Macroeconomics of Financial Markets

Fall Semester 2014

Joo Piteira, 921
Nuno Caetano, 919
Teresa Sousa, 698

BANGALORE THE INDIAN SILICON VALLEY

1. Economy of Bangalore
In contrast to many south Indian cities, Bangalore is a contemporary, fast growing, and
prosperous place that's home to India's IT industry. Many multinational corporations have set
up their Indian head office there. As a result, the city is full of young professionals and has a
vibrant, cosmopolitan air about it. There are 6 million people living in Bangalore, making it
India's fifth largest city after Mumbai, Delhi, Kolkata, and Chenna.
Bangalore is today the world's second largest IT/ITeS cluster in the world, second only to
Silicon Valley. The industry now adds more than 200,000 jobs a year providing employment
to nearly 10 million people. The sector accounts for almost $85bn worth of exports every
year. Today nearly 40% of the country's IT industry is concentrated in Bangalore. With more
than 500 companies offering back-office and outsourcing services, the industry here
generates more than $17bn revenue a year.
There are different reasons why companies are moving to Bangalore. First, we have to
consider that India, with a population of 1.2 billion people, is the worlds largest pool of
technical talent. Second, in Bangalore in particular, companies can find a unique combination
of cheap labor and high quality education. The dynamism of the city attracts people in large
numbers from all over the country, and abroad, who come to search for new job opportunities
and quality education.

2. Educational System
Education plays a vital role in the IT cluster formation in Bangalore. The city has a long
history of quality education, dating back to the 19 th century. Since that time, Bangalore has
stood out from the rest of India not only due to the education quality in general, but especially
because of the English education. In fact, there are more English middle schools in the city
today than Kannada (local language) schools.
Bangalore has today a literacy rate of 89%, 7 universities and more than 20 engineering
colleges. Universities know the demand for high-qualified students and in a city with so
many different institutions they have to be as perfect as possible to differentiate. As result of
this competitive environment the education standards are at the same level of the best
universities in the world. Among all the institutions there are very famous ones like
Bangalore University, International Institute of Information Technology or Jawaharlal Nehru
Centre for Advanced Scientific Research.

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Fall Semester 2014

3. Public Policies
Education and relative low wages are undoubtedly two very important factors in the
attractiveness of the Bangalore cluster for IT firms. However, public policies also had a
significant role in the formation of the cluster.
Since independence, the federal government took a series of measures that made Bangalore
an attractive city not only for large IT companies to invest in but also created conditions for
startups.
The process began in the 70s, when government allocated a space for the construction of an
electronic park with all the infrastructures needed for the IT industry like reliable electric
power and a modern telecom network. After that there was a process of economic
liberalization that included a series of important measures that helped to attract foreign
investment in IT:

Import duties on software and hardware were reduced;

100% foreign direct investment was allowed in the IT industry;
The government favored foreign investment in IT over foreign investment in
consumer goods

Furthermore, the Karnataka government adopted in 1997 a investor friendly policy that offers
special conditions and incentives for the IT industries which have investments in fixed assets
upto Rs. 100 crores. Some of this incentives are:

Entry-tax exempt - IT industries are exempt from paying Entry Tax on Computer
hardware, Computer peripherals and other capital goods

Power- tariff concessions:

Software industries will be treated as industrial (and not commercial) consumers and pay a
lower electricity tariff
Information Technology industries will be given priority in the sanctioning and servicing of
power.
Total exemption from payment of electricity tax without any time limit.

Concessions on company registration charges - IT companies planning expansion or

modernisation get concessions on registration charges.

