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Government Policies with respect to an

Information Technology Cluster in
Bangalore, India
ME IN E PIE T ER VAN DI JK

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The southern states in India have developed a strong reputation as a

source of software development services, with Bangalore, the capital
of Karnataka, having the strongest reputation of all. This article
focuses on the following issue: what determines the competitiveness
of an information technology (IT) cluster? The following questions
will be addressed: How did Bangalore become an IT cluster? What is
the role of the external environment and, in particular, of the national,
state and local governments for the development of this IT cluster?
Will the Bangalore cluster benefit or suffer from the present recession
in the IT industry in the US? Finally, what explains the success of an
IT cluster?

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The demand for software increased at about ten per cent per year in the 1990s,
and there has been, moreover, a shortage of software experts in most
developed countries. Given the labour-intensive nature of this work and the
price of labour it is typically an activity to outsource to a country like India
where many people have been trained in this field.1 They speak English and are
generally paid salaries, which are on the average one fifth of the salaries in
developed countries. The interest in outsourcing is also linked to a trend in
Western companies to concentrate on core activities and the perception that
information technology (IT) service vendors have the economies of scale and
technical expertise to provide services more efficiently than internal IT
departments [Lacity and Hirschheim, 1995].
There are about half a million people working in the IT sector in India, with
large concentrations in Mumbai, Bangalore, Delhi, Hyderabad and Chennai in
that order if measured in terms of number of headquarters of IT firms.2 The
southern states in India (especially Andra Pradesh, Karnataka and Tamil Nadu)

Meine Pieter van Dijk is IHS Professor of urban management in emerging economies, the economic
and financial aspects, at Economic Faculty, Erasmus University, Rotterdam. An earlier version of this
article was prepared for the working group on science and technology for development at the EADI
Conference, 2002, Ljubljana, Slovenia, 1921 September [year?].
The European Journal of Development Research, Vol.15, No.2, December 2003, pp.89104
PUBLISHED BY FRANK CASS, LONDON

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have developed a strong reputation as a source of software development

services. In particular, Bangalore is often called the Indian version of Silicon
Valley, referring to the concentration of computer-related enterprises in the
city.
The article focuses on the issue of what determines the competitiveness of
an IT cluster. After explaining the background of the IT cluster in Bangalore
and its competitiveness, the research methods deployed will be discussed and
the role of the government at the different levels mentioned will be analysed.
Subsequently, the questions about how the IT sector in Bangalore reacted to
the worldwide recession in the IT sector will be discussed.
BACKGROUND OF THE IT CLUSTER I N B A N G A L O RE

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With around 1,000 software companies employing over 80,000 IT

professionals, Bangalore is the undisputed IT Capital of India (Hindu, 28 Feb.
2002). According to the same article in 20001, at least one company with 100
per cent foreign equity participation has set up shop in this city every week.
Apart from IT majors like Infosys, Wipro, Tata Consultancy Services and
Microland, the worlds leading IT companies like GE, Texas Instruments,
CISCO, Digital, IBM, HP, Compaq, Motorola, Lucent Technologies,
Microsoft, Sun Micro Systems, Oracle, Novell and several others have made
Bangalore their home.3
Since the 1970s software production has been outsourced to specialised
companies. It took some time before India was accepted as a source for massproduction products of acceptable quality levels (Swagat, 2001, Journal of
India Airlines). Cost-cutting has been high on the agendas of many computer
firms and led to outsourcing [Bhatnagar and Madon, 1997]. A catalyst for
outsourcing has been the improvements in satellite communications. Secondly,
the time difference between India and the United States is such that Americans
can stop working on a job in the evening, send it by satellite to India, from
where it can be sent back at the end of the working day, resulting in a 24-hour,
across-the-world economy! Sixty per cent of Indian software exports go to the
US. Also, many Indian programmers working on short-term contracts have
gone to the US, which increased the total number of visas given to software
professionals in 2000 to 100,000. Half of this number were Indian (Financial
Times, 8 May 2001), of which an estimated 10,000 now have to go home
because of the recession in this sector in the US.
Bangalore is a city of about 5 million inhabitants, a quarter of which are
estimated to live in one of the 700 slums. It is not the only IT cluster in the
country, but is often called Indias IT capital, and specialises in software
production. The capital of Andra Pradesh (Hyderabad, or Cyberabad, as the
Chief Minister likes to call it) and the capital of Tamil Nadu (Madras or

