Business Daily from THE HINDU group of publications
Tuesday, Oct 17, 2006
Info-Tech - Insight
The global diffusion of IT supply
C. P. Chandrasekhar
Programmed to grow. - Shaju John
The information and communications technology (ICT) industry is today seen as truly global, with the process of diffusion worldwide having been particularly rapid over the last decade.
Diffusion, however, has two separate components: The diffusion of supply, involving production of ICT equipment and services, and diffusion in use, whether in or outside production. It is the former that would result in a truly global industry. Further, the term ICT covers a number of industries as defined in standard industrial classification systems.
Thus global diffusion need not and does not imply a similar pattern of evolution of ICT presence in individual economies.
The OECD's Information Technology Outlook 2006 provides useful and comprehensive information on the actual pattern of diffusion. Given the divergences in information on the IT industry from different sources, this collation of information by a single source enables an analysis of the process of global IT diffusion.
What has that pattern been and what are its implications?
The OECD Secretariat defines ICT activities as those that process, deliver and display information electronically. The report excludes broadcasting, media and content and divides the ICT sector into the following components:
communication equipment and systems;
electronics and components;
IT equipment and systems;
Top 250 ICT firms
If we consider the top 250 firms in the ICT sector defined as above, their revenues in 2005 (at $3002.5 billion) exceeded the ICT spend ($2963.5 billion) in all countries of the world, as estimated by the World Information Technology and Software Alliance (WITSA). While this discrepancy must be related to differences in coverage and definition, the figures do suggest that the top 250 firms account for an overwhelming share of the global market.
Of these 250 firms, 85 were core information technology firms 40 IT equipment and systems producers, 31 IT services providers and 14 software publishers. The revenues of this component of the ICT industry accounted for a relatively small share of the total revenues from ICT of the top 250 (25 per cent), which is dominated by telecommunications (33 per cent) and electronics and components (34 per cent). Within the IT sector and considering firms included in the top 250 of the ICT industry as a whole, IT hardware dominates (67.5 per cent) with revenues of $549.3 billion, followed by IT services (21.4 per cent or $174.4 billion) and software (11.1 per cent or $90 billion).
One robust way in which the diffusion of IT supply can be assessed is to check the distribution by country of origin of the top 250 firms (including those in telecommunications equipment and services). When the OECD began collating data on these firms in 2002, among the top 250 ICT firms (ranked by revenue), 150 (60 per cent) were based in the US and 42 (17 per cent) in Japan. No other country had more than ten. There were eight based in the UK and in France, seven in Canada, six in Chinese Taipei, five in Germany and the Netherlands, three in Korea, two in Denmark, Israel, Singapore, Sweden and Switzerland and one in Australia, Bermuda, Finland, Italy, Mexico and Spain.
Thus, at the turn of the century, the diffusion of ICT supply was limited. The US dominated the industry; other than Japan most OECD countries were far behind; and there were few firms from non-OECD countries that mattered in the international reckoning.
The picture was even starker in the case of the IT industry. There was not a single firm outside the US and Japan that featured among the top 10 IT equipment and systems firms, only two of the top 10 software firms (SAP from Germany and Softbank from Japan) were from outside the US and all top 10 firms providing IT services were from the US.
In sum, if the idea of substantial global diffusion of the ICT industry is justified, it is a recent phenomenon. According to the OECD, in 2005 the top 250 ICT firms reported as many as 34 countries as their bases. However, locational concentration was still high, with 116 (46 per cent) of them being based in the US and 39 (16 per cent) in Japan. Only Chinese Taipei had more than 10 firms, with a figure of 11.
There were, however, some signs of an emerging presence elsewhere in Asia with Korea reporting six firms among the top 250, and Hong Kong and India three each.
But once again, the picture in the case of the IT sector was still one of US dominance.
The top 10 firms in all IT sectors were extremely locationally concentrated. The distribution of software firms has remained the same; Chinese Taipei had entered the top 10 league in IT equipment, displacing not the US but Japan; and IT services were completely dominated by the US, except for the fact that one firm (Cap Gemini, Ernst and Young) that was earlier owned jointly in France and the US, was now replaced by French-owned Cap Gemini.
What then explains the obvious signs of diffusion of the IT industry to locations outside the OECD? The first is the growing presence of IT hardware production in countries such as Chinese Taipei, and China, encouraged by the decision of majors such as IBM to shift out of the hardware business. IBM's decision to sell its PC business to Lenovo of China was the culmination of a long-term trend in which it was moving out of hardware into IT services.
