There is increasing agreement that Indian software firms are making the transition from competitive advantage based on low cost to competitive advantage based on innovation. However, there are few insights about how this transition process works. This paper seeks to bring together the outsourcing, global value chains and firm capability literatures. It draws on empirical material focused on learning and innovation ‘events’ in Indian software firms – their inputs and sources – and makes headway in opening the ‘black box’ of supplier learning in outsourcing relationships. This paper suggests that learning from customers was important but insufficient for making the transition. Capability formation depended significantly on other channels and mechanisms outside or independent of outsourcing relationships. This paper shows how firms actively mobilised and combined internal and external sources to address spaces for learning and innovation created by outsourcing.
Keywords: firm capability, global value chains, India, Bangalore, innovation, learning, outsourcing, software industry, globalisation, technology, knowledge intensive industries, supplier