Parks and Valleys Growing Asia’S Software Industries

Parks and Valleys Growing Asia’s software industries

An Economist Intelligence Unit white paper Sponsored by the Business Software Alliance

Parks and valleys Growing Asia’s software industries

Contents

4 Executive summary

6 Introduction: Desperately seeking software

8 Foundations of a software industry A vibrant venture capital industry A software talent pool Communications infrastructure

14 Four Asian software parks Malaysia paves the way Taiwan builds on high-tech legacy Foreign investment spurs Vietnam Dalian creates outsourcing niche

19 Entrepreneurialism over innovation Launching start-ups Knowledge sharing and innovation Fostering home-grown companies

23 Conclusions: Economic reform is the greatest lever

© 2008 The Economist Intelligence Unit. All rights reserved. All information in this report is verified to the best of the author’s and the publisher’s ability. However, the Economist Intelligence Unit does not accept responsibility for any loss arising from reliance on it. Neither this publication nor any part of it may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of the Economist Intelligence Unit.

2 © The Economist Intelligence Unit 2008 Parks and valleys Growing Asia’s software industries

Preface

Parks and valleys: Growing Asia’s software industries is an Economist Intelligence Unit white paper, sponsored by the Business Software Alliance. The research was based on interviews, conducted in October and November 2007, with executives of companies based in software parks in Asia, administrators of the parks and employees of venture capital companies. Our thanks are due to all the interviewees for their time and insights. The findings and views expressed in this report are those of the Economist Intelligence Unit alone. Claire Beatty was the editor of the report. The cover image was created by Dan Page. March 2008.

Executive summary

eplicating Silicon Valley by creating where ideas, capital and people move quickly— an indigenous, export-driven software something isolated parks far from central industry with fast-growing, high- commercial districts do not offer. Rather than margin businesses is the dream of using software parks as the main route to Remerging economies worldwide. The irresistible development, governments should aim to create lure of creating a cutting-edge “knowledge and sustain policy environments that make their economy” compels governments to nurture entire country attractive to those who build software development by building software technology businesses and those who finance it. parks. The logic seems sound, particularly The main findings of the report include: given the successful precedent for industry- specific business parks in the region. Asia’s • Start-up firms benefit from the low rent booming high-tech manufacturing industries and tax breaks available at software parks flourished as a result of integrated real estate Each of the software parks examined in this and infrastructure investments. But do software report has an incubator to help launch start-up parks provide sufficient return on the colossal companies. Facilities offered by the incubators investment that they require? include shared R&D resources, low rent, tax Parks and valleys: Growing Asia’s software breaks and business administration support. The industries, an Economist Intelligence Unit white survival rate of start-ups after two years ranges paper, sponsored by the Business Software from 43% at Cyberjaya in Malaysia to 80% at Alliance, examines the effectiveness of four of Nankang Software Park in Taiwan—considerably Asia’s software parks (Cyberjaya in Malaysia, higher than survival rates outside the parks. Dalian Software Park in China, Nankang Software Park in Taiwan and Quang Trung Software City in • Asia’s software parks have not become Vietnam) in promoting start-ups and domestic innovation hubs software firms, and the extent to which they Despite providing opportunities for knowledge foster innovation. The report also discusses how sharing, software parks have not lived up to countries with successful software industries their promise for promoting technological (including Israel, Ireland and India), used innovation. Tenant companies often focus assets such as a skilled workforce and an open on outsourcing or software services. Poor investment environment to establish the intellectual property protection makes industry. multinational software firms reluctant to locate The research suggests that although they core R&D abroad, which presents a barrier to do provide a number of benefits, parks do innovation and technology transfer. Unlike not promote software in the same manner as Silicon Valley, the location of the parks, far from they did hardware manufacturing. Software commercial centres, does not position them as developers need access to vibrant environments magnets for the best and brightest software engineers.

4 © The Economist Intelligence Unit 2008 Parks and valleys Growing Asia’s software industries

• Export-focused software services dominate • Fast and cheap telecoms services are best the parks promoted through liberalisation Building an export-focused software There is a tendency for Asian policymakers to industry generates investment and economic treat telecoms services as a component of public development, but an approach tipped too far infrastructure. However, to increase penetration towards exports could pose long-term growth and reduce costs, a market-driven approach issues. Increasing domestic demand and the through liberalisation is more effective than growth of indigenous IT companies will reduce a public planning approach. For example, Asia’s vulnerability to an economic slowdown in governments should not limit the number or Western markets. type of telecoms services licenses in a market.

• Asian governments can do more to promote • Education policy needs to be directed to venture capital create sufficient numbers of highly skilled In Asia, many of the regulatory structures graduates governing foreign direct investment were The quality of surrounding academic institutions established to protect projects of national is a central consideration for companies significance. Yet restrictions around ownership, weighing up whether to relocate to a software governance and capital repatriation can park. Higher-education facilities need to dissuade quick investments in the technology produce a sufficient number of graduates with sector, where financiers may seek larger stakes the most highly valued skills to supply the of smaller firms. Asian governments have often industry. The focus of some Asian universities used public funds to stand in for venture capital on teaching means they lack the kind of (VC). In some cases this practice can be helpful research capabilities that foster innovation in in jump-starting software industries, but it risks the software industry. crowding out private investors.

