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SMEs in the IT Industry of Emerging Countries. The Case Study of IT SMEs in India.
Chapter 1 Introduction
This chapter presents the background of the research, the research question, its aim and key
objectives.
1.1. Background of the Research
Small and Medium Scale enterprises (SMEs) have been broadly been defined by Kirkpatrick
(2011) as units employing less than 500 people with annual revenues of less than $ 250,000.
In India, SMEs are those units whose annual turnover do not exceed more than $ 20 mn
(Kumaranayake, 2013). SMEs play a vital role in the economies of developing countries.
They employ as many as 22% of the total adult population in these countries and account for
10% of annual GDP (Hilary, 2012). One of the elements of the marketing mix against which
they compete vis--vis other SMEs is on price. The main focus of this paper is to trace the
impact of government regulation on pricing mechanisms of IT SMEs in developing
countries.
According to Arnold and Cannister (2014) regulation is defined as laws and policies through
which the government exerts control of the operations of firms such as SMEs. It is through
these regulations that governments manipulate price, quantity and quality of products.
Regulation is one of the means through which governments achieve sustainable socioeconomic outcomes, protect and assist SMEs (Laffont, 2010). Regulation prevent against
market failures and protect consumers from exploitation and unfair competition. However,
Tolento (2014) points out that for regulation to have the greatest impact in terms of assisting
SMEs, their impact should be based on cost of compliance and resultant impact on pricing
impact on SMEs. Egorov (2007) indicates that regulation must be so designed so as to not
create more regulation but lead to more efficient and effect operations of the SME firms. In a
developing economy, regulation must provide a stable and competitive environment for
firms, stimulate investment, eliminate ambiguity, promote innovation and R&D and facilitate
exit and restructuring. The regulatory regime must promote competition, innovation and
generate jobs and economic growth as well.
While there is extensive literature on the impact of regulation on SMEs operating in other
sectors such as retail and manufacturing in developing countries, there is very little literature
on the impact of regulatory mechanisms on IT SMEs in developing countries. One of the
findings in the literature is that SMEs are disproportionately impacted by the high cost of
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compliance which puts severe pressure on pricing mechanisms which threatens their
competitiveness. Even here, there is very little literature on the processes through which
regulations impact SMEs operating in the IT sector in developing countries. It is this gap in
the research that this paper will bridge.
1.2. Rationale for the Research
This research will focus on the IT SME sector in India which is a developing economy.
Mehta (2015) points out that IT and IT Enabled Services (ITeS) are the largest contributors to
the services sector of India. It is the largest employer in India employing 10 million persons
(Mohan, 2015). The IT sector generated $ 119 bn of revenues in 2014-15 with the export
market alone being worth $ 100 bn (Nasscom, 2015). It contributes to 8% of the Indian GDP
(Nasscom, 2014). One of the latest developments in the IT industry is the rapid growth of
technology start-ups. These start-ups fall under the ambit of SMEs as they employ less than
500 persons. Almost 3100 IT SMEs were established over the period 2012-2014 with the
software exports generated from these establishments slated to grow at 14% annually for the
next five years (Panagariya, 2015). Heeks (2014) points out that these technology start-ups
are slowly, but surely forming the backbone of the IT industry in India and are all set to play
a key role in the economic growth of the country.
It may be inferred here that there is an urgent need to examine the impact of current
regulatory environment on the pricing mechanisms of IT SMEs in India. The various areas in
which government regulation impacts IT SME cost of operations have to be examined. To the
extent the cost of complying with government regulations is more, to that extent will the
SMEs be compelled to quote higher prices which threatens to render them uncompetitive.
Given this reality on the one hand, and the lack of research on impact of regulatory
environments on pricing mechanisms of IT SMEs in India, this research assumes critical
significance.
1.3. Research Question
Does the national regulatory environment influence price competition amongst SMEs in the
IT Software Industry in an emerging economy? The Case study of the IT SME Sector in
India.
This chapter examines how national regulations impacts price competitiveness amongst
Small / Medium IT firms in emerging countries.
Pricing Impact
Robson and Gallagher (2013) point out that conventionally, SMEs have always been
sheltered from competition in developing countries. However, the development of an IT SME
sector presupposes that the country of operation has adopted a policy of liberalization and
come under the ambit of economic reforms sponsored by the IMF and World Bank. Liedholm
and Mead (2014) point out how these reforms precipitated various policy changes in
government regulations in order to encourage efficiency in the domestic markets. Some of
these policy reforms include withdrawal of subsidies and removal of protectionist policies
towards the SME sector. This effectively means that there is more competitive pressures on
IT firms, particularly those operating in the SME sector, to not only growth their share in the
domestic markets but more importantly in the international markets. Fitch (2011) says that
competition is in fact a healthy phenomenon and can lead to efficiencies in production.
