ICT Industry - NathanThe Information and Communications Technology (ICT) Industry Cluster believes that Sri Lanka can achieve $1 billion in total ICT export services by 2006—with

A Competitiveness Strategy forSri Lanka’s Information & CommunicationsTechnologies (ICT) IndustryDeveloped by The ICT Industry Cluster

Supported and funded by The Competitiveness Initiative, a joint project of the United States Agencyfor International Development (USAID), Nathan Associates Inc., and J.E. Austin Associates.

A Competitiveness Strategy forSri Lanka’s Information & CommunicationsTechnologies (ICT) IndustryDeveloped by The ICT Industry Cluster

Supported and funded by The Competitiveness Initiative, a joint project of the United States Agencyfor International Development (USAID), Nathan Associates Inc., and J.E. Austin Associates.

ICT Industry

A Competitiveness Strategy

for Sri Lanka’s

Information and

Communications

Technology (ICT)

Industry

Supported and funded by The Competitiveness

Initiative, a joint project of the United States Agency

for International Development (USAID), Nathan

Associates Inc., and J.E. Austin Associates.

Colombo, Sri Lanka

January 2002

This publication was made possible through support provided by the U.S. Agency forInternational Development Mission to Sri Lanka under the terms of Contract No. PCE-I-801-98-000-16-00. The opinions expressed herein are those of the author(s) and donot necessarily reflect the views of the U.S. Agency for International Development.

The findings and recommendations in this report are an outgrowth of in-countrymissions conducted by Mark Frazier, Chairman of Development Informatics, in2001 for The Competitiveness Initiative (TCI) led by Nathan Associates Inc. and

J.E. Austin Associates. The author acknowledges, with deep appreciation, the many insightsprovided by the core members of the Information and Communications Technology (ICT)Cluster; the in-country TCI team, especially the tireless Cluster Coordinator, T.I. Jamaldeen;leading private and public decision-makers in Sri Lanka; William Garrison,telecommunication expert with the Kenan Institute; and Dr. George Sadowsky, ExecutiveDirector of the Global Internet Policy Initiative.

This report outlines a strategy for Sri Lanka’s competitive success in exports of software,software-related services, and teleservices. It distills assessments of Sri Lanka’s opportunitiesfor and constraints on achieving competitiveness. The recommendations herein chart a pathfor growth that can resolve near-term barriers and set the stage for medium-term and long-term progress in Sri Lanka’s ICT industry.

Acknowledgements

Acknowledgements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .iii

Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .vii

The Competitive Environment for the ICT Industry . . . . . . . . . . . . . . . . . . . . . . . .1Industry Constraints and Opportunities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2The Competitiveness Strategy and the Strategic Initiatives . . . . . . . . . . . . . . . . . . .13

Centers of Excellence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17Why This Initiative? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18Policy and Operational Implications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .22Adding Value in the Business Process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .23Indicators of Success . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .24Actions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .24

Virtual Business Incubators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .27Introductory Virtual Business Incubator . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .28Comprehensive Virtual Business Incubator . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .28Why This Initiative? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .29Operational Implications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .32Adding Value in the Business Process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .32Indicators of Success . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .33Actions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .34

A World-Class Policy Environment for ICT Growth . . . . . . . . . . . . . . . . . . . . . . .39Why This Initiative? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .39Policy Assistance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .42Indicators of Success . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .44Actions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .44

Sustaining Organizational Cooperation, Progress, and Value Addition . . . . . . . .47Actions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .48

Contents

vi ◆ A Competitiveness Strategy for Sri Lanka’s ICT Industry

Appendix. Sustainability of Cluster Functions—A Silicon Valley Precedent

Glossary

ILLUSTRATIONS

Figure 1. Value of Centers of Excellence in the Business Process . . . . . . . . . . . . . . . . . .23

Figure 2. Timeline for Center of Excellence Initiative . . . . . . . . . . . . . . . . . . . . . . . . . .25

Figure 3. Value of Virtual Business Indicators in the Business Process . . . . . . . . . . . . . .32

Figure 4. Timeline for Virtual Business Incubator Initiative . . . . . . . . . . . . . . . . . . . . . .37

Figure 5. Timeline for Policy Reform Initiative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .45

Today, Sri Lanka has a promising opportunity to compete in the market ofinformation and communications technology (ICT) products and services.Competitive pressures are driving international companies to seek high-quality,

cost-effective providers of these items and they are increasingly choosing “offshore”providers. Sri Lankan firms have made a good start as offshore providers, but counterpartsin other countries, including neighboring India, are far better positioned to compete in themarket. That market is estimated at between US$120 and US$200 billion, while Sri Lanka’sICT-related exports are estimated to be from $20 to $50 million. The ICT Cluster believesthat Sri Lanka can achieve $1 billion in ICT exports by 2006—with a sound infrastructureand policy environment and the right mix of industry coordination and support fromacademia and the private sector.

Industry coordination will rest on the ICT industry committing itself to rallying governmentand public support for the goal of $1 billion in export sales and 100,000 related jobs by2006. This target is aggressive, yet achievable—comparable to India’s on a per capita basis.At present, the pace of growth necessary for reaching this target is prevented by insufficientbandwidth; costly, outdated infrastructure; policies that discourage private sector investmentin the ICT field; and a scarcity of skilled ICT engineers and professionals in the localworkforce. These constraints can be removed through vigorous policy reform, which willhelp attract investment from local and international sources. The ICT Cluster has identifiedthree strategic initiatives that will help Sri Lanka address these constraints and become aleading provider of ICT services:

• Centers of Excellence• Virtual Business Incubators • A World-Class Policy Environment for ICT Growth.

Executive

Summary

viii ◆ A Competitiveness Strategy for Sri Lanka’s ICT Industry

Located in Sri Lanka’s academic and research institutes, Centers of Excellence will usetelecommunications links to tap into global resource networks in ways that benefit the ICTindustry and spread ICT skills throughout Sri Lanka. They will help Sri Lanka keep abreastof innovations and changing market conditions through links with North American,European, and Asian counterparts. At the same time they will enable potential clients on theInternet to learn about Sri Lanka’s progress and capabilities in ICT. By encouraginginformation exchange and promoting Sri Lankan advantages, they will stimulate ICTenterprise formation, job-creation, investment, and export earnings.

Virtual business incubators, freely available through CD-ROM and the Internet, are user-friendly information programs and online marketplaces that show companies andindividuals what products and services are in demand and how to succeed in competitiveelectronic markets. They provide leads and other useful information about market trends,possible transactions, and investments.

Establishing a policy environment conducive to ICT growth is the essential step in removingcurrent constraints and signaling to investors that Sri Lanka is committed to strengtheningits ICT industry.

Each of these initiatives will help accelerate the growth of the ICT sector and ensuretraining of ICT workers to fill jobs that arise from that growth. And the expansion of theICT sector will help make other sectors of Sri Lanka’s economy more productive andcompetitive.

An immense opportunity exists for Sri Lanka to compete in the global market forknowledge-based services, such as software development, programming andmaintenance, customer service and technical support call centers, multimedia and

computer graphics operations, and processing of scanned document images. Competitivepressures, aggravated by the recent economic downturn in North America and Europe, aredriving international companies to seek high-quality, cost-effective new sources of theseservices—and they are increasingly establishing operations in offshore sites to preserve orexpand market share.

Although Sri Lankan firms have made headway in these services, counterparts in India,Israel, Ireland, and other countries are far better positioned to compete in the informationindustries market for software and teleservices. This market is estimated at between US$120and US$200 billion. India is now capturing about $8 billion worth every year and its shareis growing rapidly. A comparable figure for Sri Lanka would be $150 million, adjusting forpopulation. But revenue from exports of software and related services is currently estimatedat between only $20 and $50 million.

The Information and Communications Technology (ICT) Industry Cluster believes that SriLanka can achieve $1 billion in total ICT export services by 2006—with the right mix ofindustry coordination, support from academia, and establishment of a policy environmentconducive to ICT growth and the betterment of all Sri Lankans. The cluster is committed totransforming Sri Lanka into a sustainable, world-class center for high-value, rapidlyevolving IT services.

The Competitive

Environment for

the ICT Industry

2 ◆ A Competitiveness Strategy for Sri Lanka’s ICT Industry

The purpose of this report is to support the ICT Cluster’s commitment to transforming theICT industry. It examines the opportunities for and constraints on Sri Lanka’scompetitiveness in the ICT industry, recommends a strategy with specific initiatives toresolve near-term barriers, and sets the stage for accelerating industry growth. The strategicinitiatives are intended as a starting point for near-term action that can demonstrate theopportunity for rapid employment, investment, and skill growth in market segments vital toSri Lanka’s future.

INDUSTRY CONSTRAINTS AND OPPORTUNITIES

Global Market Context

Competitive pressure and economic recession in technology-based markets is driving largeand small organizations to seek partners who can deliver high-quality, high-value,knowledge-based services with speed. Organizations that find the right offshore partners todeliver these services stand to benefit from higher margins, faster speed to market, andbetter customer service. By positioning itself for such partnerships, Sri Lanka can establish afoundation for competitive success in the ICT industry.