Introduction: Desperately seeking software

erhaps no other industry better include shrink-wrapped packaged products, epitomises a modern economy than embedded applications, intellectual property software development. From basic home licensing, software development outsourcing computing to automating complex and IT-enabled services such as training and Pbusiness processes, software is not only an support.) area for innovation in itself, but it also enables To encourage the development of software innovation and competitive differentiation in industries, governments often devise long- many other industries. The software industry term planning and investment strategies has low barriers to entry and permits small to complement market-driven activity. companies to operate at the cutting edge of Replicating an approach that worked well in technological development, with the promise Asia’s technology-manufacturing sectors, many of high margins. Compared to other industries Asian governments have decided to make large (such as IT hardware production), it emits little investments in developing software parks. in the way of pollution and requires minimal In addition to emulating past manufacturing physical investment. The speed and efficiency successes, these parks have each drawn upon the with which a software industry can blossom templates provided by other countries that have also distinguishes it from most other export-led developed software industries, such as India, industries. With this combination of benefits on Ireland and the grandfather of all high-tech offer, it is no surprise that governments in many clusters, northern California’s Silicon Valley. developing economies have pursued the creation Their attempts raise two questions: of a software industry as a strategic priority. can strategy and policy alone provide the While for many Asian economies software foundations for a software industry regardless development is not yet a major contributor to of locale, and can software parks enable their IT economies, there are plenty of examples developing economies to leapfrog their peers of success for governments to aim to emulate. by providing an attractive environment in For example, according to India’s National which the industry can thrive? This report Association of Software and Services Companies seeks to answer these questions in two ways. (NASSCOM), the country’s US$47.8bn IT-enabled First, we examine the foundations of successful business is growing at about 30% annually and software industries, analysing the factors that now accounts for 5.2% of GDP, up from 4.8% in contributed to the success of the world’s pre- 2006. North Asia’s success in technology markets eminent software producing countries. Second, today shows that a solid grounding in software we focus on the development and operation production can kindle the growth of related of four software parks in Asia: Cyberjaya in knowledge-intensive industries, such as optical Malaysia’s Multimedia Super Corridor (MSC), storage, mobile telephony and robotics. (For Dalian Software Park in China, Nankang the purposes of this report, the products and Software Park in Taiwan and Quang Trung services that comprise the software industry Software City (QTSC) in Vietnam.

6 © The Economist Intelligence Unit 2008 Parks and valleys Growing Asia’s software industries

In sum, our analysis has found that in needs of software-producing businesses. focusing on software parks, policymakers In fact, our research suggests that what is are attempting to achieve a set of (usually needed to cultivate a software industry is not national) strategic objectives with the wrong contained within the confines of an isolated tools. Remotely located, hermetically sealed technology campus. It exists in the vibrant technology parks may be ideal for hard-disk- quality of life that attracts young creative or semiconductor-manufacturing companies professionals, in world-class universities that that need controlled physical plants to operate attract scientists, and in legal and policy precise machinery. However, apart from cheap environments that attract venture capital. rent and tax breaks, the benefits that such parks offer are often not well matched to the

Foundations of a software industry

t is not straightforward for governments that supported its growth. The combined effect to identify what they need for a domestic of policies such as the non-punitive bankruptcy software industry to bloom. Encouragingly, laws and regulations permitting limited- it seems that software industries can take liability partnerships for venture companies Iroot and grow almost anywhere. For example, created an environment where venture capital despite having had some of the world’s most firms had the confidence to take risks. Other expensive international bandwidth, India beneficial policy and business environment managed to build a software-processing business factors included actively traded stock markets, that has grown steadily to be worth nearly a powerful securities regulator that enforces US$40bn in 2007, according to NASSCOM. To financial disclosure and transparency, low levels make up for its infrastructural shortcomings, the of corruption, political stability and a convertible government allowed companies to use satellite currency. All these attributes limit the risk technology to bypass the expensive national that VC firms face when making investments. telecoms carriers. Companies in and around the San Francisco India’s most important asset is a plentiful Bay area continue to attract about one-third of source of highly skilled, English-speaking and venture capital funds raised in the US, which relatively low-cost engineering staff. But other increased by 8% in 2007 to nearly US$30bn. assets are also necessary. Countries that can However, the US did not encourage local boast cheap and plentiful labour may be able governments or state-owned banks to become to develop basic labour-intensive software venture investors, preferring the function of industries, but moving into higher-value venture capitalism to be performed by the business often requires government policies private sector. Policymakers were aware that that develop other assets, such as building government investment can crowd out better- the telecommunications infrastructure and suited private venture capital initiatives. liberalising the regulatory environment. This Most governments in Asia, by contrast, have chapter examines the basic requirements (both traditionally let public funds stand in for organic and policy-related) for the development venture capital. For example, rather than of a software industry, with reference to the encouraging venture capital and private equity, most successful software-producing countries the Chinese government is setting up its own worldwide. funds to rival international firms. In 2006, Chinese authorities established a private A vibrant venture capital industry equity fund worth about US$2.8bn to invest in Silicon Valley is the original and most successful high-tech companies in the country’s Tianjin software zone, with over 101,000 staff directly area. A year on, the government is replicating employed in software roles out of a total this model elsewhere, despite the fact that workforce of 1.2m people. The cluster would not the original fund still has not made a single have succeeded without a policy environment investment.

8 © The Economist Intelligence Unit 2008 Parks and valleys Growing Asia’s software industries

There is often a practical logic to heavy technology development. Governments can then state-led development of the industry. append venture capital and investment funds China’s technology sector, telecoms in to foster innovation in the desired technology particular, owes much of its current momentum areas. Israel is a noted example of a country to the government’s active role in investing that has leveraged defence spending and a in the network service carriers that consume serendipitous influx of R&D skills to forge a large amounts of software and hardware (an leading IT-orientated VC industry (see box). average of US$50bn annually throughout the While there is clear room for improvement, last two decades), but also create the network through sheer government doggedness much of infrastructure for other technology industries Asia is making itself more attractive to venture to thrive on. The Chinese government is also capital. Vietnam has attracted technology- actively involved in directing technology centric venture funds such as IDG Capital and standards and policies rather than letting Mekong Capital by liberalising the investment market forces dictate them. This intervention environment around technology start-ups. includes favouring products from domestic The country has made tremendous strides in rather than foreign software firms. Along with creating greater transparency and reducing state-invested banks and telecommunications bureaucracy around small business investments. firms, government purchasing accounts for half Fleet-footed VC investors are responding. the total software market in China. As part of its strategy to compete with Government spending can certainly serve Singapore in the financial services sector, as an industry catalyst and a focus point for Malaysia has been improving its attractiveness

