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Developing a National Software Strategy:

Some IP Considerations

Avron Barr

Aldo Ventures, Inc.www.aldo.com

Patrick Reilly

Intellectual Property Societywww.ipsociety.net

Softwares impact on national economic development policy is multifaceted.Crucial development activities like modernizing existing government andbusiness systems and attracting foreign investment require the capacity to createand deploy sophisticated software systems. We identify seven of these softwaredependent growth strategies. They all share the same pool of software talent andknow-how. The prospects for developing an indigenous software industry,including export companies, are dependent on many factors, including the humanresources available, trends in the global software industry, and national policiesand programs. This paper considers national Intellectual Property policies as theypertain to the development of software industries in emerging economies.

1. Softwares Role in Economic Development

Many authors have observed the complex role that software plays in national economicdevelopment strategies, pointing out that the domestic use of software products andservices must be considered in parallel with the development of software exports(Schware, 1992; Hanna, Boyson and Gunarante, 1996; Tessler and Barr, 1997).Experience has led us to view a nations capacity to create and deploy software systemsas a limited national resource its software capacity (Barr and Tessler, 1999).Economic development is accelerated if this limited resource is optimally allocatedamong the various activities that depend on software.

Among the many possible thrusts of a national economic development policy, there areseven that depend heavily on the ability to create and deploy software systems. Theyrange from modernizing information systems in existing industries and governmentagencies to creating new export industries, including, perhaps, a software export industry.Since the same software talent and know-how is consumed by all of these developmentefforts, as illustrated in Figure 1, expansion of the software workforce is typically anotherearly strategic priority.

The exact talent and know-how required to pursue these avenues of development isdifferent for each one. For instance, requirements analysis, systems integration, software


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Developing a National Software Strategy

Barr and Reilly IIPI, May 2004 2

procurement, and project management are key skills for information systemsmodernization. In contrast, software product exports require expertise in softwaretechnology, design, programming, product management, and software marketing.

For most countries, the mix of available skills is the key factor in planning their software-dependent growth strategy, because the size and maturity of the software workforcedetermines which avenues for growth are available in the early stages. India, for example,while blessed with an abundance of skill programmers to fuel its software services exportindustry, is just now applying these skills to modernization of industrial and governmentsystems, which may be one reason that India is yet to develop a significant softwareproducts export industry. (Note that the revenue per engineer for software products is, onthe average, several times that for software services.)

Each countrys situation is different and there are no absolute guidelines for optimalallocation of the software capacity. The right strategy for a given country or region at agiven time depends on:

Current assets, including skilled people (technical and business), investmentcapital, existing industries besides software, telecommunications infrastructure,and an expatriate business community;

The countrys unique geopolitical situation and cultural history, e.g., Indias earlyadvantage in English-speaking markets; and

The changing state of the global software industry, e.g., Indias ability to

capitalize on a series of global IT investment binges in client/server, ERP, Y2K,telecommunications, and e-commerce technology, in the 1990s.

It is interesting to note that the famous 3 Is, India, Ireland, and Israel, each of whichnow export over a billion dollars a year in software, have all taken very different paths tosuccess. India exports about $10B a year, still almost exclusively in software services.Irelands $1.2B indigenous software export industry is largely product sales. And Israels$3B software export revenue is dominated by software technology licensing.

Figure 1. A nation's capacity to produce and maintain software is must bedeployed across all economic development activities.

Government modernization, infrastructure & social programs

Attracting foreign investment

Increasing competitiveness of firms in existing industries

Exploiting new, software-intensive business opportunities

Exporting software talent, services, products and technology

Creating new IP in software technologies and solutions

Expanding the software workforce (education & training)

TotalSoftwareCapacity


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The impact of IP policy is quite different for different kinds of software activity. Whileplanners face a wide range of policy issues that impact software industry development(finance, labor, immigration, trade, education, etc.), the major focus of this paper will beon IP issues. (See Kraemer and Dedrick, 1999, or Tessler, Barr and Hanna, 2003, for a

broader treatment of policy issues.)

