Module 1

1. IT

1.1 Module 1

1.2 Chapter 2
1.3 Introduction

By the end of this lecture, you will know and understand more about:
a) The differences between information technology (IT) products, IT services and IT-enabled services
(ITES);
b) The various ways to deal with international clients in the IT and ITES sectors;
c) The history of the internationalization of IT and ITES;
d) Various trends in IT and ITES;
e) The supply and demand sides of IT and ITES; and
f) The factors in the creation of a successful IT-related export industry
1.4 Answer the question

Feedback
As per the last known figures, there are 18 million freelancers registered with the Upwork platform. It is the
largest global freelancing platform. Approximately 3 million jobs worth more than $1 billion are posted
annually. Its clients include more than 30% of the Fortune 500 companies like Microsoft, General Electric,
Airbnb, Automattic and BISSELL, etc.
The top five countries that spend the most on these websites are the United States, Australia, the United
Kingdom, Canada and the United Arab Emirates. Meanwhile, the top five countries with the highest freelancer
earnings are India, the United States, the Philippines, Ukraine and Pakistan.
When large enterprises from the United States and Europe first began outsourcing their software development
work, they mainly worked with suppliers in India. Although India has become very successful, many other
countries are also offering IT and IT-enabled services to large enterprise clients around the world today.
1.5 Answer the question

Feedback
All of the companies above use outsourcing: they have all been working with suppliers in Gaza or the West
Bank. In fact, some examples of companies working with Palestinian IT and ITES suppliers include Volvo,
Cisco, HP and Intel. Although Palestine is still a fairly unknown outsourcing location and suffers from an
unstable political environment, it is nonetheless a viable option for conducting IT or IT-related work.

1.6 Chapter 2
1.7 Export opportunities for IT products and services

Many companies in developing countries are already offering IT-related services or producing software
products for their local markets. Since IT is a very broad category, we will divide it into three main areas: IT
products, IT services and IT-enabled services. Let us start with an overview of the various export opportunities
in these three areas.

• IT products: Here, we are primarily looking at software products or applications, not computer hardware. IT
products can range from accounting software, to computer games, to mobile apps. These software products
can often be exported online using a digital distribution platform. For example, an app built for the iPhone or
iPad can be sold through Apple’s App Store or Google Play, allowing it to be purchased by users all around
the world. On the business side, programmers in developing countries can build applications and sell them
through various business-to-business marketplaces, run by major software vendors (e.g. Microsoft, Google,
Oracle, SAP and Salesforce).

• IT services: IT services refers to the delivery of business and technical expertise to support organizations in
their management of IT or application of IT to their business processes. IT services include application
development and maintenance and infrastructure services. In application development services, the
specifications for a particular piece of software are made by a foreign client (e.g. an airline, a bank or a
software company), and the IT services provider then builds the software locally. A company in the United
Kingdom, for example, might decide to leverage an offshore provider to build a new e-commerce software
product. In this instance, they may send the specifications to Sri Lanka, where software engineers in
Colombo would programme and test the software. IT services can be provided in a variety of ways, the most
common being managed IT services where a company provides IT services on an ongoing basis at pre-
agreed rates. Another way is on-demand IT services where a company buys IT services from a provider only
when required.

• IT-enabled services (ITES): This refers to the outsourcing of business processes to a remote provider who
leverages technology to enhance automation and deliver the services more efficiently. Many industries, like
banking, financial services and insurance (BFSI), retail, telecommunications and others, use ITES to achieve
their desired outcomes. Examples of IT-enabled services include various types of data entry or back office
work, such as market research or tax preparation, as well as customer interaction services, such as
telemarketing, helpdesks or call centres. Many of these routine tasks do not require proximity and can be
outsourced for a modest cost, especially when technology can be leveraged.

