Abstract: Are Indian Markets Liberal? Firm-Level Reactions to Market Incentives in the Development of the IT Sector

D. Rajeev Sibal

Abstract

The Indian IT sector provides an interesting expose about the confounding realities of firm competitiveness in India. The sector's success runs counter to standard economic explanations of trade theory: India's comparative advantage should lie in manufacturing because of its abundance of unskilled labor—like China. Rather, the IT sector requires highly sophisticated human capital inputs to drive success and must recruit this talent in a labor market best known for its brain drain. Another theoretically interesting paradox relates to the role of liberalization as a catalyst for the sector's boom. The paper investigates why standard economic and trade theories fail to adequately explain the rise of the IT sector in India. The paper takes a historical institutional approach to analyze the dynamics of economic development and politics of IT in the Indian economy. In addition, I conduct comparative firm-level case studies. I find that the IT sector benefitted from unique policies in pre-liberalization India. The asset-specific market principles that directed firm development enabled the firms to be well positioned in 2000 to take advantage of the Y2K phenomenon to create an opportunity for growth.