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Managing Intellectual Property In Software Industry

The foundation of the software industry is associated with intellectual property rights throwing light on copyrights, patents, trademarks and trade secrets. Each of them provides legal protection but in different ways. Trademarks protect the symbols, and names which are used to know and identify different products in the market. Copyright, patent, and trade secrets have a major role in protecting technology.

With the developing country, the Indian software companies will become more complex, and hence, advanced technology, more labour, and marketing skills will be required. For following the current trend and achieving success in that part, companies must create new intellectual property because what we have is more usable and also it will be more creative and innovative, attractive in nature.

Copyright tries to protect the specific works, creativity, and the expression of an idea. The protection of software by copyright was established by the World Trade Organization (WTO) Agreement internationally on TRIPS (Trade Related Aspects on Intellectual Property Rights). The computer programs are treated through WTO members as per Article 10 of the TRIPS agreement. Copyright also protects the software code but the code should be in written format and should be recorded. These holders of copyright can restrict others from using and selling unauthorized copies of the work.

We find that the Indian software industry created very little new and valuable intellectual property in the past. Intellectual property development was not important to the industry�s growth and development. Few companies filed for patents or registered copyrights in the US. Foreign-owned firms operating in India did so more frequently but Indian-origin output of patents and copyrights was still relatively small.

Protection of intellectual property in India has been below international standards in some respects. India does not grant software patents. Some copyright standards are equal to the world�s most stringent, but others are not. Enforcement is the principal weakness. Both standards and enforcement are likely to be improved in the future, but not immediately. In any event, neither patent nor copyright protection was important to Indian software companies in the past.

Review Of Literature
Various studies have been carried out in the field of competitive intelligence, business intelligence, their advantages to business in taking timely decisions, as well as the use of patent data for carrying out business intelligence for competitive advantage.

Hughes (2017) reports that due to the high volume and speed of scientific research, it is impossible to collect, update and analyse the variables that impact the evolution of technologies as disruptive innovations need knowledge from adjacent technologies as well. Hughes (2017)[1] proposes a model featuring expanded search depth, breadth and speed along with inputs from internal and external experts for identifying emerging technologies by coupling big data analytics machine learning with technology sequence analysis.

On the other hand, Gauzelin and Bentz (2017) report on how small and medium-sized enterprises (SMEs) perceive and make use of business intelligence in decision making and highlight that business intelligence systems are perceived as a solution to various unforeseen disruptive events that hit the businesses unexpectedly. They report that assessing the success of business intelligence is not easy as they cover the entire organizations and their benefits are long term. SMEs lack business intelligence implementation due to a lack of financial and expertise capacity to implement it.

However, small businesses deal with increasing volumes of data, hence making the appropriate choice of the best business intelligence in line with their strategy will allow them to have a competitive advantage. Collecting and analysing data on business intelligence from SMEs, Gauzelin and Bentz (2017) report that business intelligence and its use have a far-reaching impact on the operation of SMEs. S�ilen (2017), highlights the importance of competitive intelligence and market intelligence through a case study of two Swedish MNCs and reports that companies would succeed only if the competitive intelligence model, along with the specialist�s role, are properly defined in bringing out and reporting facts instead of pleasing their seniors. S�ilen (2017)[2] also highlights that the expectations from the analysts are predicting the future, which at times is difficult.

The analysts often also end up performing different tasks aside from analysis. With the increase in data and its low cost, competitive intelligence is largely defined by how well companies can draw conclusions from it, as the outcome is mainly dependent on the quality of data available and, at times of crisis, the demand for intelligence is the greatest.

Business intelligence can be viewed as a broader tool that includes knowledge management, enterprise resource planning, decision support systems and data mining[3]. Business intelligence is also referred to as competitive intelligence, market Intelligence, customer intelligence, competitor intelligence, strategic intelligence or technical intelligence[4]. Scholars have defined business intelligence as the process of collecting large amounts of heterogeneous data from multiple sources, analysing that data using advanced analytical tools and methods, and quickly presenting a high-level set of reports to multiple users that condense the essence of that data into the basis of business actions, enabling management to make efficient and effective strategic business decisions that can help organizations to survive and thrive in the global economy[5].

The main challenge in any business intelligence solution is in its intelligence ability[6].

Business intelligence or competitive intelligence is considered to be an interdisciplinary field[7]. Studies have suggested that competitive intelligence is associated with strategic management as well as knowledge management[8] and intelligence has evolved as a discipline over time[9]. Knowledge management can be perceived as an integral component of business intelligence[10]. It is usually defined in reference to collaboration, content management, organizational behavioural science, and technologies.

Knowledge management is a systematic process of finding, selecting, organizing, distilling and presenting information in a way that improves an employee�s comprehension in a specific area of interest. It can be seen as consistent with resource-based theories of the firm, such as building and competing in a capability that could be quite difficult for others to imitate practically. Knowledge management was seen to be central to product and process innovation and improvement, to executive decision-making, and to organizational adaptation and renewal (Earl, 2001).

Specific knowledge management activities help focus the organization on acquiring, storing and utilizing knowledge for such things as problem solving, dynamic learning, strategic planning and decision making. Alnoukari and Hananao (2017) report that the integration of business intelligence and corporate strategic management has a direct impact on modern and flexible organizations, which leads to a gain of competitive advantages as well as easier adaptation to changing scenarios and corporate strategies[11].

The core advantage of any competitive intelligence system is to extract the knowledge needed about competitors� opportunities and threats. Competitive intelligence ensures a firm�s competitiveness in the marketplace through a greater understanding of competitors and the overall competitive environment (Solomon, 2004). Competitive intelligence and market intelligence can also be built on competitors and influencers from exhibits and tradeshows.

Intellectual property assets are becoming increasingly important drivers of competitive advantage. This has forced organizations to effectively and efficiently mine their IP for business intelligence. Studies suggest that patent data is also a valuable source of competitive intelligence from which to derive a strategic advantage[12]. Stern (2005) highlights that for creating competitive advantage, management must focus on exploiting IP during a product�s lifecycle, which would encompass resource management and IP strategy. IP protection is a strategy that helps in formulating new strategies for protection of innovations and sustainable development[13].

Patent data, its legal status and litigation data can be used for business intelligence purposes such as IP portfolio valuation, patent valuation, identification of competitors and their R&D efforts, assessment of active researchers in a particular field, assessment of patent quality, research quality, market trends, discover human capital, and to anticipate product launches (Sagacious Research, 2017). Patent analysis enables firms to make more informed decisions about their IP strategy and create value for their business (Great Dome Associates, 2018). Analysis of patent data accelerates innovation, saving time and money[14].

