business enabling environment

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Reexamining India – Part II

When we last examined the Indian IT boom on this blog we were left with a few important conclusions. First, it became clear that the IT boom was driven by software exports and that these exports grew linearly until 1992. In that year something happened in the industry and software exports began to take off in an exponential manner.

Knowing that the primary input into software is labor, and that the rate of employment growth didn’t change dramatically, we can be certain that this take off in software exports was caused by massive increases in labor productivity; and we have a graph to show it. The figure below shows revenues per worker in the software industry over the course of the 1990s.

The takeoff is extraordinary. By the late 1990s software firms were hiring as many engineers as they could find, and each additional worker was leading to even higher marginal revenues. Shockingly, despite the huge IT workforce that was a precursor to the boom in the first place, by the end of the decade the number one complaint of IT firms in business surveys was a scarcity of labor.

The boom in labor productivity could only have come from two sources: better management practices and moving up the value chain (and it in fact came from both). India already had highly trained workers, and these workers were already working with advanced machinery. They were however engaged in simple work conducted “on-site” – mostly systems design, analysis and coding. There were few, if any, Indian firms doing turnkey software projects. By the early 2000s that fact had changed completely. Whereas in 1988 90% of all software exports were “on-site” services, by 2003 that number was down to 40% and falling.

What happened to allow India to move up the software value chain and to force firms to invest heavily in improved management practices? The logical place to start looking for clues is in the massive political change that occurred in India in 1991. In the 1950’s Nehru had established a Soviet-style system of central planning and restrictions on the private sector that came to be known as the “License Raj.” But in ’91, facing a currency crisis that required IMF intervention, the international community forced reforms on India that made it much easier for businesses to spring up and foreign investment to pour in. And pour in it did: the graph below shows foreign investment into India throughout the 1990s. Its exponential shape seems to mirror that of software exports.

But of course the story isn’t quite that simple. While the 1992-99 period did see 68 multinational software firms establish offices in the country, software exports have always been largely the domain of domestic firms. By 2001 multinationals still accounted for only 15% of such exports from India.

It is also important to note that in 1990 and 1991 the government established a series of software technology parks (STPs). The first one opened in Bangalore in August 1990 and included modern communications networks that were beyond the reach of ordinary firms. Even after liberalization the government continued to do this, and by 2002 there were 39 parks that together accounted for 80% of the country’s software exports.

So we have a lot of different elements – some involving liberalization and some involving outright subsidization – that were woven together to create a unique growth recipe for IT in India. The story can be told briefly somewhat like this.

In the mid-1980s, while Indian IT was almost entirely focused on on-site services, Texas Instruments came in and established a research and development center in Bangalore. The exact reasons they were willing to go through the trouble of starting a subsidiary in India during the License Raj years are unknown, but the fact that they had an IIT-educated Indian VP may well have had something to do with it. Many of their multinational competitors watched from afar as this business was set up, but none followed. Bangalore at the time TI arrived was a hub of the Indian defense industry, home of an IIT, and a logical place for the government to establish a science and technology park. They did so largely at the urging of the software exporters specializing in “on-site” software development. They felt that with better data links to their work sites (links they couldn’t afford on their own) they would be better able to do more of their work in India. That would save them a large amount of money in both travel and in the division of labor. Often consultants that went out from India on site visits were top tier company employees – they had to be capable of the most complex tasks that clients would ask of them. But these top employees spent little of their time on the ground doing complex tasks. Often times they simply coded, a job for which software engineers in the US and Europe almost never do Pronab Sen noted that because of this phenomenon the average productivity of an Indian on-site software engineer in the US was only 30% of his American counterpart. With reliable data links the on-site consultant could farm this work out to employees at home and spend more of his time doing complex work.

By 1993 this had begun to happen. “Off-shoring,” the development of software in India, had jumped by a third over the previous two years. Consequently, the labor productivity associated with the primary industry laborers, the on-site software engineers, had begun to soar. As more and more work was done off-shore by the companies that had previously requested on-site services, they became more comfortable with it. Gradually, more and more valuable work was allowed to be off-shored.

