UNIVERSITY OF PENNSYLVANIA - AFRICAN STUDIES CENTER
While the global software market is concentrated today, technological change is making it increasingly possible for all nations to compete. After an introductory discussion of the global software market, this paper outlines three forms of software export: programming services, conversion and localization, and product development, giving examples where these are taking place and suggesting some company strategies. The final section examines some of the steps taken by national governments to stimulate software export: subsidizing telecommunication, establishing research institutes and university programs, offering tax and financial incentives, reducing trade barriers, planning and coordinating industry efforts, marketing collectively, and passing and enforcing copyright laws.
Larry Press Professor, CIS California State University at Dominguez Hills 10726 Esther Avenue Los Angeles, CA 90064 (213) 475-6515 (213) 516-3664 (fax) Internet: firstname.lastname@example.org
STRATEGIES FOR SOFTWARE EXPORT
It is fashionable to speak of "globalization" today, of international corporations and markets, falling trade barriers, and proliferating communication networks. However, Africa, Latin America, the Caribbean, and other regions have failed to enter the global market place in many industries.
This has certainly been the case in the software industry. Howell, et al  estimate that the US accounts for about 52% of world software consumption, and US software producers hold roughly 70% of the world market. Another study published by International Data Corporation  estimates that in 1989 the US, Europe and Japan accounted for 91% of the world software market (see Table 1). Palma  estimates that only 2% of the world's software is produced in Latin America. Such figures are never precise, and the studies defined the software somewhat differently; however, there is no denying that today's software market is concentrated in North America, Europe and parts of Asia.
TOWARD A GLOBAL MARKET
While most less-developed nations have not yet played a major role in the software market, there are political, economic and technical reasons to believe they could do so in the future.
Economic and Political Factors
The movement to market economies in Eastern Europe and the Soviet Union is beginning to produce new software companies. For example, Goodman and McHenry  describe the new software joint ventures in the Soviet Union as more dynamic and outward looking than those of the old state sector. Free-trade will also encourage software export. Many Latin American nations are moving away from earlier protectionist policies toward free trade, seeing exports as a road to economic growth. Free- trade negotiations between the US and Mexico are advancing as are several others in the hemisphere, and one goal of George Bush's Enterprise for the Americas Initiative is "free and open trade throughout the hemisphere" (Bush ).
Chile exemplifies this trend. In 1970, Chile elected a Communist government, which was overthrown in a bloody coup led by Agosto Pinochet in 1973. Pinochet's government sharply reversed the then-typical Latin American economic policy of protectionism, substituting a policy of free trade and growth through export. Chilean politics changed when Patricio Alwyn was elected president in 1989, but the economic policy has not wavered.
It seems to be working. Exports now account for 30% of the economy, and that figure is rising, Chilean bonds are much stronger than others in Latin America, and of the seven largest Latin American countries, Chile has had the highest growth rate and lowest inflation rate over the last five years , .
Less tangibly, there is an air of entrepreneurial optimism in the computing industry. This is exemplified by the Chilean Software Association, which for the last two years has hosted a meeting of Iberio-American software exporters. At this meeting, software company executives from throughout the region plan regional strategy, make deals, and attend keynote talks.
The advent of mass-produced personal computers has lowered the cost of capital needed to enter the global software market. Because they are cheaper and appropriate to the needs of people in both industrial and non-industrial countries, personal computers have spread throughout the the world faster than mainframes did. For example, in surveying the Indian software industry, Yourdon  tells us "the history of the Indian computer industry can be neatly divided into two phases: a stagnant, IBM-less, pre-PC period, and a new, thriving era that began with the introduction of the PC and [Rajiv] Gandhi's push for modernization of the information technology sector."
Computer-mediated communication networks are also helping shrink the world. As John Quarterman says, we are developing a worldwide matrix of connected computer networks and conferencing systems . The matrix is being built by the academic community, corporations, and vendors of commercial services. Fueled by rapidly decreasing communication cost, the matrix is growing exponentially, as exemplified by the Internet (Merit, ):
OCTOBER, 1989 OCTOBER, 1991
Number of Packets Sent: 2 billion 11 billion Number of Networks: 809 3556
This growth is also fueled by the spread of personal computers, which are used to access the network, and in many less-developed nations, as store and forward nodes.
