Technology in Society 31 (2009) 2941

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Technology in Society
journal homepage: www.elsevier.com/locate/techsoc

Development and innovation in the IT industries of India and China

Shiu-Wan Hung*
Department of Business Administration, National Central University, Tao-Yuan 320, Taiwan

a b s t r a c t
Keywords: India China Information technology National system of innovation Innovation

This paper presents an analytic framework for analyzing innovations in the IT industries of India and China. To recognize the structural characteristics of innovation, a model is proposed based on the concept of a national system of innovation as a policy framework for studying innovations in Indias and Chinas IT industry. I discuss the extensive diffusion of new technologies in the IT industry, including technical knowledge and human resource development, industrial cluster, market information and management skills, research and development, nancial resources, domestic and international markets, and the interaction between these factors and the government. In addition to describing the role and performance of particular institutions, this framework also explores interactions among these institutions to illustrate the dynamics and efciency of innovation systems. The framework reveals that the IT industries in both India and China have unique characteristics, but they also share numerous complementary features. 2008 Elsevier Ltd. All rights reserved.

1. Introduction When Marco Polo returned to his native Venice1 from China in 1295, he was ridiculed for talking about millions of this and millions of that. Today it is just as difcult to speak of India or China in small terms. Both stir a siren song that has never lost its allure in Western minds, leading every vendor to think, If each Indian or Chinese bought just one [ll in the blank here: oil lamp, dress, computer, car, etc.], wed be rich. The enticing prospects of the vast markets of India (estimated population of more than 1 billion) and China (1.3 billion population) keep merchants, entrepreneurs, and businessmen coming back. The latest candidates dazzled by the possibilities of enormous wealth are computers and software. The IT industries in India and China have been prominent for the past several years, ranking at or near the top of the global IT players list. Products associated with computers and integrated circuits (IC), such as PCs, electronic consumer products, laptop or notebook PCs, as well as their key components and display channels, have become major products in China, while the software needed to drive all these devices has become a value-added industry in India. Networking devices, portable computers, and mobile communications have wrought dramatic changes in information acquisition and communication, as well as changed the societys lifestyle. As economic activity becomes more knowledge-intensive, economic growth depends increasingly on the accumulation of knowledge, which is derived primarily from innovations. This paper presents an analytic framework for analyzing innovations. To recognize the structural characteristics of innovation, a model is proposed based on the concept of a national system of innovation as a policy framework for studying innovations in the IT industries in India and China. The model helps to explain the extensive diffusion of new technologies in the industry, including technical knowledge, human resource development, industrial clusters, market information, management skills, research and development, nancial resources, domestic and international markets,

* Tel.: 886 3 4269903; fax: 886 3 2118558. E-mail address: shiuwan@mgt.ncu.edu.tw 1 There is an ongoing dispute among scholars as to whether Polo was born in Venice or Croatia. I have used Venice. 0160-791X/$ see front matter 2008 Elsevier Ltd. All rights reserved. doi:10.1016/j.techsoc.2007.12.009

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and the interaction of these factors with governments. Not only does the framework describe the role and performance of particular institutions, but it also explores the interactions among these institutions in order to illustrate the dynamics and efciency of systems of innovation. The framework reveals that both the Chinese and Indian IT industries have unique characteristics, but they also share numerous complementary features. The structural and institutional challenges of innovation systems are identied. Finally, future challenges and directions for the two IT industries are suggested. 2. A framework for analyzing international competition International competition is crucial for high-tech industries. Determining national competitiveness has been attempted by numerous investigators, based on factors such as capital, labor, and technology commonly applied in macroeconomic analyses of national economic growth. Schumpeter [1] emphasized that technological changes were critical in economic growth, and that monopolistic advantages provided economic incentives for undertaking industrial R&D. To understand the innovative nature of economics, the concept of a national system of innovation (NSI) was rst proposed and dened by Freeman [2]. He dened an NSI as the network of institutions in the public and private sectors whose activities and interactions initiate, import, modify, and diffuse new technologies. However, there is no single accepted denition of an NSI. Many industrialized countries have attempted to concisely dene an NSI, and Table 1 gives some examples of the range of denitions. The concept of an NSI rests on the premise that understanding the linkages among the players involved in innovation is key to improving technology performance. Innovation and technical progress result from a complex set of relationships among players producing, distributing, and applying various kinds of knowledge. The innovative performance of a country depends to a large extent on how these actors interrelate as elements in a collective system of knowledge creation and use. These players are primarily private enterprises, universities, and public research institutes and the people within each of them. The linkages take the form of joint research, personnel exchanges, cross-patenting, equipment purchases, and various other channels. Despite its various denitions, NSI can facilitate each aspect of the functions of the capacity invested in business, education, training, science, and policy-making institutions [711]. It can also provide the underpinnings that lead to market achievement. Fig. 1 shows my proposed model, which is based on an NSI as a policy framework for studying the innovation features of India and Chinas IT industry. The factors considered include technical knowledge, human resource development, industrial clusters, market information, management skill, R&D, nancial resources, domestic and international markets, and the interaction of these factors with governments. 3. The IT industry in India Although technology imports eased considerably during the 1980s, it was the 1991 opening of the market to imported goods and new foreign producers that dramatically altered the technology landscape. Many rms began to invest in new technology both for efciency gains and for quality improvement. Today the IT sector in India is the countrys fastest-growing segment. Even during the challenging global economic environment of 20012003, the software and services industry (a major component of Indias IT sector) showed signicant momentum, higher than that of other industries in the country. Fig. 2(a) and (b) illustrates the progress of Indias IT market. India continues to be a strong investment destination, as leading companies either set up shop or beef up their existing infrastructures. Outsourcing of IT needs by leading global companies to major Indian technology rms also increased during the past few years. The Indian IT software and services industry has become more rened and has moved up the value chain in terms of solutions offered to customers. Today major corporations rely on Indian software companies for both legacy and new technology solutions. Although the US is the largest user of Indian software solutions, Indian information and communication