2. Government Modernization, Infrastructure, and Social Programs

Central to most countries economic development planning are efforts to improvegovernment effectiveness (national databases, e-government), build out infrastructure(telecommunications) and implement social programs (education, rural medicine). Manyof these efforts require serious software systems development and deployment, and localsoftware people to help build and maintain them. This is often an opportunity to stimulatethe domestic software services industry. Local software consultants and services firmsgain experience with current technology and with business practices (like bidding on

contracts and quality assurance). Local firms also benefit from partnering with foreignsystems integrators and vendors who may be brought in for their specific expertise. Thetechnical know-how (on state-of-the-art systems), domain knowledge, and businessmaturity local firms gain from these projects is essential for them to become softwareexporters. Eventually, it may even lead to innovation and invention.

Some thinking about who has the rights to innovations that may occur on these projects isthe principal IP issue here. Generally, governments are inclined to support the efforts oflocal firms to capitalize on these innovations. (See Section 7.) Also, big foreign softwarevendors will express concern that their products not be pirated, but piracy is usually lessof an issue in the enterprise systems world than it is in mass-market consumer

software.

2.1 Open Source

Needless to say, using Open Source platforms, like Linux, and the growing corpus of freesoftware technology can dramatically reduce the initial procurement costs of thesesystems and free the client from proprietary platforms. Open Source is many things:

A body of free software code that can be freely modified by the users;

A community of software developers;

A cost saving mechanism for systems integrators and their clients;

A software products market sector - the only market sector defined by its IPpolicy; and

A political movement, e.g., a national policy that is explicitly anti-monopoly and,at least implicitly, anti-Microsoft and, sometimes, anti-US;

Of course, the strategic implications of Open Source are important to the entire softwareindustry, not just to government projects. But since it came up first in this context, let usoffer two caveats:


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1. Open Source is a small market with an ambiguous attitude towards creatingwealth, which is, after all, central to economic development. In other words,gaining experience in Open Source technology may actually reduce the netearning power of the nations software talent.

2. Declaring one single software technology as the national standard is tempting because it focuses limited resources and reduces inefficiencies. But this single-technology strategy can backfire if the wrong technology is chosen. For example,Japan adopted a single programming language, PROLOG, for its national FifthGeneration Project in 1985. By the time the project was over, PROLOG had allbut disappeared from the international scene, reducing the impact of the projectand setting back the Japanese software industry by several years.

That being said, the Open Source movement is large and growing and important. It willlikely evolve in the coming years to satisfy the needs of all its stakeholders. And for the

time being, it creates tremendous opportunities for systems integrators, since itdramatically reduces the initial costs of deploying some common types of enterprisesystems.

3. Attracting Foreign Investment

Software is a factor in several aspects of foreign investment:

Multi-national companies (MNCs) can open local subsidiaries and hire localtalent, including software talent. Software-focused subsidiaries can bedevelopment shops hiring hundreds of programmers, as is often the case inBangalore or Hyberdad. (On the other hand Ireland, not having a surplus of

software developers in the 1980s, positioned itself as a site for localization andsupport subsidiaries of US software companies entering the European market.)

Often the same people who went to work abroad on software services contracts oras expatriates (see Section 6.1), can be extremely useful as managers when theyreturn home because they are familiar with the clients systems, practices and people. In some cases, these returning expatriates are key to attractinginvestments in software subsidiaries.

These subsidiary operations often must duplicate the operational systemsenvironment of their parent company. This, in turn, requires licensing the samesoftware the parent uses, which, of course, requires the usual assurances about

piracy, as discussed in Section 2 in the context of government systems.

Direct venture investment in local software companies or in businesses that aredirectly enabled by software (see Section 5).

Foreign investment in existing industries might also involve modernization andinvestment in computer systems (see Section 4).