More recently, with Bangalores Millennium IT Policy and the Millennium Biotech Policy,
1
the government commited to create all the conditions necessary for the established IT
1 http://www.unido.org/fileadmin/import/41696_DynamicCity_doc_CaseStudyBangalore_Sareen.pdf

Macroeconomics of Financial Markets

Fall Semester 2014

companies and to support the new ventures that might arise in the cluster. Moreover, since
2012 barriers to FDI in other sectors were removed allowing 100%FDI in aviation, 74% in
broadcasting and 100% in telecoms.2

4. Foreign Direct Investment

As a result of all the incentives created
by
the
government,
Bangalore
experienced over the last decades a huge
inflow of Foreign Direct Investment. In
fact, between 2007 and 2012, Bangalore
was the Indian city that received more
projects (561) and created more jobs
(124.210) from a total FDI of
US$24.5bn, accounting for 15% of
Indias total FDI.
Texas Instruments and Hewlett Packard were some of the first MNC to settle in Bangalore,
but today we can find in one of the many Bangalores IT parks more than 250 high tech
companies like Oracle, Dell, Siemens, Cisco, Sony and IBM. One of the most recent
investments was made by the chinese telecom company Huawei that invested $150 million in
a new R&D center. All the investments that took place in Bangalore, made the IT cluster one
of the largest in the world and the city is now known as the Indian Silicon Valley.

Figure: Top sources and destinations of FDI in India in the Telecommunications, Media and Technology
sector3
4

Infosys is a successful case of a global leader in consulting,

technology, and outsourcing solution born in Bangalore, in 1981. It is
today the 5th biggest Indian company, 3rd in tech-sector. Infosys
headquarters are still in the city and the market value exceeds $33Bn
in American capital market. At this time firm employs more than

Goldman Sachs

The investment bank

announced
on
September 2014 the
investment of $200
million in a brand new
campus in Bangalore
2 http://www.nriforumkarnataka.org/policy/Information%20Technology%20Policy.pdf
that
will
3 http://timesofindia.indiatimes.com/business/india-business/Goldman-Sachs-to-invest-Rs-1200-crore-inaccommodate around
Bangalore/articleshow/43383998.cms
9.000 employees.
4 http://timesofindia.indiatimes.com/tech/tech-news/Yahoo-buys-out-Bangalore-startupBookpad/articleshow/43119026.cms

The new office will be

the second largest
Goldman
office
outside New York and

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Fall Semester 2014

160,000 workers and has clients across 30 countries around the world. Wipro Limited is also
a global IT firm established in Bangalore, with 147, 552 employees and clients from across
the six continents. In its last financial year (03/14) its revenues reached $7.3 billion.
Recently, a new trend is observed in the Indian IT market. After Facebook and Google
acquired Little Eye Labs and Imperium this year, Yahoo followed these global leaders trend
and, accor5ding to the Times of India, bought Bangalore-based Bookpad, a relatively new
based company by around $15 million.67
TechHub, a UK government project, represents another example of FDI in Bangalores
startups. The government launched this community and workspace for technology
entrepreneurs to support 1000 startups for the next three years. The purpose is to develop an
environment for technology startups through an international network of focused techentreperneurs and to promote the exchange of ideas and collaborations. From this UK India
Business Centre, the UKIBC will deliver a range of services and policy advice to build trade
and investment between the UK and southern India. Bangalore is a critical part of the
UKIBCs expansion strategy, to assist UK
companies active in, or wanting to enter Bangalore
and South India and to connect with local
businesses keen to work with British companies.

5. Future Expectations
Bangalore has a succesful history and its expected
to have an equally succesful future. India is
expected to remain one of the three fastest growing
economies by 2020 and the Telecommunication,
Media and Technology sector will continue to
attract the majority of the FDI in the country.
Another factor that has to be considered is the continuous increase in wages in China (the
main competitor of India in the sector) that makes Indias labor costs (the most attractive
asset in India according to an EY survey) even more competitive.
Furthermore, the federal governnment announced 2010-2020 as the Decade of Innovation in
India and measures like the increase in R&D expenditure and the creation of incubators are
being taken with the objective of making India one of the Top5 scientific and technological
countries in the world by 2020.
5
6 http://www.ey.com/Publication/vwLUAssets/EY-attractiveness-survey-India-2014/$FILE/EYattractiveness-survey-India-2014.pdf

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Fall Semester 2014

Finally, the recent boom of new industries like Aerospacial and Biotechnology in Bangalores
cluster, make the investors believe that the city will continue to have a lot of investment
opportunities in the future.8