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Issues in Financing of New Economy Firms in India

Fachbuch 2012 102 Seiten

VWL - Finanzwissenschaft


Table of contents




1 Introduction
1.2 Rational behind the Study
1.3 Objectives of the Study
1.4 Hypotheses
1.5 Study period and Data Sources
1.6 Methodology
1.7 Organization of the study

2 Literature Review
2.1 Introduction
2.2 Studies on development of software firms across the world and India.
2.3 Literature on Financing of Firms and Determinants of Capital Structure
2.4 Conclusions

3 An Analytical Review of Indian Software Industry
3.1 Introduction
3.2 Nature of New Economy Firms
3.3 Origin and Development of Indian Software Industry
3.4 Policies of Government for Promoting Software Industry
3.5 Role of Industry Organization NASSCOM
3.6 Distribution of Domestic IT Market
3.7 Overview of the Talent Pool Available In India
3.8 Conclusions

4 An Empirical Study of the Drivers of Software Industry Growth in India
4.1 Introduction
4.2 Drivers of Software Industry
4.3 Data Used for Analysis
4.4 Methodology and Model Used
4.5 Results and Discussion
4.6 Conclusions

5 Empirical Analysis of Growth of Software Industry during the Reforms Period
5.1 Introduction
5.2 Share of Software Services into Total Exports from India and Proportion of GDP
5.2.1 World of Software into Total Software Export
5.2.2 World Market for Computer Software and Services Export
5.2.3 Exporter Computer Services (Top 10 Firms)
5.3 Activity Wise Distribution of ITES/BPO Services
5.4 Trends in Software Growth of Software Industry in India
5.4.1 Indian Software Industry Growth Before and after Liberalization
5.4.2 Result Analysis and Discussions
5.4.3Testing Parameter Stability: Chow Test
5.5 Structural Changes in the Software Earning Regression
5.5.1 Unit Root Test
5.5.2 Phillip Perron Unit Root Test
5.5.3 Cointegration
5.5.4 Model Stability and Interpretation of the Results
5.6 Conclusions

6 Investigation of Employment and Export Earning Relationship in India
6.1 Introduction
6.2 Growth of IT-BPO Sector in India
6.2.1 Trends In IT-BPO Revenue and Employment
6.2.2 Indian Software Exports by Destination
6.3 Literature Review
6.4 Methodology and Data Analyisis
6.5 Conclusions

7 Trends and Issues in Financing of Software Firms in India
7.1 Introduction
7.2 Objectives, Data and Methodology
7.3 Background of the Study
7.3.1 International Studies
7.3.2 Domestic Studies
7.4 Trends in Financing of the Indian Software Firms
7.5 Financial Position of Indian Software Firms
7.5.1 Mean Comparison Test
7.6 Conclusions

8 Conclusions and Policy Suggestions
8.1 Introduction
8.2 Major Findings of the Study
8.2.1 An Analytical Review of Indian Software Industry
8.2.2 Role of Drivers of Software Industry
8.2.3 Empirical Testing of Impact of New Economic Reforms
8.2.4 Empirical Relationship Between Export and Employment in Software Industry
8.2.5 Issues in Financing of Software Firms
8.3 Policy Implications of the Study
8.4 Limitations of the Study
8.5 Scope for Further Study

List of Figure and Tables

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List of Abbreviations

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Indian software industry is of recent origin. It has been growing since signing of international treaty in1994 by Indian government. Since then, India has been emerging as one of the major giant in the field of Information Technology Enabled Services (ITES) and Business Process Outsourcing (BPO). According to National Association of Software and Services Companies (NASSCOM), IT Business Process Outsourcing (BPO) sector has been contributing 7.5 per cent of India’s GDP, 25 per cent of India’s total export and 10 per cent of total service sector revenue in 2010-11. IT services is the fastest growing segment among the others, it has been growing by 22.7 per cent, and generating export revenue (including hardware) of $69 billion. The share of software service exports from India was recorded around 58 per cent of the total global software service exports in 2011-12.

This study is conducted to explore the contribution of Indian software firms in the development of Indian economy since its inception along with it emergence as one of the new industry on the map of Indian corporate and the world. We identify the challenges faced by these industries in general and issues in financing of these firms particular. For this task, we organize the present study into eight chapters.

This study explores the drivers of Indian software industry growth, for that we run linear regression. We empirically test the impact of new economic reforms on the Indian software industry. Using the various econometric techniques, before and after the introduction of economic reforms period growth rate is compared to know whether there is any change in the growth story of the Indian software firms during the reforms period. Present study reviews the employment growth in Indian IT-BPO firms and also tests empirical relationship between export revenue of IT-BPO firms and employment growth in software industry. Main focus of the study is to find out the issues in financing of the new economy firms in India. In the broad perspective, this study is pursued for finding out which sources of finance are being tapped by these firms for financing themselves.

In order to test hypotheses relating to drivers of software industry growth in India, regression I and II have been run and results appeared thereof shows that the coefficient values of the variables, money supply (M3GDP), domestic capital formation ( DCGDP), opening of economy (OPGDP) and stock foreign exchange (FRGDP) are significant at 10%, 1% and 5% level of significance. It means that these four factors must have helped in pushing up the growth of the software industry.

We do not reject the null hypothesis of parameter stability (i.e., no structural change) if the computed value in an application does not exceed the critical F value obtained from the F table at chosen level of significance. Therefore, Chow Test prove that there is no structural change in the total value of export earning earned and software export earnings despite the new economic programme is implemented in India. To overcome the limitations of Chow Test, dummy variable regression is suggested as an appropriate alternative because it carries certain advantages. It tells difference arises in the regression of two periods is due to the intercept terms or the slope of coefficient. Results of dummy variable regression show that there is a change in the two time periods but that change is not statistically significant. Hence, the economic reforms have not made any strong impact on the earning potential of the software industry in India.

The relationship between employment in IT-BPO sector and export revenue earned by this sector are positive and significant showing that if there is one per cent increase in export revenue; employment may increase by 0.67 percent. The high value of elasticity depicts that this sector has been passing though the good state of condition and high value of elasticity of employment is sensitive to export earnings of software firms. These results are found similar to the studies conducted earlier by Padalino and Vivarelli (1997) who found that employment elasticity for US and Canada as 0.50 per cent as well as Boltho and Glyn (1995) found employment elasticity with respect to output as 0.50 to 0.60 per cent for the set of OCED countries.

Issues in financing of new economy firms or Indian software firms are new kind of study to our knowledge. We try to investigate the financing behaviour of these firms for the period 1996-97 to 2008-09 covering firm level data. We observed that bank finance remained a prominent source for these firms followed by debenture, finance from foreign institutions, and Indian financial institutions. Most important observation is that the leverage ratios of these firms declined over the period. This is because of the constraints faced by these firms while raising the funds. As these firms became financial strong by earning more profit then same profit is being utilized for financing themselves hence the reliance on external finance declined.

