, is now a key centre for semiconductor design services which require high skills.
NEW INDUSTRIES FROM NEW PLACES
THE EMERGENCE OF THE SOFTWARE AND HARDWARE INDUSTRIES IN CHINA AND INDIA
Neil Gregory, Stanley Nollen and Stoyan Tenev
Stanford University Press and the World Bank
255 pages; Price not stated