A patent portfolio can be analysed by carrying out patent landscaping[15]. Intellectual property landscaping is a strategic tool providing valuable business intelligence to ensure maximum understanding of the potential opportunities and competitive threats. Patent landscaping provides insights which guide business strategies that include cost optimization, enforcement, licensing, R&D and mergers and acquisitions. Patent landscaping supports business strategies that help in the development of a quality patent portfolio, which in turn generates revenue and mitigates risk (, 2017).

Software is one component of the broader information and communication technology (ICT) sector that also includes computer hardware, telecommunications equipment and services, and electronic components used in ICT products. Some companies, especially big companies, are both software and computer hardware producers (such as Wipro and HCL), and some companies are also engaged in telecommunications businesses (such as Tata and Hughes).

In this study we do not refer to any computer hardware business or to its components or peripherals (laptops, desktops, workstations, servers, disk drives, semiconductors, microprocessors, printers, scanners, modems, switches, hubs, routers, or other networking equipment). We do not refer in this study to any telecommunication products (such as handsets, personal digital assistants, fibre optic cables, or VSATs), or telecommunication services (such as mobile telephony or local, long distance, or international fixed line telephony).

Intellectual property played a small role in the growth and development of the Indian software industry in the 1990s. It was not part of management decision making and did not matter to company strategy. To explain this apparently counter-intuitive outcome for an industry that is commonly thought of as a high-technology industry, we consider the conditions for the creation of intellectual property, and its ownership and value to the Indian software company.

In the past, Indian software companies typically did not create very much intellectual property that was especially valuable. Most of the Indian software activity was at the entry level of the global industry�s business until very recently. Programming at a client�s workplace with on-site delivery required technically educated people, but it did not result in the creation of very much new knowledge. It was not advanced software development. The basis for competing was low-wage skilled workers who produced software services at lower cost and equal or better quality than US firms did.

Software Services and Products:
Indian software was a $12.5 billion (Rs 600 billion) industry in 2002-03, and it employed 650,000 professionals (NASSCOM 2003). In contrast, the Indian computer hardware industry was $3.46 billion (Rs 165 billion) in the same year (this figure does not include telecom equipment or services) (Dataquest 2003). Among many ways in which the software industry can be described, we begin by defining the industry in India in terms of what it produces:
  • Software services (also called software development)
    Revenue in 2002-03 of 8.9$ (435 Billion)
  • Software Products (Packaged)
    Revenue in 2002-03 of $525 million (Rs 25 billion)
  • Information technology-enabled services (also called business process outsourcing)
    Revenue in 2002-03 of $2.6 billion (Rs 122 billion)

Information technology enabled services refer to a range of business services that require software in order to be delivered to the customer � software is a critical input, not the output. These services include inbound call centres (also called customer care), web-based sales transactions, employee payroll and benefits administration, credit and debit card and other billing and accounting services, insurance claims processing, database marketing, medical transcription services, and engineering services.

Software Applications and Activities:
In this paper we focus on software services and products, and therefore we describe these businesses more fully. We divide both services and products into the types of applications or functions they perform. For example, software services are used for enterprise resource planning, e-commerce, and migration of data, to choose just three applications among many.

Software services are usually customized (unique to each customer in part), while software products are standardized. Software products range from commonplace word processing and spreadsheet packages to computer-assisted design packages and industry-specific applications such as bank accounting operations.

We break down software services into activities or service lines performed by the software vendor based on a combination of technical labour skills and management skills required and value addition achieved, in order from low to high.

Hierarchy of Software services:
  • Data entry; maintenance of existing systems
  • Custom applications development and applications outsourcing Production, programming (writing lines of code)
  • Design
Engineering (existing or new software)
  • Systems integration; information systems outsourcing, turnkey projects; project management, education and training
  • Network infrastructure management
  • Consulting; end-to-end solutions

The first two sets of activities are likely to be performed mostly on-site (body shopping in which the Indian software engineer moves temporarily to the customer�s place of business). These activities have in the past accounted for a large majority of all revenue earned. The latter activities are likely to be performed mostly off-shore in India, and they have been much smaller in revenue earned. Consulting activity, for example, was estimated to account for only 12% of all software exports in 2001-02. However, in 2001-02 for the first time, software export revenue from billings for off-shore work matched revenue from on-site billings.

Software Customers and Ownership:
We describe the Indian software industry in terms of its customers and its ownership. The customers are predominantly foreign � about three-quarters of all software was exported in 2001-02, totalling $7.68 billion � and they are predominantly businesses in more-developed countries. Nearly two-thirds of all Indian software export revenues were earned in North America in 2001-02, and about a quarter in Europe.

The software industry accounted for eight percent of all foreign exchange earnings for India in 2001 (NASSCOM-McKinsey 2002). Among Indian domestic customers, with sales of $2.42 billion, the private sector is by far the largest set of customers, with nearly three-quarters of all IT spending, while government and public sector enterprises have just over one-quarter (this includes all IT spending, not just software spending). Taking all Indian software sales together, the single largest industry was banking, finance, and insurance with 22% of all sales. Manufacturing industries accounted for 16% and telecom equipment customers bought 14% of all Indian software in 2001-02.

Multinational enterprises own software operations in India, either as wholly-owned subsidiaries or as joint ventures. They develop software for use by their parent companies, for export to customers of their parent companies, or for independent export to third party customers. While not all of the former business need be recorded as software exports, one estimate is that MNEs accounted for 22% of all software services produced in 2001-02, and for 45% of all IT-enabled services (NASSCOM 2002). In the Top 20 list of software exporters in 2001-02, there are four majority foreign-owned companies; five among the biggest 30 companies.

Growth Of Indian Software Industry
We can mark the beginning of the Indian software industry in 1973 when Tata Consultancy Services (the first Indian software company, founded in 1968) began exporting data services to Burroughs, or more aptly, in 1988 when Texas Instruments made a direct investment in Bangalore and spawned a variety of local suppliers to it.

Some industry data are available from the 1988-89 period, but the figures are small, and most annual time series data are not available until 1994-95. In the eight years from 1994-95 to 2001-02[16], sales revenue earned by the overall Indian information technology industry multiplied in size by 8 times.

The software industry, however, which currently accounts for three-quarters of the entire Indian IT industry, grew 13 times. Employment in the Indian software industry grew only 4� times, however. Software exports grew the fastest, by nearly 15 times in this eight-year span, to reach their 2001-02 figure of $7,680 million. For comparison purposes, Indian software exports in 1988-89, the first year for which we have data, were $105 million.

