Developing a National Software Strategy: Some IP Considerations

Developing a National Software Strategy:
Some IP Considerations

Avron Barr Patrick Reilly
Aldo Ventures, Inc. Intellectual Property Society
www.aldo.com www.ipsociety.net

Software’s impact on national economic development policy is multifaceted.
Crucial development activities like modernizing existing government and
business systems and attracting foreign investment require the capacity to create
and deploy sophisticated software systems. We identify seven of these “software
dependent” growth strategies. They all share the same pool of software talent and
know-how. The prospects for developing an indigenous software industry,
including export companies, are dependent on many factors, including the human
resources available, trends in the global software industry, and national policies
and programs. This paper considers national Intellectual Property policies as they
pertain to the development of software industries in emerging economies.

1. Software’s Role in Economic Development

Many authors have observed the complex role that software plays in national economic
development strategies, pointing out that the domestic use of software products and
services 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 nation’s capacity to create and deploy software systems
as a limited national resource – its “software capacity” (Barr and Tessler, 1999).
Economic development is accelerated if this limited resource is optimally allocated
among the various activities that depend on software.

Among the many possible thrusts of a national economic development policy, there are
seven that depend heavily on the ability to create and deploy software systems. They
range from modernizing information systems in existing industries and government
agencies 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 development
efforts, as illustrated in Figure 1, expansion of the software workforce is typically another
early strategic priority.

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

Developing a National Software Strategy

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

Government modernization, infrastructure & social programs
Attracting foreign investment
Total Increasing competitiveness of firms in existing industries
Software Exploiting new, software-intensive business opportunities
Capacity Exporting software talent, services, products and technology
Creating new IP in software technologies and solutions
Expanding the software workforce (education & training)

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

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 workforce
determines 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 export
industry, is just now applying these skills to modernization of industrial and government
systems, which may be one reason that India is yet to develop a significant software
products export industry. (Note that the revenue per engineer for software products is, on
the average, several times that for software services.)

Each country’s situation is different and there are no absolute guidelines for optimal
allocation of the software capacity. The right strategy for a given country or region at a
given time depends on:
• Current assets, including skilled people (technical and business), investment
capital, existing industries besides software, telecommunications infrastructure,
and an expatriate business community;
• The country’s unique geopolitical situation and cultural history, e.g., India’s early
advantage in English-speaking markets; and
• The changing state of the global software industry, e.g., India’s ability to
capitalize on a series of global IT investment binges in client/server, ERP, Y2K,
telecommunications, and e-commerce technology, in the 1990’s.

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

Barr and Reilly IIPI, May 2004 2


The impact of IP policy is quite different for different kinds of software activity. While
planners 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 be
on 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 improve
government effectiveness (national databases, e-government), build out infrastructure
(telecommunications) and implement social programs (education, rural medicine). Many
of these efforts require serious software systems development and deployment, and local
software people to help build and maintain them. This is often an opportunity to stimulate
the domestic software services industry. Local software consultants and services firms
gain experience with current technology and with business practices (like bidding on
contracts and quality assurance). Local firms also benefit from partnering with foreign
systems integrators and vendors who may be brought in for their specific expertise. The
technical know-how (on state-of-the-art systems), domain knowledge, and business
maturity local firms gain from these projects is essential for them to become software
exporters. Eventually, it may even lead to innovation and invention.

Some thinking about who has the rights to innovations that may occur on these projects is
the principal IP issue here. Generally, governments are inclined to support the efforts of
local firms to capitalize on these innovations. (See Section 7.) Also, big foreign software
vendors will express concern that their products not be pirated, but piracy is usually less
of 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 free
software technology can dramatically reduce the initial procurement costs of these
systems 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 IP
policy; 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 software
industry, not just to government projects. But since it came up first in this context, let us
offer two caveats:



1. Open Source is a small market with an ambiguous attitude towards creating
wealth, which is, after all, central to economic development. In other words,
gaining experience in Open Source technology may actually reduce the net
earning power of the nation’s 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 it’s national Fifth
Generation Project in 1985. By the time the project was over, PROLOG had all
but disappeared from the international scene, reducing the impact of the project
and setting back the Japanese software industry by several years.

That being said, the Open Source movement is large and growing and important. It will
likely 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 it
dramatically reduces the initial costs of deploying some common types of enterprise
systems.

