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The Bangalore Boom:
From Brain Drain to Brain Circulation?

AnnaLee Saxenian
University of California at Berkeley
anno@socrates.berkeley.edu

Forthcoming in Kenneth Kenniston and Deepak Kumar, eds.
Bridging the Digital Divide: Lessons from India
(Bangalore: National Institute of Advanced Study, 2000)

Revised paper prepared for Working Group on Equity, Diversity, and Information Technology, National Institute of Advanced Study, Bangalore, India, Dec 3-4, 1999. Thanks to Ken Keniston and Deepak Kumar for helpful comments on earlier draft.

The brain drain has been a curse for developing countries like India. Throughout the post World War II era, the ”best and brightest” routinely left for the economic opportunities and higher standards of living in the West. Entire graduating classes from the elite Indian Institutes of Technology emigrated during the 1970s and 1980s. These migrs often achieved impressive professional and economic successes abroad. My research shows, for example, that in 1998 Indian engineers were running more than 775 technology companies in California‘s Silicon Valley that accounted for $3.6 b in sales and 16,600 jobs. But the connections between these Non-Resident Indians (NRIs) and their home country rarely extended beyond holiday visits.

Indian policymakers now have an opportunity to transform the brain drain from a curse into an asset. Changes in the structure of competition in information technology (IT) industries have not only allowed the growth of software development in India, but also create the possibility of economic leapfrogging of a sort that was not possible in an earlier era. In many parts of the world, the “brain drain” is giving way to a process of “brain circulation” as talented immigrants who have studied and worked abroad increasingly return to their home countries to pursue promising opportunities there. As engineers and other professionals return home—either temporarily or permanently—they transfer not only technology and capital, but also managerial and institutional know-how to formerly peripheral regions. They also link local producers more directly to the market opportunities and networks of more advanced economies.

This paper suggests that policymakers learn from the experience of Taiwan, where brain circulation was critical to its shift from a peripheral source of cheap labor to a global leader in IT production. The challenge for India‘s information technology (IT) sector is to upgrade the software industry, an industry that currently produces primarily low-value added services for export markets. As in Taiwan, Indian policymakers can accelerate the process of industrial upgrading by creating incentives for engineers to return to India both as policy advisors and as investors, entrepreneurs, and managers.

The paper concludes by highlighting evidence that such connections are already emerging. It also cautions that this can only be a first step for India. The expansion of external linkages is essential to competitiveness in a global economy. However this must be accompanied by concerted efforts to develop the domestic market to insure that the benefits of the new industries contribute to a wider process of economic development.

A New Model of Competition

The structure of competition in the information technology sector has changed dramatically in the last two decades, opening up important new opportunities for formerly peripheral economies like India. The traditional, highly integrated corporate structure (the IBM or “national champion” model) has given way to vertical fragmentation and increasing firm specialization. Producers no longer compete in all stages of production from design and development to manufacturing, marketing and distribution; rather they focus on a narrow piece of the value chain in which they can excel while relying on other specialists to provide other components and final system integration. The number of actors in the industry has thus increased dramatically and competition within most horizontal layers has intensified as well.

This new model of competition—combined with advances in transportation and communications technologies—has created unprecedented opportunities for producers located far from established centers of technology. Take the semiconductor industry. In the past, large corporations performed all of the stages of production internally, and chip production remained the province of the most advanced industrial nations like the US and Japan. Today, the industry is thoroughly fragmented. Scores of specialized Taiwanese producers have become globally competitive by focusing exclusively on semiconductor design or manufacturing. Israel is home to some of the world‘s most innovative semiconductor equipment manufacturers. And Indian firms are among the latest wave of specialists to provide only the intellectual property modules used in chip design.

In this new competitive environment, the brain drain provides a crucial advantage to formerly backward regions like Taiwan and India. These regions typically have been treated as low-cost production sites for multinationals, but US-educated and trained engineers can help them leapfrog more advanced economies by transferring up-to-date technology and market information and by jump-starting a localized process of entrepreneurship. Over time, transnational communities can accelerate the technological upgrading of the regional economy by providing the base of skill and know-how needed to help local producers shift to higher value-added activities.

Because of their experience and professional networks, these immigrants can quickly identify promising new market opportunities, raise capital, build management teams, and establish partnerships with other specialist producers—even those located at great geographical distances. The speed of personal communications and decision-making that is possible within ethnic professional networks accelerates the process of learning about new sources of skill, technology, capital, and about potential collaborators. It also facilitates the timely responses that are essential in the current competitive environment.

