Saturday, July 24, 2010

Software industry and engineering colleges

Interesting NBER working paper by Ashish Arora and Surendra K. Bagde that examines the causal role of state-level undergraduate engineering baccalaureate capacity (engineering college seats) on the development of local software industry (specifically software exports) across 14 major Indian states over the 1990-2003 period (which coincides with the rise of India's software industry). They write,

"We find that differences in software exports by states are related to the supply of human capital even after controlling for factors such as how rich or large the state is, and measures of industrial production, electronics production or telecommunication investment."

The graphic below shows the state share of software exports and engineering baccalaureate capacities for the 1990-2003 period. The clear positive co-relation points in favor of the aforementioned reasoning.

And given the almost similar presence (in proportion) of state-funded engineering colleges in all states, the role of private engineering colleges assume significance,

"It is the role of private engineering colleges which is the key the puzzle. Simply put, states which allowed private engineering colleges to enter early were able to get a head start and, this early advantage has persisted for nearly a decade and a half."

The changes in software exports and engineering baccalaureate capacity over the 1990-2003 period was the largest in Karnataka, Maharashtra, Tamil Nadu and Andhra Pradesh which had the largest increases in private engineering college seats, which points to a broad causal relationship.

They conclude,

"In other words, states were favored locations for software development because they had higher stocks of human capital, and they had higher stocks of human capital because they allowed private engineering colleges to operate earlier than other states... a key source of variation (in software exports) is that some states in India allowed the entry of private engineering colleges much earlier than the rest. These tend to be the states that also subsequently became the major poles of software exports... Permitting privately financed colleges helped mitigate the adverse effects of the lack of public investments in higher education."

For the record, the number of engineering colleges in India increased from 246 in 1987 to 353 in 1995 and over 1100 in 2003, with private sector forming 80% of new colleges added in the 1987-95 period and 94% in the 1995-2002 period. Further, during the 1985-2003 period, undergraduate engineering baccalaureate capacity increased ten-fold from about 45,000 (59 per million) to about 440,000 (405 per million).

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