The annual average rate of growth of Indian software exports over the 1994-95 to 2001-02 period was 48 percent; this was faster than in the prior five years, when average annual growth was about 35 percent. However, in the 2001-02 year, the software export growth rate fell dramatically to 24 percent compared to 57 percent the year before; this was the year in which the bust occurred in the US. These figures are expressed in terms of changes in the US dollar value of Indian software exports. Because the Indian rupee depreciated against the dollar during this period, the annual growth rates expressed in rupee terms are from five to 15 percentage points higher.

Exports accounted for three-quarters of all software revenues in 2001-02. This large proportion has increased since the mid-1990s. The three-quarters figure applies again to the share of all Indian software revenue that is accounted for by software services. The newest of the software industry�s segments, which is IT-enabled services, increased its share of the industry�s revenue from 14 percent in 1999-00 (the first data point) to 19 percent in 2001-02, two years later. However, the share of software products declined slowly year-on-year from the mid-1990s to its current 2001-02 share of only four percent. Dividing the software industry�s revenue in a different way � by offshore versus on-site delivery modes � we see a steady increase toward revenue earned offshore, from 30 percent in 1996-97 to 49% in 2001-02.

Creation Of Intellectual Property In Past
Intellectual property played a small role in the growth and development of the Indian software industry in the 1990s. It was not part of management decision making and did not matter to company strategy. To explain this apparently counter-intuitive outcome for an industry that is commonly thought of as a high-technology industry, we consider the conditions for the creation of intellectual property, and its ownership and value to the Indian software company.

In the past, Indian software companies typically did not create very much intellectual property that was especially valuable. Most of the Indian software activity was at the entry level of the global industry�s business until very recently. Programming at a client�s workplace with on-site delivery required technically educated people, but it did not result in the creation of very much new knowledge. It was not advanced software development. The basis for competing was low-wage skilled workers who produced software services at lower cost and equal or better quality than US firms did.

Although we cannot measure intellectual property directly, we can use several indicators, each one of which is incomplete by itself, to begin to assess the amount of intellectual property creation in the Indian software industry.
  • Input indicators: Research and Development Spending
    Payments made abroad for technology
  • Output indicators: Patents
    Technology income earned abroad
Theory tells us that firms produce new knowledge from their existing stock of knowledge, their current R&D expenditure, and knowledge acquired from other sources, such as payments for technology from foreign sources � these are inputs. Research tells us that R&D spending is roughly proportional to patents � one of the outputs of intellectual property creation � although the ratio varies by industry and is higher for small firms than big firms. To get a rough idea of knowledge creation from patents, we can simply count them.

But to reflect better the technological and commercial value of patents, we can include data on the number of citations that patents receive from subsequent patent awards. Copyrights are an output that applies especially to software. Firms may not seek patents or register copyrights for a variety of reasons. However, firms still own intellectual property whose amount and value might be reflected in income earned from it abroad.

Inputs for Intellectual Property:
  1. Research and Development spending in Software industry to create new technology has occurred infrequently and has been small in magnitude.
    In the Indian software industry as a whole, less than 1% of revenue is spent on R&D. Among listed Indian software companies in particular, 4.3% had expenses for laboratory or R&D equipment in recent years, amounting to 0.3% of their sales revenue at the median. (Listed companies are traded on any Indian stock exchange and are subject to information disclosure requirements; many foreign-owned companies are not listed.) Among information technology companies operating in India, both Indian and foreign (these include hardware, software, telecom equipment and services, and industrial electronics companies), 63% reported R&D activity; however, only 9.6% of these IT firms reported innovative rather than adaptive R&D (innovative R&D intends to create new products or processes whereas adaptive R&D seeks to adapt foreign product or processes to Indian production or market conditions). For the US as whole, R&D expenditure is 3.7% of GDP. Large US firms such as IBM spend billions of dollars on R&D (more than five percent of their sales revenue). There are exceptions among companies in India. For example, Hughes Software Systems, a US company operating in India, spends 12% of its revenue on R&D, and Tata Consultancy Services, an Indian company, is another substantial R&D investor.
  2. The payment for technology from abroad through the external market by Indian Software firms has been small
    In recent years, 6.5% of listed Indian software companies, or 18 firms, paid for technology in this way, and the median size of the payment was 0.4% of sales revenue. From another data source, 34% of Indian and foreign IT firms (including hardware, telecom, and industrial electronics) made lump sum or recurring royalty payments abroad. Firms might make technology payments abroad in order to make or sell existing products domestically, whether they are made in India or imported into India � without intellectual property implications � rather than to create new products or processes. Not all technology payments abroad necessarily are associated with intellectual property creation, and we cannot distinguish between these two motives. Technology from abroad that is used to create new and valuable intellectual property can also be obtained by non-equity strategic alliances that firms have with foreign firms where no market transaction in technology exchange takes place. Among a sample of Indian and foreign-owned IT firms, 15% had international technology alliances in 1999-2000.
    Outputs of Intellectual Property: Patents
  3. Indian Software firms have had less US patenting activity than foreign firms operating in India. The distribution of Patenting activity has been very uneven.
    Indian software firms have fewer US software patents than foreign-owned software firms that create software innovations in India (at least in part). Only four percent of the biggest Indian software firms had any US software patents awarded from 1996-2003 whereas 33% of the foreign-owned software firms had patents awarded based on work done in India. The three Indian software firms with software patents got five in this time period; the leading company was Sasken Communication Technologies. The nine foreign-owned software firms with patents got 167 (although not all of them were software patents); the leading company was IBM, which has a major research laboratory in India (although other US software companies also have substantial software development centres in India). Indian software firms filed three software patent applications in the US in the 2001- 2003 period whereas foreign-owned firms filed 93 applications.
  4. Software Patenting has been underrepresented in India compared to the rest of the World.
    Software patenting activity, both patents awarded and applied for, has been relatively small in India. About 1.7% of all US software patents from all countries worldwide were invented in India in the 2001-03 time period � including both Indian firms and foreign firms operating in India � whereas the Indian software industry accounted for about 3.5% of worldwide information technology spending[17]. In terms of US software patent applications filed but not yet awarded, India was further underrepresented, with less than 1% of the applications filed worldwide in the US.
  5. Software patents by Indian firms and foreign owned firms operating in India appear so far to be less valuable than average patents in advanced fields.
    Among US patents awarded to software firms in India in the 1996-2000 period, the average number of citations per patent cumulated over the five years was 5.6. In comparison, US patents in advanced fields averaged 29.3 citations per patent cumulated over a five-year period beginning three years after the patent award.
  6. Software patenting is increasingly dramatically.
    Software patenting activity in the US has increased substantially in the most recent three-year period compared to the previous five-year period. Worldwide, the number of software patents awarded in the US increased at a rate exceeding 40% per year in the most recent three years. The increase was even more dramatic among companies in India, for both Indian firms and foreign firms operating in India, where the number of patents awarded to software firms increased from 10 per year in the 1996-2000 period to 40 per year in the 2001-03 period.
    Outputs of Intellectual Property: Copyrights
  7. More Indian software firms have registered copyrights in the US than have US Patents.
    Over the same 1996-2003 time period, 18% of the biggest Indian software firms had registered copyrights in the US, and the total number of copyrights for which they were the authors was 128, of which 116 were actual software copyrights.
  8. Copyrighting activity in the US by Indian software firms has been much less than for foreign owned software firms.
    Fifty-nine percent of foreign-owned software firms that had operations in India were authors of US copyrights over the long 1978-2003 time period, and they had a total of 110,914 copyrights (however, some of these copyrights were not for software, and, unlike the case of patents, we do not know how much of the copyrightable material production by foreign firms took place in India versus other countries including the home country). In the same time period, Indian software companies had 208 copyrights (the same companies that had copyrights in the later 1996-2003 period).
  9. Copyright registrations for software in India appear to exceed those in the US.
    In the most recent few years, about 500 software copyrights (excluding copyrights for printed materials) were registered in India by all firms, including Indian and foreign-owned firms, and large and small firms.
  10. The distribution of US copyrights by Indian software firms has been very uneven, and that of foreign firms has been concentrated in one firm only.
    Of 116 US software copyrights registered by 14 Indian firms as authors during the 1996-2003 time period, over half were accounted for by one firm (HCL Technologies) and three quarters were accounted by two firms (adding Network Solutions to the list). Among the 16 foreign-owned large software firms with operations in India that have registered copyrights as authors in the US during the 1978-2003 time period, one firm accounts for 97% (IBM). The second firm has 1% of the copyrights (Microsoft)

