The Evolution Of Bangalore – The Indian Silicon Valley
India contributes a share of 55% share in the market of Information Technology services worldwide. Indian IT sector is valued for its large supply of low cost but highly talented workforce. Hence, many multinational corporations have outsourced their IT services to India and also, have established their own In-House Centers (GICs). The Bangalore IT cluster holds a distinct position in the contribution towards the Indian IT sector. Huggins (2008) notes Bangalore as one of the fastest growing IT cluster outisde the USA.
Bangalore is one of the top 5 metropolitan cities in India. Bangalore has evolved from a simple park location in the mid-1980s to become the Silicon Valley of India in recent years owing to the presence of large and growing software services industry. It has over a thousand software companies and more than 2 million employees. The development has been facilitated by the inflow of human capital by local network ties and client demand arising out of non-local network ties (particularly that of MNC firms). Banglore IT cluster is a mix of domestic firms that have internationalized and foreign MNCs that have established locally in the emerging economy of India. This makes Bangalore an interesting case study. The formation of this cluster can be attributed to various factors and forces. This case study aims at exploring these and understanding the emergence of agglomeration economy in Bangalore and its impacts on a regional and national scale.
What Are the Clusters
Porter (1990) defined an industry cluster as a geographically proximate group of firms and associated institutions in related industries, linked by economic and social interdependencies. Clusters can be also be defined as groups of firms and institutions co-located in a particular geographic region, which is linked by interdependencies in providing a related product/service.
Development of the Silicon Valley
Alfred Marshall believed that positive externalities from infrastructure, skilled labour pool and knowledge spillovers lead to the development of clusters. Other scholars point towards other factors like different types of network properties and environmental contingencies which can help clusters sustain innovation and perform better. The non-local networks in such a cluster can exist in multiple forms: human capital, client relations, virtual teams, parent Subsidiary networks. Global networking is an important component of any cluster specializing in software service. The pace of innovation in cluster-based firms is higher than the firms which are not located in clusters. Local networks play a key role in transferring knowledge via informal collaboration, labour mobility and spin-offs. Also, personal local networks influence their selection of a startup location. Non-local networks are believed to contribute to knowledge spillovers. In the case of Bangalore, its emergence as a centre for information technology stems from a decision taken by the state government shortly after the independence of India from the British Empire in 1947. The foreign markets triggered the formation of early domestic policies. However, their influence started to shift to more local outcomes.
Nehruvian Model
Bangalore committed to Nehruvian model of planning under the leadership of Mokshagundam Visveswaraya (1860-1962). He aimed to industrialise the city of Bangalore through massive investment in public-sector enterprises around the city. During the 1950s, the government opened many public-sector units like Hindustan Machine Tools (HMT), Bharat Electronics Limited (BEL), Bharat Heavy Electrical Limited, Hindustan Aeronautics Limited (HAL), Indian Telephone Industries (ITI). Bangalore emerged as an important defence research centre. A few other private sector undertakings like MICO, the automotive components manufacturer and WIDID, a machine tool manufacture were also given licenses to operate in the city. Since initially, the software was more hardware-centric, IT firms decided to locate in the vicinity of hardware units.
Education Institutions and Research Organisations
In 1911, the central government established the Indian Institute of Science. After independence, four universities, 14 colleges providing scientific and engineering education and 47 polytechnics schools were established in Bangalore. The establishment of the Indian Space Research Organisation, combined with a wide range of central government investments in research and technology establishments gave Bangalore the image of a ‘science city’. By the late 1990s, India was producing about 65,000 engineers and 95000 diploma-holders annually in engineering and technology.
Local academic institutions provide labour and knowledge. The access to specialised services like training, R&D services and facilities etcetera boosted its development. As per a study conducted by Administrative Staff College of India, (ASCI), many global firms have established R&D centres in the country; some as direct subsidiaries and others in alliance with local firms. Bangalore was the choice of 40 of the 77 centres.
