Lessons to be learnt from Tel Aviv3 min read . Updated: 12 Jan 2016, 10:45 PM IST
Israel's information technology sector shows the way forward for India
External affairs minister Sushma Swaraj’s visit to Israel later this week, taking place as it does in the shadow of the Pathankot attack, will inevitably have a heavy security component. According to reports, cybersecurity cooperation between the two countries is one of the issues likely to be discussed. A growing Indian market in this area valued at around ₹ 1,500 crore, weak domestic capabilities and Israel’s status as the biggest supplier in the sector after the US make this a natural progression. But there are linkages to be made and lessons to be learnt from Israel’s information technology (IT) sector that go beyond the security dimension.
The success of India’s IT/IT-enabled services sector is perhaps the defining feel-good story of the country’s post-liberalization economy. In 1998-99, India’s software exports were valued at a relatively paltry $2.8 billion. In 2014-15, they had hit $98 billion, while domestic revenues were pegged at $48 billion. Factor in employment generation—IT and IT-enabled services account for 10 million jobs, directly and indirectly—and its status as a sunshine sector doesn’t seem liable to fade any time soon.
But there is another telling statistic. As of 2014, IT services and business process outsourcing accounted for 54.2% and 19.5%, respectively, of sector revenues. Software products, meanwhile, stood at 15.3%. That neatly sums up the infamous “coders, not programmers" perception of the Indian IT sector. The tag isn’t entirely fair—Indian IT majors have been moving up the value chain in the past few years—but on the whole, the numbers don’t lie. The industry hasn’t broken from its roots as the world’s back office; the high-value software development slice of its IT pie remains comparatively small.
Israel has taken a very different path. Dan Senor and Saul Singer’s 2009 book Start-up Nation: The Story of Israel’s Economic Miracle is the story of its IT success writ large, predicated on innovation and disruption. The start-up nation tag has since passed into popular parlance and with good reason. The Economist has noted that Israel has more high-tech start-ups per capita than any other country. With that has come a correspondingly high quotient of venture capital (again, the highest per capita in the world) and a reputation that has led the US’s Nasdaq stock market to partner with the Tel Aviv Stock Exchange for nurturing the tech boom.
Compass’s Global Startup Ecosystem Ranking 2015 report sums up the divergence neatly: Tel Aviv is ranked fifth, the highest outside the US, while Bengaluru comes in at 15. Ecosystems in different countries, economies and entrepreneurial cultures cannot exhibit the same pattern—but if that gap has to be closed, the Indian IT sector must accelerate the shift from its high-volume, low-cost selling proposition. By definition, it is a finite model. Success leads to growth leads to wage inflation and a loss of market share to lower-cost players. The rapidly evolving technology landscape, with a growing focus on social, mobility, analytics and cloud, coupled with political uncertainties in the US regarding offshoring and work visas complicate the picture further.
According to the Start-up Nation thesis, the Israeli tech ecosystem benefits from compulsory service in the Israel Defense Forces, imparting a range of skills training for potential entrepreneurs and providing leadership experience and the appetite for risk-taking that comes from being an immigrant nation in a hostile environment. These are not factors Indian companies can emulate. But they have their own strengths to leverage, from abundant manpower and a large domestic market to the entrepreneurial sensibility neatly encapsulated by jugaad.
Initiatives like Startup India show that New Delhi has its priorities right. But they also pose the risk of the government crossing the line from being an enabler to inhabiting a managerial role. It must keep its focus on providing the framework within which the IT industry can thrive: telecom and broadband infrastructure; ease of doing business; foreign direct investment in higher education to close the talent gap (Tel Aviv ranks third in the Compass rankings here while Bengaluru ranks 17th); easing visa norms to make it easier for foreign talent to work here; and joint mechanisms with countries such as the US and Israel to make private sector collaboration smoother. Bengaluru may have a long way to go, but disruption is always just around the corner in the tech industry.
Is the Indian IT sector on the right growth track? Tell us at firstname.lastname@example.org