Seoul Journal of Economics - Vol. 27 , No. 1

[ Article ]
Seoul Journal of Economics - Vol. 27, No. 1, pp. 7-40
Abbreviation: SJE
ISSN: 1225-0279 (Print)
Print publication date 28 Feb 2014
Received 15 Jan 2014 Revised 02 Feb 2014 Accepted 04 Feb 2014

Service-led Catch-Up in the Indian Economy: Alternative Hypotheses on Tertiarization and the Leapfrogging Thesis
Wooseok Ok ; Keun Lee ; Hyoseok Kim
Associate professor, Division of International Trade, Incheon National University, Tel: 82-32-835-8642, Fax: 82-32-835-0786 (wooseokok@incheon.ac.kr)
Professor, Department of Economics, Seoul National University, Tel: 81-2-880-6367, Fax: 81-2-886-4231 (kenneth@snu.ac.kr)
Department of Economics, Columbia University, Tel: 1-646-737-4661 (hk2562@columbia.edu)

JEL Classification: O11, O14, O53, O19, O25


The experience of India in economic catch-up is unique when compared to other countries. First, the catch-up process of India was not only service-led, but also accompanied by a decoupling between manufacturing and services. Second, productivity performance in the service sector was higher than in the manufacturing sector in terms of the level as well as growth rate. Finally, exports in IT services led the tertiarization of the Indian economy. From this perspective, the trajectory of the Indian catch-up can be characterized as “path-creating.” Existing hypotheses on tertiarization do not fully account for such aspects of the uniqueness of the Indian experience.

The leapfrogging argument in Neo-Schumpeterian economics provides a more plausible explanation of the Indian experience. The ICT revolution and the shift from hardware systems to client-server systems have created new markets for the global services trade. This paradigm shift lowered the costs of entry, including fixed investments, for Indian IT service firms and helped close the experience and skill gaps quickly. The industry-specific characteristics of the IT services industry and the country-specific advantages of India further lowered the costs of entry. With steady strategic and organizational innovations, Indian IT service firms succeeded in securing competitive advantages in the global market.

Keywords: Catch-up, India, IT services, Tertiarization, Technological leapfrogging


This paper is a re-writing, for English readers, of its Korean language version published as Ok (2013). The authors would like to thank two anonymous referees for helpful comments and the comments received during its presentation at the 2013 SJE International Symposium, held in September 2013 at Seoul.