In short, the world communication infrastructure is improving rapidly; technical salaries and overhead are very high in industrially developed nations; and personal computers have sharply reduced capital costs for software companies. Again, take Chile as an example. Chilean universities are excellent, and many of their graduates and faculty take advanced degrees from the US or Europe. Commercial networks such as MCI Mail and academic networks such as the Internet how provide CMC between Chile and the rest of the world. Software companies and universities use the same personal computer hardware and software tools as do their counterparts in other countries. At the same time, professional salaries, office space and other ancillary services are relatively cheap. These factors will tend to cause the dispersion in the software industry, as well as a reversal of the historical "brain drain."
The nature of software development also favors small companies with relatively low capital requirements. New products and visions seldom come from within big companies; they are often bought or developed by a small internal group.
These factors suggest that less-developed nations may have success as software exporters. Yourdon  puts it more dramatically. He feels international competition will put American programmers out of work, that "the American programmer is about to go the way of the dinosaur and the dodo bird. During the next five to seven years, I foresee massive unemployment amongst the ranks of American programmers, systems analysts and others in the data processing industry."
FORMS OF SOFTWARE EXPORT
Less-developed nations have had some success already in exporting software. They sell programming services, do conversion and localization, and have developed some products.
Tata Consultancy in India is perhaps the first and largest exporter of programming services. They began when an MIT graduate returned to India and bought a Burroughs computer. He obtained a contract to do some development for Burroughs, thus beginning his offshore programming business. The programming services business is growing, and will continue to do so. In a survey of 50 Fortune 1000 companies in the US, Woodring  found that 38% have decentralized application development and 22% are evaluating doing so. Some of this decentralization will leave the country. As consultant Herb Halbrecht  states "The role of a CIO is becoming like that of an international investment broker. Companies scour the world looking for pockets of excellence."
At first, Indian (and other) programming services were provided almost exclusively by on-site programmers, and in 1989, 80% of Indian software export was still from on-site programming (Yourdon ). However, this approach is costly, disruptive to the programmer, and exposes exporters to the possibility of the programmer leaving the company in order to remain in the host nation. It also encourages competition solely on hourly wage.
Rajesh Huuku, Vice President of CitiCorp Information Technology, is responsible for programming projects for US firms using Indian programmers. He suggests that as soon as possible, software exporters take responsibility for full projects using programmers at home (Huuku ). He states that this yields higher profit margins since the competition shifts from pure price to quality and speed of completion. Huuku does not compete on low cost, but on speed and quality. He also advises focusing by industry, application and geographic area. By specializing, his staff is able to develop and exploit specialized business expertise and knowledge, knowledge of local market conditions, and idiosyncrasies of the local requirements. This specialization leads to higher margins, as does utilization of the latest, most powerful development tools.
Of course working abroad requires increased communication overhead. Huuku stresses the need to give the client the feeling of being in control by submitting frequent status reports and keeping in constant contact with email, fax, teleconferences and phone. Communication infrastructure is particularly important. For example, he has one project in which 100 programmers situated in Bombay are developing a system on a mainframe computer in New York. Communication is provided by a dedicated satellite link that is subsidized by the Indian government. Huuku foresees a day where the operations will move off- shore also. For example, the computer running an application may be in India with data entry terminals in the United States.
Conversion and Localization
In order to be successful, a software package must be converted to the language of the nation where it will be used, and tailored to the local dialect. It should be noted that there could be more than one version in a country. For example, there could be a significant Spanish- speaking market in the United States.
Ashton-Tate/Borland, Claris, Lotus, Microsoft, Retix, and many others localize their software in Ireland. For example, Lotus produces versions of their programs in eight European languages, and translation and testing of the software and manuals are done in Dublin (Kazin ). Claris does the same, overlapping it with US beta testing, so software is released at the same time throughout the world (McClarren ). Conversion for Oriental languages is more difficult, requiring 2-byte character codes. Lotus and many others do this in Japan, and companies such as International Integrated Systems, originally formed in a joint alliance between IBM and the Taiwan government's Institute for the Information Industry, now does about half of its business converting software to Oriental languages.
Many companies also manufacture European software and support and distribute it from Ireland. The company doing conversion often also is responsible for software manufacturing and distribution as well. Conversion and manufacturing in Latin America and Africa are often superficial, with a license merely copying a version prepared for another nation.
Software products can take many forms, and while it would be unrealistic to enter North America with a new brand spreadsheet or word processor at this time, there are opportunities for software product export.
