Multinational Firms and the Evolution of the Indian Software Industry

Abstract

The Indian software industry appears to provide a startling confirmation of the benefits of multinational investment in a fledging industrial sector. The main question explored in this paper is how and why this happened. We find that multinational firms had an important catalyzing effect on the industry's evolution, even though foreign firms established by expatriate Indians probably exerted more competitive pressure. We do not accept a popular view, which ascribes this benign influence to the development of human capital. We argue is was tight labour markets due to foreign competition, which induced domestic firms to both acquire unique organizational capabilities and to improve the value-adding strategies of multinational firms.