A conduit for knowledge? demonstrating the strength of technology improvements in Indian firms that buy outsourced information technology

Abstract

The literature on the role of information technology outsourcing (ITO) and on knowledge intensive business services only rarely considers purchasers in developing countries and includes few wide-scale studies. This paper reduces that gap in that it quantifies the effect of ITO on total factor productivity using a sample of 10,100 firms in India. The results show that ITO purchasing brings strong returns and outperforms in-house IT. A comparison with studies from elsewhere reveals that Indian ITO also outperforms IT in a range of circumstances in developed countries. Taken together, these findings support the idea that ITO firms, just like other knowledge intensive business services, can act as a conduit for best practices and tacit knowledge, and that this role is very useful in a developing country context. The implication is that more ITO projects would be good for catching up in developing countries. In India, policy support for the ITO sector should be re-designed to incentivise domestic work.