Technological Efforts & Internationalization of IT Firms in India

Developing Country Perspective Recently, World Trade Report noted that, in the year 2005, world merchandise export was around $10121 billion and world commercial services export was around $2415 billion (WTO 2006). In the same year, the value of India's merchandise and commercial services exports stood at $90 billion and $68 billion respectively. In the year 2005, approximately 17 percent of the world foreign direct investment (FDI) came from developing countries (UNCTAD 2006). In the case of India, the outward FDI stock as a percentage of Gross Domestic Product (GDP) increased from 0.4 percent in 2000 to 1.2 in 2005. From the point of view of developed countries, there are numerous theories and empirical studies on international trade, and existence and growth of Multinational Companies (MNCs), (e.g. Posner 1961, Hufbauer 1966, Vernon 1966, Krugman 1979, Lall 1980, Pavitt & Soete 1980, Buckley & Casson 1985, Fagerberg 1988, Grossman & Helpman 1991, Balestra & Negassi 1992, Dunning 1993, Wakelin 1998, Co 2001). From the developing country perspective, the literature on internationalization is dominated by studies on export competitiveness of the developing country firms (e.g. Kumar & Siddharthan 1994, Siddharthan & Nollen 2004, Narayanan 2006, 2007) and effect of inward Foreign Direct Investments (FDI) on these economies (Kumar 1994, Siddharthan & Rajan 2002). The Information Technology (IT) sector of India, in particular, has been growing at an annual average growth rate of more than 25 percent over the past few years (Statistical Year Book 200506). The IT sector exports a substantial portion of its turnover. Lately, many of the firms in this sector have been observed to be choosing the FDI mode of internationalization. The present study attempts to understand the determinants of internationalisation of IT firms in India, captured in terms of exports and overseas investments. It is proposed that inter-firm differences in ownership specific advantages (O) in the home country would lead to differential international competitiveness of the firms. Specifically, we examine how O-advantages generated through differential technological efforts affect exports and overseas investments. The technological efforts are in the form of in-house Research and Development (R&D), embodied technology through import of capital goods and raw materials and spares, and import of disembodied technology against royalty and technical fee payments. An unbalanced sample drawn from the IT industry in India is empirically analyzed using maximum likelihood based Tobit estimation technique. Overview of India's IT Sector IT production and exports have been showing increasing trend over the past few years (Narayanan & Bhat 2009). During the year 2005-06, IT production in India was estimated at US$ 42.34 billion, approximately 6 percent of India's Gross Domestic Product (GDP) and 2 percent of world IT production (Statistical Year Book 2005-06). Software and services accounted for around 67 percent of this production and the rest were from the electronics hardware sub-sector. Over the years, the gap between the production of software/ services and electronics hardware subsector is also increasing (Ibid). In the year 2005-06, approximately US$ 25.89 billion (61 percent) of Indian IT products and services were exported. Today, Indian IT firms have entered both offshore and on-site businesses. However, most of the IT products and services still consist of routine support, maintenance, coding, and semi-developed package production projects (Heeks 1998, Radhakrishnan 2006). Of late, many of the IT firms have been seen investing on offices, development centres, subsidiaries, and joint ventures overseas. These investments have been mainly in the developed countries such as the USA and UK (Pradhan 2007), which are also the major destinations of IT exports. It is believed that the IT multinational companies (MNCs) from India are using market seeking and efficiency seeking FDI to come closer to their prospective clients in these countries (UNCTAD 2006, Henley 2006-7). …