At the same time that “on-site” consulting firms were beginning to do more offshore work India was liberalizing. The firms that had long watched Texas Instruments, and had seen them prove that successful R&D could be done in India, finally could make a business case to move into the country.

So foreign software firms began to move into India, and previously on-site clients began to do more work off-shore, all at the same time. This led to a fierce competition for the primary resource in the IT sector, programmers and engineers. But interestingly, as pointed out by the economist Suma Athreye, the Indian firms and the multinationals were only competing in the input market, not the product market. The large multinational subsidiaries established in India sold their product only to their parent company. This meant that the presence of multinational firms in India forced salaries up, forced domestic firms to adopt more efficient labor use strategies, but did not compete with (and potentially destroy) them. These positive incentives had an impact on labor productivity. By the late 1990’s Indian firms had earned ISO certifications that were on par with the multinationals with whom they were competing for talent. A culture of organizational management expertise was inaugurated, and as new Indian firms were created in throughout the 1990’s they sought this expertise as well. So it was truly a combination of moving up the value chain and improved business processes that led to the labor productivity boom, and it was brought about by a unique combination of public policies (some liberal, some not) and private sector initiative.

What lessons can we draw from this experience? I pull out a few, but am happy to debate them.

1) In India business parks were successful. I can think of many places where they were not. They worked in India because existing business had a need (connectivity) that the business park could solve. They were not meant to create an industry out of nothing.

2) A plan that relies on accessing export markets can work, but it works really well when you have limited competition and your citizens hold management positions with the primary overseas clients.

3) The entry of multinationals had a catalytic effect on growth in software exports from domestic Indian firms. This is likely because they only competed in input markets, not output markets, and because Indian firms were already well established.

I could probably go on, but a trend is emerging. It seems that standard interventions to support ICT industries – a business park, a strategy of liberalization – can go either of two ways. It can help your industry or hurt it, depending on conditions on the ground. This argues strongly for heterodox policies that are country specific and take account of these circumstances.

March 30, 2011/by actualize

Business Enabling Environment, Economic Growth & Trade, Enterprise Development, Originally posted on the GBI Portal

Not Your Mother’s Telecenter

By now we’ve all heard of the telecenters of the 1990s – providing access to hardware and the internet, and shaping the face of ICT4D for a while. And while Internet Cafes are still prevalent, they no longer dominate the ICT4D discussion.

Photograph of the outside of the Bwacha Women's Club Building

Photo Credit: WomenICTEnterprise.org

But there are still lessons that can be learned from past projects. The Kalomo Bwacha Women’s Club looks on the surface like any other telecenter, but in fact, it provided so much more than just access.

The enterprise provides email and telephone services; secretarial services; basic Internet training and browsing; and desktop publishing services such as the creation of calendars, brochures and cards using digital photography for government, public and private institutions, members of women’s clubs and individuals. The center engages women in using ICTs as part of an effort to transform the face of the district, socially and economically. Participants work to improve other women’s money making activities by using the internet to market their produce. The hope is that this approach will help foster economic growth in a place which is mainly dependent on farming and which has very few companies offering jobs to indigenous people.

There are ten core women members, only one of whom is paid, the rest working on a voluntary, part-time basis. The full-time employee works from 8.00am to 5.00pm, sees to the daily running of the club, types for the clients, operates the Internet, answers queries and so on.

The other members look for income-generating projects and recruit new members. They visit Kalomo villages, teaching and sensitising villagers, particularly women, on issues that affect them such as HIV/AIDS and poverty alleviation. They take digital photos, upload these onto their computers and make prints which they then use to distribute to other communities, sometimes in the form of a poster or a calendar with an educational message. They particularly promote women’s initiatives and highlight the plight of women in various communities. These visits help others to realise that they too can advertise their goods and services and learn from each other.

The club also generates income from affiliated clubs, which contribute a small annual fee. They distribute seed to their affiliated clubs who, once they have harvested it, pay them a fee. The seed may be maize seed, beans or any other that is expected to do well during that particular season. All this is at a concessional rate for the affiliated members. The club also holds community events to raise awareness and funds. The end of March will see an open market and a beauty competition, both organised by the club. ICTs play a major part in that participants will be encouraged to keep in touch via email and goods will be advertised on a web site, using digital photos. The club also hopes to create a database.

