MNGT575 - Dissertation (Ref. 30118228)

Is Agglomeration Beneficial for IT Firm
A Case of Bangalore and Hyderabad IT

This dissertation is submitted to
of Examiners of the University in partial fulfilment of the requirements for the
degree of Master of Science in International Business

I hereby attest that this dissertation is entirely my own work with all ref

Submission Date:
Signed:

s Agglomeration Beneficial for IT Firm
Clusters
This dissertation is submitted to the Graduate Management School and the Board
I hereby attest that this dissertation is entirely my own work with all ref
included and suitably labelled.
MAITRANI, Harshal

s Agglomeration Beneficial for IT Firms?
the Graduate Management School and the Board
I hereby attest that this dissertation is entirely my own work with all references

Executive Summary

This research attempts to examine several factors which lead to formation of IT
clusters by carrying out an analysis considering several aspects involved in
geographical agglomeration or industrial clustering of firms and the influences of
these aspects on the phenomenon of firm clustering. The main aim of the research is to
understand whether clustering does benefit firms in information technology sector.
Bangalore IT cluster and Hyderabad IT cluster have been taken as two examples of
such clustering of firms, wherein comparisons have been drawn from a naturally
evolved and an engineered cluster respectively. At the end of the research, it is
concluded that agglomeration of information technology oriented firms is beneficial.

Table of Contents

TITLE PAGE

1 Introduction............................................................................................................1
1.1 Research Purpose, Objective and Question.................................................1
1.2 Brief Structure of Research.........................................................................2
2 Literature Review....................................................................................................4
2.1 Evolutionary History on Agglomeration Concept........................................4
2.2 Classical Approach to Agglomeration Theories...........................................5
2.3 New Approaches to Cluster Theories..........................................................6
2.4 Cluster Concept Definitions.......................................................................7
2.5 Common Characteristics of Clusters...........................................................9
2.6 Typology for Clusters................................................................................10
2.6.1 Marshallian Cluster.....................................................................10
2.6.2 Hub and Spoke Cluster................................................................11
2.6.3 Satellite Platform Type of Industrial District.................................12
2.6.4 State Anchored Cluster................................................................13
2.7 Factors Involved in Clustering...................................................................14
2.8 Merits of Clusters......................................................................................15
2.9 Demerits of Clusters..................................................................................17
3 Information Technology Relations to Clusters.........................................................18
3.1 Clusters of Information Technology...........................................................18
3.2 Distinguishing Characteristics of Information Technology Clusters.............19
4 Methodology..........................................................................................................21
4.1 Research Methodology..............................................................................21
4.2 Research Paradigm and Ontological Stance................................................22
4.3 Data Collection.........................................................................................23
4.4 Framework Designed for Case Study Analysis...........................................23
4.5 Research Scope and Limitations................................................................24
5 Industry Definitions and Context............................................................................25
5.1 Indian IT Industry before Liberalisation.....................................................25
5.2 The Indian IT Industry After Liberalisation................................................26
5.3 Current Facts of Indian IT Industry............................................................27
5.4 Software Technology Parks of India (STPI)................................................31
5.5 Agglomeration of IT firms in India.............................................................32

TITLE PAGE

6 Case Studies.........................................................................................................33
6.1 Case Study of Bangalore IT Cluster.........................................................33
6.1.1 Historical Background and Emergence of IT Cluster...................33
6.1.2 Government Role......................................................................34
6.1.3 Academic Role..........................................................................37
6.1.4 Industry Role.............................................................................39
6.2 Case Study of Hyderabad IT Cluster........................................................41
6.2.1 Historical Background and Emergence of IT Cluster...................41
6.2.2 Government Role......................................................................42
6.2.3 Academic Role..........................................................................43
6.2.4 Industry Role.............................................................................46

7 Analyses of Data...................................................................................................47
7.1 Comparison of Bangalore and Hyderabad IT Clusters...............................48
7.2 IT Cluster and Non-Cluster Firm Comparative Evidence..........................49
8 Conclusion and Implications.................................................................................52
9 Bibliography.........................................................................................................54
10 Appendix............................................................................................................62

Acknowledgement

I would like to take the opportunity to sincerely and heartily thank
Prof. Stephanos Mouzas, professor of Marketing and Strategy, Lancaster
University Management School, for guiding and supporting me by
providing me with a concrete structure and helping in my dissertation. I
am sure it would have not been possible without his help. I would also like
to thank my parents and classmates for boosting my morale and providing
me with vital informative resources for the research.

ABBREVIATIONS

BPO Business Process Outsourcing
CAGR Compounded Annual Growth Rate
FDI Foreign Direct Investment
GSDP Gross State Domestic Product
HAL Hindustan Aeronautics Limited
HMT Hindustan Machine Tools
IIIT Indian Institute of Information Technology (Hyderabad)
IIM-A Indian Institute of Management- Ahmedabad
IIM-B Indian Institute of Management- Bangalore
IISc Indian Institute of Science
ISB Indian School of Business
IT Information Technology
ITI Indian Telephone Industries
ITPL Infosys City and International Technology Park, Ltd.
MIT The Ministry of Communication & Information Technology, India
NAAC The National Assessment and Accreditation Council
NASSCOM The National Association of Software and Services Companies
OCC Offshore City Competitiveness
SEZ Special Economic Zone
SME Small and Medium Enterprises
STPI Software and Technology Parks of India
UGC University Grants Commission

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1. Introduction
1.1 Research Purpose, Objective and Question
Traditional theories on determining collocation of particular types of firms in a
clustered environment dates back to 19
th
century. Factors such as cost saving and
customer proximity that were reasoned out to be benefiting firms from such geospatial
location, have comprehensively diminished in contemporary world. Long Term
competitive advantages possessed by developed countries including United States,
also have considerably declined and developing countries such as India, China and
Philippines have possess competitive facilities such as infrastructural developments,
transports, communication systems, education and research. This has led to changing
structures and locations of business firms.
In spite of substantial amount of globalised facilities and resource availabilities,
trends of agglomeration or clustering of firms, has continued to exist in developing
and developed countries. Examples of existence of such renowned clusters are Italian
shoe cluster, Silicon Valley and Bangalore Information Technology clusters and
several manufacturing clusters in China. Information Technology (IT) clusters in
Hyderabad and especially Bangalore city in India have evolved in recent past and
consist mainly of software and service which can be delivered at negligible costs even
at far off locations. However, clustering of firms has been observed, especially in
Bangalore. Hence, research objective is to explore IT cluster evolution, growth and to
understand key factors leading to an explanation as to why IT firm agglomeration
occurs and are there benefits of clustering in a particular location. Information
Technology firms in India have been chosen as an industry context for this research
domain because they are a contemporary example of clustering in developing
countries. The main research question thus formed for the mentioned purpose is-
Is Agglomeration Beneficial for IT firms?

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1.2 Brief Structure of Research
The research has been divided further into seven more chapters, list of
references and appendix at the end. Chapter 2 contains relevant review of previous
attempts of exploration and understandings of theories and clustering phenomenon of
firms. This includes classical and recent agglomeration theories, important definitions
and characteristics, thus providing a suitable base for classifying different types of
clusters, and helps with an attempt to argue the different factors involved, merits and
demerits in of firm clustering.
The literature supports development for further advancement towards a critical
discussion of IT relations to clustering and uniqueness in characteristics of IT clusters.
Hence, chapter 3 deals with observations and reviews of IT clustering in recent
context and provides an insight of clustering of IT firms, thus separating IT cluster
characteristics as compared clusters in other sectors.
Chapter 4 contains methodology section discussing reasons for choosing a case
study based research, ontological stance and research paradigm. Also, this chapter
discusses two important elements. Firstly, it includes data collection and methods
which have been used and reasons for same. Secondly, it involves further discussions
on relevant issues for research scope and limitations. A brief idea for case study
design framework too will be elaborated in the subsection.
Chapter 5 includes further relevance of IT industry in India, giving insights on
facts and relevant understandings of structure of processes and products which are
involved in Indian IT sector. The chapter also creates a platform of socio-economic
understandings which are essential for setting up of case study based research for IT
clusters.
Chapter 6 begins with exploration of Bangalore IT cluster evolution and critically
analysis it through brief history of formation of IT clusters, and further discussing
roles of three spheres inclusive of government, industry and academic influences on
the cluster. The next section deals with Hyderabad IT clustering phenomenon and
critical analysis is done using a similar structure to Bangalore IT cluster.

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First half of chapter 7 deals with comparative observations and findings from case
studies for Hyderabad and Bangalore IT clusters. The second half contains data
analysis of Bangalore IT cluster and non-cluster IT firms in India. The purpose of this
chapter is to achieve the linkage or confrontation of theories through empirical
observations by gaining deeper insights of research question. The last chapter includes
conclusive summary of insights through observations, achievements, further research
scope and implications.

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2. Literature Review
The study of beneficial effects of industrial cluster formation, growth,
development and innovative capacity in developing countries is widely recognised and
has been a topic of intensive discussions through various research done till date. The
review of the literature would help represent and place cluster phenomenon and
relevant studies in currently existing published work. The literature review would also
be useful to develop and highlight critical areas and arguments that can be utilised for
building an analytical framework. Previous studies on theoretical propositions and
empirical analysis have focused on several distinct yet related approaches in
understanding clusters. Hence, literature review has been divided into subsections for
the purpose of carefully distinguishing the previous research and for clearly analysing
literature in a systematic and logical method. The review includes the historic
viewpoint of the concept and development of the idea of clusters, followed by
classical view of the concept reviewing the agglomeration theories. The classical
theories further lead to new developments and contemporary approaches to cluster
research.
2.1 Evolutionary History of Agglomeration Concept
Advancement of better communication technology and transport facilities has
made the cost of delivering the goods cheaper. However, there are several different
types of clusters of similar firms which have established in close proximities. Porter
(1990) argues that most of the world trade which takes place amongst developed
nations is a result of the similar factor endowments in the nations. The traditional
factor endowments of a nation would consist of the availability of land, infrastructure
in the form of better telecommunication facilities, transport, educated and skilled
labour which has necessary know-how of the technological advancements. However,
these factor endowments which were prevalent in the developed countries no longer
provide an advantage to the developed nations alone. Many developing nations such
as China, Korea and India have built up such advancements and thus, it has led to the
diminishing role in the traditional factor endowments.

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The evidence on clustering or agglomeration of economic activities dates back
to Von Thunen Model on agricultural land use. The author as cited by Rosenberg,
(2011) argues that those goods which are easily perishable or have a shorter shelf life
would be located nearer to the market. This indicated, that the end users, who were
located in the town, would naturally have quicker access to the product and that the
transport costs would lessen. It would also lead to less risk of losses due to damaging
of goods (Rosenberg, 2011). On the contrary, Alfred Webers theory on industrial
locations is based on reducing the transport costs assuming two cases: weight gaining
and weight losing case. According to the two mentioned cases, the firms in industry
(especially manufacturing firms), would be located either near the source of the raw
materials or near the market, depending upon the weight of the raw material and the
finished goods (Bergman and Feser, 1999). A common argument which can be
pointed out in both theories is transport cost savings, thus focusing mainly on
economic relations between the cluster firms.
2.2 Classical Approach to Agglomeration Theories
Marshall (1920) points out two important factors for industrial districts
formations. Firstly, firms collocating in a close proximity tend to have advantages
through technology and knowledge spillovers. This view can be valid as any new idea
in the product, process or organisation by a firm is adopted by the followers of the
cluster. This idea can result in a build up of several improvements upon the original
idea or creation of new ideas by other firms. Secondly, collocations of firms help
economies of scale and scope. Economies of scale occur in two types; external and
internal. An example of external economies can be infrastructural developments in
that particular area such as construction of roadways, railways and better
communication systems. Krugman, Obstfeld & Melitz (2012) argue that not all
external economies of scale are relevant to the firm level as it can also apply to
industry level resulting in industry cost reductions on a large scale basis and can be
beneficial to collocated firms of that particular industry, instead of just being
advantageous to a single firm. Hence, external economies of scale are more beneficial
to the industry rather than a single firm in that particular industry.

