While policy reform has put in room for many of the conditions for future growth, the lack of domain expertise skills originating from small domestic and local markets, limited university research and interactions with the commercial sector remains. Several of these skills are being acquired through cross-border communications and alliances. This, in consequence, implies that established domestic and local firms now compete with MNCs and start-ups with overseas links that have superior domain skills. As a result, while the large domestic and local organization leadership of the software IT industry is increasingly being shared with MNCs and start-ups, the acquisition of domain skills is likely to result in benefits for the industry as a whole, implying higher value-addition.
Software might be considered a particularly difficult type of service to offshore, because the labour needs to be skilled, relative to what is required for the offshoring of, say, routine call-centre work or voice transcription. Even within software, an individual would expect that kind of work to support product software, done by MNCs, would be the point of origination. However, the absence of certain initial conditions, notably the absence of supportive policies to induce MNCs, can cause certain weaknesses to be embedded in the industry.
The software development companies in India have been growing at phenomenal rates over the last ten years (a decade). Currently a 19.62 billion rupee ($612 million) industry, it has experienced compound annual growth rates of over 40-50%. It concentrates on the behaviour and incentives of both the potential clients/customers of the software industry and the Indian companies. By analysing and understanding this behaviour, we can understand why many Indian software companies grew and gained large degrees of market leadership while others did not. These frameworks will also enables a context for analysing actual company and customer behaviour in the software industry.
Classical comparative advantage models just only provide superficial explanations for analysing the growth of the Indian software IT industry. We must need to evaluate the industry beyond the basic assertion that foreign organizations wished to take benefits of the wage differential existing in between Indian software firms and overseas software firms. This does not sufficiently evaluate the imperfectly competitive nature of the IT industry and the growth of few Indian firms and stagnation of others. In order to understand this behaviour, one must look at the transaction costs involved in using an Indian software company rather than a local, domestic one. Potential clients incur an additional search cost in trying to find a company that satisfies their requirements and Indian firms must find ways and methods to reduce this search effort. Indian firms have managed to do this through market signalling.