Suggested videos

Brief overview of the IT and ITES sector:

• https://www.youtube.com/watch?v=RzqlbFVTdJM
• https://www.youtube.com/watch?v=TnKGD97AyLc&ab_channel=BrainStation23

1.8 Some terminology

IT or ITES can be procured in multiple ways. The choice depends on the upfront investment that a company is
willing to make.
Subsidiaries
When a company needs services, the first option is to set up a subsidiary in another country to deliver those
services. This subsidiary is also known as a “captive centre”. These captive centres are owned and run by the
company itself. For example, Microsoft has its own research labs in various locations across the world,
including India, China and Egypt, all of which are staffed by Microsoft employees. This option requires an
upfront investment to set up the captive centres as well as incurring the operating costs.
Third-party providers
The second option is for a company to hire a third-party IT/ITES provider to do the work, which is also known
as “outsourcing”. The term refers to the relocation of IT and/or business processes to another country. The
relationship with the IT/ITES provider is governed by an agreement or contract that defines obligations to
provide services to the buyer. This option requires a relatively small investment, since the third-party providers
usually spread the one-time costs (e.g. transition of services or installation of technology) over the contract
term.
Staff augmentation
The third option is known as “staff augmentation”, which refers to the procurement of skilled labour from a
third-party IT/ITES provider. These resources are usually procured on a time and material basis. The third-
party provider includes the set-up costs in the hourly rates of the resources. In this case, the third-party
provider is not responsible for the outcomes of the services rendered by its resources.
At times, companies choose to partner with third-party providers to enhance their offerings. For example,
Vanguard, an investment management company, partnered with Infosys in July 2020 to enhance its defined
contribution (DC) business, and deliver a technology driven approach to reshape the corporate retirement
plan experience for its sponsors and participants.
Location
Another important concept is location. These third-party IT/ITES providers can be located onshore, nearshore
or offshore.
• An “onshore” location denotes that the services are being provided within the same country.
• A “nearshore” location denotes that the services are being provided in a country within close proximity.
Some companies prefer “nearshore” service delivery locations to save travel time and eliminate the difference
in time zones (both of which can facilitate collaboration). For example, much of Germany’s offshoring
activities are done in Poland and other Eastern European countries. Likewise, Mexico and Central America are
popular nearshore locations for the United States and Canada.
• An “offshore” location denotes that the services are being provided in another country located in a far-off
time zone. For example, the Dutch airline company, KLM, has some of its software development work done
by Indian suppliers.
Captive centres, nearshore and offshore delivery centres are often located in low-cost countries in order to
take advantage of lower labour rates, a concept known as “cost arbitrage”.

1.9 The history 1/2

International transactions can be considered to have three parts: the professional subject (situation), personal
issues (people) and cultural aspects. All three parts have an impact, and play an important role in business
success.
You should always keep in mind that not all business conflicts occur for business-related reasons. In fact, a
conflict in business could be:
• Situation-related: e.g. pressure of time, circumstances
• Personality-related: e.g. temper, skills
• Culture-related: values, norms, habits

Case example:

Ms. Li from Guangzhou would like to discuss further projects with Louis Kabete, her long-standing business
partner in Nairobi. She is in Kenya for a few days. She decides to make a surprise visit to his main office
without making an appointment in advance. She is greeted in a friendly manner and some younger staff
members take care of her request. Ms. Li is quite annoyed as she had expected Mr. Kabete to take care of her
personally.

What happened here? Did Mr. Kabete try to antagonize her on purpose? Well, let’s consider the three parts of an
international transaction. There are a few possibilities:

Situation: Mr. Kabete is not in Nairobi right now. He didn’t know Ms. Li would be coming! He has asked one of
his nephews to take care of her.
People: Mr. Kabete is a cautious person. He is reluctant to engage and discuss important business matters
without prior preparation.
Culture: In the Kenyan context, trying to contact somebody of Mr. Kabete’s status without giving prior warning
is quite impolite.

1.10 The history 2/2

Going abroad to buy or produce services or products is not a new phenomenon. Over the years,
industrialized nations such as the United States and the United Kingdom have seen many of their
manufacturing industries, such as shipbuilding, automobiles and textiles, go to other countries. Since the
1990s, global sourcing has also been gaining importance in the market for software and IT services.
According to a Statista report, the revenue in the IT outsourcing market was expected to grow from $378.1
billion in 2018 to approximately $413.7 billion by 2021.

There are several reasons for this internationalization:

• Trade (including services) has become increasingly globalized, especially since borders began opening in
the 1980s as market-based solutions gained broad acceptance. The collapse of the Soviet bloc further
spurred this process. Today, countries are competing with one another to attract foreign investment and
create a business-friendly international environment. Technology parks have been created to help
international companies set up and run business operations more easily.

