Total Factor Productivity of the Software Industry in India

This paper uses the Malmquist Productivity Index (MPI) to estimate change in total factor productivity (TFP) and its constituent components for software companies in India during 1999–2008. On average, the software industry in India has gained productivity by 0.4 per cent; it recorded the lowest technical change in 2005–06 and the highest in 2003–04. Export and human capital were found the most important factors of TFP growth. Older companies have better TFP growth than new companies, and the productivity growth of Indian-owned companies is better than group-owned companies. The coefficient of initial overall efficiency score was found to be negative and statistically significant, indicating that the companies which had initially low level of efficiency had improved upon TFP growth. Companies that initially had low efficiency improved their TFP growth. Research and development (R&D) has little role in the growth of TFP, probably because Indian software companies cater to the lower end of the value chain.