explaining the success of the Indian IT industry

Abstract: Specialisation in production in a specific sector by a country is often a result of the possibility of trade and an exploitation of the country’s comparative advantages. The patterns of specialisation can be explained through the economic theories of either Hechscher-Ohlin and the relative endowment of production factors, or Ricardo with differences in production technologies. To additionally promote specialization in a sector, comparative advantages can be created through directed industrial policies and strengthened by foreign direct investments. The ability to exploit comparative advantages and export goods depends on the demand from foreign markets which could increase through the creation of a reputation. Factors important for the development of an IT industry in India are analysed in this study in order to give an explanation for India’s specialisation in the IT sector. The comparative advantage of high skilled labour at a low cost and the liberalisation of the economy, which shifted the development strategy from import substitution to export orientation, often explain the development of the IT industry. However this study indicates that there are more factors which have contributed significantly to a specialisation in IT, and these are knowledge of English, industry policies directed towards the sector, foreign direct investment and a creation of a reputation in the global market.