• The shortage of talent in technology has given an impetus to the outsourcing of IT services to countries like
India, China and others in Eastern Europe. Globally, the gap in tech talent amounted to roughly 40 million
jobs in 2020. By 2030, the shortage is predicted to reach 85.2 million workers. In response, during the past
few decades, universities in India, China and other developing countries have been increasing their number of
software engineers through training. Today, China trains four times as many software engineers as the United
States every year. The abundant supply of labour in developing countries allows companies to assign a large
number of staff and respond to business needs in days instead of months. In the past, a large part of this elite
workforce would emigrate to industrialized nations. Today, however, global technology firms’ ability to access
talent from anywhere in the world has significantly reduced the need for emigration. Today, many companies
are importing the work without importing the workers.

• The IT-related sector is largely made up of labour-intensive activities. Wages make up a large part of the
costs for software products and other IT and ITES services. As such, offshoring can help companies save
large sums of money. In fact, typical savings from offshoring can range from 25% to 40%. As such, working
with staff in the developing world makes good business sense for companies in developed countries.

• Another advantage of offshoring lies in the ability to “follow the sun” (also known as working “around the
clock”). This involves using time zone differences to speed up work on a project. For example, with offshoring,
a team in the United States could hand off its work at the end of the day to the team members in India or
China, who can then continue the work while the American team members sleep.

• Over the course of just two decades, communication costs have decreased, while communication quality
has increased. It is now almost as easy to work with someone located across the ocean as it is to work with
someone located on the other side of town. In 1994, Indian programmers hired by American firms had to mail
their software on tape every week to the United States. Today, they can share the results of their work online
quickly and easily. Expensive phone calls have been replaced by voice over internet protocol (VoIP)
communication at zero marginal cost. Communications systems, such as Slack, Zoom and Microsoft Teams,
enable customers and service providers to collaborate almost as well as if they were physically in the same
conference room.

• Finally, the popular destinations for outsourcing, such as India and China, have also been bolstered by local
government policies. These include direct financial investment, policies to encourage training of workers, and
the creation of centres for research and innovation.

Contributors to IT outsourcing
Avasant research shows that mid-sized tech companies have been the largest contributors to the IT
outsourcing industry’s growth. In 2020, midsized companies increased the amount of work outsourced to
service providers to from 9.1% (in 2019) to 11.8%. In 2021, desktop support, data centre operations, help
desk and network operations are predicted to be the four least outsourced IT functions. In contrast,
application development is predicted to be one of the most frequently outsourced IT functions in 2021, with
more than 60% of organizations outsourcing at least a part of their development work.

Suggested videos

Partnership between ITC and the Netherlands Trust Fund IV (NTF IV), which has helped Uganda create
favourable conditions for companies and strengthen their ICT sector:
https://www.youtube.com/watch?v=P-xNUPhIqqQ&ab_channel=InternationalTradeCentre

Outsourcing of IT services to South Africa:

https://www.youtube.com/watch?v=_bP7VicwbTk&ab_channel=ImpactIT

History of the IT sector and gives three examples of business process outsourcing (BPO) companies that
moved to digitize their business to meet demands of the growing industry:
https://www.youtube.com/watch?v=Mc1_y3WEKqU&ab_channel=CNBC-TV18