Such academic institutions foster training and collaboration with other entities and contribute to the development of cluster. The engagement of Texas Instruments (TI) with local instituions to tap into scientific talent directly in the mid-1980s was a crucial point. TI participated in curriculum development activities and provided funds to, laboratories, especially with the Indian Institute of Science. Further other MNCs followed TI. Bangalore had emerged as a cluster for scientific and knowledge-intensive activities.
FERA
Another major policy change in the 1970s was the Foreign Exchange Regulation Act (FERA) which aimed to reduce foreign ownership of firms in India including the computer firms. Some companies accepted the policy while others like IBM chose to leave the country in 1978. The exit of IBM encouraged WIPRO to emerge as the new producer of the 8-bit microprocessor. The ex-employees of companies like IBM chose to either leave the country or set up their own small companies. This resulted in many startups being introduced in the market in the late 1970s.
Trade Protection and Liberalization
During the second half of the 1970s, the government liberalized hardware imports with a reduction in duties, especially for software exporters. But by early 1980s, the import duties on hardware were raised with an exception to firms which used hardware for the development of domestic software and exports. Also, the Department of Electronics became more supportive of the domestic software industry. The policy to protect hardware industry forced the Indian computer firms to focus on producing and using micro or personal computers rather than mainframes. This policy helped in the creation of software engineers who were experts in programming for PCs, in operating systems like MS-DOS and UNIX, a non-IBM compatible computer based on Intel and Motorola chips. By the end of 1988, more than 599 software companies were making packaged software. This policy also led to the formation of Indian companies like HCL, WIPRO Information Ltd and DCM DP to become the first manufacturers of computers that were based on UNIX. Also, a new Software Policy was introduced in 1984 which recognized software development as commerce. This encouraged more companies to come to the new emerging IT market. Reacting to these foreign market developments domestic firms like WIPRO or Infosys entered the software industry and located in Bangalore in the early 1980s.
KEONICS
In 1976, the Government of Karnataka’s Ministry of Medium and Large Industries, established the Karnataka State Electronics Development Corporation (KEONICS) to expand the electronics industry in the state as per the public planning model. The corporation introduced many new projects with the joint collaboration of Indian and foreign industrial houses and promoted private enterprises. In 1977, it established a new industrial park called Electronics City on 335 acres about 18 kilometres south of Bangalore. In the 1990s, 90 organizations were present on the Electronic City campus. Mainly the organization aimed at import substitution, testing and manufacturing. Indian Telephone Industries was the largest public sector unit in terms of external investment. It also housed the Software Technology Park (STP), the first in the country. The STP in Karnataka managed various infrastructural constraints, particularly those related to telecom. This promoted IT opportunities in Bangalore.
Building networks and reducing cultural differences. Graduates from the elite Indian Institutes of Technology emigrated during 197s and 1980s and many succeeded in achieving professional and economic successes abroad. In 1988, 775 technology companies in California’s Silicon Valley were run by Indian engineers. These companies accounted for $ 3.6 billion in sales and 16,600 jobs. Some chose to return to their home country. Many opened their own companies which later became MNCS. As per one study, 71 of the 75 multinational in Bangalore's software technology park were led by whole had lived and worked overseas, especially in the U.S. Also, many US companies like Yahoo, Hewlett Packard, General Electric opened their operations in India largely because of the excellent work performance of many Indians working in their U.S offices. This helped in the diffusion of knowledge across the global scale. This strengthened the roots of the software industry in Bangalore.
NASSCOM
In 1988, NASSCOM (National Association for Software Service COMpanies) was founded to support industry interests. Before the foundation of NASSCOM, Bangalore entrepreneurs held regular informal meetings. The Association provided a platform for hold formal meeting where founders and CEOs met. These meetings characterize the incresing role of local social networks in a relatively small community of industry people. Such meetings contribute in knowledge spillovers. Hence, industry people now had an official platform to discuss the latest trend in the industry. NASSCOM has now become the apex body of the Indian IT industry.