Table 1 Selected denitions of national systems of innovations. Freeman, 1987 Lundvall, 1992 Nelson, 1993 Patel and Pavitt, 1994 Metcalfe, 1995 A network of institutions in the public and private sectors whose activities and interactions initiate, import, modify and diffuse new technologies [2] The elements and relationships which interact in the production, diffusion and use of new, and economically useful, knowledge . either located within or rooted inside the borders of a nation state [3] A set of institutions whose interactions determine the innovative performance ... of national rms [4] The national institutions, their incentive structures and their competencies, that determine the rate and direction of technological learning in a country [5] A set of distinct institutions which jointly and individually contribute to the development and diffusion of new technologies and which provides the framework within which governments form and implement policies to inuence the innovation process [6]

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Fig. 1. Analytical framework for innovation in the IT industries of India and China.

technology companies began tapping regions outside the US market as well. Revenue contributions from the US market continue to rise owing to the large number of IT-enabled services (ITES) and business process outsourcing (BPO) projects being outsourced to India. Indian companies also made modest headway in segments such as packaged software support and installation, product development and design services and embedded software solutions. As shown in Fig. 3, some of the key services provided by Indian players are:

a
20 4.0 3.5 15

b
12000

25

Share in total exports (%)

10000

20

Share of GDP (%)

3.0 10 2.5 2.0 5 1.5 0 1.0

USM Dollars

USB Dollars

8000 6000

15

10 4000 5 2000 0 0

97-98

98-99

99-00

00-01

01-02

02-03

03-04

96-97 97-98 98-99 99-00 00-01 01-02 02-03 03-04

Year

Year

Fig. 2. (a) Indian IT market: 19972004; (b) software and service exports as a percentage of Indias total exports Source: [12].

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Indias IT Industry

Custom application development and maintenance

Applications outsourcing

IT enabled services

R&D services

Customer care Web sales/marketing Billing services Database marketing Accounting Transaction document management Transcription Telesales/telemarketing Benefits administration Tax processing HR hiring/administration Biotech research
Fig. 3. Key services provided by Indias IT industry [12].

   

Custom application development and maintenance Applications outsourcing IT enabled services R&D services

Compared to other competitors such as Ireland, the Philippines, and China, India won the bulk of the global ITES/BPO business because of its price/performance/quality strengths. Indias enormous English-speaking scientic manpower base ranks second only to the US (in terms of numerical strength). Call centers and business process outsourcing are emerging as the next growth segment in India. The ITES segment currently employs approximately 70,000 people and accounts for 10.6% of the total IT software and services industry revenue. The ITES/BPO industry has taken root in most of Indias leading cities, including NCR, Mumbai, Bangalore, Chennai, Kolkata, Hyderabad, Kochi, Ahmedabad, and Pune [12]. Outsourcing of software needs depends primarily on quality of services, and that factor remains a prime edge for Indian software companies. According to a NASSCOM (National Association of Software and Service Companies) survey, among 54 companies that acquired SEI CMM Level 5 certication, 27 companies are located in India. Some of the key players in this market (including captive and third party ITES/BPO vendors) are AMX, Convergys India Services, GE Capital Standard Chartered, Dell, Healthscribe India, EXL Services, Daksh eServices, Wipro Spectramind, and 24/7 Customer. Key services include customer care, web sales/marketing, billing services, database marketing, accounting, transaction document management, transcription, telesales/telemarketing, benets administration, tax processing, human resource hiring/ administration, and biotech research. Notwithstanding the overall global economic slowdown, the Indian IT software and services industry maintains steady growth and retains its position as the spearhead of Indias exports. The Indian software and services industry is convinced, and it will be able to achieve the ambitious targets it has set. The Indian IT sector is expected to show continued growth in IT software and services exports, ITES, and the domestic IT market. It is also expected that over the next few years, Indian software and services companies will adopt a global delivery model that includes four components: onshore (same