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Internal economies of scale occur in the presence of fewer firms in an industry,
and also when the output of these firms is comparatively larger. In such case, firms are
arguably more efficient. However, the assumption mentioned for internal economies
of scale is when firms operate in a perfectly competitive environment which would
drive the prices down and naturally eliminate those firms which are not efficient
(Krugman, Obstfeld and Melitz, 2012). Another critical assumption is lack of
acknowledgment for interventions as government regulations and policies at local,
state and national level can tend to have a capacity to create influential effects on
clusters. For External economies of scale, the number of firms is comparatively larger
and competition reduces unit cost of production (Krugman, Obstfeld and Melitz,
2012). Whereas, for internal economies of scale, fewer firms would continuously try
to achieve efficiency in production so that the unit cost of production would reduce.
This happens phenomenon occurs as a result of the competitiveness between firms of
that particular industry. This demonstrates the importance of internal and external
economies which are involved in agglomeration of firms.
2.3 New Approaches to Cluster Theories
Maskell (2001) divides economies of agglomeration into two main types. The
first type includes the possible advantages gained by diverse types of firms due to
geographical proximity between various activities of several firms in the area. Jacobs
(1965, as cited by Van der Panne, 2004) argues that knowledge spillovers occur
between complementary industries so that the knowledge in production, processing
and services is transferred between different industries in order to build innovative
ideas and generate efficiency to have increasing returns. This concept is urbanisation
economies and is a part of scope externalities. The second type of agglomeration
economies, locational economies, firms with similar economic activities are closely
located. Locational economies have been stronger driving force for cluster research as
firm structures and configurations has led to improvements and enhanced learning
processes (Maskell, 2001).

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Arthur (1989) argues that increasing returns in the form of agglomeration
economies cause a monopoly. This emphasises that if agglomeration economies are
unbounded, then a single location selected by historical accident would provide
monopolisation of the industry. On the contrary, Krugman, Obstfeld & Melitz (2012)
argue that comparative advantage in the form of differences between technology and
resources can only partially explain the initial advantage of the location chosen by
industries. The authors support Arthurs view that a historical accident does provide
an initial advantage to an industry at a particular place, but in due course, this initial
advantage may not even be relevant for the growth and sustenance of clusters. This is
due to the argument that the initial advantage merges with external economies of scale
which make initial circumstances which were created for it, to disappear (Krugman,
Obstfeld and Melitz, 2012). Nonetheless, these insights according to these authors,
explain the formation and clustering of the firms of the Silicon Valley region in
California.

2.4 Cluster Concept Definitions
Geographical agglomeration and cluster have identical meaning and are used in
literature to describe the same phenomenon. The meaning and definitions of clusters
have been changing with respect changes in technological advancements, approaches
and significance of clusters. Hence, it is essential to define a cluster for the purpose of
research. Several terminologies including local industrial specialisation, spatial
economic agglomeration and regional development have been used to for clusters
(Martin and Sunley, 2003). Due to such vast nomenclature issues, for the purpose of
this research, industrial cluster, industrial district or simply cluster will be
utilised.

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The United Nations Industrial Development Organisation (UNIDO) (2001)
defines clusters as Sectoral or geographical concentration of firms that produce and
sell a range of related or complementary products and, thus, face common challenges
and opportunities. Further, the author(s) mention that clusters give rise to external
economies such as specialised suppliers and talent pool which helps foster innovative
development in terms of management, technical and financial matters. The UNIDO
(2001) paper also analysis the difference between clusters and networks. This has
been done as the two terms have been alternatively used in literature. A network is
composed of firms located in geographical proximity, cooperating with each other
through joint developments to achieve efficiency in a collective manner and in order
to penetrate markets which are beyond an individual firms capability. Hence,
networks act as horizontal integrations or vertical integrations of firms within or
outside clusters. The following table elaborates comparison of networks and clusters
in a detailed manner.

Comparison of Networks and Clusters
Networks Clusters
Allow firms specialised access at lesser
costs
Attract required services to an area
Memberships are limited to firms Memberships are open to all
Are based on contractual agreements Are based on social values that help
develop trust and promote reciprocity
Encourage firms to engage in complex
production by making the process simpler
Create demand for firms with similar and
related capabilities
Are based on co-operation Require both co-operation and
competition
Business goals are common Visions of firms are collective in nature
Source: Rosenfeld (2001)

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Bergman and Feser (1999) define industry clusters as a group of business
enterprises and non-business organisations for whom membership within the group is
an important element of each member firms individual competitiveness. Porter
(2000) defines clusters as geographic concentration of interconnected companies,
specialised suppliers, service providers, firms in related industries and associated
institutions (e.g., universities, standards agencies, trade associations) in particular field
that compete but also cooperate. Cluster boundaries are often difficult to draw as one
has to consider understanding the linkages within and between the industries and
especially those which are main determinants of competition. Hence, the boundaries
can be determined by gauging strength of knowledge spillovers on productivity and
innovativeness.
2.5 Common Characteristics of Clusters
Common characteristics of clusters can be identified with the help of
definitions of clusters through various literatures. These characteristics are as follows:
Cooperation and competition existing together between firms
Geographical concentration of firms in a particular area
Firms fall under a particular category or similar categories such that there are
inter-linkages due to a constant need of understanding different requirements
Work is diverse; generally ranging from traditional economic roles to
technical scientific and/or high skilled roles
Driven by relationships rather than membership to a particular body
Influencing innovativeness in production, processing and practices in order
to circumvent competition and help improve efficiency and effectiveness
Clusters also tend to have contacts and connection with the rest of the world
through global extensions. For example, Indian diaspora has had a significant role in
the growth and success of Indian IT firms in Bangalore cluster (Balasubramanyam and
Balasubramanyam, 2010).

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2.6 Typology for Clusters
Since Marshals views on industrial agglomeration, the fundamental models
of clusters have been evolving in due course. Apart from the Marshallian types of
industrial districts, Markusen (1996) also identifies three other types of cluster
formations. These types of clusters are based upon fundamentally distinct type of firm
industrial configurations, internal versus external preferences, and government
structures.

2.6.1 Marshallian Cluster

Figure 1: Pictorial Representation of Marshallian Cluster

Source: Markusen (1996)

The Marshallian industrial districts comprise of small and locally owned firm
concentrations in close proximities. As a result, investment and other business
decisions are done locally itself. Within this cluster, most of trade takes place between
the buyers and the sellers through a medium of long-term contracts and obligations.

Suppliers Customers

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Markusen (1996) argues that although Marshal does not clearly say so, the
linkages between the firms in the district and the outside world can be believed to be
minute. Hence, the scale of economies which occur in this type of cluster could be low
resulting in barriers to large firm formations from this type of cluster. Also, these
clusters are specialised in certain product or process explaining inter-firm labour
migration within the cluster. Although fundamental characteristics of Marshallian
clusters mainly depict the economic relation between the firms in the cluster, Sforzi
(2000) argues that the model is more complex as there is de-composition in firms
production processes into several phases and then re-composition of processes which
interweave cooperation and competition between the firms within the cluster.
2.6.2 Hub and Spoke Cluster

Figure 2: Pictorial Representation of Hub and Spoke Cluster

Figure 2 represents a Hub and Spoke cluster in which bigger circles are large
firms or hubs and smaller firms or local firms are the smaller circles. Hubs act as the
anchors for the activities inside the cluster. The smaller firms are mainly suppliers and
the related services which act as spokes to the hubs. There can be single or group of
dominant firms which buy from the suppliers locally or externally and mainly sell
products or services to consumers outside of cluster.

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The labour or talent is attracted more towards hubs and new talent pool is
employed by the smaller firms. Markusen (1996) argues that substantial amount of
intra-district trade takes place amongst the hub and the spoke firms, but the
cooperation between competitive firms to share innovative ideas, risks and stability of
the market notably lacks in this cluster type.
2.6.3 Satellite Platform Type of Industrial District
Figure 3: Pictorial Representation of Satellite Platform Type of Industrial
Cluster

= The Branch Office and/or Plant
Figure 3 represents Satellite Platform type of industrial cluster formation
consisting branch based multi-platform firms centrally located inside cluster to obtain
benefits through government incentives offered in that particular area. Markusen
(1996) argues that reason for such establishments have two main benefits. The first
benefit is for government as clustering these areas help stimulate economic growth.
The second benefit is for businesses to simultaneously lower their costs as compared
to the urban area establishments which have high salary demanding labour along with
expensive rent and taxations. The main characteristic of such cluster includes minimal
or no relationships between the satellite firms in the cluster as they are controlled by
the parent firms which usually locate outside the cluster (Boja, 2011).

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2.6.4 State Anchored Cluster

Figure 4: Pictorial Representation of State Anchored Cluster

Source: Boja (2011)

Figure 4 represents State Centred or State Anchored Cluster in which
government establishments or non-profit organisations dominate the sector. The small
firms, which eventually get concentrated in this cluster, benefit from the short-term
public-private contracts, but policies and implications by the government or the state
play a key role in determining extent to which firms can benefit (Markusen, 1996).
The cluster can resemble a Hub and Spoke type, wherein, instead of large firm being
private, it is state or public owned. An example of such cluster can be a US military
base in the middle and small firms and suppliers would be within its periphery (Boja,
2011). However, the author argues that if the ties strengthen between the firms located
in the cluster, it can change its characteristics to resemble more like Marshallian
cluster.

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2.7 Factors Involved In Clustering

Evolution of cluster is derived from series of factors which are prevalent in
business environment and location specification. On one hand, Porter (1990)
emphasises on four factors; firm strategy, structure and rivalry; demand conditions;
factor input conditions ; relating and supporting industries, in the shape of a
Diamond and argues that the rate of change of interactions of these four factors is
directly proportional to the productivity of the firms in the cluster. On the other hand,
The Triple Helix Model formulated by Etzkowitz (2002a, 2002b and 2003) includes
the understanding of the relationships between the institutions of government,
academia and the industry which lead to the study of assessing whether collaborative
linkages between the three mentioned spheres lead to cluster formation, growth and
maturity eventually leading to innovations. This phenomenon, according to the author,
also addresses the evolution of clusters based on knowledge transfer by the linkages
between the three spheres.
Porter (1990) argues that globalisation has resulted in new competition as many
industries have internationalised, not just in the manufacturing sector but also in the
service sector. Strong alliances between firms from different countries have made it
possible for global scale of production and distribution of goods and services.
However, Morosini (2003) argues that although globalisation has reduced importance
of traditionally localised factors of productions, it has led to increasing significance of
localised clusters across a range of firms external, internal and social factors.

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The author summarises the representation included in these factors. External
factors are represented by main customers, main product and service markets, key
demographic trends and main legal and regulatory frameworks. Representation of
internal factors includes key resources such as human capital and financial capital, key
processes such as innovation, research and development, product development and
supply chain management, and finally, key competencies and capabilities such as
speed of innovation. The social impact on cluster is given by learning about external
factors and managerial capabilities, creation of knowledge, sharing of knowledge and
cultural behaviour and norms (Morosini, 2003).