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Chennai) are important competitors.4 Microsoft has, for example, selected

Hyderabad for its development centre, while a computer firm called E4E has
recently set up labs in Bangalore and Madras.5
During the Second World War Indias first aircraft factory was founded in
Bangalore: Thus at the threshold of Indias independence in 1947 Bangalore
had one of the most technologically advanced industries and work force of the
time in India [Srinavas, 1998]. In the years after independence the national
government established some of the countrys biggest public sector factories in
Bangalore, notably Indian Telephone Industries, Hindustan Machine Tools,
and Bharat Electronics and Bharat Earth Movers [Renu, 2000]. They have been
drivers of Bangalores fast growth. Bangalore is now known as a centre for
outsourcing the development of software, a practice that was established up in
the 1970s. Renu [2000] adds that overstaffing in the traditional governmentowned industries resulted in skill supply for other enterprises and plenty of
specialists, many of which became entrepreneurs of their own account. The
private sector took advantage of the large number of engineers and skilled
workers trained in the public sector companies. Contributing to the growth of
this was the establishment of the Peenya industrial area, later called Electronic
City [Bordia and Martin, 1998].
Wipro is now Indias largest listed software services company and earns
about a third of its global IT revenues by providing research and development
(R&D) services in areas such as broadband to equipment makers such as
Nortel (Financial Times, 8 May 2001). In 1996 Philips of the Netherlands
opened a software development centre in the city, where, by 2000, 750 people
were already working only four years after the centre opened. The company
grew 60 per cent per year in the early years (Flying Dutchman, 2002, Journal
of KLM Airlines, No.1[Also given as 2001 in original]). Smaller firms often
operate from residencies and many of them are recent start-ups; Renu [2000]
notes that the residential areas change their character when the buildings are
used for commercial rather than for residential purposes. IT firms, however,
are usually located in the city, or at one of the following locations: Electronic
City [City/city?] (78 IT firms 60 per cent of the total number at that
location), ITPL-Whitefield, the Peenya industrial area and the Rajajinagar
industrial estate. ITPL-Whitefield is the location for the international
technology park. It has been established with an investment of around Rs15.4
[million?] and is [was or is being] constructed with the active participation of
Singapore.6 It caters exclusively to the needs of the IT industry and houses the
state-of-the-art infrastructure necessary for the further development of the IT
sector.
Renu [2000: 23] gives a more detailed picture of the IT sector in Bangalore
by distinguishing the location of:

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Predominantly hardware firms in Rajajinagar, Malleshwaram, Jayanagar

and Indiranagar;
Software companies in Korammmangala; and
Computer peripherals in S.J.P. Road, Balepete and Chickpete.

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She also classifies firms that are not hardware or software producers but
dealers/agents, training institutes and others.
Renu, moreover, mentions that with a compound annual growth of almost
30 per cent between 1987 and 1991 the Indian software industry expanded
almost twice as fast as the world-leading US software industry in that period
[2000]. In Bangalore, major software companies Wipro, Satyam and Infosys
continue to grow, but new activities are also developing in particular, what is
called business process outsourcing industries, ranging from call centres to
managing back-office tasks.
Renu went on to consider why companies choose Bangalore city. The city
is known for its favourable climate, which is slightly better than in many other
Indian cities due to its altitude, and cosmopolitan character, having grown
rapidly due to migration. It has been the state of Karnatakas capital since the
early twentieth century and had one of the first polytechnics in India. The
availability of the Internet has facilitated this development and is now used to
identify excellent Indian companies that have registered for outsourcing. Many
IT companies selected Bangalore for setting up a plant because of the
availability of cheap specialised labour and because Karnataka was the first
state to develop its own IT policy. Also, the presence of a number of good
research and training institutes is often mentioned [2000]. To this, Sachs et al.
[2002] add that high-tech services such as information- and communicationbased industries are almost always reliant on a network of universities and
urban labour markets. Finally, a high quality of life at the location in question
is also important.
We will try to establish whether these factors are important for the clusters
studied, but we also try to identify other relevant and some city-specific
factors.
RESEARCH STRATEGY