Software success story: Israel—A fertile venture capital environment

Israel, with a US$3.17bn software led to a commercially viable, locally after five years at the original cost. industry focused largely on high- manufactured product. Yozma invested US$20m directly and value applications and security The Israeli government set up its another US$80m through ten private technologies, took an approach that first VC fund, Yozma, in 1992. Although funds on condition that they obtain combined fostering venture capital this was a government initiative to matching investments from established with promoting investment into begin with, Yozma was privatised after foreign VCs. By 1999, this government R&D. In 1977, the Israeli and US five years. The skills base and access to initiative had resulted in a vibrant, local governments established the BIRD finance persuaded many of the world’s VC community investing over US$1bn. Foundation. Its role was to fund joint leading technology companies to locate Israel did establish a number of cooperation in R&D between Israel’s their R&D centres in Israel. high-tech parks, mainly around urban start-ups and established US firms. The The Israeli government reduced the universities, but they never housed Israeli government financed half of risks to early VC investors by providing software firms exclusively. Nor have the designated companies’ R&D expenditure tax deductions on investments, co- parks been a central feature of the growth in return for royalties if the project investing and offering a share buy-back strategy for the Israeli software industry.

as a lower-cost location for private banking 1960s, Frederick Terman, who is often referred and specialist funds such as Islamic financing. to as the father of Silicon Valley. Courting the finance sector has created a more After the Second World War, Mr Terman was beneficial environment for investment overall. keen to find ways to prevent a brain drain of Taiwan uses a model, in part influenced by engineering talent from California’s bay Japan and South Korea, which blends hands- area to the large companies based on the on government management, investment US East Coast. He also wanted to generate and promotion of technology research with some income from a surplus of land that the harnessing the resources of private equity university owned adjacent to its campus. funds. Overly rigid and bureaucratic at times, To encourage big eastern companies to yet Taiwan’s ability to focus government open branch offices near Stanford, he attention on technology projects gives promised a reliable stream of new recruits investors the confidence that they will be and established work-study programmes to carried out. permit continuing education for those already employed. Moreover, outreach programmes A software talent pool were set up to give established firms access The role of education in developing the requisite to university research before publication software skills cannot be overstated. This is why and facilitated close university-government Silicon Valley was so successful—and goes some collaboration, particularly on the naval way to explain the difficulty of recreating its contracts that many of the large companies success elsewhere. were working on. Northern California’s pre-eminent technology A major aim of Asian governments in industry did not start out as a software zone. developing software parks is to create hubs It was borne out of a hardware-centric industry of innovation. This is an area where Asia cluster. Like Israel after it, Silicon Valley owes has often lagged behind Europe and the US. a good deal of its success to the fact that much Critics blame Asian educational systems’ of early demand for its products came from US emphasis on rote learning for the region’s military clients who were themselves recruiting relative lack of creativity. It seems as though scientific talent from the rich pickings of university research itself does not make the universities such as Stanford and UC Berkeley. difference. Few patents come from university The US government played an indirect role laboratories in the US or UK, and companies in nurturing Silicon Valley’s growth. It gave rank their contacts with local universities as military contracts to a cluster of aerospace being of little importance to developing their firms in California and funded many of the technology.2 However, institutions that do projects that employed the region’s engineers. have strong research capabilities produce better However, more significant were the ambitions of trained graduates to populate the technology Stanford University’s dean during the 1940s to workforce. Asian universities tend to focus on

2 Strengthening China’s Technological Capability, World Bank Policy Research Working Paper 4309, August 2007

10 © The Economist Intelligence Unit 2008 Parks and valleys Growing Asia’s software industries

teaching rather than research and as a result are One way to create the foundations for a relatively weak in this area. software industry is to leverage and adapt a India does have excellent academic pre-existing skills base. Ireland serves as an institutions, although there are some concerns example of a country that was successfully that they develop technical expertise rather able to achieve this by building on its financial than soft skills such as project management and services expertise. It was also able to reverse a critical thinking. The greater problem is that decades-long brain drain. they produce too few graduates to sustain the software industry’s growth.

Software success story: India—Trained in the USA

It’s easy to forget that Silicon Valley services companies to do project work. India, like China, faces a rapidly eroding is not the only, or even first, US By 1999, Indian nationals constituted labour cost differential. Some parts of technology cluster that fostered a the highest percentage (14%) of all the Indian workforce command wage software industry of note. Other US foreign-born science and engineering increases of between 20% and 30% cities such as Boston, Austin, Seattle professionals working in the US. The annually. Additionally, India’s currency and Durham in North Carolina have subsequent dotcom crash started to is appreciating and competitive threats software clusters of their own that stem this flow. Indian returnees put loom from software development sprung up in most cases because of their experience to use, establishing operations in lower-cost markets like a surrounding density of world-class IT services companies themselves or Vietnam, the Philippines and Eastern universities. India has followed these continuing to work for the firms that Europe. With its strong links to the examples to create industry hubs around sent them abroad. These emerging US software industry, India will be its premier science and technology IT service companies still focused particularly vulnerable to an economic universities. Seven of these prestigious on delivering software services to slowdown in the American economy. institutions are known as the Indian international customers. NASSCOM appreciates this potential Institutes of Technology (IITs). However, the industry is now facing threat and has begun to build a skills But India’s software industry has capacity constraints and there are database of IT professionals, validated its roots in the demand from Silicon signs that the government and industry by third-party vetting processes. The Valley and other US technology associations may have to play a greater aim is for the database to strengthen clusters. During the dotcom bubble role. The IITs and 20 more-recently the security and quality credentials of of the late 1990s, surging demand for established National Institutes of Indian software firms and to enhance IT professionals in the US sparked an Technology serve only a sliver of India’s their competitive advantage. The exodus of skilled workers from India. population. The IITs produce just database had over 125,000 registrants These individuals either emigrated by 12,000 graduates annually. by mid-2007 and NASSCOM hopes to themselves or were sent abroad by IT As well as a shortage of skills, increase this to 500,000.

