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AMITY BUSINESS SCHOOL

A PROJECT REPORT ON Macro Level Clustering of Countries to Identify their Potential for Establishing IT & ITES Industry

SUBMITTED TO:
Ms. Amanpreet Kang Dept. of International Business SUBJECT International Economics & Policies

SUBMITTED BY: SUBMITTED ON:


12th October, 2012 MAYANK GUPTA, A-34 SOURAV MUKHERJI, B-28 SURAJ KUMAR, D-47 MBA-Gen (2011-2013)

Table of Contents
INTRODUCTION ............................................................................................................................... 2 Macro-Level Indicators for IT and ITES Industry: ............................................................................ 2 LIST OF COUNTRIES TAKEN UP FOR STUDY: ................................................................................... 6 SPSS OUTPUT:- ................................................................................................................................ 7 Agglomeration Schedule ................................................................................................................. 9 List of Countries in Different Cluster ............................................................................................ 11 Mean of Clusters Under Variables ................................................................................................ 13 INTERPRETATION:- ........................................................................................................................ 17 STAGE-1 ............................................................................................................................................................. 17 STAGE-2 ............................................................................................................................................................. 17 CLUSTER 1: "Pioneers- The trailblazer technocrats" ......................................................................................... 18 CLUSTER 2:"Challengers- The striving bullyboy"............................................................................................... 18 CLUSTER 3: "Laggards- The shoddy Lazybones" ............................................................................................... 19 CLUSTER-4: "Mediocres- The under-achieving strugglers" ............................................................................... 19 REFERENCES: ................................................................................................................................. 20

INTRODUCTION
The objective of this project was to classify countries on the basis of various macro-economic factors that affect the establishment of IT and ITES Industry in a country. To achieve our objective, first we identified 20 macro-economic variables that play significant role in providing right environment for development of IT and ITES Industry. Then, we collected the data on these macro-economic variables for 77 countries. After that, we compiled the latest available data of the given indicator on a excel sheet. Then, the data was exported to SPSS.19 & cluster analysis was done. Finally, based on the characteristics of clusters, we have given names for each cluster.

Macro-Level Indicators for IT and ITES Industry:


1) GDP (per capita growth) - Gross domestic product (GDP) is the market value of all officially recognized final goods and services produced within a country in a given period. GDP per capita is often considered an indicator of a country's standard of living. GDP per capita is not a measure of personal income. Under economic theory, GDP per capita exactly equals the gross domestic income (GDI) per capita. 2) High technology exports (current US$) - High-technology exports are products with high R&D intensity, such as in aerospace, computers, pharmaceuticals, scientific instruments, and electrical machinery. 3) Literacy Rate, youth total (% of people ages 15-24) - Youth (15-24) literacy rate (%). Total is the number of people age 15 to 24 years who can both read and write with understanding a short simple statement on their everyday life, divided by the population in that age group. Generally, literacy also encompasses numeracy, the ability to make simple arithmetic calculations. 4) ICT goods exports (% of total goods exports) - Information and communication technology goods exports include telecommunications, audio and video, computer and related equipment; electronic components; and other information and communication technology goods. Software is excluded. 5) ICT good imports (% of total goods imports) - Information and communication technology goods imports include telecommunications, audio and video, computer and related equipment; electronic components; and other information and communication technology goods. Software is excluded.
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6) ICT service exports (% of service exports, BOP) - Information and communication technology service exports include computer and communications services (telecommunications and postal and courier services) and information services (computer data and news-related service transactions). 7) Secure Internet Servers - Secure servers are servers using encryption technology in Internet transactions. 8) Mobile cellular subscribers per 100 people - Mobile cellular telephone subscriptions are subscriptions to a public mobile telephone service using cellular technology, which provide access to the public switched telephone network. Post-paid and prepaid subscriptions are included. 9) Compensation of employees (% of expense) - Compensation of employees consists of all payments in cash, as well as in kind (such as food and housing), to employees in return for services rendered, and government contributions to social insurance schemes such as social security and pensions that provide benefits to employees. 10) Communications, computer, etc. (% of service exports, BOP) - Communications, computer, information, and other services (% of service exports, BoP) cover international telecommunications and postal and courier services; computer data; news-related service transactions between residents and nonresidents; construction services; royalties and license fees; miscellaneous business, professional, and technical services; personal, cultural, and recreational services; and government services not included elsewhere. Service exports refer to economic output of intangible commodities that may be produced, transferred, and consumed at the same time. International transactions in services are defined by the IMF's Balance of Payments Manual (1993), but definitions may nevertheless vary among reporting economies. 11) Communications, computer, etc. (% of service imports, BOP) - Communications, computer, information, and other services (% of service imports, BoP) cover international telecommunications and postal and courier services; computer data; news-related service transactions between residents and nonresidents; construction services; royalties and license fees; miscellaneous business, professional, and technical services; personal, cultural, and recreational services; and government services not included elsewhere. Services imports refer to economic output of intangible commodities that may be produced, transferred, and consumed at the same time. International transactions in services are defined by the International Monetary Fund's (IMF) Balance of Payments Manual (1993), but definitions may nevertheless vary among reporting economies.
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12) Research and Development Expenditure (% of GDP) - Expenditures for research and development are current and capital expenditures (both public and private) on creative work undertaken systematically to increase knowledge, including knowledge of humanity, culture, and society, and the use of knowledge for new applications. R&D covers basic research, applied research, and experimental development. 13) Researchers in R&D (per million people) - Researchers in R&D are professionals engaged in the conception or creation of new knowledge, products, processes, methods, or systems and in the management of the projects concerned. Postgraduate PhD students (ISCED97 level 6) engaged in R&D are included. 14) Patent Applications, residents - Patent applications are worldwide patent applications filed through the Patent Cooperation Treaty procedure or with a national patent office for exclusive rights for an invention--a product or process that provides a new way of doing something or offers a new technical solution to a problem. A patent provides protection for the invention to the owner of the patent for a limited period, generally 20 years. 15) Foreign Direct Investment, net outflows (% of GDP) - Foreign direct investment are the net inflows of investment to acquire a lasting management interest (10 percent or more of voting stock) in an enterprise operating in an economy other than that of the investor. It is the sum of equity capital, reinvestment of earnings, other long-term capital, and short-term capital as shown in the balance of payments. This series shows net outflows of investment from the reporting economy to the rest of the world and is divided by GDP. 16) Foreign Direct Investment, net inflows (% of GDP) - Foreign direct investment are the net inflows of investment to acquire a lasting management interest (10 percent or more of voting stock) in an enterprise operating in an economy other than that of the investor. It is the sum of equity capital, reinvestment of earnings, other long-term capital, and short-term capital as shown in the balance of payments. This series shows net inflows (new investment inflows less disinvestment) in the reporting economy from foreign investors, and is divided by GDP. 17) Internet users - Internet users are people with access to the worldwide network. 18) Workers Remittances, receipts (BOP, Current US$) - Workers' remittances are current transfers by migrants who are employed or intend to remain employed for more than a year in another economy in which they are considered residents. Some developing countries classify workers' remittances as a factor
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income receipt (and thus as a component of GNI). The World Bank adheres to international guidelines in defining GNI, and its classification of workers' remittances may therefore differ from national practices. This item shows receipts by the reporting country. Data are in current U.S. dollars. 19) Workers Remittances and Compensation of employees, paid (Current US$) - Workers' remittances and compensation of employees comprise current transfers by migrant workers and wages and salaries earned by nonresident workers. Remittances are classified as current private transfers from migrant workers resident in the host country for more than a year, irrespective of their immigration status, to recipients in their country of origin. Migrants' transfers are defined as the net worth of migrants who are expected to remain in the host country for more than one year that is transferred from one country to another at the time of migration. Compensation of employees is the income of migrants who have lived in the host country for less than a year 20) Workers Remittances and Compensation of employees, received (Current US$) - Workers' remittances and compensation of employees comprise current transfers by migrant workers and wages and salaries earned by nonresident workers. Data are the sum of three items defined in the fifth edition of the IMF's Balance of Payments Manual: workers' remittances, compensation of employees, and migrants' transfers. Remittances are classified as current private transfers from migrant workers resident in the host country for more than a year, irrespective of their immigration status, to recipients in their country of origin. Migrants' transfers are defined as the net worth of migrants who are expected to remain in the host country for more than one year that is transferred from one country to another at the time of migration. Compensation of employees is the income of migrants who have lived in the host country for less than a year.

