The explosion in mobile phone penetration in the last few years in many developing countries, particularly in India and China, has fuelled speculative chatter that these countries have “leapfrogged” development. In particular, the notion that these countries are at the cutting edge of information and communication technology (ICT) primarily because of the rapid diffusion of mobile telephony, has also gained ascendency. The Information Economy Report 2012, published recently by the United Nations Conference on Trade and Development (UNCTAD), however, offers more sober food for thought. The study’s primary focus was on the development of software capabilities in the developing countries.

The gap between the promise of ICT-based technologies and what has actually been delivered in developing countries remains wide. The slow diffusion of technologies that are geared to meet the development needs in areas such as healthcare, education and governance is primarily attributable to the slow progress in the development of software capabilities in developing countries, notes the UNCTAD study.

The software divide

According to the World Information Technology and Service Alliance (WITSA)/HIS Global Insight, the global expenditure on software — not including the software that is embedded in most devices — was about $1.2 trillion in 2011. Significantly, about four-fifth of this expenditure was in the developed world; most of the remaining expenditure was in countries in the East, South and South-East Asia. Thus, the rest of the world spent only 4 per cent of the global expenditure on software in 2011, indicating that the digital divide is even more lopsided when it comes to software use. As software development is heavily controlled by the multinational companies, even these figures do not tell the full story. A significant proportion of the software expenditure undertaken in developing countries would, as a result, flow back into developed countries via transfer pricing.

But even more interesting is the fact that expenditure on software is a much bigger fraction of ICT budget in developed countries when compared to developing countries. Spending on software and services accounted for about 43 per cent of ICT expenditure in North America in 2011, compared to just 11 per cent in Latin America, the report observed. “Low ratios in developing regions can be seen as a sign of limited software use, hindering the passage to the information society,” it noted, while observing that low incomes in developing regions are not necessarily a barrier to development of software capabilities and use.

Economic linkages

In countries such as India, Sri Lanka, Jamaica and the Philippines, exports have been the prime engine for software development, with the share of software in domestic ICT business trailing. In countries such as Argentina and Malaysia, software development for both the domestic as well as export markets have reached a certain level of maturity.

Countries such as Brazil, South Africa and South Korea have established a fairly vibrant domestic software market, the demand for which trails exports. While the virtues of software exports have been fairly well-highlighted, the role of software development in the domestic economy, especially in terms of the linkages it establishes among economic entities is less recognised, the study observes. Domestic development can enhance skills of workers and generate greater efficiency in enterprises, it observes, especially with reference to China.

China’s story

“The indirect effects on society may be expected to be larger when software is locally developed for domestic enterprises and institutions,” the report points out. Software output in China was about $286 billion in 2011, almost 40 times higher than the output in 2000. Significantly, 90 per cent of this output was used to service the needs of the domestic market. The software industry’s “linkages” to the wider economy in China is reflected not only in the embedded software in electronics, but also in the several China-specific instances of ICT innovation.

For example, the “transaction value” of e-commerce business in China in 2011 amounted to $926 billion, about 12 per cent of China’s Gross Domestic Product that year. Much of this was transacted on indigenous platforms such as Alibaba and Taobao. The emergence of indigenous alternatives to Google and other search engines, such as Baidu, and social networking alternatives such as Renren, are a complete contrast to Indian Web culture, which still relies heavily on the English language for a prop.

This did not happen because of the great foresight of enterprising private entrepreneurs or fortuitously, but because of deliberate state policy, observes the report. “The uptake of ICTs and associated software has been supported by government policies and Chinese language software, translation engines and security systems,” it observed.

The study notes that even in countries such as Russia, software and software services, especially those targeting the domestic economy, account for a significant proportion of the ICT segment. Although the overall size of the software industry in Russia is smaller than in Brazil and China, demand is geared to the needs of the extractive industries, telecommunications, financial services and the public sector, it observed.

Not by market alone

Based on an analysis of the software industry in the developing countries, the study observed that “the successful development of software capabilities cannot be accomplished solely by market forces”. It also urges countries to use and integrate Free and Open Source Software (FOSS) in their software policy regimes as an important pillar for the development of indigenous national software development capability.

For the Indian IT industry, the report comes at a time when it has been clear, ever since the recession of 2008-09, that the export thrust is running out of steam. Many companies, which enjoyed a prolonged period of high margins on the export side of the business, have been reluctant to look inwards. But now, with export markets themselves stuck in the mud – characterised by slow growth, low margins and most importantly, great uncertainty – the UNCTAD study gives some ideas for an industry that evidently needs a course correction.