2.8 Merits of Industry Clusters
I.) Economic Development: Porter (2000) argues that clusters allow a focus on
important priorities, and provide assistance to policies involved in promoting science
and technology, education, training, foreign direct investment inflows and export.
Foreign direct investments are mainly attracted towards developed as well as
emerging clusters and enhance export capabilities (Porter, 2000). Clusters also
contribute to the Gross Domestic Product of the nation. For example, Bangalore,
which mainly constitutes of businesses relating to Information Technology (IT) and
Information Technology Enabled Services (IT-ES), contributed a GDP of $83 Billion
in the Indian Economy (Rediff Business, 2010).
II.) Provides common pool of factor endowments: Location of specialised
suppliers, skilled labours and public infrastructural investments are prevalent in
clusters in order to cater to the needs of the pre-existing firms and corporations.
Hence, the costs of recruitment, training and selection of employees are reduced
drastically allowing new firms and establishments to benefit from this common pool.
The employees too benefit due to the presence of ample amount of opportunities
derived from the collocation of these companies.

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III.) Coexistence of Cooperation and Competition: Proximity naturally amplifies
rivalry and due to presence of several firms in short distances from each other, the
intensity is accentuated. Although, cooperation would generally be found within
vertical linkages in the cluster, for example, the suppliers and the producers, certain
levels of cooperation between rivals also is beneficial for the firms in the cluster
(Porter, 2000). A suitable example of such coexistence of cooperation and competition
can be a group of rival firms who are working together in an instance of corporate
lobbying. An individual companys efforts will not affect much as compared to
combined effort of firms of the industrial cluster. Cooperation also results in taking
advantage of complementarities, exploit new markets, and integrate activities (Barkley
and Henry, 2001).
IV.) Promote Innovation: As a result of congestion of specialised skills of
employees and suppliers, alert vendors and formal and informal interactions with the
research and academic institutions foster a strong growth of innovation in the clusters.
This type of environment in the cluster helps create spillovers or dissemination of
knowledge which results in pressures to offer new or better products and services.
Porter (2000) argues that location affect the competitive advantage by the means of
productivity and productivity growth.
V.) Real Benefits of Location: Productivity growth can be achieved through
efficiency and effective use of resources and innovative production and processes.
However, it can be obviously argued that location proximity benefits cannot be
measured in an era where rapid development of communication technologies like
wireless communication and high width broadband services have evolved at cheaper
costs. Pravitt (1987, as cited by Radulovic, 2008) argues that several authors assume
that technological knowledge to be codified easily and transferred to long distances,
whereas, in reality, it is a complicated process, target specific and cumulatively
developed. Thus, the idea involved in the argument is that geographical closeness and
personal connections results in the required knowledge transfers.

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2.9 Demerits of Clusters
I.) Intellectual Capital Leaking- Collocated firms have two types of knowledge
flows, knowledge inflow and knowledge outflow (Iammarino and McCann, 2006). It
can be assumed that knowledge inflows to a firm with direct competition to its rivals
in the cluster can be positive inflow. However, knowledge outflow which are
unintentional, can have private affects on the firms intellectual capital and intangible
assets and can be reasoned out to be negative knowledge flows (Grindley & Teece,
1997 as cited by Iammarino & McCann, 2006). However, dAspremont et al. (1998)
argue that even if acknowledgeable firms or participants cannot be identified, R&D
environments with adverse selection and moral hazards through joint, but balanced
collaborations for research are best solutions with ideal disclosures which leads to
public good.
II.) Uneven Economic Distribution- Another important discussion and critical
argument against clusters is the lack of unified distribution of economic activities
resulting in the uneven distribution and development of the country (Heeks, 1996).
Porter (1990, 1998) argues that clustering helps competiveness and lead to significant
advantages for global competition. However, Bennet et al. (1999) argue that despite
globalisation, increased industrial clustering would more likely lead to further
concentration and localisation of businesses within the economy, thus leading to
uneven distribution of economic activities and lopsided development of the economy.

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3 Information Technology Relations to
Clusters
Oxford English dictionary defines IT as the study or use of systems such as
computers or telecommunications for storing, retrieving and sending information. In
a broader sense, Information technology refers to anything related to computing
technology, networking, software, hardware, the internet, or the people who work with
the previously mentioned technologies (Tech Terms, 2011). IT clusters arguably are
an important type of technology clusters and most of these clusters represent high
efficient (Boja, 2011).
3.1 Clusters of Information Technology
The backbone of success of several IT clusters has been an underlying fact that
human activities have been made simpler by the continuous use and adoption of IT
oriented products and services. As a result, demand for IT products and services have
achieved constant growth. Another factor which has been essential for the
accomplishments of the IT clusters has been defined by the particularities of
production processes (Boja, 2011). These particularities can be address by two
distinguished perspectives. Firstly, software products designed for a purpose can be
implemented and duplicated at negligible costs. Hence, the production processes are
different from others. Secondly, the physical IT products, which are hardware, are
manufactured in mass production which naturally lowers down the costs (Boja, 2011).
However, different customers require customised products and solutions
depending upon their usage requirements and need constant upgradation and
maintenance. This leads to a paradox concerning hidden costs of consultation,
implementation and maintenance of IT products. Nonetheless, Boja (2011) argues that
as IT clusters are knowledge and high skill based clusters, the development of IT
clusters usually originates in locations which have strong associations with research
oriented institutions and universities. Hence, it can be argued that traditional factors,
such as the raw materials that are required for industries, are of small or no relevance
to these types of clusters.

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3.2 Distinguishing Characteristics of IT Clusters

I.) Resource Requirements- Fundamental resource requirements of IT clusters
include a pool of technically qualified and skilled workforce. Infrastructure costs can
be lesser as compared to other manufacturing sectors, especially for software firms as
relatively inexpensive sunk and fixed costs are attached to the start ups of software
oriented firms as compared to manufacturing firms. Balasubramanyam and
Balasubramanyam (2010) argue that presence of firms flocked together does little to
the formation of human capital, but firms that collocate in geographical proximity and
produce similar products and services, provide a favourable environment for
generating human capital. In other words, contemporary IT clusters are a result of
socio-economic factors that help assist creation and a spread of the human capital.
II.) Quality of Linkages and Technology adoptions- Linkages within IT
cluster can be horizontal who co-operate, compete and technology which gets created,
irrespective of its source of creation, gets adopted quickly by followers. This occurs as
a result of difficulties in blocking the technical know-how as the efficient workforce
can be easily acquired within the cluster due to rapid mobility of employees within
cluster. Saxenian (1996) highlights importance of quality of linkages by concluding
with comparisons between Silicon Valley and Route 128 based firms. The author
argues that Silicon Valley succeeded due to adoption and use of technological changes
regardless of place of origination, and Route 128 based firms had definite stance
regarding their policies which were in-house development. As a result they lacked
optimal use of the linkages in the cluster.

20
III.) Government Role- Government plays key roles in well being and
successful establishment of the IT clusters and main infrastructure and related policies
can be provided its sustained growth and development. Apart from infrastructure,
government or similar agencies can provide knowledge of the members, suppliers,
competitors, supporting services and R&D environment to IT firms for cooperative
growth and competition within IT clusters. Government roles tend to influence IT
clusters in various ways. For example, Korea is world renowned for companies like
Samsung and LG, but there has been no growth and sustainability of IT clusters. Sohn
and Kenny (2007) argue that the reasons for failure of IT clusters in Korea has been
initial government policies to support large companies or Chaebols in order to
acquire their technology and enhance their capabilities to conduct research internally,
thus neglecting university entrepreneurial initiatives. On the other hand, one of several
factors measuring success of the Indian IT clusters has been highlighted by the
historical analysis of the government policies towards Indian IT companies (Basant,
2006).

21
4 Methodology

4.1 Research Methodology
Case Study approach would be utilised for the purpose of the research analysis.
This approach has been defined by Yin (1989), [...] an empirical enquiry that
investigates a contemporary phenomenon within its real life context; when the
boundaries between the phenomenon and the context are not clearly evident, and in
which multiple sources of evidence are used. It is reasonable to argue that IT clusters
can be considered, in contemporary terms, as complex phenomena as several agents
act upon its formation, structure, growth and survival. This research can be considered
to be an exploratory study of firms in IT clusters in order to help develop an
environment to explore IT cluster evolution in India, as a whole.
The research has been focused to answer questions such as how and why
are IT firms in clusters despite arguments mentioned previously regarding lesser
dependence of traditional roles of factor endowments in contemporary world. Also,
the main purpose is to critically analyse whether it is beneficial for IT firms, in
particular to collocate in clusters. Hence, an appropriate methodology for suitably
approaching questions such as how and why can be effectively explored by the use
of case study based research (Eisenhardt, 1989; Siggelkow, 2007; Yin, 2003). Case
study research will be utilised with help of Bangalore and Hyderabad IT clusters. This
would lead to a comparison of two clusters and create a foundation for the empirical
analysis of the IT cluster. Thus, case study research would be an effective solution to
successfully divide this research with the qualitative and quantitative data from the
industry clusters of Hyderabad and Bangalore to provide useful insights to IT clusters
through multiple sources of evidence.

22

4.2 Research Paradigm and Ontological Stance

Collis and Hussey (2009) argue that an interpretivists analysis involves data
analysis to obtain themes and patterns and/or use linguistic analysis for exploring
semantics, syntax and context. Thus, interpretive element is necessary and equally
important to analyse different meanings social actors are involved in attaching, to the
phenomenon and also to gauge the nature of social interactions between economic
agents which contribute towards evolution and developmental change within firms
within IT cluster in India. Hence, the research paradigm would mainly focus on
interpretive methods by using online resources and make use of these resources to
solve open ended questions. The criteria of research would include linkages which are
relevant to IT clusters in Bangalore and Hyderabad, education institute roles,
government regulations and interventions which have created influential effects on IT
clusters in India.
An assumption that there is no single or objective truth to research question
will be formed in order to carry out the research as multiple agents are involved in the
IT clusters. Hence, the ontological stance which will be appropriate for the research is
subjectivism to reach consensus of shared truth. Basant (2002) argues that inter-
sectoral synergies and spillovers contribute mainly to growth and development of the
computer cluster. Knowledge flows or spillovers are indeed complicated to analyse
with the medium of quantitative methods and will be considered to be a shortfall for
research objective.

23
4.3 Data Collection
Data Collection has been mainly focused on the availability of information
from secondary sources. The secondary sources of data collections include scholarly
work in academic articles from different journals, press releases of different
publications, books on IT Industry in India and archival documentation of reports. The
main reports which will be used are from authentic government bodies of India such
as Software Technology Parks of India (STPI) and official websites of state bodies of
Karnataka and Andhra Pradesh. The reports available from the recognised body, The
National Association of Software and Services Companies (NASSCOM), would be
used to conduct empirical analysis and enquiries in the research. The firm data for
conducting non-parametric analysis on total income and employees will be obtained
from Dun and Bradstreet (2011). The secondary source of data collection includes
qualitative as well as quantitative data.
4.4 Framework Designed for Case Study Analysis
Industry and government linkages have always been considered have linkages
of these institutional spheres. However, Etzkowitz (2002) argues that the role and
overlapping functions of academia as another sphere with the former two comprises of
the Triple Helix Model (THM). The Triple Helix comprises of the knowledge
producing institutions like the Universities, Industry comprising the start up firms,
small and medium enterprises and the multinationals, and government at different
levels. The interaction of these three actors can reveal and help the understanding of
the regional development or national development. Also, empirical analysis of the
three spheres helps shape up logical concrete findings and implications and there may
be reasonable assumption that the interconnection between the three resources spurs
new business models and opportunities, technical and scientific advancements
(Etzkowitz, 2003). This, in turn, will illustrate and lead to conclusions regarding the
main research question.