Ownership and Value of Intellectual Property to Indian Software to Indian Software Developers:
To the extent that Indian companies did create intellectual property that contained new knowledge, it was in the past typically created as part of a customized software development contract with a foreign client. It was a one-off engagement to meet the particular needs of the client. This had two implications for the Indian software supplier.

First, the software that the Indian company created was the property of the client for whom it was created and who paid for it. It did not belong to the Indian vendor, and in principle could not be used again without consideration being given to the original client. Therefore, the software services, even if valuable to the client, were not of much future business use to the Indian company.

Second, the customized software was unique to the business application for which it was created and therefore did not have much if any value in other business applications. It did not have value for other clients and therefore it was not of much future business value to the Indian software supplier.

Intellectual Property Protection For Software
Innovation in software products can be protected as intellectual property, usually either through the use of copyrights or patents. Both patents and copyrights are devices that are intended to protect a firm�s or individual�s innovation from misuse by others, although they are quite different devices for doing so. Copyrights, generally, protect the expression of an idea. That is, copyright protection extends to a specific work, but cannot be applied to the ideas contained in such work.

The application of copyright protection for software products was firmly established internationally via the World Trade Organization�s (WTO) Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPs). Under Article 10 of the TRIPs agreement, WTO members are required to treat computer programs, whether in object or in source code, as literary works as defined in the Berne Convention. Copyright protection thus extends automatically to software code once the code has been written and recorded in a medium (i.e., hard drive of a computer). A copyright holder may use his or her right to prevent others from using, making, selling or distributing unauthorized copies of the work.

Unlike in the context of copyright, the TRIPs agreement does not explicitly discuss patent protection for software. The TRIPs agreement does, however, contemplate protection for software under its general discussion of patentable subject matter in Article 27. Article 27 makes patent protection available to any inventions in all fields of technology, provided they meet the minimum threshold requirements of novelty, utility and no obviousness. Like copyright, a patent holder may use his or her right to prevent others from using, making, selling or distributing unauthorized copies of the invention protected.

The protection offered by patents tends to be broader than that of copyright, as copyright protection extends only to a specific expression whereas patent protection extends to the underlying functionality of an invention. Because patents can offer broader protection than copyrights, they are seen as more valuable if they can be obtained. However, patent protection tends to be more expensive to obtain than copyright protection, because patents require a formal application process in every country where protection is desired. This application process often involves not only application fees, but attorney and translation fees as well.

In practice, the extent to which software may be patented varies by country, depending upon the formal requirements and limitations placed on the patenting of software by individual countries. The 1981 Supreme Court decision in Diehr is widely regarded as the seminal case on the patentability of software in the United States. In Diehr, the Supreme Court reaffirmed the long-held idea that a mathematical formula or algorithm, in the abstract, is unpatentable subject matter.

The Supreme Court went on to hold in Diehr, however, that when a formula or algorithm is employed in a claimed invention, one must view the invention as a whole to determine patentability and not summarily dismiss the invention as unpatentable simply because a formula or algorithm (i.e., software) was used. In other words, an invention that includes software may be protected via the patent laws, provided the invention, as a whole, meets the criteria of patentability.

Following Diehr, it still was not entirely clear to what extent software itself could be protected via the patent law. The Federal Circuit however cleared up much of this confusion in its 1998 State Street and 1999 AT&T decisions. In State Street, the Federal Circuit found a software program used to manipulate financial data to be patentable subject matter. Here, the court reiterated that unpatentable mathematical algorithms are merely abstract ideas constituting disembodied concepts or truths that are not useful.

The Federal Circuit, however, reasoned that to be patentable, an algorithm must be applied in a useful way, thus a software program, which employs mathematical algorithms in its operation, may be patentable subject matter if it has some type of practical application, i.e., a useful, concrete and tangible result. The Federal Circuit further held in AT&T that a resulting physical transformation is unnecessary, and that a transformation of data in one form to another will serve to establish the requisite tangible result.

Despite the TRIPs agreement�s explicit prohibition on discriminatory treatment as to field of technology, many countries have come to view patent protection for software as a policy choice and as such have placed limits on the patent protection available for software. For instance, the European Patent Convention (EPC) classifies software programs as unpatentable subject matter. This restrictive policy towards software patents however has been tempered by the European Patent Office�s (EPO) Technical Board of Appeal.

For instance, the Technical Board of Appeal has held that an invention may be patentable even is software is a component in the invention, provided patent protection is not sought simply for the software as such, thus bringing European protection for software patents closely in line with the U.S. Diehr decision discussed above. The state of patent protection for software in Europe however many changes in the near future as the European Commission has proposed a Directive on Software Patentability. However, given how contentious the issue is in Europe, it is difficult to speculate how the Directive will ultimately change the nature of software patentability.