High Growth Opportunities

The competitive opportunity for providers of offshore or “long distance services” is immenseand growing. The World Bank estimates the annual market to be $120 billion and Dun &Bradstreet $200 billion. India’s exports of software and related services have grown fromapproximately $100 million in 1990 to more than $8 billion today.

Software and related services are at the high-skill end of knowledge industry work flowinginto developing countries. In the mid-1980s, multinational corporations began establishingoffshore centers for software development, initially focusing on structured programming,maintenance, and testing of slow turnaround projects. As telecommunications bandwidthexpanded, more services—such as requirements analysis, research and development,product design and engineering, and distribution—began to emerge in new offshorelocations.

Customer and technical support operations are among the newer opportunities for offshoreproviders. Companies such as Microsoft, Dell, America Online, and GTE are committed toproviding round-the-clock support to their customers. Typically these companies realizesavings of 60 to 80 percent by locating their call centers overseas. Countries such as theDominican Republic, Costa Rica, and the Philippines have experienced a growth surge inthe customer service market segment as North American, Asian, and European companieshave begun providing such service across time zones and in multiple languages for theglobal market. In this single market segment alone, India is aiming at a 20-fold growth in

The Competitive Environment for the ICT Industry ◆ 3

employment—creating 700,000 jobs—and more than $2 billion in annual exports over thenext six years.1

Image processing is another emerging teleservices opportunity. Banks, insurance companies,brokerage houses, and order fulfillment centers scan large batches of documents—such asloan applications, insurance claims, credit card transactions, and stock exchange orders—and send them offshore for analysis, keying, and response. In contrast to low-value,traditional offshore data entry operations, these new back office service bureaus can chargepremium prices for fast turnaround services.

Media content development, particularly the creation, enhancement, and conversion ofvideo and audio files, is yet another emerging opportunity. Broadcasting companies andowners of video archives—including hundreds of universities and technical institutes—areplacing their resources in digital form for delivery in global markets. In response to publicand corporate demand for “e-learning,” organizations that have more than 100,000 hoursof videotaped courses are converting their materials into online formats and are seekingaffordable transcription, indexing abstracting, translation, animation, and graphicenhancement services. Offering substantial savings over “onshore” multimedia developers,the Monterey Institute of Technology in Mexico and the Singapore Polytechnic Institute inAsia are already partnering with U.S. and Japanese content providers in providing mediaservices.

In addition to high-volume and high-value offshore operations in these market segments,the range of entry-level opportunities for small and new entrepreneurs in developingcountries is growing. These include fast start-up introductory services that can lead tosustained outsourcing relationships when infrastructure, skill training, and commitment toclient satisfaction converge. These include

• Remote secretarial and answering services,• Tutoring and mentoring services,• Research and consulting services,• Graphic art and electronic publishing services,• Editing and technical writing services,• Translation services,• Digitization of maps and plans for GIS/CAD CAM programs, and• Monitoring of webcams for neighborhood watches and security services.

1Language skills explain, in part, why the Philippines and Costa Rica have been successful in this marketsegment. If Sri Lanka revives and strengthens its ability to teach foreign languages to its work force, it willbe better able to compete against counterparts in East Asia on the basis of quality not just price.


These entry-level markets have tremendous growth potential for developing countries. Forexample, more than six million secretaries and word processors are employed in NorthAmerica at an average annual salary of more than $18,000. Increasingly, firms are hiringprofessionals outside of North America who can help provide round-the-clock services,including real-time call handling and messaging services and high-quality publications.

In East Asian countries millions of individuals want to improve their skills in English andother western languages. Some can afford private tutors, while others are examiningdistance learning with institutions based in the United States. Because of its location andrelatively educated workforce, Sri Lanka could provide online tutoring that costs less than aU.S.-based service and is more timely for Japanese, Korean, or Chinese clients wishing topractice online in the evening. Even North American families wishing to improve theirchildren’s academic performance could seek affordable and personalized service from tutorsoverseas. Online research and consulting specialists in countries around the globe competefor tens of millions of dollars in outsourcing work through electronic markets, such asElance.com.

Countries that promote entry-level telework opportunities—as well high-volumeproduction—are preparing for sustained competitiveness. India, Ireland, Israel, thePhilippines, and the Dominican Republic are among the most advanced in adopting neededreforms. In addition to adopting market-oriented economic policies, they are introducingcompetitively priced telecommunications services, strengthening intellectual propertysafeguards, creating close linkages between private industry and technical trainingproviders, and adopting vigorous international promotion campaigns.

Driving Forces

Five powerful market forces are driving the new ICT market opportunities.

1. Plunging telecommunications costs and capacity constraints

The growth of offshore opportunities for software products and teleservices is being drivenby plunging costs in international telecommunications that make offshore labor costadvantages overwhelming. Until recently, the direct labor cost advantages of, for instance,call center and image processing operations, were offset by the incremental cost ofinternational telecommunications. But Internet solutions for voice and data transmissionhave made it possible in open marketplaces to reduce costs by an order of magnitude ormore over traditional circuit-switched providers. Consequently, pager and voice mailtranscription and answering services, inbound and outbound telemarketing, customerservice, and technical support centers are growing.

India’s recent surge in exports of software and related services—to an estimated $8 billion in2001—springs from openness to steep reductions in telecommunication costs and the


introduction of telecommunication breakthroughs, such as systems that bypass thetraditional monopoly of international networks. India’s software exporters are therefore ableto compete in high-value markets that require continuous interaction with overseas partnersand customers, as well as in traditional, highly structured, lower value programming,testing, and maintenance projects.

2. “Anytime, anywhere” learning

How skills are acquired has changed fundamentally. Because of rapidly changing marketsand technologies, companies must keep abreast of best practices. In response, new e-learning systems that rapidly create and share online learning resources have emerged.

Flexible and affordable systems let corporations and universities digitize their courses,workshops, seminars, and technical briefings almost as soon as they are delivered sostudents and practitioners can keep up with market conditions, skills, and technologicalchange. These resources can be made available at low cost and as needed via CD-ROM,intranets, or the Internet. By enabling world-class skills to permeate throughout the ICTindustry quickly and inexpensively, these “just-in-time” training resources help level theplaying field for entrepreneurs, faculty, and students in developing countries.

3. Reputation-based online markets

Outsourcing, once dominated by onshore and offshore firms, is now also occurring throughnew reputation-based online marketplaces that are especially suited to the competitiveneeds of small and new firms. For example, reverse-auction marketplaces such as Elance(www.elance.com) and Smarterwork.com are offering—at low or no entry cost—opportunities for hundreds of thousands of entrepreneurs to compete for service projectsaround the world. In these new forums, buyers and sellers meet to contract for projectsranging from secretarial services and data entry to highly sophisticated web design and

Wireless access pointsfor less than $220 (left)can provide 250 userswith network access andshared access to two-way Internet satelliteearth stations (right) suchas Starband andDirecway, which are lessthan $500 installed inNorth America.


database projects. These projects tend to be small—ranging from $100 to $10,000—buthave already aggregated to more than $80 million over the past 18 months in the case ofElance.com, one of dozens of online marketplaces. Contracting, arbitration, and paymentare all handled online.

Bidders from developing countries enjoy a strong advantage in these marketplaces, giventhat the venue favors highly competitive bids. The new markets have also adoptedreputation-building systems in which all parties to a transaction post feedback on theirexperiences. When they satisfy their initial clients, offshore producers gain powerfulreputation points and visible client references that can give them a sustained competitiveadvantage.

The World Bank’sOpenWorld Presenter is a downloadable e-learning tool.

E-Bay offers millionsof users access toElance.com, a global“reverse auction”marketplace forservices whereentrepreneurs indeveloping countrieswho bid aggressivelyon small projects canquickly build solidreputations throughclient feedback.


4. Online workflow systems

Innovations in “virtual” team management are also driving growth in offshore opportunities.As their role in the delivery of knowledge-based services continues to grow, small and newentrepreneurs are finding that the quality of project management, or workflow, is critical tosuccess. Workflow systems to manage project teams across time zones and nationalboundaries have emerged; and free and low-cost web-based tools for online meetings,project scheduling, task assignment, and tracking are making it possible for small groups tocooperate effectively. Large companies have turned to workflow solutions built upon LotusNotes, Microsoft Exchange, Groove.net, and other powerful coordination andcommunications tools. In most instances, these tools enable round-the-clock work onsophisticated projects, with responsibilities shifting to affiliated production centers in stepwith their respective workdays. Such tools afford a competitive advantage—speed tomarket—to those who source knowledge-based services globally and coordinate productionthrough online systems.