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Again, there is more to be gained with this kind of foreign investment than just themoney. Working in a well-run software shop or marketing organization is valuableexperience. Often the initial software workforce has technical skills but no projectmanagement or marketing experience, for instance.

One other side effect of attracting software work from MNCs: When enough of theseoperations locate in the same region, they support the development of a habitat ahigh-tech community offering specialized expertise and services needed by thesesubsidiaries consultants, documentation writers, disk duplicators, etc. (Lee, Miller,Hancock, and Rowen, 2001). It just so happens that indigenous software startups need thesame expertise and services. This is how the indigenous Irish software publishingindustry got its start, for example, by piggybacking on the habitat expertise thatdeveloped around the MNCs in Dublin (Crone, 2002).

In attracting foreign investment, of course, the investors may have serious IP concerns, as

well as security issues. While government regulations and judicial recourse are important,these concerns are only finally addressed over the course of long business relationship. InIndia in the early days of its software industry growth there was no national IP policy orenforcement mechanism. The local subsidiaries made private contracts with the MNCs toensure protection of their IP. This was less of an issue in the early days, because most ofthe work done in India was maintenance of rather mundane information systems. But thesincerity and diligence of the Indian firms help establish an environment of trust directlywith their clients where much more sensitive information could be shared. (Of course,Indias IP regulatory and enforcement environment has also evolved in the meantime.)

4. Increasing Competitiveness Of Firms In Existing Industries

Every bank runs on software, as does every airline and every insurance company. Makinginvestments of the software capacity in key industries is an important part of a nationalsoftware strategy making existing businesses more efficient and more competitiveglobally. Furthermore, some manufactured products contain a lot of embedded software everything from automobiles to toys another drain on the software capacity.

As was the case with government modernization, it is the local software consulting andcontract services firms who are most likely to be involved with industry modernization,often working with foreign systems integrators and products vendors. (Local enterprisesoftware product vendors typically appear much later in the development of the softwareindustry, see Section 6.4.) And again, these commercial projects can be an important

stimulant and source of experience for the local firms. In fact, domestic experience in aparticular industry often shapes the later export offerings of small local firms, many ofwhich are founded by veterans of these commercial projects.

With commercial systems, we see again the IP issue mentioned in Section 2 about theownership of invention and innovation on these projects. There are several additional IPconcerns:


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Very often business will want or need to be on the same software platforms astheir international customers and business partners. This may preclude lower-costOpen Source projects and technology and require licensing of proprietary systems

Clients also have other proprietary information, including production methods,technologies and know-how, and must be assured that they can share thisinformation with software consultants and systems integrators.

Client companies often have software IP assets themselves, including embeddedsoftware.

5. Exploiting new Software-Intensive Businesses Opportunities

There are several new types of businesses that can now, thanks to the Internet, be locatedin any country. Often these businesses require significant software investment to beglobally competitive:

For an on-line business like Amazon or e-Bay or an on-line game, the software isthe key asset in its offerings.

For a call center or services outsourcing business, the key asset is the knowledgeof the employees whose services are being offered. Still, the software shapes theform of the offering, which can be a competitive advantage or disadvantage.

As mentioned earlier, the prospect of hundreds of billions of dollars of high-end services being outsourced over the Internet, like accounting or x-ray interpretation, has manycountries interested in expending software capacity to enable rapid development of thesesoftware-enabled businesses and the infrastructure needed to support them. While

Business Process Outsourcing, or BPO, as the next wave of high-end servicesoutsourcing is called, is a great business opportunity, its long-term impact on economicdevelopment may be problematic. As is already the case with call centers, customersmove their business from country to country looking for quality and the best price. Theinevitable glut of quality service providers from all over the world will bring down pricesfor even the most sophisticated teleservices the race to the lowest possible pricescenario.

On-line businesses bring up some new IP and privacy issues. For example, even in low-end outsourcing businesses, like retail call centers, incidents involving the security ofcustomer information can cause permanent damage to a business, or even to a countrysreputation.