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country as client), on-site (at the client site), nearshore (country near the client country), and offshore (based in India) [12]. 4. The IT industry in China Since the mid-1990s, Chinas high-tech industry has grown rapidly. Despite a downtrend in the global IT industry and frustration with IT stocks, Chinas IT industry has broad and optimistic prospects. The created value of its high-tech industry increased almost three-fold in 6 years, from 108.1 billion Yuan in 1995 to 309.5 billion Yuan in 2001. Consequently, the share of created value of the high-tech industry among total Chinese industry increased from 8.8% in 1995 to 13.9% in 2001. Fig. 4 shows export revenues earned by Chinas IT industries [13]. In contrast to India, the majority of Chinas high-tech exports consist of computer and telecommunication products, as shown in Fig. 5. According to Chinas Ministry of Information Industry, the share of these products among total Chinese high-tech exports was 49.1% in 1997, which increased to 80.4% by 2003. Chinas IT industry saw a sales revenue of 2.68 trillion Yuan (US$322.3 billion) in 2004, up 42.3% year-on-year, becoming the countrys leading driver of economic growth. Based on this solid foundation, China aims to become a major player in the IT industry. In 2004, prots in the IT industry exceeded the industrys turnover growth speed for the rst time. Production, sales, and prots in the industry grew hand in hand. China accounts for a signicant and growing share of the worldwide output of notebook computers, at-panel displays, game boxes, DVD players, mobile phones, and handheld computing devices. Some Chinese companies that design and manufacture their own products, such as the computer maker legend, have made substantial inroads in the rapidly growing domestic Chinese market. Moreover, Chinas growing role as a low-cost producer generates substantial benets for global users of IT products through resulting price reductions on IT equipment. It is generally believed that the biggest contributor to the development of Chinas IT industry is Taiwan. Since 1990, Taiwans IT industry has confronted the challenges of declining prot margins and a shortage of engineers. One solution is to take advantage of the abundant supply of engineers and lower labor costs in China. Beginning in the early 1990s, Taiwans IT industry began moving to mainland China, and today the industry is a major Taiwanese investor in mainland China. For example, the largest order-to-made chipmaker in China, Semiconductor Manufacturing International Corporation, and the newly founded HeJian Technology Company were developed by Taiwanese businessmen and engineers. In 1992, 90% of Taiwans IT products were made domestically, while 10% were made abroad. In comparison, only 36% of Taiwans IT products were made at home in 2002, while 64% were made abroad. Thus, nearly two-thirds of the value of Taiwans IT industry was created by overseas production bases in China. As a result, Taiwans direct investment in China should make a tremendous contribution to the development of Chinas IT industry. Most would agree that Chinas IT industry will maintain rapid and healthy growth that will mean a good start for the 11th Five-Year Plan, which began in 2006. However, the government will continue macroeconomic controls to encourage rational and rapid development of the industry. 5. Innovations in the Indian and Chinese IT industries To study the innovation features in the IT industries in India and China, a model is presented which uses an NSI as a policy framework. The model includes government policies, technical knowledge and human resource development, industrial clusters, market information and management skills, R&D, nancial resources, domestic and international markets, and the interaction of these factors with the relevant government.
500

400

US Billion Dollars

300

200

100

0 1995 1996 1997 1998 1999 2000 2001 2002 2003

Year
Fig. 4. Product export revenues from Chinas IT industries. Source: [13].

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Chinas IT Industry

Computer

Telecommunication

Key Component

PC Manufacture

Software Developments

Equipment Manufacture

Telecommunication Service

On-line Service

1.Monitor 2.CPU 3.Printer 4.CD-R Drive

1.Telecom 2.Postal 3.Banking 4.Financing & Accounting 5.Electric Power 6.Education

Fig. 5. Chinas IT industry structure.

1.Fixed line 2.Mobile 3.Paging

1.News 2.Internet 3.Phone 4.ISP 5.Email 6.E-commerce

5.1. Government policy 5.1.1. India The Indian governments policies regarding IT innovation fall into two distinct stages: 19701990, and after 1991. In June 1970, after recognizing the importance of developing an integrated and self-reliant national electronics industry that would progress rapidly, the Indian Government initiated a separate Department of Electronics. In the 1980s, to make it easier for potential software exporters to get started, the government lowered duties on software imports and simplied import procedures. It also allowed all export-oriented companies to bring in hardware without any duties. During this period, the government acted as the gatekeeper for electronics technology diffusion into the country, laying down a specic locus of growth and deciding which technologies would be imported. However, this controlled approach proved to be a failure [14,15]. It was not until 1991 that the relationship between domestic and foreign IT needs became more dynamic in terms of technology and investment [16,17]. An Industrial Policy Resolution announced by the Indian government in July 1991 mandated that foreign investment and technology collaborations were welcome in order to obtain higher technology, increase exports, and expand the production base. As a result, the customs duty on system software and applications software was made uniform and reduced to 10%. This helped the software industry to grow in recent years. The government also put in place a quality telecommunications infrastructure to improve overall competence throughout the country. In addition, intellectual property rights laws were implemented to improve compliance with and protect intellectual property rights. Most Indian institutions are adjusting quickly to this new international regime that promotes the development of Indian technology in general, including the IT industries. 5.1.2. China Since implementing its open-door policy in 1979, Chinese efforts have led to major improvements in overall institutional performance. The Chinese government has been friendly in its efforts to promote the economy for the past 20 years [18]. It centrally develops a series of science and technology plans, and then uses the plans to allocate resources and assign R&D work to relevant institutes. Additionally, the government has taken initiatives to train the population in the English language. National Science & Technology (S&T) plans, proposed by the State Science and Technology Commission and State Planning Commission, are the fundamental policies for organizing and developing S&T activities in China. Each plan outlines the primary direction of S&T development during a particular period. Those who perform S&T activities fulll their assigned tasks

