Jordan Times
Thursday, April 8, 1999
Special Feature Story
Silicon Wadi: Can Jordan develop an internationally respected and competitive software industry?
By Ramzi T. Abdel Jaber
The first Middle East MIT alumni conference is due to be held in Jordan later this year. The topic of the conference will be creating knowledge-based industries in the region. Speakers will include world-renowned economist Lester Thurow, author of “Head to Head' and `The Future of Capitalism', technology strategist Michael Cusumano, author of `Microsoft Secrets' and `Competing on Internet Time', and Kenneth Morse, Managing Director of the MIT Entrepreneurship Centre, who has played a key role in launching several MIT-based startups including 3COM and Aspen Technology.
The short answer is yes! Getting there though requires coordination, planning, and investment over the course of several decades. Many countries have tried to create such an industry. The few that succeed manage to create wealth, provide jobs, and as a result experience tremendous economic growth.
The impetus for this essay was a request by H.E. Dr. Marwan Muasher, Jordan's Ambassador to the U.S., who asked me to put together a small memo on the specifics of how the Government of Jordan can nurture and develop a software industry. He wanted me to highlight, based on my experience, the critical success factors for the creation of software clusters. As I will indicate later on in my article, a large number of world-renowned experts have already figured out what needs to be done a long time ago. To try and summarise their work in a few paragraphs would do injustice to their research efforts and valuable insights. Alternatively, I would like to use this article to focus on why Jordan should consider the development of an internationally competitive software industry, how other countries have approached the challenge, and what Jordan's overall strategy should be, should it decide to take on that challenge.
Why software?
Two main reasons: It is a very attractive industry and more importantly, there is a strategic fit between the requirements for building such an industry and the available or potential resources in Jordan.
The advent of the information age has resulted in an unprecedented demand for software products. As a result, the industry is becoming an increasingly important part of the world economy. In the U.S. alone, the total market size for software and software-related services is estimated at $108 billion. The total software industry market size outside the U.S. is estimated to reach $117 billion by 2001. What's encouraging is that prospects for growth are also extremely high. In the U.S., the industry grew 12.5% for the years 1990-1996, nearly 2.5 times the growth of the overall economy. The industry is expected to continue on this steep growth trajectory. Finally, in addition to the large market size and great future prospects, gross margins are very attractive, in many cases reaching 90 per cent!
For countries that are able to take advantage of this phenomenon, the payoffs are impressive:
Creation of an ever-growing number of high paying jobs. By 2001, the industry will employ over 1 million people outside the U.S.. Within the U.S., direct employment will also reach 1 million by 2005.
In addition to job creation, the industry will provide a growing stream of tax revenues. In 1996/1997 alone, the software industry and supporting industries contributed over $28 billion in tax revenues to world governments.
What is also encouraging is that software economics lend themselves to a country such as Jordan:
The highly skilled labour that is required to support such an industry is probably one of Jordan's only resources.
The fact that once developed, the marginal cost of producing an additional copy of a certain software is close to zero facilitates Jordan's participation, as scale does not become a paramount issue anymore.
The collapse of time and distance as a result of technologies such as the Internet, renders transportation of software very cheap and enables companies to compete irrespective of size and location; thus reducing key barriers that could impede Jordan's entry to the market.
What does it take to get there?
Almost all experts agree that the following main ingredients are required for the creation of a successful software industry: Talent, funding, and supporting industries, infrastructure, and government regulation. The following few paragraphs highlight several success stories that reinforce the need for the above-mentioned ingredients.
Silicon Valley: “The only place on earth not trying to figure out how to become Silicon Valley!”
The most spectacular example of a software industry cluster is Silicon Valley, the strip of land between San Francisco and San Jose. It is the home of such companies as YAHOO!, Netscape, Cisco Systems, Hewlett Packard, Apple, Adobe, 3COM and many others. Entrepreneurial activity in the Valley adds up to 3,500 hi-tech companies on an annual basis.
