Evolution of dynamic capability in emerging market firms from the Indian IT industry for rapid globalization

Abstract

This study examines how emerging market firms (EMFs) develop capabilities to leapfrog in the knowledge intensive global information technology (IT) industry. Academic literatures have thus far focused on globalization of large multinational companies (MNCs) from developed countries, mainly from the OECD. While firms from the OECD are well endowed in resources, firms from developing countries are generally resource poor and their establishment, development and international expansion have taken place within an institutional environment that is different from those found in western economies. Hence how resource poor EMFs learn to transform comparative advantages into dynamic firm-specific capabilities deserves attention. The study explores how Indian IT firms “moved up the value ladder,” moving out of the “low road” where the barriers to entry are low and competition is based mainly on price and squeezing wages, to the “high road” where competition is based on differentiation. A combination of qualitative and quantitative methodology is used. The qualitative part focused on inductive case study research, moving along observation, categorization and association, finally giving rise to constructs and models. The quantitative part entailed deductive econometric studies on 703 companies using panel data method, testing hypothesis to identify which factors contribute to globalization of EMFs. The findings reveal that globalization of EMFs is an evolutionary process and in each phase of evolution, the EMFs progressively learn from their linkages with MNCs and leverage them to globalise rapidly. Through linkages with MNCs, EMFs gained access to markets, technology, and reputation. The research identified the distinctive capabilities acquired by the EMFs in each phase of their capability lifecycle. Linkages with and learning from international and domestic innovation networks transformed EMFs’ business model and upgraded their capabilities. The study shows that dynamic capability in the form of powerful intellectual property enabled EMFs to evolve from service provider to a partner status. Findings of this study present a novel and contemporary insight on how EMFs evolve to develop dynamic capability, which enables them to leapfrog in a fast changing technology space. The results challenge the view that the Indian software industry presents the classic problem of locking-in a low road of the innovation trajectory.