1.11 Trends in outsourcing

The phenomenon of outsourcing in the IT field is still gaining in magnitude, and several ongoing trends can
be observed:
• Outsourcing core business services: With the growth of business process outsourcing (BPO) projected to
reach $220 billion by 2020, customer-provider relationships are expected to become trustworthy to the point
where even core business operations (processes that are strategic to the firm) will become outsourced - a
shift from non-core services (back office functions, e.g. accounts payable and billing). Providers that are able
to bear this responsibility will see themselves ahead of the curve.
• Increase in offshoring: In the past, only very large companies were able to take full advantage of the low-
cost structure and global resource pool provided by the access to international resources, by either
establishing their own subsidiaries or contracting with third-party providers. Today, thanks in part to
improvements in telecommunications, smaller and medium-sized firms can begin to source staff
internationally. Offshoring has even become possible for very small or start-up companies. According to the
Mordor Intelligence 2019 study, the IT services market is expected to register annual growth of approximately
8.87% in 2020-2025.
• Nearshoring vs offshoring: Another trend is the growth of nearshoring. Proximity in terms of time zones,
shorter travel times and cultural similarities make it more attractive to seek international partners closer to
home. Many Japanese companies, for example, nearshore some of their activities to China. Mexico and
Colombia, meanwhile, have an edge over India in terms of their proximity to the United States. Indonesia and
the Philippines, for their part, are logical destinations for many Australian companies.
• Best of breed outsourcing: The provider landscape is dynamic. A growing number of developing countries
now have an IT-related export sector. In particular, IT-enabled services have low barriers to entry in terms of
skills, scale, technology, managerial capabilities and domain knowledge. This makes an export-oriented ITES
sector accessible to many nations across the world. A good example is Suriname, with a population of only
500,000. This small country is nonetheless quickly becoming an important Latin American location for Dutch-
speaking call centres. An emerging trend within the outsourcing field is the need for multiple provider
outsourcing where no one provider can fill the demand for all services/skills and thus multiple specialist
providers are needed. The providers who offer wider ranges of expertise and quality services in one package
are ensured to survived in the competitive markets.
• Contract models: Contract models in the past were usually transaction-based or full-time equivalent-based
(FTE-based). These are now shifting to outcome-based models where providers are looked on as service
integrators and are expected to share responsibility and risks. Providers can get ahead by learning to build
strategic partnerships, invest in relationships and redesign their pricing strategies based on outcomes rather
than hours worked.
• Focus on value creation: The main justification for outsourcing has always been largely about cost reduction.
Nevertheless, the demand dynamics and drivers of the global sourcing of services continue to evolve rapidly.
Moving beyond cost savings, there is now a greater focus on sustained performance improvement, and the
creation of a flexible and scalable organization. In the foreseeable future, clients/companies will be moving
away from cost cutting as the deciding factor to quality of the products/services being delivered. Providers will
now work in partnership with clients where project risks and value-driven services will be the focus.
• Increased adoption of technology: Providers are investing in artificial intelligence (AI), robotic process
automation (RPA) and cloud computing to enhance the quality of their output and reduce the risks associated
with service delivery. Artificial intelligence refers to computing systems that learn from past history to make
recommendations, while robotic process automation (RPA) refers to software “robots” that mimic and
automate routine human interaction with computer systems. Both technologies are increasingly being used in
IT-enabled services to reduce human effort, improve quality and deliver results faster. This is especially the
case for customer service processes. Analysts predict that, by 2022, 90% of customer interactions will be
facilitated by chatbots, powered by AI and RPA. IBM, Samsung and Microsoft are some of the leading firms in
this area. Cloud computing has made it easier for providers to deliver services across the world without
having to run their own data centres or set up telecommunications with their customers.
• Cybersecurity: With companies forced to adopt remote working, cybersecurity has become extremely
important. A UN report <https://www.voanews.com/covid-19-pandemic/un-warns-cybercrime-rise-during-
pandemic> found a sixfold increase in malicious e-mails during the COVID-19 pandemic, with a cyberattack
registered every 40 seconds around the world. Such incidents are prompting companies to tighten their
software security measures, and more than half
<https://www.computereconomics.com/article.cfm?id=2432> of them are using third-party providers to
deliver security services.
• Corporate social responsibility (CSR): The choice to outsource is still usually based on cost savings.
However, a new trend involves the outsourcing of IT work due to corporate social responsibility (CSR)
initiatives. These refer to corporate programmes established to accomplish various social goals or global
development objectives. For example, several international relationships between Palestinian IT companies
and large American firms (e.g. Cisco, HP and Intel) arose due to CSR initiatives (rather than business
initiatives).

Suggested video
Outsourcing non-core services (provided by Troinet, an IT services company):
https://www.youtube.com/watch?v=h0XqszWLK08&ab_channel=Troinet

1.12 Activity - 4/4

Feedback
Outsourcing refers to a company contracting a part of its work to a third-party provider.
Offshore outsourcing refers to outsourcing that is done across national borders.
Offshoring can refer both to the set-up of a subsidiary abroad, or to a company’s offshore outsourcing
activities. The term refers to the relocation of business processes to another country, typically to a cheaper
location.

1.13 Chapter 2

1.14 Answer the question

Feedback
The largest user of Indian IT services is not Germany or France, but rather the United Kingdom. Although
European companies tend to have a more conservative business style than American ones, the widespread
worldwide use of the English language has made outsourcing easier for British companies. However, other
European countries still boast many interesting outsourcing business opportunities.

