Diasporas and Domestic Entrepreneurs: Evidence from the Indian Software Industry
Executive Summary — Several recent studies have highlighted the important role that cross-border ethnic networks might play in facilitating entrepreneurship in developing countries. Little is known, however, about the extent to which domestic entrepreneurs rely on the diaspora and whether this varies systematically by the characteristics of the entrepreneurs or their local business environment. The Indian diaspora is estimated at over 18 million people spanning 130 countries. Given that formal institutions in India remain weak and hence the informal barriers to trade are higher, do diaspora networks serve as substitutes to the functioning of the local business environment? Do they help entrepreneurs to circumvent the barriers to trade arising from imperfect institutions? This study examines the extent to which software entrepreneurs within India vary in their reliance on expatriate networks. Key concepts include:
- Entrepreneurs located outside software hubs—in cities where monitoring and information flow on prospective clients is harder—rely significantly more on diaspora networks for business leads and financing.
- Those who rely more on diaspora networks also have better performing firms. This benefit from the diaspora is stronger for entrepreneurs who are based outside hubs.
- Benefits from the diaspora accrue most to entrepreneurs who have previously lived abroad and returned to India, compared with those who have not lived abroad.
- Professional rather than ethnic ties may well form the basis for these networks.
- Policymakers in developing countries could leverage their diasporas to help with domestic entrepreneurship by developing links between the diaspora and smaller cities rather than with hubs.
This study explores the importance of cross-border social networks for entrepreneurship in developing countries by examining ties between the Indian expatriate community and local entrepreneurs in India's software industry. We find that entrepreneurs located outside software hubs—in cities where monitoring and information flow on prospective clients is harder—rely significantly more on diaspora networks for business leads and financing. Relying on these networks is also related to better firm performance, particularly for entrepreneurs located in weaker institutional environments. Our results provide micro-evidence consistent with a view that cross-border social networks serve an important role in helping entrepreneurs to circumvent the barriers arising from imperfect local institutions in developing countries.