Immigrants can also serve as role models and mentors for local entrepreneurs, providing advice, contacts, and even financing, as well as the confidence to take risks. Their managerial experience helps them create flexible and transparent Silicon Valley-type companies instead of the more traditional and hierarchical businesses that dominate in developing countries. Last, but not least, they can be invaluable advisors to domestic policymakers, helping to reshape financial and regulatory institutions and the physical and technical infrastructure to support the entrepreneurial risk-taking that facilitates success in today‘s fast-paced economy.

The Limits of the Bangalore Boom

The emergence of software production in India has captured the world‘s attention. A country that remained very poor and isolated from the international economy until the early 1990s has suddenly become a global center for leading edge, information technology industries. The Bangalore region, where a large proportion of the software activity is located, has even been dubbed the “Silicon Valley of Asia.”

The reality, as scholarly studies have since demonstrated, is that the Indian software industry is overwhelmingly engaged in routine, low-level design, programming, and maintenance services for export. Foreign multinationals are drawn to regions like Bangalore primarily for the abundant low wage, English speaking skill. Indigenous Indian companies have similarly exploited this cost advantage in serving foreign clients, either onsite or offshore (in India.) The productivity (revenues per employee) in the Indian software industry has thus been very low compared to competing centers of software production such as Israel and Ireland. And its $4 b. in software revenues in 1998-99 remain a tiny fraction of an estimated world software market of $300-500 b.

The developmental potential of this trajectory is quite limited. The provision of routine software services for export may be profitable for individual companies, but provides few opportunities for long term technological learning and industrial upgrading. Meanwhile the advantage provided by low cost labor is disappearing fast: wages for software professionals in India have risen 20% in the past decade, surpassing competing low wage, human capital rich regions like Philippines and China. Finally, it seems that the software boom has, at least initially, exacerbated the brain drain: young software workers compete to work for US corporations in hopes of being transferred to Silicon Valley. Indian nationals today account for over 40% of the H1-B visas granted annually in the US for professionals with scarce skills, or some 30,000 workers in 1999.

The dominant strategies for upgrading the Indian software industry involve two related approaches, both of which require capabilities that are in short supply in India. Some producers seek to provide higher value added consulting services by accumulating knowledge and developing specific domain expertise, while others aim to develop software tools and reusable code that will lower the cost of providing services to clients, and offset rising wages. Both strategies require more sophisticated technical capabilities than in the past, and in many cases also require in-depth knowledge of particular business domains and marketing expertise.

However this upgrading need not be limited to established companies. In the new model of competition, entrepreneurial start-ups are often the leading sources of innovation and industrial upgrading. While established producers have considerable resources and experience, as well as established reputations, start-ups offer flexibility and focus without vested interests (in this case, a history of high profits based on cheap labor.) As the software products business increasingly becomes an Internet-based service business, with firms leasing or selling software over the Internet, new start-ups may have an even greater advantage over the incumbent actors. The US experience suggests that entrepreneurs are likely to lead as well in developing e-commerce applications.

In short, the challenge for Indian policymakers is to create a context that not only supports upgrading of the established producers but also an environment that supports indigenous entrepreneurship. The lessons from Taiwan are instructive.

The Silicon Valley-Hsinchu Connection ¹

The economic relationship between Taiwan and the United States was a textbook First-Third-World relationship in the 1970s. Consumer electronics producers invested in Taiwan primarily to take advantage of its low-cost manufacturing labor. Meanwhile, Taiwan‘s best engineering students came to the United States for graduate education and the majority stayed in the US to pursue professional opportunities that were not available at home. Tens of thousands ended up in Silicon Valley.

While most accounts of the Taiwan “miracle” focus on the role of government agencies in promoting new industries, few recognize the central role played by Overseas Chinese engineers both indirectly, in developing these policies, and directly, by returning to start and run Taiwan‘s IT companies. Senior policymakers in Taiwan sought advice from US-based Chinese engineers in the 1960s and 1970s in their efforts to develop strategies to upgrade the island‘s industrial base. Silicon Valley-based Taiwanese were critical to a range of new policies, including those that expanded technical education, encouraged university-industry collaborations, and supported aggressive private-sector development of leading edge technology sectors such as semiconductors.

