Infosys set up in Bangalore, far from watchful eyes in Delhi.

Photographer: Gireesh Gv/The India Today Group/Getty Images

Why Doesn't India Have Its Own Silicon Valley?

Dhiraj Nayyar is a journalist in New Delhi. Trained as an economist, he has worked at the Financial Express, India Today and Firstpost.com. He is editor of "Surviving the Storm: India and the Global Financial Crisis."
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When India’s Prime Minister Narendra Modi visits Silicon Valley this weekend, he'll meet some of the most influential, innovative and wealthy Indians in the world. Two of the planet's most powerful technology companies have CEOs of Indian origin: Microsoft's Satya Nadella and Google's Sundar Pichai. Indeed, one study found that 15 percent of all Silicon Valley startups in 2012 were led by Indians, even though they comprised only 6 percent of the area’s population.

The question Modi should ask himself is this: Why hasn’t India been able to replicate, even in in some small measure, Silicon Valley's top-end technology ecosystem? Why haven't Indians been able to create a Google or Facebook in Bangalore?

The question may sound counter-intuitive. If there's one thing India is known for abroad, besides poverty, it's the country's prowess in information technology. How often have you heard the assertion that if China is the factory of the world, India is its back office? Modi has repeated the boast; so has China’s President Xi Jinping.

QuickTake India's Aspirations

In that claim, though, lies a partial explanation for why India's technology scene remains underdeveloped. Beginning in the 1980s, Indian tech companies focused on providing relatively low value-added IT services to overseas clients, rather than developing high value-added products. The choice made sense. Companies faced a tough climate for doing business in then-socialist India and a small domestic market. Red tape strangled the hardware sector, as so many others in India; archaic labor laws and a lack of power discouraged new factories. Given India's nationalized banking system, financing for risky startups was slim-to-nonexistent.

By contrast, the tech services sector was virtually unregulated. While not as well-trained and innovative as in the U.S., India's pool of engineers was large, low-cost and English-speaking. Companies such as Infosys and Wipro could set up private generators to power their Bangalore campuses and could grow far away from the watchful eyes of Delhi bureaucrats.

India's IT giants may be victims of their own success. At least until the global economic crisis hit in 2008, Infosys, Tata Consultancy Services, HCL and Wipro were hugely profitable and globally respected. They never had to develop the risk appetite to branch out into higher-end services, let alone product development.

At the same time, the hype over the Bangalore boom obscured the fact that India hadn't really created a true startup ecosystem. Silicon Valley, for instance, benefits greatly from the presence of several top-notch universities; academic research is translated quickly into the real world, while feedback travels in the other direction. Yet despite setting up 14 new Indian Institutes of Technology since the 1990s, successive Indian governments haven't seen fit to locate one in Bangalore itself. (Modi's proposed putting one in Dharwad, a town more than 400 kilometers away.) Meanwhile, India spends only 0.8 percent of its GDP on research and development, compared to 2.8 percent in the U.S. and 1.8 percent in China, both of which have much higher GDPs than India. Until relatively recently, Indian startups attracted limited venture capital and private equity funding compared to their Chinese counterparts. Intellectual property protections were weak.

After the financial crisis dried up demand, companies such as Infosys and HCL responded by seeking to move up the value chain. Infosys, which appointed Vishal Sikka, a high-ranking executive at Germany's SAP as CEO in 2014, is now pursuing advances in automation, artificial intelligence and design.

Still, any true tech pioneer is more likely to emerge from outside the circle of Bangalore's giants. In the last few years, a clutch of Internet-based start-ups has begun to take advantage of a sector that is today as lightly regulated as IT services were three decades ago. Their young entrepreneurs have shown a greater appetite for risk than their predecessors. Perhaps more importantly, they've benefited from the emergence of a new set of VC and private equity investors willing to stake capital and nurture businesses over the long-term. New e-commerce players such as Flipkart and Snapdeal have attracted investments valuing them at $15.5 billion and $4.8 billion in 2015, respectively. Zomato, a restaurant search-and-discovery service founded in 2008, has received over $200 million in funding and now has a presence in over 20 countries.

Flipkart and Snapdeal are still small companies by the standards of world leader Amazon and China’s Alibaba, of course. And for now, they're focused on expanding their Indian footprint rather than expanding globally. But the fact that they enjoy a huge domestic market (today's India is much richer than India in 1985) means that they've got a good shot at developing products and technology that could have much wider appeal.

Modi intends to showcase this new startup culture while in Silicon Valley. If he really wants India to produce an Apple or Amazon, though, he needs to focus on improving the environment for innovation at home -- cutting regulations, investing in research and education, and boosting growth in order to expand the domestic market. Indians abroad are obviously talented and nimble enough to innovate. The question is whether India is, too.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Dhiraj Nayyar at dhiraj.nayyar@gmail.com

To contact the editor responsible for this story:
Nisid Hajari at nhajari@bloomberg.net