5. Talent in ICT diasporas

Offshore sourcing of software and teleservices is being driven by the experience,relationships, and (increasingly) investments by nationals who have succeeded in ICT-related professions and ventures overseas. India, for example, has hundreds of thousands ofprogrammers, technicians, and others employed in international companies or overseasbusiness ventures relating to information technologies. In many cases, they have broughttheir knowledge, contacts, and capital back to India to help launch companies into globalmarkets for software and teleservices. Sri Lanka’s estimated talent base of 10,000 ITspecialists now living overseas can play a similar role.

Global Market Risks and Challenges

Although these driving forces present opportunities for Sri Lanka, they also pose challenges,global and local. For instance, high-value operations require continuous updating of skillsbecause of rapid changes in markets and technology. Otherwise, technical skills quicklybecome obsolete, penalizing companies and institutions that are slow to adapt new methodsof diffusing best practices. Also, millions of small and new low-cost competitors will bebuilding their reputations through new outsourcing markets such as Elance.com, Ants.com,and Guru.com. Competition will intensify as global telecommunication costs fall and newfirms seek projects to establish their credentials.

These challenges affect companies worldwide, as well as those in Sri Lanka. Accordingly, SriLanka may be able to stand out in the global marketplace by turning challenges intoopportunities—and by using new capabilities to overcome local challenges.


Sri Lankan Context

Sri Lanka could become a vibrant competitor in ICT in new global markets. Companiessuch as Millennium, John Keels Computer Services, E-Runway, Informatics, and others areemploying thousands of Sri Lankans in providing custom software products, programmingservices, and teleservices for export. Estimates of current ICT-related service exports rangefrom $20 to $50 million.

Sri Lanka’s fundamental assets include favorable macroeconomic policies, a highly adaptableand trainable workforce, a demonstrated sensitivity among education and technicalinstitutions to market needs for skills, and a business culture open to global partners andinvestors. The government is now paying more attention to information technology issues,and the Board of Investment (BOI) and the Export Development Board (EDB) are engagingin international marketing and promotion.

In addition, Sri Lanka’s new, broad-based ICT Cluster is bringing together private andpublic sector stakeholders, a dynamic local private sector, and export-oriented firmssuccessfully offering software products and services. The cluster consists of

• Associations of export-oriented software and teleservices firms, • Hardware vendors,• Universities and technical institutes,• Government officials,• Venture capitalists,• Business incubators and ICT park developers,• ICT lawyers,• Business associations interested in increasing ICT, and • International marketing and promotion bodies.

The 14-member core of the cluster, formed in response to The Competitiveness Initiative (aUSAID-funded project), includes representatives from these groups and is chaired by Dr.Lalith Gamage, head of the Sri Lanka Institute of Information Technology (SLIIT). Thecluster has working groups in infrastructure, education and training, legal issues, venturecapital, and international marketing and promotion.

Sri Lanka has also seen progress in infrastructure, education and training, marketing andpromotion, and venture capital—yet problems in these areas are still constraining ICTcompetitiveness.

Infrastructure

Sri Lanka’s telecommunications, electric power, and other infrastructure are becoming morecompetitive. An independent regulatory body, the Telecommunications Regulatory


Commission, with oversight of the telecommunications sector has been formed; preferentialpricing has been offered by Sri Lanka Telecommunications (SLT) and the BOI in a WorldTrade Center area; satellite data bypass systems are operational for a number of internationalfirms; and new competition will arise after partial demonopolization in 2002. In addition,IT parks similar to India’s software technology parks are in development.

Yet infrastructure requirements are suffering because of

• Government hesitance to fully liberalize telecommunications;

• Uncertain ground rules, especially procedures for licensing Voice Over Internet Protocol(VOIP) and new categories of telecommunications service;

• High dedicated Internet access pricing relative to regional competitors;

• Unreliable level of service standards in data transmission through discounted SLT linesoffered to World Trade Center-based exporters;

• Costly local Internet access for dial-up public users (costs are10 times higher than othercountries because charges for metered local calls are included with Internet accessprices);

• Apparent public market rather than business market focus among potential providers ofalternative low-cost Internet access to exporters (e.g., Elektroteks);

• Low bandwidth and high prices for Internet access in rural areas;

• Frequent power outages, forcing companies to purchase generators; and

• Public sector rather than private sector funding for technology park initiatives, causingconcern among foreign multinationals about the responsiveness of developers to marketrequirements.

The government’s hesitance to liberalize telecommunications appears attributable tolingering protectiveness toward the SLT monopoly, legal obligations to foreign partners inSLT, and its own lack of understanding of revenue flowback that could result from full-strength liberalization. As for Internet access pricing, India’s prices for software exporters areas low as $4,000 per month for a full-circuit 2-megabit Internet connection. Legal and otherbarriers may be responsible for Sri Lanka’s inability to provide high bandwidth at affordableprices. Sri Lankan providers until recently have been paying a full-circuit price of between$20,000 to $30,000 per month (although SLT has confirmed an intent to lower half circuitcosts to Indian levels for ICT exporters). The country’s long distance charges for call centerand other teleservice exporters remain far higher than in other countries, where highvolume users can pay less than $ 0.10 per minute for inbound and outbound calls.


Education and Training

Education and training systems in Sri Lanka impart high-quality technical skills but to avery limited number of top-level graduates. Important achievements include a highstandard of top-level ICT training (confirmed by student performance in internationalcompetitions and placement in overseas companies); growing action to expand the supplyof skills, notably by SLIIT, major universities, and private providers; business communityinfluence on ICT curricula through formal and informal channels; and a tradition of on-the-job opportunities for students.

Vital education and training requirements, however, remain unmet. Problems include

• A thin base of top-level technical skills relative to India’s on a per capita basis (5,000 peryear would be needed to keep pace);

• A dearth of broad-based entrepreneurial traditions and English skills outside of urbanareas;

• Inadequate faculty pay resulting in constant poaching risk;

• Inertia in institutional autonomy and updating of curricula in public education andtraining systems, consigning Sri Lanka to long-term catch-up status;

• Bandwidth constraints (including high prices) that limit access by Sri Lankan firms,faculty, and students to distance learning and on-demand learning resources, whichcould otherwise be vital to ICT competitiveness; and

• Lack of— Awareness in key ministries of near-term advantages of distance learning and virtual

universities;— Awareness among overseas top-level international university and technical institutes

of Sri Lankan partnership opportunities (In contrast to Mexico and Singapore, Sri Lankan technical institutions and universities have yet to systematically partner with well-known overseas universities to create global online learning resources.);

— Vouchers and scholarship funds for e-learning;— ICT-related virtual internship and online work-study opportunities (in contrast to

Singapore–Hewlett Packard precedents);— Success sharing and performance-linked “flexiwage” budgets in institutions;— Systematic opportunities for ICT-oriented young people to gain entrepreneurial

experience; and— Systematic engagement of Sri Lanka’s ICT diaspora as adjunct and associate lecturers

in Sri Lankan universities and technical institutions.


Marketing and Promotion

At present, the government and private sector engage in some international marketing andpromotion. BOI has attracted some foreign-owned ICT companies, and the EDB hassupported local firms’ overseas trade shows and road shows. Many Sri Lankan softwareexporters have mounted aggressive and successful individual marketing campaigns.

Yet international marketing and promotion suffer from a lack of

• Solid, systematic information about ICT activity and capabilities; • Central repository of IT-related opportunities and players;• Clear promotional message about what Sri Lanka distinctively offers;• Adequate high-level access channels to decision-makers in leading multinationals;• Adequate overseas conference and road show participation and follow-up;• Systematic referral of outsourcing and joint venture leads generated by BOI and EDB

overseas missions;• Clearly defined introductory export service offers by small or new Sri Lankan firms; and• Awareness of new business opportunities in online markets.

Until recently, there was a pervasive lack of awareness in Sri Lanka concerning daily postingof hundreds of teleservices outsourcing projects in Elance.com and similar reputation-basedmarketplaces. More than 250,000 entrepreneurs are registered in Elance.com, but akeyword search in early May 2001 found only one Sri Lanka-based company. Most SriLankan firms in the ICT industry would benefit from orientation and guidance on how tocompete in these new online teleservices markets.

ICT Cluster initiativesto assist globalmarketing andpromotion of ICTinvestment and exportopportunities willcomplement andreinforce existing BOIand EDB campaigns.


Venture Capital

Private investment in Sri Lanka export firms is occurring through local venture capitalfunds, but the volume is small in comparison with other countries. Achievements includecreation of two primary Sri Lanka-owned venture capital firms, at least one successfulprecedent for incubating a venture capital-funded local firm to stage substantialcapitalization, and attraction of some overseas Sri Lankans in leveraging global capital forlocally funded firms.

Sri Lankan venture capitalists, however, face substantial obstacles, including

• Lack of automatic registration for overseas capital investment by Sri Lankan firms;• Unequal tax treatment of venture capital funds (some have tax holidays); and• Lack of investment by the Sri Lankan diaspora.