By sending women out, this “telecenter” reaches out into the community and makes changes in the lives of the women there. Rather than waiting for them to come to the center, the center brings its services and support to the community.

This is just one of several Women’s ICT-based enterprises described on the Women’s ICT Enterprise website. Although the site has not been updated in some time, the cases are still interesting and provide a good background for similar projects today.

Source: Comminit and WomenICTEnterprise

March 8, 2011/by actualize

Connectivity, GBI Highlights, Originally posted on the GBI Portal

Universal Service Funds – Africa

Group of attendees from Intel's Africa USF Conference

Photo credit: Eric White, Integra LLC

Universal Service Funds (USF) hold the promise of extended rural connectivity for millions throughout Africa, but governments often lack the technical capacity and know how to utilize these private enterprise models. Through GBI, USAID will work with private sector partners to further the use of USFs in sub-Saharan Africa, determining both the best practices and the barriers that inhibit successful performance. This project will build the host country’s capacity to deploy USFs, evaluate potential solutions and create a value chain of local ICT, ISP, and telecommunications partners who can harness the power of USFs to close the digital divide and fulfill the promise of rural connectivity.

March 1, 2011/by actualize

Agriculture, GBI Highlights, Originally posted on the GBI Portal

GBI Presents “Rural ICT Solutions for Feed the Future”

Eric White, of the GBI team, gave a presentation to a gathering of USAID infrastructure specialists from missions around the world about the importance of investing in ICT infrastructure. He specifically highlighted the importance of wireless voice and broadband connectivity in meeting the US Government’s goals under the new “Feed the Future” program.

Food Security, Mr. White explained, can come either through improving domestic agricultural output and distribution or through improved cross-border trade facilitation. He highlighted ways that ICT infrastructure improves both. After pointing out that agricultural development is the flip side of rural economic growth Mr. White explained how numerous studies, at both the macro and micro level, have found a 10-1 relationship between expanding ICT coverage and GDP growth. A 10% increase in ICT penetration is generally associated with a 1% increase in GDP growth rates.

Mr. White then explained how it is possible to work with private sector firms to expand ICT access to rural people in developing countries. He pointed out the remarkable willingness-to-pay of even the very poor when it comes to communication. Even people living on only a few dollars a day are willing to pay up to 10% of their income for access to communication. Given that relatively large willingness-to-pay and a relatively low cost of capital it is in fact possible to reach every developing country resident with wireless technology through the smart use of targeted subsidies and investment in emerging low-cost technologies.

Eric White ftf presentation

View more presentations from Integra LLC.

February 26, 2011/by actualize

Agriculture, Originally posted on the GBI Portal

Facebook for Farmers: Technology empowers China’s rural workers

Mr Qing, ploughing in the fields, relies on China Mobile's farming service

The BBC recently reported on Nongxintong, a network created by China Mobile to deliver news and information directly to rural farmers via their cell phones.

The farmers, who generally don’t have access to the internet, receive text or audio messages with market prices, job opportunities, warnings, advice, buyers and sellers. There is also a mobile phone hotline aimed at those with rural businesses.

Click here to read the original article.

January 19, 2011/by actualize

Agriculture, Business Enabling Environment, Economic Growth & Trade, Originally posted on the GBI Portal, Workforce Development

ITC’s E-Choupal: Improving the Lives of India’s Rural Farmers

The agriculture industry is imperative in India. The country ranks second worldwide in its farming output, agriculture allotted 16.6% of the country’s GDP in 2007 and employed 52% of the total workforce. Yet most Indian farmers remained impoverished. The origins of this problem stem from the archaic government regulation called the Agriculture Produce Marketing Committee (APMC) Act. Created in the 1960s, the APMC Act founded that agri-companies, like ITC, could only buy agricultural produce through designated markets called mandis where they would have to buy from registered commission agents. Once the crop was harvested, farmers would take their produce to the mandis where their produce would be auctioned by commissioned agents. Since the agent was the only channel between the farmer and the processor, agents would typically auction off multiple lots before taking it to the processor. Thereby ensuring no price or quality transparency in this farm-to-factory cycle. Since the mandis were a formidable distance from the fields, farmers would have to accept the price offered them at auctions on the day that they bring their harvest to the mandi. As a result, traders are well positioned to exploit both farmers and buyers through practices that maintain system-wide inefficiencies and pocket additional differences in price.

