Technovation 22 (2002) 551–560

www.elsevier.com/locate/technovation

Embeddedness, knowledge transfer, industry clusters and global

competitiveness: a case study of the Indian software industry
*
N. Dayasindhu
FPM Office, IIMB, Bannerghatta Road, Bangalore 560076, India

Received 22 May 2001; received in revised form 31 August 2001; accepted 24 September 2001

Abstract

This paper develops a dynamic theoretical framework for global competitiveness. The framework is used to assess competitiveness
of organizations in the Indian software industry. Behavioural drivers of transaction cost economics like trust and experience influence
embeddedness that describes the relationships among organizations in an industry cluster. The spiral for knowledge transfer, culture
variables and embeddedness influence knowledge transfer. Embeddedness and knowledge transfer are key determinants of industry
clusters that lead to global competitiveness. Industry clusters are characterized by external economies, generalized reciprocity and
flexible specialization. Generalized reciprocity describes the relations between constituents of an industry cluster that are based on
trust. Flexible specialization facilitates the production of a variety of products for specific markets using general-purpose resources.
Global competitiveness is achieved by increased productivity, focussed direction and increased pace of innovation and growth. The
implications of the framework for organizations in the Indian software industry are creating trust and encouraging inter-organization
relationships. These organizations also need to design processes for tacit knowledge transfer, implement mentoring programs and
build general management capabilities.  2002 Elsevier Science Ltd. All rights reserved.

Keywords: Embeddedness; Knowledge management; Industry clusters; Global competitiveness; Indian software industry

1. Introduction organizations do not seem to have any other key

A few Indian organizations, notably those in software
services industry have established their presence in the
most competitive global markets. Indian organizations
have a long way to go before they become truly global
organizations. The performance of the Indian software
industry is not fully explained by the diamond frame-
work of Porter (1988). This framework studies competi-
tiveness based on: (1) firm strategy, structure and rivalry;
(2) factor conditions; (3) demand conditions and; (4)
related and supporting industries. Most Indian industries
are characterized by an underdeveloped domestic market
both in terms of size and sophistication. Telecommuni-
cations and power infrastructure are poor. Inter-company
rivalry is at low levels. There is absence of industry clus-
ter and no real institutional support. Apart from qualified
and relatively inexpensive human resources, most Indian
* Tel.: +91-80-6993056; fax: +91-80-6584050.
E-mail address: nd@iimb.ernet.in (N. Dayasindhu).
resources to provide a sustainable competitive advan-
tage. Knowledge management and industry cluster
theory play an important role in attaining global com-
petitiveness. Both these theories have implications on the
strategic role of management. Nonaka (1991) argues that
the competitive environment and customer preferences
change constantly. This makes it imperative for organi-
zations to create knowledge continuously, and to exploit
it to make successful new products, services, and sys-
tems. Porter (1998) posits that understanding industry
clusters helps organizations to make more informed
decisions on choosing locations, fostering productive
social relationships in those locations and working with
other constituents to nurture the cluster.
Therefore, it is of interest to develop a framework
based on economics, sociology, knowledge management
and industry cluster theories to study the sustenance of
global competitiveness of organizations. The theoretical
framework explains how organizations can attain a pos-
ition of global competitiveness. Organizations in the
Indian software industry provide an empirical testing
ground for the theoretical framework.

0166-4972/02/$ - see front matter  2002 Elsevier Science Ltd. All rights reserved.
PII: S 0 1 6 6 - 4 9 7 2 ( 0 1 ) 0 0 0 9 8 - 0
552 N. Dayasindhu / Technovation 22 (2002) 551–560
2. Embeddedness, knowledge transfer, industry
clusters and global competitiveness
2.1. Embeddedness
The most relevant economic theory for this research
is transaction cost economics (TCE). This is because the
rules governing a transaction are among the critical vari-
ables that determine its governance structure
(Williamson, 1991). A transaction is an economic
exchange, i.e. the transfer of some goods or services
between technologically separable activities. Two activi-
ties are said to be technologically separable if all coordi-
nation issues between them can be solved (not always
efficiently) by keeping a large buffer of inventory
between them. Transaction costs are the costs of admin-
istering an exchange relationship. These include costs of
negotiating, drafting and monitoring contracts. Also
included are the costs of settling disputes and enforcing
settlements along with the opportunity costs associated
with administering the contract inefficiently. TCE owes
its origins to the seminal work of Ronald Coase who
posited that coordination of economic activity will be
through prices/bargaining and transaction costs are
incurred while using the price mechanism for coordinat-
ing economic activity.