However, competition from large, established IT firms may pose a threat to small and
medium sized IT firms and lead to a decline in output and in profits. In such a scenario,
unfettered competition is actually not a desirable phenomenon for developing countries. This
is true for the IT SME sector also operating in these countries. In such countries, unfettered
competition can lead to price wars and rivalry.
Harvey (2009) points out that while IT SMEs are necessary vehicles for growth in a
developing nation and play a vital role in providing employment and in poverty alleviation,
their ability to compete each other and to survive in the global markets in the more liberalized
economies of developing countries, will depend on the regulatory environment in which they
operate. To the extent that this regulatory environment enables them to lower costs and quote
cheaper prices for IT projects undertaken by them, to that extent will these firms be able to
compete in the global arena. There are various aspects to be considered in the way the
regulatory environment of developing countries impacts costs and hence pricing of IT SMEs.
liberalized their exchange rates have witnessed appreciation of their currency which have the
negative consequences of making their IT exports uncompetitive.
Trade regulations covering import and export routines in emerging nations increase
transaction costs of IT SMEs (Heeks, 2014). This is on account of volumes of paper work,
bribes, cost of subcontracting, customs and port procedures. Moroever, these latter
procedures are cumbersome as compared to those of developed countries.
Impact of Social Regulations refers to regulations implemented by governments to protect
employee and social rights.
Impact of Health and Safety Laws
Government regulations regarding health and safety are necessary in order to protect
employees from any detriment. However, Biggs and Snograss (2008) say that insofar as these
regulations are related to worker compensation and to mechanisms that ensure their
workplace health and safety, they incur a cost which are higher for SMEs to bear. In
addition, there are the additional associated costs such as penalty for non-compliance with
employee related health and safety regulations. IT SMEs also fall under the government
ambit of environmental regulations that regulate waste disposal and use of machinery / office
equipment to minimize pollution. Because of their larger number, IT SMEs are collectively
considered to be significant polluters by governments even if they do not pollute the
environment substantially at the individual levels (Gayi, 2011). Complying with
environmental norms, especially for firms with fewer financial resources, are additional and
significant costs.
Impact of Labour Regulatory Laws
Regulation with respect to labour laws comprise of policies on remuneration, labour
legislation and systems of training. The government sets out legal frameworks that govern
method of dispute settlement, stoppages of work, strikes and union activity. Government
legislation lays down the minimum conditions under which labour works, hours of work,
payment for work on holidays, severance and compensation and benefits (Daniels and
Ngwira, 2013). Such legislation defines scope of employment for women. Aryeetey and
Nissanke (2010) point out that in developing economies, such laws are generally inflexible
and involve indirect costs which impact SME costs of business and their ability to be flexible
and adapt. Goodman (2014) classifies all labour legislation even for IT SMEs into three
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categories, (i) laws related to minimum wages, (ii) to mandatory non monetary benefits and
(iii) guarantees of job security.
Minimum wages for the workforce in IT SMEs is high in emerging economies and this
deters SME firms from hiring more workers required for expansion. Such minimum wages
result in higher indirect transaction costs for SMEs even in cases of temporary hiring.
Minimum wage related disputes between the government, employees and government
officials increase operational costs (Tripathi and Mishra, 2014). In addition, there are nonwage related costs associated with hiring that in countries of Latin America can be very
expensive.
Not all wages are in the form of cash. Compensation to IT workers often take the form of
bonuses, housing, transportation, family wage allowances, payments on maternity benefits,
employee insurance, sick pay, reward & recognition payments etc (Udell, 2010). These are
additional labour related costs which place additional accounting and administrative burdens
on SMEs. It is for this reason that most SMEs rely on temporary labour. However, this is a
risky proposition as training such labour is both risky and expensive and this in turn can
impact productivity of the labour force.
Governments attempt to provide job security to IT workers in the form of legislation related
to severance pay, laws related to hiring and termination of workers, etc. It may be noted that
severance payments take the form of direct costs, which can be very high especially in time
of economic downturns (Zorpette, 2015). Even when workers are dismissed on such charges
as excessive leave taking, theft, sabotage and insubordination, they are entitled to full
severance packages. Tolento (2015) points out that this is especially so in African and South
American countries. Poor performance is seldom included in the charges for dismissal as it is
difficult to prove in court of law. In addition, such dismissals have the effect of creating
disputes in labour courts which in turn increases costs of transaction to businesses (Schware,
2014). Such costs constrain IT SMEs from hiring permanent labour. Impact of severance
pay-outs can be especially high during times of adverse economic conditions when there are
retrenchments. Lideholm and Mead (2014) indicate that government legislation in fact
increases the cost of exit which in turn has its impact on pricing, competition and SME
development.