1.15 Demand for IT and ITES

Although cost savings have always been the dominant demand driver in offshore sourcing (for example,
during the 2008 economic recession), shortages of skilled IT staff can also cause companies to search for
talent abroad. A well-known example of a tight IT labour market occurred in the late 1990s due to the
technology boom, the Y2K remediation efforts and the Euro currency conversion. A more recent example is
the shortfall in COBOL programmers. Although the language is 60 years old, it is suddenly in demand, and
several state governments in the United States as well as some companies like IBM and Cigna still use it. In
April 2020, the state of New Jersey (United States) was looking for COBOL programmers to deal with the
1,600% increase in unemployment claims!

There are several particularly interesting markets with a large demand for IT and ITES:

The United States

The largest market for offshore sourcing is the United States. This should not be surprising given that the
country is a leader in the software industry through its innovation clusters, such as Silicon Valley, its catalyst
role on the internet, and its powerful global corporations. The most active sectors in offshoring are financial
services (banks, investment firms and insurance firms) and technology companies (software, hardware and
telecommunications). By itself, the US market accounts for more than 57% of India’s total exports of computer
software and IT-related services. South-East Asia, Eastern Europe and Latin America are also popular
locations for outsourcing services to the United States.

Europe
Europe’s offshore sourcing of IT-related services has grown slower than that of the United States. There are
several reasons for this. European firms tend to have a more conservative style of doing business than
American companies, and thus tend to take fewer risks in sourcing for specific projects. Many European
organizations prefer to deal with providers they know well. Trust is important, and building personal
relationships takes longer. For example, although the European Union accounts for 31% of India’s IT-related
exports, the majority of these actually go to the United Kingdom (the Indian software giant Tata Consultancy
Services (TCS) set up operations in the United Kingdom in 1975).
Apart from the United Kingdom, Northern European countries such as the Netherlands, Sweden, Denmark
and Finland are more accustomed to offshoring than countries in the south of Europe. As such, smaller
European nations can also be considered as potential markets. Many companies in the Netherlands, for
example, have been working with suppliers in developing countries for more than 25 years. India is the most
popular offshore destination for large Dutch enterprises and is now earning more than $1 billion annually from
Dutch clients.
Nevertheless, despite Europe’s conservative culture, the latest IT spending research from Avasant’s Computer
Economics group shows IT organizations in Europe outsourcing at a slightly higher rate than organizations in
the United States. This is largely attributed to the desire to maintain flexibility in IT staffing in the face of more
restrictive employment regulations compared to those in the United States. Although much of these
outsourcing services are delivered by local in-country service providers, it does indicate that the times may be
changing in Europe, with offshore and nearshore outsourcing becoming a greater opportunity in the future.

Regional markets
Unfortunately for many software products made in developing countries, the mature markets of Europe or the
United States are not very promising. In most cases, these IT products’ functionality is unsuitable for
industrialized nations (even India has not been very successful in this field). In such cases, it is often more
rewarding to develop these products for regional markets closer to home. For example, Palestinian software
companies sell their products (in the Arabic language) to regional markets such as Jordan, Egypt and the
Gulf states. These markets could also be interesting for IT service suppliers since the competition is much
less fierce.

1.16 Tools to build cooperation with government

Offshore sourcing began when the Indian IT company TCS began delivering data services to the American
company Burroughs in 1973. By 1983, Indian IT-related exports were estimated at a modest $18 million. Fast
forward 30+ years, the IT/ITES industry grew to $167 billion in 2018-19.

Asia and the Middle East

• India: As per the India Brand Equity Foundation (IBEF), India is the leading sourcing destination across the
world, accounting for approximately 55% market share of the $200 billion to $250 billion global services
sourcing business in 2019-20. As per the ASC Group, the Indian IT and business process management (BPM)
industry is expected to grow to $350 billion by 2025, and BPM is expected to account for $50 billion to $55
billion out of the total revenue. Indian IT and BPM companies have set up more than 1,000 global delivery
centres in approximately 80 countries across the world. India has become the digital capabilities hub of the
world, with approximately 75% of global digital talent present in the country.

• China: The start of the twenty-first century saw China enter the market as an offshoring destination. China
has become a frontrunner due to the global tech sector’s growth in China as well as becoming the centre for
innovation. According to a report by the China Business Network (CBN) Co. Ltd, other than the four Tier 1
cities of Beijing, Shanghai, Guangzhou and Shenzhen, 15 more Tier 1 cities (e.g. Chengdu, Hangzhou,
Wuhan, Tianjin and Nanjing) and 30 Tier 2 cities were added to the list of hotspots in 2017. There are plenty of
technology graduates available to be employed by this sector.