There are many paths to a new software product. A company may have a program which is successful in its local market, which can be adapted for sale abroad. These products may enjoy a special advantage based on local knowledge or cultural characteristics. For example, Chile's expertise in the timber industry is exploited by Excelsys Engineering's Logmeter. Logs come to mills on large trucks. When they arrive, Logmeter automatically estimates the volume of wood and expected output using a PC with a video camera to scan an image of the truck. Estimation time and cost are lower and accuracy higher than with the earlier, manual method. This program would have been difficult to develop in a nation without a significant timber business. Excelsys has also developed software that is embedded in export products such as automatic teller machines or queue maintenance systems for banks.
It is also possible to reverse the effect of the traditional "brain drain," by developing software based on a returning student's work. Another Chilean example is Ars Innovandi's text retrieval program Search City, which grew out the doctoral research of Ricardo Baeza-Yates at Waterloo University. After graduating, he returned to the University of Chile, and collaborated with Ars Innovandi on developing an exportable, world-class product. Such stories may become increasingly common.
As standards of living for professionals increase, hardware costs fall, and local research facilities and communication nets improve, there will be less incentive for students to remain in North America or Europe after completing their education.
Niches may be carved out in an industry or product area or in building expertise with new tools and platforms. Every new platform or standard creates demand for new applications, conversion of old applications and the development of programming tools. Seybold  advises developers in all nations to watch news of emerging standards for interoperability, object-oriented development, mail-based applications, pen-based computing, multi-media, etc. for niche opportunities.
Once the decision is made to offer a product for export, there is much work to be done. Some of the steps and considerations are outlined below.
The first step is to conduct market research in the target nation. Companies should know who their competitors are and look at their products, prices, market size and shares, distribution channels, marketing approach, etc. Even if you end up working with an publisher, you will be better able to negotiate if you have done independent market research.
It is necessary to prepare a business plan, anticipating investment, staffing, cash flow, etc. Ken Wasch, Executive Director of the US-based Software Publisher's Association, estimates that between $500,000 and $1,000,000 is required to enter the United States with a new product that has its own identity . The business plan will serve to guide your work and can be used in raising capital.
One should also learn as much as possible about legal and financial factors like taxes, trademark, copyright, and import regulations. Contacts should be made with consultants, lawyers, accountants, bankers, government people, etc. who can be on call for a fee rather than be on your payroll.
A market may be entered alone or with a local partner. Options include finding a publisher, OEM sales, selling through a distributor, or opening a joint venture or your own local office. Partnership with a publisher or an OEM sale lowers investment and return. Royalty rates are typically 5-15%, but your partner will assist in product development and marketing. Distributors typically offer far less service, leaving the software company fully responsible for creating the product and demand for it. It is also possible to remain independent. For example, Graphisoft, a Hungarian firm, has opened their own offices in Canada, the US, and Western Europe, and market their internally developed CAD software for the Macintosh. The six year old company now has 30 programmers, so it appears to be viable .
In any case, a decision to enter a new market is a commitment to an ongoing project, requiring software maintenance, product upgrades, a public relations presence, and looking for new product variations. The latter is particularly important because cross-cultural insights can lead to truly innovative follow-on products.
There are many ways in which governments can encourage the development of software exports. This section outlines several of them.
Subsidize Telecommunication Infrastructure
In any industry, the ability to communicate with customers, employees, and suppliers for marketing, coordination and control is critical. The strategic importance of telecommunication is even greater in software and other information processing industries, where the product itself is information. Low cost telecommunication has been a major contributor to the software export success of nations such as India and Ireland.
Note that both internal and external telecommunication are necessary, and that the telecommunication may be relatively low-cost appropriate technology. An excellent example is afforded by the Relcom network in the old Soviet Union. Relcom was initially established to support customers of Demos, a software company specializing in the Unix operating system. Relcom connects 391 organizations in over 70 cities from Saint Petersburg to Vladivastock. It does not provide broadband services, but simple electronic mail and Usenet-like bulletin boards, which have a significant marginal impact because the alternative communication services are very poor. It should be noted that the vast majority of the 391 computers on the network are 286-based PC clones, and the communication uses voice grade phone lines.
Offer Tax and Financial Incentives
Tax and financial incentives are used to attract subsidiary offices of software companies. For example, Ireland offers a 10% corporate tax rate for computer services companies, employment grants for jobs created, capital grants toward the cost of computers, equipment, office furniture and buildings, training grants, rent subsidy grants for companies renting facilities, and research and development grants.