3. Attracting Foreign Investment

Software is a factor in several aspects of foreign investment:
• Multi-national companies (MNCs) can open local subsidiaries and hire local
talent, including software talent. Software-focused subsidiaries can be
development shops hiring hundreds of programmers, as is often the case in
Bangalore or Hyberdad. (On the other hand Ireland, not having a surplus of
software developers in the 1980s, positioned itself as a site for localization and
support subsidiaries of US software companies entering the European market.)
• Often the same people who went to work abroad on software services contracts or
as expatriates (see Section 6.1), can be extremely useful as managers when they
return home because they are familiar with the client’s systems, practices and
people. In some cases, these returning expatriates are key to attracting
investments in software subsidiaries.
• These subsidiary operations often must duplicate the operational systems
environment of their parent company. This, in turn, requires licensing the same
software 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 are
directly enabled by software (see Section 5).
• Foreign investment in existing industries might also involve modernization and
investment in computer systems (see Section 4).



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

One other side effect of attracting software work from MNCs: When enough of these
operations locate in the same region, they support the development of a “habitat” – a
high-tech community offering specialized expertise and services needed by these
subsidiaries – consultants, documentation writers, disk duplicators, etc. (Lee, Miller,
Hancock, and Rowen, 2001). It just so happens that indigenous software startups need the
same expertise and services. This is how the indigenous Irish software publishing
industry got its start, for example, by piggybacking on the habitat expertise that
developed 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. In
India in the early days of its software industry growth there was no national IP policy or
enforcement mechanism. The local subsidiaries made private contracts with the MNCs to
ensure protection of their IP. This was less of an issue in the early days, because most of
the work done in India was maintenance of rather mundane information systems. But the
sincerity and diligence of the Indian firms help establish an environment of trust directly
with their clients where much more sensitive information could be shared. (Of course,
India’s 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. Making
investments of the software capacity in key industries is an important part of a national
software strategy – making existing businesses more efficient and more competitive
globally. 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 and
contract services firms who are most likely to be involved with industry modernization,
often working with foreign systems integrators and products vendors. (Local enterprise
software product vendors typically appear much later in the development of the software
industry, 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 a
particular industry often shapes the later export offerings of small local firms, many of
which are founded by veterans of these commercial projects.

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



• Very often business will want or need to be on the same software platforms as
their international customers and business partners. This may preclude lower-cost
Open 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 this
information with software consultants and systems integrators.
• Client companies often have software IP assets themselves, including embedded
software.

5. Exploiting new Software-Intensive Businesses Opportunities

There are several new types of businesses that can now, thanks to the Internet, be located
in any country. Often these businesses require significant software investment to be
globally competitive:
• For an on-line business like Amazon or e-Bay or an on-line game, the software is
the key asset in its offerings.
• For a call center or services outsourcing business, the key asset is the knowledge
of the employees whose services are being offered. Still, the software shapes the
form 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 many
countries interested in expending software capacity to enable rapid development of these
software-enabled businesses and the infrastructure needed to support them. While
Business Process Outsourcing, or BPO, as the next wave of high-end services
outsourcing is called, is a great business opportunity, its long-term impact on economic
development may be problematic. As is already the case with call centers, customers
move their business from country to country looking for quality and the best price. The
inevitable glut of quality service providers from all over the world will bring down prices
for even the most sophisticated teleservices – the “race to the lowest possible price”
scenario.

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 of
customer information can cause permanent damage to a business, or even to a country’s
reputation.

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

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



software exports generate hard currency. For development policy makers, and for
entrepreneurs, it is hard to resist expending software capacity to try to build an export
industry. In fact, it is often the case that limited resources are focused on exports when
they 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 to
their home country, in terms of the money they send home. There are indirect benefits as
well, including their potential help with business connections wherever they are working
and 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 – in
fact, a global market for software talent (Barr and Tessler, 1996). Labor is typcially the
easiest form of software export to organize, and it has few IP-related issues. It probably
also is the least beneficial to a country’s economic development. And it’s a cyclical
business, subject to the immigration policies of the host countries, which is where IP
issues would also be handled.

6.2 Software services exports

Developing software locally for foreign companies is by far the largest type of software
export. This may involve a local subsidiary of a multi-national corporation, or a local
software services provider who does contract work for foreign firms. Almost always
these software services firms get their initial experience by doing local projects for
government and commercial organizations. Eventually, they become very sophisticated
in the kind of work they can do (consulting and advanced technology) and in their
business processes.