While Europe (via the EPC and EPO decisions) has only gone so far as to provide patent protection for software embedded in a larger invention, Japan has chosen to pursue a course much more closely aligned with the U.S. According to Examination Guidelines for Computer Software-Related Inventions issued by the Japanese Patent Office, software-related inventions are patentable if they are a creation of technical ideas utilizing a law of nature. The guidelines go on to further explain that software amounts to this creation of technical ideas utilizing a law of nature when information processing by software is concretely realized by using hardware resources, or in other words, when software is run on a computer. In practice, this means that most software is patentable subject matter in Japan.

Protection of Intellectual Property in India:
The protection of intellectual property was of little interest to Indian software companies in the past. In part this lack of interest is explained by the small new knowledge content of Indian software services � there was not much intellectual property to protect. Indian companies did not own the customized intellectual property they might have created since their work product fell under work for hire standards or ownership was explicitly transferred to the hiring company.

But even if India companies created software services that had new knowledge value, they did not seriously take steps to protect it. The chief intellectual property protection available for software in India is copyright protection. India�s copyright law conforms to the requirements set out by the TRIPs agreement and thus software is protected as a literary work in India (for a broader discussion of copyright protection in India, see below). This is not to say that software is well protected in India, as this depends not only on standards established by laws, but also on enforcement of the standards by the judicial system.

India has had a bad reputation among foreign business people for intellectual property protection, although that bad reputation has not come unduly from the information technology sector. Over the last ten years, India has implemented a number of legislative measures to bring it into compliance with TRIP�s requirements.

Nevertheless, there is great concern about inadequate intellectual property protection in software. This concern is mainly due to piracy of packaged software products.
� India is one of the 11 countries on the US Trade Representative�s Priority Watch List for 2003 for unfair trade in intellectual property under the Special 301 provision of US trade law. Three other countries (one of which is China) are in still more serious USTR categories.

� India is reckoned to be the 5th worst offender in terms of dollar losses due to piracy of business software (installation without a license) amounting to $343 million.
� India had the 11th highest rate of software piracy in 2002: 70% of all software used was pirated.

The piracy rate for China was 92% and, in the US, it was 23%. The worldwide average business software piracy rate was 39% in 2002.[18]

India view of Patents for Software[19]
Under Indian law, computer programs are thought of as embodying a pure mental act because they are seen as essentially the application of mathematical algorithms. Thus, computer programs themselves are per se unpatentable in India. India, however, does grant patents to inventions which employ software in their operation.

These patents may be more aptly thought of as hardware rather than software patents. As discussed earlier, the rise in importance of embedded software (in which software is fixed within hardware and cannot be reprogrammed) may blur the distinction between software and hardware patents, or may make software more frequently patentable as part of a larger product.

The fact that patenting of software is becoming more important worldwide is not lost on Indian policy makers. However, the wisdom of extending patent protection to software is a much-debated policy option. Whether software should be patentable in India, or whether copyrights are the more suitable form of protection, turns on several characteristics of software.

Whether justified or not, doubts about the wisdom of patents for software rely on the following arguments:
  1. Software tends to evolve incrementally over time, and it tends to model reality rather than invent new techniques; many competent programmers might be able to invent or reinvent software routines so that the non-obvious criterion ought to be difficult to demonstrate.
  2. The software industry is technologically dynamic and rapidly makes existing software obsolete so that the concept of 20-year protection seems at odds with the behaviour of the industry; in fact, some software becomes obsolete before a patent application can be decided.
  3. Whether by impacting the interoperability between different software platforms or by blocking types of user interfaces, patents could operate to reduce the availability of consumer choice and thereby negatively impact the overall social benefit of software products.
  4. Since copyright is already available for software, patent protection is not necessary as long as copyrights are enforced.

Each of these arguments against software patenting has counter arguments. For instance, point one questions the wisdom of software patenting based on the notion that much software cannot meet the non-obvious criterion. This is not an argument against the availability of software patents, but against the wrongful award of software patents. Indeed, many so-called inventions in other fields of technology cannot meet the non-obvious requirement and thus should not be granted patent protection.

Only those inventions that do meet all the criteria for a patent should be afforded patent protection, regardless of the field of technology. Point two questions the usefulness of patent protection for software since much software becomes obsolete before a patent�s 20-year term expires.

A patent holder has the choice to continue patent protection for the full 20-year term, or to discontinue paying the patent maintenance fees if the software becomes obsolete and thus release the invention from patent protection. There is no reason to deny patent protection for software to those who want it for the full 20-year term just because many software patent holders would likely discontinue protection before the term expired. Point three questions the wisdom of software protection for patents on the basis that they may reduce consumer choice and social benefit by standing in the way of access to necessary, or at least optimal, advances in software programming.

A practical example of this concern is the case of the Eolas patent in the US, where the threat of enforcing a broadly crafted patent claim affecting plug-in technology sent ripples of concern across scores of software producers and internet businesses. Many claimed that enforcement of the patent would greatly hinder further development of the internet. However, the dire implications of enforcement of the patent forced the USPTO to re-examine the patent, and it has since rejected certain claims in the patent. Thus, the Eolas case demonstrates that a patent system can be flexible enough to address concerns over enforceability of software patents.

Lastly, point four argues that software patents are unnecessary because copyrights already provide sufficient protection. Because copyrights protect only a single expression of an idea, competitors can circumvent copyright protection and relatively easily make use of an innovative idea conceived by another company. Indian software company managers express this view. Patent protection provides a broader level of protection, and if applied to software, can encourage innovation in the field more than copyright does.

The Changing Basis For Competitiveness In Indian Software
Despite the record of the past, there is no doubt that the creation and protection of intellectual property is becoming important for Indian software companies and will increase in importance over time. The reason stems from the often-repeated global evolution of industries, in which the location of production shifts geographically over time and the product and service composition of the industry changes.

Typically, as an industry grows and develops, the basis for competing changes. Firms� competitive advantage might change from cost to quality, and from product quality to service quality. Production technology might change from labour-intensive to capital-intensive or from unskilled labour-using to skilled labour-using. New competitors from other countries might arise if they acquire the critical factors of production or access to foreign markets, or if their governments succeed in promoting the industry.

The Indian software services industry, which was first among outsourcing locations for software services sought by multinational enterprises in North America, faces an industry evolution. By the end of the 1990s, perhaps marked by the end of Y2K work, the Indian first-mover advantage was over. Competitive advantage was shifting. Other countries have several of the same factors that India had, or they were developing them. The Indian software industry was at a critical turning point.