The behavioural and environmental factors that are the
basis of TCE are bounded by rationality, opportunism,
task complexity and human asset specificity (Scott,
1987). Bounded rationality is the behaviour that is
rational with a view to maximize utility but is con-
strained by the limited cognitive and computational
abilities of humans and organizations. Opportunism
refers to the pursuit of goals by self-interest-seeking
humans or organizations with calculated dishonesty and
guile. Human asset specificity acts as a barrier for entry
to competitors. Human asset specificity is present when
employees from outside the company are not good sub-
stitutes for those inside due to certain idiosyncratic skills
possessed. TCE combines institutional economics with
aspects of contract law and organization theory to ident-
ify and explicate the key differences that distinguish
three generic forms of governance, viz. markets, hybrids
(clusters) and hierarchies (Williamson, 1991).
In the context of organizations involving in economic
transactions with several other organizations, the socio-
logical concept of embeddedness articulated by Granov-
etter (1985) becomes an important determinant of com-
petitiveness. Embeddedness refers to the fact that
economic behaviour is affected by the industry constitu-
ents’ dyadic (pair-wise) social relations and the structure
of the overall network of social relations. Embeddedness
is an ongoing process continuously shaped by the
relations between the different constituents. It not only
shapes the agents but is also shaped by them (Jones et
al., 1997).
Embeddedness emphasizes on the role of social
relations and structures of these relations in generating
trust and discouraging opportunism. There is a prefer-
ence for transacting with constituents of known repu-
tation (known from social relations) than others. The
importance of embeddedness is that the role of other
constituents, trust and experience not discussed by TCE
are recognized and addressed.
Two types of embeddedness have been identified;
relational embeddedness that refers to the relation
between two constituents and structural embeddedness
that refers to the extent to which the other constituents
are connected to the two constituents. Structural embed-
dedness leads to an increased diffusion of norms that
enhances relationships, information to safeguard
relationships and formation of social mechanisms to
safeguard relations. It also leads to more information
about the constituents and has a constraining effect on
opportunistic behaviour. Embeddedness leads to the for-
mation of social mechanisms like restricted access (a
limit on the number of members), macroculture (shared
values and norms among constituents), collective sanc-
tions (punishment meted out by constituents on erring
partners) and reputation (the skills and reliability of the
constituents) that coordinates and safeguards relations
(Jones et al., 1997).
The optimal level of embeddedness is an intermediate
range that is neither too tight to fragment relations or
too loose to form relations (Uzzi, 1997). The number of
constituents also influences the degree of embeddedness.
The sociological approach integrates effectiveness and
efficiency while TCE explains just the efficiency of
organizations.
2.2. Knowledge transfer
Knowledge management is a critical factor influenc-
ing global competitiveness especially when competition
is becoming increasingly knowledge intensive. Knowl-
edge management is creating, acquiring, interpreting,
retaining and transferring knowledge to improve per-
formance by purposefully modifying behaviour based on
new knowledge. This definition is based on the work on
learning organizations and knowledge management by
Garvin (Garvin and Gray, 1997). Knowledge can be
either explicit or tacit and can be held by individuals or
collectively in groups. Explicit knowledge can be articu-
lated and, more often than not, captured in the form of
text, tables and diagrams (Nonaka, 1991). Tacit knowl-
edge cannot be articulated. As Polanyi (1966), who
coined the term put it “We know more than we can tell”.
Explicit and individual knowledge constitute the techni-
cal expertise. Explicit and collective knowledge are the
rules, regulations and laws. Tacit and individual knowl-
edge constitutes intuitiveness. Tacit and collective
 N. Dayasindhu / Technovation 22 (2002) 551–560
knowledge constitute the wisdom of social practice
(Baumard, 1999).