It has been observed that this industry is at saturation point in the cities like Bangalore, Hyderabad, Mumbai, and Pune due to infrastructural bottlenecks. Infrastructural bottlenecks relating to rapid mass transport in urban and semi- urban areas, metro service, law and order, mass but affordable housing, health centers, recreation centers, banking and finance institutions, training centers, stress reliving and rehabilitation centers are necessary for continuous growth of software industry in India. These bottlenecks can be removed with better coordination between centre and state governments with an apex body NAACOM. By accepting a policy of public- private partnership, urban infrastructure can be built in the cities where potential of growing this industry is possible. There is need to bring drastic change in urban planning in India.

Government should allow software firms to enter into engineering and management education at higher level for catering need of ready human resources and increasing employability of fresh engineering and management graduates. As NASSCOM reports mention that Global technology related spending is expected to grow by 5 per cent in 2012. However, India accounts for less than 5 per cent of global technology spending is not enough to keep the Indian software industry competitive hence the Indian software industry should spend more on R and D for harnessing untapped potential for growth of Indian IT-BPO sector, in both core as well as emerging opportunities.

We observed that bank finance is preferred as prominent source of finance by these firms followed by finance from debentures, finance from foreign institutions, and to some extent from Indian financial institutions. In such circumstances, during a start-up stage of the firm support from government sponsored venture capital funds and technology funds is required along with vibrant ,diverse, and liquid equity market should be promoted in the county. We find that these firms could not raise substantial finance from the various sources such as Indian financial firms, debentures and public deposits. In order to collect the funds from these sources capital market reforms are inevitable for making Indian capital market more liquid and diverse.

Keywords : New Economy Firms, India, Software Industry, Dummy Variable Regression, Chow Test, Employment, Economic Reforms, Financing.

Chapter 1 Introduction

1.1 Background

Middle class people can do a business with modest capital although they have no legacy of business. Majority of Indian software firms were started by first generation entrepreneurs. Later on some of the firms did wonders in their adventure and acclaimed name and fame across the world. Presently, Indian IT sector has become a trusted brand in the world. To gain this status, Indian software industry has gone through a stage of start-up stage to maturity in the last 25 years. Since 1994, India has been emerging as a major giant in the field of Information Technology Enabled Services (ITES)/ Business Process Outsourcing (BPO). According to National Association of Software and Services Companies (NASSCOM), IT Business Process Outsourcing (BPO) sector contributed 7.5 per cent of India’s GDP, 25 per cent of India’s total exports and 10 per cent of total service sector revenue in 2010-11. IT services was the fastest growing segment among the others, growing by 22.7 per cent, and generating export revenue (including hardware) of $69 billion. The share of software service exports from India remained around 58 percent of the total global software service exports.

IT sector has given take off to the India’s service sector (Gordon and Gupta, 2004). This industry has generated employment of 230,000 jobs in 2012, thus it provides direct employment to about 2.8 million, and indirectly it has given employment to 8.9 million people in India. Indian Domestic Hardware market crossed Rs 615 billion in 2012. It is driven by increasing market for notebooks, net-books, tablet computers, mobility devices, improved connectivity tools, etc.

Domestic customer base in India comprises of the government, large, micro, small and medium enterprises. Household sector consumers represent unique set of requirements. Accordingly, Suppliers and manufacturers are realigning themselves to suit India specific needs and innovating new ways to target Indian customers. Direct employment within the domestic IT-BPO sector has been growing above 7 per cent in 2011 and crossed 600,000 employees. This industry has been offering job opportunities in Tier I, Tier II and also expanding in Tier III cities in the recent period with direct and indirect job opportunities. These IT hubs are expanding at a rapid speed. The Indian IT-BPO industry has proved to be a premier source of mass employment across the country.

This chapter begins by a background of the present study. Section 1.2 explains the rationale behind the study. Section 1.3 gives a list of objectives of the study. Section 1.4 states the hypotheses of the report. Section 1.5 is on the study period and data sources. Section 1.6 explains the methodology used for preparing this report. Section 1.7 is on organization of the present study.

1.2 Rationale behind the Study

IT sector has a potential to develop the economy in the long term. Learning from the development experience of American economy where IT sector brought resurgence since 1995. Indian IT service sector has given a push to GDP growth after signing international treaty in 1994. Before that, Indian software firms were in infancy stage. As on toady, it is one of the major industries in India. The share of software service exports from India is around 58 percent of the total global software service exports (Nasscom Report, 2011-12).

With this remarkable achievement, some vital questions were unanswered relating the impact of new economy reforms on the growth prospectus of software firms, what was the role of socio-economic overheads in pushing further the growth of software industry in India? is there any relationship between software export and employment growth in the software sector? How software firms grow and raise finance from the different sources and have they faced constraints while raising finance?

Therefore, this study is conducted to explore the contribution of Indian software firms in the development of Indian economy since its inception along with it emergence as one of the new economy industry on the map of Indian corporate and the world. We try to identify the challenges faced by these industries in general and issues in financing of these firms in particular.

1.3 Objectives of the Study

Considering the contribution and role that played by the software industry in India’s economic growth; study of this sector is a matter of academic pursuit and research. A layman wants to know the recent development in Indian software industry along with impact of economic reforms on growth journey of software firms. These are few rational questions hence we pursue the following objectives in the present study:

1 . To understand the origin and overall development of Indian software industry.
2. To take review of policies of government for promoting software industry.
3. To evaluate the role played by industry organization NASSCOM.
4. To examine the role of various drivers of Indian software industry.
5. To verify the impact of new economic regime and also the contribution of stable government in enchasing the growth of Indian software industry.
6. Empirically test the impact of new economic reforms on the growth of Indian software industry.
7. To establish empirical relationship between export revenue of IT-BPO firms and employment in software industry.
8. To examine the trends in financing of the Indian software firms.
9. To suggest measures for overcoming the constraints faced by these firms while procuring funds.
10. To recommend policy for continuous development of Indian software firms.

1.4 Hypotheses of the study

Present study is theoretical in nature but tries to prove the hypotheses that we crafted after reviewing related literature. We explore the impact of new economic reforms on the growth of the Indian software industry represented by export earnings. In order to have a continuous growth and development of the industry, how infrastructural inputs overhead are essential is examined in the present study. It also tries to establish the link between the export earning of the software industry and employment potential in the software sector. It searches constraints being face by these firms while raising finance from the various sources in India. In the start-up stage these firms faced constraints on account of non-availability of collateral assets. The following hypotheses are tested using appropriate econometric and statistical techniques in the present study:

1. Total value of software sales and software export earnings increased during the economic reforms period.
2. No structural change in the software industry development during the period of study.
3. The growth of Indian software depends upon economic and non-economic factors.
4. Employment in software industry in India increases as software export earnings increases.
5. Leverage of the Indian software firms declined over the period of the study.