Minister K. T. Li, who is widely regarded as the architect of Taiwan‘s technology industry, invited Overseas Chinese investors to set up local venture capital operations and to invest in Taiwanese companies. As a result, Taiwan boasts one of the world‘s largest and most sophisticated venture capital industries. K.T. Li also developed the Hsinchu Science-based Industrial Park as a way to attract Taiwanese entrepreneurs back from the US and located government offices in Silicon Valley in the 1980s, long before other nations. Several agencies also actively courted overseas engineers by paying their way to technical seminars or offering them senior positions in the government or academia. The Ministry of Education even paid the airfare for engineers who agreed to return to Taiwan permanently.

These efforts to reverse the brain drain paid off in the late 1980s and early 1990s, when several thousand Taiwanese returned annually from the U.S. Even those who remained stayed closely connected to Taiwan‘s emerging technology sector. Silicon Valley-based engineers formed the Monte Jade Science and Technology Association with the goal of “promoting cooperation and the mutual flow of technology and investment between Taiwan and the US.” At the same time, a growing cohort of highly mobile engineers began to work in both the United States and Taiwan, commuting across the Pacific regularly. These “astronauts,” who seemed to live in the air, have the professional contacts and language skills to function fluently in both the US and Taiwan business cultures and to draw on the complementary strengths of the two economies. Take two examples:

Miin Wu immigrated to the US in the early 1970s to pursue graduate training in electrical engineering. Like most of his classmates from the elite National Taiwan University, he took advantage of fellowship aid available in the US at the time for poor but talented foreign students. After earning a doctorate from Stanford University in 1976, Wu recognized that there were no opportunities to use his newly acquired skills in economically backward Taiwan and remained in the US. He worked for more than a decade in senior positions at Silicon Valley semiconductor companies like Siliconix and Intel. He also gained entrepreneurial experience as a founding member of VLSI Technology. By the late 1980s, economic conditions in Taiwan had improved and Wu returned 1989 to start one of Taiwan‘s first semiconductor companies, Macronix Co, in the Hsinchu Science-based Industrial Park. He initially recruited 30 senior engineers, mainly former classmates and friends from Silicon Valley, to return to Taiwan. This team provided Macronix with the specialized technical skills and experience to develop new products and move into new markets quickly. Wu also transferred elements of the Silicon Valley management model to Macronix, including openness, informality, and the minimization of hierarchy—all significant departures from traditional Taiwanese corporate models. Macronix went public on the Taiwan stock exchange in 1995 and the following year became the first Taiwanese company to list on Nasdaq. The firm is now the 6^th largest semiconductor maker in Taiwan, with over $300 m. in sales and some 2,800 employees.

K. Y. Han. After graduating from National Taiwan University in the 1970s, Han completed a master‘s degree in solid state physics at the University of California at Santa Barbara. He worked in Silicon Valley for nearly a decade before joining his college classmate, Jimmy Lee, to start Integrated Silicon Solutions (ISSI). Han and Lee mobilized their professional and personal networks in both Taiwan and the US to build ISSI. They bootstrapped the initial start-up with their own funds and those of other Taiwanese colleagues. They recruited engineers in Silicon Valley to focus on product design and development and sales of their high-speed static random access memory chips. Many of their initial customers were Taiwanese motherboard producers. With the assistance of the Taiwanese government, they established partnerships with Taiwan‘s semiconductor foundries and opened an assembly, packaging and testing facility in the Hsinchu Science-Based Industrial Park. By 1995, when ISSI was listed on NASDAQ, Han was visiting Taiwan at least monthly to monitor the firm‘s manufacturing operations. Finally, he joined hundreds of other Silicon Valley “returnees” and moved back to Taiwan. This allowed him to coordinate the logistics and production control process on a daily basis. Han still spends an hour each day on the phone with Jimmy Lee and he returns to Silicon Valley as often as ten times a year. Today ISSI has $110 million in sales and 500 employees worldwide.

A closely-knit community of Taiwanese returnees, astronauts, and U.S.-based engineers like Miin Wu and K.Y. Han has pioneered the upgrading of Taiwan‘s IT industry. The relationship between the Silicon Valley and Hsinchu regional economies today consists of a decentralized mix of formal and informal collaborations between individual investors and entrepreneurs, small and medium-sized firms, and the divisions of larger companies located on both sides of the Pacific. In this complex mix, the trust among Taiwanese engineers with shared professional and educational experiences accelerates flows of capital, skill and technology, as well as institutional and managerial know-how. Many observers claim that the information flow between the regions is continuous and that Hsinchu is like an extension of Silicon Valley.