The move toward off-shore outsourcing work introduced client communication as an additional requirement for business success, and it coincided with the introduction of software design and engineering work into the client relationship. It marked the first small contribution that new knowledge could make to the Indian software company�s client engagement.

Knowledge Content of Software Business Segments
Amount and Type of Knowledge Created by Each software Business Segment
(Lighter vs. Darker shading indicates Lesser vs. Greater Relationship)
Knowledge Content
Managing Intellectual Property In Software Industry

Software Business Segments By Value Addition
Success Factor for Indian Software (Past and Future)
Among many possible explanations for India�s export success in software services, we can focus on a few of the leading reasons, and we can show that for some of them the Indian advantage is eroding[20].

Skilled Labour:
India has an abundant quantity of technically well-educated young people with engineering qualifications in an industry that depends on skilled labour rather than physical or financial capital, and these people are paid low wages by dollar standards. About 70-80 percent of the cost of producing software services is accounted for by labour; software engineers in India produce half or more of the output value of their counterparts in America but their wages are a tenth or less compared to American wages, so the unit cost of Indian software services is much lower than it is for American competitors.

However, wages for Indian software engineers are rising rapidly as demand for them increases rapidly. By 2005, the forecasted new demand for qualified employees on the part of Indian software firms could absorb the entire new output of qualified graduates in engineering, even if no other industries employed any new engineering graduates[21]. This will obviously be an excess demand disequilibrium, and either the wages of software engineers will rise even more rapidly or lesser-qualified graduates will be employed, unless Indian software firms change their businesses to demand less new engineering labour.

The Indian software industry started in Bangalore, in which a cluster of firms grew up in geographic proximity. Other clusters developed later (in Mumbai, Delhi-Gurgaon, Hyderabad, and Chennai). This pattern of industrial development followed the successful American model. One of the claimed advantages of clusters, or agglomeration, is that they facilitate the sharing of tacit knowledge. Know-how that is gained from experience cannot easily be codified or transmitted in writing, but can only be learned from face-to-face communication and visual observation.

Tacit knowledge diffuses across firms in a geographic cluster, increasing the capabilities of each of them. However, Indian software managers acknowledge limitations to the transfer of tacit knowledge within a cluster. Professional ethics forbid discussing a client�s contract with others who are not engaged in that contract, even within the software vendor itself. Tacit knowledge transfer should be limited to general practices.

On the other hand, Indian software managers point out two other advantages of clusters: source of labour, and source of credibility. The Bangalore cluster started in part because of the presence of well-regarded scientific organizations, both universities and government research institutes, which were sources of supply of suitable labour. When large numbers of software firms establish themselves in the same cluster, they also become a source of employment for other firms.

Once the cluster is established and acquires a reputation, as a sort of geographic brand equity, then new and unknown firms acquire a measure of credibility merely by their location. However, the labour supply advantage of the cluster might diminish along with the impending Indian national demand-supply imbalance, and the cluster credibility factor might lose strength if the brand equity attached to India substitutes for identification with a particular cluster.

Government Policies:
The government of India played multiple roles in the growth and development of the Indian software industry. In the very early years, the severe restrictions on inward foreign direct investment and the very high import tariffs on equipment surely had an adverse effect on the industry�s growth (although the swadeshi or self-reliance policies surely also resulted in the largely home-grown nature of the industry).

Later, economic reforms � some domestic deregulation in 1985 and major liberalizations of trade and investment policies in 1991 � coincided with the dramatic growth of the software industry, a young industry that developed just as the license raj restrictions were lifted. At the least, government was not in the way when the industry was ready for growth.

Perhaps the main government contribution to the development of the Indian software industry was an indirect one. Public policy approach created the educational and research infrastructure that resulted in the critically important skilled labour advantage. For example, the several publicly funded and highly regarded Indian Institutes of Technology and the Indian Institute of Science, among other public colleges, produced sizable numbers of very well-educated graduates who were available for employment by software companies.

In addition, the central government supported research in institutions such as the Indian Space Research Organization and in several atomic energy labouratories, and in so doing created a pool of highly technically educated people who were available later to software companies. The government did not support R&D in software directly, but enabled the private sector to achieve its human capital advantage.

Another set of government actions in the 1990s was targeted specifically to the software industry. Notable among these was the creation of software technology parks that offered reliable electric power and adequate international telecommunications links, two of the infrastructure weaknesses that mattered to the software industry. In addition, the central government made earnings from exports of software free of income tax, which provided a powerful incentive for Indian companies to develop their export capabilities. However, this tax break is being phased out, and by 2007 it will be gone; this source of Indian export advantage will not apply in the future. Indian software companies have not benefited from government-supplied R&D incentives such as the Bayh-Dole Act in the US[22]. As recently as 2002, there was no equivalent legislation in India[23].

Even if there had been, it wouldn�t have had much impact on the software industry. The main reasons are that very few Indian software companies performed innovative R&D in the past, and even if they did, India does not grant patents for software.

English Language:
All educated Indians are English speakers; their university education is in English. The main export customers in North America were English speakers, and even in other countries, software (like air traffic control) is dominated by the English language. Leading competitor countries for outsourced software development, such as Ireland, Israel, and Philippines, are also populated by English-Speaking educated people. One potentially very strong competitor country is China, and to the extent that the use of the English language among educated Chinese increases, the Indian advantage diminishes.

Non-Resident Indian (NRIs):
Indians living and working in the US, many of whom were also technically educated and employed in businesses, constituted a bridge between the market for software in the US and the suppliers in India.

The NRIs:

  1. provided knowledge of the US market that Indian companies did not have,
  2. they helped to overcome adverse country of origin effects attached to India in the early years of the industry,
  3. they were a source of knowledge about western managerial practices if they returned to India after the 1991 reforms, and
  4. they could make financial investments to stimulate the start-up of new and small companies in India.
Some of the advantages that NRIs provided, especially US market knowledge, remain important for the future of Indian software companies. The other advantages are less important for the future. For example, the Indian software industry no longer suffers a negative country of origin effect � if anything, it is now a positive effect.

Indian National Culture:
There is apparently a good fit between Indian national culture and the requirements of successful software development. India is individualistic. Indian national culture supports openness, candour, and free exchange of ideas. It is ritualistic but adaptive, not absolute. These traits all match up well with software development that requires individual initiative along with interaction and free expression, and a willingness to change from the past.

The culture-software fit is less good for other potential software competitor countries, such as China. There is at least one Indian national culture trait that appears inimical to successful software development, and that is high power distance � acceptance of large status differences and respect for hierarchy. Of course, the more educated, the younger, and the more oriented to international business, the less national culture traits bind people. And China, a main potential competitor, also has high power distance.