24
4.5 Research Scope and Limitations
The source of data collection is secondary sources. This means that data
collected initially will be for different purpose as compared to the research objective
of the dissertation. Nonetheless, Saunders et al. (2009) argue that Secondary data
sources can provide valuable information to partially or completely answer research
question or questions. Hence, assuming this argument to be valid, the research has
been carried out.
The research conducted is only for IT clusters in India. The analysis or findings
of IT clusters in other economies may be similar or different, depending upon various
factors which can be taken into consideration. Case study based research is widely
criticised for lacking scientific rigour. Also, it has been criticised to be difficult for the
researcher to maintain control and decide scope of the study. However, Wilson (2011)
argues that case study based research criticisms can be overcome by the use of
rigorous documentation of the processes which involved in the research. Another
factor which can be considered as a limitation is non-parametric analysis has been
carried out in chapter 7 as fewer assumptions of probability distribution of data are
required and sample sizes of both, Bangalore IT cluster and Non-Cluster firms are
inadequate. Although IT firms have office locations in several cities, Bangalore firms
for the purpose of analyses have been chosen according to their head quarter or
registered office locations. Non-cluster firms which are chosen are those who dont
have their quarters of registered office in Bangalore, but elsewhere in India.

25
5 Industry Definition and Context

5.1 Indian IT Industry before Liberalisation
More than 30 years ago, India decided to develop into an Information
Technology oriented economy on its historical reputation for mathematics in order to
become a global player. In 1970s, central planning authorities helped start IT
developmental phase focusing initially on education and training for creating a human
resources and building business friendly environments for IT and also wanted to
ensure that the foreign direct investment would fall in lines with the priorities for
development (Messner, 2009). However, these policies backfired as it became
difficult for foreign firms to operate in such highly regulated environment.
The 1969 Monopolies and Restrictive Trade Practices Act and the 1974
(FERA) Foreign Exchange Regulation Act had significant effects on IT industry. The
former restricting firms that wanted to achieve scale economies, while the later
leading to IBMs exit from India in 1977 (Messner, 2009). In order to create more
employment opportunities, government reserved 50% of manufacturing capability for
small scale enterprises. Prior to economic reforms which took place in the 1991,
Indian IT industry consisted of firms that were vertically integrated majorly
dominated by public sector firms from hand full private sector firms. The main
international private sector firms were international players such as IBM, DEC,
Honeywell, and ICL and domestic companies comprised of names such as NELCO,
Hinditron, and Tata InfoTech (Kauffman & Kumar, 2008).

26

5.2 Indian IT Industry after Liberalisation
Liberalisation in 1991 allowed breaking shackles of licensing system, removing
restraints on Foreign Direct Investment (FDI). Noninterventionist policies towards
international trade led to substantial increase in growth rate of Indian economy which
was running long term fiscal deficits (Balasubramanyam and Balasubramanyam,
2010). Due to wage differences between IT personnel of India and western world, IT
professionals from India were temporarily employed at onsite regions near clients
from western countries to save costs on developing software coding (Messner, 2009 &
Heeks, 1998). This business form was popularly known as Bodyshopping. Also,
some Indian firms including Tata Consultancy Service, Wipro and Infosys started
serving required IT support to foreign clients due to limitations of IT service adoption
in Indian domestic firms from other sectors.
A fortuitous turnaround for Indian IT firms occurred with the origination of
Y2K issue (Year 2000 Problem), as it allowed them to demonstrate their capabilities
in IT sector. The problem was related to system failures or bugs which recognised
four digit years into two digits in an ascending order. It meant that logically that data
stored was rolled over by dates of years such as 97, 98, 99 but year 2000 had two
zeroes at end which defied logic of ascending order resulting in errors. This provided
opportunities for Indian IT firms to solve technical issues for several foreign clients
resulting in export revenues generation, trust and extension of contracts from old and
new clients (Balatchandirane, 2007). Low labour cost, familiarity with coding, low
end labour intensive problem and linkages with foreign clients were the advantages of
Indian IT firms (Illiyan, 2008). As a result, Indian IT industry witnessed a major leap
from year 2001 and IT exports outgrew domestic markets as shown in the figure 5.

27

Figure 5: Indian IT Industry Domestic Sales and Exports from 1999 to 2010

Source: NASSCOM (2010) & Messner (2009) Figures in ($) USD Billion

5.3 Current Facts of the Indian IT Industry
The talent pool of IT sector in India is diverse, inclusive of 30% of employees
in age bracket of 18-25 years and 44% within range of 25-30 years. Also, 70% of the
employees have work experience of 0-5 years while 30% have more than 5 years
(NASSCOM, 2010). A. T. Kearney Global Services Location Index which includes
criteria such as financial attractiveness, people skills and availability and business
environment has ranked 1 to India amongst all nations with an overall score of 7.01,
and the analysis of IT domains such as Voice, Business Process Outsourcing (BPO)
and Information Technology Outsourcing (ITO) has led to findings that India is most
favoured destination for same in all domains (AT Kearney, 2011). The IT workforce
has been increasing every financial year due to substantial contributions of fresh talent
in technical and other related fields from different educational environments. As
observed in table 1, more than half numbers of engineering graduates are majoring in
IT.

E: Estimated, F: Forecasted
Source: NASSCOM (2010)

The employment in IT sectors has been rising
close to a million of the workforce being employed in
Exports in 2010. Hence, as observed in figure 6,
almost doubled. The contribution to this talented work force has
through efficient education
pursue further studies by offering scholarships and company funding.
Evalueserve survey analysis observed that
industry revenue on training and skill development of new recruits. Collaborati
partnerships and tie-ups have been focused by firms such Tata Consultancy Services
(TCS), Intelenet, Accenture and Patni Computers with the educational institutes such
as IIT (Indian Institute of Technology) in Mumbai, Chennai, Narsee Monje Institute o
Management Studies, BITS Pilani and IIM Kozhikode
technical, but also soft skills, leadership, personality development and business
communications (NASSCOM, 2010). Employees too are attracted to IT firms
better opportunities, fast track merit oriented progression,
prospects and achieve financial independence.

FY2006E FY2007E
513000
690000
415000
553000
365000
378000
Figure 6: Subsectorwise Employment in IT
IT Services and Software Exports
28
F: Forecasted & FY: Financial Year
employment in IT sectors has been rising significantly
workforce being employed in IT Services and Software
as observed in figure 6, employment in
. The contribution to this talented work force has also
and training by IT firms as they encourage employees to
pursue further studies by offering scholarships and company funding.
y analysis observed that IT firms invest, on an average of 2%
industry revenue on training and skill development of new recruits. Collaborati
ups have been focused by firms such Tata Consultancy Services
as IIT (Indian Institute of Technology) in Mumbai, Chennai, Narsee Monje Institute o
Management Studies, BITS Pilani and IIM Kozhikode in order to not only develop
but also soft skills, leadership, personality development and business
(NASSCOM, 2010). Employees too are attracted to IT firms
fast track merit oriented progression, seek long term career
prospects and achieve financial independence.
FY2007E FY2008E FY2009E FY2010F
690000
877000
958000 993000
553000
635000
738000
768000
378000
450000
500000
525000
Figure 6: Subsectorwise Employment in IT-BPO Sector
IT Services and Software Exports BPO Exports Domestic Market
significantly every year with
IT Services and Software
5 year span has
also been achieved
age employees to
pursue further studies by offering scholarships and company funding. Nasscom-
on an average of 2%, of
industry revenue on training and skill development of new recruits. Collaboration,
ups have been focused by firms such Tata Consultancy Services
as IIT (Indian Institute of Technology) in Mumbai, Chennai, Narsee Monje Institute of
in order to not only develop
but also soft skills, leadership, personality development and business
(NASSCOM, 2010). Employees too are attracted to IT firms to foster
long term career
FY2010F
993000
768000
525000
BPO Sector
Domestic Market

29

Venture Capitalists and Private Equity players contribute to growth of Indian
IT industry and have been one of main drivers for same. In last eight years,
investments in IT industry have grown up to 16 times at a compounded annual growth
rate (CAGR) of 42% and government has been playing major role in this growth. The
roles of government have been in development of focus areas such as business
environment, education, e-Governance and Global Trade Development (NASSCOM,
2010). Figure 7 lays down a summary of these key focus areas and measures by Indian
government. New directive for Direct Tax codes automatically reduces ambiguity and
simplifies calculations regarding tax payment. Economic reforms have paved a way to
progressive policies resulting in increased government spending in IT and in 2009
alone, Indian government spent USD 5.1 Billion in IT products comprising of 50% in
Hardware, 20% in software and 30% in IT services (NASSCOM, 2010).

Figure 7: Summary of
Source: Compiled from NASSCOM (2010)

Business
Environment
New Direct Tax
Code, Company
Law Reforms,
proposed Goods
and Services Tax
Act (Indirect
Taxes)
Financial
Sector Reforms
Development
of Long-term
debt markets
and corporate
market bonds;
improve
futures
markets
Education
Education for all
Development
30
Summary of Key Focus Areas and Government Measures
Source: Compiled from NASSCOM (2010)
Education
Education for all
Higher
Education
Reforms
Faculty
Development
Inviting FDI
E-Governance
National E-
Governance
Programme- 27
Mission mode
projects at the
Central and
State level
UIDAI
programme
development
Key Focus Areas and Government Measures

Global trade
development
Bilateral and
Multi-Lateral
Agreements
Social Security
agreement
implemented
with Belgium
and Germany,
and other
nations

31
5.4 Software Technology Parks of India (STPI)
The Software Technology Parks scheme has also played a significant role in
the improvement and emergence of the Indian IT industry. In the Indian financial year
of 2009, 94% of the total IT exports was from the STPI units and 6% was from the
Special Economic Zones (SEZs) (STPI Annual Report, 2010). Since 2000, key
policies for STPI units for a term of 10 years include 100% tax waivers on export
profits, exemptions from customs and excise duties, service and sales tax, no location
restriction, procedural ease with the help of single window clearance have not only
helped the large IT companies, but also become advantageous for small and medium
enterprises (SMEs) by the creation of low entry barriers (STPI Annual Report, 2010).
Thus, STPI schemes have helped generate a level playing field for large and SMEs by
providing favourable environment for continuous growth of SMEs as well. Several
different categories of IT exports have been observed by STPI units. Also, there has
been a constant growth in the exports of IT products. The IT industry continues to be
dominated by the software and service exports. Figure 8 shows phenomenal growth
trend of software exports represented by a line graph, thus tempting to point out the
underlying fact that Indian IT industry, as observed, is driven by exports.
Source: STPI Annual Reports 2004-05 to 2009-10
17150
28350
36500
46100
58240
80180
104100
141000
164400
216190
0
50000
100000
150000
200000
250000
99-00 00-01 01-02 02-03 03-04 04-05 05-06 06-07 07-08 08-09
Figure: 8 Software Export Value
Software Export Value
Figure in Rs. Crore
Financial Year

32
5.5 Agglomeration of IT firms in India
Despite of such astounding and escalating growth figures, firms in Indian IT
have agglomerated in the specific or core regions. These core regions have been
identified as the tier 1 cities including Delhi, Kolkata and Mumbai which in north, and
Hyderabad, Bangalore and Chennai in south. These firms can be further divided into
three types; the Offshoring centre setups delivering services from their subsidiaries
only to their own firms, firms of Indian origin or native firms, multi-national firms
who either have bought firms of Indian origin or developed their subsidiaries in India
(Messner, 2009). Considering socio-economic factors for business environment, IT
firms have accordingly chosen main cities, especially Bangalore, for their
establishment. NeoIT (2004) Offshore City Competitiveness (OCC) index for
comparison of 27 cities in India that boast IT firms, indicate in their key finding that
Gurgaon followed by Bangalore, Pune, Hyderabad and Chennai were leaders of the
pack. This was based on the evaluation of 4 key factors, as can be observed in table 2,
including skilled labour, catalysts, infrastructure and financials.