LIST OF COUNTRIES TAKEN UP FOR STUDY:


Argentina Armenia Australia Austria Belarus Belgium Bosnia and Herzegovina Brazil Bulgaria Canada Chile China Colombia Costa Rica Croatia Cyprus Czech Republic Denmark Ecuador Egypt, Arab Rep. El Salvador Greece Guatemala Hong Kong SAR, China Hungary Iceland India Ireland Israel Italy Japan Jordan Kazakhstan Kenya Korea, Rep. Kyrgyz Republic Latvia Lithuania Luxembourg Malaysia Malta Mauritius 6

Nigeria Norway Pakistan Panama Paraguay Peru Philippines Poland Portugal Romania Russian Federation Saudi Arabia Serbia Slovak Republic Slovenia South Africa Spain Sweden Switzerland Tanzania

Estonia Finland France Georgia Germany

Mexico Moldova Morocco Mozambique Netherlands New Zealand

Tunisia Turkey Uganda Ukraine United Kingdom Sri Lanka

SPSS OUTPUT:DESCRIPTIVE STATISTICS N Communications, computer, etc. (% of service exports, BoP) Communications, computer, etc. (% of service imports, BoP) Compensation of employees (% of expense) Foreign direct investment, net inflows (% of GDP) 77 -29.2288 392.3369 8.014834 44.7818310 77 3.5405 53.1533 20.058014 11.0147708 77 8.9057 92.3660 33.604424 15.5391486 77 Minimum 2.0757 Maximum 71.7958 Mean 34.907684 Std. Deviation 17.2739175

Foreign direct investment, net outflows (% of GDP) GDP per capita growth (annual %) High technology exports (current US$) ICT goods exports (% of total goods exports) ICT goods imports (% of total goods imports) ICT service exports (% of service exports, BoP) Internet Users

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-7.0371810000 486.89102000 11.089567117 60.260040606 00 337 6604

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-6.8124685000 8.9171110000 2.6921661074 2.7707335454 49 653

77

549792.0000

1.5851E11

1.337278E10 2.9012661E10

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.0048

49.0706

6.272071

10.0029936

77

1.8254

42.7614

8.919870

7.0573362

77

1.2230

38.9552

7.971393

7.2225944

77

289239.2310

1.0060E8

14826956.032 20358111.418 355 8755 7.428002906

Literacy rate, youth total (% of people ages 15-24) Mobile cellular subscriptions (per 100 people) Patent applications, residents Research and development expenditure (% of GDP) Researchers in R&D (per million people) Secure Internet servers

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70.869370

100.000000

95.74627457

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32.8267

209.6399

115.248781

30.8002500

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290081

7672.44

36395.963

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.0261

3.4739

.986651

.9162458

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15.828320

7371.709500 1862.1139475 1872.1126762 9 82 23670.617

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14 8

124255

9856.86

Workers' remittances and compensation of employees, paid (current US$) Workers' remittances and compensation of employees, received (current US$) Workers' remittances, receipts (BoP, current US$) Valid N (listwise)

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4900000.0950

2.7069E10

3.077666E9

5.9401530E9

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3200000.0480

2.2048E10

3.376910E9

4.4371203E9

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178612.944256 5.3043696000 3.3922436755 7.7429233256 5250 E10 86E9 377E9

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Table 1: Minimum, Maximum, Mean and Standard Deviation of all Variables