Although returning Sri Lankans have been a powerful force in forming software-relatedexport companies, there appear to have been few initiatives to link Sri Lankans workingoverseas with opportunities to invest their technical know-how, capital, and marketingcontacts in building the local ICT industry. The diaspora has yet to connect in a systematicway as investors.

Financing

In general, companies grow steadily by reinvesting profits or grow quickly by acceptingfinancing through external investors and being willing to dilute ownership. But in Sri Lankalocal investment capital is scarce and interest rates for traditional bank loans areprohibitively high. In 2001, for instance, a bank customer could obtain a collateralized loanat an interest rate of 18 to 22 percent per annum. Loans denominated in foreign currencyare available at an interest rate of 4 to 6 percent, close to international corporate rates, butto be eligible the business must have foreign currency earnings. A business with an overseaspresence and seeking debt financing on international markets can find cheaper capital, butmust bear the risk of exchange rate fluctuations. Such fluctuations may add 8 to 10 percentannually to the cost of capital for companies relying on local revenues—or substantiallymore if the rupee is severely devalued. Sri Lanka’s lack of investment capital and highinterest rates are significantly restricting growth in most industries, including ICT.

Legal

Sri Lanka’s laws and policies affecting ICT competitiveness are being modernized, but veryslowly. In recent years, stronger IPR policies protecting software have been adopted, butmore comprehensive and complex legislation [i.e., Trade Related Intellectual Property(TRIPs)] needs to be addressed in parliament. Reform proposals for electronic transactionshave broad-based support, intellectual property enforcement actions have been initiated,and laws in some ministries have been published on the Internet. In addition, domainregistration policy is being reformulated to make approval criteria clear.


Legal progress, however, is hampered by persistent problems, including a lack of

• Online regulations and forms, • Online company registry (no online company formation system such as found in

Delaware, USA; Dominica; or Anguilla),• Electronic payment gateways for government (e.g., domain and company registry), and• Electronic consultative and workflow systems in government.

THE COMPETITIVENESS STRATEGY AND THE STRATEGIC INITIATIVES

The strategy for improving the competitiveness of Sri Lanka’s ICT industry takes intoaccount the global and local context of that industry and the opportunities therein. Thestrategy is to strengthen the ICT industry’s ability to identify and respond effectively to thoseopportunities. The strategic initiatives—Centers of Excellence, Virtual Business Incubators,and a World-Class Policy Environment—are first steps in translating strategy into action.The initiatives emerged from intensive discussion among ICT Cluster stakeholders andprovide the cluster and the industry with a basis for responding to market opportunitiesthat will increase Sri Lankan exports, while building a foundation of good policy, workforceskills, and global relationships for migration into high-value market segments.

The initiatives can help the Sri Lankan ICT industry grow while avoiding the low-cost, low-value trap by moving into markets for higher value products and services. For the domesticeconomy, these initiatives will help increase system efficiencies, lower the costs and risksassociated with lack of timely information, reduce overhead costs by encouraging adoptionof online teaming and workflow systems, spread skills through online learning, andimprove the business climate. They will also spread awareness of and competence in“upmarket” opportunities while encouraging investment in the technical and marketinginputs that enable exporters—and their supporting institutions and service providers—tocompete on the basis of value rather than price alone. Specifically, they will

• Stimulate investment in and use of competitiveness infrastructure, including highbandwidth telecommunications networks vital to ICT success in the global marketplace.This will be measured by improved price–performance ratios for networks relative toregional competitors.

• Increase the pace of Sri Lanka’s technology innovation, as measured by an increase inthe overseas sales of high technology hardware and software from Sri Lanka.

• Improve the policy and regulatory framework, as measured by substantial reductions inthe costs of forming companies and obtaining international trade and investmentapprovals online, as compared with systems before e-government reforms.

• Establish an enduring public–private dialogue in the ICT industry.


In becoming more competitive, the ICT industry can help make the entire Sri Lankaneconomy more competitive. To do so, the ICT industry needs government and economy-wide support. The ICT Cluster must lead the industry in (1) setting a clear national ICTcompetitiveness target and gaining backing for it from the public and private sectors; (2)committing Sri Lanka to a better ICT business environment through improved policies,technical infrastructure, workforce skills, private sector involvement, and industrypromotion; and (3) turning technology-driven change into opportunities for all Sri Lankanfirms.

National ICT Competitiveness Target

The target for national ICT competitiveness needs to be a clear, measurable result that canwin backing from decision-makers and provide a baseline for assessing progress. The ICTindustry should seek government commitment to a national goal of achieving $1 billion inexport sales and 100,000 jobs from exports of ICT products, ICT services, and teleservicesby 2006. This target is aggressive yet achievable—comparable to India’s on a per capitabasis—and can focus all concerned on the steps needed to assure rapid private sectorgrowth.

Improved ICT Business Environment

To be globally competitive the ICT industry in Sri Lanka has to be able to match or exceedthe best practices and performance of ICT firms in the leading countries of the world. Thismeans Sri Lanka has to be able to

• Implement policies to establish a world-class business environment for ICT growth,especially through initiatives to remove constraints on growth;

• Build telecommunications infrastructure that is competitive in capacity, price, andconsistency to deliver international and local bandwidth;

• Introduce innovative skills diffusion systems so people may keep abreast of fast-changing technologies and market conditions;

• Stimulate entrepreneurship awakening individuals and firms to ICT opportunities; and

• Expand international marketing and promotion by engaging the Sri Lankan diaspora inICT business development and export growth and by developing an engaging globalmarketing message.

Technology-driven Change and Market Leadership

Technology-based firms increasingly find themselves in a life-or-death struggle to cope withtechnological change and global competition. As the recession deepens in ICT markets,


firms are recognizing that they must discard traditional high-cost approaches in favor offlexible systems that engage innovation and talent around the world.

In this environment, Sri Lanka has an unprecedented opportunity to become a leadingoffshore center for systematic solutions to problems caused by rapid technology change andmarket globalization. Sri Lanka can accelerate near-term ICT growth by providing essentialservices to overseas and local companies and institutions in the following areas:

• Online research and development systems for linking research and developmentcenters to ensure innovative product and service design flow that surpasses “onshore-only” alternatives.

• E-learning for “anytime, anywhere” learning to prevent skill obsolescence.

• “Virtual” team management to capitalize on the aggressive, price-competitive entry ofnew firms.

• Global technical support to ensure customer satisfaction and loyalty.

• E-government to establish world-class enabling environments in which companies cando technology-intensive business.

• Access systems to deliver affordable, reliable telecommunications and power solutionsto populations in poorly connected areas of the world.

Given the alternative—loss of competitiveness and market share—companies will chooselocations that can systematically deliver solutions in these areas. Sri Lanka, therefore, canprofit by offering comprehensive solutions to firms struggling with technological changewhile seeking affordable paths for expanding in global markets.

A strategy recognizing these market opportunities will help Sri Lankan, as well as foreign-owned firms, avoid “locking in” on obsolete technologies and skills. This will benefitcompanies in the ICT industry by laying technological and educational foundations and itwill enable growth in other industries.

Sri Lanka can improve its ICT competitiveness by launching centers of excellence inareas critical to high technology firms. Advances in telecommunications make itpossible to assemble global networks that link North American and other overseas

universities, institutes, and specialists with Sri Lankan counterparts to work on research anddemonstration projects.

By launching complementary centers in market niches, Sri Lanka will be able to establish aglobal resource network for increasing skills, raising awareness of Sri Lanka, and helpinglocal entrepreneurs enter overseas markets. Specialties proposed for the centers include

• Online research and development, with a focus on innovations in performance supportsystems to coordinate research teams that link “onshore” technical institutes withoffshore counterparts;

• E-learning systems and services, with an emphasis on innovations to enable affordablecapture and “anytime, anywhere” distribution of best practice skills in fast-changingtechnologies;

• Project management and virtual teaming, concentrating on performance-centeredsystems to find, engage, and oversee subcontractors in the global information economy;

• Global technical support, specializing in offshore hybrid contact centers (voice, email,web) for multinational hardware and software firms;

• E-government, focusing on automation of public sector forms, workflow, and reportingsystems, especially as these affect the competitiveness of ICT firms; and

• Access breakthroughs, specializing in turnkey “telectric” packages for ruraltelecommunications access (satellite and wireless local loop) and associated alternativeenergy systems.

Centers of Excellence


Other specialties could include wireless local area networks and middleware systems,micropayment systems, and information abstracting and indexing systems. All of thesecould emerge as large-scale, high value-added export opportunities for Sri Lanka, and canbenefit from rather than be put at risk by rapid change in technology. In addition, thecenters can provide a sustained flow of updated ICT-related materials to help ensure SriLanka’s global competitiveness.