33
6 Case Studies
6.1 Case of Bangalore IT Cluster
6.1.1 Historical Background and Emergence of IT Cluster
Bangalore, fourth largest city in India, is located in southern part and lies in
middle region away from eastern and western coast. Briefly after Independence,
Indian government strategically set-up an Air force base and sensitive public sector
industries such as Hindustan Machine Tools (HMT), Bharat Heavy Electricals
Limited, Hindustan Aeronautics Limited (HAL) and Indian Telephone Industries
(ITI). The strategic positioning was deliberate for protection from borders or coasts
(Basant, 2006). The first of IT firms during that phase were mostly hardware oriented,
and Bangalore, having advantage of public enterprises such as the HAL and electrical
industry, capitalised on seeds of industrialisation which were sowed in this era. The
presence of hardware firms also caused the gravitation of software firms in the city
(Balasubramanyam and Balasubramanyam, 2010).
Several reasons have been identified for evolution of IT cluster in Bangalore
(Basant, 2006 and Balasubramanyam and Balasubramanyam, 2010). The software
export scheme in 1972 mostly benefited Indian firms in forms of concessions and
lesser import duties. Some of other main causes for Bangalore IT cluster evolution can
be reasons such as Karnataka state initiatives in 1977 to establish IT parks, presence
of public sector enterprises, government initiative to establish STPIs, presence of
educational institutions such as Indian Institute of Management Bangalore (IIM-B)
and Indian Institute of Science (IISc), cities ambient culture and pleasant weather
(Basant, 2006 & Balasubramanyam and Balasubramanyam, 2010). Basant (2006)
argues that several Indians who were employed in US firms gave assurances and
bagged several outsourcing opportunities for Indians IT firms mainly located in
Bangalore. The R&D institutional setups in Bangalore owe significantly to
contribution of Indian managers who had worked in US and possessed necessary
knowledge for high skilled tasks, or Indians who had deeper knowledge concerning
management from an international outlook (Sonderegger and Taube, 2010).

34
Another distinct characteristic of Bangalore IT cluster is development of gated,
technology oriented exurbs which are self contained and fulfil needs and international
standards for hi-tech industries. One such example of this exurb is the Infosys City
and International Technology Park, Ltd. (ITPL) which helps maintain high standards
such as state of the art infrastructure, required power, satellite communications, shuttle
service, commercial space, training and recreational activities (Audirac, 2003).
Compared to ITPL, the rest of Bangalores infrastructure is in a much poorer state.
6.1.2 Government Role
The Karnataka State Government attempted to set up support measures in
electronics industry by establishing Karnataka State Electronics Development
Corporation in 1976, facilitating support to private firms in marketing, testing and
development and manpower training centres (Basant, 2006). Another vital
establishment by this corporation was development of Software Technology Park
which gave opportunities to firms and spurred growth of IT sector in Bangalore.
Government incentives through establishments of STPI and software export scheme
can be argued to represent a catalyst in already developing cluster through market
forces.
Balasubramanyam and Balasubramanyam (2010) argue that there is an
underlying truth to Economist Magazines argument that IT sector was untouched by
public policies due to benign neglect by policy makers. In other words, IT industry
escaped bureaucratic rules and regulations that prevailed in licence raj because of
lack of sector specific knowledge and understanding. Etzkowitz (2003) argues that in
some countries, the governments reduced role helps benefit industry as compared to
excessive intervention. Also, DCosta (2011) argues that state has intervened from
time-to-time, unwittingly leading industry at first, and then letting market to follow,
but continuously providing infrastructural and fiscal support. Basant (2006) gives
examples of such interventions such as providing import-substituting policies and
educational establishments in 1960s and 70s that helped create opportunities to an
export market in 1980s, co-financing International IT park, tax free environment and
providing public institutions for research such as IISc and IIIM-B.

35

Basant (2006) argues that setting up of satellite facilities, which were further
enhanced in 1992 through establishment of exclusive satellite gateway for exporters,
took care of communication barriers and constraints. Such observations suggest that
government interventions have been influential to growth of IT sector in Bangalore
and Economist Magazines remarks indicating free market driven structure of IT
sector due to negligence by policy makers is not entirely true.
In the body shopping phase, that is, from 1991 to 2000, Indian firms supplied
programming services in return for small share of revenues. This was customised by
foreign companies and later tagged under their brand name (Heeks, 1991). The work
was onsite in foreign destinations and endogenous complete packaged software from
India did not seem to be present. Basant (2006) identifies two reasons for the
transition of work of IT firms from onsite to off-shore location. The first reason was
introduction of 15% foreign exchange tax expenditure in late 1980s. In 1988, 65% of
Indian exports were completely developed at clients site, i.e. onsite. This meant that
only 35% percent of Indian software exports had elements of work being done in
home country (Heeks, 1991). Another constraint was difficulty in receiving foreign
visas, especially for US, due to tighter regulation and government control on
immigration or foreign nationals. This reduced incentive for foreign firms to hire
onsite Indian workforce and due to cost pressures and time constraint intensifications
during this phase, it made logical sense for businesses to perform their activities
offshore (Heeks, 1998). Bangalore had a strong skilled workforce. Along with this and
devaluation of the Rupee in 1991, it led to cost advantage and transition to offshore
activities benefiting Bangalore IT cluster. This resulted in a rise in number of SME
start-ups (Basant, 2006).

36
Throughout, 1990s constant deregulation took place which led to rapid
development of government provisions and incentives in forms of tax reduction, tax
free conversion of rupee into foreign currency and import duty reductions on
communication & hardware imports (NASSCOM, 2010). According to Basant (2006)
two notable policies which also have played an important role in evolution of
Bangalore IT cluster in particular is the Karnataka state governments IT policy of
1997 which was first ever IT policy in an Indian state. Second important role involved
allowing 100% FDI on IT industry favouring high technology and infrastructure
investments with medium of FDI policy during 1999-2001.
In 2005, Indian government, due to pressures from leftist parties, dropped
protection of embedded software. Embedded software is software which is integrated
with hardware. Software has not been allowed to be patented. However, embedded
software was earlier allowed to be patented (The Hindu, 2005). This had mixed
reactions within experts in IT business. According to Santosh (as cited by Hindu,
2005) it was not necessary for Indian IT industry to have same laws as other countries
due to its developing phase, as keeping technology and developments, in an open
domain may provide to be critical. However, former Vice-president of Nasscom, Mr.
Mehta (as cited in The Hindu, 2005), felt that embedded software protection would
provide incentives for innovative SMEs. Intellectual property is a valuable asset to a
firm and also a medium to generate revenues.
The NASSCOM (2008) survey of IT firms in Bangalore, rate government
support to be 4.6 on a scale of 1-10
1
. Hence, it can be argued that state and national
government, to an extent, has let IT sector flourish through market driven forces in
Bangalore IT cluster. Krishnan (2010) points out that a large number of software firms
believe that venture capital is more important than direct government support for
innovation environments. In spite of venture capital requirements, Prabhu and
Venkatesh (2009, as cited by Leleur, 2009) argue that venture capital is available for
start up firms and there have been many initiatives regarding the same, but it is
difficult for IT firm start ups to receive adequate amount at initial stage.

1
Appendix Table 3: Comparison of Bangalore and Hyderabad IT cluster, page 63

37
6.1.3 Academic Role
One of main reasons for attractions of IT firms in Bangalore has been due to
availability of skill sets and a large talent pool. Due to colonial English rule in past,
availability of a strong community of skilled graduates who have an ability to interact
in English has been developing since (Basant, 2006). This talented professional pool
has created competitive advantage to Bangalore cluster in comparison with clusters in
other countries. Also, labour cost, as compared to developed countries, for IT
professionals in India, is cheaper (Arora & Bagde 2006).
The education system in Bangalore has one of highest standards as compared to
other cities in India. The presence of a large population of engineering and
polytechnic students has significantly added to a rich pool human resource. Recruiters
are interested in engineering graduates, who complete their engineering graduation in
four years, as they go through screening process for admissions in colleges forming a
highly competitive environment. They also develop skills such as problem solving
techniques, logic building, and rapid adoption to technological changes (Arora and
Bagde, 2006). Also, educational institutes provide useful exposure in fundamental
computer training in course for reducing training period of fresh graduates after
employment (Arora & Bagde, 2006). Karnataka state has several recruitments of
students in engineering and polytechnic graduation. The number of enrolments in
engineering and polytechnic education in 2005-06 in Karnataka was 169,563 and
96,566 respectively
2
. Along with the high enrolment, the expenditure on education has
also increased, but the percentage of Gross State Domestic Product (GSDP) in 2005-
06 is still low at 3.13%.

2
Appendix Table 4: Karnataka State Enrolment and Expenditure , page 64

38
Bangalore itself has approximately 70-90 colleges which produce around
20,000 fresh engineering graduates every year for IT sector and around 30,000 for
BPO related jobs and IT firms such as Infosys, Wipro, Satyam, TCS, IBM, Cognizant,
Oracle and Lucent are main recruiters of fresh candidates from various disciplines
(NASSCOM, 2008). Table 3 shows that Bangalore is rated 8.0 on 10 for IT skill set
assessment and literacy rate, according to the 2001 census is also about three quarters
of population being literate. The State Law Labour Ecosystem Index (2006) ranks
second spot to the city. The skilled labour availability is high and thus, has created a
favourable rating of 7.9 out of 10 for Business environment.
Another important contribution to cluster by academia has been networking
and contacts with research and development institutes. Srinivas (1998), through a field
survey to study why IT firms were attracted to Bangalore, found out that apart from
skilled labour, R&D institution presence in city was second major contribution for
choosing to locate in Bangalore. This indirectly indicates possible linkages between IT
firms in Bangalore with educational institutions. Thus, Bangalore also acquires its
diversity through provision of skilled labour, knowledge and academic institutions.
However, Basant (2006) argues that number of spinoffs from academic institutions in
Bangalore has not been significantly large, despite being a hub for new cultures being
adopted by IT firms and presence of academic institutions which have adequate
amount of research programmes.
The World Economic Forum (2009) report on Global Information Technology
ranks India 4
th
position for availability of scientists and engineers, at 22
nd
spot for
quality of maths and science education, but ranks as low as 46
th
for University-
industry collaborations. Balasubramanyam and Balasubramanyam (2010) compare
Marshalls view on Sheffield cutlery business to Bangalore software firms. The
authors state a view that availability of required skills for a particular sector in a
particular region is important for evolution of a cluster in that area and Bangalore
cluster has evolved due to proximity of IT industry and educational institutions,
especially in engineering and polytechnic. Hence, it can be argued that linkage of
academic institutions with industry has primarily been focused on creation of human
capital.

39
6.1.4 Industry Role
Bangalore has a better social infrastructure and standard of living as compared
to other cities, thus maintained its attraction level to expats and senior management
levels (NASSCOM, 2008). The Economic Forum Report (2009) ranks intensity of
local competition for India as high as 12
th
in world. One of the underlying reasons for
this has been the high employee attrition rates of the IT firms in the Bangalore cluster.
NASSCOM (2008) report mentions that employee attrition rate in Bangalore are a
high percentage (40-60%) due to high levels of competition resulting in higher degree
of compensation-based and brand obsessed poaching. Balasubramanyam and
Balasubramanyam (2010) mention two ways which make knowledge flows to be
possible in Bangalore IT cluster. Firstly, employee attritions help transfer inter-firm
knowledge as employees leave with some expertise gained from previous firm.
Secondly, employees of similar types of firms gather and socialise formally and
informally. This adds on to transfer of tacit knowledge and expertise in IT field.
However, high attrition rates are generally viewed as negatively for IT firms and some
firms attempt to create activities such as parties and trips and promote recreational
activities like gym, spa and yoga facilities for their employees (NASSCOM, 2008).
IT firms in Bangalore have also taken up role of government by building
infrastructure in form of IT parks with support of government. Krishnan (2003)
identifies an example of such development between joint venture including industry
and government to develop urban infrastructure, creation of civic facilities and
primary education as well as joining hands to set up e-governance. This supports
Krugman, Obstfeld and Melitz (2012) view of how external economies of scale
benefit the industry by collocations of firms. Presence of IT firms in Bangalore has
created a need for building suitable urban infrastructure to accommodate state-of-art
facilities for IT firms and their employees.