The major issues studied here are: how does the IT sector in Bangalore
compare with IT clusters in other cities like Hyderabad? Is it an innovative
cluster, which is able to be competitive? The theoretical framework used is
based on Van Dijk [1999, 2000], which deal respectively with a classification
of cluster case studies and with competitiveness at the regional, city, cluster
and enterprise level. The research question formulated are:

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Which factors are influencing the competitiveness of the cluster of IT

enterprises in Bangalore City?
How does Bangalore compare with other Indian cities?
What are the effects of local institutions and policies of local government?
What are the advantages and disadvantages of a cluster of IT enterprises?
To what extent is innovation taking place in the cluster?
What explains the success of the IT cluster?

The hypotheses concerning the advantages of clusters formulated in theoretical

studies such as Van Dijk [1999] can also be tested in this situation:
1. Clusters with limited interrelations between the enterprises are at an early
stage of their development.
2. A labour division cluster would lead to more inter-firm relations.
3. A more developed cluster will stimulate innovation.

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In explaining the level of development of these IT clusters, we will pay in

particular attention to the demand conditions, the role of large firms in the
cluster and the reliance on a network of universities and research institutions.
Finally, the quality of life in Bangalore will be considered, as will some other
city-specific factors.
To begin this section, though, two definitions and related criteria.
Competitiveness is considered a measure for the performance of a firm,
cluster, city or region. IT companies are defined as companies for which
selling, producing or developing hardware, software or products based on an
intelligent combination of the two are important activities. Cluster is defined
as a physical concentration of similar or related enterprises. The following
defining characteristics of a cluster were suggested for the fieldwork [Van Dijk,
1999]:
1. Spatial proximity (or nearness) of the enterprises. In the case of Bangalore
the cluster extends only over a limited number of square kilometres.
2. A high density of economic activities, resulting from the relative
concentration of similar or related enterprises.
3. The presence of firms involved in the same (competing), similar or
subsidiary activities.
4. The existence of inter-firm linkages between enterprises as a result of
(vertical) subcontracting, and specific forms of (horizontal) co-operation.
No primary data was collected by the author because a number of studies were
already available and the main focus of the article is on the role of different
levels of government with respect to the IT cluster in Bangalore, which can be

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assessed in a more direct way by approaching the different institutions

concerned and their relevant websites. Renu [2000] and Bordia and Martin
[1998] collected primary data, while the work of Heeks [1996] and Heitzman
[1999] contains information on policies in this city and state. Business journals
like the Financial Times and Indian newspapers have also frequently and
extensively covered the IT industry in Bangalore.
Use was made of a study of 120 IT enterprises studied with a pre-coded
questionnaire with a limited number of open questions [Renu, 2000]. The
research enables one to make the theory of the advantage of clusters specific
for an urban economy in an Asian country in which activities related to the
computer industry play an important role. It should also be possible to provide
feedback to the computer companies and local government on how to increase
the attractiveness of different Indian cities for IT activities and how to proceed
with their nascent IT clusters.
THE ROLE OF DIFFERENT LEVELS O F G O V E R N M E N T