1.5 Study Periods, Data Sources

Present study is based on secondary data collected from the data sources. We use data for the period 1984-85 to 2010-11 for which latest data was available at data sources. Data on Software Export earnings is collected from Report of NASSCOM, Electronics and Information Technology, Annual Report 2011-12, Ministry of Communication and Information Technology, New Delhi. Data on Gross Domestic Product, Foreign Exchange Reserve, Gross Domestic Capital Formation, M3 (Liquid Money), Government Spending on Research and Development are compiled from the latest Hand Book of Statistics on the Indian Economy of the Reserve Bank of India.

We examine the relationship between IT-BPO revenue percentage of GDP and employment in IT industry India for that study begins from 1994-95 and ends by 2011-12. Study begins from 1994-95 because the real impact of new economic reforms were seen from this year even though the economic reforms were introduced since 1991.

Firm level balance sheet data which 1996-97 to 2008-09 extracted from the corporate data base of the Center for Monitoring Indian Economy (CMIE) and Reserve Bank of India (RBI), Reports of NASSCOM, Hand Book of Statistics on Indian Economy RBI (2012), Electronics and Computer Software Export Promotion Council (ESC), Statistical Year Book 2010-11 have been used for several kinds of data and information. However, we have not used the survey based data on choosing particular sources of finance or all the sources together, reasons thereof by the software firms, and also knowing the problems and challenges faced by these firms. Due to non-availability of data at firm level for long time, we could not use panel data methodology for studying financing pattern of the software firms.

1.6 Methodology

We review the origin and overall development of the Indian software industry using review method. Today the Indian software industry has been acclaimed as one the efficient, cost effective and quality rendering service the world. In the previous studies on the determinants of particular sector or a whole economy, Cobb Douglas production function was used covering the requisite factor or infrastructure constituents as inputs. Holtaz and Ekin (1992), Muneel (1990), Ghosh and De (2004), Ghosh and Bagchi (2002), and Tupe (2011) used Panel data, Logit regression or ordinary least square regression method. In the present study, we use ordinary least square regression method (OLS) for finding out possible determinants of Indian software industry.

To account the growth of Indian software industry during the economic reforms and to seek the answer of the research question such as whether during the economic reforms period software industry has done well or not? For that, we use different econometric techniques or methods. Among them, the Log linear model, F test techniques and dummy variable regression model have been used.

Employment intensity in Indian IT-BPO industry is estimated using the linear regression technique. We use employment growth as dependant variable and IT-BPO revenue as percentage of GDP as independents or exogenous variable in the present model. Present study explores the employment GDP relationship from demand and Supply side.

In line with earlier studies in corporate finance on the financing pattern, we use firm level balance sheet data extracted for the period 1996-97 to 2008-09 from the corporate data base of the Center for Monitoring Indian Economy (CMIE) and Reserve Bank of India (RBI). Firm level data is aggregated to understand the funds procurement process under the different heads. Various kinds of means of finance were used for collecting finance by the software firms.

1.7 Organization of the Study

The first chapter presents the rationale behind the study, objectives, hypotheses, and methodology used in the research report. The Second chapter reviews related literature. This endeavor has given us new dimensions of the subject under study and also gave deep insight into the subject matter. The third chapter traces the origin and overall development of Indian software industry. The chapter four examines the drivers of Indian software industry. In the chapter fifth, we empirically test the impact of new economic reforms on the Indian software industry using econometric techniques.

The core objective of the chapter sixth is to review the potential of employment in IT-BPO firms along with it establishes empirical relationship between export revenue of IT-BPO firms and employment in software industry. The chapter seventh searches the issues being faced by the new economy firms while financing them in India. In the broad perspective, this study is pursued for finding out which sources are being tapped by these firms for financing them and are they facing constraints while procuring finance from the various sources, and how their financing pattern went under change. All these questions are answered in the chapter seventh. The chapter eight concludes the report with suggestions. This chapter begins by introduction. Section 8.2 deals with major findings of the study. Section 8.3 gives policy implications of the study. Section 8.4 in on the limitations of the study, and section 8.4 suggests the scope for further research.

Chapter 2 Literature Review

2.1 Introduction

Information And Communication Technology (ICT) industry has been playing a giant role in transforming the economic structure of India. Today it has occupied prominent place in the total exports made from India and raised the attention of other economies in this regard that India is one of the leading trading countries in the IT services export. IT industry has transformed the business structure and way of servicing to the customers and citizen of the country. ICT revolution made decision making process fast. It enables organization to cover unreached geographical areas and segment of business. New paradigm of IT innovation increased knowledge level of the entire County. ICT enhances efficiency of the firms and also improved the governance of the economy.

In the context of the subject of the present research, it is necessary to take a review of related literature. This endeavor may explore the new dimensions of the subject under study and also it may give deep insight into the subject matter. This chapter begins by introduction and section 2.2 deals with studies on development of software firms across the world and India. Section 2.3 reviews the literature on financing of firms and determination of capital structure. Section 2.4 concludes the chapter.

2.2 Developments of Software Firms across the World and in India

Patibandlal and Peterson (2002) examine the role of Transnational Corporations (TNC) in developing externalities in India; they observed that TNC pushed further firm level development and market dynamics. Their study can be concluded as TNC gave positive contribution in developing present software industry and related institutions in India. Hogan and Hutsna (2005) use a sample of 117 Irish Software companies for examining capital structure and financing issues. They conclude that internal funds are the most important source of funding for the software firms further; they also find that use of external debt is a rare phenomenon. However, the large Irish IT firms prefer equity finance as an external source. Further, they observe that banking industry does not advance funds to these firms due to information asymmetries.

Ilavarasan and Shrtmen (2003) observe whether software work is routine or not be taking case of some selective software firms in India. They find that none of the hypotheses out of six have been rejected that support the case of routine nature of software development by rejecting conclusion drawn by Taylor. Mehra and Dhawan (2003) study the process of organizational learning of software firms in India. Their study conclude that organizational health, opportunities to learn, flexibility, risk taking, innovativeness and interaction are the important factors for making environment conducive for the growth of firms as well as organizational learning.

Bandopadhyay and Das (2005) examine the linkage between firms financing decision and real market performance using panel data of Indian corporate firms for the period 1989-2000. They conclude that real market activities like advertisement, marketing, distribution, research and development, ISO third party quality certifications significantly affect firm’s performance. Further, they find that lending by Development Finance Institutions (DFI) help in boosting sales and growth of the firms significantly in the long run. Banerjee (2003) measures seven Indian Software firm’s competencies in terms of use of both simple and second order resources. Further he concludes that core competency of the firm does not depend upon resources. Software firms under study have high capability to switch combinations of higher order of resources.

Dossan and Kenney (2007) review the growth and development of software firms in India since 1980.They find that India has its own dynamic and work done in this regard, which can further attract off shore work. They also advocate that to reap the advantages to globalization, Indian people should learn and upgrade their skills. Service sector in India is rich in opportunities. Hence people having engineering background should take advantage of it by investing in software firms.