40

Basant (2006) specifies on intra-industry linkages and mentions an example of
IT firms sending their products to Public and Private firms for testing and potential
client building purposes. The author also identifies linkages between small firms such
as System Logic, Datacons Pvt. Ltd. and Nagaraj Technologies to large companies
such as Mindtree, Wipro, HP and Texas Instruments wherein former supply
employees on contractual or project basis. In addition to this, the author also
emphasises development of intellectual property such as a piece of code that can be
sold to large firms.
Diaspora ties with Bangalore IT cluster have been studied by Dossani (2006, as
cited by Balasubramanyam and Balasubramanyam, 2010) and Sonderegger and Taube
(2010). Although, just an estimate, but Balasubramanyam and Balasubramanyam
(2010) claim that approximately 3000 people are returnees from abroad to Bangalore
every year. Dossani (2006, as cited by Balasubramanyam and Balasubramanyam,
2010) mention fact that through skills and expertise of Indian diaspora, 21 domestic
software firms were set up by 1981 having software exports of worth $ 4 Million
annually and several of these firms relocated to Bangalore due to rising land costs in
Mumbai. Sonderegger and Taube (2010) argue that role of diaspora has changed over
time and opening of R&D centres by Multi-National companies in India has been
possible by diaspora skills, expertise and persuasion for trusting Indian IT firms,
mainly located in Bangalore. The authors also claim that 80% of PhDs in India are
from industrialised economies, but only recently have there been joint collaborations
between the research centres and Indian educational institutions for cooperative
research and PhD training activities.

41

6.2 Case Study of Hyderabad IT Cluster
6.2.1 Historical Background and Emergence of IT Cluster
Hyderabad, the capital of Andhra Pradesh state, is located in south-east region
in India. Predominantly being an agriculture oriented state, the credits for initiation to
develop IT environment go to Chandra Babu Naidu, and economist and ex-Chief
Minister of Andhra Pradesh (Balasubramanyam and Balasubramanyam, 2010;
Balatchandirane, 2007). Naidu was interested in growth and development of Andhra
Pradesh via technology sector development. This technology led development was
fuelled by liberal economic policies and privatisation and it was through such reforms
that he managed to acquire a loan of $266 Million per annum from the World Bank
circumventing the central government authorities (Balasubramanyam and
Balasubramanyam, 2010). In addition to this, he played a pivotal role in Andhra
Pradesh organisation for future IT development missions by creating a team which
was responsible for attracting Multi-National and SME IT firms by providing them
attractive offers for locating in Hyderabad and allocating government based projects
such as E-sewa (Balatchandirane, 2007).
Naidus vision was to modernise government administration by using
applications which were computer based. An example of it is payments of utility bills
and tax at a single counter (Hyderbadcityinfo.com, 2011). Chandra Babu Naidu also
played a significant role in helping Hyderabad to host Microsofts investments and
giving huge government project. Microsofts first developed centre outside Seattle,
opened up in Hyderabad which also led to other IT firms opening up their centres in
Hyderabad (Balatchandirane, 2007 & Balasubramanyam and Balasubramanyam,
2010). Hence, it can be argued that seeds of IT cluster in Hyderabad were sowed
during Chandra Babu Naidus regime and cluster formation in Hyderabad city was
originally engineered by government. Biswas (2004) argues that government has
managed to actively involve human resource developments in IT sector by taking
private sector on board to compliment efforts undergone by public sector.

42

6.2.2 Government Role
Hence, it can be noticeable that state government has played an essential role in
providing attractive features such as infrastructural development, incentives and
collaborative projects with IT industry in Hyderabad. NASSCOM (2008) assessment
for IT firms in Andhra Pradesh emphasises key perspectives of IT firms in Andhra
Pradesh resulting in establishing an argument that Andhra Pradesh has a very stable
and vibrant political environment which sets up policies and provides incentives to
establish a good business environment. The local government helped new IT firm start
ups by providing them with cheaper land, directly in comparison with number of jobs
created, 50% waivers on registration and stamp duties, and 25% rebates on electricity
bills (Balatchandirane, 2007). Also, incentives such as non applicability laws
including labour, pollution control and statutory power cuts were provided to IT sector
by consultations with Chandra Babu Naidus panel of experts (Balasubramanyam and
The states first IT policy document (Government of Andhra Pradesh, 2000)
entitled AP First laid visions and objectives for making Andhra Pradesh, knowledge
intensive, high-technology state. Notable objectives in this document are economic
and human resource development, good governance, government-business and citizen
interface and intra-Governmental processes. A key policy in infrastructural
development which is present in governments endeavour is by providing High-tech
space which includes built-in electrical communication ducts, providing data ports and
air-conditioning (Government of Andhra Pradesh, 2000). Apart from creating
facilities for IT firms, state government also formed institutions other than those
which were meant for engineering and polytechnic education through mode of public-
private partnerships (Biswas, 2004). An example of such of these types of institutions
which facilitate growth and creation of skilled human resource for IT is establishment
of Indian Institute of Information Technology (IIIT) in Hyderabad.

43
State government invested in preventing pollution and maintaining hygiene for
high skilled IT population. One such way was through Municipal Corporation
privatisation in order to maintain streets and create parks to have a suitable
environment and high standard of living (Balatchandirane, 2007). However,
Balasubramanyam and Balasubramanyam (2010) argue that in spite of such facilities,
IT sector and especially the software firms do not depend much on basic social
infrastructure, but depend upon of human capital and technical workforce generation
that is suitable for sustaining and maturing of IT industry.
The government support, according to NASSCOM (2008) survey of IT firms in
Hyderabad, rate the government support to apparently be as high as 7.4 on 10
3
. A
salient feature of IT cluster in Hyderabad has been a display of good understanding of
factors which are significant for IT sector growth and making use of IT led change in
Andhra Pradesh with respect to other industries, government services, education and
life of its citizens (Biswas, 2004). However, observations result in stating the obvious
fact that it can be concluded that government has forced a construction for resource
allocation for IT firms in order to lead the state in achieving its aim of growth and
development.
6.2.3 Academic Role
Hyderabad has some world class educational institutions. Indian School of
Business (ISB) is one such school which has been promoted by Wharton, fortune 500,
Kellogg and London Business School. In addition to this, major Indian firms have
contributed to its establishment and some well known personalities in Indian industry
are members of its governing board (Balatchandirane, 2007 & Biswas, 2004). A
unique characteristic of ISB and IIIT in Hyderabad and IIM-Bangalore is that these
institutions do not fall under regular system for higher education in India which is
controlled by UGC (University Grants Commission). Instead, these institutions are of
much higher quality and maintain their standards through rigorous screening process
granting admissions only to brightest minds (Balatchandirane, 2007).

3
Appendix Table 3: Comparison of Bangalore and Hyderabad IT Cluster, page 63

44
In comparison with Karnataka, Andhra Pradesh has more number of
enrolments of students who want to pursue doctorates, engineering and architecture
but lesser number in polytechnic education. However, expenditure in education as per
GSDP has been declining and in year 2005-06 it was lower, as compared to
Karnataka, at 2.07%
4
. Also, according to provisional results of population, Andhra
Pradesh and Karnataka have 76,210,007and 52,850,562 respectively (Census of India,
2001). Hence, the ratio of tertiary education enrolments as per state respective state
populations indicates superiority of Karnatakas education. Also, Balasubramanyam
and Balasubramanyam (2010) point out historical comparisons between medium of
education between Hyderabad and Bangalore, by mentioning that Hyderabad rulers
were keen on imparting education in arts and architecture and reputable Osmania
University, changed medium of instruction from Urdu to English only a year after
Indian independence. In contrast, rulers of Karnataka not only initiated education to
masses through public and private schools, but also established Engineering College
and University of Mysore as early as 1911 (Balasubramanyam and Balasubramanyam,
2010).
Apart from ISB and IIIT, Hyderabad itself hosts 33 Colleges accredited by The
National Assessment and Accreditation Council (NAAC), an autonomous body by
UGC. Out of 33 colleges, 8 have been graded A rating and 23 have been graded B
rating (NASSCOM, 2008). Current graduate pool which has been employed for IT
BPO sector is about 200,000. Apart from the 40,000 engineering graduates from
Hyderabad, there are about 6,000 students in MCA (Masters in Computer
Applications), 10,000 in BCom Computers, 4,000 in MSc Computers and 2,000 in
MCom and MBA Information Systems (NASSCOM, 2008). In spite of governments
success in involving private players in educational establishments, Hyderabad ranks at
8
th
spot in State Law Labour Ecosystem Index of 2006 and Business environment
rating is 7.2 rating as compared to Bangalores 7.9
5
.

4
Appendix Table 6: Andhra Pradesh Enrolment and Expenditure in Higher Education, page65
5
Appendix Table 3: Comparison of Bangalore and Hyderabad IT cluster, page 63

45

Key BPO recruiters identified in Hyderabad include Wipro, TCS, Genpact,
Dell, Deliotte, UBS, Karvey Global Services, HSBC, Bank of America and Nipuna
and for IT sector are Infosys, Cognizant Technologies, Google, Microsoft, Satyam,
Convergys, Oracle and Ness Technologies (NASSCOM, 2008). Hyderabad, like
Bangalore, has a high attrition rate of employees and this has been caused due to a
competition between firms in IT sector and strong attraction for employees to switch
to jobs which have higher pay scales (NASSCOM, 2008).
Multi-National firms such as Microsoft, Motorola, Mentor Graphics, Oracle,
Baan and ATI Technologies Inc. have set up their R&D centres in Hyderabad
(Bowonder & Richardson, 2000 & Business-standard.com, 2005). However, these
centres are creation of multi-national firms and it is arguable that they only benefit
firms which establish them. This results in insufficient dissemination of knowledge,
unlike Bangalore R&D centres, which also benefit other firms through spillovers.
Nonetheless, ATIs Chief Technology Officer Hartog (2005, as cited by Business-
standard.com, 2005) briefly acknowledges the importance of availability of
engineering talent in Hyderabad, for justifying case for ATIs establishment of R&D
centre in the city.

