Corporate venturing to foster innovation in the Indian software industry

Abstract

Started in 1974, the Indian IT industry accounted for $17.1 billion in export revenue and employed over 500,000 persons. Having originated in the early 70s when local markets were absent and government policies towards private enterprises were hostile, the industry succeeded by innovatively exploiting a new global market opportunity. Though government policies frowned on the private sector in general, it was largely ineffective against large companies. Instead it provided protection to these companies by discouraging transnational companies from setting up shop in India.1 The first stage of policy reforms in India in the mid 1980s coincided with the emergence of a new business model based on the workstation-based programming and standard operating systems and high-level languages which replaced the model of mainframe-based programming and manufacturer-specific operating systems. The new business model made coordination of programming projects across remote locations possible. Programming could now be done anywhere in the world by programmers whose only raw material was a fully specified software system, i.e., the programmers did not need to know which firm’s hardware the program would work on and even the type of application the program was intended to support. Policy reforms and reduced tariffs turned India into an ideal off-shoring destination for foreign firms. The business model had already proven successful in Ireland and Israel and a large pool of programmers available in India. The domestic software industry took advantage of the new possibility for modularized programming and shifted from supplying programmers to supplying modular software programs from India. By mid-1990s, the third decade of the industry, the first foreign software outsourcing firms established Indian operations. Initially focused on programming only, they moved ahead of domestic firms in value-addition by doing more sophisticated work, such as design and engineering services, made possible by their superior domain skills. From 1999, reforms in intellectual property protection and venture capital policy induced foreign venture capital entry into software startups, many of which are technically sophisticated product development firms. In consequence, from its third decade onwards, the industry has seen higher value-addition, more product development and shared leadership.