Tang and Jang (2007) examine the determinants of capital structure of lodging and software firms using the generalized least square analysis. They conclude that fixed assets and growth opportunities variables have significant influence on debt-equity structure in the case of lodging firms. However, in the case software firms all variables showed significant relationships with debt equity ratio, which suggests that the variables used in the study were rightly representing the determinants of capital structure.

ICT firms may play vital role in the process of rural development in the developing countries. These firms may bring down the transaction cost and give accesses to rural people of knowing about market structure, price level, weather condition, modern technology applications in agriculture and most important advantage of ICT is that documents of property record can be downloaded at minimum cost. This move can replace corruption in the governance. The goal of responsible and committed government may come into reality by adopting ICT at various level of administration. As pointed out by (Kelles and Viitanen, 2005) that ICT offers instruments but no solution. To achieve goal of rural development, government should emphasis on infrastructure availability and its intensive use. Besides that, government should promote use of ICT in the administration, which may create employment opportunities, narrowing down the economic inequality and most importantly eradication of poverty.

The role of South African government in promoting ICT is analyzed by (Chigona, Mjali and Denzl, 2005). They conclude that there is no conclusive evidence on government initiatives for using information and technology for the development of a country. Further, they observed that government is influenced by globalization forces and hence has adopted the various forces of globalization. (Moitra, 2001) observes that five factors contributed for the growth of software industry in India namely quality and talented manpower, world- class quality and high process maturity, competitive cost s structure, rapid delivery capability, and English speaking pool. Therefore it grows annually by 50%. It becomes driver of economic development and major foreign exchange earner.

Arora et al, (2001) find that Indian software industry is maturing and growing with their capability and not only that it acquired the ability to execute big and complex projects. A large number of software firms in India have come up as start-ups, showing that the supply of entrepreneurial talent appears to be forthcoming when the opportunity arises, even in new and technology intensive sectors. Most of the Indian software industry is of flat kind of organization managed by relatively young, talented, dynamic and laborious technocrats. This industry has set the example of stock options for employee and spread the equity culture among the investors. The stocks of software industry on the leading stock exchanges are rocking and it has increased market capitalization by many folds. However, obtaining finance for software development for this industry is a big challenge and most of the software firms rely on parent company for financing their plan of product development. These firms rely on banking and financial institutions for regular financing.

ICT brought fundamental changes in the economy and not only that it made permanent improvement that to achieve economic growth in the US economy (Greenspan, 2000). The same kind of observation is drawn by (Jorgenson, 2001) by saying that ICT push further the development of US economy. According to (Singh, 2004) present share of Indian IT sector the world IT market is extremely low as 2%. This can be treated as an opportunity for Indian IT sector for its future development because Indian software industry has various comparative advantages over world IT industry.

Bhtanagar Subash (2006) pointed out some weaknesses of the Indian software industry such as slow development of domestic market, lack of product and process innovation in the small and medium sized firms. The infrastructure bottlenecks are persisting in road, electricity, venture capital, airlines and quality education facility etc. Further he elaborated that India’s current competiveness in IT sector over the other countries will remain continue in near future.

Illiayan Ashraf (2005 ) gave some vital suggestion for the further development of Indian software industry such as effective Govt. policy, managerial attitudes and cyber-savvy leaders to encourage investment in software industry, support to minimize risk in software development and export, proactive policy for long term investment. Current and advanced curricula must be introduced in the university and management education to cater the demands of the emerging technologies and changing needs of the industry. Industry-Academia collaboration has to be strengthened for research in products.

Mathur (2006) concluded that growth of Indian IT industry is hampered by supply as well as demand side factors. Supply side constrains are largely of infrastructure facility consist of telecom, power, manpower, transport, personal computer penetration, internet, use of local language on keyboard and speed of internet and bandwidth. From demand side, demand for softwares and accessories are greatly influenced by price structure and quality; which is also determined by monetary and fiscal policies. Easy finance at affordable interest rate is the stumbling block in the either expansion or start-up process of the IT firms.

2.3 Review of Literature on Financing of Firms and Determinants of Capital Structure

There is huge theoretical literature on corporate financing in general however an appropriate capital structure for a firm remained unsolved. Several empirical studies tries to tell an appropriate capital structure for the firms considering nature of the product it manufactures and sector from which that firms works. Pioneering work of Modigliani and Miller (1958) and earlier several studies cited that capital market imperfection, information asymmetries, moral hazard and adverse selection may affect the price of both equity and debt finance provided to the firms are discussed in the studies conducted by Jensen and Mecking (1976), Leland and Pyle (1977), Stiglitz and Weiss (1981) and Myers and Majluf (1984).

Volume of Cash flow and its sensitivity works as constraint on capital structure decision of firm (Fazzari et al. 1988). Present literature on capital structure disputes the validity of the static trade-off theory by stressing upon an optimal capital structure advocated by (Harris and Raviv, 1991) versus both the pecking order hypothesis forwarded by (Myers, 1984; Shyam-Sunder and Myers, 1999) and the more recent market timing view (Baker and Wurgler, 2002). Last two theories do not advocate the target capital structure to be achieved at a specific point of time.

New economy firms are of recent origin and are based on sophisticated technology. Though there is always a backup of R and D and their survival and growth is linked to several factors such as government policy, technically strong man power and penetration of product use and literacy thereof, competition from existing firm and continuous changes. Hence these firms may find it difficult to raise finds from capital market. The rule of maker imperfection applies to these firms. External financing is not possible to this kind of firms due to information asymmetries and possibilities of default. In view of the difficulties finance providers face in assessing the new technology and R&D involved and the prospective demand for the end-product (Moore and Garnsey (1992), Matthews (1994) and Storey and Tether (1996).

In the literature on financing to new economy firms reached to conflicting conclusion that these kind of firms face lot of hardship in garnering finance form market as well as banks comparing with old firms (Bank of England 2001). Hence most of the firms prefer internal finance. Several studies do agree on at least one point that debt finance is not suitable for the early-stage financing of innovative high-tech firms. The information asymmetries and moral hazard present at the start-up stage have a particularly marked impact on banks and other debt providers because of the lack of collateral and market presence which characterize most New Economy Firms at start-ups.

Kaplan and Stromberg (2000) studied 200 venture capital investments in 118 US firms by 14 venture capital firms over the period 1987-99. They find that convertible preferred stock was widely used as financing option in 189 rounds out of 200 firms. Brierley and Kearns (2001) find that new economy firms in UK have lower capital gearing and debt-equity ratios than old economy firms.

Studies made by Mason and Harrison (1998) attribute the source of the information asymmetry underlying debt finance of small new economy firms start-ups to the difficulties being faced by banks in assessing technical projects and ultimately distinguishing between good and bad lending propositions. Risk aversion may then lead to banks incorrectly to reject projects with good prospects.