Communications infrastructure certain software applications will either not Software technology firms cannot develop work properly or will fail to function at all. their products or deliver their services without This is not to say there is no progress in a robust communications infrastructure. this area. High-speed networks are being built Governments must either provide the rapidly in some countries and the increase in infrastructure themselves, or liberalise the international capacity has caused tremendous sector so that market forces will spur the rapid downward price pressure. Bandwidth is fast development that many Asian countries require becoming a commodity, and its increasing in this area. ubiquity in those countries that have prioritised In many of Asia’s developing countries, its development means that specific locations high-speed Internet access has been cannot rely upon it as a sole differentiator. variable, insufficient or expensive. Advanced Software parks or technology zones that offer infrastructure essentials such as optical fibre advanced telecommunications infrastructure are not widespread. In countries that practice as part of the value proposition to prospective online censorship or content filtering, restricted tenants are finding the gap between the access to international Internet gateways can infrastructure offered by the parks and that mean significantly longer upload and download available elsewhere is closing. times. Without sufficient network speeds,

Software success story: Ireland—Leveraging assets to create a niche

Ireland focused on building infrastructure As a result, Ireland became a major them from locating their R&D facilities and convincing its talented graduates to offshore centre for global companies, there—they can benefit from greater tax stay (or return) by stimulating investment particularly from the US. By 2007, half of write-offs by putting R&D in locations and job creation. Like Silicon Valley the world’s top 50 banks located some of with higher tax regimes. had decades before, Ireland suffered their back-office operations in a cluster Despite efforts to promote R&D, from a brain drain in the 1970s and known as the International Financial Ireland deals mainly in mature technology early 1980s. In 1986, the government’s Services Centre (IFSC). that others have developed elsewhere. inward investment agency, Enterprise With extensive back-office By 2000, Ireland had become the world’s Ireland, devised a strategy to reverse process expertise and investment in largest exporter of software products, this trend by encouraging multinationals communications infrastructure by the largely because companies like Microsoft to set up operations in Dublin. Ireland government and resident multinationals, had located their regional packaging, offered an educated, English-speaking the OECD frequently ranks Ireland in first localisation, distribution and logistics workforce, proximity to Europe and a place among member countries for the processes there. Ireland’s indigenous low 10% corporate income tax rate. The significance of the high-tech sector in companies have had a marginal role in Irish government invested heavily in its economy. However, the country’s low this rapid growth in exports of high-end infrastructure and training with help from corporate tax rate, designed to lure in the software products, with foreign firms the European Union’s regional aid funds. multinationals, paradoxically discourages accounting for 90% of the exports.

12 © The Economist Intelligence Unit 2008 Parks and valleys Growing Asia’s software industries

There are several examples illustrating the related licences are hampering the sector. importance of telecoms liberalisation. Until Newcomers focus on the mobile telephony 2002, India’s telecommunications industry was market. constrained by the state-owned monopoly, As well as benefiting the software industry, which offered some of the world’s most liberalisation also drives Internet usage and expensive international call rates. Hesitating e-commerce. Hong Kong’s telecommunications to reform the sector, the Indian government policy in recent years has been aimed at did allow private very small aperture terminal increasing competition in both the fixed-line (VSAT) links in the country’s technology parks and mobile markets. Intense price competition to bypass the public network, so that companies has made Hong Kong one of the cheapest and were able to lower the costs of calling abroad. most efficient places to host data centres The sector really flourished after liberalisation, in Asia, attracting a greater market-share in when bandwidth costs dropped to a fraction of this area than rival centres such as Singapore their monopoly levels. or Kuala Lumpur. Hong Kong has become a When Malaysia’s Cyberjaya opened, the hub for e-commerce in Asia, and was placed government marketed the park’s state-of-the- fourth in the Economist Intelligence Unit’s art infrastructure as a key attraction. In recent 2007 e-readiness ranking (an index of over 100 years, many other countries including Malaysia’s qualitative and quantitative factors that show neighbours have caught up and even overtaken the “state of play” of a country’s information the nation in average broadband speeds and and communications technology infrastructure penetration rates (13% as of 2007). Despite and the ability of its consumers, businesses and losing its monopoly in 1994, the state-owned governments to use ICT to their benefit).3 Hong Telecom Malaysia still has a 95% share of the Kong’s government has taken a strong role in fixed line market. A lack of competition in the driving digital adoption; 90% of government telecommunications industry and bureaucratic services were online by 2003. red tape involved in granting communications-

3 The 2007 e-readiness ranking, Economist Intelligence Unit, 2007

Four Asian software parks

sia’s software parks have been China, Nankang Software Park in Taiwan and built on the theory that with the Quang Trung Software City (QTSC) in Vietnam. right infrastructure and policies, The development of these parks follows the governments can create industry- precedent set in the 1980s and 1990s when Aspecific clusters from scratch. The theory governments across the region built large out- says that placing similar knowledge-based of-town parks to house the industrial operations companies and research institutes within close of foreign high-tech companies. Incentives to physical proximity will encourage innovation relocate there included competitive rents and tax and expertise-sharing among professionals, and breaks. Initial tenants were usually firms looking will employ an ever-renewing supply of skilled to bring down the cost of assembling consumer graduates. In principle, the cluster will also electronics and IT hardware components, increase the productivity of the firms based before moving into more technology-intensive there and stimulate the establishment of new production such as microprocessors. Asian companies. Is this borne out by the software high-tech industrial clusters such as Penang parks already in operation across Asia? To find in Malaysia and Hsinchu in Taiwan proved out, the remainder of this report focuses on the highly successful, drawing in billions of dollars development and operation of four software of foreign direct investment and prompting parks in Asia: Cyberjaya in Malaysia’s Multimedia policymakers in the region to try to emulate this Super Corridor (MSC), Dalian Software Park in success but with software rather than hardware.

Phases since founding and total government investment in four software parks

Cyberjaya Dalian Nankang QTSC Year of founding 1997 1998 1999 2001 Phases since founding 2 2 3 1 Total government investment (US$m) 1000 55 612 14 Source: Administrators from each of the software parks either provided the data in these and subsequent exhibits about the parks or confirmed numbers found in secondary sources.

