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EVOLUTION OF THE BANGALORE ICT CLUSTER:
A STAGE THEORY BASED ON CRYSTAL GROWTHMODEL
Mathew J ManimalaIndian Institute of Management
Bannerghatta Road
Bangalore-560076: India.Email: [email protected]
Paper for presentation at the International Entrepreneurship Forum 2006 (IEF) 6th InternationalConference on "New Venture Creation and the Creative Trajectory: Entrepreneurship, Innovation and
Creativity in Business, Riga, Latvia: 31 August to 2 September 2006.
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A natural phenomenon Marshall (1890) : The secrets of the
industry are in the air
Social capital ?
CLUSTERING OF INDUSTRY
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CLUSTERING OF INDUSTRY
Physical infrastructure Business services
Financial infrastructure Talent pool
Social capital
[Limitations of studies conducted afterthe event]
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THE INNOVATION ECOSYSTEM FOR CLUSTERDEVELOPMENT: INGREDIENTS IDENTIFIED
Geographical proximity of firms Sectoral specialization
Close interaction among firms
Technology sources and support Access to investment funds and financial services
Infrastructural facilities
Favourable government policies Business support services
Social capital
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CLUSTER DEVELOPMENT: SOME ISSUES
Stages of cluster development
Differential requirements of each stage
Ecosystem: Causes or Consequences
Influence of the dominant factor
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BANGALORE ICT CLUSTER: FACT FILE
Silicon Valley of India More than 1200 software companies (2003)
Combined turnover: USD 3 billion (2003) Turnover doubling every two years Type of software:
- System (16%)- Application (28%)- Communication (11%)- Services (29%)
- Integrated circuit design (4%)- General (12%)
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THE BANGALORE ICT CLUSTER: THE EVOLUTION
1984: Texas Instruments sets up an offshore developmentfacility in Bangalore.
1984: Government of India announces changes in itscomputer and software policy, recognizing software as anindustry, reducing import duties on hardware and softwarefrom 135% to 60%, and at the same time reducing the
corporate income tax exemption on net software exportsincome from 100% to 50%. 1985: Government of Karnataka sets up KEONICS(Karnataka State Electronics Development Corporation
Limited) to develop IT and telecom infrastructure and toprovide consultancy and training in IT.
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THE BANGALORE ICT CLUSTER: THE EVOLUTION
(Contd.) 1986: Department of Electronics (DoE), Government of India,
announces a new software policy, liberalizing imports ofhardware and software and increasing the export obligations ofhardware importers.
1989: VSNL (the Government of India owned telecomcompany) commissions a direct 64-kbps satellite link to the USwith a new gateway switching system that operated through
Intelsat. 1991: Software Technology Parks of India (STPI) scheme was
launched by the Ministry of Information Technology (formerlyDoE), Government of India, with whom 100% export-oriented
software units could be located/registered so that they could gettax/duty exemptions; Bangalore had one of the first STPIs,which subsequently had the fastest growth in membership andwas the first park (and also the city) in India to be connected by
the Internet.
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THE BANGALORE ICT CLUSTER: THE EVOLUTION(Contd.)
1992: Government of India sets up exclusive satelliteinternational gateway for software exporters. 1993: Government of India launches the Electronic Hardware
Technology Park (EHTP) scheme (similar to the STPI scheme),
allowing tax and duty exemptions to 100% export oriented unitsregistered with them. 1997: Government of Karnataka becomes the first state in India
to announce its IT policy. 1999: Government of Karnataka establishes Indian Institute of
Information Technology (IIIT-B) in collaboration with the ITindustry for conducting advanced and industry-oriented coursesin IT related subjects.
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THE BANGALORE ICT CLUSTER: THE EVOLUTION(Contd.)
1999: KITVEN Fund (Karnataka Information TechnologyVenture Capital Fund) is established jointly by the Karnataka
State Industrial Investment Development Corporation(KSIIDC), Karnataka State Financial Corporation (KSFC), andSmall Industries Development Bank of India (SIDBI).