6. Exporting Software Talent, Services, Products, and Technology

For economic planners, software is an attractive industry itself non-polluting andecologically sustainable, requiring relatively low capitalization, presenting a constantlyexpanding global market, and relatively prestigious. Yes, software is the key tocompetitiveness in all industries, and yes, it is the key to the knowledge economy, but


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software exports generate hard currency. For development policy makers, and forentrepreneurs, it is hard to resist expending software capacity to try to build an exportindustry. In fact, it is often the case that limited resources are focused on exports whenthey might best be used to attract foreign investment, revitalize an existing industry, or

train the next generation of software people.

6.1 Software labor exports

Talented software people going abroad to work can have a direct economic benefit totheir home country, in terms of the money they send home. There are indirect benefits aswell, including their potential help with business connections wherever they are workingand their increased experience and know-how when they return (see Section 3).

What was once a brain drain of technical talent is increasingly a two-way street infact, a global market for software talent (Barr and Tessler, 1996). Labor is typcially theeasiest form of software export to organize, and it has few IP-related issues. It probablyalso is the least beneficial to a countrys economic development. And its a cyclical business, subject to the immigration policies of the host countries, which is where IPissues would also be handled.

6.2 Software services exports

Developing software locally for foreign companies is by far the largest type of softwareexport. This may involve a local subsidiary of a multi-national corporation, or a localsoftware services provider who does contract work for foreign firms. Almost alwaysthese software services firms get their initial experience by doing local projects forgovernment and commercial organizations. Eventually, they become very sophisticated

in the kind of work they can do (consulting and advanced technology) and in theirbusiness processes.

While the bulk of outsourced software work still involves rather standard softwaresystems, increasingly, software product development, embedded systems, and otherproprietary systems are being outsourced globally. Here the client will have the highestconcern about the protection of proprietary technology and business information.

6.3 Mass-Market, shrink-wrapped software products exports

We divide software products publishing into mass-market and enterprise publishing,

because the IP considerations are quite different (as are the marketing methods). In ourexperience, software product publishing is a much more involved business to get into,and exporting software products involves significant additional complexity and risk. The primary reason for this is a lack of understanding of the complexities of softwaremarketing on the part of software entrepreneurs. (Barr, Tessler and Miller, 2002.)

Mass-market publishing is the shrink-wrapped variety of software, like games and otherconsumer products. It is typically written for the PC and, increasingly, for mobile


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devices. These shrink-wrapped products are inherently a high-risk, title business likemusic publishing. Almost all the money is made by the few big hits and other titles havedifficulty getting any attention at all. Most products never even make it into the saleschannel.

In countries where there is rampant piracy of consumer titles, there is no domestic marketfor PC titles. This forces developers to immediately try to sell their products abroad,which puts them at a tremendous disadvantage. (Note, for instance, that this is not anissue for on-line offerings, like multi-player games.)

One other IP issue is patent and copyright protection for these products and the technicalinnovations the firms develop. While the value of the copyrighted titles may be short-lived, any software company working on the technological cutting edge is likely to createtechnical innovations that could be a separate source of revenue. It is unusual for early-stage entrepreneurs to think in terms of licensing these innovations they are focused on

their products. But to the extent that national policy can simplify and promote theprotection and capitalization of these inventions, e.g. by creating an IP foundation andoffering IP expertise, they can be an effective export themselves.

6.4 Enterprise software publishing

The crown jewel of the software business for the last 30 years has been publishingsoftware products for businesses and other large organizations. This is where companieslike IBM, Oracle and even Microsoft make their money. This is the hardest softwarebusiness for new companies to master, but 80% of worldwide software sales are in thiscategory.

