Limited growth opportunities amidst opportunities for growth: an empirical study of the inter-firm linkages of small software firms in India

Abstract

Small firms are important to all economies. This is especially true with the rise of the information and communication technologies (ICTs), as the technical characteristics of information goods lower entry barriers for small firms seeking to take advantage of the growing global demand for ICTs. However, for accessing global markets, or for technological learning, the literature points to the potentially important role of intermediary institutions. This paper examines inter-firm linkages in India, the world’s largest exporter of software services, to explore the extent to which large software firms, both foreign multinational corporations (MNCs) and domestic firms, play an intermediary role for the growing number of small firms. Drawing on 172 in-depth, semi-structured interviews, the paper finds that linkages between the large and small firms are few and weak. MNCs prefer working with large domestic firms as they seek the scale to cut costs for labor-intensive services. Large domestic firms too tend not to outsource work to small firms. They prefer independent execution, viewing small firms as potential competition. Any inter-firm links are typically limited to labor contracting and rarely provide access to markets or opportunities for technological learning. Thus, lacking the operational scale, technological or domain diversity, small firms end up dependent on personal networks to access global market opportunities, i.e., despite the growth in opportunities provided by ICTs, the growth opportunities for small software firms in India remain circumscribed.