Agglomeration Schedule
Cluster Combined Stage 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 Cluster 1 23 12 39 57 31 9 5 23 9 12 39 23 11 37 5 4 9 58 Cluster 2 29 50 76 73 41 43 69 57 51 34 54 63 52 64 31 65 14 66 Coefficients 3.910E16 8.008E16 9.805E16 1.508E17 2.299E17 3.020E17 3.924E17 4.446E17 4.558E17 4.875E17 5.189E17 5.438E17 5.708E17 5.831E17 6.291E17 6.551E17 6.677E17 7.051E17 Stage Cluster First Appears Cluster 1 0 0 0 0 0 0 0 1 6 2 3 8 0 0 7 0 9 0 Cluster 2 0 0 0 0 0 0 0 4 0 0 0 0 0 0 5 0 0 0 Next Stage 8 10 11 8 15 9 15 12 17 21 20 28 22 24 24 27 39 30

19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62

6 39 12 11 3 5 5 46 4 5 33 18 4 8 4 2 13 3 25 8 2 13 47 21 19 2 2 13 13 8 2 19 2 8 21 2 1 24 2 1 16 21 45 10

22 71 77 27 6 37 39 61 12 23 67 58 5 62 11 30 56 4 42 49 9 17 68 60 70 18 3 25 75 74 13 46 38 47 33 59 35 26 19 28 36 24 72 16

8.535E17 9.535E17 1.002E18 1.112E18 1.298E18 1.300E18 1.324E18 1.337E18 1.452E18 2.161E18 2.431E18 3.114E18 3.136E18 3.377E18 3.483E18 4.409E18 4.817E18 5.117E18 5.292E18 6.803E18 7.873E18 8.755E18 9.814E18 1.437E19 1.481E19 1.490E19 1.810E19 2.008E19 2.239E19 2.507E19 2.543E19 3.653E19 4.434E19 4.803E19 4.846E19 5.025E19 5.272E19 6.746E19 7.512E19 8.751E19 1.018E20 1.041E20 1.157E20 1.654E20

0 11 10 13 0 15 24 0 16 25 0 0 27 0 31 0 0 23 0 32 34 35 0 0 0 39 44 40 46 38 45 43 49 48 42 51 0 0 54 55 0 53 0 0

0 0 0 0 19 14 20 0 21 12 0 18 28 0 22 0 0 33 0 0 17 0 0 0 0 30 36 37 0 0 47 26 0 41 29 0 0 0 50 0 0 56 0 59

23 25 27 33 36 25 28 50 31 31 53 44 33 38 36 39 40 45 46 48 44 46 52 53 50 45 49 47 49 52 51 57 54 64 60 57 58 60 65 68 62 66 64 65

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63 64 65 66 67 68 69 70 71 72 73 74 75 76

40 8 2 2 8 1 2 2 40 1 2 1 40 1

55 45 10 21 20 7 8 15 44 32 48 2 53 40

1.935E20 2.525E20 2.637E20 3.212E20 4.832E20 5.007E20 5.762E20 7.898E20 8.344E20 1.399E21 2.703E21 2.871E21 3.181E21 1.336E22

0 52 57 65 64 58 66 69 63 68 70 72 71 74

0 61 62 60 0 0 67 0 0 0 0 73 0 75

71 67 66 69 69 72 70 73 75 74 74 76 76 0

Table 2: Coefficients of each of the variables

List of Countries in Different Cluster


CLUSTER 1 UNITED KINGDOM SWITZERLAND NETHERLANDS MEXICO MALASIA KOREA,REP FRANCE CLUSTER 2 JAPAN GERMANY CLUSTER 3 UKRAINE UGANDA TURKEY TUNISIA TANZANIA SWEDEN SRI LANKA SPAIN SOUTH AFRICA SLOVENIA SLOVAK REPUBLIC SERBIA SAUDI ARABIA RUSSIAN FEDERATION ROMANIA PORTUGAL 11 CLUSTER 4 PERU NIGERIA MAURITIUS ICELAND CHILE

POLAND PHILIPPINES PARAGUAY PANAMA PAKISTAN NORWAY NEW ZEALAND MOZAMBIQUE MOROCCO MOLDOVA MALTA LUXEMBURG LITHUANIA LATVIA KYRGYZ REPUBLIC KENYA KAZAKHSTAN JORDAN ITALY ISRAEL IRELAND HUNGARY HONG KONG SAR, CHINA GUATEMALA GREECE GEORGIA FINLAND ESTONIA EL SALVADOR EGYPT, ARAB REP.