Offshore Software Production
The first ‘offshore’ software production centre in the city was made possible by the agreement between the US-based Texas Instruments and India’s Videsh Sanchar Nigam Limited (VSNL). A few years later VSNL set up three more ground station for the use of several organisations like ISRO, HAL and STP. This introduced changes in organizational capacity, market demand, and technological feasibility and induced the creation of the cluster. In 1992, Indian Prime Minister P.V. Narasimha Rao and Singapore Prime Minister Goh Chok Tong decided to lead a private initiative called the Information Technology Park, ‘the first such development in India’. It was a joint venture between the state government and private enterprise from India and Singapore.
Agglomeration Economies
The formation of clusters results in agglomeration economies. Maskell (2001) refers to two kinds of agglomeration economies emerging out of clustering. The first kind of agglomeration economies, called ‘urbanization economies’ accrue from the geographical proximity of industries and services in general. The second one is referred to as ‘locational economies’ that arise from the geographical agglomeration of related economic activities. In Bangalore, we see both types of agglomeration economies. Multiple firms are located in close proximity of each other. The companies with similar functions like Inosys, Wipro, Mindtree are close to each other. Similarly, PSUs are located close to each other. This proximity helps the firms to share common resources like workforce. Hence, the effective cost is reduced and profits of firms increase. Companies with dissimilar functions are located close to each other in IT cluster Whitfield, Banglore. This is an example of urbanization agglomeration economy. The positioning of Victoria secret near Google depicts how companies with completely different working sectors can come together to take advantage of agglomeration economies. Also, IT clusters are spread across the country. These clusters often share resources for their development.
Impacts
The IT industry completely changed the face of Bangalore. The garden city of India, Bangalore represented an ideal template for the city of the future where trained experts and managers created new career opportunities in environment-friendly campuses. The software industry impacted Bangalore in the following ways:
Contribution to National GDP
Bangalore is the hub of $150 billion tech sector, which values nearly 10% of the country’s GDP. Bangalore contributes more than 35 per cent of India’s IT exports. It is home to the largest number of tech start-ups in the country and ranks third at the global level.
Increase in Population
The software industry provided career opportunities not just for software development but to all another kind of jobs. It fueled other business like hospitality, tourism, transportation and so on. Soon Bangalore became a place where new middle-economic section could retire and enjoy suburban homes while among the latest technological advancements. Bangalore saw a large inflow of population. The population of Bangalore urban (BBMP limits) has increased by 48% i.e., from 5.84millon in 2001 to 8.64 million in 2011. The population density in the region has increased from 7881 persons/km2 (2001) to 11 664 persons/km2 (2011).
Urban Sprawl
The increase in population led to the urbanization of the city. The vegetation cover started decreasing to facilitate industry and housing development. The conversion of open land into non-agricultural land after 1991 is very fast in Bangalore urban agglomeration. The figure shows the increase in the low and medium density areas and a decrease in the high-density areas over a time span of 8 years between 1992 and 2000. As the ‘garden city’ converted into ‘silicon valley’, the paved surfaces in the city increases by 1005%. The green cover reduced from 68% in 1973 to 25% in 2012. The areas of lands and ponds reduced from 3.4% to 1%.
Conclusion
The local network ties facilitated the supply of human capital. The non-local network ties increased client demand. These two became the primary drivers of the evolution of the Bangalore industry. Non-local network ties establish the foundation of the cluster. However, the local network ties strongly influence the emergence and growth of the cluster. The non-local network plays a dominant role in the consolidation phase of the cluster evolution. The policy changes introduced by the government laid the foundation of the IT industry in the region. The establishment of educational institutions encouraged to research and development in the field. Talents professionals started their own ventures like Infosys which fueled the emergence of more startups. The formation of IT Park was a key point in the history of the development of the sector.
The development of Silicon Valley has affected the nation and the city in various positive and negative ways. It has contributed to the GDP of the nation. It has resulted in a decrease in vegetation cover. Hence, we can conclude that local and non-local network both contributed towards the development of Silicon Valley of India. It comprises both localisation agglomeration economy and urbanization agglomeration economy. The development of such clusters affects the growth of the nation in various positive and negative ways.