It taps the talent pool supplied by leading regional universities such as Stanford, Berkeley, and UCLA. Many of today's global giants grew out of Stanford's classrooms (e.g., Sun Microsystems, Silicon Graphics, HP, and Cisco). The Valley attracts one third of the venture capital raised around the world, $5 billion, to support such entrepreneurial activity. The supporting industries and services are world-class: patent lawyers, hi-tech consultants, advisors, and marketers, PR, and headhunters. The infrastructure is also unparalleled. I have a T-1 Internet connection to my apartment — and it comes with the rent!
India: “Second largest pool of scientific manpower that speaks English and costs less!”
India is another example of a successful industry cluster. The software industry grew from $10 million in 1989 to $2.2 billion in 1999. Software exports have grown at a staggering CAGR of 55 per cent to reach $1.8 billion. There are over 550 world-class software companies situated in Mumbai, Bangalore, Delhi, and the up-and-coming Hyderabad.
India's key success has been the relative abundance of low-cost, highly skilled manpower. Over 160,000 people are currently employed by the industry. India has over 32 engineering colleges and 700 private training institutes teaching computer science courses graduating 100,000 engineers on an annual basis. More importantly, the quality of education at such places as the India Institute of Technology (IIT) and the India Institute of Science (IIS) is at a par with that of the major leading technology universities worldwide.
Interestingly enough, the infrastructure is very poor. I was shocked to learn, during my trip last summer to Bangalore, India's high-tech capital, that electric blackouts are a daily norm that last 3-5 hours. The government has been smart enough to realise the importance of the supporting infrastructure and hence has allowed companies such as Satyam, Infosys, WIPRO, and Tata Infotech to bypass the local infrastructure by building their own satellite link ups. Some of these companies have even gone a step further by building other complimentary services. One of the companies I visited, Satyam, had a 600-acre campus with power generators, satellites, restaurants, health clubs, theatre, housing, and even an animal sanctuary — things I only saw at large U.S. software developers.
Local governments in India have played and continue to play a pivotal role in encouraging the industry. The Governor of Hyderabad has made several trips to Microsoft and other technology leaders to encourage cooperation and investment. In fact, companies such as Motorola, IBM, Texas Instruments, Digital, and Sun Microsystems have set up their own shops. The government has set up several software technology parks where import duties and corporate taxes are exempt for five years. Companies within these parks are exempt from import duties and corporate taxes for the first five years of operations. The parks offer centralised computing facilities and high-speed data communication links. Moreover, profits derived from software exports are 100 per cent tax-free.
Israel: “Silicon Valley's closest rival”
Whereas the U.S. has 18 engineers/10,000 people, Israel has 135! Israel has the third largest number of companies listed on the NASDAQ thus trailing only the U.S. and Canada. It is the home to some 2000 high-tech firms. Many companies such as Sun, IBM, Motorola, HP, Silicon Graphics, and others have invested in Israel through subsidiaries, research centres, venture capital funds, or acquisition of Israel companies. Intel developed its MMX chip and has three factories in Israel.
Israel's hi-tech exports amounted to $5.7 billion in 1997 (33 per cent of total exports). Approximately 185,000 people are employed in the hi-tech sector.
In addition to the talent pool, Israel has the funding. Currently, 54 venture capital firms operate in Israel with total funds raised between 1991-1997 of $1.5 billion. Between 1992-1997, Israeli companies raised $3.5 billion on Wall Street.
In a recent study by the Council on Competitiveness, Israel, along with Taiwan and Singapore, was identified as a country that has made substantial investments in upgrading its innovative capacity and will soon be on a par with 2nd tier OECD countries.
Where does Jordan fit?
Jordan's 85% literacy rate, 33,000 engineers, $1,600 GDP/Capita, 88 telephone lines/1000 people, and 13 private and 7 public universities puts it at a clearly better starting point than India with its 50 per cent literacy rate and $350 per capita income. So what should Jordan's strategic positioning be vis-a-vis other countries.