Between 1992 and 2004 IBM's total revenues increased from $64.5 billion to $96.3 billion. However, over this period IBM's revenue from IT services increased from $7.4 billion to $64.5 billion, while its revenues from the sale of hardware fell sharply.
The transition from a situation where services accounted for just 11.5 per cent of the company's revenues to as much as 67 per cent has meant that IBM is now principally a services provider and not a manufacturer. Transitions of this kind have occurred elsewhere as well. Ireland which was and still is a major exporter of IT equipment is also now moving rapidly in the direction of being predominantly a services exporter.
The diffusion of hardware production is reflected in the export data provided by the WTO. As emerges from Table 1, if we take office and telecom equipment as a whole, there appears to be a generalised shift in global export market share between 2000 and 2004, away from most of the 15 leading exporters (that together accounted for 97 per cent of global exports in 2004) to China.
The only exception is South Korea. In fact, besides Korea, the US and Japan are the only countries that had a global market share in excess of 5 per cent. But the export shares of these countries have been falling. On the other hand, China accounted for more than 15 per cent of the global market.
However, there is another aspect to this story. While it is indeed true that between 2000 and 2004 China has registered a remarkable expansion in its exports of commodities such as electronic data processing and office equipment (Table 2), it also emerged as the leading importer of electronic components and integrated circuits, with it share in global imports rising from 6.8 per cent in 2000 to 22.4 per cent in 2004.
The US (14.92 per cent) and Japan (12.31 per cent) still dominate the world market for these products and there are only three other countries (Taipei, South Korea and Malaysia) which recorded market shares of more than 5 per cent. In sum, the dramatic signs of diffusion of IT supply seem still predominantly the result of a well-noted process, where developing countries (in this case largely China) serve as locations for parts of the production chain involving assembly of imported components. In fact, if we go further back in the value chain, this point is only strengthened. While semiconductor manufacture has also been shifting to locations outside the US and Japan, the equipment needed for such manufacture is still concentrated in these countries.
As Chart 1 shows, the US and Japan account for as much as 86 per cent of the world market for semiconductor equipment, with Europe as a whole contributing 13 per cent and the rest of the world just 1 per cent. Control over knowledge and the core technologies still remain with the dominant players despite some limited diffusion of supply.
Software and IT services
The question that remains is whether this feature is true of the other component of the IT industry: software and IT services. As already noted, dominance of IT firms over software products is overwhelming.
The only possible exception in this area is the growing importance of IT services exports from new locations such as India, as a result of the off-shoring of services to lower cost sites. This provides the second reason for the overall picture of diffusion of the IT industry globally. But does this point to the emergence of a relatively independent software services industry?
First, while it is true that there have been sharp increases in such exports from countries such as India and Ireland, those increases are from a small base (Chart 2). Second, the share of these countries in total global exports of these services is still small, being around 3 per cent in the case of India and 5 per cent in the case of Ireland, as opposed to the UK's 11 per cent and the US' 13 per cent.
What is more, there is increasing evidence that this development too reflects in large part the relocation of supply bases by developed country firms, rather than being predominantly the contribution of domestic firms.
This last point comes through when we consider the growing role of intra-firm trade in IT goods and services. Data on this is available largely from the US. As Table 4 shows 77 per cent of US imports of computer equipment and 66 per cent of US imports of computer and information services are intra-firm. This has been made possible by a sharp increase in US foreign investment in the IT area, involving creation or acquisition of both IT goods producing and IT services firms.
It is known that FDI projects account for an overwhelming share of China's exports of ICT goods. And, according to UNCTAD, there were 632 FDI-driven, export-oriented IT services projects across the world in 2002-03, besides 513 call-centre projects and 139 projects offering shared services. While many of these were in the developed countries, developing Asia accounted for 265 (or 42 per cent) of the IT services projects. India, the leading offshoring location, was home to 118 of these (19 per cent). This drive on the part of foreign firms to find cheap offshore locations underlies both the expansion in trade in IT services and the importance of intra-firm trade in the area.
To conclude, though there are signs of some global diffusion of IT goods and services supply, this diffusion is still limited, largely the result of developments since 2000 and driven substantially by FDI flows from developed countries, especially the US. The process of diffusion thus seems to be the result of restructuring of operations by the dominant players rather than substantially the result of the emergence of new players. The globalisation of the industry is led by the core, with important implications for the impact of such diffusion. Perhaps the area where diffusion of ICT is truly global is the diffusion in use, which we would take up later.
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