Economic and financial performance of Indian IT services export firms

Abstract

This paper examines the economic and financial performance of the Indian IT services export sector. Specifically, economic performance is measured by total factor productivity (TFP) growth and financial performance is examined in terms of factors explaining accounting and market returns with the aid of seventy-six firm data set over a twelve year period (2004–2016).While thirty years of rapid development in the Indian IT services export sector is well documented, this paper suggests that much of the growth is attributable to replication rather than innovation. Results support the proposition that growth in the real output of Indian IT services sector is predominantly due to growth in real inputs (96%), as TFP accounts for only 4%. In addition, our estimation of Cobb-Douglas production function suggests modest economies of scale in the range of 1.06–1.14. With respect to financial performance, regression results confirm the important role of asset turnover, dividends, and debt in explaining accounting return measured by return on assets (39% adjusted R2). On the other hand, as expected, regression results explain only 10–14% (adjusted R2) of market return, which is total return on stocks including dividends. Statistically significant variables affecting market returns are: exchange rate, asset turnover, payout ratio, and standard deviation of the market return itself.