A center of excellence can begin by establishing networks of international and nationaltechnical experts and advisers with interests in the center’s specialty. A center can

• Organize teleseminars, workshops, and distance learning events;

• Oversee cooperative international research projects and joint development of learningresources;

• Mobilize pioneering technology application projects in adjacent communities andthroughout the country;

• Sponsor nation-wide prizes, awards, and competitions at secondary and tertiary levelsto recognize outstanding accomplishments by Sri Lankans in the center’s specialty;

• Co-sponsor “career days” and job fairs with private international and local firms activein the center’s specialty; and

• Establish application review systems for scholarships and grant funding of relatedresearch projects.

Where existing office and classroom space and sufficient international bandwidth arecommitted, the centers can be launched in various forms, ranging from almost purelyvirtual to high-end new technology centers.

Each ICT stakeholder institution hosting a center should retain control over staffing,program activities, and access to physical facilities. Hosts would be asked to commit toproviding the rest of the ICT Cluster with access to (1) recordings of workshops, seminars,and lectures for incorporation into online resources; and (2) highlights of digital resources.Funding requirements can be minimized through maximum use of “virtual” rather thanactual research, development, and training linkages.

WHY THIS INITIATIVE?

Sri Lanka’s ICT industry needs to distinguish itself in order to establish brand leadership inglobal markets and to surpass the competition. Centers of excellence can be a cost-effectiveway to make the country visible as a world-class offshore location. But the benefits gobeyond changing perceptions. Substantively, the centers can become a valuable channel for

Centers of Excellence ◆ 19

insight and expertise into fast-changing technologies and market conditions. Reputableexperts and institutions—if closely linked by shared interests and affordabletelecommunications with their Sri Lankan counterparts—can provide insights critical tocompetitive success in ICT.

Sri Lankan firms can also expect to benefit from informal, but real, “door opening” channelsas individuals affiliated with prestigious institutions come to recognize the value of thecountry’s innovations, products, and services. Such channels will speed the success ofexport-oriented ICT firms in meeting aggressive employment and export sales targets.

Baseline Advantages

Sri Lanka has intrinsic comparative advantages for new centers of excellence. Its labor forceis highly literate and trainable, with a demonstrated ability to excel in technologydevelopment and entrepreneurship. Labor cost differentials enable a wide range ofknowledge-based operations at direct labor savings of 60 to 80 percent relative to NorthAmerican counterparts.

Sri Lanka’s overseas community includes approximately 10,000 professionals withexperience in global markets and technologies. These professionals are already beginningjoint ventures and bringing technical know-how to the country, albeit on a much smallerscale than that of India’s ICT diaspora.

Culturally, Sri Lanka’s various traditions have given it facility in dealing with internationalpartners. Geographically, it is a gateway into South Asian markets with more than onebillion people. The time zone differences relative to North America give Sri Lanka-basedresearch, development, and support operations an advantage in meeting round-the-clockdemands for delivering products and services to the global market.

The Market

Market conditions are driving more universities and technical institutes in developedcountries to work closely with counterparts in emerging markets. And, as appreciation forthe global demand for ICT education, training, and certification grows, universities andresearch institutes are entering into relationships with offshore partners.

For example, more than 50 engineering universities that are members of the NationalTechnology University, the foremost U.S. distance-learning network, have teamed withMexico’s Monterrey Institute of Technology to adapt course material for the Latin Americanmarket. Japan’s Mitsubishi Labs has similarly partnered with Singapore Polytechnic to bringJapanese technical information to the English market.


Cooperative research projects between onshore and offshore institutes in health,environmental sciences, and other technology-intensive fields are also underway. Theseprojects capitalize upon the demand of industry and institutes worldwide to engage newpools of affordable talent in developing economies.

Supporting Industries and Services

As telecommunications costs decline, Sri Lankan centers of excellence will be able toestablish alliances and partnerships that include universities and technical institutes aroundthe world. Centers of excellence will also benefit from close working relationships with SriLankan business incubators, IT parks, and networks of firms offering expertise and businesssolutions in each center’s specialty. (The Virtual Business Incubator strategic initiativepresented in the next chapter explores these possibilities in detail.)

Organization

Sri Lankan universities and technical institutes are already moving toward complementaryspecialties, as evidenced in the pending Virtual University initiative that has encouragedColombo University to position itself as a multimedia technology leader and Moratuwa as aleader in computer-aided design and engineering. To reinforce such developments, it isrecommended that centers of excellence with the following specialties be launched soon:

• E-Government, The Sri Lanka Institute of Information Technology (SLIIT) (inconjunction with relevant ministries). SLIIT’s computer services center has a solidrecord of software development for Sri Lanka’s public sector and is well positioned tohost this center.

• Project Management and Virtual Teaming, University of Moratuwa. The University’sleadership in many engineering and ICT disciplines makes it a prime site for this center.

• E-Learning, Institute of Computer Technology, University of Colombo. Thereputation of Colombo University and its Institute of Computer Technology forinnovation in distance learning and multimedia position it to become a center ofexcellence in e-learning.

• Online Research and Development, Virtual Learning Inc.

• Wireless LAN and Middleware Systems, University of Peradeniya. The University’sstrengths in networking and software development make it a natural host for this center.

• Technical Support Systems, Software Exporters Association.

• Telecommunications and Power Accessibility, Arthur C. Clarke Center for ModernTechnologies (affordable “telectric” telecommunications and power solutions).


Telecommunications pioneer Arthur C. Clarke and his colleagues at the Sir Arthur C.Clarke Centre for Modern Technologies have won recognition worldwide forinnovations in telecommunications and power system.

Other potential sponsors of centers of excellence include nonprofit organizations, such asLacnet, that engage IT professionals in the Sri Lankan diaspora. Mobilizing Sri Lankansabroad in projects that benefit in-country ICT institutions can provide a rich source oftechnical and market insight that can improve the country’s competitiveness overall.

The new headquarters ofThe Sri Lanka Institute ofInformation Technology,a possible center for e-government.

University ofMoratuwa, possiblecenter for projectmanagement andvirtual teaming.


Responsibility for each center should be assumed by the hosting institute under terms andconditions to be developed with the ICT Cluster in its Memoranda of Understanding andsubsequent formal agreements. At a minimum, this commitment should include agreementby the center to record and share highlights of its activities in digital form. The mostimportant determinant of the success of the centers is the sustained commitment of the SriLankan hosting institutions. Accordingly, the ICT Cluster should create a system that doesnot ration in advance the number of centers that may be established.

POLICY AND OPERATIONAL IMPLICATIONS

The Centers of Excellence initiative will also help resolve policy-induced constraintsthrough networks of internationally recognized advisers who could bring their insight,expertise, and independent perspectives to bear on telecommunication liberalization andother policy reform debates. And, by mobilizing new networks of advisers and technicalexperts, each center will be in a position to reinforce the public–private dialog on policyand contribute practical solutions to policy constraints.

The centers of excellence can also seed operational improvements benefiting the ICTindustry as a whole. Such improvements include

• Efficient government processing of forms (including licenses, permits, and fast-trackprocessing of applications of incentives) through e-government demonstration projects;

• Greater leverage in negotiating favorable international telecommunications prices byexpanding the volume of international telecommunications traffic (throughvideoconferences, teleseminars and research projects);

• Advanced technical training, international project experience, and updated ICTcurricula;

University ofPeradeniya, possiblecenter for wirelessLAN and middlewaresystems.


• Reinforcement of international marketing and promotion through affiliation of SriLankan institutes (and their affiliated entrepreneurs) with internationally knownuniversities and research institutes; and

• Stimulation of new venture capital flows as local and foreign investors see demonstratedSri Lankan capabilities in center of excellence specialties.

ADDING VALUE IN THE BUSINESS PROCESS

Centers of excellence will directly affect Sri Lanka’s competitiveness by adding value acrossthe business process for companies in the ICT industry. The areas highlighted in Figure 1indicate where in the business process value chain this initiative will have the greatestpositive impact.

Figure 1. Value of Centers of Excellence in the Business Process

• Research & development. Substantial gains are expected in Sri Lankan R&Dcapabilities as centers enter into relationships with overseas counterparts recognized asinnovators.

• Procurement. The centers will also facilitate sourcing by Sri Lankan firms of technicalexpertise and state-of-the-art tools, and identification of strategic technologies, products,and services.

• Sales and marketing. Established and new exporters will gain market share as thecenters lead to Sri Lanka’s “branding” as a world-class gateway to solutions in criticalareas. International advisers affiliated with each center can be a source of endorsementsand marketing ideas for exporters.

• Customer service. Given that one center is proposed to focus on global technicalsupport, export firms in Sri Lanka should benefit from state-of-the-art strategies andsolutions in customer service.