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The fact that by now almost every Indian city is trying to build up an IT centre
in the city or the region means it may be more interesting for new start-ups to
eschew Bangalore as a location and benefit from the incentives provided
elsewhere in the country. Some state or local governments certainly provide
substantial benefits to make investments in this sector attractive. For example,
the central government and the state concerned promote new investments in IT
companies very seriously. There is certainly a tradition of stimulating the IT
sector in general and clusters of enterprises specifically in states like Andra
Pradesh, Gujarat, Karnataka, Maharastra and New Delhi. In 2001, for
example, the government of Gujarat placed a huge advertisement proclaiming
Gujarat to be the next big IT destination in almost all national journals (for
example, Times of India, 29 June 2001). On the same day the Economic Times
reported that P. Mahajan, minister of parliamentary affairs and IT, presented a
strong case in Orlando (USA) to the CEOs of 150 IT companies to outsource
to Indian IT firms.
Table 1 provides an overview of possible support for IT clusters in India.
The policies listed are ranged from higher level (national), to state-level, citylevel and enterprise-level initiatives. Unfortunately, only limited evidence
could be found concerning the last type of initiatives. Also, publicprivate
partnerships are not yet very common in India, while factors such as
climatologically and quality of life seem to be the most important factors for
locating in Bangalore.7
Moreover, Table 1 summarises the framework for the analysis of the
Bangalore IT cluster.8 Each category will be considered in terms of what extent
it is important in the case of Bangalore. Some varieties of public support could

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TABLE 1
I T CL US T E R P ROMOTIO N A CTIV ITIES,
PA RT I AL LY T HROUGH P UBL IC-PRIVATE C O -O PERATIO N

1. Policy-related incentives (for example)

1.1 Fiscal
1.2 Targeted Education and Training
1.3 Marketing Support Cluster Marketing through Advertising, and so on.
1.4 Industrial Policies Dispersal
2. Prices and Subsidies
2.1 Land*
2.2 Electricity and Water Supply
2.3 Enterprise Buildings
3. Innovation Promotion
3.1 Involving Research Centres
3.2 Stimulating Incubator Centres
3.3 Promoting Linkages with Training and R&D Institutions*
4. Physical Support
4.1 Space
4.2 Secondary (electronic) Infrastructure

6. Other Initiatives and Factors

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5. Stimulating Co-operation
5.1 Group Formation of Enterprises and Consultation of these Groups
5.2 Promotion of Inter-Firm Relations*

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Note: * These cases could lead to a public-private partnership.

even lead to publicprivate partnerships, something quite uncommon in the

case of Silicon Valley the classic example of an IT cluster [Castells and Hall,
1994].
National, State and City-Wide Policy Initiatives
In the years after independence the national government established some of
the countrys biggest public sector factories in Bangalore (see above). At the
national level several other initiatives were taken to develop the IT sector in
India. In this respect, the Prime Minister said recently that liberalisation has to
go on (Financial Times, 7 Feb. 2002). However, Renu [2000] remarks that
until 1977 the regulatory framework proved inadequate for the establishment
of technological capabilities for new firms. The industrial policies restricted
the access of these firms to technological resources from abroad, slowed down
the innovation diffusion process and impeded quality competition. It was,
however, successful in building the human capital stock necessary for the rapid
growth of an indigenous computer industry. Hence, the emerging private

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BOX 1
AT T E NT I ON F OR T HE I T S E CTO R IN TH E N ATIO N A L PRESS

Distorted duty regime to persist in finished component sector, Economic Times, 4 March 2002
Oracle is not scaling back in India, Economic Times, 4 March 2002
IT: the past, present and future, Hindu, 28 Feb. 2002
India prepared for the big bytes, Economic Times, 4 March 2002
Zhus blessing puts Delhi in dilemma over IT alliance, Financial Times, 29 Jan. 2002
Blue chip cos. eye Bangalore for call center operations, Economic Times, 22 Feb. 2002
Software magnet, Business Standard (Bangalore), 22 Feb. 2002
Indian software weathers global recession, Financial Times, 6 Feb. 2002
Industrial service sectors growth expected to rise, Financial Times, 26 Jan. 2002
Have Silicon dreams. Need a push up? Economic Times, 4 March 2002
IBM (India) plans focus on software solutions, Economic Times, 4 March 2002
Industry on a blazing trail, Hindu, 28 Feb. 2002
Welcome IT cluster, Economic Times, 21 Feb. 2002

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computer industry looked outside the country to replenish its stock of

technological know-how. Presently, English-language newspapers in India
announce new technology projects, usually at the national or state level,
approximately every other day. Some recent headings are summarised in Box
1, which gives an impression of the importance attached to the development of
the IT sector and the issues playing a role in its development.
The Indian authorities expect a lot from the IT sector and put considerable
effort into its development. They are also willing to accept foreign investment
in the sector if that could trigger off further development. Finally, the
government clearly thinks in terms of publicprivate co-operation projects as
a means of developing the IT sector.