Changing Indian Software Company Strategies
As some of the bases for competitive advantage in Indian software diminish � especially low labour cost and government support for industry � other countries are becoming stronger threats. The countries that Indian software managers themselves mention most often are Philippines, Israel, Ireland, Russia, and China. A recent McKinsey study identified China and Philippines as India�s potential competitors in the short run (NASSCOM-McKinsey 2002).

Managers of Indian software companies need to change their business strategies to retain export competitiveness. Indian software companies are changing their business strategies by changing their business segments, in two ways. First, they are seeking to move away from programming on-site, and instead moving
  1. Toward higher value-added and more sophisticated and complex offshore software services such as systems integration and consulting Second, they are seeking,
  2. Develop packaged software products
    Software products are more risky than customized software services because they might not succeed in the marketplace. Both of these shifts in business segments call for new and different capabilities compared to lower-end software services. Most important, they both require:
    • More creative and business-centred relationships with clients, with more insight into customers� needs, and more global marketing knowledge, which has been possessed by foreign firms more than Indian firms
    • Program management skills and general management skills of coordination and control, as well as technical skills
    • Up-front financial investment, especially to develop packaged products, which many Indian companies in the past had not been able to make
    • Superior technology, which requires advanced R&D
    • Brand equity, so that customers are willing to buy with assurance of long-term support.

Competitive Basis for Software Business segments:
A closer and more detailed look at the bases for competing in each of the several segments of the software industry shows the change in capabilities that will be required of Indian software firms if they are to shift toward higher value-added software services and packaged products.

Low labour cost, the result of low wages and high productivity, is critically important for competitive success in entry level software services such as programming, but much less so in high-end software services such as systems integration and consulting, for which labour qualifications are more important.

Management and marketing capabilities exhibit the opposite pattern as labour cost:
They are low in importance for programming and high in importance for systems integration and consulting. Domain knowledge � knowledge of the customer�s needs particular to his or her industry and country � becomes important with high-end software services, similar to management capability.

The level of advancement of technology used to compete in software is low for programming and medium for other software services. This implies little R&D spending is necessary for the former but some is helpful for the latter. Foreign technology is of medium importance for most software services, but becomes critical for software consulting.

Neither financial nor legal nor physical infrastructure is of high importance to software services competitiveness, nor is clustering, in the view of Indian software managers.

Government policies are regarded as quite important to software business success, both targeted incentives and general trade and investment liberalizations. The sole exception is the smaller importance of government trade and investment policies for systems integration and consulting businesses.

Market Competitiveness:
Ease of entry into low-level software services has contributed to the competitiveness of the industry and its international success, but this feature of the industry is less important for higher-level software services and products. The presence of foreign competitors exhibits the opposite trend: not important for entry-Level software services but critical to competitiveness of the marketplace for higher-end software services and products.

Whether or not Indian software companies will succeed in their transition from entry-level on-site software services providers to high value-added end-to-end business solutions providers and consultants is by no means assured yet. Their new competitors include strong foreign multinational firms such as IBM and Accenture, which are the world�s leaders in systems integration. In the development of packaged software products, success has been elusive, as the data on revenue from software products shows and as individual company experiences illustrate.

Intellectual Property In The New Software Industries
The intended shift by Indian software companies toward higher-level software services and packaged software products, if it actually occurs, implies that the companies will need to create new intellectual property of higher value than pre-existing software services or products.

The value of software to the company that produces it depends on its innovativeness and on the number of times that components of it can be re-used for the same or different customers.
More innovative software is likely to be more attractive to the customer, either by reducing costs of existing activities or by enabling new activities to be undertaken, and accordingly to command a higher price.

More innovative software is also likely to yield higher margins for the software supplier because of fewer competitors and fewer substitutes compared with generic software. Software with more re-uses is likely to be more valuable to the software supplier because of economies of scope � initial development costs need not be incurred again for additional customers. As is often expected of innovations with wide applications, innovative and re-usable software carries the potential of higher revenue and higher profit for Indian software firms compared to lower-level customized software services.

Creating Value in software:
A business issue that faces Indian software companies is how to increase both the innovativeness and uses for new software products and services. The resolution of this issue implies a newly important role for intellectual property. Software development projects that Indian companies do for foreign customers typically include a portion of genuinely customized work that is unique and proprietary to the customer. It is not useful to anyone else.

However, some portion may be reusable. The work might produce tools that are applicable to other customers� needs, and these tools consist of explicit knowledge. The work might also have some element of knowledge that is primarily tacit � for example, how the software engineer solves the customer�s problem. The reusable portion of a typical customized software services contract might be 30-40 percent.

Both the explicit, reusable tools and the tacit knowledge potentially contain new intellectual property. To ensure that they do � that they have value to other customers � the software company needs to make investments in research and development, or in organizational learning more broadly. A software tool that was created as part of one customer�s project needs to be adapted and completed for uses with other customers. The tacit how-to knowledge needs to be converted into codified knowledge so that others in the company can benefit from it in their future work. The mechanisms might include expert systems, project post-mortems, and case studies.

The IP-led Services Player was one of the long-term strategies formulated by the recent NASSCOM-McKinsey Report (2002), and it stressed an R&D orientation and consistent investment in emerging technologies. The additional investment to complete and generalize the common portion of a customized software contract typically might be 30-40 percent of the original contract effort.

The recent establishment or expansion of overseas development centres by several major foreign information technology companies (for example, IBM, General Electric, Microsoft), and the prominence given to them by their parent companies signifies a favourable R&D climate in India, especially as a source of talent, and suggests high probability for success on the part of Indian software companies if the resources can be committed. Indeed, some Indian software companies have themselves established dedicated overseas development centres for foreign companies, such as HCL has done for Toshiba in Japan[24].

Creating a new Business Model
To develop new software tools that are reusable by the software outsourcer as part of customized software development contracts requires a new business model. One model is that the Indian software developer accepts a reduced price for the project from the customer in return for which the Indian company is able to use some of the tools developed for this project for other customers or products.

Although the customer ordinarily would own all of the software for which it pays, it gives up some of its ownership rights in return for a lower project price. In other words, the Indian software developer invests its own resources in reusable tools and acquires (partial) ownership in return.

To implement this type of business arrangement raises several questions centred on the value of intellectual property and the rights to use it. How can the boundaries between customer-specific proprietary software services and reusable software tools be drawn? How great will be the value to the software vendor of the potentially reusable software tool? How much investment in R&D by the software vendor will be required to equip the potentially re-usable tools for other applications?