INDICATORS OF SUCCESS

Possible indicators of progress for the Centers of Excellence initiative include:

• Output measures— Number of center-affiliated cooperative research and development projects; — Number of center-affiliated teleseminars, workshops and lectures— Number of center advisers affiliated with leading international technical institutes

and universities— Number of articles referring to Sri Lankan activity in international ICT publications

• Outcome measures— Number of patents and inventions in ICT registered annually by Sri Lankan

individuals and firms— Number of articles by Sri Lankans published in peer-reviewed international ICT

journals— Export sales of Sri Lanka-originated ICT hardware and software products — Employment by ICT exporters

Export sales and employment would be measured in absolute numbers and performancejudged relative to India’s on a population-adjusted basis. For such measures to be useful,the ICT Cluster should establish a neutral, independent evaluation system of Sri Lankancenters of excellence relative to international counterparts. This evaluation should beconducted annually by individuals or institutions with no direct or indirect interest incenter programs or results.

ACTIONS

Actions recommended to launch the centers include the following:

• Prepare concept paper on centers of excellence, including a proposed framework ofcommitments;

• Identify center specialties and recommend proposals that centers can make to overseascounterparts in — Joint research, — Teleconferences and seminars,— Conversion of lectures and courses to digital form,— Translation/localization of publications, and — Provision of research associates.

• Draft and produce print, web, and CD-ROM presentations to introduce center ofexcellence opportunities to local and overseas allies;


• Negotiate in-country agreements with hosting institutes and incorporate centers as legalentities;

• Draft and circulate invitations and memoranda of understanding to secure affiliationwith international advisers, technical institutes, and universities;

• Sign agreements and launch programs with overseas counterparts, including conversionand enhancement of initial lectures, workshops, and seminars, and host in-countryorientation;

• Mobilize overseas and local advisers’ input on dialog with government ontelecommunications policy reform, e-government initiatives, and intellectual propertyenforcement; and

• Solicit informal advice from center-affiliated experts on marketing strategies, jointventure, and investor approaches.

Figure 2. Timeline for Center of Excellence Initiative

Targets and Expected Results

The Center of Excellence initiative should aim to consummate agreements with Sri Lankanhost institutes (e.g. SLIIT, Moratuwa, Colombo, and/or Peradeniya) within three months ofthe ICT Cluster’s decision to proceed. Figure 2 above is the timeline for the initiative.

Virtual Business

Incubators

Developed as web portals or CD-ROMs, virtual business incubators (VBI) will showSri Lankan firms how to succeed in competitive electronic markets; provide agateway for future investments by local and diaspora investors; and share

understanding necessary for pursuing market opportunities, global and local. Thanks totheir digital format, VBI materials can be disseminated rapidly among Sri Lanka’s establishedand emerging export firms, technical institutes, telecommunications and internet providers,venture capitalists, and industry associations.

VBIs can include interviews with North America-based corporations, universities, andtechnical institutes on outsourcing trends and success factors, and interviews with SriLankans overseas who have succeeded in information technology and can offer practicalinsights or mentoring relationships. They can also be designed to facilitate online linkagesin the ICT industry, as well as bridge building with overseas mentors, advisers, andpotential investment sources or marketing leads. As such, VBIs can be an entry point forbusiness planning, market analysis, contracting, and promotion tools and services that SriLankans can use to move into high value-added niches.

VBI content can be presented in multimedia formats including streaming video andsynchronized text and graphics with links to documents, tutorials, certification resources,and other material. Content should reflect input from ICT Cluster decision-makers andmembers.

Two VBI versions should be offered—an introductory VBI and a comprehensive VBI.


INTRODUCTORY VIRTUAL BUSINESS INCUBATOR

The introductory VBI should be a standalone CD-ROM suitable for broad distribution tostudents and entrepreneurs in learning centers, Internet cafes, and secondary schools; andto in-country associations and centers of ICT education, training, and certification. Itspurpose would be to raise awareness of ICT-related business and career opportunities.

The introductory VBI will present opportunities in ICT market segments, describe freeresources to assist in venture startup, and offer guidance for entrepreneurs interested inlaunching teleservice export companies on a part- or full-time basis. Focusing onopportunities requiring entry level to intermediate skills, the VBI can include

• Video presentations by Sri Lankans who have succeeded overseas and by internationalcompanies seeking to outsource work to specialized entrepreneurs overseas;

• Examples of the types of teleservice export opportunities now accessible to Sri Lankanfirms of all sizes;

• A virtual tour of online marketplaces that offer hundreds of teleservice outsourcingprojects daily, including advice on how Sri Lankan firms can make their presence felt;

• Videotaped interviews with Sri Lankans in the United States who have launched ICTventures; and

• Interviews with North American firms seeking offshore teleservice partners.

Versions can be offered in Sinhalese and Tamil, if desired, in tandem with the government’scampaign to open 50 learning centers. To supplement the CD-ROM, a web-based versionwith streaming audio is also planned.

COMPREHENSIVE VIRTUAL BUSINESS INCUBATOR

The comprehensive VBI will be a set of CD-ROMs for intranet and campus area networkdeployment in universities, ICT organizations, technical institutes, and software industryassociations seeking to move Sri Lankan firms to higher value-added market segments. Itshould assemble a foundation of resources for building links with in-country and overseascounterparts.

In addition to the content offered in the introductory VBI, the comprehensive VBI caninclude presentations by corporations and universities seeking solutions in call centers,image processing, media conversion, and other sophisticated operations. It will emphasizestrategies and partnerships that can help establish Sri Lanka as a base for high-value,distinctive products and services in the global market. It may also include

Virtual Business Incubators ◆ 29

• Interviews and guidance on value-added outsourcing and other linkage building for ICTuniversities, technical institutes, and companies seeking to open new teleservicesmarkets;

• Virtual tours of onshore call centers, image processing, media conversion operations,with advice from practitioners on criteria for outsourcing decisions; and

• Expressions of interest by Sri Lankans employed overseas in ICT or implementing ICTcurricula and systems in U.S. universities (e.g., Carnegie-Mellon and Georgetown) inacting as online technical, marketing, or business advisers and resources for Sri Lankancounterparts.

As with the centers of excellence, the comprehensive VBI can be made freely available toinstitutes and organizations that agree to provide in-kind support or financially contributeto in-country ICT clustering activities. For example, in return for receiving thecomprehensive VBI, they might commit to digitally recording ICT-related seminars andworkshops so that highlights of the proceedings can be used to update the VBI.

If response to material generated for a prototype comprehensive VBI is favorable, full-scaleimplementation can follow. This would include capturing workshops and seminars andadding them to VBI resources; test-marketing teleservice outsourcing offerings fromparticipating institutes; and expanded input from overseas Sri Lankans and other technicalspecialists on strategies to move up the value-added ladder in products and services for theglobal market.


VBIs offer an exceptionally fast and affordable way to increase survival rates of small andnew firms, accelerate specialization of established firms, and encourage ICT industrydevelopment by spreading awareness of immediate and medium-term opportunities inglobal markets and providing practical ways for entrepreneurs to respond. They can alsostrengthen business associations, venture capital funds, and universities and technicalinstitutes, including centers of excellence.

Baseline Advantages

Although Sri Lanka has immense human capital, broad segments of the population—including students at the tertiary and secondary education level—are inexperienced withentrepreneurship. Stimulating entrepreneurship will enable the country to better use itslabor force, which is highly literate and trainable and has demonstrated abilities to excel intechnology development. The initiative will also tap the financial and human capital of SriLanka’s overseas community of approximately 10,000 professionals, many of whom haveexperience in global markets and technologies.


The Market

Small and new entrepreneurs have exceptional opportunities for offering their services andproducts in global electronic marketplaces. Online markets (such as www.elance.com,which has recently partnered with Ebay.com) enable firms to find and deliver introductoryprojects, and to evolve from these into sustained outsourcing relationships in

• Remote secretarial and answering services,• Tutoring and mentoring services,• Research and consulting services,• Graphic art and electronic publishing services,• Editing and technical writing services, and• Translation services.

In the case of secretarial services alone, more than six million secretaries are now employedin North America at an average annual salary of more than $18,000—potentially a source oftens of thousands of jobs for Sri Lanka.

Countries that promote entry-level telework opportunities—as well as high-volumeproduction—stand to benefit greatly from increasingly decentralized ICT sourcing. Broadgrowth in entrepreneurial skills and attitudes is an important step in ensuring Sri Lanka’supward mobility in global markets for knowledge industries.

Supporting Industries and Services

VBIs will accelerate the growth of ICT-related industries in Sri Lanka by stimulatingformation of new firms offering expertise and business solutions to established ICTstakeholder institutions and companies. As VBIs spread awareness of industry needs andopportunities, entrepreneurs will be better positioned to respond.

Organization and Consensus-building

Approximately 30 Sri Lankan companies—employing 2,000 workers, in companies rangingin size from a few employees to more than 400—are exporting software and related services(including teleservices). Informal estimates place the aggregate level of export earnings bythese firms at between US$20 million and $50 million annually, up substantially from 1999.

In contrast to India’s experience, Sri Lanka’s initial wave of ICT export growth has resultedlargely from direct business development and joint ventures by Sri Lankan entrepreneursrather than multinational corporations. Among the largest and most successful firms areJohn Keels, E-Runway, Millennium, Informatics, and Media Solutions. Other dynamic, new,locally owned export firms have formed the Software Exporters Association. Another groupof ICT Cluster firms is the Sri Lanka Association of the Software Industry (SLASI), an


association of more domestic-market oriented software and systems integrationentrepreneurs, including many who represent international firms in their product andservice offerings.

