THE GLOBALIZATION OF THE SOFTWARE INDUSTRY: PERSPECTIVES AND OPPORTUNITIES FOR DEVELOPED AND DEVELOPING COUNTRIES



The summary of the paper:
In the traditional neoclassical model, capital and labor are symmetric. Countries relatively abundant with labor can just as easily specialize in labor intensive sectors and adopt labor intensive technologies as countries with abundant capital can specialize in capital intensive sectors. However, as we all know, labor and capital have been anything but symmetrical. Poor countries have had to follow in the footsteps of richer countries, moving from agriculture to manufacturing, moving from labor intensive to capital intensive sectors. Might software, with its dependence on human capital but relatively low intensity in physical capital, offer a new way for labor abundant countries? Can developing countries leverage their abundant labor endowments to target human capital intensive service sectors for exports and growth, without having to invest the large amounts of capital that manufacturing requires?
   It is true that software, particularly software services, do allow a country to participate in the high-tech sector with only a limited physical infrastructure. However, even a successful software industry is likely to account for a small share of GDP and employment. The software industries in the countries we have studied account for at best 2-3% of their respective GDP, and an even smaller fraction of the total labor force, so that the direct impact on economic growth is likely to be small. Hence we turn to examine the indirect effects.
   One possible set of indirect effects works through the links to other sectors. Some authors have argued that software is to the knowledge based economy what capital goods were to manufacturing – an input source whose importance for productivity and innovation was far greater than was reflected in revenues or share of GDP. Software does supply basic inputs to virtually every industrial sector. Better software would therefore increase productivity across the board. Though attractive, this argument has a problem. Software is internationally traded and it is not clear why a country, particularly not at the leading edge of technology, could not use software developed elsewhere. There may be some advantages to have a domestic software sector which could tailor software to local requirements at lower costs. However, this must be weighed against the possible lower efficiency in developing software domestically. The net effect of all these factors is that having a domestic software industry provides at best a modest contribution to the overall growth of the economy even when considering the potential effects on the large set of domestic user firms and industries.
    Success at an export oriented industry also has spillovers for other industries in terms of enhanced reputation. China’s initial success in producing and exporting light manufactures of all kinds has earned it the reputation of being a desirable location for all manufacturing. Conversely, years ago, Japanese automakers had to fight the reputation for shoddy quality that its early exports of light manufactures had earned it. Today, India enjoys a reputation for service quality, largely due to the software industry. It is no accident that it is the favored destination for other service exports, ranging from call centers, customer care and medical transcription to high end R&D services.
Full Article : http://www.nber.org/papers/w10538

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1 Comments

  1. sometimes we do not need to build applications from scratch. you have an open source system such as Odoo and it can be customized according to the client requirements. It is cheap and powerful. Also, if this system installed in the cloud, then it would be very cheap for the small and mid-size companies. with this ideology, no need for local data enter and expensive ERP systems/applications, so the companies/Clients will save lots of many. Regards. Abdullah Bahattab

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