Malaysia paves the way bold step resulted in a scramble by other Asian One of the first to build a software park was countries to keep up and develop their own Malaysia. In the mid-1990s Malaysia’s software parks. The hope was to generate a then prime minister, Mahathir Mohamad, had software outsourcing boom similar to that of a vision to capitalise on newly developed India. Internet technologies and create a Multimedia The MSC scheme was not an unqualified Super Corridor (MSC). It opened in 1996 and success. Early on, prohibitive immigration covers 750 square kilometres, an area larger laws made it difficult for companies to hire than Singapore. The centrepiece of the MSC is expatriates. The MSC had other unpopular Cyberjaya, which opened in 1997. Malaysia’s policies, such as dress codes in its buildings and a venture fund that favoured bumiputras,

14 © The Economist Intelligence Unit 2008 Parks and valleys Growing Asia’s software industries

or ethnic Malays. To generate interest, the software park in Taiwan, Nankang covers 27 government exempted tenants from positive acres and houses 274 tenant companies. Now in discrimination laws governing bumiputra hiring its third phase of expansion, the park focuses on and ownership, as well as those concerning specific market niches of integrated-circuit (IC) Internet censorship. design (such as system-on-a-chip for embedded A marketing drive in 2005 boosted what computers), digital content and biotechnology. had been a slow uptake by tenants, and there Tax incentives, low rent, credit availability and are now 1,870 companies in five “cyber-cities” its location have made Nankang consistently across the MSC. As of 2007, Cyberjaya itself popular with local firms. Although the park’s had 419 companies, a multimedia university, website is five years out of date and it has no 34,000 workers and 14,000 residents. Nightlife active marketing programme, its occupancy rate and affordable housing are limited but there are stands at an enviable 98%. plans to open an international school, hospital, With the much larger Neihu Science Park shopping centre and recreation club to lift the and Taipei Tech Park nearby, Nankang forms part area’s appeal. The MSC continues to expand, of Taiwan’s high-tech corridor that extends to with plans to open a US$90m Cyberport in 2009. Hsinchu Science Park, an hour’s drive to The Cyberport will aim to provide a nearshoring the southeast of Taipei and the linchpin of destination for firms in Singapore, which is just Taiwan’s high-tech manufacturing might. Hsinchu across the border. is itself a creation of the government’s systematic In 2007, an A.T. Kearney survey of top IT investment in research and development outsourcing locations worldwide put Malaysia facilities. in third place. Just four years earlier, it had From the beginning, apart from its broader not even made the top ten.4 In recent years, role as a seed investor in R&D infrastructure, Malaysia’s prime minister, Abdullah Badawi, has the Taiwanese government has been actively helped secure major investments by companies involved in cultivating other aspects of an IT such as Dell and Satyam. In 2005, Mr Abdullah ecosystem at Nankang. It recruited expatriate identified shared services, creative content Taiwanese entrepreneurs from Silicon Valley, and biotechnology as strategic priorities. reduced the investment risk for early VC firms, Like India, Malaysia has IT skills and English- and eased capital controls and public listing language speakers. It has successfully leveraged requirements for high-tech firms. With software, these assets to create an international offshore Taiwan hopes to copy the success it enjoyed business. with technology hardware. In the 1990s, Taiwanese companies were the world’s dominant Taiwan builds on high-tech manufacturers of computer products such as legacy scanners and IC chips. Nankang Software Park opened in 1999 on the Taiwan has a combination of valuable assets outskirts of Taiwan’s capital, Taipei. The largest similar to those of Silicon Valley, Israel and

4 2007 A.T. Kearney Global Services Location Index™

Ireland. It has deep IT expertise and many of its 2005. According to the Vietnam Software early technology entrepreneurs are Taiwanese Association, software outsourcing services returnees from Silicon Valley. Nankang tenants have also grown rapidly in recent years, give positive reports on Taiwan’s IT workforce. reaching US$70m in 2005, an increase of over “We hire locally, mostly PhDs and Masters, 55% since 2004. as the talent pool is very good,” says Matt Vietnam is perfectly positioned to capitalise Huang, Chief Operating Officer of Armorize on foreign multinationals’ “China plus one” Technologies (one of Red Herring magazine’s strategies under which they are diversifying top 100 technology start-ups in Asia), “Taiwan their investment locations for political is so small that you can tap into its best reasons and to spread risk. Having attracted universities.” technology giants such as Intel and Foxconn, Taiwan also has an attractive business the Vietnamese government has proved its will environment, with funding schemes and and ability to draw in investment in the high- industrial coordination methods that are similar tech industry. Technology parks are a central to those used by Israel to promote a positive part of the strategy. By providing in-house investment climate. Finally, like Ireland, Taiwan customs clearance and investment licensing, has proven able to append a software industry and independent power, water and sewage, the to pre-existing domestic industries. Domestic parks allow tenant companies to bypass many of IT industries in the semiconductor and mobile the challenges faced by firms located outside. device manufacturing sectors are both key anchor Located on the outskirts of Vietnam’s Ho Chi industries that help fuel Nankang’s development, Minh City, QTSC opened in March 2001 with the particularly with regard to developing software aim of having up to 20,000 workers and students solutions for system-on-a-chip applications. by 2015. It was part of the government’s five- Taiwan’s Nankang is the most successful of the year economic plan for the city. The collective Asian software zones examined in this report. revenue from QTSC’s tenant companies is approximately US$30m, and 46 of its 77 firms Foreign investment spurs are wholly foreign owned enterprises. QTSC Vietnam tenants employ 3,000 engineers and have access Low production costs, skilled labour, to a pool of 4,000 students who are based government incentives, political stability in or around the park. Since 2004, QTSC has and an extensive expatriate community have been able to cover its costs without subsidies propelled Vietnam to 17th position in a 2007 from the government. In total, the park has A.T. Kearney global ranking of countries received US$50m in investment, with this figure for software outsourcing. In 2005, Vietnam projected to more than double by 2008. had not even made the top 40. Turnover QTSC has a Sun training centre, an IBM in software and software services reached service centre, an incubator to support start- US$300m in 2006, up from US$250m in up firms that is funded by the European Union