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ECUADOR DENMARK CZECH REPUBLIC CYPRUS CROATIA COSTA RICA COLOMBIA CANADA BULGARIA BRAZIL BOSNIA AND HERZEGOVINA BELGIUM BELARUS AUSTRIA AUSTRALIA ARMENIA ARGENTINA Table 3: Different Countries under different Cluster Categories

Mean of Clusters Under Variables


Cluster Number of Case

Mean

Mean

Mean

Mean

Communications, computer, etc. (% of service exports, BoP)

58.4287

40.7622

27.2048

34.1218

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Communications, computer, etc. (% of service imports, BoP)

36.3317

37.1707

27.7465

33.5865

Compensation of employees (% of expense)

6.0861

13.2084

23.9125

20.9567

Foreign direct investment, net inflows (% of GDP)

.7081

1.7340

4.2605

9.2426

Foreign direct investment, net outflows (% of GDP)

1.7372251500 3.7363953286 43.9054448073

9.5990512127

GDP per capita growth (annual %)

1.0373970000 1.7005926445

4.2444179400

2.7316786994

High technology exports (current US$)

1.4028E11

6.4480E10

1.8894E8

4.7119E9

ICT goods exports (% of total goods exports)

7.8781

14.2811

.3307

5.8027

ICT goods imports (% of total goods imports)

10.5816

13.9876

6.3104

8.5111

ICT service exports (% of service exports, BoP)

5.1350

6.3343

3.2312

8.6195

Internet Users

84399070.363 31859300.349 13398686.7651 7 8

10839189.4840

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Literacy rate, youth total (% of people ages 15-24)

99.000000

98.710253

92.768436

95.549987

Mobile cellular subscriptions (per 100 people)

117.4819

114.1724

100.7640

116.4471

Patent applications, residents

168564

24061

89

1346

Research and development expenditure (% of GDP)

2.9860

1.8403

.7506

.8471

Researchers in R&D (per million people)

4466.852850

2792.977941

1541.249961

1701.459887

Secure Internet servers

89363

44949

621

4167

Workers' remittances and compensation of employees, paid (current US$)

1.0191E10

1.2478E10

40120620.6410

2.0485E9

Workers' remittances and compensation of employees, received (current US$)

6.5700E9

8.8100E9

2.5667E9

2.7362E9

Workers' remittances, receipts (BoP, current US$)

1.6505317750 5.5445641929 2.6159806881E1 E9 E9 0

1.4014399319E9

Table 4: Mean of each Cluster under different Variables 15

Figure 1: Dendrogram using Average Linkage (Between Groups) depicting different cluster formations

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INTERPRETATION:The output is first derived by doing a hierarchical analysis to find the number of clusters that exist in the data. In order to find the mean rating, descriptive statistics has been performed. The final step was a K-Means output with a predetermined number of clusters to be specified. STAGE-1 At first, the data was analysed with the help of descriptive statistics. From the descriptive data, we have got the mean rating of the countries based on the 20 macro-economic indicators. From the mean rating, we got the average mean for the entire set of countries which gave us an idea of the mean value of each macroeconomic variables. An agglomeration schedule helped us to identify large differences in the coefficients. From the agglomeration schedule, we use the difference between rows in a measure called coefficient in order to identify the number of clusters in the data. A large difference in the coefficients values between any two rows indicates a solution pertaining to the number of clusters which the lower row represents. Finally, based on our judgment, we chose 4-cluster solution. The dendrogram, in addition to agglomeration schedule, provides a rescaled distance measure between various clusters combines at various stages. STAGE-2 In the second stage, we performed a K-MEANS cluster. This is because a K-Means Cluster procedure generally gives more stable clusters, since it is an interactive procedure compared with the single pass hierarchical methods. The output of the K-Means Cluster gave us the initial cluster centers, the country listing of cluster membership i.e. which country belongs to which of the clusters. Based on the study, we describe each of the characteristics of 4 clusters as follows:

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CLUSTER 1: "Pioneers- The trailblazer technocrats"


The countries belonging to this cluster are United Kingdom, Switzerland, Netherlands, Mexico, Malaysia, Korea Republic and France. The countries has a higher mean in the service exports of Communication, computer etc. and a high mean in the service imports in the communication, computer etc. This means that the countries are engaged in covering international communications, postal services, computer data, news related services transactions between residents and non-residents. The countries are also engaged in exports and imports of information and communication technology goods. Also, the countries has maximum number of internet users as well as the mobile cellular subscribers among the other clusters. The countries even has secure internet servers. The clusters has highest mean in the case of patents applications, Research and development expenditure and the number of researchers in the R&D. This implies that these countries are engaged in conceptions or creations of new knowledge, products, processes, methods or systems and in the management of projects concerned. A high mean score on patents applications denotes that the intellectual property and patents of a new company entering in that company will be safe and protected by the Government rules and regulations. This also verifies the fact about the literacy rate which is the highest as compared to other clusters.The clusters also has a high mean in the case of workers remittances and compensations. For a country, attracting an inflow of FDI strengthens the connection to world trade networks and finances its development path. But the countries in this cluster are having a lowest mean of FDI inflow. This shows that these countries might face a problem in the future regarding the development of the nation.

CLUSTER 2:"Challengers- The striving bullyboy"


The countries belonging to this cluster are Japan and Germany. The countries has a higher mean ratio in the case of imports of communications, computer etc. This implies that the countries are spending heavily on telecommunications, postal and courier services, computer data, news related service transactions between residents and non-residents., construction services, royalties and license fees. The countries also exporting products of high R&D intensity such as aerospace, computers, pharmaceuticals, scientific instruments and electrical machinery.

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CLUSTER 3: "Laggards- The shoddy Lazybones"


This cluster is comprised of 63 countries. The cluster has a higher mean rating of compensation of employees as a percentage of expense. This implies that the countries in this cluster provide a good wage structure, social security, insurance and pensions to the employees working in that country which is a conducive environment for employment in IT Sector. However, the countries lag in the field of patent applications, R&D expenditure. This implies that the foreign companies intending to enter into these countries will not prefer to open up a subsidiary in these countries. The literacy rate is lowest for these countries which means that these countries will not be able to provide adequate skilled workforce required by an IT company. The countries have a low mean rating in the case of ICT Goods and Services import and export. This shows that these countries are not having infrastructure in the IT sector as well as the allied sectors of communications, electronic components and technological services. So, there is an entry barrier for IT Companies to enter into these countries because the basic required infrastructure are not supported by these countries.

CLUSTER-4: "Mediocres- The under-achieving strugglers"


The countries which fall under this cluster are Peru, Nigeria, Mauritius, Iceland and Chile. Taking into the consideration of the various macro-economic indicators, the countries have an average rating in almost all of the indicators. This shows that the countries are in the development stage of becoming an attractive destination for the IT Service Industry. In other words, we can say that the countries are in an evolving stages of various researches and patent applications. These countries are on the verge of becoming favorable for the development of IT Sector, which requires a boost from the Government in the form of policies, and from the private sector in the form of funds and infrastructure. The countries under this cluster has a higher mean rating in the case of FDI Net Inflows. This shows that these countries are being considered to have potential to develop. So, the investors are pouring money in the form of FDI.

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REFERENCES:

TEXT-BOOKS: Nargundkar R.- Marketing Research 2nd edition Malhotra N.K.,- Marketing Research 5th edition

WEBSITES: http://data.worldbank.org/ http://data.worldbank.org/indicator

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