Bangalore houses the most prominent IT cluster in India. From a mere 13 software firms in 1991–2, the city now has a pool of over 1200 firms working in areas, such as computer chip design, systems software and communications software, and employing over 100 000 IT professionals.
Compared with other locations in India, Bangalore has a high-end tech- nology/industry concentration, such as very large scale integration (VLSI) and telecommunications services, and a higher degree of MNC presence with over 200 foreign firms in operation. It is ranked fourth as a global hub of technological innovation, behind San Francisco and Austin in the USA and the Taiwanese capital, Taipei. But why and how did Bangalore emerge as the leading hub of Indian IT industry?
Early Factor Advantage
There are several factors – historical, geographical, economic, cultural and political – that have contributed to the emergence of Bangalore as the dominant IT cluster in India. Bangalore has been fortunate to be rich in the supply of both economic and non-economic factors, and as Ramachandran (1986) noted had the key ingredients required to make it a preferred choice of business location.
Skilled labor
Among the advanced factors, highly skilled labor plays a very important role in the development of any industry (Hanna, 1994; Porter, 1990). As the
highly skilled technical and managerial personnel becomes the key location factor. Bangalore has a large, highly skilled IT talent pool available at a rel- atively low cost, thanks to the historical development of the city’s educa- tional, research and industrial infrastructure. Karnataka has one of the strongest educational infrastructures, both at undergraduate engineering and postgraduate levels. Of the 67 engineering colleges in the state, 26 are located in and around Bangalore, including the Indian Institute of Information Technology. In addition, entrepreneurial and managerial talents are encouraged by institutions such as the Indian Institute of Management Bangalore.
Research institutions
There has been early localization of science and technology related research and training institutions, as Bangalore is considered an ideal place – in terms of climate and infrastructure – to conduct scientific research in sensitive areas like defense and electronics as well as fundamental research in science.
The seed was sown with the establishment of the elite Indian Institute of Science, a number of the largest and most prestigious public sector enter- prises in fields, such as electronics, aeronautics, earth moving equipment and machine tools, and research organizations, such as the Indian Space Research Organization and the Defence Research and Development Organization. They were established partly for climatic reasons and partly for technical and economic reasons. These enterprises created a good pool of technical personnel in Bangalore, an important condition in developing the IT industry anywhere.
Social network
Over the years the pool of technical and managerial talent has grown, making Bangalore one of the richest social networks for IT. Many of the graduates who migrated to the USA for higher education and jobs form part of the social network that nurtures the local software industry.
Investments made by government and other public institutions for spe- cialized infrastructure, such as technological and management institutions, and educational programs and investments by companies – in training pro- grams, infrastructure, centers of excellence, testing laboratories and so on – have contributed to the development of this network and Bangalore as a city.
Economic infrastructure
Bangalore has had a good network of roads and airport connectivity for a long time thanks to the city’s attractiveness for setting up industrial, research and defense establishments. Even during the pre-independence
period, it was called the ‘Garden City’ of India, with an excellent infra- structure. Bangalore started experiencing power shortages only in recent years when the demand for power grew rapidly and without adequate mea- sures taken by the government to enhance the supply. A similar situation exists regarding growing traffic congestion on the roads.
Social infrastructure
Bangalore has been identified as an ideal place to live with an abundance of rich social infrastructure. This includes a moderate climate, good housing, parks and educational facilities.
Growth in Local Entrepreneurship
Bangalore became home to three categories of firms. Initially, it was the MNCs, starting with the establishment of Texas Instruments in 1984 as a 100 per cent export oriented firm. The early days of growth of IT saw a few more MNCs, such as Digital Equipment, IBM and HP choosing to be in Bangalore.