Although these segments of the ICT Cluster have different agenda and membershippriorities, all wish to

• Increase the pool of entrepreneurial, business management, project management, andtechnical expertise in Sri Lanka;

• Promote Sri Lanka as a center of ICT innovation; and

• Improve systems for finding, mobilizing, and managing in-house and external talent tomeet the needs of global markets.

The VBIs will make it possible for a growing number of firms—new entrepreneurs andestablished companies alike—to work together to mutual benefit in these areas.

Potential VBI supporters include venture capitalists, who are seeking a wider range ofinvestment opportunities; industry and professional associations who may welcome abroader membership base; and education and training institutions wishing to attractstudents by demonstrating clear paths for applying skills in the global marketplace on apart-time basis during their studies and on a possible full-time basis after graduation.

Companies that will not welcome entry by new firms, however small, may resist VBIs. Thisresistance can be mitigated if established firms recognize new entrants as talent to hire ortargets to acquire.

The ICT Cluster’s working groups—with a modicum of preparation and suitable tools—canoversee arrangements for recording the insights of Sri Lankan entrepreneurs and resourceproviders for incorporation into the introductory and comprehensive VBIs. Thesearrangements can include interviews and case studies of Sri Lankan entrepreneurs andspecialists in business plan development, finance, marketing, contracting, projectmanagement, and workflow quality assurance systems. This effort can be greatly assisted bycommitments of cluster stakeholders to make ICT students available as interns or viaworkstudy projects. The students would prepare in-country multimedia input for the VBIsand possibly translate material into Sinhala and Tamil.

In North America, specialists can be engaged to interview Sri Lankans and companiesinterested in offshore sourcing of ICT products and services. The North American teammembers should also take the lead in preparing market opportunity profiles and assemblingtools for online market research, business planning, marketing and promotion, contracting,project management, quality assurance, and monitoring of client satisfaction.


Following startup assistance, the hosting institute should assume responsibility for eachVBI, under terms and conditions to be developed with the ICT Cluster in its Memoranda ofUnderstanding and as elaborated in formal agreements.

OPERATIONAL IMPLICATIONS

The VBI initiative will improve the operational environment for ICT Cluster firms byincreasing the number of companies operating in the cluster and the range and depth of SriLanka’s services and products for domestic and global markets. Larger Sri Lankan firms willbenefit from the growing range of specialized startup firms. These small firms will constitutemore prospective suppliers and subcontractors and a new pool of talent, technologies, andbusinesses that the big firms can hire, acquire, or team with.

The VBIs can introduce small and large firms alike to collaborative workflow and onlineoutsourcing opportunities, improving the coordination of marketing and delivery to theglobal market. They can also be a venue for venture capitalists to advise new firms andprovide them with “templates” for seeking and finding capitalization. As conditions in theNorth American market drive established venture capital funds overseas, this VBI functioncan help Sri Lankan firms to gain visibility and to present themselves in a way compatiblewith the norms of global venture capital.

The VBIs can offer links to model outsourcing agreements and affordable internationalcontracting engines (e.g. www.quickforms.com) to minimize legal uncertainties and costs indoing business for the global market.

ADDING VALUE IN THE BUSINESS PROCESS

VBIs will directly affect several elements of Sri Lanka’s competitiveness in the businessprocess. The highlighted areas in Figure 3 indicate where in the business process valuechain this initiative will have the greatest positive impact.

Figure 3. Value of Virtual Business Indicators in the Business Process


• Administration and management. The growth of entrepreneurship facilitated by VBIswill bring new talent and methods into the industry. Better management technology andmonitoring systems, as well as business-oriented leadership teams will also support thisarea.

• Research & development. Sri Lankan exporters can expect a substantial impetus inresearch and development because startup firms often act as an innovating force andproving ground for ICT solutions.

• Procurement. Stimulation of ICT entrepreneurship will increase options for sourcing ofexpertise and state-of-the-art business skills, and rapid identification and deployment ofnew technologies.

• Distribution. VBI-affiliated firms may also offer solutions for electronic product andservice delivery that the ICT industry, as well as other industries, could adopt.

• Sales and marketing. VBI firms may similarly provide sales and marketing support inweb site development, customer relationship management, and online marketingcampaigns for export-oriented firms of all sizes.


Measurable indicators of progress for the VBI initiative can include the following:

• Output measures— Number of startup ICT firms exporting to the global market— Survival rates of firms in the global ICT export market

• Outcome measures— Export sales of ICT hardware and software products originating from Sri Lanka— Employment by ICT exporters (absolute performance and relative to India on a

population-adjusted basis)

Export and employment will be measured in absolute numbers and performance judgedrelative to India’s on a population-adjusted basis. For such measures to be useful, the ICTCluster should establish a neutral, independent evaluation system of Sri Lankan VBIsrelative to international counterparts. This evaluation should be conducted annually byindividuals or institutions with no direct or indirect interest in the VBIs or their results.


ACTIONS

For the prototype VBI, the following actions can begin very soon:

• Survey 20 to 30 representative ICT firms, secondary and tertiary technical institutes,venture capitalists, and existing incubator(s) to determine desired VBI content and typesof affiliated in-country and overseas advisers (e.g., marketing, investment, or legalspecialists).

• Identify prospective contributors of VBI content, such as Sri Lankans overseas and U.S.ICT firms and universities.

• Draft detailed outline of introductory and comprehensive VBI content based on industryinput and expressions of interest.

• Record 15 to 20 interviews or background profiles and prepare other source material.

• Deliver prototype introductory and comprehensive VBIs.

• Gather feedback on prototypes from Sri Lankan focus groups and specify neededimprovements.

Interviews should feature Sri Lankans successful in ICT overseas sharing lessons learnedwith entrepreneurs based in Sri Lanka; U.S.-based companies interested in offshore sourcingof teleservices describing types of projects and what they look for in overseas providers;developers of online marketplaces offering introductory projects; and U.S.-based providersof online workstudy, internship, and other credential-building experiences of value to SriLankan ICT competitiveness.

A stakeholder in theICT Cluster, theSoftware ExportersAssociation, is usingthe Internet to buildbridges between thediaspora and SriLankan-ownedexporters of softwareand related services.The VBI initiative cansystematically buildupon such precedents.


Upon a decision to proceed to full rollout, the VBI will move into final production andshould require about three months to prepare. Planned actions include the following:

• Conduct a high profile launch of the introductory VBI with live or taped endorsementsby leading Sri Lankans at home and overseas, as well as allied U.S. companies anduniversities.

• Sponsor live events, including teleseminars, with U.S. and Sri Lankan ICT industryparticipants to refresh comprehensive VBI content and provide continuous insight intothe requirements of competitiveness in rapidly changing markets and technologies.

• Stimulate expanded teleservices outsourcing and distance learning linkages. The U.S.-based VBI project team should expand contacts with North American organizationsincluding IT-oriented universities, industry associations, and entrepreneurs to confirmtheir interest in establishing cooperative relationships with Sri Lanka’s ICT industry,including possible test projects for translating or localizing technical training materialsand converting video courses to online formats. These projects can be a source of newcredentials, revenue, and skills for industry participants.

• Expand VBI technical advisory and mentoring personnel to feature Sri Lankan ITentrepreneurs and technical specialists in the United States who will share their insightsin digital form and act as online “telementors” to counterparts in Sri Lanka.

Following the rollout of the initial incubators, additional material can be integrated intoannual or semi-annual updates of the multivolume CD-ROM. Each Sri Lankan host of thecomprehensive VBI, for example, should be expected to demonstrate commitment byagreeing to record and convert training materials on a continuing basis using on-demandlearning tools and turnkey packages provided by the project team.

The roll out should conclude with implementation of a plan for transitioning to self-sustainability and negotiation of VBI agreements for private sector support in the form ofadvertising or sponsorship.

Targets and Expected Results

The goals for this initiative are to (1) produce and distribute at least 3,000 introductory VBICD-ROMs and (2) install the comprehensive VBI at three or more host institutes. ICTstakeholders—such as educational institutions, industry or professional associations, andInternet cafes or ISPs—can offer the introductory VBI with co-branding to clients, includingstudents, association members, and customers. The comprehensive VBI should be installedas an intranet or extranet resource on local or campus area networks at hosts such as SLIIT,Moratuwa, Colombo, Peradeniya, Software Exporters Association (SEA), or SLASI.


Finance and Investment

Because they are digital, not physical, VBIs can be started and maintained at minimalexpense. The introductory VBI could attract funding (including advertisements) fromcorporations, nonprofit institutes, and development organizations that may see it as avehicle for reaching a large audience in Sri Lanka. The comprehensive VBI can bemaintained by host institutes that commit to digital recording of workshops andconferences. The VBI can also be augmented by students through projects, internships, andworkstudy activities, as well as by international donor organizations that provide digitizedhighlights of ICT consultancies.

