Technical Efficiency Analysis of Indian IT Industry: A Panel Data Stochastic Frontier Approach

Abstract

Globalization and the development of modern technologies have led to the emergence of service trade. The success of Indian information technology (IT) has changed perception of globe about India and has captured the attention of the globe as it seems a paradox that a developing economy is emerging as a global hub for software exports. In the past three decades, the contribution of the Indian IT industry to national income, employment generation and offsetting the current account deficit is remarkable. In this consideration, the present study is an attempt to analyse the technical efficiency of the IT industry of India during the period 2000–2016 by applying panel data stochastic frontier analysis approach. The study reveals that foreign capital, age and profit ratio have a significant impact on mitigating the technical inefficiency of the IT industry while the research and development (R&D) expenditure has turned out statistically insignificant in determining efficiency. Indian IT industry is mostly driven by service exports which are not survivable in the long run. The study suggests that the Indian IT industry has to transform itself from low value-added to high value-added, from service-driven to product-driven.