16 © The Economist Intelligence Unit 2008 Parks and valleys Growing Asia’s software industries

and a USAID-funded marketing initiative. The than half of whom study engineering or the park attracts firms with tax incentives, value- sciences, companies at Dalian largely focus on added-tax rebates, services for processing software services and outsourcing rather than tax and business applications, and relaxed more innovative work. entry and exit permits for expatriates. It is Of the Asian software parks discussed in currently negotiating with foreign investors this report, Dalian’s development of an IT specialised in software production, business industry most closely resembles that of Ireland. process outsourcing, data centres and call It is conveniently located near to the larger centres. While the park offers some relief and wealthier markets for IT services—Japan from Vietnam’s infrastructure shortfalls, and South Korea. As well as a compelling one drawback is its isolation. While road talent repatriation programme, Dalian has the links to the park have improved, QTSC’s requisite Korean and Japanese language skills to general manager, Chu Tien Dong, notes that service these markets effectively. But focusing its surroundings lack attractive expatriate on Japan and South Korea is no guarantee of residential areas. success for Dalian in the longer term. On one The Vietnamese software industry is still in hand, it may offer an outsourcing niche and a an early stage of development, but does have sustainable source of competitive advantage. potential for nurturing a successful industry On the other, if Dalian seeks to build larger, similar to India. Vietnam has an increasingly global IT industries, this niche focus could be favourable investment environment and an its downfall. inexpensive, well-trained workforce. It has If Dalian is the Chinese software industry’s already attracted some of the global software “factory”, Zhongguancun Science Park (Z-Park), firms and related financial services industries. a software park located in the Haidian district of north-west Beijing, is its “brains”. Z-Park Dalian creates outsourcing niche is the largest software park in China and Dalian Software Park is one of 11 national- consists of five science zones. It is also in close level software parks designated by the Chinese proximity of China’s elite institutions, Tsinghua central government in 2001. Founded in 1998, University and Beijing University. The Beijing Dalian Software Park serves as one of China’s six area is emerging as a major source of software bases for national software exports. Its tenant talent. It has twice as many programmers as firms generated nearly US$930m in software- China’s closest competing city, Shanghai. related revenue in 2006 and this figure is VanceInfo (formerly named WorkSoft) is growing at 45% per year. Foreign companies a leading provider IT services and offshore account for 43% of Dalian Software Park’s 389 software development services based at Z-Park. firms, which employ 25,000 people. Despite its It was founded in Beijing in 1995 and relocated 22 universities with 200,000 students, more

to Z-Park in 2003. The company, which employs resembles Silicon Valley.” The firm’s affiliation 3,675 staff as of end 2007, also has subsidiaries with Z-Park boosts its appeal with international in six other high-tech parks or economic zones clients and the relocation reimbursement around the country. According to Chris Chen, offered by the district government was an the CEO, “Z-Park is in an attractive area that additional incentive to move.

Too far from the action

As with any property development, take-up rate in the late 1990s because Phil Tran, a Vietnamese returnee from location is the main factor in determining of its location and lack of facilities. the US, Glass Egg develops multimedia a software park’s value to tenants and While Nankang and Dalian software video games for leading US companies. its ultimate construction costs. To build parks are only 30 minutes’ commute A workforce of skilled local programmers large-scale developments on affordable from their respective central business is paid less than one- tenth the wages of land, developers select sites that are districts, Cyberjaya and QTSC are twice American counterparts and enables the far from a capital city’s central business this distance. A lack of proximity to the firm to earn profit margins above 50%. district or in secondary cities like capital city is a hindrance. However, this Mr Tran acknowledges that QTSC has China’s Dalian. However, these are often can be overcome if the area around the good facilities and rent is competitive, destinations that prospective staff may park is made sufficiently attractive. yet he would not relocate to the park. find unattractive. Business facilities form only part of “QTSC is too far from Ho Chi Minh City’s For companies assessing software the incentive to locate to a software universities and our expatriate managers parks, access to skills is a critical issue. park; executives have to want to live would not want to live there because it Location becomes most important for there too. Historically, executives is an hour’s drive from the city’s central activities higher up the software value working at Cyberjaya have preferred to business district.” Instead, Glass Egg has chain. These functions rely on attracting live in Malaysia’s capital, Kuala Lumpur, its office in a modern building downtown the highest-calibre individuals, who and commute every day. This is beginning called “E-Town”. Its main competitor, demand access to cultural amenities and to change, with significant investment Alive Interactive, is also located within top-quality schools for their children. in transport infrastructure to the city the central business district rather than Hong Kong’s Cyberport, which opened and high-quality expatriate living QTSC. in 2000 at a cost of US$2bn, was only accommodation. While it’s fair to say that none of Asia’s 75% occupied in 2007. Touted as a centre Location is also a challenge for software parks offer the programmers’ for digital media, Cyberport is far from QTSC. Glass Egg Digital Media is one of playground that is Silicon Valley, Hong Kong’s main media production Vietnam’s software success stories but developers are aware of the need to facilities and has no subway link into the the company has had no affiliation with provide an attractive lifestyle environment city. Malaysia’s Cyberjaya also had a slow any software park. Founded in 1999 by and are making progress in that direction.

