Atanu Dey writes about one of India’s advantages, in response to an exchange we had on the need to create a large domestic market for affordable computing solutions:

The most significant positive factor in India’s favor is its size. It is what we economists call a “large economy”. Large economies have the luxury of changing parameters which define the market itself. In comparison to that, “small” economies have to take those parameters as given (or ‘exogenous’) or external to them or outside their control. In a way, you can consider a large economy to be have some sort of ‘monopoly power’. Monopolies have the power to change one parameter (price) at will which firms in competitive (or oligopolistic) markets don’t have — the latter are ‘price takers’ in that they cannot dictate prices and take whatever price they can get.

So India is large enough to be able to change ‘world prices’. Suppose you were to create a widget which is suited to Indian conditions. Assume that the cost of production of these widgets exhibit economies of scale — that is, fixed costs are extremely high and marginal costs are very low, and hence average costs continue to decline as the volume produced increases. In such a case, given India’s enormous population, the number of widgets required would be high, and thus the average cost will be appropriately low, and therefore the market clearing price for widgets will be low and quantities will be high.

Now replace ‘widgets’ in the above with whatever — “COMPUTING SOLUTION” for instance. Get the hardware that is appropriate for the Indian market developed and get the software developed for the same. Concentrate on the needs of India alone to begin with. Note that hardware and software meet the criteria of high fixed cost and low marginal cost. Marry the hardware and software to create the computing solution, price it just above average cost, and voila! YOU HAVE LIFT-OFF!!

Do we need to create the large domestic market? If by creating you mean bringing the solution to the market, then yes. However, all the ingredients exist. We just have to judiciously put them in them together using the right recipe. I suspect that we are more than up to that job.

Over the past few months, as the shift in jobs to lower-cost countries like India has accelerated, there as been some concern in countries like the US. The Economist writes that offshoring “promises huge benefits to consumers everywhere.”

The main advantage of shifting business operations to India and similar low-cost countries comes from a combination of lower wages and the improvement in the quality and price of international telecommunications. A report by HSBC says that the cost of a one-minute telephone call from India to America and Britain has fallen by more than 80% since January 2001. With high-grade jobs, the saving on wages is not as high as with lower-grade ones. NASSCOM, India’s National Association of Software and Service Companies, reckons that an IT professional with three to five years’ programming experience earns $96,000 in Britain, $75,000 in America and $26,000 in India. At the other end of the scale, low-grade call-centre jobs that in Britain earn a salary of $20,000 earn less than one-tenth of that in India.

But the benefits of offshoring are not confined to lower costs. An article in the latest issue of the McKinsey Quarterly says that many companies that move their back-office functions offshore miss huge opportunities to reap efficiencies beyond those that come from using cheaper labour. Companies are merely replicating what they do at home, where labour is expensive and capital is relatively cheap, in countries in which the reverse is true. For one thing, offshoring allows companies to work round-the-clock shifts, ferrying data back and forth from one place to another as the sun sets. For another, it allows them to rethink the way they solve IT problems. American Express, for example, paid local programmers in India $5,000 to write some software that it needed. To have bought a software package that could do the same job would, the company estimates, have cost it several million dollars.

For the future, offshoring promises to diminish the effects of the demographic crunch in countries where the ratio of the working population to the total is set to fall. HSBC reckons that America would require an extra 8.6m workers to maintain the ratio at its 2000 level for 20 years. Countries that are reluctant to allow in immigrant workers to do their unfilled jobs now have the option of sending some of those jobs out to the workers, before they even think of emigrating.

Jane Linder of Accenture’s Institute for Strategic Change says that the majority of those who pass on traditional back-office functions to others find, in the end, that substituting a single supplier for many employees allows them greater control and discipline over their operations. At the same time, it frees them to think more clearly about strategy. And the boost to efficiency means lower prices and better services for customers everywhere. That, surely, is not something to fear.

Offshoring combined with business process transforming promises increased productivity for companies. Business has started doing the first part. What will come next is a rethink on how things get done, especially using new technologies built around web services and service-oriented architectures.