• The Philippines: This is the third country in the region with a flourishing outsourcing industry ranging from
business process to technology to manufacturing. The Philippines also offers what its competitors in this
region do; i.e. skilled low-cost labour and 24/7 availability, etc. Due its large English-speaking populations and
cultural compatibility (especially with the United States), it is most often the first choice for voice-related
services, etc. In 2019, there were 1.2 million BPO workers in the Philippines, and 60% of its business came
from the United States.

• Others: Russia, with its large talent pool in science and technology, has a large outsourcing industry as well.
Another upcoming country is Viet Nam, which has developed into a potential option for software development.
Pakistan, Nepal, Sri Lanka, Bangladesh and Malaysia are also emerging as IT-exporting nations. Egypt,
Jordan and Palestine are the most sought-after countries in the Middle East.

Central and Eastern Europe

• This region is becoming quite an attractive sourcing destination due to availability of technology expertise
and its proximity to Western Europe. IT outsourcing to Eastern Europe is now viewed as a major business
enabler of digital transformation rather than just an attractive cost-cutting option. Ukraine, Poland, Romania
and the Czech Republic are the leading Eastern European software development markets. Poland has the
largest IT talent pool in Europe (279,800 IT professionals), followed by Ukraine (184,700) and Romania
(116,100). The other prominent countries in this region are Lithuania, Bulgaria, Macedonia and Moldova.
Estonia has also become a centre for specialized services.

Latin America
• Brazil, Nicaragua, Costa Rica, Mexico, Colombia and Surinam are leading the rest as offshoring options.

Africa
• Kenya, Uganda, Morocco, Senegal, South Africa and Mauritius: Although these countries’ local IT exporters
are usually smaller than their Indian counterparts are, their tariffs are often lower, and they usually have
regional expertise that their larger competitors lack.

Suggested video
South Africa as an attractive BPO destination:
https://www.youtube.com/watch?v=edcCiHxL8rk&ab_channel=BusinessDayTV

1.17 Benefits of entering the IT and ITES export sector

The IT and ITES export sector’s low capital requirements and high labour intensity make it attractive for
economies with low wages and a labour surplus. These services can take advantage of internationalization
without many of its negative attributes, since the sector’s activities are relatively environment-friendly and do
not depend on well-maintained roads or harbours. Unlike products such as textiles or automobiles, software
and data can be transported quickly and cheaply through digital channels. In this section, we will introduce
some of the benefits of entering the IT and ITES sectors:
• Job creation: Unemployment is a major problem for most developing countries, in which a university degree
often does not guarantee securing a job. Chronic unemployment causes labour migration, resulting in a
“brain drain” to more advanced economies. Job creation is necessary to address this and becoming involved
in the IT and ITES export sector is an effective way to do so. For example, the IT and ITES export sector is one
of the fastest-growing segments of the Indian economy, giving direct employment to more than 1 million
people (and even more in indirect employment, such as catering, travel and cleaning). Employment in call
centres in the Caribbean has also grown rapidly, with at least 13,000 call centre jobs in Jamaica and 30,000 in
the Dominican Republic.
• Revenue generation: Exporting software and IT-related services is a good source of foreign currency. Once
again, India is a spectacular example: its annual export revenues grew to more than $175 billion as of 2019.
An Indian software programmer can generate more than 10 times the foreign currency earnings of an
employee working in the garment industry.
• Improvement to the national business culture: The larger companies involved in the IT-related export industry
offer exemplary working conditions in modern, air-conditioned offices. This makes the offshore industry an
attractive white-collar sector that is popular among employees. Staff members also receive a variety of
benefits such as free meals and company-provided transportation. Furthermore, these companies’ structure
tends to be “flatter”, with a large degree of employee participation in decision-making. The ITES sector
creates particularly attractive opportunities for young women who may otherwise have remained unemployed
or settled for a less lucrative profession.
• Knowledge transfer: Working on offshore projects is a form of knowledge transfer from wealthy nations to the
developing world. The technical and domain knowledge gained through working for foreign clients can be
channelled and used for domestic projects. Knowledge no longer needs to be developed locally. In addition,
the wealth created in that area improves the overall quality of life (e.g. it can help arts and entertainment to
flourish there) and helps attract more foreign clients.
• Other economic and social impacts: IT-related export success has a positive effect on the domestic economy. It
spurs investments to overhaul developing nations’ antiquated communications infrastructure, which, in turn,
benefits other economic sectors. In addition, the IT export industry creates demand in various services, such
as transport, construction, accounting, hospitality and legal counsel. Demand for skills, in turn, generates
investments in general education, higher education and specialized training institutes, thus creating a virtuous
cycle.