Besides the lack of venture capital, one key disadvantage that startup firms have in manycountries is the lack of a domestic market for their new enterprise software products.While piracy takes its toll on domestic enterprise software sales, it is not the dominantissue in this category. What startups need are local customers who have state-of-the-artinformation systems and who are willing to serve as beta-test sites for innovativesoftware in its early stages. Government and industry consumers are often reluctant toinclude untested products from small firms in their planning. And without a domesticcustomer to help with product evolution and validation, the local firm is at a disadvantagewhen it enters foreign markets.

Because new enterprise software products must fit into a much more complex operational

environment, the development of secondary innovations that might generate significantlicense revenues is quite common in these firms. In fact, many enterprise startupcompanies actually wrap an innovation or two into a product and try to take it to marketas a solution. Increasingly, the enterprise market is open to unwrapped innovations licensed technology that is incorporated into other companies products. Mostentrepreneurs, however, are not even aware of this possibility and are unfamiliar with themechanics of partnering and licensing technology. Certainly savvy venture investors will


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be concerned with IP protection, but in most countries, investors do not have enoughexperience in the software business to help guide the entrepreneurs.

7. Creating New IP in Software Technologies and Solutions

In most countries, government and university research facilities employ some of the topsoftware talent, sometimes consuming a significant portion of the countrys total softwarecapacity. (Not all programmers are equal. The best are 10 times more productive than theaverage, and probably more innovative too.) The fruits of these research efforts aretypically not market oriented and rarely find their way into actual products or solutions.(The celebrated spin-off from a university lab is the exception to the rule. In fact, many ofthese startups are actually a way of packaging and proving the commercial value of aninvention, and are acquired by other software companies for their IP assets before theybecome real businesses.)

Research in these labs does often result in significant technical innovations andinventions. However, since the labs are not generally motivated to generate revenue fromtheir inventions, and are not capitalized adequately to develop and market an IP portfolio,this is rarely a source of national export revenue. But, with some help, there is potentialhere. Israel, for example, exports $3B of software technology a year, almost exclusivelyin the form of technology licenses and much of it comes out of defense research labs.And the use of a national software IP portfolio for trading with holders of other neededIP could be a significant benefit as well.

We should say explicitly that the IP licensing business is a complex and cutthroat as anybusiness. Lawyers are involved. This is not a business for the faint of heart and must be aglobal business from the get go. Still, its a significant opportunity.

8. Expanding the Software Workforce

For most countries there just isnt enough software capacity to staff these various ways ofusing software to support economic growth. Decisions by policy makers and byindividuals shape the developmental path taken. Soon enough, everyone realizes thatmore software people are needed. In fact, without some critical mass of software talentand experience, many avenues for development are closed. (Consider, for example, amulti-national corporation choosing among possible sites for a new facility the size andmaturity of the software labor pool is high on their list of criteria.

Unfortunately, the same software talent used in all of these economic developmentstrategies is also critical to growing the software workforce itself teaching, mentoring,directing research, etc. Sadly, this expenditure of the nations software capacity is oftenoverlooked, since it doesnt directly impact the economy, resulting in slower than optimalgrowth.

As an illustration of how software IP policy must take the state of the countrys softwareindustry into consideration, countries in the very early stages of software capacity


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development may benefit dramatically from pirated software and free Open Sourcetechnology. It can be quite expensive to buy licenses for the software that every studentuses in classroom and lab work. A realistic assessment of the countrys situation,combined with a long-term view to creating value, is the best approach to developing an

IP policy that supports the fledgling industry.

One final thought about software education and training its not all technical. Softwareactivities require project management and marketing know-how and, increasingly,knowledge about IP protection and capitalization (Barr and Tessler, 2002). We stronglyrecommend that the curriculum of software professionals include education in the rolesand significance of intellectual property in marketing products and services, attractingventure capital, and creating corporate value.

