Title: Software Export from Developing Nations IEEE Computer, December, 1993. Abstract: Today, software production is concentrated in developed nations, but developing nations have an opportunity to increase their share of the global software market. This paper begins with a brief discussion of the current software market. The second section discusses economic, political and technological changes facilitating software export from developing nations. The next section outlines three forms of software export: programming services, localization, and product development. This section includes examples of where these are taking place, and suggests some company strategies. The final section examines some of the steps taken by national governments to stimulate software export: subsidizing telecommunication, establishing research institutes and university programs, offering tax and financial incentives, reducing trade barriers, planning and coordinating industry efforts, marketing collectively, and enacting and enforcing copyright laws. Author: Larry Press Professor, CIS California State University at Dominguez Hills 10726 Esther Avenue Los Angeles, CA 90064 (213) 475-6515 (213) 516-3664 (fax) Internet: lpress@isi.edu Keywords: Software export, offshore programming, developing nations SOFTWARE EXPORT FROM DEVELOPING NATIONS Today, it is fashionable to speak of "globalization," international corporations and markets, falling trade barriers, and proliferating communication networks. Yet, developing nations in Africa, Latin America, the Caribbean, and other regions have been slow to enter the global marketplace. This has certainly been the case in the software industry. The Association of Data Processing Service Organizations estimated that in 1989 the U. S. accounted for about 52% of world software consumption, and U. S. software producers held roughly 70% of the world market. The International Data Corporation estimated that the U. S., Western Europe and Japan accounted for 91% of the 1989 world software market (see Table 1). In his opening address to the first meeting of Iberio-American Software Exporters, chairman Pablo Palma estimated that only 2% of the world's software is produced in Latin America. Even though such figures may not be precise, and the above studies defined the software market somewhat differently, it is obvious that today's software market is concentrated in North America, Europe and parts of Asia. Toward a Global Market While most developing nations have not yet participated in the global software market, many, for example, Cuba [6], see software as a potentially attractive industry. There are economic, political, and technical reasons to believe developing nations may increase their share of the global software market. Several of these are discussed below. Economic and Political Factors The movement to market economies in Eastern Europe and the former Soviet Union is beginning to produce new software companies. For example, Goodman and McHenry [4] describe the new software joint ventures in the former Soviet Union as more dynamic and outward- looking than those of the old state sector. Even Cuba is open to joint ventures with capitalist partners [6]. Free-trade also encourages software export. The integration of Hong Kong into the rapidly growing and opening Chinese economy will spur software companies in both nations. Many Latin American nations are moving away from earlier protectionist trade policies, seeing exports as a road to economic growth [3]. Several have or are working toward free-trade agreements within the region and with North America. One goal of our country's Enterprise for the Americas Initiative is free and open trade throughout the Western hemisphere. Chile exemplifies this trend. In 1970, Chile elected a leftist government, which was overthrown in a bloody coup led by Agosto Pinochet in 1973. Pinochet's government sharply reversed the prevalent Latin American economic policy of protectionism, substituting a policy of free trade and growth through export. Chilean politics changed when Patricio Alwyn was elected president in 1989, but the economic policy has not wavered, and it seems to be working. Exports now account for 30% of the economy, and that figure is rising. Discount rates on Chilean government bonds are lower than any in Latin America, and of the seven largest Latin American countries, Chile has had the highest economic growth rate and the lowest inflation rate over the last five years [1]. Less tangibly, there is also an air of entrepreneurial optimism in the computing industry. This is exemplified by the Chilean Software Association, which has twice hosted meetings of Iberio- American software exporters, where software company executives from throughout the region planned regional strategy, made deals, and attended seminars. Technological Factors Technological factors also facilitate the participation of developing nations in the global software market. These include the nature of innovative software projects, progress in the power and distribution of personal computers, and the rapid proliferation of computer-mediated communication networks. The nature of software development favors small companies with relatively low