Nonaka and Takeuchi (1995) posit that explicit and
tacit knowledge are not mutually exclusive but comp-
lementary entities and knowledge can be converted from
one form to the other. The knowledge creating process
is a dynamic spiral that moves from the individual to
organization and inter-organization dimensions. This
Socialization–Externalization–Combination–Internalization
(SECI) spiral is composed of four sequences. Socializ-
ation (tacit to tacit) is the sequence where knowledge is
transmitted through observation, imitation and practice
from one individual to another. This is a limited form
of knowledge creation since no systematic insight into
the knowledge is obtained. The organization or industry
cannot leverage this knowledge since it is not explicit.
Externalization (tacit to explicit) is the sequence where
tacit knowledge is translated into explicit knowledge that
can be communicated to other members in the organiza-
tion or industry. Combination (explicit to explicit) is the
sequence where discrete parts of explicit knowledge are
combined into a new whole. Internalization (explicit to
tacit) is the sequence where the members of the organi-
zation or industry enrich their own tacit knowledge base
applying the new body of explicit knowledge. These
sequences start all over again to compose the knowl-
edge-creating spiral. Externalization (converting tacit
knowledge to explicit) and internalization (using that
explicit knowledge to extend one’s own knowledge
base) are the critical steps in the spiral of knowledge.
Although what is described is the knowledge-creating
spiral a close observation reveals that the creation takes
place through transfer of knowledge and this theory can
be applied to study knowledge transfer as well. Cohen
and Levinthal (1990) state that absorptive capacity for
knowledge is a function of the recipients’ current level
of knowledge and cannot be separated from its creation.
Tacit knowledge remains elusive, limiting the degree
to which it can be articulated and shared. Szulanski
(1996) found that most difficulties in transferring largely
tacit knowledge are a result of the recipients lacking
experience to make effective use of new ideas and ardu-
ous relationship (that is laborious and distant) between
the source and recipient. Also, there are problems asso-
ciated with identifying the precise original tacit knowl-
edge that needs to be transferred.
Two important factors that influence transfer of
knowledge are culture and social systems. Polanyi
(1966) states that tacit knowledge is embodied in the
intersection between the individual and his culture. Hof-
stede (1991) in his seminal work posits that the cultural
variables that influence the business context are indi-
vidualism vs. collectivism, power distance, uncertainty
avoidance and masculinity vs. femininity. Individualism
is the culture attribute describing a loosely knit social
framework in which people emphasize only the care of
553
themselves and their immediate family. Collectivism is
the cultural attribute that describes a tight social frame-
work in which people expect others in groups of which
they are a part to look after them. Power distance
describes the extent to which society accepts the fact that
power in organizations is distributed unequally. A high
power distance culture shows a greater respect for auth-
ority and gives status a lot of importance in society.
Uncertainty avoidance refers to the culture attribute
describing the extent to which a society feels threatened
by uncertain and ambiguous situations and tries to avoid
them. Masculinity is a culture attribute describing the
extent to which societal values are characterized by
assertiveness and materialism. Femininity is the culture
attribute that emphasizes relationships and concern for
others.
Grant and Baden-Fuller (2000) state that inter firm
collaboration and clusters result when the knowledge
domains and product domains of the different organiza-
tions are incongruent and collaboration increases the
efficiency of knowledge utilization. Collaboration offers
risk-spreading benefits when there is an uncertainty over
future knowledge needs.
2.3. Industry clusters
From the preceding key determinants that contribute
to competitiveness, viz. TCE, embeddedness and knowl-
edge transfer what emerges is a strategy that favours
industry clusters. This strategy focuses on building
strong relationships between organizations that form a
cluster that enhances competitiveness. This cluster of
organizations is called an industry cluster. Typically
cluster constituents are suppliers, producers, customers,
labour markets and training institutions. They also
include financial intermediaries, professional and indus-
try associations, university departments and schools,
regulatory institutions and bodies of law and the govern-
ment. The clusters can be a subset of the industry, for-
med by only some constituents of the industry charac-
terized by a persistent relationship over a period of time
(Maskell and Malmberg, 1995).
Important features of industry clusters are external
economies, generalized reciprocity and flexible speciali-
zation. The industrial location theory states that the cost
savings that occur as a result of spatial concentration are
a major cause for creating industry clusters. The cost
savings usually result from increased market power,
availability and use of specialized facilities, shared
physical and human infrastructure, reduced risk for bud-
ding entrepreneurs and knowledge transfer. More
important than the static external economies like cost
savings are the dynamic external economies associated
with knowledge transfer, innovation and specialization.