BOX 2
S TAT E - L E V E L I T I N I T I AT I V E S I N K A R N ATA K A

First state to announce a comprehensive IT policy

Created a separate Department of Information Technology at an early stage
Used the available engineering colleges to train people for this sector
Houses and supports the Indian Institute of Science*
State government is setting up the government- and industry-led Indian Institute of Information
Technology (IIIT-B) at Bangalore
Created Electronics City on the outskirts of Bangalore
Created Software Technology Park in Bangalore and Mysore; new ones due to open soon in
Manipal and Mangalore
Created Information Technology Park at Whitefield, Bangalore
Introduced concepts of electronic kiosks and electronic governance
State-wide network being established

Note: * Endowed by Indias leading industrial firm, TATA.

Source: Renu [2000].

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After the Prime Minister had set up the National IT Task Force in May
1998, chief ministers of various states have been setting up state-level IT task
forces. The results for Karnataka are summarised in Box 2. The Karnataka
state government is also considered very supportive for the development of the
IT sector in the state. It will be concluded that policy efforts at the state and
city level reinforced each other and contributed to the success of the IT sector.

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Policies at the City and Local Government Level

Many cities in India are trying to attract high-tech industries by giving, for
example, financial support. This is obviously also the case with Bangalore,
which has a history of proactive planning and policy-making. Bangalore
Municipality was established in 1862, and the city has a long history of urban
planning [Heitzman, 1999]. The Bangalore City Corporation (BCC) was
founded in 1949, which became the Bangalore Development Authority (BDA)
in 1976. In 1985 the Bangalore Metropolitan Region Development Authority
(BMRDA) was created with the authority to plan for a metropolitan region
including the Bangalore urban district, the Bangalore rural district and one
taluka in the Kolar district. In 1995 a plan was presented for the whole region.
The Bangalore municipal government then started to formulate positive
economic policies, both generally and with respect to small and medium IT
enterprises in the city. Local government is very active and developed, for
example, its own IT policy and looks for publicprivate partnerships for
infrastructure development.

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Type of activities for IT cluster promotion in Bangalore

1. Policy-related incentives (for example)
1.1 Fiscal IT companies settling in Bangalore usually get a number of tax
incentives. Incentives are also provided in India for investments in
infrastructure. This instrument is used on a limited scale in Bangalore,
however.

TABLE 2
CE NT RE S F OR S CI E NCE AND T ECH N O LO G Y A N D C EN TR ES O F
H I G H E R E D U C AT I O N I N B A N G A L O R E

Science and Technology

Indian Institute of Science (IISC)
Indian Space Research Organization
Regional Remote Sensing Services Centre
National Aerospace Laboratory
Defence Research and Development Organization
Indian Institute for Astrophysics
Source: BMRDA [2002].

Centres of Higher Education

Indian Institute of Management
National Law School
National Institute of Advanced Studies
University of Agricultural Science

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1.2 Targeted Education and Training Companies benefit from the large
number of education and training institutes in the city. The important ones are
listed in Table 2, where a distinction is made between centres of science and
technology (S&T) and centres for higher education.
1.3 Marketing Support The State government is actively promoting
Bangalore as the capital of software in India and abroad. The Chief Minister
often travels to the US and receives, for example, Bill Gates (Microsoft) when
he visits Bangalore (Business Times, 15 Nov. 2002).
1.4 Industrial Policies: Dispersal In November 1971 the government of
Karnataka thought that it was necessary to disperse industries to backward
areas in the state. For that purpose the state was divided into four zones. An
incentive package and concessions were made available to industries installing
themselves in areas around the city of Bangalore which were identified as
backward.