capital requirements. Innovative products seldom come from large organizations within big companies. Rather, they are purchased or developed by a small internal group. This phenomenon is illustrated by Apple's spin off of General Magic to develop software for portable computers and communication devices. Developing nations can afford to support small groups of creative and highly qualified software developers. The advent of mass-produced personal computers has also lowered the cost of capital needed to enter the global software market. Because personal computers are cheaper and useful to people in both industrial and non-industrial nations, they have spread throughout the world more rapidly than mainframes did. For example, in surveying the Indian software industry, Yourdon [12] tells us "the history of the Indian computer industry can be neatly divided into two phases: a stagnant, IBM-less, pre-PC period, and a new, thriving era that began with the introduction of the PC and [Rajiv] Gandhi's push for modernization of the information technology sector." Computer-mediated communication networks are also helping shrink the world. The global Net is being built by linking research and education networks, commercial services, and proprietary corporate networks. The growth of research and education networks is exemplified by the Internet. Mark Lottor of SRI International, estimates that the Internet, the major research and education network, grew from the 4-node ARPANET in 1969 to 1,313,000 million hosts in January, 1993. The growth rate is over 1,000 new hosts per day, and is accelerating. Although it began in the U. S., the Internet illustrates the international nature of the global network. Statistics in the directory /statistics/nsfnet@nis.nsf.net show that NSFNET, the U. S. Internet backbone, grew from 164 domestic and 9 foreign networks in July, 1988 to 5,904 domestic and 3,678 foreign networks by February, 1993. Significantly, many developing nations find that they can afford Internet connectivity [7], and according to Larry Landweber of the University of Wisconsin, 109 political units are now on-line. While not as dramatic, commercial services are also growing rapidly. For example, market researchers at the International Data Corporation estimate the 1991 electronic mail market for North American carriers at $438.88 million, and they predict growth to $1,718 million by 1996. Though not as large a market, they predict an even higher growth rate for Electronic Data Interchange transactions. Proprietary networks are expanding as well. For example, DEC's internal network grew from less than 10,000 systems in 1986 to 83,410 today, connecting 542 locations in 37 nations. Today, large organizations are most likely to have wide-area networks, but carriers are beginning to offer new services which will allow the interconnection of local area networks used in smaller companies. Advances in communication technology will insure continued network expansion. Optical transmission capacity has been increasing ten-fold every four years since the mid-1970s. New technologies which substitute optical for electronic information processing -- optical amplification, optical frequency-division multiplexing, and optical signal processing -- promise continued improvement. The growth of the global Net will continue. The improving world communication infrastructure, low cost of personal computers, and high salary and overhead costs in industrial nations are a potential boon to non-industrialized nations. Again, Chile serves as an example. Sixty nine percent of the computer science faculty at the University of Chile have or will soon have PhDs from prestigious U. S. or European universities, and the computer science department of the Catholic University has set a goal of 100% PhD faculty. Commercial networks and the Internet connect Chilean universities and businesses with the rest of the world, and they use the same software and development tools as their counterparts in other countries. At the same time, professional salaries, office space, and other ancillary services are relatively inexpensive, while middle-class living standards are quite high. These factors give Chile and other developing nations an opportunity in the global software industry, and may lead to the reversal of the historical "brain drain." These trends also suggest that less-developed nations may achieve significant market share. Yourdon [11] puts it more dramatically. He predicts that "international competition will put American programmers out of work, just as Japanese competition put American auto workers out of work in the 1970s." By the end of the decade he foresees "massive unemployment among the ranks of American programmers, systems analysts, and software engineers." Forms of Software Export Less-developed nations have already had some success in exporting software. They sell programming services, localize software, and develop some software products. Programming Services Tata Consultancy in India is perhaps the first and largest exporter of programming services. The company was founded by an MIT graduate who returned to India, bought a Burroughs computer, and then obtained a contract to do some development for