However the rapid growth of indigenous entrepreneurs offirms, such as Wipro, Infosys and Microland, whose promoters had no family business background, has been remarkable. Many IT executives set up their ventures in Bangalore either because they belonged to the city or the state or because they had developed strong social networks there. The new generation of entrepreneurs were inspired by the success of those around them and the opportunities they had exploited as managers. The virtuous circle contin- ued to attract more and more start-ups, while the city continued to have branches of existing firms from other cities.
Attractiveness of the Industry
The success of most Indian software firms comes from serving foreign cus- tomers, especially in the USA (Kapur and Ramamurti, 2001). Given the small size of the domestic market, Indian firms had to be export oriented and were dependent on the growth of the export market (Chakraborty and Dutta, 2002). Since the 1970s outsourcing of software development activ- ity by firms in developed economies became a trend due to the huge increase in software costs, increasing demand for complex information systems applications, rapid obsolescence rates of the IT infrastructure and inadequate supply of IT personnel. As a result, IT work is today distrib- uted globally on the basis of cost, location of customer sites and expertise, and is largely independent of the IT company’s country of origin (Salzman, 2000). As a result, many large and medium sized US firms focused their
Differences in time zones allow work to be carried out by Indian teams on a 24 hour basis, shortening cycle times and improving productivity and service quality. The social network connecting people of Indian origin in the USA, often working in Silicon Valley, with engineers and managers in India has also played an important role in exploiting this advantage (Kapur and Ramamurti, 2001). Being members of a vibrant cluster, Bangalore based firms could tap the network and capitalize on the US demand more than others.
This is clearly visible from the fact that Bangalore remained the most favored destination for both Indians setting up ventures based in India or working for the Indian subsidiaries of foreign multinationals (Heeks, 1999;
Taeube, 2004). In 2000 71 of the 75 multinationals located in Bangalore had executives of Indian origin returning from abroad as heads (Ghemwat, 2000). Overseas Indians, who returned to start new companies or supply venture capital, have fueled new venture formation. In addition, overseas companies opened software centers in India to strengthen interaction between their organizations and Indian suppliers. By 2001 several MNCs had R&D subsidiaries also in Bangalore.
Benefiting from Cluster Advantage
The basic principle of clustering for manufacturing industries applies to IT, the major difference being the virtual nature of the activity. In terms of spatial concentration traditional manufacturing firms and knowledge based firms follow the same pattern. Success of a cluster depends on the attractiveness of the specific location for firms in the related industries and the ecosystem that gets evolved. A cluster of independent and informally linked software firms and institutions located in the same city has definitely allowed firms to exploit advantages in efficiency, effectiveness and flexibility (Porter, 1998a, 2000). This is fine with Bangalore, which has witnessed close relationships between local industry and major research universities and institutions in the area, reasonably active venture capital industry, some degree of inter-firm cooperation, tolerance for spin-offs, and nurturing of firms largely outside the purview of large, ponderous, bureaucratic firms and financial institutions. The process of synergy building is steady, and its speed depends on the growth of the industry and the benefits that individ- ual firms can derive from the cluster.
The Bangalore cluster has affected the development of software firms in three broad ways as argued by Porter (1998a). First, by increasing the pro- ductivity of companies based in the area; second, by driving the direction and pace of innovation, which underpins future productivity growth; and
third, by stimulating the formation of new businesses, which expands and strengthens the cluster itself. Companies have been able to operate more productively in sourcing hardware and software, accessing information, technology and local institutions, coordinating with related companies, and measuring and motivating improvement. Software firms have been able to tap into an existing pool of specialized and experienced employees, thereby lowering their search and transaction costs in recruiting. It has been easier to attract talented people from other locations because the cluster offirms signal opportunity and reduce the risk of relocation for employees. However there is not enough evidence available to suggest that formal inter-firm kiretsu type linkages (Tyrini, 1994) exist among IT firms in Bangalore, whereby they gain from disintegration of the value chain and use of efficient networks of market transactions (Scott, 1988; Storper, 1997).