Accordingly, what will be the price for transfer of intellectual property from the customized software client to the software services supplier? How will the IP rights of the original client be protected?

The changes in the strategies and business models envisioned above will also raise questions for the internal organization of Indian software companies. How will the R&D and organizational learning be paid for? How will internal customers in the software company (e.g., another business unit) be treated compared to external customers in the utilization and pricing of software? How will conflicts of interest be avoided?

Moving toward Higher Value-Added Business
The development of more innovative and re-usable software tools, and the codification of tacit knowledge about methods of solving clients� problems in particular, assist the Indian software company�s emerging strategy of moving from lower-level programming toward higher-level systems integration, consulting, and end-to-end solutions. Greater management capabilities as well as copyrighted or patented technical achievements will enable Indian software companies to compete more effectively against the incumbent global firms.

In this report we document the growth and development of the Indian software industry in the last decade, describe the role of intellectual property in the industry�s development in the past, assess the status intellectual property rights protection for software in India, explain the fundamental changes in the strategies that some Indian software companies are undertaking to be competitive in the future, and speculate on the new and different role for intellectual property and its protection in the Indian software industry in the future.

Industry Size and Growth:
Size: The Indian software industry was a $12.5 billion industry in sales revenue in 2002-03, accounting for more than three percent of Indian gross domestic product. It is mostly a customized software services (not packaged products) business, and mostly an export business with only a small domestic market. It is mostly an Indian business, not a foreign-owned business: among the top 20 software firms operating in India, seven are foreign-owned, and among the top 100 just 22 are foreign-owned. The foreign-owned companies accounted for an estimated 22% of all software services produced in 2001-02.

The growth of the Indian software industry has been exceedingly fast and sustained over the last decade. The compound annual growth rate averaged 42% per year. In the last two years during the turndown in the business, the growth rate has been slower but still very fast at roughly 28% per year. The growth rate of Indian software exports has been faster than the growth rate for the industry overall.

Intellectual Property Creation in the Past:
Intellectual property was not important to the growth and development of the Indian software industry in the past. It did not figure in company strategy or managers� decisions. Indian software companies did not create very much new and valuable intellectual property. Technology inputs that might create intellectual property were small. Indian software firms spent very little on research and development in-house � less than one percent of their revenue � and much of that was adaptive rather than innovative R&D. They purchased very little technology from foreign sources, and only a few firms had international non-equity strategic alliances for technology.

Patent Protection:
India does not award patents for software because under Indian law, software tends to fall into established unpatentable subject matter (i.e., business method, algorithm or pure mental act). However, software that has a technical effect and is part of a physical system, is patentable. Discussions at high levels in India about pure software patenting are taking place. The issues include the extent to which social benefit would be impeded by software patents, the usefulness of 20-year patents in an industry with rapid rates of technological obsolescence, and the extent to which software patent applications can meet the non-obvious criterion. A change in Indian software patent policy may occur in the future, but not immediately.

The unimportance of Patent Protection:
Whatever the status of patent protection for software in India, it hasn�t been important to the software industry. In the first place, patents were sought in the US where the market was, not in India. Second, most Indian software services were customized for the client. It was the client�s property, not the Indian software company�s property. Even if it were, it would have limited general use because it was customized to the client�s needs. Third, the benefit/cost ratio for patenting in the US was unfavourable. The dollar cost of filing for a patent was high and the cost of defending a patent would be high. The benefit was thought to be small because technology obsolesces rapidly and the competitive threat from the use by other firms of an inventor�s proprietary technology was small anyway. Therefore, secrecy was an option to patenting, and the oligopoly-oligopsony nature of the industry facilitated informal technology sharing agreements.

Copyright Protection:
Indian protection of software copyrights meets international standards in some respects but not others. In particular, Indian law does not prevent a properly registered software package from being copied for use on multiple computers, and does allow multiple copies of software to be made for non-commercial uses. High level discussions now taking place may reverse these two differences from international standards and bring India into full TRIPs and WIPO compliance.

A more serious weakness in software copyright protection is its enforcement. Deterrence for copyright infringement is weak because proof is difficult and penalties are small. Conviction rates are low because the judiciary is understaffed and underqualified, and delays are too frequent and too long. Here also improvement might occur in the future in the form of proposals for the creation of special intellectual property courts.

Small Value of Copyrights:
The value of copyrights has been doubted by Indian software companies. Aside from weak enforcement, it was easy to evade copyrights and hard to know when infringement occurred. On the other hand, Indian lawyers believe that software copyrights have great potential value. Here we encounter a vicious cycle: without copyrights or patents there is no well-functioning market for pricing intellectual property, and without a price it is hard to ascribe value to it.

Indian Software and Intellectual Property in future
The business model for the Indian software industry in the past will change in the future. To be the low-cost vendor of entry level customized software services will not be the main basis for competing by Indian software companies. The historical Indian advantage of labour that is abundant, low-wage, low-cost, technically educated, and English-speaking is being eroded.

Indian wages are rising as demand catches up with supply, and other countries, especially Ireland and Israel in Europe, and China and the Philippines in Asia, are developing their own competitive labour pools. Other start-up boosts, such as income tax relief on export earnings from the government and marketing assistance from non-resident Indians in the US, will be less important in the future.

Shifts in companies� strategies:
The Indian software industry is seeking to move downstream along the value chain toward more complex tasks of design, systems integration, and consulting that require more customer contact, more domain knowledge, more innovation, and more project management. There is also an attempt on the part of some companies to develop mass-marketed packaged software products, although so far these efforts have met with only modest success. The basis for competing in these segments is advanced technology, highly skilled labour technical labour, and managerial and marketing skill.

The role of intellectual property in future: These new competitive requirements mean, among other things, that the Indian software industry must create new and valuable intellectual property in the future. Intellectual property is more valuable if it is more innovative, which yields bigger margins, and if it is reusable or has a wide range of uses, which yields more licensing revenue without increasing cost proportionately. The implications for intellectual property are clear: Indian software firms must create new, advanced intellectual property, and they must protect it.

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  20. This list of leading reasons draws on Arora (2001), Kapur & Ramamurty (2001), Patibandla & Petersen (2002) and on interviews with Indian software company managers conducted by the author.
  21. Patwardhan and Rathi (2005)
  22. The Bayh-Dole Act, enacted in 1980, allows universities and other non-profit organizations to retain title to inventions created with federal funding, subject to several conditions including the expectation of patent filings and government (non-exclusive) licensing rights (Cornell Research Foundation 2001).
  23. Damodaran 2002
  24. NASSCOM-McKinsey 2002

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