Entrepreneurship and Indian IT outsourcing: the good, the bad, and the money saved

We now turn to an actual case study that I had done a few years ago of the outsourcing of semiconductor chip design. It's intended to show exactly how Indian firms undertake the work, how learning occurs, as well as to show some of the costs of outsourcing from the point of view of the client, particularly, the cost of coordination, the cost of delays.

So, by way of background, I've called these companies A for the client and B for the outsourcing company in India, which is a Bangalore-based company. So, A is a fabless semiconductor startup located in Silicon Valley that was founded in January 2002. It was founded in order to build the physics microprocessor, which would be used in video games to calculate motion and collision and within a year, A had designed the logic circuitry. That's really the intellectual property of the company. The heart of it is exactly how it should work, which is what the logic circuitry does. The next step in creating the chip is to actually convert that logic into an electrical circuit, design that electrical circuit, and burn that circuit onto a chip. Now, due to the downturn, which took place in the US in 2001 and 2002, it did not have enough money to do the work itself. So, it contracted with this large Indian IT services firm B to complete the design. These workers were directly recruited from universities in most cases, so they didn't have the deep experience that you typically find in Silicon Valley. Even though India already had a large multinational chip industry, the VLSI industry as it's called, and there were companies like Texas Instruments, TI and Intel, it was still small in terms of the number of people that were available. Hence, B had to recruit their workers pretty much fresh from university.