This cross-Pacific technical community has helped make Taiwan the world‘s leading producer of notebook computers and a range of related PC components, while its semiconductor manufacturing capabilities on a par with the leading Japanese and U.S. producers. The growing integration of the technological communities of Silicon Valley and Hsinchu offers benefits to both economies. Silicon Valley remains the center of new product definition and design and development of leading-edge technologies, whereas Taiwan offers world-class manufacturing, flexible development and integration, and access to key customers and markets in East and Southeast Asia.

India‘s Overseas Resource

Indian immigrants are a significant presence in the US information technology industry. There are at least 30,000 Indian professionals working in Silicon Valley today and they have developed strong collective identity based on their common educational and professional backgrounds—many were graduates of the prestigious Indian Institutes of Technology. Professional associations such as The Indus Entrepreneur (TiE) and the Silicon Valley Professionals Association (SIPA) provide opportunities for networking and information sharing as well as role models and sources of finance for entrepreneurs. However this community remains local rather than a transnational one. Very few US-educated Indian engineers have returned to start companies or work for established firms.

The NRI community has instead played a middleman role, encouraging and helping US technology companies to gain access to India‘s low-cost software expertise.

Take the case of Radha Basu, who left South India to pursue graduate studies in computer science at the University of Southern California in the early 1970s. She was subsequently drawn into the Silicon Valley labor market and began a long career at Hewlett-Packard (HP). When Basu returned to India in the mid-1980s the government invited her to establish one of the countries first foreign subsidiaries. She spent five years establishing HP‘s software development center in Bangalore and then returned to the US.

Radha Basu was uniquely positioned to negotiate the complex bureaucracy and the backward infrastructure of her home country. She explains that it takes both patience and cultural understanding do business in India: “You can‘t just fly in and out and stay in a five-star hotel and expect to get things done like you can elsewhere. You have to understand India and its development needs and adapt to them.” Many US-based Indian engineers followed Basu‘s lead in the 1990s, exploiting their cultural and linguistic background to help develop Indian software facilities for large US companies such as Oracle, Novell and Bay Networks.

The Indian community in Silicon Valley has thus played an important, but largely arm‘s-length, role connecting U.S. firms with India‘s low-cost, high-quality skill. Although some, like Basu, have returned to establish subsidiaries, most do little more than promote India as a viable location for software development. As they became more visible in U.S. companies during the 1990s, NRIs were increasingly instrumental in convincing senior management in their firms to source software or establish operations in India. The cost differential was the motivating factor for such moves: wages for software programmers and systems analysts are ten times lower in India, and the fully loaded cost of an engineer is 3540 percent what it is in the United States. The availability of skill is of growing importance for Silicon Valley firms facing shortages of skilled labor.

However, few US-educated Indian engineers choose to work permanently in India. This is due in part to the difference in standards of living, but most agree that the frustrations associated with doing business in India are equally important. Radha Basu explains that the first HP office in India consisted of a telex machine on her dining room table, and that for many years she had to produce physical evidence of software exports for customs officials who did not understand how the satellite datalink worked. She adds that when the Indian government talked about a “single window of clearance” to facilitate foreign trade, she would joke “where is the window?”

For example, Basu could not convince Indian customs agents that it was possible to export software without material evidence. For five years she was thus forced to dump all of the HP systems data onto tapes and ship them physically to customers in the United States so that they could be registered and recorded as exports. Similarly, when Texas Instruments set up the first earth station in Bangalore, it entailed a long-winded process that included breaking or removing 25 government regulations.

Business conditions have improved dramatically in India since Basu arrived. The establishment of the Software Technology Parks (STPs) scheme in the late 1980s gave export-oriented software firms in designated zones tax exemptions for five years and guaranteed access to high-speed satellite links and reliable electricity. The national economic liberalization that began in 1991 greatly improved the climate for the software industry as well. Yet even today, expatriates complain bitterly about complex bureaucratic restrictions, corrupt and unresponsive officials, and an infrastructure that causes massive daily frustrations—from unreliable power supplies, water shortages, and backward and costly telecommunications facilities to dangerous and congested highways.

These challenges are manageable for large established companies. However it is not surprising that many engineers describe India as hostile to entrepreneurs. India has a very small venture capital industry, multiple regulatory constraints on such funding, and almost no domestic market for information technology products. As a result the software industry is dominated by a small number of large export-oriented domestic and foreign corporations that have minimal ties with each other, local entrepreneurs, or the Indian engineering community in Silicon Valley. These companies have been so profitable playing the wage gap that they have had few incentives to address higher value-added segments of the market—or to nurture entrepreneurial companies that might do so.