Conceptual Diagram
The conceptual diagram that may be formulated on the basis of the literature review above is
indicated in figure 2.1.
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devise competitive pricing mechanism both for the domestic market as well as for the
international markets.
Chapter 3 Methodology
This chapter presents the quantitative techniques that will be used in this dissertation.
3.1. The Process of Research
According to Zikmund (2003), research in order to be valid, must be conducted according to
scientific processes whilst the phenomena of interest is being studied. Saunders (2010)
extended this argument by formulating the Saunders Research Onion as shown in figure 3.1
which clearly outlines all the steps to be followed in a process of scientific inquiry.
strategies that will lead to the fulfilment of research objectives. There are three schools of
philosophy including the positivist, interpretivist and realistic schools of thought. According
to the positivist school of thought, research to be valid must be objective, use numeric data
and statistical software for analysis. Interpretivism believes that natural phenomenon are
extremely complex. Hence, it is not possible to analyse them completely objectively as
various realities are capable of different explanations. Realistic school of thought attempts a
compromise between these two views by stating that reality is complex and that there is a gap
between what all can be known about that reality and what is actually known. The task of
valid research therefore is to reduce this gap about the reality being studied as much as
possible.
This research will follow the positivist school of thought. The main aim of this paper is to
examine the impact of the regulatory environment on the pricing mechanism of IT SMEs in
India. Insofar as there are a definite set of regulations and pricing mechanisms are
mathematical in nature, it may be inferred that only statistical tools will be able to analyse the
impact of regulations on pricing in an objective manner. The researcher would like to extend
the findings of this research to all IT SMEs operating in developing countries. For this, the
results of this research have to be as objective as possible. In the interest of securing objective
results, the researcher has chosen the philosophy of positivism.
3.3. The Case Study Research Approach
The case study approach has been used in this dissertation. Wegner (2008) points out that
case study approach is most appropriate whenever there is a need for a detailed analysis of
the particular phenomena being studied. The case study must be typical of the phenomenon
being examined. In this research the requirement is to examine the impact of the regulatory
environment on pricing of IT SMEs in an emerging economy like India. The company
chosen as the case study is Zenith Software systems located in Koramangala, Bangalore city.
This firm has morphed from being a manufacturer of computer hardware to an exporter of
software, primarily to the United States. It employs about 250 persons and hence falls under
the definition of an Indian IT SME. For these reasons, Zenith Software Systems has been
chosen as being typical of Indian IT SMEs.
The case study approach includes the theoretical and empirical stages. These are explained in
the next section.
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The Questionnaire
The questionnaire was chosen as the primary data collection tool on the basis of the
recommendations of Anderson et al., (2005) who identified several advantages associated
with it including speed of collecting data, economies of scale involved in the process and
because it is more practical as compared to other methods of data collection such as
interviews, surveys and focus groups. The questionnaire can be answered at the convenience
of the respondents and under condition of anonymity.
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The questionnaire used in this research consists of 15 close ended questions. A close ended
questionnaire has been chosen as it can be used to collect numeric data. This data can
subsequently be used for statistical analysis. The questions can be answered by indicating a
0 for a no or a 1 for a yes. Other questions could be answered along a 4 point Likert scale
where 1=Strongly Disagree, 2 = Disagree, 3 = Agree and 4 = Strongly Agree. This indicates
how much respondents agree or disagree with any particular option in the questionnaire.
According to Wegner (2008), sampling is the method of selecting those respondents whose
answers would be most relevant to the research being conducted. The purposive sampling
method will be used in this research which involves choosing from a larger population of
respondents, only those whose views and answers would be most appropriate and useful to
the research. This ensures the validity and accuracy of the results as well. The researcher will
contact the head of human resources of Zenith Software systems and explain to him the
nature and purpose of the research. The researcher will ask permission to conduct the
research at Zenith and ask for introductions to managers and to other personnel in Zenith who
will be able to inform on the impact of regulations on their pricing mechanisms. The author
hopes to interview at least 50 personnel in the firm in this regard.
Once the managers are identified, the author will obtain their email IDs and send them the
questionnaire over email, asking them to fill in the questionnaire and send it back to him
within 5 days time. As and when the filled in questionnaires come in, the author collates the
data in an excel summary sheet prior to analysis.
The statistical tool of Microsoft Excel is the data analysis tool. Both frequency and weighted
mean will be the two statistical parameters used. Frequency indicates the percentage of
respondents who selected a particular answer option while weighted mean indicates the
extent to which respondents agreed or disagreed to any particular option. The results of this
analysis will be presented in graphical / tabular format with each graph / table being followed
by the analysis explanation.