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and depend on ofcial allocations for necessary resources. Consequently, they neither suffer dramatic losses that might result from failure in innovation activities, nor do they benet fully from success [19,20]. In addition, China adheres to a proactive scal policy and moderate monetary policy aimed at expanding domestic demand to maintain the continuity and stability of Chinas macro economy. More long-term treasury bonds have been issued. The government carefully considers how to effectively utilize the funds, how to adjust the investment structure, how to improve the investment performance, how to increase consumption, and how to make consumption support the national economy. China adheres to a reform and opening-up policy, to solve economic problems, vigorously develop its service trades, and accelerate the growth of its high-tech industries. China is also intensifying institutional reforms and creating a sound environment that encourages talented personnel to display their abilities. Great effort is being spent to develop laborintensive industries and services, and to develop the role of small and medium-size enterprises, individual and private businesses, and other rms in the non-public economic sector. It is believed that all these economic measures will further improve Chinas institutional performance as well as its IT industries in the near future [21]. 5.2. Technical knowledge and human resources development 5.2.1. India In an effort to achieve techno-economic development, India has adopted a two-pronged approach: (1) creating a climate for indigenous development of technology in the country; (2) transferring and adapting technology from other advanced countries. In the past, most industries were under the umbrella of government protection and were primarily concerned with managing production with very little thrust toward innovation. Today, things have changed drastically. The industrial organizations that earlier only managed production now seek innovation and have established in-house R&D units. National laboratories for scientic and industrial research must earn their R&D allowances by commercializing indigenously developed technologies and promoting applied R&D projects, which results in the generation of patents instead of buying industrial R&D. This has also meant additional opportunities for entering into joint ventures for growth [2224]. Human capital is a precious asset for economic and high-tech development. India has an enormous pool of technically qualied people who receive low wages. By 2002, the number of IT professionals in India had reached 520,000. In addition, a large proportion of Indian graduates are procient in English and well-suited to the ITES industry. The broad range of expertise in myriad technologies and platforms gives the Indian software engine awesome power to deal with virtually any kind of IT requirement. This enormous base of skilled manpower is the envy of many countries and a major draw for potential customers. Out of 122,000 engineers trained annually, almost 75,000 new software engineers are ready to join the industry. Others migrate overseas or join end-user organizations. Educational universities, as well as the prestigious Indian Institutes of Technology, are major sources of newly qualied personnel. In addition, thousands of other technical personnel are trained by private-sector institutions. 5.2.2. China China has a low-cost manufacturing base and has acquired manufacturing competencies for some time, especially in hardware manufacturing. Whether it is the indigenous development of technology or the acquisition and adaptation of imported know-how, R&D constitutes an essential component of the innovation system for building technology capability in China. Currently, China needs technological innovation and adaptation at an accelerating pace since globalization has highlighted the need to upgrade its technologies even in the smaller industrial sector. Well-trained and skillful engineers with the will and commitment to development and compete, as well as efcient and effective management, are critical and fundamental success factors for Chinas IT industries. China has given top priority to education and economic development, and has increased its input so as to promote educational reform and development, strengthening primary education, vigorously developing education of higher learning and vocational training, pushing forward quality education and developing a life-long learning education system. According to ofcial statistics [25], the number of college students enrolled in 2001 was 9.4 million, and among every 100,000 people there are 3611 people with at least a college education, an increase of 154% over the 1422 people in 1990. China is combining its human resource restructuring with ongoing industrial restructuring, rural economic development and urbanization, and a Westernized development strategy, according to ofcials. In addition, China has a large and growing number of skilled engineers who received training and some IT work experience in the US and other advanced countries. Since the 1990s, the return of these experienced Chinese personnel has made a major contribution to enhancing the human capital in Chinas high-tech industries. 5.3. Industrial cluster Competitive advantage derives not just from rm-level resources but also from difcult-to-imitate capabilities embedded in network relationships. Firms can leverage their relational resources for knowledge acquisition and exploitation by building relationship-specic assets, knowledge- sharing routines, and effective governance mechanisms into network relationships. Through close social interactions, rms can increase the depth, breadth, and efciency of mutual knowledge exchanges. Furthermore, knowledge is especially important for technology-based rms such as the IT industry; generating and exploiting