The focus on knowledge related externality is predomi-
554 N. Dayasindhu / Technovation 22 (2002) 551–560
nant in advanced technology industries (Krugman,
1997).
Powell (1987) argues that generalized reciprocity is a
feature of industry clusters. It is the social dimension
where transactions occur not by discrete exchanges or
administrative fiat but through relations based on trust
and reputation between the constituents.
The concept of flexible specialization (Piore and
Sabel, 1990) is a key feature of the constituents of the
industry cluster. ‘Flexible’ here refers to the nature of
production systems where general-purpose machinery is
used to produce a variety of products and ‘specialization’
refers to the fragmented nature of product markets
requiring more variety and innovation. This leads
organizations to vertically disintegrate since economies
of scale makes it difficult to remain flexible and usually
results in an industry cluster characterized by a number
of specialized organizations with a complex web of
relationships among them.
2.4. Global competitiveness
The real purpose of industry clusters is to achieve a
position of global leadership vis-a-vis competitors and
make the constituent organizations globally competitive.
Porter (1998) posits that competitiveness (that contrib-
utes to industry leadership) is achieved in three ways:
increasing the productivity of organizations, driving the
direction and pace of innovation and stimulating growth
of new organizations and institutions. Clusters allow
each constituent to benefit as if it had greater scale and
as if it has joined with others formally without sacrificing
its flexibility. Productivity, innovation and growth of
new organizations are enhanced by better access to lab-
our and suppliers, specialized information, complimen-
tarities, and access to institutions and public goods. They
are equally enhanced by motivation to perform better as
a result of peer pressure and measurement of perform-
ance since the cluster constituents often share common
resources.
3. Theoretical framework
The theoretical framework developed for analysing
global competitiveness goes beyond the popular dia-
mond framework of Porter (1990) that focuses on four
factors: (1) the nature of firm strategy, structure and riv-
alry; (2) factor conditions or the basic endowments on
which the organizations seek to compete; (3) the nature
of local demand and; (4) the presence of related and sup-
porting industries. The framework is designed to over-
come the criticism that the Porter approach is like a static
opaque black box (Enright, 1996). Although Porter’s
diamond framework is a good starting point to under-
stand competitiveness, it is short on specifics. It does
not elaborate on the dynamic processes that result in the
factors determining competitiveness. As discussed in the
previous section, this dynamic theoretical framework is
based on economic, sociological, and knowledge man-
agement and industry cluster theories. The framework
explains competitiveness in a business context that has
increasingly become knowledge intensive and human
resource driven. The proposed theoretical framework is
shown in Fig. 1.
The economic, sociological and knowledge manage-
ment theories provide the underlying variables that deter-
mine competitiveness. TCE determines whether the
knowledge cluster is the cost minimizing governance
form. Embeddedness goes beyond the economic ration-
ale and describes the nature of relations between industry
constituents that lead to knowledge cluster creation.
Knowledge transfer cements the relations between
organizations.
4. Methodology and research strategy
Qualitative research is used since it is best suited for
understanding complex socio-economic phenomena.
This research follows an interpretive approach. Inter-
pretive studies generally attempt to understand phenom-
ena through the meanings that people assign to them.
The case study methodology is used since it is best
suited to the empirical inquiry that investigates bounded
contemporary phenomena within the real life context
(Creswell, 1997). The characteristic of a case study is
that it strives towards a holistic understanding of the
phenomena under research. The case study methodology
is appropriate when organizational rather than technical
issues are the focus of research. A detailed analysis of
a single case on the Indian software industry is the focus
of this research. This research is based on information
collected via in-depth formal and informal interviews
and published material. This is the best strategy to gain
insights into socio-economic phenomena from the per-
spective of the constituents. The dearth of reliable quan-
titative information available also influences the choice
in favour of in-depth interviews.