Philpott (1994) emphasizes the inability of innovative businesses while procuring early-stage finance for relieving moral hazard by meeting banks’ requirements for collateral. Bruinshoofd and Haan (2005) observed sample ICT firms from North-American and Western European firms during 1991-2002. They find that generally ICT firms hold more cash than that non ICT firms due to their special character and their financial behaviour is not much different from the non- ICT firms. Venture capital financing is not an answer to the problems faced by innovation firms (Hall 2002). Lino Sau (2007) advocated that Pecking order hypothesis comes in first preference when innovative firms financing decision is being taken.

ICT firms are young firms, often work on a small scale, using mainly immaterial or firm-specific assets in the early stage of their development (use seed capital and start-up capital) are unable to generate sufficient financial flows to service the debt they had taken earlier and may raise in future. All features together and with an average degree of information asymmetry, give a natural choice of either equity finance or debt finance as traditional sources of financing for the firms.

2.4 Conclusions

We reviewed the development of software firms’ right from the start-up stage till the fully mature firms across the globe. In this, we could understand the role of government in promoting new economy firms. We conclude that future development of Indian software industry will depend upon the managerial attitudes, cyber-savvy technocrats, and leaders having competence in knowledge management. To encourage investment in software industry, support for minimizing risk in software development and its export is essential, proactive policy for long term investment is vital for further growth of software industry in India.

In the literature on financing to new economy firms, we reached to conflicting conclusion that new firms face lot of hardship in garnering finance form market as well as banks comparing it with old firms (Bank of England 2001). Hence most of the new economy firms prefer internal finance. Several studies do agree on at least one point that debt finance is not suitable for the early-stage financing of innovative and high-tech firms. The information asymmetries and moral hazard are present at the start-up stage that has a particularly marked impact on banks and other debt providers. Lack of collateral and poor market presence is the vital feature of the New Economy Firms at start-up stage.

Chapter 3 An Analytical Review of Indian Software Industry

3.1 Introduction

21st century becomes century of information technology. With the advancement of scientific knowledge and innovations, its application into commercial field has been increasing very fast in all the sectors of world economy. The term information technology means a technology that sends information from one place to another using different gadgets or instruments. Generally, information technology is understood as computers or communication spreading instruments along with requisite technology required to make it functional with softwares, operating systems and languages. According to Hanna and Dugonjic (1995) IT industry is viewed as, “on the supply side are computer hardware, softwares, telecommunication equipments, and micro-electronics industries. On the demand side the applications of IT in the socio-economic sectors of the economy”.

The word “Information technology” for some time was considered as synonyms to computers. But with the rapid advancement in the various information delivery systems such as Radio, TV, Telephone, Web edition of Newspaper, Fax, Pager and of course spreading of computer networks with LAN, WAN, and WWW; now information technology refers as entire gamut of media and devices that are used to transmit and process information from various target groups in the society. IT, therefore, has been rightly termed as information and communication revolution or information and communication technology (ICT).

According to Low (2000), “activities that are related to generating, processing, transmitting, disseminating, storing, archiving and retrieving information constitute information industry”. The information industry has thus covered a wide range of industries, viz., manufacturing, education, entertainment, defense, the communications, etc.

In the knowledge economy, the raw material that matters is intellectual rather than physical. Low (2000) therefore, states “the knowledge economy implies shift in the geographical centre from raw material and capital equipment to information and knowledge, especially in education and research centers and man- made brain industries”. The knowledge economy depicts the automation of labour-intensive manufacturing and service activities, as well as growth in new service industries such as health care, distance education, software production and multimedia entertainment. The pervasive influence of information technology is so strong that there is no sphere of human life in which it is not able to make a place for itself. All the sector of the today’s economy are the users of the ICT not only that but they are the strongly benefitted from it.

This chapter traces the origin and overall development of Indian software industry. This chapter begins by introduction in which we explain the meaning of the new economic firms. Section 3.2 reveals the nature of new economy firms. Section 3.3 traces the origin and development of Indian software industry. Section 3.4 takes review of policies of government for promoting software industry. 3.5 evaluate the role played by industry organization NASSCOM. Section 3.6 focuses on the distribution of domestic IT market. Section 3.7 overviews the talent pool available in India. In the end, section 3.8 concludes the chapter.

The (SMEs) small and medium enterprisers are important source of employment and economic growth for developing countries. It is therefore; with the recognition of this fact, manufacturing of some products and service-rendering business avenues are exclusively reserved for the SMEs. In the process of global economic development, now, technology based firms such as ICT come up as a result of scientific development and innovations. The new technology firms are also called new economy firms because their origin is of last 25 years. New technology firms play vital role in translating scientific knowledge and research enquiries into commercial products and process. These firms have potential of accelerating economic development further and make the life comfortable.

Some of the world largest new technology based firms have work stations in many countries across the globe. These firms are: Apple, Dell, Gateway, Intel, Microsoft, Infosys, Wipro, Tata Consultancy Services, Mahindra Satyam Computers, Mahindra British Telecom, Cape-Gemini, and Cognizant etc. Amongst these firms, most of them are founded in USA and Europe except Indian software firms. ICT or new technology based firms are defined by Little (1977) as “independent ventures of less than 25 years old and that supplies products or services through its invention or technology”.

3.2 Nature of New Economy Firms

NTBFs (New technology based firms) are knowledge based and endowed with quality human resources. These kind of firms can be started initially either by one or two persons together. Presently known as reputed and giant in the field of IT, all these new economy firms were either started or promoted by either one or two persons having rich backgrounds of computer, electronics and finance together or respectively. At the start-up level, these firms were started with own funds or merge funds were raised from relatives and friends.

New technology firms (NTBF) generally possess four competencies. The competencies are: domain thrust competence, domain knowledge competence, product competence and project competence. Domain thrust competence is developed over the period of time. A firm which has been just started initially recruits local employees and personnel of different skills. All these people divided into group according to skills, liking and their competencies. These personals are being trained in the beginning stage of their career and repeatedly trained over the period of time. Learning by doing help the organization to achieve stages of domain thrust competencies. The domain knowledge competence can be understood on degree of knowledge to its personnel. The level of domain knowledge can be increased by recruiting experienced and specialness personnel from outside of the firm or deputing internal personnel for acquiring special domain from the leading educational institution.

Product competence of a firm is reflected in the product manufactured by firm and market share of that product into the total market. Product competence can be achieved by innovation and constant emphasis on R&D. project competence is a result of organizational structure and quality of human resources employed by a firm. Product and project competences are complex and independent in software firms, in all four competences are bases on organizational structure and flexibility in the function of personnel. The resources of an organization can be directed to accomplish these four competencies. Firms in the startup stage have to develop these competencies, so that its survival chances may be important and it may progress lot in future. A study conducted by P. Banerjee (2003) on the seven software firms from India, shows that core competency does not depend upon resources of a software firm. In that core competence has the high capability to switch combinations of higher order resources.