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knowledge in high-technology sectors demands that knowledge be continually replenished. This type of network learning can be facilitated by the industrial cluster. 5.3.1. India A large part of Indias success in the software sector is due to the crucial role played by the State of Karnataka in promoting and boosting the IT clusters. Karnataka has emerged as the capital of the computer industry and other high-tech industries, especially software. The government of Karnataka is very positive about the software and services marketplace, and has helped create a critical telecommunication and policy infrastructure that encourages growth in this sector. Bangalore has long been known as Indias answer to Silicon Valley, and it is this city where most large software companies have set up shop and operate out-of state-of-the-art facilities. Bangalore has positioned itself to help market the software industry, which is why it plays host to international conferences, workshops, and exhibitions devoted to the software eld. The city has the highest number of engineering colleges in the world, almost 50% of the worlds SEI CMM Level 5 companies, COPC/ISO recognized Customer Interaction Centers, and over 103 R&D Institutions. Finally, Bangalore was just ranked fourth-best global hub of technological innovation by the United Nations [12]. 5.3.2. China Industrial clusters in China, known as High-Tech Industrial Development Zones (HIDZ), are similar to popular Science Parks in developed countries [19]. The development of such zones was spurred by the successful development of high-tech zones such as Silicon Valley in the US and the Hsinchu Science Park in Taiwan. The business scope of these high-tech zones mainly focuses on electronic and information technology, biology engineering, and advanced manufacturing technology. The rst HIDZ was founded in 1988 in the Haidian district of Beijing, now known as Zhongguancun E-Street. By the end of 2002, there were 120 high-tech zones in China, including 53 national zones covering 29 municipal cities and regions. After nearly two decades of development, the HIDZs now play a major role in the Chinese economy and its related IT industries [20]. 5.4. Research and development 5.4.1. India Prior to liberalizing the Indian economy in 1991, there were few manufacturing centers for global rms, largely because India had poor intellectual property protection policies, and despite its strong pool of highly trained engineers and scientists. However, since India signed the GATT Agreement in 1993, a number of multinational rms (e.g., Microsoft, Oracle, Sun Microsystems, LG Electronics, Sanyo) have set up R&D centers in the IT sector to have ready access to local skilled manpower [15]. In addition, due to the increasing competition, many Indian rms have strengthened their design centers, introduced new technologies, and oriented themselves to market-based systems. The government of India is committed to promoting Indias technology capacity and capabilities and deploys them for ` -vis global national development. National institutions and industries continually review their strategies and policies vis-a competition, especially in view of revisions of intellectual property rights being considered by the World Trade Organization, with science and technology being given high priority. Since the Indian industry has become more aware of the latest developments in high-tech abroad, the government has sponsored R&D projects in new elds with a view to encouraging industry to invest in R&D and to avoid repetitive imports of technology, as well as to gain an edge over some of these technologies if possible. This new strategy for technology management in specic areas could provide long the R&D system in India, creating a technology base as well as achieving peaks of excellence in certain areas [26,27]. 5.4.2. China Manufacturing capability is one of the pillars on which Chinas economic strength rests, so examining the state of its technology provides further insight into the countrys current and future industrial capabilities. The rapid growth of the Chinese economy and the development of supporting technological capability has had a dramatic inuence on manufacturing worldwide, and the IT industry is no exception. For years, research institutes and enterprises were the two major innovators of manufacturing capability in China. Chinas enterprises invested in importing technology more than in developing their own R&D capabilities, mainly because they lacked incentives to enhance their innovation capacity. In 1999, R&D expenditures among research institutes was 43.4% of national R&D spending, while that of enterprises was 41.6% [28]. Although the two ratios are similar, the former has been decreasing while the latter is increasing. Before Chinas reforms, research institutes were the primary performers of R&D. Since reform began and following the principle of enterprises as the principal performers of R&D, Chinas research institutes have been forced to industrialize and undertake major reforms in Chinas innovation system. Universities, the other R&D performer in China, consumed only 10.6% of national R&D spending in 1999. Chinese universities are the primary performers of basic research, representing half of all national basic research expenditures, with over half of the researchers engaged in basic research nationally. Encouraging universities to spin off technology-based enterprises, one important reform policy in Chinas education and innovation systems, is an effective measure for urging universities to interact with industries and to promote technology diffusion [2931].

