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Forum: The “I”s have IT

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
January 2007
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The software industry is eyed by many emerging market economies as a pathway to export earnings and economic growth. At a talk at the IMF in December, Carnegie-Mellon University’s Ashish Arora said that the success of software exports from the “I” countries—India, Ireland, and Israel—reflected as much good luck and trust in entrepreneurship as successful government policies or better human capital.

According to Arora, the information technology (IT) revolution in the 1980s opened a window of opportunity that could potentially have been exploited by many countries. But the greater success of software firms in the “I” countries shows that “comparative advantage sets the stage but does not provide the script.” In hindsight, he said, it is possible to see three reasons why these countries were well positioned to take the lead:

The diasporic effect. Many of the “reserve army of underemployed” engineers and scientists in these countries had previously migrated to the United States and the United Kingdom. For instance, “people born in India are estimated to account for nearly 5 percent of the IT workforce in the United States,” Arora noted. Likewise, a 2005 survey found that three-fourths of Irish software companies had a founder who had worked abroad. Through their work abroad, this diaspora gained an appreciation of the business practices of people who were to become their customers.

Freedom to experiment. Second, the software companies in the “I” countries had freedom to experiment. This trust in entrepreneurship by policymakers in these countries was important, he said. “It is forgotten that Indian software giants like Infosys made huge mistakes in their early days, but they were allowed to learn and adapt.”

Luck helped, too. Fortunate timing also played a role. “India and Ireland, in particular,” Arora said, “were lucky that they embarked on major economic reforms and liberalization” around the same time that the IT revolution permitted a “decoupling of the hardware and software sectors.”

Still, in populous countries like India, the software industry cannot serve as an important source of employment. But “the excitement regarding India’s software exports has never been about its employment-generation capability,” he said. “Rather, it is an example of what is possible. Software made ‘Brand India’ a respected one” The organizational capabilities developed by Indian software firms can also be used in other sectors, such as engineering and business process services.

Room for more?

Quizzed on whether others could emulate the success of these three countries, Arora said “there is no reason why they should not be able to do so, but the firms in these countries have a head start.” He joked that “providing business services is no different from having a good plumber. Once you form a relationship with someone who you know will be there to fix your problems, you tend to continue the relationship.”

That said, the IT industry offers several niches that can be successfully occupied by newcomers. Arora pointed to Brazilian companies that are, for instance, exploiting their “better hardware capabilities to gain a technical edge” over rivals in other countries.

Prakash Loungani

IMF External Relations Department

For more detailed information on the research that formed the basis for Ashish Arora’s presentation, please see http://www.heinz.cmu.edu/bio/faculty/ashish.html or http://ideas.repec.org/e/par15.html.

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