Reduce Trade Barriers
Lower trade barriers (tariffs, quotas, currency conversion restrictions, needless bureaucracy, etc.) on computers, software, communication equipment, and related information processing products will make it possible for software companies and universities to import modern hardware and software tools at competitive prices. It will also encourage general expansion of the information technology sector and create demanding, sophisticated users. Demanding users and the availability of competing imports force the local software industry to excel in order to compete. A larger domestic information technology industry also provides demand for software products, employment buffers, support for university growth, etc.
Plan and Coordinate Efforts
According to Chang and Aoyama , software has been one of the fasting growing industries in most Far Eastern countries in recent years. In surveying software in Japan, Taiwan, South Korea, and Singapore they observe a high level of activity in every country. They also note that while developments in each country are unique, there is one common thread, that "the effort to industrialize software is likely to be made through a national, government-directed, and publicly funded initiative." [footnote 1] Carlos Ominami, Chilean Minister of Economics has also established the Intersector Committee for Development of Software which will ensure high-level coordination between universities, the government and software companies .
Invest in Related University Programs
Encouraging students to study computer science and related fields by investing in universities creates a body of professionals needed to establish a healthy local software industry and user community, to build the local infrastructure, and to staff foreign offices. A sophisticated and demanding local user community is a driving force toward software innovation; they will push software companies to produce world-class software. Infrastructure also requires well-trained people. The organizers of the Soviet Relcom network described above state that a lack of trained unix system programmers is the key constraint they face in expanding the network. The investment in universities should include the establishment of contact and relationships with major universities in other nations.
In the long run, the ability of the university system to produce trained programmers and computer scientists may be a critical limitation in the expansion of a national software industry. For example, India may become a victim of their own success. Today they have only around 50,000 programmers, and they for 275,000 programmers by 1995 (Yourdon ).
Establish World-Class Research Facilities
The "brain drain" has been a major problem for less-developed nations. Some of the best students remain abroad after obtaining an advanced degree. A major reason for this is the inability to continue the sort of work they had done as students. However, declining hardware and telecommunication costs make it increasingly feasible to establish major computer science research centers in any nation. Such centers would offer powerful incentives for gifted students to remain at home and would be a continuing source of innovation for exportable products.
There are many examples of coordinated marketing activities. Ireland has established Industrial Development Agency offices in 17 cities in North America, Europe and the Far East, and many other nations have similar offices. In Chile, the Economics ministry subsidizes technical assistance and consultation, market research, preparation of promotional material, marketing design, and quality certification. They also co- sponsor the annual meeting of Iberio-American Software Exporters and a regional trade show, maintain foreign offices, and aid the organization of software-producing enterprises.
Governments can also provide national booths at foreign trade shows. For example, at the 1991 Fall Comdex show there were 20,000 attendees from 102 countries, and over 1,000 companies signed up to be listed in an Export Interest Directory. There were trade-delegation booths from India, The Netherlands, Belgium, Israel, Singapore, Hong Kong, Canada, Brazil, Columbia, Uraguay, and the United States. Most of these covered extended areas, providing exhibit space for several companies.
Pass and Enforce Copyright Laws
To develop a domestic software industry, copyright laws must be passed and enforced (legally and by persuasion). Jeremy Butler, past Senior Vice President, International and OEM, at MicroSoft, estimates that biggest "opportunity" in software export is stopping piracy (Butler ). Table two presents his estimates of the software sales increases in various countries if piracy were completely eliminated. In spite of these figures, Butler stated that progress is being made in most countries, with new and enforced copyright laws.
Today world software production and consumption are largely confined to North America, Western Europe and parts of the Far East; however technology is dispersing rapidly and less-developed nations may increase their share of this growing market. The battle for the expanding world software market will be competitive, as indicated by the fact that there were trade delegations and booths at the 1991 Comdex show from India, The Netherlands, Belgium, Israel, Singapore, Hong Kong, Canada, Brazil, Columbia, Uruguay, and the United States.
This survey has cited examples of early efforts to export software to North America and Europe. It remains to be seen whether Yourdon's prediction of the demise of the American programmer will come true, but the American programmer should surely take offshore competition seriously. The quality of today's offshore programmers is high, and their salaries and overhead are low. On the other hand, although cultural and language barriers are diminishing, they still exist. Software, particularly custom, in-house applications, requires communication with and sensitivity to the users.
Finally, we described actions governments have taken to stimulate the growth of software exports. Nations which feel that software export is an attainable goal should consider pursuing several of those policies.