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5.5. Market information and management skills Networks embedded in social institutions mimic market structures through signaling and information exchange among participants, which can affect the ow of information in fundamental ways, shaping content, access, and credibility of information. 5.5.1. India India is experienced in accessing market information and managing its software industries. Unlike other sectors of the economy, collective action on behalf of the private sector is much stronger. The role of NASSCOM is particularly noteworthy. The primary objective of NASSCOM is to act as a catalyst for the growth of the software-driven IT industry in India. Its other aims include facilitation of trade and business in software and services, encouragement and advancement of research, facilitation of education, and generating employment and growth of the economy in India. Industry associations in India have either been distant from the state or, in the case of key industry associations, have encountered conicting interests between upstream and downstream members. The lobbying, advocacy, and public relations roles of NASSCOM are unique among Indian industry associations. Not only does it represent almost all rms in the sector, both domestic and foreign (850 rms representing more than 95% of the industrys revenues, thus giving the industry a unied voice), but it also manages to work in tandem with the government to jointly promote the sectors interests. 5.5.2. China The lack of managerial experience and few models of IT development are two major weaknesses in Chinas IT industry. Few managers have experience in a market economy and most IT developers are young and inexperienced. There are few role models for either group. As a result, there is a proliferation of small software enterprises that have had no exposure to process management models or systems integration. Thus it is no surprise that Chinese rms have failed to achieve the level of quality or the reputation associated with successful software outsourcing in India. There is little evidence of an ability to organize large-scale, complex software projects involving the development of separate but linked modules by multiple development teams. This may be partly related to low labor costs, but it is more likely due to inadequate management skill and organization. 5.6. Financial resources 5.6.1. India The past and existing policy frameworks of India predictably led to a decline in value added to the hardware industry; indeed, many units eventually were closed down. One reason for this was nancial resources for which the government was using import duties as an instrument. Most countries that have successfully set up a hardware industry on a large scale with high value addition have done so without using import duties. In the past, this was one reason for the progressive decimation of the hardware industry. Higher duty on personal computers, for example, meant that the cost of personal computers was higher in India. This in turn severely impeded the large-scale penetration of PC-based applications in the social and economic spheres of the country. 5.6.2. China According to 2003 statistics [32] and in terms of foreign currency reserves, China is the worlds second-largest holder of foreign currency reserves (US$ 356.5 billion) after Japan (US$555.1 billion). Ongoing nancial resources for investment are critical in the successful development of any countrys IT industry. In addition, due to its huge potential market, China is becoming increasingly attractive to international capital markets and that international capital inow is increasing. Except for Japan, China is the largest absorber of foreign capital among all the Asian nations [6]. Such an abundant capital supply will undoubtedly assist in developing Chinas IT industries, especially in the hardware manufacturing. In addition, in 1992 China liberalized its market access and initiated more favorable policies toward foreign investment, recognizing that it could play an important role in developing technological leadership. These reforms triggered a dramatic inow of foreign investment in all sectors of the economy, particularly from Taiwan and Hong Kong. By the late 1990s China was one of the worlds leading recipients of foreign direct investment, and multinational corporations became the dominant mechanism of technology transfer as well as an important source of new management models and training in the technology sector. 5.7. Domestic and international markets Thanks to their huge populations and undeveloped communications industries, both India and China still have enormous domestic markets for their IT industries. For example, the development of communication in both countries urban, rural, and outlying regions will mean long-term, stable development of their IT industry. Over the last 10 years, the communications market in China has taken off rapidly in all segments including wired and wireless, narrow-band and broadband, and optical

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network with SDH and DWDM. Today, it is the only growth market in the world, and the growth is likely to be sustained for another 20 years or more. The demand for communications equipment and systems will continue to drive the demand for communications integrated circuits and optoelectronics components and technologies. Internationally, Indian and Chinese IT products remain competitive mainly because of their low costs. India still leads the competition in global IT outsourcing and should be carefully considered by organizations selecting offshore vendors. Although more options for external service provision are becoming available worldwide, India remains the market leader with a majority of essential resources and a sufciently robust technology infrastructure. On the other hand, China is a low-cost manufacturing base and has acquired manufacturing competencies, especially in hardware manufacturing. Firms around the world either set up their factories in China or have their IT products manufactured in China. All this will in turn drive innovation in the IT industries for both India and China. 6. Future challenges and directions for India and China Although the innovation model for India and Chinas IT industries is largely developed, it faces some challenges: structural challenges regarding the composition of production and exports, and institutional challenges regarding the institutional framework of the economy. These reect changes in the relationships between elements of the innovations for the Indian and Chinese IT industry. Despite the prominent development of the IT industry in India and China, there are some fundamental structural challenges for these two countries: 6.1. High demand for infrastructure improvements 6.1.1. India To promote its IT competitiveness, India needs to improve its institutional performance. One problem that besets the development of Indias IT industries is bureaucracy. The legal system in India is complicated, and resolution of issues takes a long time. Corruption is also widespread. In addition, while awareness of piracy is slowly spreading, the protection of copyrights has not been well enforced. This may harm the development of IT industries, especially the software industries. Indias brand equity in the global market is poor, although improving. However, the cultural misalignment between India and Western countries still poses problems in large integrated projects. India does not share cordial relations with its neighbor Pakistan. Additionally, political relations with China have yet to be completely normalized. The 1991 liberalization in India induced competition, and entrepreneurial rms have begun to exploit it through an integrated set of technological and organizational responses. The changes observed in the Indian IT industries are just the beginning. Accumulation of technological knowledge and the commercial utilization of innovation have become more widespread, which has resulted in more technology-based new ventures. To continue the technological development and integration with global technology, more liberalization and market reform should be undertaken. 6.1.2. China Chinese professionals are not procient in English. Gaps still exist in skill sets at the higher end due to a low emphasis on higher education before 1999. Growth of the Chinese IT industry will be affected by a limited supply of IT and management professionals. This has already resulted in increased costs and wages. Today, wages of IT professionals in China are 1520% higher than in India. Chinas education system has made slow progress. The education system and methods restrict the nurturing of students innovative capabilities. The Chinese education system is unable to generate an adequate quantity or quality of science and technology personnel. Hu [33] pointed out that major reforms of Chinas education system should be undertaken to foster innovation by focusing on basic education that would achieve fundamental changes in knowledge components and learning orientation. Collaboration with training companies will help increase the domestic training market, while collaboration with IT companies would assist in further penetration of China, Japan, and neighboring markets. It must be said that a lingering fear of China exists in some countries because of its political system. Chinas growth, as well as its military force, provokes fear in surrounding countries such as Japan, Korea, and Taiwandeach of which has more advanced IT technologies. This could lead to further difculties in importing from these countries in order to upgrade Chinese IT industries. The recent passage of the Anti-Secession Law against Taiwan in 2005 raised tensions across the two countries as well as concern from the US, Japan, and Europe. This will have a negative effect on the Chinese economy as well as its IT industries. 6.2. Insufcient R&D investment Although expenditures for science and technology in India and China have increased, they still remain below 1% of GDP, and the ratio of R&D personnel to the total labor force also remains low. This low R&D intensity mainly results from low R&D investment in both the public and private sectors. The public sectors in India and China tend to be the major nancers of R&D,