5. Case study of the Indian software industry
The Indian software industry is chosen for the case
study. Based on the US dollar the annual rate of growth
of the Indian software industry during 1999–2000 has
been 46% (NASSCOM, www.nasscom.org) while the
Indian economy in the same period grew at an annual
rate of about 6%. The Indian software exports during
1999–2000 grew at an annual rate of 57% in US dollar
terms (NASSCOM, www.nasscom.org). The software
industry that predominantly provides a range of software
 N. Dayasindhu / Technovation 22 (2002) 551–560
Fig. 1. Embeddedness, knowledge transfer, industry clusters and global competitiveness.
services has about 185 of the Fortune 500 organizations
as its customers (NASSCOM, www.nasscom.org) and is
probably the only globally competitive industry in the
organized sector in India. About 90% of India’s software
exports are to the demanding markets in USA, Europe
and Japan. NASSCOM also reports that 15 out of the
23 organizations worldwide that have a Software Engin-
eering Institute-Competency Maturity Model (SEI-
CMM) Level 5 are located in India. More than 75% of
the income of the organizations in the Indian software
industry is from non-Indian customers. These organiza-
tions have shown consistently increasing trends in pro-
ductivity (growth in revenue per employee), innovation
(largely in software development processes and human
resources management) and growth (in revenue, profits,
and wealth of employees and off shoot organizations)
for the last 5 years (NASSCOM, 1999 and
www.nasscom.org).
A performance characterized by 5 years of increasing
productivity, innovation and revenue and profit growth
555
helps to identify organizations that have sustained com-
petitiveness to be included for this research. Indian
software industry in this context refers to those organiza-
tions that have a majority Indian ownership, distinctly
Indian management and employees. In depth interviews
were conducted with employees of the organizations
selected. Since the ‘real’ and not the ‘official’ descrip-
tion is required to validate the framework it was agreed
that the identity of the interviewees and their organiza-
tions would not be revealed. A sample of four organiza-
tions that satisfied the requirements was selected. The
interviewees were eighth employees, i.e. two from each
of the selected organizations. A profile of the organiza-
tions and the interviewees with their identification are
listed in Table 1. For example, A refers to organization
A and Bx refers to the interviewee x whose employer is
organization B.
This case study reveals the role of different factors in
the theoretical framework in the context of the Indian
software industry. Rapidly changing technology is a key
556 N. Dayasindhu / Technovation 22 (2002) 551–560
Table 1
Profile of organizations and interviewees
Organizations
A: One of India’s top–ranked software firms. It offers clients services in Az: Undergraduate degree in Computer Science with 2 years
the area of software development, maintenance and reengineering services experience in A on web technologies. Prior experience of 1 year in
and e-commerce and internet consulting for global clients. It is a SEI
CMM Level 5 organization.
B: One of India’s leading software firms, that provides enterprise
solutions, global support services and software development services to
global clients. It is a SEI CMM Level 5 organization.
C: One of India’s biggest software firms, that provides end to end
software solutions in diverse technology and business domains. It is a SEI marketing. Prior experience of 1 year with a bank.
CMM Level 5 organization.
D: A leading provider of telecom software services and solutions to
clients around the world. It is an ISO 9901 organization.
feature of this industry and it may be easier for organiza-
tions to manage these changes if they collaborate with
other organizations. However, this is not easy since most
organizations in the Indian software industry compete
for the same customers. It is difficult for these organiza-
tions to work together since they are waiting for an
opportunity to grab each other’s customers. The flux in
technology and development methodologies makes
software projects complex to manage and makes it next
to impossible for an employee to be an expert in more
than one technology. The interaction of employees
within the organization is structured to transfer explicit
knowledge and usually misses out on tacit knowledge.
A mentoring programme facilitates the transfer of tacit
knowledge. Indian culture encourages the mentoring
concept as it emphasizes strong social relationships
between superiors and subordinates. The employees of
the Indian software industry feel that they will perform
better if they are trusted to interact with those outside
the organization especially to learn new technologies and
solve common technology issues. Even if there is no for-
mal interaction between organizations in the Indian
software industry, there is an informal interaction
between employees of different organizations based on
ties established in college or outside work. Increasing
competition from countries that have a cost advantage
over India in software production makes it imperative
for the organizations in the Indian software industry to
specialize based on their competencies. Organizations
need to outsource parts of software projects to other
Indian organizations that have a competence and cost
advantage in those fields. A detailed discussion of the
Interviewees
database applications with another organization.
Ay: MBA with 3 years experience in international marketing with
A.
Bx: Undergraduate degree in Mechanical Engineering with 3 years
experience in networking for an offshore development center in B.