Burroughs. According to Richard Heeks of the University of Manchester, Indian software exports grew from $54.1 million in 1987 to over $200 million annually today, and net earnings are in the 55-60% range. Entrepreneurs and government officials in many developing nations would like to emulate India. In a survey of 50 Fortune 1000 companies in the U. S., Woodring [10] found that 38% have decentralized application development and 22% are evaluating doing so. Once the decision is made to outsource development, companies may look beyond their national borders. According to consultant Herb Halbrecht "the role of a Chief Information Officer is becoming like that of an international investment broker, and companies scour the world looking for pockets of excellence." At first, Indian (and other) programming services were provided almost exclusively by sending programmers to the customer's site. For example, in 1989, 80% of Indian software export revenue was from on-site programming [12]. However, this approach is costly, disruptive to the programmer, and exposes exporters to the possibility of the programmer leaving the company in order to remain in the host nation. It also encourages competition on price only. Rajesh Hukku, Vice President of CitiCorp Information Technology, is responsible for programming projects for U. S. firms using Indian programmers. He suggests that as soon as possible, software exporters should take responsibility for full projects using programmers at home. He states that this yields higher profit margins since the competitive focus shifts from low cost to software quality and completion time. He also advises focusing on particular industry, application or geographic areas. By specializing, his staff is able to develop business expertise and knowledge, as well as knowledge of local market conditions. This specialization leads to higher profit margins, as does the utilization of the latest, most powerful development tools. Working abroad incurs an increased communication overhead. CitiCorp's Hukku stresses the need to give the client the feeling of being in control by submitting frequent status reports and keeping in constant contact using electronic mail, fax, and audio and video teleconferences. Communication infrastructure is particularly important. For example, he has one project in which 100 Bombay programmers are developing a system on a mainframe computer located in New York. Communication is provided by a dedicated satellite link that is subsidized by the Indian government. Huuku foresees the day when the computer will also be moved abroad. For example, a computer in India may be connected to data-entry terminals in the U. S. Localization Software companies increasingly localize programs, tailoring the documentation, user interface, and promotional material to local markets and languages [footnote 1]. Localization is facilitated by internationalizing the program, that is, by designing it modularly, with culturally dependent and culturally independent elements clearly separated [8]. For example, MicroPro International was an early user of internationalization as a strategic tool. They prepared internationalization guides for their programmers, and their WordStar word processor remained the market leader in many nations long after it had dropped from the leading position in the U. S. Several such guides are now available, see, e. g., [5, 8]. [footnote 2] Ashton-Tate/Borland, Claris, Lotus, Microsoft, Retix, and many others localize their software in Ireland. Lotus produces versions of their programs in eight European languages, with the translation and testing of the software and documentation done in Dublin. Claris operates in a similar manner, overlapping localization beta testing in the U. S. to insure that their software is released at the same time throughout the world. Ireland is also a popular distribution and manufacturing center for European software and support. Software localization for the Asian market is more difficult because it requires 2-byte character codes. Lotus and many others do their Asian localization in Japan. International Integrated Systems, originally formed as a joint alliance between IBM and the Taiwan government's Institute for the Information Industry, now does about half of its business localizing software for other Asian markets. Currently, localization and manufacturing in Latin America and Africa are often minimal, with little locally added value. A local licensee may merely copy and distribute a version prepared for another nation. Product Development Software products can take many forms. While it would be unrealistic to try to enter North America with yet another spreadsheet or word processor at this time, there are export opportunities for more specialized products. A company may have a program which is successful in its local market, which can be adapted for sale abroad. These products may enjoy a special advantage based on local knowledge or cultural characteristics. For example, Chile's expertise in the timber industry is exploited by Logmeter, a program from Excelsys Engineering, a Chilean developer. Logs come to mills on large trucks. When they arrive, Logmeter automatically estimates the volume of