To develop a sustainable, high value-add software industry, Jordan's strategy should be executed in two phases. The first phase is geared towards catching up with the rest of the software industry and the second targets getting ahead.
Focus on the basics to catch up!
I highlighted the basics earlier: Nurturing talent by strengthening academic institutions and encouraging research and development, facilitating financial funding by providing incentives for venture capital, relentlessly improving the supporting infrastructure, and developing specific government policies geared towards encouraging the sector. We have got to execute on all fronts if we want to even have a chance at a successful and thriving software industry.
Jordan's initial market entry strategy should rely on its labour cost advantage, which is on a par with that of India. Dedicated software development centres and off site support centres could be the key entry mechanisms. At the initial stages, companies could focus on low value add software development — `me too' products and services — that are faster, better, and cheaper. The revenue influx from such activities would enable those companies to strengthen R&D and undertake more value add work. This is pretty much India's story between 1980-1990. Now, India has large companies with the size, credibility, market reach, and knowledge to compete against the Microsofts of the world.
If I were to give six key recommendations to companies and to Jordan's government during the initial catch up phase, they would be:
Focus, Focus, Focus — Due to the limited market for software products in Jordan, most companies end up being everything to everyone. To compete in the more competitive, specialised global marketplace, our software industry should focus initially on several key areas just like India did with the Y2K and the euro conversion. The focus could be certain industry vertical such as banking or education for example.
Target outside markets — Jordan would need to go immediately to other markets due to the fact that local demand for software is relatively miniscule. Although the ultimate market would be the U.S. and other major industrialised countries, Gulf states and Israel could serve as the starting point.
Buy your first large customer — As Kenneth Morse, Managing Director of MIT's Entrepreneurship Centre, always tells me: you have to buy your first big customer, meaning that you have to give them a deal that they can't refuse. Once you have contracted work from a company such as Intel or HP, it becomes much easier to sell your products and services to other firms. It becomes also easier to attract and train talent.
Celebrate success stories — Success stories draw talent, give credibility vis-a-vis customers, and attracts venture capital. Once we have a company or two that compete internationally, we've got to make sure that everyone knows about them. Yahoo! now valued at $35 billion, was created by two Stanford MBAs out of a room with less than $1,000. Mirabilis ICQ, started by a couple of 25 year-old Israelis was acquired by AOL for $400 million, InfoSys — India software development company doubled its share price in the first couple of hours of trading on the Nasdaq, and the list goes on. The world loves to hear such mega success stories.
Overcome stereotypes — when you talk to anyone in the hi-tech industry about creating a software cluster in Jordan, two issues surface: Stability and the fact that Jordan is just not known for technological innovation. An industry association or the government can overcome both issues with the assistance of specialised PR companies, spin-doctors, who can construct credible, fact-based storylines to educate potential customers/investors. Of course good work usually speaks for itself.
Build marketing joint ventures — Packaging and marketing products is a different but core capability required to successfully compete in the industry. Companies should initially build joint ventures to market their products. Once they have reached a large enough size, they could start their own direct channels.
Leverage the intangibles
The second step is really getting ahead in certain areas. That is something that while India is currently struggling with, Israel has managed to excel at. Very specialised niches such as Internet security, or custom chip design are at the core of Israel's software industry.
Differentiation and innovation are the key to sustaining a competitive advantage and to sustaining a higher wage level and living standard. As any person with an economic background would know, differentiation enables companies to extract monopoly rents. There will always be someone who does it cheaper, better, faster. The name of the game is to always be a moving target.
If you thought catching up is challenging, getting ahead is a much harder undertaking that requires focus on intangibles. The following are my recommendations for tackling the challenge:
Encourage entrepreneurship and nurture creativity and innovation throughout the educational system. The effects of such policies are unbelievable. According to a 1997 BankBoston study, the Massachusetts Institute of Technology (MIT) has spawned over 4000 companies (e.g., Infoseek, Lotus Development, Raytheon, Digital, and Firefly) employing over 1 million people and accounting for the world's 24th largest economy ($116 billion). Another study indicates that half of Silicon Valley's revenue comes from Stanford-seeded companies.