Entrepreneurialism over innovation

he level of government investment Matt Huang, examined the two main centres into software parks proves how deeply for Silicon Valley’s outsourced R&D: China and held is their belief that the parks will India. Mr Huang found costs in India higher support start-ups, enable innovation, and than expected and China’s political environment Tpromote domestic companies as well as foreign too restrictive. Moreover, the Nankang firms. The question is whether the parks are able incubator, which had a stringent application to successfully meet these objectives. procedure, offered half-price tenancy to its member companies and streamlined procedures Launching start-ups for participating in government projects and Each of the four software parks examined for receiving research grants. this report has an incubator that provides Taiwan’s government emphasises research and subsidised rents and other support for start- often requests that engineers doing their two- up companies such as access to government year compulsory military service work in research grants and sources of seed funding. In return, firms free of charge, which is a great benefit to successful incubator tenants act as showcases start-up companies. In 2005, Taiwan’s Industrial for visiting delegations. Those that succeed in Technology Research Institute (ITRI) also set incubators generally outgrow the facilities and up an incubator in San Jose, California, to link relocate to elsewhere in the park. Incubator Taiwanese VC firms and technology companies facilities also provide business centres to help with entrepreneurs based in Silicon Valley. young firms apply for government-sponsored However, venture capitalists interviewed for R&D grants. Founders of high-tech start- this report state that when making investment ups usually have engineering—rather than decisions it is immaterial whether or not a business—backgrounds, so they welcome company is located within a software park. More efforts to provide administrative support. persuasive factors include the firm’s technology, Although executives with start-ups in quality of management and business plan. software parks praise the incubator facilities, The survival rates of start-ups vary enormously. some observe that government R&D grants QTSC’s director, Mr Chu, reports that start-ups are too small to be of much use—particularly within the park have a 65% survival rate after once a company has grown beyond about ten employees. To address this need, parks also have Incubator survival rates after two years programmes to link their more established firms 90% 80% with VC funding to make up the shortfall. 80% Nankang’s incubator and R&D activities are 70% 65% 60% managed by Taiwan’s Institute for Information 54% 50% 43% Industry, a non-profit quasi-governmental 40% organisation. The Institute invited a Silicon 30% 20% Valley start-up, Armorize, to locate its R&D 10% operations within the incubator. Before 0% agreeing, Armorize’s Taiwanese co-founder, Nankang Dalian QTSC Cyberjaya Source: Software park administrators

two years in comparison with 30% outside the export industry and providing the resources park in Ho Chi Minh City, the country’s commercial to support start-ups, there is little evidence capital. This result is consistent with findings from that this results in technological innovation the OECD and the US Small Business Innovation by domestic companies or technology transfer. Research (SBIR) programme, which show the Multinational companies either hesitate to efficacy of incubators in doubling the survival locate core R&D abroad or they spread their rates of member firms. Cyberjaya has a high research across multiple locations or countries to throughput of start-up companies—250 from 2004 protect their intellectual property. In China, two- to 2007. The park is able to host 35 companies in thirds of the 50,000 patents awarded in 2006 its laboratories at any time and another 30 in the went to non-residents or foreign companies.7 incubator. If these patent holders leave the country their intellectual property goes with them. Knowledge sharing and An Economist Intelligence Unit survey of innovation 260 executives found that few companies are Software park tenants describe few formal shifting global oversight of R&D to Asia.8 Only a opportunities for intra-park collaboration small percentage, 5% of respondents, indicated between firms, although they do participate in that they are moving R&D management out of reciprocal exchanges with visiting delegations headquarters and to the places where research from overseas parks. Nankang runs frequent is being carried out, predominantly China and “match-making” events for tenant companies India. but they are described as not particularly useful The reasons for moving R&D include getting from a learning perspective. The park’s “CEO closer to customers or suppliers as well as club” has become a showcase for prospective better access to skills. Only one respondent tenants rather than a genuine opportunity to cited costs as the primary motivating factor. share experiences of the incubator. China and India were voted the first and second Informal knowledge sharing is more common. most attractive destinations for locating R&D The close proximity of tenant companies, facilities. Singapore and Vietnam also received particularly within the incubators, fosters high marks. The results show that the latter two information exchange at all levels. Indeed, markets as well as Malaysia are becoming more firms constantly poach one another’s technical attractive as R&D destinations. In contrast, experts. With so much start-up activity within other North Asian markets including Hong Kong, the parks, newly formed companies help to Japan and Taiwan are perceived as becoming absorb the staff from less successful businesses less attractive places to locate R&D, due to high that may be shedding employees. costs and competition for resources such as Although the parks’ focus on attracting skilled labour. multinationals is effective for kick-starting an

7 WIPO Patent Report: Statistics on Worldwide Patent Activity, World International Patent Organisation (WIPO), 2006 8 Economist Intelligence Unit, Corporate Network Survey, 2007

A serious hindrance to innovation, domestic tenants. QTSC, the newest of the parks particularly in packaged software, is the has the smallest, although the park’s incubator rampant piracy in Asia. An annual study will play a central role in increasing this conducted by BSA (the sponsor of this report) percentage. and a technology research firm, IDC, into global software piracy states that in 2006, 88% of the Percentage of domestic and foreign companies within software used on PCs in Vietnam was pirated. each of the software parks This amounts to a global loss of revenue of Foreign firms Domestic firms 100% US$96m. China also suffers from a high rate of 20% 9 23% software piracy, measured at 82% in 2006. As 80% 43% a result, firms shy away from producing easily- 60% 60% copied consumer packaged software in favour of software services. 40% 80% 77% 57% Fostering home-grown 20% 40% companies 0% While securing multinationals as anchor Nankang Dalian QTSC Cyberjaya tenants is a crucial success factor to making Source: Software park administrators the parks economically viable, ultimately the ambition is to create a flourishing domestic Red Herring magazine produces an annual software industry. Building an export-focused list of the 100 most promising start-ups in industry that comprises mainly multinational Asia, selected for being the most innovative. companies generates investment and economic Of 2007’s 100 winning firms, 37 are in China, development. However, an approach tipped four are Malaysian, and Vietnam and Taiwan too far towards exports could pose long-term produced only three each. Of these winners, growth issues. The future for India’s software very few are located within the software parks industry is at the centre of this debate, as it is discussed in this report, instead preferring particularly vulnerable to a slowdown in the US. locations that are in the commercial capitals One of the strategies may be to build a domestic where they have access to the best and software product industry in India as opposed brightest students and faculty from top to the current emphasis on services. technical universities. Of the four Asian software parks, Nankang and Cyberjaya have the greatest proportion of

9 Fourth Annual BSA and IDC Global Piracy Study, 2007

Official performance metrics

Since software parks are major government investments, they A measure of performance that provides more insight is must account for their performance. Some do so by tracking occupancy rate. Companies and employees make their the number of tenant firms and the revenues they generate and preferences known by either moving to the parks or staying levels of employment. away. By this measure, Nankang in Taiwan is the most fully occupied park.