Prior experience of 2 years in Unix at another organization.
Bw: Graduate degree in Computer Applications with 2 years
experience in database applications in B.
Cv: MBA with 4 years experience in C as a domain expert and in
Cu: Graduate degree in Computer Applications with 3 years
experience in C in various programming languages.
Dt: PhD in Electronics Engineering with 2 years of design
experience in D.
Ds: Graduate degree in Electronics Engineering with 3 years of
design experience in D.
application of the theoretical framework in the context
of the Indian software industry follows.
5.1. Embeddedness
Most organizations in the Indian software industry are
engaged in providing services for systems integration or
turnkey projects. A software project is usually done in-
house and not outsourced even when the task complexity
makes this option viable and efficient. Dt states
I’m a part of a team that has world class design
capabilities. Our design skills are enhanced by mar-
keting inputs we get from our partners abroad who
tell us what to design.
The proliferation of technologies and the overhead costs
of large multinational organizations make outsourcing
prudent. It is getting increasingly difficult to hire and
retain employees who are experts in certain technologies
or domains. This human asset specificity implies that
organizations need to specialize in certain technologies
or domains. The reasons for the absence of outsourcing
are the unwillingness on the part of the bigger organiza-
tions to share expertise and the fear of losing customers
since both the smaller organizations seem to be compet-
ing for the same customers. This opportunism leads to
cost undercutting that sometimes results in a fall in qual-
ity. The technologies that drive software development
are for most part developed in the USA. The Indian
software industry requires significant monetary and time
investments to keep abreast of these technologies. This
 N. Dayasindhu / Technovation 22 (2002) 551–560
bounded rationality about advances in new technology
can be overcome if there is a relationship among organi-
zations to let one another know of global developments
in technology. The rapid change in technology makes it
impossible for one organization to develop competencies
in all technologies.
The flux is not only in technology but also in the
methodology of the software development process. In
such an environment, the organizations need to ensure
that their employees are skilled with the most relevant
technologies and methodologies. Although most organi-
zations have formal training sessions and knowledge
repositories, employees seem to want more. They want
to meet with professionals from other organizations on
similar technologies and methodologies to find out more.
Cu states
All of us in our group in the organization know
what each of us is good at. The organization is huge
but we do get to the person with the expertise. Some
of my friends in the organization and outside meet
once in every 10 or 15 days to keep abreast of the
technology. A lot of knowledge is shared but no cor-
porate secrets are let out. I come back and share this
knowledge with other colleagues at work.
Interestingly, the Post Graduate Program in Software
Enterprise Management offered by the Indian Institute
of Management Bangalore (a part time program for
software professionals to enhance management skills) is
seen as a neutral meeting place for professionals from
different organizations to discuss topics of mutual inter-
est. The neutrality of the venue is an important factor
when the senior management in a number of organiza-
tions do not trust their employees.
Software professionals believe that trust is a binding
factor that fosters relationships between organizations.
They feel that trust can be fostered only with the bless-
ings of top management. Bx observes
All my colleagues firmly believe that we can per-
form better if we are allowed to network with counter-
parts in other organizations. At present, senior man-
agement does not seem to trust us since they feel we
will be lured away. Of course, I informally consult
with my friends from college in other organizations.
However, the ‘horror’ stories floating in the industry
about poaching of software professionals make the top
management averse to trusting other organizations. This
seems justified by the high employee turnover rates
(some organizations have a 20% employee turnover rate)
in the Indian software industry. Embeddedness can be
nurtured by a reinforcement of successful experiences in
working relationships. The lack of trust among senior
management seems to prevent a cascade of such success-
557
ful experiences. It is the organizations in the Indian
software industry who need to work out a level of
embeddedness that is tight enough to safeguard com-
petencies and yet flexible enough to transfer knowledge
that will be beneficial to the industry as a whole. Without
trust it is seems difficult to achieve embeddedness and
knowledge transfer.
5.2. Knowledge transfer
Though trust of top management is an issue, Indian
culture is to a large extent favourable for knowledge
sharing. Indians have a collective culture bounded by
norms that emphasizes strong social relationships that
provides a natural environment for knowledge sharing.
