On the back of services-led growth, India has been attracting huge investments in various sectors. The rise of the Asian century has also compelled foreign players to make inroads into India and its Asian counterpart China. The two countries are touted to be the engine of world economic growth in the coming decades. The economies of India and China have been growing twice as fast as the rest of the world over the past two decades. While investors favor India for offshoring IT, business processing and R&D activities, China is favored for manufacturing and assembly jobs. Information Technology (IT) and offshoring services have been significant contributors to India's economic growth in the recent past. According to McKinsey, share of IT Software & Services Industry in India's GDP is expected to reach 7% of GDP in 2008 from 4.1% of GDP during 2004-05. Share of IT exports is expected to grow to an estimated 35% of India's total exports in 2008 from present level 25% of India's total exports in 2004-05.
India's large pool of technical and research expertise-accompanied by the fact that they are more economical than their counterparts'-has been favoring R&D investments in a major way. IT R&D services currently account for more than 15% of total IT exports. Peter Drucker, the world-renowned management guru noted that the fate of advanced economies depends on making knowledge workers more productive. Perhaps, it can be said that the third-world countries like India and China have been successful in doing so. Thomas Davenport, who holds the President's Chair in IT and Management at Babson College, says in his book Thinking for a Living, "Countries whose knowledge workers aren't highly productive will lose jobs to other parts of the world where knowledge workers are paid less and produce more for the money." And this prophecy seems to have come true and accordingly, a number of international IT bigwigs made a beeline to India recently and announced huge investments in R&D. Foreign IT giants like Intel, Cisco Systems, and Microsoft have announced billion dollar investments in India and a large chunk of these investments have been assigned to the R&D sector. The increasing importance given to the R&D activities by domestic companies across various sectors is also attracting foreign players to invest in India. For instance, according to a study of 25 domestic drug companies, the R&D expenditure of these companies went up sharply by 42% to Rs.1,814.65 cr during the 2004-05 fiscal from Rs.1,278.08 cr during 2003-04. The other reason aiding in foreign investment inflows is the fact that MNCs want to aid their operations already set in India. A local R&D center would help them in knowing more about the Indian market. It was in the early 1990s that some MNCs had started setting up operations in India to cater to international markets. This trend has gained momentum in the last few years.
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