3.3 Origin and Development of Software Industry in India

Indian software industry has become world recognized industry today. It has grown by leap and bounds due to supportive role being played by government with funding and policy packages. Private sector initiative in starting up software industries is not recognizable in the beginning stage of software industries in India, well trained engineers and personnel having knowledge of management have given dedication in developing today’s software industry. In 1972, Dept. of Electronics introduced a policy of permitting duty free import of computer systems, on the condition that importer would promise to export software and related services worth twice the value of the cost of imported computer in a given time. This becomes a mile stone for the leading firms that were in the either process inception or expansion. After that, in the year 1980 the same department gave a fillip to software exporting firms by declaring export friendly polices which spell out the intention of formation of export promotion council and given push to import of materials needed for the industry by liberalizing rules thereof.

In 1998, in order to give further boost to software exports Government of India made four major task forces comprising chief executives of leading software firms to study the problems of sector and recommend the policies for making it mare vibrant. This task force gave 108 recommendations in an IT Action Plan. Further, this recommendation hoping software export reach to US $ 50 billion by 2008 and creating 1 million new jobs over the next five years. Task force gave the following vital recommendations:

1. Blank approval for overseas acquisition if it is made from export earning of softwares.
2. Zero duty on all IT products from the year 2002 by advancing International Trade Administration (ITA) schedules.
3. Broadening definition of software for including entire range of IT softwares as per WTO-ITA norms.
4. Exemption for developers and exporters from physical and customs bonding at Software Technology Parks (STPs) .
5. Need to setup Engineering Development Units (EDUs) and Export Progressing Zones (EPZs).

3.4 Policies to Promote Software Industry

Meanwhile govt of India took decisions to convert Department of Electronics into the Ministry of Communication and Information Technology. This was followed by Indian IT Act was enacted to address the large number of issues pertaining to development of IT sector. Along with this development, various state governments promoted software industry by declaring friendly policy and took initiative in setting up state sponsored IT product manufacturing industry and IT education giving institutions, and also made provision of infrastructure for further development of IT industry.

Economic reforms were introduced in 1991 in India. Reforms give emphasis on foreign investment by simplifying the procedures and removed hurdles prevailed earlier on domestic as well as well foreign investment. Foreign firms allow setup its owned subsidiaries in the Electronics Export-Processing Zones by recognizing the importance of IT sectors and its contribution into foreign exchange earnings, Government of India made available fast, low cost data connection facilities, and rationalized duties, taxes and tariff applicable to IT industry. The role of Reserve Bank of India (RBI) becomes supporting after the introduction of reforms. Series of measures were introduced by RBI for future development of software industry. Some of the important measures are: design of software export declaration form (SOFTEX), allowed to acquire share of overseas parent company by Indian employees, foreign exchange can be used for buying services, companies whose software export sales were over 80%; all those firms can grant stock options to non-resident and permanent resident employees. Computer software firm can use 70% of its earning to meet contract related expenses abroad.

In order to promote software industry, 100% tax breaks were offered on corporate income and profits of these firms provided firms located in any free trade zone, software Technology Park or any special economic zone. However these deductions were phased out from the financial year 2009-10. Indian software firms allow acquiring overseas company through American Depositary Receipt/ Global Depositary Receipt stock swaps without prior approval for up to $100 million or ten times of the export earnings of the previous financial year. The govt. of India has enacted various laws relating to IT industry such as Intellectual Property Rights (IPRs) and joined the World Trade Organization (WTO) and Trade Related Intellectual Property Rights (TRIPRs) and Trade Related Investment Measures (TRIMs). Besides that to make better software industry, govt. introduced National Telecom Policy in 1998. This policy defines the role of regulator, operators’ responsibility towards customers and due diligence, license fee to be charged and revenue to be shared among the various private operators. Private companies were permitted to setup international gateway. In 2002, international long distance tariff were liberalized two years ahead of WTO commitments. As a result Tele-density to 78.10 percent and the breakup the overall - with respect to wire line and wireless are 2.77 and 72.70 respectively. The total broad band subscriber base of India was 13.3 million at the end of December 2011. Cellular phone users’ number reached to 893.84 million and wire-line subscribers reached to 32.69 million. India is third largest in the world in terms of gross telephone subscribers, and second largest in Asia.

3.4.1 Software Technology Parks

Creation of NASSCOM in 1988 and later establishment of Software Technology Parks (STPs) in 1990 represented a fundamental approach to policy making for the software industry. An important institutional intervention was the establishment of Regional Technological Parks (RTPs). STPs were introduced to provide infrastructure to private companies so that it would be possible them to export software at minimum cost. STPs were established in 39 locations, including most of the major towns of the country. The important feature of these STPs was that they provide ready-to-plug IT and telecom infrastructure. STPs also give single-window clearance for all regulatory matters to be obtained. The benefits and approvals given to IT industry from STPs are similar to those of export oriented units.

Export-import policies offer incentives to IT Industry are also applicable to member of STPs. The companies registered with these parks account for more than 75 percent firms are software exporters. Many of these companies have not benefited from the actual infrastructure provided by STPs in significant way. Perhaps, the major contribution of these STPs was to enable new enterprises to launch and nurture newly born software firms and small and medium enterprises to grow further. Already established software companies merely registered with these parks but they did not use infrastructure of it. Hence, STPs have acted as pushing and motivating agent for many new software firms in India. In the startup stage of firms, a minimum kind of support is required to nurture and develop the firm’s competency.

3.4.2 Cluster Development

The software industry in India has been concentrated in six to seven cities such as Bangalore, Hyderabad, Chennai, Mumbai, Delhi and Pune. Very few Research studies give reasons why these locations have become fertile centers of IT industry in India. Few studies pointed out that many centers do not have the best infrastructure even though these centers become hub of software industry in India. The one reason often cited is the availability of large pool of locally trained manpower. The other significant reason may be the attractiveness of these locations for young and upwardly mobile professionals (Meine Pieter and Van Dijk 2002). Most locations have a strong cosmopolitan character. Other author such as (Srinavas 1998) have reported the importance of an affordable cost of living and favorable climate as important reasons for choosing a location has leading support to this argument. For example, Bangalore perhaps acts as boost for making best education system in India and therefore, it is very attractive place for educational professionals. Tenure of progressive chief ministers’ and special policy implementation from the state governments has attracted many IT firms. Growth of the Hyderabad as IT center is the classic example of it but other locations thrived without such political support.

3.5 The Role of the Industry Organization

The National Association of Service and Software Companies (NASSCOM), India’s software industry association, was founded in 1988 and has been a vocal and potent force in lobbying for policy reforms, including rules limiting access to capital markets, issuance of stock options, easing rules on foreign currency transactions, and improving telecom infrastructure.

NASSCOM plays a significant role in establishing a brand image for India in the global software services markets by participating in global trade fairs and events and organizing learning events in India that features prominent experts from major markets. An annual report of NASSCOM has acquired a prominent status as the most reliable source of data and information about the Indian software industry. NASSCOM activities are influenced by the dominate software players, who share a great commonality of interest in terms of policy recommendations and the Indian brand. NASSCOM also has a legacy of providing very dynamic leader such as (Dewang Mehta); whose contribution is widely acknowledged by members of software industry and Indian media.

