The drawbacks that remains is the lack of domain skills arising from small domestic and local markets, limited university research and related educational system, and low linkages in between university and commerce. There are many examples of nations whose domestic companies successfully shifted to high value-added software despite lacking several supposedly essential attributes. For instance, Israel had succeeded without a massive domestic market (however it could be argued that it has done best in defence-related software domain, for which it has, a large home market). Of course, the difference with Israel was its openness to MNCs from the beginning.
Indeed, product development in India (including R&D) rose from 10% of software exports in 2000 (this is the year from which major changes in overseas ownership rules, and telecommunications, intellectual property protection and venture capital policy reforms began) to 25% in 2003 and revenue per employee rose by 14% . It appears that the Indian software development industry is acquiring domain expertise skills. Many of this is undoubtedly because of the leveling of the playing field for MNCs and start-ups since 1999. Some has to do with a strategy of foreign alliances being pursued by the larger domestic and local firms. The IT industry, thus, appears to have the capability to rise up and move the value-chain. As a result, industry leadership, currently with massive domestically-owned software services firms offering and providing customized programming services, will have to be shared with start-ups (diaspora-linked or funded with overseas venture capital) and MNCs offering innovative products and services. The top 20 software exporters included 5 MNCs in 2005, up from just 2 in 2001.
Domestic and local entrepreneurship drove the IT industry’s origination, survival and innovation during the period of time when the state used policy to promote SOEs and to crowd out the private sector. These state policies effectively prevented the private development of software in India. The private sector, in collaboration with MNCs, found an innovative solution, that of exporting programmers instead.
Although, this strategy had caused certain drawbacks and weaknesses such as the shortage of domain expertize skills and project management skills to become embedded.
The rapid growth of the industry, which happened in the mid-1980s, was preceded by a paradigmatic movement in government policy from hostility to the private sector to support for it; and maturation was also critically provided by the modularization of the software programming function and techniques through the establishment of Unix and the workstation in the 1982. These results led firms to a focus on customized programming services located in Bangalore. In this process, the industry acquired right amount of skills in managing projects remotely. Other weaknesses, particularly the scarcity of domain expertize skills and complexities in with coordinating cross-border projects, persisted.