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but they distribute most of their resources to the science and technology activities that focus on defense and national security. For its part, the private sector has undergone reforms of its role and function, and its R&D capacity remains immature. Consequently, total R&D is low in India and China, and these two countries continue to be mainly engaged in low- and medium-technology industries. According to the Global Competitiveness Report [34], IT industry investment in R&D activities in India and China is insufcient and lower than most other global IT countries. In 2001, total R&D expenditures in India and China as a percentage of gross national income were 0.62% and 0.06%, respectively, while total R&D expenditures of other major IT players in the world were US (2.55%), Japan (2.80%), Korea (2.70%), and Taiwan (2.08%). Clearly, India and China lag far behind these countries. This may be due to the fact that the Indian and Chinese governments have failed to provide sufcient incentives that encourage industry to undertake R&D activities, which in turn has led to a lack of innovative products due to weak R&D. Another issue is the lack of awareness about patents in India and China, which inhibits the integration of these two countries research efforts with the rest of the world. The demand for patent information will increase with time, in order to promote the development of indigenous technologies and to avoid the repetitive import of costly technologies. Bhattacharya [35] analyzed Indian and Chinese patent activities in the US for the period 19962001, and found that of the 621 patents from India, 382 patents were nationally assigned and 239 were non-nationally assigned. Likewise for China: among the 1,086 patents, 452 were nationally assigned patents and the remaining 634 were non-nationally assigned. For both countries, the majority of the patents that were invented but non-nationally assigned were assigned to foreign entities. For example, a majority of Chinese patents were technologies invented in Taiwan and nationally assigned to China. These patents belong to multinationals of Taiwanese origins, such as United Microelectronics Corporation, ACER, Industrial Technology Research Institute, etc. Obviously, R&D capacity in India and China needs to be improved. 6.3. Competition from other countries Due to liberalization and the signing of the GATT Agreement, an era of large-scale subcontracting has emerged in India because of the availability of cheap labor, raw materials, and a large consumer market. However, competition from other locations with equally low costs, such as the Philippines, Malaysia, South Africa, and Eastern European countries, pose a threat to the Indian ITES and IT services industry. Companies in the US have recently considered Eastern Europe as an outsourcing possibility for tasks such as data centers or payroll operations. The UKs use of India is largely driven by historical and cultural links to the country. But some companies may be forced to look elsewhere as skills and resources become scarcer and costs begin to rise. With increasing competition, margins are reduced for Indian IT rms as they try to retain business. In context, the strength and relevance of Indias policy declarations on science, technology, industry, and education will also be tested. There are opportunities for service providers to improve their competitive edge by acquiring resources and companies in Hungary, Poland, the Czech Republic, and Russia more cheaply than in India and for users to buy comparable levels of IT service at a much lower cost. These Eastern European countries are also home to an abundance of well-educated and highly skilled workers who have a better understanding of Western European culture than do their Asian counterparts. Despite its prominent IT industry, China faces competition from Taiwan and other Asia-Pacic countries in the hardware export market. China does not rank highly in process and management skills. A substantial amount of Chinese IT production takes place at foreign-owned establishments or through foreign outsourcing of manufacturing and assembly activities to Chinese companies. A key incentive for foreign manufacturers is low production costs compared to alternative locations; Chinese labor costs are quite low compared to labor costs in advanced industrial nations or developing countries that compete with China (although Chinas cost advantage shrinks substantially when productivity differences and non-labor costs are taken into account). In the 1980s, most investments by Taiwan in mainland China were smaller companies involved in labor-intensive industries. In the past few years, however, large corporations have been investing actively in the mainland, particularly in machinery, electronics, chemicals, and other technology- and capital-intensive industries. It is estimated that about 43% of Taiwans approved investment in the mainland is related to electronic and electrical products. The investments are also increasingly geared toward vertical integration, mainly upstream industries. With WTO accession and the three links (i.e. transportation, postal and trade links across the Strait) technology and capital investment as well as upstream movement are expected to continue, especially from large corporations. The rapid development of Chinas IT sector is likely to encourage Taiwan producers of information electronics to increase their investment across the Strait in order to tap into the market. In recent years, most investments from Taiwan have been in the electronics or IT-related industries. All these Taiwanese investors are likely to compete with Chinese companies. For example, Shanghai-based Semiconductor Manufacturing International (SMIC) has a new foundry that produces chips for companies looking to outsource their manufacturing. It is headed by Richard Chang, a Texas Instruments veteran who oversaw the Taiwanese foundry World Semiconductor Manufacturing before it was acquired by Taiwan Semiconductor Manufacturing Company (TSMC). But before Chinese companies can become global players, they will need to deal with the competition from Taiwan and upgrade out-of-date facilities. That is not the only challenge facing Chinas chipmakers. SMIC may have a hard time acquiring world-class customers from Taiwan; especially now that Taipei has allowed its chip manufacturers to invest in China.