NASSCOM’s membership grew from 38 members in 1988 to over 1256 firms in December 2011. So far as distribution of total membership is concerned large companies comprises 69% , medium scale firms 12%, small firms 10% and institutional membership size was 9% respectively. It works more effective way in protective interest of the members and remains alert on policy concerns and brand promotion abroad. The general observation about NASSCOM is that it is less effective in representing small and medium scale enterprises in abroad.

3.5.1Specialization of NASSCOM Members

NASSCOM members are engaged in variety of business. The prominent business activities are relating to IT services, BPO, software products, engineering design, internet and E-Commerce, Animation and gaming, organization that provides services to the IT-BPO industry are also given as status of institutional remembers. NASSCOM gives membership to India headquarter organization, multi-national service providers having presence in India, Global in-house centers, (GICs) of the foreign corporation are also treated at par with India members.

The Table 3.1 reveals the specialization of NASSCOM members. It can see that 62 per cent members are engaged in IT services and 30 percent in BPO services are the backbone activities of the Indian software industry. In the product development activities, 36 per cent firms are engaged and only 13 percent member firms are offering services such as Engineering, R&D, and Embedded. In the near future, there is need to concentrate on this avenue of the business by the Indian IT industry. There are several firms which they offer many services under same banner hence the percentage shown does not come to 100.

Table 3.1 Specialization of IT Members firms

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Source: Data compiled from NASSCOM Annual Report 2011-12.

The NASSCOM undertakes the several initiatives and work with multiple organization and government. The major activities are: 1) it advocates with centre and state governments for undertaking favourable policy and decisions for protecting the interest of the members. 2) It works closely with the member organization for integrated work and promoting new organization, mentoring the new member organization. For that it organizes training, get together, conference conclave and workshop for it members. 3) In order to develop the IT-BPO industry it contrite on the research, data collection, organizing events, representing forum to the government, entrepreneurship, etc.

Table 3.2 Revenue earning of Indian software firms

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Source: Data compiled from NASSCOM Annual Report 2011-12.

3.5.2 Revenue Earning of Indian Software Firms

Table 3.2 gives information on the types of IT-BPO firms and their strength in the Indian software industry. Large firms whose revenue fetching capacity is above 200 crore are 69 percent. All these firms are quite old and have earned reputation of doing business. Medium and small firms’ revenue earning potential is less than 200 crore and 50 crore respectively. Institutional member strength into total IT-BPO firms is 9 percent. However there are very few firms whose average revenue is many fold times of the large IT firms. Small firms find problems in raising finance in the startup stage and also beginning years of the firm. Hence the survival of new firms is difficult in India. In the 12th five year plan, Government India is proposing to allocate Rs. 1000 crore for financing new IT –BOP firms.

Table 3.3 Geographical Distribution of Firms

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Source: Data compiled from NASSCOM Annual Report 2011-12.

3.5.3 Geographical Distribution of Firms

The Indian software firms are located mainly in tier I cities since the long time due to the favourable factors to the industry. Most of the International (MNC) and Indian IT-BPO firms set up their first firms in the metros. Table 3.3 shows that 21 per cent firms located in the Bangalore. Now this city is known as IT hub of India as well as Silicon Valley of India. Mumbai has attracted 15 per cent firms. However in the western India another city Pune has becomes IT hub. In the south India Chennai and Hyderabad attracted 12 and 9 per cent respectively. In the North India IT firms do not find any attractive destination except Kolkatta.

However, since 2005 IT-BPO firms are shifting their operations to tier II and III cites due to rising costs of rent, taxes and wage push inflation. Other reasons of Shifting IT-BPO firms are driven by hunting of young talent, incentives and infrastructure facilities offer given by various state governments. Presently new destinations of IT have been emerged as Mangalore, Bhubaneswar, Nagpur, Nashik, Cochin, Trivandrum, Trichy, Indore, Ahmadabad, and Baroda. Presence of these firms in the smaller cities creates direct and indirect employment, giving boost to infrastructure of various types. According to case study made by DTE & T Orissa and STPI, Bhubaneswar IT –BPO manpower demand would reach to 4, 30,000 in 2011-12 approximately four times in 2007. The dispersion of IT –BPO firms helped in removing problem of regional imbalances in India. There are several instances of contribution given by IT –BPO in education, health and corporate responsibility.

3.6 Domestic IT Market

The following table 3.4 gives idea about domestic IT market which is classified into four segments. This market has been growing very fast due to demand from consumers, Indian enterprises, and government initiatives for increasing use of IT in infrastructure management and governance. Hardware market is expanding rapidly on account of use of notebook, personal computers, internet devices, connectivity tool, and mobility instruments. Hardware and IT services is the major segment of domestic market which contributes 41 and 38 percent respectively followed by software and BPO services. Domestic IT-BPO sector is expected to grow by 7 per cent in 2012 and provides nearly employment to 6 lakh person in the tier II and Tier III cities across the India.

3.7 Talent Pool of India

India’s talent pool has been expanding rapidly on account of government initiative of expanding technical and general education facilities by promoting privatization in higher education. In the various states of India non-aided and private colleges are being opened to cater the need of engineers, general and management graduates.

Table 3.4 Domestic Market IT-BPO in 2011

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Source: Data compiled from NASSCOM Annual Report 2011-12.

Table 3.5 reveals that the strength of arts graduates are 38.0 per cent followed by commerce and engineering graduates. Near about 4.4 million graduates and post graduates are ready to hire and having base of English speaking. The quality of engineering and science graduate are not up to the mark and expectations of the industry hence the NAASCOM with IT-BPO initiatives stated finishing school in the selective engineering colleges where students and teachers are trained. In this endeavor, the leading Indian IT-BPO firm Infosys has taken the lead.

Table 3.5 Talent Pool of India

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Source: Data compiled from NASSCOM Annual Report 2011-12.

3.8 Conclusions

In this chapter we review the origin and overall development of the present Indian software industry. Today, Indian software industry has been acclaimed as one the efficient, cost effective and quality rendering service the world. This journey was begin in 1972 when dept of electronics was established to explore the possibility of use of electronics in economy and allowed to duty free import of computer on condition and it would be used for creating value added services and products for exports. And later in 1980 by declaring friendly policies which spell out the intention of formation of export promotion council and given push to import of materials needed for the industry by liberalizing rules thereof.

1991 policy of Liberalization, privatization and globalization (LPG) creates the most favorable climate to grow this industry. Percentage of IT-BPO revenue to India’s GDP rose from 0.62 to 7.50 percent during the period 1994-95-2011-12. This industry has crossed aggregate revenue earning of USD 100 billion in 2012. This achievement is remarkable despite the infrastructure bottlenecks faced by the industry concerned. Indian software industry has provided direct employment to 2.80 million people and indirect employment worked out to more than 8.9 millions.