One US company, Visible Systems, has complained that this subsidy and coordination is unfair. Visible Systems markets a CASE tool in competition with POSE (Picture-Oriented Software Engineering), a program developed in Singapore. Visible Systems filed a claim with the Department of Commerce asserting that POSE had been developed with a $15 million subsidy from the Singapore National Computer Board. Commerce initially found in their favor, imposing a 15.25% punitive duty on POSE, but they subsequently reversed the decision, citing fear of retaliation . Commerce still holds that software is merchandise, not intellectual property, and that they therefore have the right to charge a duty.
UNITED REST OF STATES EUROPE JAPAN WORLD TOTAL
1989 15,830 14,349 3,334 3,220 36,733 1989 pct. 43% 39% 9% 9% 100%
1994 32,040 33,256 7,726 7,660 80,682 1994 pct. 40% 41% 10% 9% 100%
Increase 16,210 18,907 4,392 4,440 43,949 Increase pct. 102% 132% 132% 138% 120%
Table 1. The worldwide software market for 1989 and 1994 (estimated). Figures are in millions of dollars.
COUNTRY SALES INCREASE
Canada/US 15% UK 40 Australia 50 Japan 90 Italy 100 Brazil 200 Korea 300 Taiwan 400 Mexico 500 Spain 500 USSR infinity symbol
Table 2. MicroSoft estimates of sales increase if software piracy were eliminated.
1. Beli, Pedro, "Globalizing the Rest of the World," Harvard Business Review, July-August, 1991, pp 50-55.
2. Bush, George, Speech to the American Chamber of Commerce, Santiago Chile, December 7, 1990.
3. Butler, Jeremy, Speech to the Comdex International Marketing Symposium, Las Vegas, November, 1990.
4. Chang, Carl K, and Aoyama, Mikio, "Software in the Far East," IEEE Software, March, 1989, pp 11-12.
5. Davis, Ludlum A., "Commerce Department Reverses Singapore Ruling," Computerworld, April 2, 1990, p 119.
6. Dyson, Esther, "Eastern Infrastructure," Release 1.0, August 21, 1990, pp 1-34, EDventure Holdings, Inc., New York
7. Goodman, S. E. and McHenry, W. K., "The Soviet Computer Industry: A Tale of Two Sectors," Communications of the ACM, June, 1991, pp 25- 29.
8. Halbrecht, Herb, personal interview, October, 1990.
9. Howell, Thomas R., Noellert, William A., Ohri, Bonnie, and Wolff, Alan W., "Japanese Software, the Next Competitive Challenge," ADAPSO, Arlington, VA, January, 1989.
10. Huuku, Rajesh, Speech to the Second Meeting of Iberio-American Software Exporting Enterprises, Santiago, Chile, July, 1991.
11. Kazin, Stewart, Vice President for Manufacturing, personal interview, October, 1990.
12. McClarren, Dan, Vice President for Manufacturing, Claris, personal interview, October, 1990.
13. Merit/NSFNET Information Services, Ann Arbor, Michigan.
14. Ominami, Carlos, Speech to the Second Meeting of Iberio-American Software Exporting Enterprises, Santiago, Chile, July, 1991.
15. Palma, Pablo, Speech to the First Meeting of Iberio-American Software Exporting Enterprises, Santiago, Chile, July, 1990.
16. Seybold, Patricia, Speech to the Second Meeting of Iberio-American Software Exporting Enterprises, Santiago, Chile, July, 1991.
17. Quarterman, John S., "The Matrix: Computer Networks and Conferencing Systems Worldwide," Digital Press, Bedford, MA, 1990.
18. Wasch, Ken, Speech to the Second Meeting of Iberio-American Software Exporting Enterprises, Santiago, Chile, July, 1991.
19. Woodring, Stuart and Colony, George F., "How Software will be Managed," Forrester Software Strategy Report, June, 1990. Programmer," American Programmer, 1988, pp 1-8, New York.
20. Yourdon, Ed, "The Decline and Fall of the American Programmer," American Programmer, March, 1988, pp 1-8.
21. Yourdon, Ed, "India," American Programmer, October, 1989, pp 3-26, New York.
22. --, "Worldwide Information Technology Spending Patterns, 1989-1994: An Analysis of Opportunities in 30 Countries," International Data Corporation, Framingham, MA, September, 1990.
23. -- "The Latin American Market comes to Life," The Economist, June 8,
1991, pp 77-79.
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