Most economic relations between Silicon Valley and regions like Bangalore are still conducted primarily by individuals within the large American or Indian corporations. There are few Taiwan-style “astronauts” or U.S.-educated engineers who have their feet sufficiently in both worlds to transfer the information and know-how about new markets and technologies or to build the long-term relationships that would contribute to the upgrading of India‘s technological infrastructure. And there are no institutionalized mechanisms—either public or private—that would both facilitate and reinforce the creation of more broad-based interactions between the two regions.

Conclusions

The lesson from Taiwan is clear. The new structure of competition in IT provides unprecedented opportunities to leapfrog economically—and the brain drain can be turned from a curse into an advantage in this process. Indian policymakers have a tremendous resource in the US to draw upon for policy advice, technical expertise, and managerial and entrepreneurial know-how. The challenge is to create an environment that will attract these immigrants back home as entrepreneurs, investors, and advisors. This will require actively addressing the regulatory, infrastructure and institutional constraints that have thus far limited their return—a process in which they can also play a role.

Changes are occurring very rapidly and at many different levels in India today. Communications between the technology communities in India and the United States are growing. Successful Silicon Valley entrepreneurs like Hotmail's Sabeer Bhatia have become the role models for a new generation of Indian engineers. TiE has established branches in Bangalore and New Delhi to provide contacts, role models and information to start-ups. Alumni associations from the Indian Institutes of Technology organize seminars and social events in Silicon Valley. And while reversal of the “brain drain” is not yet on the horizon, a growing number of U.S.-educated Indians report a desire to return home, while others have left the large Indian companies to try their hand at entrepreneurship. In short, there is a small but growing technical community linking India and Silicon Valley—one that could play an important role in upgrading the Indian software industry in the future.

Even the Indian government is responding faster than anyone predicted. Prime Minister Vajpayee's claim that IT stands for "India's Tomorrow" reflects the commitment to change, as does the formation of an IT Ministry and a Cabinet committee on information technology. The Securities and Exchange Board has been working actively to revise their treatment of venture capital. And a report by McKinsey & Co. has forecast that India's IT industry will generate $87 billion in annual revenues, $225 billion in market value, and 2.2 million jobs by the year 2008.

Important as these developments appear, the most significant aspect of India's move up the technology ladder will come if entrepreneurs focus on developing products and solutions for the Indian market. The risk of brain circulation as a development strategy is the creation of dynamic enclaves that are globally connected—but lack connections to the domestic economy. The only way to avoid widening the economic gap between regions like Bangalore and the rest of the Indian economy is to insure that IT is used to meet domestic needs and provide the basis for a more broad-based process of economic development.

Promising models are emerging. Bangalore's Innomedia Technologies, for example, has developed a low-cost technology for interactive television that involves using existing cable-TV infrastructure to provide viewers with video on demand, interactive media and online shopping. And a handful of spin-off companies from the Indian Institute of Technology Madras have developed telecommunications systems that will make the Internet affordable and accessible to large segments of the Indian population. Information technology has created a confidence and hope in India that did not exist before—largely because India and Indians have participated in it. These entrepreneurs can be the catalysts for the growth of a dynamic domestic market—while also providing affordable technology and a model for many other developing countries around the world.

References

Arora, Ashish, V.S. Arunachalam, Jai Asundi, and Ronald Fernandez “The Indian Software Services Industry” Research Policy Forthcoming, 2000

Parthasarathy, Balaji “Globalization and Agglomeration in Newly Industrializing Countries: The State and the Information Technology Industry in Bangalore, India” Unpublished doctoral dissertation, University of California at Berkeley, 2000.

Saxenian, AnnaLee “The Silicon Valley-Hsinchu Connection: Technical Communities and Industrial Upgrading” Working Paper No. 99-10, Stanford Institute for Economic Policy Research, September 1999

Saxenian, AnnaLee “Silicon Valley‘s New Immigrant Entrepreneurs” Public Policy Institute of California, San Francisco, 1999 http://www.ppic.org/publications/PPIC120/index.html

¹ In this paper, Hsinchu refers to the 50 mile region encompassing both the Taipei metropolitan area and the Hsinchu Science-Based Industrial Park. This area is the location of the approximately 900 technology companies in Taiwan‘s IT industry.

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