Human Capital and Development: A Tale of Two Cities--Software Sector in Hyderabad and Bangalore

This paper discusses the factors that promote clusters and the role of clusters in the generation and spread of human capital The analysis in the paper is based on a comparative study of software firms in the two neighbouring south Indian cities – Bangalore and Hyderabad. Some of the features of the software industry, especially the human capital intensity of its production process and the interaction between human agents in the industry, are especially relevant for the discussion of the role of clusters in the birth, growth and dissemination of human capital. In the main, the paper argues that whilst the software producing firms located in Bangalore display the characteristics of a genuine cluster, those located in Hyderabad are much less of a cluster. The second section of the paper discusses the nature and factors that promote clusters drawing upon the work of Krugman, Porter and Marshall. The third section reports on the structure and size of the software industry in Bangalore and Hyderabad. The fourth section analyses the nature of the software industry and its implications for human capital development and diffusion. The fifth section discusses nature and origins of the firms in the two cities and the claims of the two groups to the status of a cluster. The last section summarises the main conclusions of the paper.