wood and expected output using a PC with a video camera to scan an image of the truck. Estimation time and cost are lower and accuracy higher than with the traditional manual method. This program would have been difficult to develop in a nation without a significant timber business. Excelsys has also developed software that is embedded in such export products as automatic teller machines or systems for managing managing queues at bank teller windows. Products may also be based on the work of a student returning from abroad. A Chilean example is Ars Innovandi's text retrieval program "Search City," which grew out of the doctoral research done by Ricardo Baeza-Yates at Waterloo University. After graduating, he returned to the University of Chile, and collaborated with Ars Innovandi on developing an exportable, world-class product. As local standards of living for professionals improve, hardware costs fall, and research facilities and communication networks improve, there will be less incentive for students to remain in North America or Europe after completing their education. They will return home with product ideas, expertise, and familiarity with foreign markets. Niches can be carved out in particular industries or product areas or by developing specialized expertise with new programming tools and platforms. Every new platform or standard creates a demand for new applications, conversion of old applications, and the development of programming tools. At the second meeting of Iberio-American Software Exporters, consultant Patricia Seybold recommended that developers watch for news on emerging standards for interoperability, object-oriented development, mail-based applications, pen-based computing, and multi-media for new niche opportunities. Once the decision is made to offer a product for export, there is much work to be done. The first step is to conduct market research in the target nation. Companies need to know the competition, including their products, prices, market size and shares, distribution channels, and marketing strategies. This knowledge is needed even if the exporter plans to work with a local publisher or distributor, and may be provided by a returning student. It is necessary to prepare a business plan, anticipating investment, staffing and cash flow. Ken Wasch, Executive Director of the Software Publisher's Association, estimates that between $500,000 and $1,000,000 is required to enter the U. S. with a new product that will have its own brand identity. The business plan serves to set goals and can be used to raise capital. One should also learn as much as possible about legal and financial factors such as taxes, trademark, copyright, and import regulations. Contacts should be made with consultants, lawyers, accountants, bankers, and government people who can be retained for a fee. A market may be entered alone or with a local partner. Options include finding a publisher, bundling or embedding software into another product, selling through a distributor, or opening a joint venture or local office. Partnership lowers investment cost as well as the returns. For example, publisher's royalty rates are typically 5-15%, but publishers will assist in product development and marketing. Distributors typically offer far less service, leaving the software company fully responsible for creating the product and the demand for it. Another approach is to remain independent. For example, Graphisoft, a Hungarian firm, has opened offices in Canada, the U. S., and Western Europe, and markets its internally developed computer-aided design software for the Macintosh. The six year old company now has 30 programmers. A decision to enter a new market is a commitment to an ongoing project that requires software maintenance, product upgrades, a public relations presence, and continued product development. Cross-cultural insights might lead to innovative follow on products. Government Strategies There are many ways in which governments can encourage the development of software exports. This section outlines several of them. Subsidize Telecommunication Infrastructure In any industry, the ability to communicate with customers, employees, and suppliers for marketing, coordination and control is critical. The strategic importance of telecommunication is even greater in the software and other information processing industries, where the product itself is information. Low cost telecommunication has been a major contributor to the software export success of nations such as India and Ireland. Note that both internal and external telecommunication are necessary, and they may be achieved using relatively low-cost technology [7]. An excellent example is the Relcom network in the former Soviet Union. Relcom was initially established to support customers of Demos, a software company specializing in the Unix operating system. Two years after its founding, Relcom connects over 3,000 organizations from Saint Petersburg to Vladivostok. Relcom provides electronic mail and Usenet-like bulletin boards, and it has a significant impact because alternative communication services are very poor. The vast majority of the computers on the network are 286-based PC clones communicating over voice-grade