2001: NASDAQ opens its office in Bangalore. 2003: The number of software units registered with STPI in
Bangalore grows to 1154 (with an export turnover of US$ 2.67billion), while those registered with EHTP in Bangalore grows
only to 31 (with an export turnover of US$ 0.30 billion).
Source: Compiled fromwww.bangaloreit.com, Basant 2006, andthe websites of specific schemes and agencies mentioned above.
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THE TRIGGERING EVENT: TEXAS INSTRUMENTS (1984)
Shortage and cost of S/W professionals in
Europe and the U.S. Real estate costs and militant movements in
Mumbai and Delhi
IISc alumnus connection of a high-rankingTI employee
Low cost talent pool and low real estate
prices in Bangalore The climate!
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CULTURAL OPENNESS & LABOUR FORCE DIVERSITY
Bangalore: a border city
High-tech public sector organizations(Defence, Space, Aerospace, Telecom,Machine tools, Electricals & Electronics)
Post-Independence political scenario The weather factor
Indian Institute of Science
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THE DOMINANT FACTOR THEORY
The entrepreneurs/entrepreneurial organizations
experience of the external world stimulated by oneor a few factors within the region is the trigger forcluster formation (Crystallization)
(Examples: Manchester, Ahmedabad,Jamshedpur)
Dominant factor(s) are different for each stage ofcluster development
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STAGES OF CLUSTER DEVELOPMENT
1. Incubation
2. Nucleation
3. Agglomeration
4. Attrition
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INCUBATION Battles for the city (1809The British, the local kings,
people from the bordering regions): Diversity of people
Diversity of Industry- British side: Weaponries, Breweries, Tanneries, Tobacco- Local side: Garments
Cultural diversity: Acceptable for Europeans also(German MNC: BOSCH-MICO 1951)
Technology culture and labour diversity- Research & manufacturing organisations in the
public sector: Aeronautics, Space, HeavyElectricals, Electronics, Machine tools, Telecom etc;
Employment (1980s): 300, 000
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INCUBATION (Contd.)
Gender diversity in labour force:
- Garment Industry (Employment: 80,000)
- Impact on IT/BPO sector: 21% female employees in 1997- Steadily increasing government changing the
law on employment of women at night
Popular hypothesis (Institutions causing enterprises)not supported; It is the other way!
(Example of Bangalore: The accommodative struggle
by different groups to control the city leading to thecreation of different institutions and enterprises, whichfurther operate on a mutual causation mode.)
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INCUBATION (Contd.)
Productive nature of moderate levels of conflict(Peace of the graveyard is absolutely unproductive)
IISc cited as an illustration of the popular hypothesis:But IISc itself is a product of an enterprisingindividuals interaction with other systems.
(J N Tata, his exposure to various cultures and hiscollaboration with the British and the Maharaja of Mysorein setting up IISc).
Essential features of the Incubation process:
Developing the general capabilities of the people/region, especially through openness to other culturesand newer ideas.
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NUCLEATION
Dynamic development in the external environmentacting upon a prepared ground.(Fortune favours a prepared mind - Pasteur)
External developments favouring Bangalore:- Shortage and high cost of software professionals inEurope and America.
- Indian cities with better connectivity (Mumbai,Delhi) had higher cost of real estate.
- Militant nationalist movements in some Indian cities. Failure of cluster initiatives on unprepared grounds:
(Eg: Bangalores EHTP with only 31 units in 10 years,compared to STPI with 1154 units in 12 yearson account of Level of investment, Sophistication inmanufacturing, Physical infrastructure, etc).
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AGGLOMERATION
Includes growth of the initial unit Three patterns of growth and agglomeration:
1. Agglomeration after unit growth
2. Both simultaneous
3. Agglomeration to a grown-up unit
(Bangalore had this pattern) Attraction for other units to move to the same location
- Competition for similar benefits
- Use of common resources- Supplier/customer chains
- Reduced risk perception in the company ofothers in a new place
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AGGLOMERATION (Contd.)
