Asish Arora Suma Athreye
American Indian
Information Economics and Policy, Vol.1(2001)
4. The growth of software and human capital formation: public and private investments in training and the rewards to an engineering education
Though India has one of the largest numbers of scientists and engineers it also has some of the lowest rates of literacy in the world with 52% of the total working population that cannot read or write. As Table 3 showed, despite the large total numbers of engineers, the numbers of engineers per million of population was smaller in India compared to several other countries. There is correspondingly an over-reliance on the existing stock of trained but underemployed engineers, for whose services a slowly growing and protected economy could not generate adequate demand.
A very large fraction of the employees of Indian software firms are graduates of engineering college. Most of the Indian software firms interviewed by Arora et al. (2000) reported hiring only engineers. Data from a sample of nearly 60 software firms indicates that over 80% of their employees had an engineering degree. Only 13% were non-engineers trained in software development.14 In interviews, many firms categorically stated that they hired only engineers.
This preference for engineers was unremarkable, and of little consequence, at the start of the industry, when its demand was small relative to the annual supply. India graduates over 160,000 engineers of all varieties. The sharp and sustained growth of the Indian industry has meant that by 1998-99, the number of employees has climbed to nearly 250,000, and estimates suggest that this may have crossed 400,000 in 2000-2001. If the industry continued to grow at 50% per year, then even allowing for increases in productivity, it appears that the software industry is going to run out of engineers to hire. (See Arora, Asundi and Fernandes, 2000 for more details.)
These projections are consistent with other evidence. Wages in the software industry have grown at over 20% per annum and attrition rates are high. When asked in 1998-99 to list the top 3 problems they faced, more than half of all firms (out of a sample of over 100 firms) irrespective of age, size or market orientations (either export or import) selected manpower shortage and employee attrition as the most serious problem affecting them (Arora, et. al, 2000). Despite paying substantially above Indian standards, virtually all firms find it difficult to attract and retain talented software developers.
The public policy response has been to emphasize increased investments in engineering colleges, increased emphasis on information technology in engineering curricula and the creation of institutes of information technology (IIIT) along the lines of the better known Indian Institutes of Technology. Though superficially reasonable, this is not the answer. These investments are unlikely to have a significant affect on supply in the short run. Moreover, expanding such capacity faces the problem that the growth of the software industry has tended to siphon off engineering masters and PhD students. A recent report on graduate engineering education in India noted that the number of engineering PhDs produced has fallen from 675 in 1987 to 375 in
1995. Concurrently, the number of engineers with postgraduate training has also risen only slowly, from a little over 12,000 in 1987-89 to a little over 17,000 in 1990-92. Surveys of India’s premier technological institutions-the Indian Institutes of Technology (IITs) show that a very large fraction of postgraduates from those institutions enter the Information Technology (IT) sector, in some cases as many as 90%!
Moreover, Table 6 below shows that the bulk of the Indian engineering capacity is located in just a few states – Maharashtra, Karnataka, Tamil Nadu and Andhra Pradesh. Further, the table also shows that the bulk of the capacity here is accounted for by “self financed” colleges, where students receive a much smaller subsidy, if at all, compared with the state financed colleges. An interesting and hitherto unexplored question is the reason that the organizational innovation of self- financing colleges has not diffused to other parts of the country. We can only speculate that this has to do partly with cultural and political factors, and partly with the lower returns to investments in human capital in other parts of the country. Not coincidentally, the south and west are also economically more advanced.
We believe that although investments in engineering education are necessary, a bigger part of the solution lies in a more efficient use of existing human capital resources. Implicit in the discussion thus far is that only engineering graduates are well suited to perform the tasks required. This assumption appears to have shaky foundations. First, the bulk of the engineers working in the industry are not, in fact, trained in software engineering, computer science or related disciplines. Further, a very significant fraction of the work involves developing and refining business applications, databases and the like. Indeed, initially a great of the work involved porting applications from one computing platform, typically a mainframe, to another platform such as a Unix platform. This work requires familiarity with software development tools. It does not require a deep knowledge of computer architecture or operating systems. Finally, much of the work has tended to consist of small projects, with fairly low levels of technical complexity. Arora et al (2000) report that the median size of the “most important export project” of the firms they surveyed was only 150 man months, with an average of 510. This suggests that the typical export project is even smaller. Moreover, about half of the work was carried out in India; the rest was onsite, in the US.
When pressed, most of the managers agreed that they did not require engineers: Bright graduates from any field could, with proper training, do what was needed. It seems that the preference for engineers is in some cases a way of signaling quality to customers. As one CEO put it “Take somebody from a good college (any of the top 20 colleges in India), give him 3 months of orientation and they are ready to take up a programming assignment. I don’t need all these engineers…. But I don’t want to be branded by my customers as a guy who hires NIIT graduates.” (Emphases added.)
(From Sloan Report, Arora et al 1999)
This is a clear instance of a “race to the top”. With limited market power, Indian software exporters try to distinguish themselves from the competition by pointing to the quality of their processes and people, and when possible, their experience.
Firms also have quality concerns. Some managers we interviewed believe
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