46

6.2.4 Industry Role
In Hyderabad IT industry, which mainly thrives in software sector, newer firms
tend to work on low end IT usage such as generation of medical prescription, writing
CAD and CAM reports. Also, three quarter percent of software exports from
Hyderabad have been occurred through dotcom facilities (Biswas, 2004). Hence,
Biswas (2004) Hyderabad IT industry is viewed as an agglomeration of firms that
supply low end IT software and services to sophisticated international customers and
one of important ways in which it should concentrate for sustenance and growth is
through value added services and innovations. Nonetheless, some firms help their
employees for achieving quality by improving their skills with additional training and
collaboration with institutions, introducing specific courses in curriculum for training
students and improving quality of fresh graduates. Examples of such initiatives which
have been effectively initiated by industry in colleges, for making students improve
their employability prospects are Train the Trainer and The Genesis Project
(NASSCOM, 2008).
Government has pushed IT cluster of Hyderabad forward by offering tax free
environments. This is evident from fact that there are 44 current and planned SEZs
which serve as tax free environments for businesses. However, negative aspects of
such economic zones are very less chances of technology transfer resulting in
continued low skill IT work and overpopulation which already exists in the major
cities including Hyderabad. Urban migration occurs for better job prospects and social
environment in cities, but brings employment opportunities helping human capital
development which is a necessity for IT cluster (Balasubramanyam &

47

7 Analysis of Data
7.1 Comparison of Bangalore and Hyderabad IT Cluster

The discussion of Bangalore and Hyderabad IT clusters, via case studies, show
two different evolution attributes. Bangalore IT cluster, as discussed earlier has
evolved with respects to its initial advantage and historical background. This initial
advantage has made Bangalore, a leader for IT firm location and attractiveness.
Bangalore has utilised this initial advantage by merging it with external economies of
scale, with support of creation of an environment which can thrive IT infrastructure
and investments in human capital generation for its growth and sustenance (Arthur,
1989 & Krugman, Obstfeld and Melitz, 2012). Hyderabad has been a late mover and
government has played a role of an entrepreneur. This entrepreneurship role can be
observed through evidences of policy initiatives, collaborations with private players
and incentives provided by state government.
Bangalore and Hyderabad IT cluster can be compared through output and
employment multipliers of fundamental IT subsector including software and
hardware. Ministry of Communications & Information Technology (MIT),
Government of India (2005) defines Output Multiplier as total increase in output for
every unit increase in final demand of a particular sector and Employment Multiplier
as man-years of additional employment created for a unitary increase in the output of
the sector. These multipliers thus elaborate efficiency of a particular state with
respect to IT software and hardware sector. When employment multiplier is high and
output multiplier is low, it depicts that state indulges in low skilled technical IT work.

48
Table 7 gives summary of output and employment multipliers of different
states in India with respect to IT software and hardware sector. Employment
multiplier of Andhra Pradesh is 3.87 and output multiplier is 1.15 in software sector.
In contrast, Karnatakas output multiplier is 1.45 and employment multiplier is 0.23.
Hence, it can lead to an argument that Karnataka is more efficient in software sector
and also more productive as compared to Andhra Pradesh, which has more
employment of in low level software work. Hardware sector output multiplier of
Andhra Pradesh state is 2.16 and employment multiplier is 0.57 in contrast to
Karnatakas output multiplier of 2.52 and employment multiplier of 0.09. Hence,
Karnataka state, as compared to Andhra Pradesh, is more efficient, productive and
mainly involved in high level of both, software and hardware IT applications and can
be considered to be superior. This can result in concluding that Bangalore IT cluster is
superior to IT cluster which has been formed by Hyderabad. Balasubramanyam &
Balasubramanyam (2010) argue that out of several differences, main underlying fact is
that Bangalore IT cluster has evolved on the factors of comparative advantage which
were important for its creation and maintenance of export industry and Hyderabad has
evolved due to sponsorships by government, private players and large volumes of
state government investment.

49
7.2 IT Clusters and Non-Cluster Comparative Evidence
It is evident from case studies that location attractiveness for IT firms depends
upon various factors and there is no one single truth. However, through both cases,
key evidences that have been lit are importance of skilled and technical generation of
human capital, advantages of locations with regards to R&D establishments,
educational institutions, government role and support, ease of accessing information
and market knowledge. The factors essential, especially for IT firms, are numerous
and keep changing according to type of work involved requirement of specific skill
level. Knowledge spillovers from industry in form of gaining and sharing information
about competitive firms and their processes and products are also better understood by
being in a cluster. These spillovers do create negative influences for IT firms, but can
result in common good and competiveness for an industry (Porter, 1990 & 2000,
Grindley & Teece, 1997 as cited by Iammarino & McCann, 2006 & dAspremont et
al., 1998).
Another essential aspect of understanding is quality of linkages between these
factors which justify setting up of a particular IT firm in a particular location
(Saxenian, 1996). Linkages and networks within IT cluster pertaining to labour,
market, government and non-government support dominate IT cluster and prove to be
fruitful for maturity and long term survival of IT firms. Hence, traditional factors such
as location proximity to customers seem to possibly disappear in relation to IT firms
and especially in Indian IT firms which are more oriented towards software and
service. Non-cluster IT firms, do have an apparent disadvantage when it comes to
skilled human capital formation and a readily available market for recruitment
available in city clusters. Lack of sufficient information and support also add to woes
for non-cluster IT firm locations.

50
In a survey of IT and electronic firms conducted by IIM-Ahmedabad, firms
were asked rate factors regarding advantages of locations for their particular IT firms
ratings were given on scale of 0 to 5 wherein 5 is more advantageous
6
. The findings of
survey indicate that proximity to customers is not an essential factor for advantage for
IT cluster and non-cluster firm locations. It can thus emphasise upon dominance of
export oriented Indian IT industry having customers mainly based in advanced
nations. Also, it dismisses traditional demand oriented factor and classic
agglomeration theories that cluster evolution were based upon.
The highlights of findings stress significance of firstly, access to skilled labour
as Bangalore IT firms rate locational advantages at 3.99 as compared to non-cluster
firms which rate it at 3.29. Secondly, the advantages of locations with regards to better
access to support services, training facilities and R&D institutions for IT firms in
Bangalore at 3.89, 3.94 and 3.61 respectively are also significantly higher as
compared to non-cluster IT firms which are at 3.08, 2.91 and 2.56 respectively.
Hence, the role of importance of training by industry, academic institutions and
university along with presence of R&D centres in IT clusters is emphasised through
these findings.
As Bangalore attains all required fulfilments of an Information Technology
cluster, that is, presence of international and domestic firms, infrastructure, academic
and R&D institutions, state government and national government support,
innovativeness, cooperative competition, global networking, connection with firms
and other such attributes, it can be argued to be an IT cluster. A comparison of
performance of firms which have head quarters and/or main registered offices in
Bangalore, with those which have main set ups in locations which are non-cluster
oriented, further justifies case of benefits for IT firm being located in a cluster. Table
9 shows cluster firms of Bangalore and Non-cluster firms with their respective total
incomes and employees in 2008. The Non-clustered firms are from other locations
including Ahmedabad, Pune, Mumbai, Delhi, Indore, Kolkata and Chennai.

6
Appendix Table 8: Survey Results of IT and Electronic Firms in India, page 67

51
A Mann-Whitney-Wilcoxon is conducted for two purposes. The first purpose is
to analyse whether there is a difference in distribution of total income of Bangalore IT
cluster and non-cluster firms. The second purpose is to analyse whether there is
difference in distribution of employees of Bangalore IT cluster and non-cluster firms.
The results indicate that there is a significant difference between the total incomes of
IT firms located in Bangalore IT cluster and Non-Cluster firms, and that there is a
tendency for Bangalore IT cluster firms to have better incomes as compared to Non-
Cluster IT firms in India
7
. Conclusion of same test for distribution of employees in
Bangalore IT cluster and Non-Cluster firms suggests that, at = 0.05, there is no
difference between distribution of employees in both, Cluster and Non-Cluster
locations
8
. However, at = 0.10, we can possibly conclude that there is a significant
difference for the employees of firms in Bangalore IT cluster and Non-Cluster
locations. It can be argued that Non-Cluster locations have access to labour that is
generally employed in low skill IT work. This can be justified with an argument that
total income trends of Non-Cluster IT have previously been proved to be
comparatively lower than Bangalore IT cluster firms.

7
Appendix Table 9: Mann-Whitney-Wilcoxon Test for Total Income Differences, page 68
8
Appendix Table 10: Mann-Whitney-Wilcoxon Test for Employee Differences, page 70

52

8 Conclusion and Implications

The conceptualisation of agglomeration has been changing with time and the
factors that are essential for clustering of firms. IT firms form a cluster due to different
factors which are involved in their formulation. Government, industry and academic
linkages contribute to success for IT firm clustering. However, the amount with which
these three spheres interact with each other provides an inference of their level of
success. A main influence for IT cluster is efficient and effective manpower that is
skilled in particular types for suitably fitting the purpose of kind of work required.
Government role is important in supporting collocated firms but clusters tend to be
more market driven. Historical background does help formation of cluster, but its
growth and evolution depends upon internal and external interactions.
Bangalore IT cluster is superior to Hyderabad IT cluster due to its initial
advantage and has lived up its reputation to be an essential location for skilled IT
human resource, knowledge generation and spillovers. Linkages between the
academic institutes and R&D centres are also been observed be stronger in Bangalore
IT cluster than in case of Hyderabad. This is the reason why firms located in
Bangalore IT cluster benefit by locating in clusters and in turn help develop external
economies. Diaspora contributions cannot be failed to mention as they have also
helped capitalise a large amount of local talent.
A significantly strong historic setting of electronic firm at first, and later IT
hardware and software firms have helped achieve cluster evolution in Bangalore.
Although, distribution of IT firm employees in Bangalore cluster as compared to non-
cluster firms is not significant, total income trends suggest that IT firms in Bangalore
tend to benefit more than their non-cluster counterparts as observed through their total
income distribution differences.

53

IT cluster firms in India establish different departments or sectors of their work
in different Indian cities. This can be as a result of different resource requirements.
Also, precise activities of both departments of a single firm could differ. However,
availability of data could be suitable for businesses or managers, but restricts further
empirical analysis and observations for research purpose and empirical research on
growth, development factors by recognising precise activities of firm departments in
different cities could be utilised in further research prospects.

54
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62
APPENDIX

Table 1: Supply of technically qualified workforce in India (2006-10)
Nos. FY 2006
E
FY 2007
E
FY 2008
E
FY 2009
E
FY 2010
F
Degree (4 Years) 201,100 244,500 258,800 312,200 342,705
Diploma (3 Years) 122,500 127,900 133,600 139,500 154,770
Total Engineering Graduate
Output
323,600 372,400 392,400 451,700 497,475
MCA (Masters in Computer
Applications)
40,800 47,300 47,000 46,700 54,466
Engineering Post-Graduates 13,600 14,200 14,800 15,700 18,311
Total Engineering Post-Graduate
Output
54,400 61,500 61,800 62,400 72,777
IT Engineering Graduates (Degree) 117,400 142,800 153,500 185,515 203,642
IT Engineering Graduates (Diploma) 73,000 76,200 79,600 83,107 92,204
MCA (Masters in Computer
Applications)
40,800 47,300 47,000 46,700 54,466
Engineering Post-Graduates 13,600 14,200 14,800 15,700 18,311
Technology Graduate and Post-
Graduate (Computer Science,
Electronics, Telecom, etc.) output
244,800 280,500 294,900 331,022 368,623
E: Estimates F: Forecast

63
Table 2: OCC Index Factors, their Dimensions and Weights
Weights Factor Considerations Dimensions
25% Labour Number, Quality,
Education System

25% Infrastructure Power, Telecom, STPI,
Physical, Roads, Airports

30% Financial Cost of Living, Real Estate
Prices

20% Catalyst Government Support,
Supporting Industries,
Social & Political Stability,
Competing Companies,
Development of City,
Weather

Source: NeoIT (2006)

Table 3: Comparison of Bangalore and Hyderabad IT Cluster
Assessment Parameters Bangalore Hyderabad
Government Support 4.6 7.4
Business Environment 7.9 7.2
IT Skill Set Assessment 8.0 7.9
Infrastructure 7.6 7.4
Living & Social Environment 5.4 5.2
Literacy Rate (2001) 74.9% 68.5%
State Labour Law Ecosystem Index
(2006)
Rank 2 Rank 8
Number of IT & BPO Employees (2006-
07)(Approximate)
500,000 200,000
Space Availability Rating Excellent Average