Naturally, there has been an accumulation of extensive market, technical and competitive information within the cluster, and the local firms have pre- ferred access to it. In addition, personal and professional relationships, old boys’ networks built in technical colleges and universities, and community ties have fostered trust and facilitated the flow of information. The Bangalore cluster has also developed an unmatched reputation as an indus- trial location, which in turn has benefited the firms located in the city dealing with global buyers and suppliers. Beyond reputation, the city based firms have often profited from a variety of joint marketing mechanisms, such as company referrals, trade fairs, trade magazines and marketing delegations.
Bangalore’s cluster of high quality IT companies made it easy for over- seas companies to meet many potential vendors in a single trip, which allowed them to multi-source or switch vendors if necessary. This also led to a high degree of local rivalry, which was very motivating. Peer pressure amplified competitive pressure among other Bangalore based firms, even among non-competing or indirectly competing companies. Pride and the desire to look good in the local community had spurred professionals to attempt to out do one another. The state government that promoted IT in a big way during the latter half of the 1990s also fueled rivalry. As a result, there has been a rapid increase in the number of IT companies in Bangalore, thereby intensifying rivalry.
The diffusion of technology, facilitated by the entry of multinational firms from the USA, has been helping firms move up the value curve. At the same time, Indian software firms like Infosys and Wipro opened offices in the USA or acquired US companies, to better serve their clients on high- end projects and to have listening posts in Silicon Valley. Thus physical dis- tance was bridged by the strengthening of cross-national, intra-firm networks and by inter-firm social networks among Indians and overseas Indians.
upgradation in the same manner as envisaged by Porter (1998a). Because most sophisticated buyers in the world have been part of this cluster, local firms usually have a better window of the market than isolated competi- tors do. Small and medium size companies continued to get opportunities to grow as the bigger companies moved into larger projects, vacating space for the smaller ones. Being located in the same place and being part of the network, these players got the first crack at outsourcing orders vacated by the big ones. The ongoing relationships with other entities within the cluster have also helped companies learn early about evolving technology, hardware and software availability, service and marketing concepts and so on. Such learning was facilitated by the ease in making site visits and frequent face to face contact. In addition, serial entrepre- neurs tended to choose their familiar and a comfortable location for their subsequent ventures, as was found in Cambridge, UK, by Vyakarnam and Myint (2005).
Local Government – Indifference to Intermittent Active Facilitation
The role of the state and the local governments, albeit small, was also important in developing the industry. The 1971 policy of the government attracted substantial investments to locations around Bangalore. In 1997 Karnataka became the first state to come out with a specific policy for the promotion of IT, which included a number of tax concessions and other benefits to IT investors.
In recent years, like most fast movers, Bangalore started facing the pinch on two counts. On the one hand, the rapid growth of the population rising on the wave of IT success impaired the livability of Bangalore with dra- matically escalated real estate prices, congestion, poor road conditions and other overloads on the local infrastructure. On the other hand, many other state governments started to aggressively promote IT and provide better infrastructure and policy support to attract investments. This provided alternative locational choices for software firms looking for new investment opportunities in India.
In the absence of government initiatives, the leading software firms started early on to invest heavily to overcome the bottlenecks in physical infrastruc- ture. For example, Infosys had to install its own telecommunications system, stock 11 tons of back up batteries to keep the computers running, 4000 gallons of diesel fuel to power its generators during power cuts, operate its own sewage treatment plant to reuse water as a remedy to erratic water supply and run a fleet of buses to transport its employees (Ghemwat, 2000).
Shortage of public infrastructure forced several Bangalore based firms to
start moving to new locations for expansion of their operations. With the rapid erosion of the relative factor advantage, the role of local government has increasingly become critical to sustain the prominence of the Bangalore based IT cluster.
Recent initiatives by the state government have started paying dividends again, with several new IT based investments of high quality flowing in. For instance, the state government has set up a new university with excellent facilities exclusively for engineering education. There is also greater atten- tion now paid to decongest the city.