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2. Prices and Subsidies

2.1 Land Renu [2000] notes that, originally, no specific policy seems to have
guided the location and development of industries in and around Bangalore. It
was often convenient to set up units along or in the vicinity of high roads.
Subsequently, a policy of discouraging new industries in Bangalore itself
became effective. Investment subsidies were, for example, not permissible in
Zone 1 (covering the Bangalore urban agglomeration). However, interest
subsidy on term loans was possible and price preference for small-scale units
for the first five years was also possible. The policy was modified after two
years when two industrial estates were excluded from the rule [Veerasandra
and Bommasandra] [is this a reference to a study that isnt in the references
or names of the two estates?] and Electronic City was shifted from Zone 1 to
Zone 2. No examples of publicprivate partnerships based on land were found.
2.2 Electricity and Water Supply The early industrialisation of Bangalore
was positively influenced by the availability of cheap water and electricity and
the authorities made an effort to keep up a regular supply of these services.
2.3 Enterprise Buildings No examples of the government providing
enterprise buildings were found. This is an important incentive for IT
industries in China to opt for a certain location [Van Dijk, 2003].
3. Innovation Promotion
3.1 Involving Research Centres No evidence was found of government
efforts to stimulate IT companies to link with existing research institutions.

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Although the presence of six major science and technology institutions and
four major centres of higher education were not the main reasons to choose
Bangalore, the companies located there do benefit from the substantial number
of education and training institutes in the city. This helps in providing the large
amount of skilled labour necessary for such an industry.
3.2 Stimulating Incubator Centres No evidence was found of incubator
centres created by local government in Bangalore.
3.3 Promoting Linkages with Training and R&D Institutions This was not an
official policy; however, some of the IT enterprises have developed linkages
with the existing R&D institutions.

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4. Physical Support from the Government

4.1 Space Space has been made available for IT companies; Renu [2000]
also notes co-ordination between industrial and urban development in the state,
which contributed to successful industrialisation. The urban planning
department recognised that the planning exercise must concern itself with the
major function of [a/the?] city, which is providing economic growth in the
state in this case. The approach was not so much controlling the pattern of land
use, but rather optimising land use in terms of economic returns, employment
generation, provision of shelter and the raising of additional resources for the
citys development.

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4.2 Secondary (electronic) Infrastructure Renu [2000] concludes that the

industrial areas and estates in Bangalore district are better serviced than those
in other parts of the state. The existing electronic information infrastructure
allowed the creation of back-up centres in rural India during the crisis between
India and Pakistan in June 2002.
5. Stimulating Co-operation
5.1 Group Formation of Enterprises and Consultation of these Groups No
evidence was found that this is an important activity in terms of government
input in Bangalore.
5.2 Promotion of Inter-Firm Relations Two government organisations, the
Karnataka Industrial Development Board (KIADB) and the Karnataka State
Small Industries Development Corporation (KSSIDC), contributed to the
promotion of industrial development. KIADB did this in and around
Bangalore, while KSSIDC set up a large number of industrial estates (16) in
the Bangalore district.

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6. Other Initiatives and Factors

Karnataka is known for the relatively peaceful industrial relations that prevail
in the state. Bangalore seeks to improve the quality of its urban environment
by restructuring the inner city and stimulating expensive housing areas. The
city is also cooler than most Indian cities because of its altitude. Finally, it is
considered a green city, which has certainly contributed to its attractiveness to
the IT sector.
THE RECESSION: LOSES OR BENEFI T S ?