64
Table 4: Karnataka Enrolment & Expenditure in Higher Education
Enrolment (Figures in Numbers)
Courses Enrolment during the year
2001-02 2002-03 2003-04 2004-05 2005-06
Ph.D/ D.Sc. /D. Phill. 951 4658 5388 3107 3107
M.A. 2187 5689 6591 8405 8405
M.Sc. 1222 14570 17127 13270 13270
M.Com. 689 4955 5624 2187 2187
B.A./ B.A. (Hons.) 238215 157090 185155 171743 171743
B.Sc./B.Sc. (Hons.) 62036 59646 70628 48392 48392
B.Com/B.Com (Hons.) 62748 63110 74584 72499 72499
B.E/B.Sc. (Engg/B. Arch.) 88942 92160 107162 32863 169563
Medicine, Dentistry, Nursing,
Pharmacy, Ayurvedic & Unani
etc.
7185 48133 56239 56239 68517
B. Ed. 6634 6934 8218 6800 6800
Open University - - - - 0
Polytechnic - - - - 96566
Others 66218 87510 102474 290736 290736
Total 537027 544355 6391990 70241 951786
C: Expenditure on Education: GSDP and Expenditure in Crores
Year
Gross State
Domestic Product
(GSDP)
Expenditure on
Education
Expenditure on
Education as
Percentage of GSDP
2001-02 107933 3570.92 3.31
2002-03 117492 3960.92 3.37
2003-04 128556 3993.92 3.11
2004-05 148541 4764.15 3.21
2005-06 170741 5350.05 3.13
Source: Ministry of Human Resource Development (2011)

Table 5: IT, BPO Relevant Graduate Pool Enrolled in 2004-05
Educational Background Karnataka Andhra Pradesh
Engineering 46,000 83,000
Science 16,000 73,000
Commerce 24,000 60,000
Arts 57,000 57,000
Polytechnic 23,000 6,000
Total 248,000 279,000

65

Table 6: Andhra Pradesh Enrolment and Expenditure in Higher Education
Enrolment (Figures in Numbers)
Courses Enrolment during the year
2001-02 2002-03 2003-04 2004-05 2005-06
Ph.D/ D.Sc. /D. Phill. 6815 7168 4939 4752 6129
M.A. 13647 15066 14312 14477 18777
M.Sc. 15982 24425 16613 17053 21129
M.Com. 5241 5727 6079 6375 7567
B.A./ B.A. (Hons.) 167774 172237 171323 171808 171808
B.Sc./B.Sc. (Hons.) 209832 214438 224149 219501 243961
B.Com/B.Com (Hons.) 161388 166039 170169 178655 184479
B.E/B.Sc. (Engg/B. Arch.) 74272 126078 148160 194793 330086
Medicine, Dentistry, Nursing,
Pharmacy, Ayurvedic & Unani
etc.
12962 14088 12553 15671 23019
B. Ed. 10298 10339 11448 12221 36332
Open University - - - - 97083
Polytechnic - - - - 49320
Others 156 13972 18112 221413 221413
Total 693879 769677 797857 1056719 1411103
C: Expenditure on Education: GSDP and Expenditure in Crores
Year
Gross State
Domestic Product
(GSDP)
Expenditure on
Education
Expenditure on
Education as
Percentage of GSDP
2001-02 157150 4866.26 3.10
2002-03 168143 5039.44 3.00
2003-04 190880 4468.28 2.34
2004-05 210449 4365.65 2.07
2005-06 236034 5235.39 2.22
Source: Ministry of Human Resource Development (2011)

66

Table 7: Output and Employment Multipliers of Hardware and Software IT Sector for
Indian States

Software Sector Hardware Sector
State
Output
Multiplier
Employment
Multiplier
Output
Multiplier
Employment
Multiplier
Delhi 1.41 2.35 3.17 0.10
Maharashtra 3.22 0.32 2.71 0.36
Andhra Pradesh 1.15 3.87 2.16 0.57
Karnataka 1.45 0.23 2.52 0.09
Kerala 1.64 2.56 2.67 1.46
Tamil Nadu 1.46 0.67 2.12 4.10
Haryana 1.62 2.00 2.84 0.24
Rajasthan 1.42 5.40 2.77 0.23
Uttar Pradesh 1.31 1.43 2.19 0.06
West Bengal 1.41 2.18 2.40 0.39
Gujarat 2.25 1.30 2.42 0.31
Source: Ministry of Communications & Information Technology, Government of
India (2005)

67

Table 8: Survey Results of IT and Electronic Firms in India
No. Advantages of Locations Bangalore Cluster
Firms
Non-Cluster
Firms
Significant
Difference
1 Proximity to Customers 3.46 3.29 N
2 Access to Information from
Competitors
3.08 2.68 Y
3 Access to Information about
Competitors
3.17 2.63 Y
4 Availability of Skilled Labour from
Competitors
3.16 2.78 Y
5 Access to Skilled Labour 3.99 3.29 Y
6 Presence of Hardware and Software
Suppliers
3.77 3.25 Y
7 Better access to support services 3.89 3.08 Y
8 Better access to training facilities 3.94 2.91 Y
9 Better access to R&D Institutions 3.61 2.56 Y
10 Better access to Information on fairs
and exhibitions
3.74 2.53 Y
11 Availability of repair/maintenance
services
3.85 3.38 Y
12 Availability of better Infrastructure 3.30 3.68 Y
Source: Basant (2006) IIM-Ahmedabad Survey of IT and Electronic Firms

Note: Survey contains a sample of 166 IT and electronics firms from Bangalore, and
47 and 96 firms from Pune and NCR (National Capital Region, Delhi) respectively.
The sample of cluster firms are from Bangalore, Pune and NCR together combined
count of 309 cluster firms. A sample of 105 firms has been taken for the non-cluster
firms and significance level for testing is 5%. Also, Y=Considerable Significance &
N=Non-considerable Significance.

68
Table 9: Mann-Whitney-Wilcoxon Test for Total Income Differences
Bangalore IT Cluster Firms Total Income
(Rs. Million)
Rank Non-Cluster IT firms Total Income
(Rs. Million)
Rank
Acer India (Private) Limited 8690.8 36 Accel Frontline Limited 1875 24
Apara Enterprise Solutions
Private Limited
462.5 11 American Megatrends India
Private Limited
160 2
ASM Technologies Limited 300.6 8 Aptech Limited 851.4 19
Aztechsoft Limited 2453 27 Ashtech Infotech Private
Limited
260 6
Cranes Software
International Limited
2476 28 Bahwan Cybertech Private
Limited
1024 20
i-flex Solutions Limited 15523.4 39 Bar Code India Ltd. 172.5 3
iGate Global Solutions
Limited
7483.57 35 CMC Limited 9944 37
Infosys Technologies
Limited
135240 41 Design Tech Systems Limited 300 7
Marlabs Software Private
Limited
256 5 Elitecore Technologies
Limited
325.5 9
Mascon Global Limited 1413 22 Embee Software Private
Limited
749.9 17
MicroSense Private Limited 500 13 Financial Technologies
(India) Limited
1741 23
MindTree Consulting
Limited
5977 34 Helios & Matheson
Information Technology
Limited
3950 33
Mistral Solutions Private
Limited
610.5 15 ITC Infotech India Limited 2051.8 25
Mphasis Limited 11028 38 Lifetree Convergence
Limited
548.1 14
Sasken Communication
Technologies Limited
3761 32 Momentum Infocare Private
Limited
130 1
Siemens Information
System Limited
104340 40 Omnitech InfoSolutions
Limited
777.9 18
Subex Azure Limited 2361 26 Persistent Systems Limited 3144.1 30
Tata Elxsi Limited 3084 29 Scientech Technologies
Private Limited
220 4
VXL Instruments Limited 730 16 SP Software Private Limited 420 10
Wipro Limited 135790 42 Veeras Infotek Private
Limited
480 12
Sum of
Ranks-
537 Visesh Infotechnics Limited 1103.3 21
Zenith Computers Limited 3549.3 31
Sum of Ranks- 366
Source: Dun and Bradstreet (2008)

69

Table 9: Mann-Whitney-Wilcoxon Test for Total Income Differences (Continued)
H
0
: There is no difference in the distribution of total income of Bangalore IT cluster
and non-cluster firms
H
1
: There is a difference in the distribution of total income of Bangalore IT cluster
and non-cluster firms

T
=
1
2
n
1
(n
1
+ n
2
+ 1)

=
1
2
(20) (20 + 22 + 1)

= 430

T
= _
1
12

1

2
(
1
+
2
+ 1)

= _
1
12
(2)(22)(2 + 22 + 1)

= 39.71

Value of T= 537

Z =
1 -
T
c
T

=
537 - 430
39.71

= 2.69

Therefore, p-value = 2 (1- 0.9964)
= 0.0072

At = 0.05,

P-value < 0.05, H
0
rejected.

70
Table 10: Mann-Whitney-Wilcoxon Test for Employee Differences
Bangalore IT Cluster
firms
Employees Rank Non-Cluster IT firms Employees Rank
Acer India (Private)
Limited
142 5 Accel Frontline Limited 2523 29
Apara Enterprise
Solutions Private
Limited
165 6 American Megatrends
India Private Limited
199 8
ASM Technologies
Limited
380 17 Aptech Limited 632 20
Aztechsoft Limited 2194 27 Ashtech Infotech Private
Limited
210 9
Cranes Software
International Limited
715 22 Bahwan Cybertech Private
Limited
223 10
i-flex Solutions Limited 8907 37 Bar Code India Ltd. 70 1
iGate Global Solutions
Limited
5945 36 CMC Limited 3509 32
Infosys Technologies
Limited
72241 40 Design Tech Systems
Limited
250 13.5
Marlabs Software
Private Limited
450 18 Elitecore Technologies
Limited
275 14
Mascon Global Limited 2300 28 Embee Software Private
Limited
190 7.5
MicroSense Private
Limited
250 13.5 Financial Technologies
(India) Limited
1451 24
MindTree Consulting
Limited
4162 34 Helios & Matheson
Information Technology
Limited
1624 25
Mistral Solutions
Private Limited
244 12 ITC Infotech India Limited 1900 26
Mphasis Limited 17867 38 Lifetree Convergence
Limited
287 15
Sasken Communication
Technologies Limited
3611 33 Momentum Infocare
Private Limited
80 2
Siemens Information
System Limited
4640 35 Omnitech InfoSolutions
Limited
505 19
Subex Azure Limited 688 21 Persistent Systems Limited 3200 31
Tata Elxsi Limited 2600 30 Scientech Technologies
Private Limited
190 7.5
VXL Instruments
Limited
242 11 SP Software Private
Limited
110 3
Wipro Limited 68000 39 Veeras Infotek Private
Limited
115 4
Sum of
Ranks->
502.5 Visesh Infotechnics
Limited
316 16
Zenith Computers Limited 749 23
Sum of
Ranks->
339.5
Source: Dun and Bradstreet (2008)

71

Table 10: Mann-Whitney-Wilcoxon Test for Employee Differences (Continued)
H
0
: There is no difference in the distribution of employees of Bangalore IT cluster and
non-cluster firms
H
1
: There is a difference in the distribution of employees of Bangalore IT cluster and
non-cluster firms

T
=
1
2
n
1
(n
1
+ n
2
+ 1)

=
1
2
(20) (20 + 22 + 1)

= 430

T
= _
1
12

1

2
(
1
+
2
+ 1)

= _
1
12
(2)(22)(2 + 22 + 1)

= 39.71

Value of T= 502.5

Z =
1 -
T
c
T

=
502.5 - 430
39.71

= 1.83

Therefore, p-value = 2 (1- 0.9664)
= 0.0672
At = 0.05,
P-value < 0.05, H
0
cannot be rejected.

At = 0.10,
P-value < 0.10, H
0
rejected.

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