phone lines. Provide Tax and Financial Incentives Tax and financial incentives can entice software companies to open subsidiary offices and invest in a country. For example, Ireland offers a variety of incentives, such as a 10% corporate tax rate for computer services companies, employment grants for jobs created, and capital grants toward the cost of computers, equipment, office furniture and buildings. It also offers training grants, rent subsidy grants, and research and development grants. Reduce Trade Barriers A reduction in trade barriers (tariffs, quotas, currency conversion restrictions, and bureaucracy) on computers, software, communication equipment, and related information processing products will make it easier for software companies and universities to import modern hardware and software tools. It will also encourage general expansion of the information technology sector and provide more demanding, sophisticated users. Demanding users and the availability of imports force the local software industry to excel in order to compete. A larger domestic information technology industry provides demand for software products, employment buffers, and support for university growth. Plan and Coordinate Efforts According to Chang and Aoyama [2], software has been one of the fastest growing industries in most Far Eastern countries in recent years. In surveying software development in Japan, Taiwan, South Korea, and Singapore they observe high levels of activity. They note that while developments in each country are unique, there is one common thread, that "the effort to industrialize software is likely to be made through a national, government-directed, and publicly funded initiative." [footnote 3] For example, Japan's Ministry of International Trade and Industry arranges for pre-product cooperation between companies. Carlos Ominami, Chilean Minister of Economics has also established The Intersector Committee for Development of Software which will ensure high-level coordination between universities, the government and software companies. Invest in Information Technology Education Encouraging students to study information technology by investing in universities creates the body of professionals needed to establish a healthy local software industry and user community, build the local infrastructure, and staff foreign offices. Infrastructure also requires well-trained people. The organizers of the Relcom network (described above) state that a lack of trained Unix system programmers is the key constraint they face in expanding their network. The ability of the university system to produce trained programmers and computer scientists may be a critical limitation in the expansion of a national software industry. For example, India may become a victim of their own success. Today they only have around 50,000 programmers, and they will need an estimated 275,000 programmers by 1995 [12]. The investment in universities should include the establishment of contacts and relationships with major universities in other nations. Pre-university education will, in the long run, lay a fundamental foundation for the software industry. Widespread computer literacy programs lead to a demanding local market and provide future developers. Nations including Chile, Costa Rica, Cuba, and Malaysia have programs underway for universal deployment of computers and networks in schools and community centers. Establish World-Class Research Facilities The "brain drain" has been a major problem for less-developed nations. Some of their best students remain abroad after obtaining an advanced degree. A major reason for this is the inability to continue the research they had begun as students in their home countries. However, declining hardware and communication costs make it increasingly feasible to establish major computer science research centers in any nation. Such centers offer powerful incentives for gifted students to remain at home and can be a continuing source of innovation for exportable products. Market Collectively There are many examples of coordinated marketing activities. Ireland has established Industrial Development Agency offices in 17 cities in North America, Europe and the Far East, and many other nations have similar offices. In Chile, the Economics ministry subsidizes technical assistance and consultation, market research, preparation of promotional material, marketing design, and quality certification. They also co-sponsor the annual meeting of software exporters (mentioned above) and a South American trade show, maintain foreign offices, and aid the organization of software-producing enterprises. Governments can provide national booths at foreign trade shows. At a recent Comdex show there were 20,000 attendees from 102 countries, and over 1,000 companies signed up to be listed in an Export Interest Directory. There were trade-delegation booths from India, The Netherlands, Belgium, Israel, Singapore, Hong Kong, Canada, Brazil, Columbia, Uraguay, and the United States. Most of these provided exhibit space for several companies. Enact and Enforce Copyright Laws In a Comdex presentation, Jeremy Butler, past Senior Vice President, International and OEM, at Microsoft, estimated that