9. About the Authors

Avron Barr is a strategic marketing consultant. His consulting firm, Aldo Ventures,works with software businesses to help them understand their markets, define theirofferings, and explain their ideas. Aldo Ventures also consults with policymakers,industry associations, donor organizations, and NGOs about the software industry's rolein national economic development strategy. www.aldo.com

Patrick Reilly is a Patent Agent and IP Attorney and the Founder and CEO of theIntellectual Property Society, which is a donor supported membership organizationworking to increase public awareness of, and participation in, the evolution of intellectualproperty rights and emerging technologies. www.ipsociety.net

10. References

Arora, A., Gambardella, A. and Torrisi, S. (2001) In the Footsteps of Silicon Valley? Indian andIrish Software in the International Division of Labor, SIEPR Discussion Paper 00-41, StanfordUniversity. http://www.sses.com/public/events/euram/complete_tracks/modularity_and_division/arora_gambardella_torrisi.pdf

Barr, A. and Tessler, S. (1996) The Globalization of Software R&D: The Search for Talent.Council on Foreign Relations, Globalization of Industrial R&D Study Group.http://www.aldo.com/papers/cfr1296.pdf

Barr, A. and Tessler, S. (1999) Software Entrepreneurism in Korea, Stanford University,http://www.aldo.com/papers/FinalReport.pdf.

Barr, A. and Tessler, S. (2002) Towards a Professional Software School. Aldo Ventures, Inc.

Barr, A. and Tessler, S. (2002)Developing Sri Lankas Software Industry. A Report to the WorldBank. http://www.aldo.com/Publications/Papers/Sri_Lanka_Aide_Memoire_070202.pdf.

Barr, A., Tessler, S. and Miller, W.F. (2002) Korea and the Global Software Industry, AldoVentures, Inc., November 2002. http://www.aldo.com/Publications/Papers/Korea2002.pdf


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Carmel, E. and Agarwal, R. (2001) Tactical Approaches for Alleviating Differences in GlobalSoftware Development.IEEE Software, 18, 2, 22-29..

Crone, M. (2002) A Profile of the Irish Software Industry. Northern Ireland Economic ReseachCentre, http://www.qub.ac.uk/nierc/documents/Software/IrProfile.pdf

Enterprise Ireland (2002) Annual Report & Accounts, 2001, http://www.enterprise-ireland.com/documents/uploaded/EIAR(51).PDF

Fisher, R and Reilly, P. (2004) Identifying and Disclosing Risks and Vulnerabilities Particular toValuations of Intangibles Can Decrease D&O Liability, unpublished manuscript.

Hanna, N., Boyson, S. and Gunaratne, S. (1996) The East Asia Miracle and InformationTechnology: Strategic Management of Technological Learning, World Bank.

Kraemer, K. and Dedrick, J. (1999)National Policies for the Information Age: IT and EconomicDevelopment. CRITO, http://www.crito.uci.edu/itr/publications/pdf/natl-policies10-99.pdf

Lee, C-M., Miller, W.F., Hancock, M. and Rowen, H. (2001) (Eds.) The Silicon Valley Edge: aHabitat for Innovation and Entrepreneurship, Stanford University Press, Palo Alto, CA.

McKinsey & Company (2002)NASSCOM-McKinsey Study 2002.

Saxenian, A. (2001). Networks of Immigrant Entrepreneurs, in: Lee, C-M., Miller, W.F.,Hancock, M. and Rowen, H. (2001) (Eds.) The Silicon Valley Edge: a Habitat for Innovation andEntrepreneurship, Stanford University Press, Palo Alto, CA.

Schware, R. (1992) Software Industry Entry Strategies for Developing Countries: A Walking onTwo Legs Proposition,World Development, 20, 2, 143-164.

Tessler, S. and Barr, A. (1997) National Software Industry Strategies, Council on ForeignRelations, Globalization of Industrial R&D Study Group. http://www.aldo.com/papers/cfr197.pdf

Tessler, S., Barr, A., and Hana, N. (2003) National Software Industry Development:Considerations for Government Planners. Electronic Journal of Information Systems inDeveloping Countries,EJISDC (2003) 13, 10, 1-17.

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