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Thousands of Indian software engineers are likely to return to India because of

the slowdown in the economy of the United States (Financial Times, 8 May
2001). In many cases it means back to Bangalore. The big question is
whether the Indian concentration of software companies in this city is going to
benefit from the recession because American firms will be tempted to
subcontract more to a low-income country, or whether they will suffer from the
slump in demand and the large number of unemployed IT workers.
It is known that American telecom equipment makers operating globally,
companies such as Cisco and Nortel, not only cut jobs but also curb outsourced
projects. The latter has put on hold a three-year, $350 million investment in
India, including a new research and development plant (Financial Times, 8
May 2001). The bigger companies, such as Wipro and Satyam, were somewhat
hit, but also better placed to search for new markets the European market, for
example. Moreover, new activities have been developed, such as investing in
call centres or managing back-office tasks for foreign customers such as
paying bills (Economic Times, 22 Feb. 2002). Finally, it has been noted that
billing rates have fallen in the current recession and may not rise very fast even
in a global recovery because of stiff competition from China (Economic Times,
21 Feb. 2002) and Taiwan (Business Standard, 22 Feb. 2002).
Ultimately, in terms of surviving the recession, much depended on whether
the Indian software makers managed to find other markets outside the major
contracting markets of the US and Japan; Europe has become more important
recently. The crisis also forced companies to become more practical and focus
on solving real-world problems (Financial Times, 13 Feb. 2002): it meant
operating on leaner budgets and focusing on finding new customers.
The meltdown of the IT sector in the US had serious implications for the
Indian information technology industry. However, US demand in 2001 was
again 40 per cent higher than in 1999, the pre-crisis year (Financial Times,
18 July 2001). Indian software exports totalled $1.9 billion during the last
three months of 2001, a 25 per cent increase compared with the same period
in 2000. Admittedly, this is slower growth than in the previous ten years, but
it shows a basically resilient IT industry sector. The year 2001 was the first

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recession that the IT sector in Bangalore has faced. However, they

weathered the recession quite well and even achieved some growth in their
production (Financial Times, 6 Feb. 2002). Although most companies have
tried to diversify their production, two-thirds of the orders still come from
the US.
OTHER FACTORS INFLUENCING TH E D EV E L O P M E N T O F
BANGALORES IT CLUSTER

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The effects of the world-wide stagnation in the IT industry on Indias emerging

economy are limited. It could have been a threat because fewer products are
demanded, but it was also an opportunity because there was even more
demand for low-cost suppliers. The forecasts for the exports of the Indian
software sector were lower growth in 2001 decreasing from 55 per cent in
2000 to 4045 per cent in 2001 (figures from the National Association of
Software and Services Companies in New Delhi). The final figure was 25 per
cent, which is still substantial. Nonetheless, the industry did face reduced
demand for the first time after a decade of rapid growth.
To find out to what extent the cluster is a real cluster with labour division
and innovation diffusion, we looked at the inter-firm relationships. Normal
economic relations (buying and selling) between companies in the cluster are
not very well developed. However, other types of co-operation (the exchange
of ideas, carrying out projects together, and so on) seem to be quite important.
Many IT firms have well-developed relationships with other companies,
government or universities, but it does not seem to lead to much labour
division or innovation.
Innovation is certainly taking place in individual companies and many
companies invest a substantial part of their profits for this purpose. Some firms
consider innovation to be the result of carrying out jobs for others. The overall
evidence suggests that this cluster is not yet a fully developed, innovative
cluster [Van Dijk, 1999]. The cluster still has to develop further into a full
labour division cluster, which currently is hardly the case. Complementary
activities are carried out jointly on an infrequent basis; only when these
activities are more frequent could Bangalores IT cluster become a truly
innovative cluster.
In the case of Bangalore, then, the importance of local demand is not so
significant. The role of large firms is important, but these were not necessarily
large foreign firms.[not entirely clear] R&D was present and has been
developed, although it is not the key to understanding the success of
Bangalore. Finally, the quality of life factor certainly contributed to making
Bangalore an attractive city for a knowledge-intensive industry.