Consolidate, encourage and fund isolated cases of excellence. Jordan has a large number of extremely qualified individuals both inside and outside the country. Educational programs such as the Jubilee School should be more common. There should also be constant networking with the Jordanian talent pool working in hi- tech worldwide.
Nurture a culture that is risk-taking, improve our work ethic and working environment, invest in training and upgrading of skills, and encourage the development of business networks worldwide.
Strengthen the innovative capacity of Jordan by encouraging both public and private investments in basic sciences, the fundamental foundation for innovation and differentiation.
Of course all of the above recommendations should be coupled with several government policies such as the strengthening of patent and copyright laws, the establishment of technology parks and a software development promotion body.
Where do we go from here?
Numerous cities and countries have named themselves Silicon something (e.g., Silicon Island (Taiwan), Silicon Plateau (Bangalore), Silicon Alley (New York), Silicon Fern (Cambridge, U.K.) and attempted to copy the Valley's success story.
If the recipe for success (i.e., talent, funding, infrastructure, etc.) is out there, one might wonder why many of those countries have failed to create such an industry? The answer is twofold:
Those factors are only prerequisites to success: You've got to have them to be in the game. However, having them does not necessarily mean that you will win. This is why it is an imperative for Jordan to execute against all major areas (talent, funding, infrastructure, supporting products/services, and government regulation) as they are very interdependent.
It takes a long time to reap the benefits of executing against those factors. Many governments worldwide lose sight of that and hence fail. The March 11, 1999 study by the Council on Competitiveness on innovation indicates that investments in innovative capacity made by Scandinavian countries in the mid to late 80's will render Finland, Sweden, and Denmark the new international innovation centres by 2005. Hence, we have to articulate a long-term vision that is clearly communicated and executed against by successive governments. Creating a cluster in Jordan will probably take several decades.
Now that we are all fired up and ready to go out and create our own miracle, we should start by thinking of a name — Silicon `Wadi'? Pretty good but unfortunately already taken by Israel. Maybe Silicon `Jabal' or `Sahel'!
The writer works with McKinsey & Company's Silicon Valley Office in Palo Alto, CA. He has served on several worldwide, technology strategy client engagements. Abdel Jaber also worked with Andersen Consulting, Booz Allen & Hamilton, and is a Partner and Manager of Business/Product Development at Integrated Business Solutions, an IT start up in Jordan. He holds an MBA from the MIT Sloan School of Management, with a specialisation in the fields of information technology, business strategy, and entrepeneurship.
Sources:
“Building an Information Economy”, Business Software Alliance, 1997
“Give it Away and Get Rich”, Business Week, 1998 “PriceWaterhouseCoopers Study Documents Rapid Job Creation”, Business Software Alliance, October 27, 1998 For more details refer to:
Michael Porter's “Competitive Advantage of Nations” and “Clusters and Competition”; AnneLee Saxenian's “Regional Advantage”; Mohan Sawhney's “Economic Ecosystems and the Silicon Valley Ecosystem”.
Also Kenneth Morse, Simon Johnson, and Scott Stern's work at MIT Bob Metcalf, Infoworld, March 2, 1998; “Silicon Envy”, The Economist, February 20, 1999; India's National Association of Software and Services Companies (NASSCOM); “Software in India. Bangalore Bytes”, The Economist, March 23, 1996; “Bottlenecked in Bangalore”, Red Herring, February, 1997 issue; “Silicon Envy”, The Economist, February 20, 1999; “Silicon, Silicon Everywhere”, The Economist, March 29, 1997; Israel's Business Arena, http://www.globes.co.il; “Israeli startups accuse local VCs of collusion”, Red Herring, March 1999 issue; “The new challenge to America's Prosperity: Findings from the innovation index”, Council on Competitiveness, March 11, 1999; Jordan's Department of Statistics Yearbook of Labour Statistics, 1995; “MIT: The impact of Innovation”, BankBoston, March 1997