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7. Implications and forecast This analysis suggests that both India and China are moving rapidly toward developing prominent IT industries by carrying out complex innovations. The analytical results support the idea that a national system of innovation can be used to enhance the competitive position of technology-based rms. In addition, traditional routes to innovation and economic development can offer some guidance in the rapidly changing, contemporary, techno-economic world. This study implies that such an innovation model may be applied to similar countries (with huge populations and with a less developed infrastructure), such as Brazil, Indonesia, or a few African countries, to help them innovate and develop their economies and industries. 7.1. India As for forecasts, it seems clear that Indias software and services industry will continue to drive the countrys IT sector. Indias success in the software arena can be attributed to the software industrys knowledge and expertise in cutting-edge technologies and its large base of skilled manpower. Both these strengths are likely to contribute to the industrys future growth. Indias prowess in emerging technologies will also help the software and services industry acquire new customers, despite a debilitating US economic slowdown. There is only one way the Indian software industry is headed and that is up. The coming years will conrm this trend. The offshore outsourcing market, still in a nascent stage, is expected to witness substantial growth over the next few years. It is expected that Indian software and services companies will adopt a global delivery model based on four components: onshore (same country as client), on-site (at the client site), nearshore (country near to client country) and offshore (based in India). 7.2. China China will soon be the worlds largest Internet and mobile phone market because the Chinese market is so enormous, giving it the potential to determine global standards for both technology and content. China will be a leader in developing new devices for Internet access, bypassing the computer-dominant model of the US. There are 10 million computers in Chinese households, but 350 million televisions. A combination of set-top boxes and new wireless devices centered on Internet access will spur growth in the number of Chinese people with access to the Internet. The analysis in this study suggests that Indian and Chinese rms, focusing on software and hardware, respectively, can join to provide state-of-the-art solutions at cost-effective prices, thereby cutting out the middlemen. They could even consider a joint institutional mechanism between the two governments that could determine whether modalities for this could be established. If economic cooperation between India and China is to break out of the present traditional mold, then knowledge-based technologies need to occupy a far more prominent position in their economic relations. If countries like India and China will concentrate on specic areas of their technological advantage, they can benet far more than by competing across the spectrum. In combination, rather than competition, Indian and Chinese IT industries can be a potent force. This is a principle that has far wider application in mutual cooperation. 8. Conclusions For the past two decades, the prominent development of the IT industries in India and China has led to a new denition of IC: India and China instead of Integrated Circuits. The IT industries in India and China have become the focal point for industrial technology development in these two countries, and process technologies are undergoing rapid growth. The present status of competitiveness between India and China is based mainly on the effectiveness of technical knowledge and human resource development, industrial clusters, market information and management skills, R&D, nancial resources, domestic and international markets, and the interaction of these factors and the government. However, a shortage of welldeveloped infrastructure, insufcient R&D, and competition from other countries may be challenges for the further development of the IT industries in these two countries. References
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Shia-Wan Hung is an Assistant Professor at the Department of Business Administration of National Central University, Taiwan. She received her Ph.D. from the Institute of Business and Management of National Chiao Tung University, Taiwan. She earned her M.S. from the University of Wisconsin-Madison in USA and her B.S. from National Chengchi University of Taiwan. Her research focuses on technology management, strategic management, and knowledge management. Dr. Hung has had articles published in Technology in Society, Asian Survey, Total Quality Management & Business Excellence, and other journals.