In spite of this aspect of Indian culture, knowledge trans-
fer between organizations in the Indian software industry
seems to be curtailed by the large power distances that
signify an uneven distribution of power within the
organizations and lack of relationships between organi-
zations. Az observes
I think Indians, at least in the software industry,
feel good about transferring the knowledge they pos-
sess with others. It gives a sense of pride and satisfac-
tion. Don’t forget Indian society gives an exalted pos-
ition to the teaching profession. And we like to be a
mentor to our juniors.
Indians take pride in being mentors to their junior col-
leagues at work and mentoring. Most organizations have
successfully implemented processes that facilitate
explicit knowledge transfer. This is probably a first step
towards the larger goal to cultivate knowledge transfer
between organizations.
Though the organizations in the Indian software
industry do not seem to possess an institutionalized
methodology to transfer knowledge like the SECI spiral,
they do have some explicit knowledge transfer processes
in place. According to Ds
All knowledge cannot be gained by training. The
difference between an average and excellent software
engineer is the level of intuitive feel the latter acquires
with experience. This can only be learned by obser-
vation.
Within organizations, explicit knowledge is transferred
by the formal training sessions, intranets, and knowledge
repositories, etc. Tacit knowledge is more difficult to
identify and transfer. At present most organizations seem
to have only ad hoc processes that transfer tacit knowl-
edge and the presence of a mentor program seems to
facilitate this process.
Knowledge is a key driver of performance in the
Indian software industry. This knowledge is not the
558 N. Dayasindhu / Technovation 22 (2002) 551–560
static and explicit type that is found in source codes and
flowcharts but dynamic and tacit like rules of thumb dis-
covered from experience that resides with employees.
The value of such tacit knowledge increases only when
it is freely transferable and without doubt transferring
tacit knowledge is a difficult process. The incongruence
in the product and knowledge domains is a further testi-
mony to the importance of knowledge transfer. The
decision process is traumatic when there is a choice of
competing technologies coupled with an uncertainty to
choose one over the other. Again, only in few instances,
do organizations have shared expertise to arrive at a
decision in such situations. Cv states
In my previous project the client was new to our
company. It was difficult to understand some of their
documentation and we were having a delayed start.
Luckily, we knew a small company that had worked
with this client before. We sought their help and they
were only too happy to share their experiences. I think
this is a one off incident.
Software professionals dismiss fears of increased
employee turnover when they interact with professionals
from other organizations since knowledge sharing on of
job profiles, compensation levels and work culture hap-
pens on a regular basis. Usually in Indian software
organizations, knowledge transfer happens when team
members get trained and then teach other team members
what they have learnt. But rarely is the expertise of
another organization sought to train or complete the part
of the work for which skills do not exist internally in
another organization.
5.3. Industry clusters
The organizations in the Indian software industry real-
ize that there is a reasonable overlap in the work they
do. In quite a few cases certain organizations have their
strength in particular technologies or domains. It
becomes very difficult for another organization to repli-
cate this expertise and may be better off outsourcing
work to organizations that have these skills. The craze
to acquire new expertise is one of the reasons for high
employee turnover and rising salaries in the software
industry. Bx notes that
Sometimes we accept a project for which we do
not have the requisite skills. A quick formal training
is organized. It may be better to outsource these pro-
jects or exchange them with another company for a
project where we have the expertise. But top manage-
ment feels that we need to have a presence in a full
range of services to attract clients. I’m sure our com-
pany will become more productive when we develop
relationships with other companies. And more innov-
ative too because there will be a healthier competition
in the exchange of ideas among the organizations.
Undoubtedly, this phenomenon brings down pro-
ductivity when a few key employees with the requisite
skills leave in the middle of a project. The rising
employee turnover has led to increasing employee com-
pensation. A rapid increase in the employee compen-
sation level has been a large contributor to the increasing
cost of Indian software services that is driving their cus-
tomers to explore cheaper options in other countries.
What is required is a process by which organizations
identify their strengths and specialize on them. A sym-
biosis among organizations will increase external econ-
omies and competitiveness since the organizations will
be sure of business since they complement each other.
5.4. Global competitiveness
When organizations in the Indian software industry
build relationships and transfer knowledge among them,
they foster an industry cluster. Real productivity
increases characterized by decrease in production time
and costs and increase in quality are a benefit of industry
clusters. Knowledge transfer leads to innovation that can
assist organizations moving up the value chain by offer-
ing sophisticated services and products that no one single
organization could have done alone. Cv observes
Indian software firms are globally competitive
based on costs. Soon we might lose this advantage.