Chapter 4 An Empirical Study of the Drivers of Software Industries’ Growth in India

4.1 Introduction

The term new economy emerges from the excellent performance shown by economy of United States of America (USA) in the 1990’s due to brilliant performance of ICT firms. Not only USA but Finland, Ireland, Sweden, Singapore, Canada & Australia also made significant stride on the basis of ICT development in the decade 90’s. The penetration of new economy wave reached ultimately in developing countries and into that especially in India it reached in the same decade. However, the role of Information and Communication Technology (ICT) in India in the beginning years of decade 90’s was very limited and it was virtually in the infancy stage. As Pohjola (2001a) concludes that the relative contribution of ICT into GDP growth in the developing countries was less than 2% (China, India, Argentina, Chile, Brazil & Venezuela) compared to more than 10% in the US , Ireland, Canada, Sweden & UK.

The basic difference between developing & developed countries in the context of benefits derived from ICT (product & service) are, they were hindered in the beginning of decade 90’s in developing countries due to the lack of computer, slow investment in infrastructure facilities, lack of skilled human capital and poor performance in research & development. In order to earn smart returns on investments, supportive social and economic services are essential such as supply of skilled labour, infrastructure, regulations, taxation, drinking water, primary education and irrigation, post office, telephone, internet , hospitals, and express highways.

These services minimize transaction costs and enhance the profit margin of the producers. Relatively, these facilities were available in India when the ICT or new economy firms have entered into India or some of them were in the start-up stage. However, infrastructure services those days were not competent to shoulder the responsibility of becoming catalyst of change. After a passage of time, the new economy firms created a few success stories on the basis of rapid development of e-banking, e-commerce and internet portals. Using ICT, India made rapid economic progress and technological revolution in some sectors of the economy. In this chapter, we examine the role of various drivers of Indian software industry. To verify the impact of new economic regime and also the contribution of stable government in enchasing the growth of Indian software industry in the last 25 years we use dummy variable. Present chapter is organized as; it begins by introduction and section 4.2 deals with drivers of software industry. Section 4.3 is on data used for analysis. 4.4 deal with Methodology and Model used in the chapter. 4.5 discusses the results appeared and section 4.6 concludes the chapter with policy implications.

4.2 Drivers of Software Industry

Generally, in the first phase of ICT revolution, the productivity of firms and profit margin of owners of the firm enhances, later on, in the long run, it gives contribution into increasing growth rates of the economy. Appropriate and enough infrastructure facilities along with institutional network are the key requirements for the development of a region or a particular industry. The socio-economic infrastructure increases efficiency, minimizes risks and keep the transaction cost in control of doing a business.

The difference in productivity and economic growth rates were examined by the various researchers across the countries (North 1990, Hall and Jones 1990, World bank). All these studies pointed out that such difference arises on account of presence of institutional set up and its competencies. Technological progress in the country works as catalytic agent for the further development of a country. Software sector has made remarkable progress in India since 1991. The contribution of software export into GDP rose from 0.02 percent in 1991 to 9.84 percent in 2009-10. In the present analysis, the following factors are reviewed however all of them have not been used due to non- availability of time series data on each variables.

4.2.1Macro Economic Factors

Description of the variables used in the present study for knowing determinants of growth of software industry can be grouped into two categories namely macroeconomic factors and non-economic factors. Both the factors play an important role in promoting the growth of software firms in India in particular and its contribution into GDP of India in general. In order to understand the working meaning of each variable and proxy used are discussed below. The selection of proxy is a big task before researcher. We select an appropriate proxy after referring literature available on the present topic (Zinnes et al 2001, Philip A.P. 2008). These proxies capture the approximate meaning and relevance of the variable used in the present study. The probable significance value of this variable may be positive or negative related to dependent variable. All these variables might have helped directly or indirectly to present Indian software industry from its beginning stage to the present position of software industry in world.

1) Software Industry Growth

The software industry growth can be captured by considering its contribution into GDP of India. Basically, export made by software and related services have occupied prime place in the overall ICT market in the world. The growth process of Indian software industry is influenced by the growth in export of domestic and international software product and services. The Indian IT sector has expanded from US $ 1.73 billion (Rs.5450 crore) in 1994-95 to US $ 12.0 billion (Rs. 57,033 crore) industry in the year 2009-10.

So far as total export made from India is concerned, IT sector contribute to around. IT sector not only remains major contributor in the exports but also it provides job to people in India. The recently being developed cites such as Pune, Bangalore, Hyderabad, Mysore, and to limited extent New Mumbai and Delhi becomes centers of software industry as a result of rapid growth of IT firms in these cities. We use software export earning to gross domestic product (SEGDP) as dependant variable. This variable represents the growth and development of Indian software industry.

2) IT Infrastructure

Recent stride made by India in the development of economy is the result of robust infrastructure availability such as telecom, power, road, airport etc. The development of software industry is depending upon the relevant facility of telecom network. Besides that, regular and uninterrupted power supply, well connectivity of roads, express state and national highways, domestic and international air network are the prerequisite factors for the growth of software industry. Indian govt. has realized the importance of infrastructure and its relation with development of overall economy and its conclusive link with the development of software industry; hence several policy initiatives have been directed for the presence of adequate infrastructure facilities.

India did not have adequate infrastructure facilities at the time of introduction of economic reforms in 1991. As a result the development of software sector remained limited until 1993-94. In 1996 India had 15 main telephone lines per 1000 peoples compared to 395 per 1000 for Ireland and 446 for Israel. The situation works worse when we take into account penetration of PCS in the total population is 1.5 computers per 1000 people where as computer users 145 for Ireland and 117.6 for Israel (WDR, 1998-99). Even today, the figure of PCs ( ) per 1000 in India does not appear to be significant over the other countries.

The growth of software industry in India is impressive but it is difficult to account for the productivity and growth of present software sectors that has been halted due to constraints of infrastructure. By and large, Software industry requires two basic inputs i.e. affordable power and bandwidth. In India, both inputs are being supplied in shortage. Hence, many software firms rely on self generative power. However, bandwidth speed being provided in 2MB, Which is adequate to perform regular task. It is a found that quality and speed of communication and computer/internet infrastructure in India is not advanced as developed countries.

But that has been changing since the introduction of New Economic Programme in 1991. After realizing a need of robust communication network in India, number of policy initiative has been introduced in 1991. It includes privatization of telecom sector with an entry to domestic operator for launching mobile and internet service, paging, data transmission, 3G networks. These are the some important milestones in the development of today’s software industry in India.

The role of transmission network and internet in pushing up the development of a country is acknowledgement by (Eaton, Korturny, and Canning 2000). Both studies mentioned the need of high quality telephone system. To account for the contribution of telephone network into software industry growth, we use number of telephones per 100 persons. We do not use main lines per 100 people because as it shows the capacity. Therefore, it is treated as capital stock. The penetration of telephone services can be judged better by considering users of telephone.



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Titel: Issues in Financing of New Economy Firms in India