1. Aggarwal, Sonia N. Government Bytes: Industrial Policy in the Indian Software Industry. Berkeley APEC Study Center Working Papers Series BWP 13-02, 2013.
2. Amiti, Mary, and Wei, Shang-Jin. Fear of Service Outsourcing: Is It Justified?. NBER Working Paper Series No.10808, 2004.
3. Arora, A., V. S., Arunachalam, J., Asundi and Ronald, F. “The Indian Software Services Industry.” Research Policy 30 (No. 8 2001): 1267-87.
4. Athreye, Suma S. “The Indian Software Industry and Its Evolving Service Capability.” Industrial and Corporate Change 14 (No. 3 2005): 393-418.
5. Bailey, Martin N. and Solow, Robert M. “International Productivity Comparisons Built from the Firm Level.” The Journal of Economic Perspectives 15 (No. 3 2001): 151-73.
6. Banga, Rashmi. Critical Issues in India’s Service-led Growth. ICRIER Working Paper No. 171, 2005.
7. Basant, Rakesh. Banglore Cluster: Evolution, Growth and Challenges. Indian Institute of Management Working Paper Series No. 2006-05-02, 2006.
8. Baumol, William J. “Macro-economics of Unbalanced Growth: The Anatomy of Urban Crisis.” American Economic Review VII (1967): 415-26.
9. Bosworth, Barry, and Maertens, Annemie. “Economic Growth and Employment Generation: The Role of the Service Sector,” in Ejaz Ghani (ed.), The Service Revolution in South Asia. New Delhi, India: Oxford University Press: pp. 103-146, 2010.
10. Bosworth Barry, Collins, Susan M. and Virmani, Arvind. Sources of Growth in Indian Economy. NBER Working Paper 12901, 2007.
11. Buera, Francisco J., and Kaboski, Joseph P. “The Rise of the Service Economy.” The American Economic Review 102 (No. 6 2012): 2540-69.
12. Cho, Choong Jae. A Study on the Factors and Effects of the Service Economy in India. Seoul: Ph.D dissertation, Hankuk University of Foreign Studies, 2008 (in Korean).
13. Clark, Colin, The Conditions of Economic Progress. London: Macmillan, 1940.
14. Dasgupta, Sukti, and Singh, Ajiit. “Will Services Be the New Engine of Indian Economic Growth?” Development and Change 36 (No.6 2005): 1035-58.
15. Dasgupta, Sukti, and Singh, Ajiit. Manufacturing, Services and Premature Deindustrialization in Developing Countries: A Kaldorian Analysis. UNU-WIDER Research Paper No. 2006/49, 2006.
16. Dougherty, Sean M., Herd, Richard and Chalaux, Thomas. What is Holding Back Productivity Growth in India? Recent Microevidence. OECD Journal: Economic Studies 2009 (2009): 1-22.
17. Eichengreen, Barry and Gupta, Poonam. The Service Sector as India’s Road to Economic Growth? ICRIER Working Paper No. 249 (2010).
18. Ethiraj, Sendial K., Kale, Prashant, Krishnan, M. S., and Singh, Jitendra V. “Where Do Capabilities Come From and How Do They Matter? A Study in the Software Services Industry.” Strategic Management Journal 26 (2005): 25-45.
19. Fisher, Aallan G. B. “Primary, Secondary, Tertiary Production.” Economic Record 15 (No. 1 1939): 24-38.
20. Francois, Joseph F., and Reinert, Kenneth A. “The Role of Services in the Structure of Production and Trade: Stylized Facts from Cross-Country Analysis.” Asia-Pacific Economic Review 2 (No. 1 1996): 1-9.
21. Friedman, Thomas. The World Is Flat A Brief History of the Twenty-First Century. Farrar: Straus and Giroux, 2005.
22. Fuchs, Victor R. The Service Economy. New York and London: Colombia University Press, 1968.
23. Gerschenkron, Alexander. Economic Backwardness in Historical Perspective. Cambridge: The Belknap Press of Havard Univeristy Press, 1962.
24. Griliches, Zvi. Output Measurement in the Service Sectors. Chicago and London: University of Chicago Press, 1992.
25. IMF. World Economic Outlook: Financial Systems and Economic Cycle. Washington: IMF, 2006.
26. Indian Ministry of Finance. Economic Survey 2008-2009. 2009. Available at: http://indiabudget.nic.in/.
27. Jeong, Moo Sup. “Comparison of Productivity between Korean and Indian IT Services Firms and Analysis of Sources of Competitiveness.” Paper presented in 2009 The Center for Economic Catch-up Conference, 2009 (in Korean).
28. Jeong, Moo Sup and Park Bun Soon. Dual Structure of Indian Economy and Policy Implications. SERI Issue Paper 2009. 11. 20. (in Korean)
29. Joseph, K. J., Abrahm, Vinoj, and Mallick, Hrushikesh. “Service Sector in India's Economic Resurgence. Mimeograph, Centre for Development Studies, Trivandrum Kerala, India, 2009.
30. Krishnan, Rishikesha T., and Vallabhaneni, Kumar. “Catch-up in Technology-driven Services: The Case of the Indian Software Services Industry.” Seoul Journal of Economics 23 (No. 2 2010).
31. Lee, Keun. Schumpeterian Analysis of Economic Catch-up. Cambridge, UK: Cambridge Univ. Press, 2013.
32. Lee, Keun and Lim, Chaisung. “Technological regimes, catching-up and leapfrogging: findings from the Korean industries.” Research Policy 30 (No. 3 2001): 459-83.
33. Lee, Keun., Mani, Suni, and Mu, Qing. “Explaining Divergent Stories of Catch-up in the Telecommunication Equipment Industry in Brazil, China, India and Korea.” in Malerba, F. and Nelson, Richard R. (eds.), Economic Development as a Learning Process: Variation Across Sectoral Systems. Cheltenham, U.K. and Northampton, M.A., U.S.: Edward Elgar Publishing, 2012.
34. Lee, Keun, Park, Tae Young, and Krishnan, Rishikesha T. “Catching-up or Leapfrogging in Indian It Service Sector: Windows of Opportunity, Path-Creating and Moving up the Value-Chains.” Forthcoming in Development Policy Review, 2014.
35. Nasscom. Software Industry in India 2001-02. New Delhi: National Association of Software and Service Companies, 2002.
36. Noll, Roger and Wallsten, Scott J. “An Assessment of Indian Telecommunications Reform.” In Hope, N. C., Kochar, A. and Noll, R. (eds.), Economic Reform in India: Challenges, Prospects and Lessons, New York: Cambridge University Press, 2013.
37. Ok, Wooseok, “Chapter 5, Service-based Catch-up in India” In K. Lee (ed.), Catching-up, Forging ahead, and Falling behind of Nations (in Korean), Seoul: Seoul National University Press. pp. 148-186, 2013.
38. Perez, Carlota and Soete, Luc. “Catching Up in Technology: Entry Barriers and Windows of Opportunity.” In Dosi G. (ed.), Technical Change and Economic Theory. London and New York: Pinters Publishers: pp. 458-479, 1988.
39. Pilat, Dirk and Wölfl, Anita. Measuring the Interaction between Manufacturing and Services. OECD STI Working Paper 2005/5, 2005.
40. Rosenberg, Nathan. “Sources of Innovation in Developing Economies: Reflections on the Asian Experience.” Seoul Journal of Economics 26 (No. 3 2013): 283-310.
41. Schettkat, Ronald and Yocarini, Lara. “The Shifit to Services Employment: A Review of the Literature.” Structural Change and Economic Dynamics 17 (No. 2 2006): 127-47.
42. Sridharan, Eswara. “The Capacity for Innovation and the Trajectory of the Indian IT Industry.” Science, Technology & Society 7 (No. 1 2002): 3-11.
43. Stiroh, Kevin J. “Information Technology and the U.S. Productivity Revival: What Do the Industry Data Say?” American Economic Review 92 (No. 5 2002): 1559?76.
44. Summers, Robert. “Services in the international economy.” In Inman, R. P. (ed.), Managing the Service Economy: Prospects and Problems. Cambridge, U.S.: CUP, pp. 27-48, 1985.
45. ten RAA Thijs, and Wolff, Edward N. “Outsourcing of Services and the Productivity Recovery in U.S. Manufacturing in the 1980s and 1990s.” Journal of Productivity Analysis 16 (2001): 149-65.
46. Walters, Robert, Stapleton, Tim, and Andrews, Richard. India's Services Sector: Unlocking Opportunity, Austrialian Government, Department of Foreign Affairs and Trade, 2007.
47. Wong, Poh-Kam. National Innovation Systems for Rapid Technological catch-up: An Analytical Framework and a Comparative Analysis of Korea, Taiwan and Singapore. Paper presented at the DRUID Summer Conference, Rebild, June 9-12, 1999.