Incorporated in 1910, ITC is one of India’s leading private sector companies with a market capitalization of nearly US$18 billion, an annual turnover of US$4.75 billion. Rated one of the “World’s Best Big Companies” and “World’s most reputable companies” by Forbes magazine, ITC has business interests in tobacco, hotels, agri-business, retail, information technology, and others. The company founded its first E-Choupal site in June 2000, where they created Internet kiosks in rural farming villages to create an “improved supply chain”, directly connecting themselves and the farmers. The e-Choupals serve as both a social gathering place, choupal means gathering place in Hindi, to exchange information and an e-commerce hub. What began as an effort to re-engineer the system of processing and acquiring soybean meal, rice food grains, wheat, lentils, and coffee in rural India also created a highly profitable distribution and product design channel for the company. An e-commerce platform that is also a low-cost, mutually beneficial system focused on the needs of rural India.

In addition to the farmers only using the e-Choupal there is also a host farmer, called a sanchalak, who acquires some operating costs and is obligated to serve the entire community; the sanchalak benefits from increased esteem in the community and a commission paid him for all e-Choupal transactions. The farmers can use the Internet kiosks for daily access to closing prices on local mandis, as well as to track global price trends or find information about the weather and new farming techniques.

The rural farmers can also use the e-Choupal to order seed, fertilizer, and other farming products such as consumer goods from ITC or its partners, at prices lower than those available from village traders. When it is time to harvest the crops, ITC offers to buy the crop directly from any farmer at the previous day’s closing price and then the farmer transports his crop to an ITC processing center known as Choupal Saagars. Choupal Saagars are alternatives to the traditional mandis, catering to about 40 e-Choupals and are all within tractor driving distances. The crop is then weighed electronically and assessed for quality, and the farmer is paid for the crop along with a transport fee. Through this new process, farmers benefit from a more accurate weighing, quicker processing, and immediate payment. Further, the access to a wide range of information, including precise market price knowledge and market trends, assists them in deciding when, where, and at what price to sell.

Though the e-Choupal system serves as a catalyst for rural transformation, alleviating rural seclusion, cultivating transparency for farmers, and enhancing their productivity and incomes, there were still some core problems like education, health care, and insurances, which still eluded the farmer. Governmental system inefficiencies have long kept farmers in an economic hiatus, and companies in the agrarian society struggled to find a balance between their social and shareholder obligations. However, with the e-Choupal system, ITC had a model that created a unification of their seemingly oppositional needs.

The e-Choupal program converged with ITC’s corporate social responsibility initiative to act upon objectives to help the community they were working in. Through their e-Choupals, ITC created Supplementary Learning Centers to help with rural India’s primary education, empowered women to become part of the global marketplace, and developed a three-tier Choupal Health Care model to cultivate the installation and delivery of both preventative and curative healthcare services. In addition, they also generated a full scale retail marketplace in the Choupal Saagars to the rural population and created financial product marketing for the farmers and their families where ITC offers to sell credit through their network. The Kisan Credit Card, third party loans, and channel credit allowed farmers to establish a better established infrastructure which drove down certain aspects of cost and improved the quality of their crops. Weather insurance, life insurance, along with pension and disability incomes were also established for farmers to have for themselves and their families just in case disaster struck.

One of the retail Choupal Saagars

The e-Choupal system lets farmers be more lenient with their choices, gives them a higher profit margin on their crops, and access to information that improves their productivity. By providing a more transparent process and empowering local people as key nodes in the system, ITC heightens trust and fairness. Critical factors in the success of the venture are ITC’s extensive knowledge of agriculture, the effort ITC has made to retain many original aspects of the existing production system, including maintaining relationships with local partners, ITC’s continued commitment to transparency, and the treating the farmers and local partners with respect and equality.

Sources: CIA World Factbook- India

January 11, 2011/by actualize

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