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According to Wegner (2008), validity is very important if the results of the research are to be
credible. Credible results are considered to be more accurate and truthful. In this research, the
independent variables include size, registration, monetary, credit, trade, health, safety,
minimum wage, non-wage, complexity, enforcement and stability, all of which have been
obtained from the conceptual diagram. The dependent variable is price competitiveness.
Since these variables have been derived from the literature, they may be considered to be
valid. The questionnaire has been formulated according to the literature review. This means
that what is being tested is not guesswork or based on whim and fancy but on research
conducted by other scholars.
If the results of a particular research are to be considered to be reliable, the same method if
used again must yield similar results (Wegner, 2004). In order to ensure the reliability to this
research, the author will first conduct a pilot or trial run of the questionnaire amongst 10 of
the respondents. The respondents will be asked as to what problems or difficulties they
encountered whilst answering the questionnaire and what confused them. This will indicate
whether the questions are clear or not or if there are any ambiguities. On the basis of
feedback given by the respondents suitable corrections will be made. This will eliminate any
ambiguities whilst answering the questionnaire and ensure objective and reliable results.
3.4. Ethical Behaviour
As far as possible, the literature review and the conceptual model will be based on data
gathered from peer reviewed articles. This is to ensure reliability, credibility and validity of
the data used. The researcher will not copy or plagiarize from any other research paper. The
researcher will not reveal the identities of the respondents. This will ensure confidentiality of
respondent identity. There will be no attempt on the part of the researcher to influence the
respondents as they answer the questionnaire. The respondents will be contacted only through
official channels of telephone and email. The researcher undertakes to follow all the rules and
regulations of the university while conducting the research.
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Questionnaire
Section A Demographics
1. Please indicate your age by ticking the relevant slot below:
25-35 years
36-40 years
41-45 years
46-50 years
More than 50 years
2. Please indicate your gender by ticking the relevant slot below:
Male
Female
3. Please indicate your educational level by ticking the relevant slot below:
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Non Graduate
Graduate
Post Graduate
4. What is your total experience in the IT industry?
Less than 1 year
1 5 years
6 10 years
More than 10 years
5. What is your tenure in this firm?
Less than 1 year
1 5 years
6 10 years
More than 10 years
Strongly
Agree
Agree
Disagree
Strongly
Disagree
to the scale:
1=Strongly Disagree, 2 = Disagree, 3 = Agree, 4= Strongly Agree
Particulars
Strongly
Agree
Agree
Disagree
Strongly
Disagree
3. How do you believe that regulations relating to monetary / credit policies in India impacts
your ability to compete on price? Please rate the following options according to the scale:
Strongly
Agree
20
Agree
Disagre
e
Strongly
Disagree
Strongly
Agree
Agree
Disagre
e
Strongly
Disagree
5. When you export your software products, the following aspects of associated regulation are
added costs that impact your pricing making your firm less competitive. Please rate the
Strongly
Agree
Agree
Disagre
e
Strongly
Disagree
6. How do you believe that regulations related to health and safety of your workforce make you
more competitive price wise? Please rate the following options according to the scale:
Strongly
Agree
Agree
Disagre
e
Strongly
Disagree
7. How do you believe that regulations related to the environment make you less competitive
price wise? Please rate the following options according to the scale:
Strongly
Agree
22
Agree
Disagre
e
Strongly
Disagree
8. How do government regulations on minimum wages impact your pricing mechanisms? Please
Strongly
Agree
Agree
Disagre
e
Strongly
Disagree
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Particulars
Strongly
Agree
Agree
Disagre
e
Strongly
Disagree
10. How do government regulations on job security for workers impact your pricing
mechanisms? Please rate the following options according to the scale:
Strongly
Agree
Agree
Disagre
e
Strongly
Disagree
11. How do you believe that tax regulations are configured to make IT SMEs in India more
competitive in terms of pricing? Please rate the following options according to the scale:
Particulars
Strongly
Agree
Agree
Disagre
e
Strongly
Disagree
12. How do you believe that the way tax regulations are enforced make IT SMEs in India more
competitive in terms of pricing? Please rate the following options according to the scale:
Strongly
Agree
Agree
Disagre
e
Strongly
Disagree
Strongly
Agree
25
Agree
Disagre
e
Strongly
Disagree
14. The following is the negative impact of regulation on Indian IT SMEs which makes
them uncompetitive on price? Please rate the following options according to the scale:
1=Strongly Disagree, 2 = Disagree, 3 = Agree, 4= Strongly Agree
Particulars
Strongly
Agree
Agree
Disagree
Strongly
Disagree
Strongly
Agree
26
Agree
Disagree
Strongly
Disagree
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