1.18 Tools to build cooperation with government

Several factors are requirements for establishing an IT and ITES export industry.

• Skilled resources: Availability of a skilled and scalable talent pool is one of the key prerequisites of a
successful IT-related export industry.
• Linkages: The effective use of relationships between individuals, companies and nations due to geographical,
cultural, linguistic, historical or ethnic connections is one of the most important factors in developing a
successful IT and ITES export industry. Indians who came to the United States to pursue advanced education
often stayed in the country after graduating and rose to influential positions in high-tech companies. Their
expertise was used by Indian service providers to create contacts, gain initial sales contracts and introduce
them to the American market. Such expatriates can also be helpful in creating an understanding of cultural
differences. Linguistic linkages, meanwhile, are illustrated by India’s success, which is partly due to the
widespread fluency in the English language in this former British colony. African francophone countries such
as Morocco and Tunisia, meanwhile, have found significant success working for French customers.
• Capital: An export industry needs capital in order to grow. Although most companies in developing nations
grow using their own capital, this restricts their ability to expand and prosper. Outside capital for growth can
come from foreign or domestic sources. These sources include government funds, bank loans, venture
capital, investment capital, foreign direct investment (FDI) equity offerings and foreign aid. Smaller and
younger firms find it particularly difficult to gain access to capital. National governments, meanwhile, can also
play a role in a number of ways, for example, through grants and loans.

• Tax incentives: Many governments offer generous tax breaks for entities to set up operations in specific
locations within their countries. These incentives include tax holidays and credits, rebates and investment
allowances. The goal is to create jobs and attract investors.
• Cultural alignment: Cultural factors play an important role in the alignment of minds and expectations. Most IT
and ITES vendors take their teams through cultural orientation to manage the complexities of working
relationships and avoid misunderstandings. On-the-job training at client locations also helps to build
relationships and develop an understanding and appreciation of cultural differences.
• Compliance with legal and statutory requirements: Due consideration needs to be given to the compliance and
risk policies of countries where there is demand for IT and ITES services. Data transfer is a huge area of risk
and vendors in the IT-related export industry must be prepared to be in compliance with all requirements.
• Business continuity: Clients want to be assured of risk-free service continuity. This requirement has
heightened after the COVID-19 pandemic, when some IT vendors struggled to have services up and running
seamlessly. The cities where the IT/ITES vendors set up their delivery centres must be backed with robust
infrastructure. Also, the vendors must be prepared to provide services from alternate locations if their primary
location goes down.
• Quality of life: The quality of life in a location helps attract foreign clients. An example is the city of Bangalore
in India, which is one of the most attractive locations for expatriates to live in India. Equally important, having a
high quality of life also helps keep the best employees from moving away or emigrating. Locations with high
quality of life levels have several common characteristics: quality of the neighbourhood (natural, recreational
and lifestyle amenities), an abundant labour market and high levels of environmental quality.
1.19 Answer the question

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In many ways, India can be considered the pioneer of this export sector. However, competition is rising from
across the world: not only from various countries in Asia, but also from Eastern Europe, Latin America, Africa
and the Middle East.
Since ITES have low entry barriers in terms of skills, scale, technology, managerial capabilities and domain
knowledge, thousands of companies are targeting potential clients in the United States, Europe and other
markets.

1.20 Key points

Notes:

• IT products, IT services and IT-enabled services are all suitable for export.
• Global sourcing has been gaining importance as part of the software and IT services marketplace
since the early 1990s. These sectors are attractive for developing countries, since they bring a virtuous
cycle of important benefits such as job creation, revenue generation, improvements to the business
culture and knowledge transfer.
• A growing number of developing countries now have an IT-related export sector. Although there are
several developed export markets for IT and ITES, such as the United States and the European Union,
regional markets can also be attractive.
• Important factors in the creation of a successful IT export sector include the availability of a talent pool,
effective use and creation of relationships, the availability of capital, tax incentives, cultural alignment,
compliance with legal and statutory requirements, business continuity and the quality of life in the
location in question.

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1.22 End