biggest "opportunity" in software export is the stopping of piracy. Table 2 presents Butler's estimates of the software sales increases in various countries if piracy were completely eliminated. Software piracy is a dilemma for a developing nation. Piracy may be the only means of obtaining software to sustain development in a capital-starved nation, yet to develop a domestic software industry, copyright laws must be passed and enforced (legally and by persuasion). Weisband and Goodman [9] analyze this dilemma, and suggest various policies, including establishing price differentials for developing nations. Summary Today, world software production and consumption are largely confined to North America, Western Europe and parts of the Far East. However technology is advancing and dispersing rapidly, creating an opportunity for less-developed nations to increase their share of this growing market. This survey has cited examples of efforts of developing nations to export software to North America and Europe. While Yourdon's prediction of the demise of the American programmer may never come true, American and other programmers must expect serious competition from developing nations. The quality of today's foreign programmers is high, and their salaries and overhead costs are low. On the other hand, although cultural and language barriers are diminishing, they still exist. Software, particularly custom, in-house applications, requires sensitivity to the users. Government action can stimulate the growth of software exports. Nations which feel that software export is an attainable goal should pursue policies such as subsidizing telecommunication, establishing research institutes and university programs, offering tax and financial incentives, reducing trade barriers, planning and coordinating industry efforts, marketing collectively, and enacting and enforcing copyright laws. ----- Footnotes 1. Local markets do not necessarily correspond to national markets. For example, there is a significant Spanish- speaking community in the United States. 2. There is an Internet list for discussion of internationalization. To subscirbe, send a message to insoft-l-request@cis.vutbr.cs. 3. One U. S. company, Visible Systems, has complained that this subsidy and coordination is unfair. Visible Systems markets a CASE tool in competition with POSE (Picture-Oriented Software Engineering), a program developed in Singapore. Visible Systems filed a claim with the Department of Commerce asserting that POSE had been developed with a $15 million subsidy from the Singapore National Computer Board. Commerce initially found in their favor, imposing a 15.25% punitive duty on POSE, but they subsequently reversed the decision, citing fear of retaliation. Commerce still holds that software is merchandise, not intellectual property, and that they therefore have the right to charge a duty. ----- Tables United Rest of States Europe Japan World Total 1989 15,830 14,349 3,334 3,220 36,733 Market share 43% 39% 9% 9% 100% 1994 32,040 33,256 7,726 7,660 80,682 Market share (est.) 40% 41% 10% 9% 100% Projected 102% 132% 132% 138% 120% Growth rate Table 1. The worldwide software market for 1989 and 1994 (estimated). Figures are in millions of dollars. ----- Country Sales Increase Canada/U. S. 15% UK 40 Australia 50 Japan 90 Italy 100 Brazil 200 Korea 300 Taiwan 400 Mexico 500 Spain 500 former USSR infinity symbol Table 2. Estimates of sales increase if software piracy were eliminated. ----- References 1. Beli, Pedro, "Globalizing the Rest of the World," Harvard Business Review, July-August, 1991, pp 50-55. 2. Chang, Carl K, and Aoyama, Mikio, "Software in the Far East," IEEE Software, March, 1989, pp 11-12. 3. Evans, Peter B., "High Technology Industry in the Americas," The Institute of the Americas, La Jolla, CA, 1989. 4. Goodman, S. E. and McHenry, W. K., "The Soviet Computer Industry: A Tale of Two Sectors," Communications of the ACM, June, 1991, pp 25-29. 5. Kennelly, Cynthia Hartmann, "Digital Guide to Developing International Software," Digital Press, Bedford, MA, 1991. 6. Mesher, G., Briggs, R., Goodman, S, Press, L., and Snyder, J., "Cuba, Communism, and Computing," Communications of the ACM, November, 1992, pp 27-29, 112. 7. Press, L. "The Net: Progress and Opportunity," Communications of the ACM, December, 1992, pp 21-25. 8. Taylor, Dave, "Global Software," Springer Verlag, New York, 1992. 9. Weisband, Susan P. and Goodman, Seymour E., "International Software Piracy," IEEE Computer, November, 1992, pp 87-90. 10. Woodring, Stuart and Colony, George F., "How Software will be Managed," Forrester Software Strategy Report, June, 1990. Programmer," American Programmer, 1988, pp 1-8, New York. 11. Yourdon, Edward, "The Decline and Fall of the American Programmer," Prentice Hall, Englewood Cliffs, New Jersey, 1992. 12. Yourdon, Edward, "India," American Programmer, October, 1989, pp 3-26, New York. Biography: Larry Press is Professor of Computer Information Systems at California State University at Dominguez Hills. His interest in information processing technology in developing nations has taken him to Eastern Europe, Latin America, and South Central Los Angeles.

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