Number of park tenants, revenues and employees (2007) Occupation rates of software parks (2007) 100%

Nankang Dalian QTSC Cyberjaya 80% Number of companies 274 389 77 419 in park 60% 98% 95% 96.5% Tenants’ annual 4000 930 30 N/A 40% 80% revenues (US$m)

20% Employees 8,000 30,000 3,000 34,000

0% Nankang Dalian QTSC Cyberjaya

Source: Software park administrators Source: Software park administrators

Conclusions: Economic reform is the greatest lever

ur research shows that Asia’s software taken in order to nurture software start-ups and parks do attract IT companies and attract established software companies: generate often much needed foreign direct investment. They are effective 1. Create an attractive investment environment Ovehicles for supporting start-ups and technology Investment climates that facilitate easy access entrepreneurs with successful incubator schemes. to finance benefit small entrepreneurial firms Software park tenants rely on the low office rents and the venture capitalists that invest in and tax breaks, considering these to be central them. While some governments feel that the to encouraging industry development. The parks activities of VCs and private equity firms clash also create job markets for IT professionals and with their national interests, as the examples graduates. of Silicon Valley, Israel and others demonstrate, The main failure of the parks examined for their involvement is essential to expanding this report in terms of achieving their broader promising businesses quickly. Regulatory goal is that they tend to encourage mainly structures governing foreign direct investment lower-end software outsourcing, since they are in developing countries were set up in an era of fundamentally an evolution of foreign export- large-scale plant and property investments in processing and high-tech manufacturing zones. projects of national significance. Regulations For environmental and cost reasons, these zones around ownership, governance and capital were developed in locations away from densely repatriation dissuade quick investments in the populated centres. However, being a knowledge- technology sector, where financiers often seek industry, software does not need to be tucked larger stakes of smaller firms. Bankruptcy laws, away in an industrial park. The successful when they stigmatise failure, can also stifle development of companies on the outside of entrepreneurialism. Governments must protect these parks is proof of this. investors’ money, yet in markets such as China, The incentives put in place to encourage failed entrepreneurs are not allowed to start investment and court anchor tenants have new companies for several years. enabled Asian governments to delay tackling essential reforms to the financial and 2. Liberalise the telecommunications sector communication sectors. Deregulating, enacting Most markets in Asia have made progress in data-privacy laws, strengthening intellectual liberalising their telecommunications sectors, property enforcement and limiting the risk but this process must be ongoing in order to exposure of VC firms may all have a greater keep pace with advances in technology. An impact on the development of a vibrant issue currently facing policymakers in the software industry. region is the convergence of fixed and mobile With or without creating a specific park, platforms, or voice and data applications, and the examples of Silicon Valley, Ireland, Israel the implications of these trends. Most telecoms and the four Asian parks studied here suggest operations in Asia are licensed in one service that there are several policy steps that can be class or another, whereas technology firms

require ever more multimedia approaches. concerns about piracy in Asia. Even in markets Governments that seek to license carriers for where robust systems seem to be in place, such unified communications, such as Singapore, as Malaysia, poor enforcement in areas such and recently India, allow telecoms companies as CD and DVD piracy undermines confidence. to provide the services that their customers As well as discouraging foreign investment, require. In a small number of instances, particularly in R&D, poor IP protection can governments do have to restrict the number of also stand in the way of skills development, licences that they grant (such as spectrum for technology-transfer and innovation. wireless services). But as a rule, market forces are usually best at correctly determining the 5. Remain technology neutral number of competitors that should exist in a Governments are at their most effective when given industry. creating and enforcing a legal and policy framework that prevents anti-competitive 3. Focus higher education on producing the behaviour and reduces business uncertainties. most valuable skills They should also promote a technology neutral A skilled, low-cost workforce is a vital attribute development environment and avoid dictating for attracting investment from multinational standards or the use of some technologies software companies. It is also something that over others. There are exceptions. In Taiwan’s many Asian nations have and is not a factor case, the government specifically encouraged that differentiates them from each other. To development of system-on-a-chip as a break away from the rest, policymakers in Asia commercially viable niche industry based on the will need to take an active role in ensuring previous experience it had with semiconductors. that higher education institutions produce However, it is easier to get it wrong than get it an adequate number of IT graduates to fuel right when directing development of specific expanding software industries and also that technologies. Although not a software example, universities are providing the most marketable the lessons that China is learning through its skills. In addition to technical expertise and foray into creating a 3G standard do apply more research experience, the industry needs soft generally. By going against the global standards skills such as project management, critical and pushing TD-SCDMA as its own standard, thinking, presentation skills and cultural China has bound a whole industry to an awareness for dealing with foreign companies. isolated and rapidly outdating technology area which damages its credibility in the global IT 4. Strengthen intellectual property marketplace. This type of misguided government protection policy is not only in fundamental opposition to To encourage the development of high-value the laws of innovation but potentially derails an areas of software production such as packaged entire industry. software, governments must address valid

LONDON NEW YORK HONG KONG 26 Red Lion Square 111 West 57th Street 6001, Central Plaza London New York 18 Harbour Road WC1R 4HQ NY 10019 Wanchai United Kingdom United States Hong Kong Tel: (44.20) 7576 8000 Tel: (1.212) 554 0600 Tel: (852) 2585 3888 Fax: (44.20) 7576 8500 Fax: (1.212) 586 1181/2 Fax: (852) 2802 7638 E-mail: [email protected] E-mail: [email protected] E-mail: [email protected]