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Global Development Institute

Analysing the Software Sector in Developing Countries Using Competitive Advantage Theory

Richard Heeks

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.

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Educator's guide

Synopsis questions

  1. Summarise why the software sector may be seen as important to developing countries. [Part A]
  2. Summarise Porter's theory of competitive advantage. [Part B]
  3. Does India's software industry demonstrate a competitive advantage?  If so, why?  If not, why not? [Part C]
  4. What is good and bad about using Porter's theory of competitive advantage to research development informatics issues? [Part D]

Development questions

  1. Find further evidence to address the question of whether ICT production or ICT consumption are more important in development.  Draw your own conclusions.
  2. Identify two other theories of competition and/or competitiveness that could be applied to issues of software sector development.
  3. With such a small share of the world market, can India's software industry truly be described as "globally competitive"?
  4. Can apparently simple models like Porter's diamond properly reflect real life?
  5. Can Porter's model really be called a "theory" or is it something else?
  6. Porter's model was formulated during the 1980s.  Is there a sense in which it is now "past its sell-by date"?
  7. Identify at least three other development informatics research questions to which Porter's theory could usefully be applied.