While the bulk of outsourced software work still involves rather standard software
systems, increasingly, software product development, embedded systems, and other
proprietary systems are being outsourced globally. Here the client will have the highest
concern 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 our
experience, 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 software
marketing on the part of software entrepreneurs. (Barr, Tessler and Miller, 2002.)

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



devices. These shrink-wrapped products are inherently a high-risk, “title” business like
music publishing. Almost all the money is made by the few big hits and other titles have
difficulty getting any attention at all. Most products never even make it into the sales
channel.

In countries where there is rampant piracy of consumer titles, there is no domestic market
for 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 an
issue for on-line offerings, like multi-player games.)

One other IP issue is patent and copyright protection for these products and the technical
innovations 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 create
technical 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 the
protection and capitalization of these inventions, e.g. by creating an IP foundation and
offering 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 publishing
software products for businesses and other large organizations. This is where companies
like IBM, Oracle and even Microsoft make their money. This is the hardest software
business for new companies to master, but 80% of worldwide software sales are in this
category.

Besides the lack of venture capital, one key disadvantage that startup firms have in many
countries 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 dominant
issue in this category. What startups need are local customers who have state-of-the-art
information systems and who are willing to serve as beta-test sites for innovative
software in its early stages. Government and industry consumers are often reluctant to
include untested products from small firms in their planning. And without a domestic
customer to help with product evolution and validation, the local firm is at a disadvantage
when 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 significant
license revenues is quite common in these firms. In fact, many enterprise startup
companies actually wrap an innovation or two into a product and try to take it to market
as a solution. Increasingly, the enterprise market is open to unwrapped innovations –
licensed technology that is incorporated into other companies’ products. Most
entrepreneurs, however, are not even aware of this possibility and are unfamiliar with the
mechanics of partnering and licensing technology. Certainly savvy venture investors will



be concerned with IP protection, but in most countries, investors do not have enough
experience 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 top
software talent, sometimes consuming a significant portion of the country’s total software
capacity. (Not all programmers are equal. The best are 10 times more productive than the
average, and probably more innovative too.) The fruits of these research efforts are
typically 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 of
these startups are actually a way of packaging and proving the commercial value of an
invention, and are acquired by other software companies for their IP assets before they
become real businesses.)

Research in these labs does often result in significant technical innovations and
inventions. However, since the labs are not generally motivated to generate revenue from
their 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 potential
here. Israel, for example, exports $3B of software technology a year, almost exclusively
in 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 needed
IP could be a significant benefit as well.

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

8. Expanding the Software Workforce

For most countries there just isn’t enough software capacity to staff these various ways of
using software to support economic growth. Decisions by policy makers and by
individuals shape the developmental path taken. Soon enough, everyone realizes that
more software people are needed. In fact, without some critical mass of software talent
and experience, many avenues for development are closed. (Consider, for example, a
multi-national corporation choosing among possible sites for a new facility – the size and
maturity of the software labor pool is high on their list of criteria.

Unfortunately, the same software talent used in all of these economic development
strategies is also critical to growing the software workforce itself – teaching, mentoring,
directing research, etc. Sadly, this expenditure of the nation’s software capacity is often
overlooked, since it doesn’t directly impact the economy, resulting in slower than optimal
growth.

As an illustration of how software IP policy must take the state of the country’s software
industry into consideration, countries in the very early stages of software capacity



development may benefit dramatically from pirated software and free Open Source
technology. It can be quite expensive to buy licenses for the software that every student
uses in classroom and lab work. A realistic assessment of the country’s 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 – it’s not all technical. Software
activities require project management and marketing know-how and, increasingly,
knowledge about IP protection and capitalization (Barr and Tessler, 2002). We strongly
recommend that the curriculum of software professionals include education in the roles
and significance of intellectual property in marketing products and services, attracting
venture 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 their
offerings, and explain their ideas. Aldo Ventures also consults with policymakers,
industry associations, donor organizations, and NGOs about the software industry's role
in national economic development strategy. www.aldo.com

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

10. References

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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 Lanka’s Software Industry. A Report to the World
Bank. 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, Aldo
Ventures, Inc., November 2002. http://www.aldo.com/Publications/Papers/Korea2002.pdf



Carmel, E. and Agarwal, R. (2001) Tactical Approaches for Alleviating Differences in Global
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