Learning from the Bangalore Cluster
Overall, it is observed that factors such as historically and accidentally created human resources, proactive policies to attract and allow multina- tional firms to exploit human resources, technology leverage by local firms, emergence of a new class of entrepreneur and their link with the epicenter of IT in Silicon Valley, and to some extent the facilitating role of the state government have played crucial roles in the emergence of the Bangalore cluster. A closer look at these factors shows that the competitiveness of a location for cluster formation depends on the confluence of a number of variables as shown in Figure 5.1.
These factors are quite in line with the existing literature on the compet- itiveness of location (Porter, 1990, 1998a).
Industry attractiveness
Influenced by the global demand condition and industry structure, rapid growth in the industry expectedly emerges as a critical factor that creates the necessary customer pull and momentum for any firm to flourish, and consequently any location to grow rich. This is a fundamental requirement for any location to flourish.
Factor supply
Bangalore, with its developed pool of physical, technical and economic infrastructure, fulfills the key dimensions of supply of factors in the formation of a cluster. Lessons from the experience of regional development in a number of countries, including relocation strategies of firms in mature industries to low wage zones such as Malaysia and Thailand, provide insight into the continuing attractiveness of Bangalore.
Entrepreneurs and managers look for a combination of factors when choosing their location.
Knowledge based industries are influenced by a different set of loca- tion factors compared to traditional manufacturing based industries
(Ramachandran, 1986; Saxenian, 2000). Regional development indeed depends on the development of economic activities and income generated in the region. Ramachandran (1986, 1989) has shown a shift in the mix of location factors from economic to social as a region develops its eco- nomic infrastructure, in line with the Maslowian (1954) hierarchy of needs argument. According to Ramachandran, as the supply of physical infrastructure reaches a reasonable level, the need of entrepreneurs and managers to have fairly high quality non-economic factors (pleasant envi- ronment, social infrastructure) would go up. This is particularly so in knowledge driven industries, where employees, the key source of value addition, are highly mobile. The kind of economic infrastructure would not be the same for manufacturing and non-manufacturing industries.
For instance, the quantity and quality of communications infrastructure of IT industry is much higher compared to manufacturing.
Local pool of entrepreneurs
The third factor is the supply of a local pool of entrepreneurs; both at the early stage to kick start the growth of the cluster and at a later stage to Figure 5.1 Natural growth drivers of clusters
Location Attractivenes Industry Attractiveness
Factor Conditions Local Pool of
Entrepreneurs
Outsider Local
Infrastructure Related
Industries Personnel
Industry Structure
Demand Conditions
sustain the momentum. For entrepreneurs, ‘home proximity’ is the most important location factor (Ramachandran, 1986), particularly in societies such as India with strong cultural bonds among family and community members. In case the relative factor advantage of the cluster goes down temporarily, a capital flight is bound to happen. However the local entre- preneurs are more likely to continue and work for the revival of the cluster advantage because of their greater bond with the location (Stuart and Sorenson, 2003). In addition, in dealing with a turbulent industry, such as IT, the location of the business in a place where one’s social and profes- sional networks are present becomes important (Johannisson, 1998). This is particularly so for start-ups with limited internal resources (Siegel et al., 1993), but with the need to have a growing pool of resources (Barney, 2002).
This is evident in the case of the Bangalore cluster where companies like Infosys and Wipro have taken a very active role in supporting the Karnataka government to revive factor conditions and to some extent arrest the flight of capital to other locations, such as Chennai and Hyderabad. The presence of this important factor, that is, a local pool of entrepreneurs shaping the competitiveness of a location has not received enough attention in the extant literature.
However a fundamental question that remains is the replicality of the
‘Bangalore Strategy’ elsewhere in India. Since the competitive, technologi- cal and regulatory environments are not the same, it will be interesting to see the extent to which clusters like Hyderabad and Kolkata have followed the same strategy as Bangalore.