We need to develop some expertise and the best way
to develop this is for all firms to come together and
identify their strengths. A game plan for the entire
software ecosystem needs to be put in place. Other-
wise when the markets shrink there will a blood bath.
Industry clusters also provide a useful medium for
growth of new organizations that further enhance exter-
nal economies, generalized reciprocity and flexible spe-
cialization. If industry clusters are not formed there is
a real possibility of Indian software firms losing their
competitive edge to cost competitors like China, Philip-
pines and Malaysia.
6. Significance and implications for the Indian
software industry
An attempt has been made to develop an integrated,
dynamic theoretical framework to explain global com-
petitiveness using economics, sociology knowledge
management and industry cluster theories. This research
provides insights to industry and academia to create and
sustain global competitiveness in the Indian software
industry.
 N. Dayasindhu / Technovation 22 (2002) 551–560
The importance of this research in the Indian context
is highlighted by an increasing awareness of the impor-
tance of knowledge societies. The Prime Minister of
India has recently unveiled a five-point agenda for Indi-
a’s development into a knowledge society. This agenda
has prompted the Planning Commission to think of
‘envelope goals’ and Strengths Weaknesses Opport-
unities Threats analysis to foster knowledge societies.
The task force constituted by the Planning Commission
will among other objectives focus on defining, shaping
and communicating public policy issues that relate to
the emergence of India’s knowledge society, developing
public awareness programs and researching issues
related to the knowledge society (Venkatasubramanian,
2000).
The key implications of this framework are:
1. Creating an organization culture that emphasizes
trust: the top management needs to realize the impor-
tance of the role of trust in creating embeddedness
and enhancing knowledge transfer. Often some top
managements tend to mistrust their people when they
discover that they are interacting with other organiza-
tions. This is not helping to create embeddedness and
enhance knowledge transfer. Trust needs to be
reinforced more by actions than by words.
2. Encouraging inter organization relationships: organi-
zations must have a policy of exchanging knowledge.
A good start can be regular symposiums or seminars
in neutral territory like an academic institution that
will provide an opportunity for employees of different
organizations to interact in a professional environ-
ment. This increases embeddedness, rate of knowl-
edge transfer and should result in establishing
relationships among different organizations.
3. Designing processes that enhance tacit knowledge
transfer: though explicit knowledge is transferred
within an organization and probably between organi-
zations, tacit knowledge is not. The tacit knowledge
transfer holds the key to global competitiveness. A
tacit transfer mechanism like the SECI spiral in the
industry assists in creating industry clusters. Knowl-
edge transfer should be built into work processes
rather than designating it as a separate activity.
4. Implementing mentoring programs: knowledge is fos-
tered when there are industry-wide active mentoring
programs that provide opportunities for junior
employees to acquire tacit knowledge from their men-
tors. Mentoring increases productivity by a quick
transfer of skills to junior employees. Mentoring can
be thought of as a precursor to inter organization
knowledge transfer.
5. Building general management capabilities: equally
important as technical skills are management skills.
However, a person good with excellent technical
skills need not have a similar proficiency in general
559
management skills. This mismatch impedes knowl-
edge transfer, productivity and innovation. The real
driver of competitiveness is how well an organization
can assist its technically competent employees to
quickly acquire and leverage the appropriate general
management skills. A general management capability
provides organizations and their employees an under-
standing of the benefits of building relationships both
inside and outside the organizations to enhance trans-
fer of knowledge.
It is imperative for organizations that aim to become glo-
bally competitive to evolve a strategy to encourage
building relationships with other organizations and pro-
mote knowledge transfer among organizations. This
helps in creating industry clusters that ultimately sustain
global competitiveness of organizations.
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N Dayasindhu is a doctoral student at the Indian Institute of Management
Bangalore. His research interests are industry structure, resource-based
view of the firm, inter-firm networks and firm level strategies in the Indian
software industry. He has a Masters degree in Physics from the Indian
Institute of Technology, Madras and has worked as an equity analyst track-
ing the Indian software industry. He is a recipient of the National Talent
Search Scholarship awarded by the National Council of Educational
Research and Training, an apex resource organization of the Government
of India.