Analysing the Software Sector in Developing Countries Using Competitive Advantage Theory

Abstract

Information and communication technology (ICT) production in developing countries has been under-researched compared to ICT consumption, yet it offers greater developmental returns. Within the ICT sector, software production is particularly attractive, with low entry barriers and strong potential to create jobs, exports, skills and other developmental externalities. Western nations were first movers in software, so a key research question is to understand how developing countries – as latecomers – can create competitive advantage in software. This paper presents Porter's theory of competitive advantage, based on the diamond of determinants, as a framework for addressing this question. It applies this theory to the case of India's software industry which it finds does have a competitive advantage, based on variables such as ever-increasing advanced skills, domestic rivalry, clustering, and government policy/vision. The paper identifies some challenges to Porter's theory that can be resolved relatively easily but also some less tractable problems around the issues of understanding government policy, processes of upgrading/innovation, and local/global linkages. All these require some amendments to Porter's original ideas. Nonetheless, Porter's theory is seen to be a valuable tool for development informatics research, applicable to a variety of ICT sectors – not just software – and offering answers to questions about whether sectors are competitive, why they are or are not competitive, and what should be done to improve or sustain competitive advantage.