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P O L I C Y R E C O M M E N D AT I O N S F O R F U RT H E R D E V E L O P M E N T O F T H E
IT CLUSTER

Significant activity is already occurring at the international level to promote

India as a country for software outsourcing. Central government is aware that
high-tech industries can help to employ people, attract investments and earn
foreign exchange. Typically, India was one of the first developing countries to
sign international agreements on intellectual property rights. Different levels
of government can do more, though, to develop IT activities. In particular, the
following policies would be recommended at the different levels:
State level
Provide space and appropriate infrastructure for IT companies, to the extent
that this goes beyond the border of the cities;
Provision of incentives and the facilitation of exports by state-level
authorities;

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City level
Develop a vision and strategy for the further development of the IT sector,
answering the question what is the best strategy to develop the sector
further?
Provide co-ordination between the different levels of government, such as
between the different plans of different districts;
Stimulate entrepreneurs to organise their own networks and accept those in
discussions as the major private-sector partners for the government;
Local government level
Consider the entrepreneurs or their organisations as partners for a dialogue;
Provide space and infrastructure;
Supply buildings and business support services;
Provide other incentives;
Attract foreign investors;
Provide information to entrepreneurs;
Set up an enterprise network;
Promote linkages with local knowledge centres, such as the existing
universities and R&D institutions.
In general, the Indian government should provide an enabling environment for
IT enterprises and, in particular, create a starter-friendly environment. At the
enterprise level, the choice is between focusing on a narrow market segment
and building sectorial expertise or capturing broader markets. At the national
level, a more positive attitude towards foreign investments in this sector could

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help to attract foreign capital and the latest technology. Foreign direct
investment may also help to conquer new markets and provide benefit from
international management practices.
CONCLUSIONS

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Bangalore, a state capital, became the location of the first concentration of IT

industries in India, but it is not one of the most important cities in India; rather,
it happened to be the first technology centre in India. Bangalore seeks to
improve the quality of its urban environment by restructuring the inner city and
stimulating the development of expansive housing areas. In Bangalore, a weak
demand for its products was never an issue because of the importance of
software exports. In terms of our theoretical framework, several educational
institutes and research centres are located in Bangalore and contributed to the
development of the city as an IT centre. However, this was not a crucial factor,
except for providing the necessary cheap and skilled labour.
There may be not enough relations between the existing R&D institutions,
the universities and the IT sector. However, the low wages and the high
number of skilled workers have worked to the benefit of Bangalore. This
labour force speaks English and has received a solid technical education.
Indian government policies focused on creating an enterprise-friendly
environment and on attracting foreign capital to the city; the authorities did use
the locally available knowledge resources as a sales factor. Bangalore also has
some large technology enterprises. The most important factors for the citys
success, though, were the climate and the presence of already established hightech industries, which provided the right environment for the software sector
to develop.
The development of the software sector in India in general and in
Bangalore in particular has had a demonstration effect for other industrial
sectors. IT industries are non-polluting and labour and knowledge intensive. It
demonstrated to other companies that export-orientation can pay off, that
foreign investment can give access to technology and markets, and that
strategic alliances may be very rewarding. It has also improved Indias image
abroad in terms of entrepreneurial and technological capabilities [Renu, 2000].
In terms of Porters diamond [will the readership understand this
phrase?], the existence of a large local market also contributed to the
development of the sector [Porter, 1990].[Odd place to introduce a new
theorist/idea.] For the time being, Indias attractiveness for software
development remains undiminished.

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NOTES
1.
2.
3.
4.
5.
6.
7.
8.

Hewlett-Packard, for example, has facilities in India, as well as Mexico, Singapore, Scotland
and other countries (Datamation, 2000).
To put this figure in perspective, 560,000 people have lost their jobs in the IT sector in the US
since the IT bubble burst in 2001 (US high-tech job market plunges, International Herald
Tribune, 20 March 2003).
TCS, Infosys, Wipro, Satyam and HCL are considered the big five in IT in India (Economic
Times, 21 22[2, 12?(i.e., Feb., Dec?)] 2002).
Indias capital, New Delhi, also has an important concentration of computer-related industries.
These labs will provide the kind of support Stanford University has provided to Silicon Valley
(Financial Times, 28 Feb. 2001).
The rate of exchange was 45 rupees to the dollar during 2002.
No efforts were made to assess the quality of life in an objective way, but entrepreneurs
interviewed often referred to the attractiveness of Bangalore as a city to live in.
The framework has been developed for a comparative analysis of two Asian and two European
IT clusters, together with Willem van Winden at Erasmus University.

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