Two types of agglomeration:
(Based on competition and collaboration)
1. Horizontal
(Similar firms competing with one another)
2. Vertical
(Firms in the supplier/customer chain)
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ATTRITION
Natural like the Decline stage in
Life-cycle theory Lessons from history
(Eg: Manchester)
Seeds of attrition in the processof agglomeration itself
Causes internal to the cluster:Legitimation and competitionissues
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ATTRITION (Contd.)
With increasing agglomeration,
legitimacy for new entrant decreasesleading to high legitimation costs;
and competition increases the cost ofresources
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External causes: Increasing attractiveness ofother places
Actual and Virtual attrition
- Actual: Existing firms moving away
- Virtual: New firms choosing other locations
Signs of attrition in Bangalore:
- Apple closing shop in Bangalore
(except for sales and services)- Fab-City going to Hyderabad
- Dubai Internet City considering Hyderabad,
Kolkatta and Kochi
ATTRITION (Contd.)
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Signs of attrition in Bangalore (contd.):- Periodic complaints about physical infrastructure,
transport and power
- Increasing cost of professionals
(Yet India remains the lowest in manpower costsamong outsourcing destinations)
- Karnataka pushed to the 8th position in terms of
percentage growth in software exports (34% asagainst Andhras 51%)
- But in absolute terms Karnataka is far higher than its
nearest competitor (INR 3700m against Maharashtras
INR 1550m) Attrition can be delayed, but not prevented. But the
knowledge, skills and resources generated by a cluster canbe recycled (Flexible recycling of firms)
ATTRITION (Contd.)
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CONCLUSION
Need for an evolutionary perspective oncluster formation (Clustering as a processversus cluster as a state)
Four identifiable stages in the evolution of acluster:
1. Incubation2. Nucleation
3. Agglomeration
4. Attrition The requirements of each stage are different
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Policy makers generally fail to recognise theinevitability of the first and last stages; Hence:
- The nucleation efforts without proper incubation
(E.g. Industrial Estates in India)- Unnecessary and futile resource support fordeclining (dying) clusters(E.g. The National Textile Corporation NTC
in India to support the dying textile clusters;European Unions support for reviving the textile
cluster in Manchester)
Dominance of a single factor (or a few factors)facilitating the process in each stage(Dominant Factor Theory)
The influence of such factors are relative and context-
specific, and therefore cannot be easily replicated
CONCLUSION (Contd.)
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The four stages can be reorganised into two phases:1. Phase I (Incubation and Nucleation)
2. Phase II (Agglomeration and Attrition)
Requirements for Phase I :- General capability building through
infrastructure development and openness to
new ideas, people and culture(proactively open policies)
Requirements for Phase II :
- Industry specific infrastructure, institutions andpolicy support
(sensitively supportive policies)
CONCLUSION (Contd.)
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In the early phase, Enterprises cause Institutions
In the later phase, Institutionscause
Enterprises(though mutual causation is not excluded ineither phase)
Attrition stage: Delay the attrition and facilitate
recycling of resources generated by the cluster.
CONCLUSION (Contd.)
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CONCLUSION (Contd.)
A generalised model of Entrepreneurship Development,applicable to cluster development as well:
TASK ENVIRONMENTUniversities & collegesTechnology/R&D institutionsIndustrial estatesPromotional/training agencies (Govt. &NGO)Financial institutionsIndustrial & commercial organizations
TASK ENVIRONMENTUniversities & collegesTechnology/R&D institutionsIndustrial estates
Promotional/training agencies (Govt. &NGO)Financial institutionsIndustrial & commercial organizations
GENERAL ENVIRONMENTSocial norms and cultureFamily influences & socialization
Early stage educationLegal-political systemEconomic ideology/environmentTransport & communication infrastructure
GENERAL ENVIRONMENTSocial norms and cultureFamily influences & socialization
Early stage educationLegal-political systemEconomic ideology/environmentTransport & communication infrastructure
Entrepreneurial traits,motives and attitudes
Entrepreneurial traits,motives and attitudes
SuccessfulEntrepreneurs
SuccessfulEntrepreneurs
Technical &Managerial Skills
Technical &Managerial Skills
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THANK YOU
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