In some cases, hosts may choose to give physical form to the incubators to maximizebusiness development opportunities. In these cases, substantial funding may be needed.Each sponsor of a hybrid virtual–actual incubator could expect the incubator to becomeself-sufficient as graduating firms went on to enjoy large-scale appreciation of their shares.Actual incubators typically take 5 to 35 percent equity interests in their tenants, in returnfor offering low- or no-cost rent and support services.

Building International Linkages

The VBIs can help North American companies and institutions find partners that (1)provide affordable knowledge-based services, (2) improve the economics of global customerservice and technical support centers, and (3) speed conversion of course materials toonline formats for the global market.

Material in the introductory and comprehensive VBIs will be organized to promoterelationships in the ICT industry in Sri Lanka and with North American counterpartsthrough online discussion forums and other such functions. The VBIs will also be useful to

SLIIT is reserving twofloors in its newcomplex for theConceptNurserybusiness incubator.This area will be a“proving ground” forhigh-bandwidth localarea network accessto comprehensive VBIresources.


centers of excellence in establishing near-term and long-term relationships with universities,technical institutes, influential technologists, and industry associations in the United States.These bodies are increasingly seeking to digitize their products for online delivery, andrelationships with Sri Lankan specialists can add value to this process, as can opportunitiesto cooperate in joint research projects.

Figure 4. Timeline for Virtual Business Incubator Initiative

Partnerships in this area can help position both the United States as well as Sri Lanka tocompete in global markets more effectively across a range of export markets, and create aplatform from which to expand offerings of high-value, differentiated products and servicesin fast-changing markets. The anticipated transition to self-sufficiency is as shown in Figure 4above.

A World-Class

Policy Environment

for ICT Growth

Software and service exporters are key to increasing Sri Lanka’s export earnings andemployment. The success of these exporters and their expansion in near-termmarkets depends in part on creating a world-class policy environment conducive to

ICT growth. This initiative will help improve the business climate by mapping opportunitiesand implementation plans for accelerating full de-monopolization and privatization of alltelecommunications services (with revenue generation and fiscal impact projects). Itincludes policy-related initiatives in E-government, education and training, marketing andpromotion, venture capital, and resolution of legal issues. Activities may include policy andoperational assessments and recommendations, workshops, and study tours. The insights ofexperts expressed through such activities should be captured digitally so best practices,findings, and recommendations are accessible to all in the industry. This “digital leveraging”can also enrich the Centers of Excellence and VBIs.


The Centers of Excellence and VBI strategic initiatives can establish a foundation for helpingSri Lanka adapt to market opportunities and overcome long-term policy and operationalchallenges. Policy reforms that boost ICT competitiveness and overcome policy andoperational constraints in the near term are also needed.

Telecommunications liberalization may offer the highest returns of any policy reform and isperhaps the area most in need of immediate expert assistance. As noted in an analysisconducted in May 2001 by Dr. George Sadowsky, executive director of the Global InternetPolicy Initiative and cofounder of the Internet Society, the “ICT policy environment in SriLanka is at best indifferent and at worst hostile to the growth of the ICT sector”—primarilybecause of protective telecommunications policies and practices. Barriers noted by Dr.Sadowsky include


• The apparently indefinite continuation of the SLT monopoly on data traffic entering SriLanka via (SLT-controlled) submarine cable links, which are now operating at anestimated 25 percent of capacity;

• SLT resistance to attempts by other providers to obtain wholesale rights to access thesecable links;

• The evident resistance of the formally independent Telecommunications RegulatoryCommission to introduction of competition for Voice Over Internet Protocol (VOIP)telephony, approval of landing rights in Sri Lanka by competitive submarine cables (e.g.,Global Crossing), and authorization of an Internet exchange, independently funded andoperated by ISPs.

Such barriers impose a cost disadvantage on ISPs, whose only alternative is to supplyInternet connectivity through costly satellite links, which require substantial initialinvestment for high bandwidths and have inherent transmission delays. The high costs ofinternational telecommunications also seriously impede Sri Lanka’s competitiveness inemerging markets, constraining growth of customer service and technical support callcenters, image processing, and other teleservices export operations that could otherwiseemploy tens of thousands of Sri Lankans in coming years.

The entire ICT industry stands to gain from this policy reform initiative, although it maynot be universally supported. SLT and the Telecommunications Regulatory Commission(TRC), in particular, may prefer to maintain the status quo and safeguard the interests of theincumbent telecommunications provider.

To indicate Sri Lanka’s intention of providing a world-class environment for ICT growth,other policy reform and implementation initiatives need support. For instance, policyreform is needed to remove obstacles in the following areas:

• Business–Government interface. Pilot or demonstration projects can be fast-tracked tosimplify business startup and operating approvals for ICT Cluster exporters and theirsupport providers. At present, Sri Lankan exporters must follow time-consuming andcomplex rules and procedures in their interactions with government, relative toconditions in Singapore, Ireland, India (notably Andra Pradesh), and Dubai. Thesecompeting jurisdictions have put forms and approval processes online to facilitate ICTgrowth.

• Education and training. At present, Sri Lankans do not have ready access to broad-based national scholarships or voucher programs to expand access to ICT traininginstitutes and e-learning resources. In the public sector, providers of ICT education andtraining have no performance-linked bonuses to deter loss of faculty to higher payingcommercial institutions. Other countries, by contrast, are adopting reforms to makeeducation and training systems more sensitive to fast-changing market needs.

A World-Class Policy Environment for ICT Growth ◆ 41

• Tax and regulatory treatment of venture capital. Other countries provide privateventure capital funds and wide latitude to ICT export firms opening overseas offices,and offer favorable tax treatment for investors in such firms. Sri Lanka’s regulatorycontrols in these areas place national firms at a disadvantage relative to competitors inother countries who operate in more liberal business environments.

• E-commerce. Although the Council for Information Technology (CINTEC) LawCommittee, the Legal and Judicial Reform Project, and the IPR Reform Commission areundertaking substantial legislative drafting in e-commerce reform, Sri Lanka has yet toput in place new or updated provisions for electronic transactions. Sri Lanka does nothave laws that— Recognize digital contracts, signatures, and notarizations essential to e-commerce;— Provide adequate data protection/privacy laws or “safe harbor” provisions for the

public and business;— Fully safeguard intellectual property rights;— Protect against computer crime such as fraud, identity theft, sexual exploitation of

minors, and destruction or misuse of data; or — Protect electronic fund transfers.

Telecommunications expert William Garrison has also identified bandwidth pricing andlicensing policy as two areas requiring policy reform.

Bandwidth Pricing

The United Nations Development Program (UNDP) estimates that Sri Lanka’s cost ofInternet access is approximately 50 times that of comparable access in the United States.Some operators, as well as business consumers, say that international connectivity thatsupports high-speed Internet applications can now be obtained at less than $.05 perminute. To sustain offshore “back shop” arrangements with U.S. firms, Sri Lankan softwarecompanies need Internet access at comparable costs. Sri Lanka cannot be cost-competitiveuntil the differential in Internet pricing with the U.S. market moves close to zero. Twochanges could reap enormous benefits. First, the government should fully divest itself ofownership in SLT to end any vested interest in protecting or favoring SLT’s market position.Second, TRC should be given a clear, unambiguous mandate to regulate on behalf ofconsumers, relying on competition to the greatest extent possible to govern the marketbehavior of operators and service providers. Where competition fails to protect consumersor operators are able to exercise undue market power, then the TRC must have enoughpower to enforce pro-consumer regulations.

One short-term solution is to have “closed-user groups.” Such groups—such as a universityor a high-technology park complex—would have access to reliable, affordable bandwidth inthe quantity they require. The advantage of such an arrangement is that through political


support ICT sectors could gain government approval to get the bandwidth that they need tosupport their businesses. The disadvantage is that, in a perfect environment, separating thecountry into the “bandwidth rich” and “bandwidth poor” stifles innovation and does notsolve the bandwidth problem for all Sri Lankans. It is thus not a good long-term solution.

Licensing Policy

The Government should undertake a publicly transparent process of renegotiating theextant operator licenses to remove divergent, asymmetrical conditions between operators ina given class. All licenses should be brought into conformity with the pro-liberalizationconditions set out in the 1991 Telecom Act.

The actions described in the next section will clearly indicate to Sri Lanka and overseasmarkets the country’s commitment to establishing conditions favorable for the competitivesuccess of the ICT industry.

POLICY ASSISTANCE

The following activities can help the industry and government evaluate internationalprecedent, identify best practice reforms, and project the revenue and fiscal impact ofpolicies.

Analyze concentrated telecommunications reform options and prepare economic andfiscal impact projections. Specialists should examine how regulatory reforms can beapplied broadly or in demonstration areas (e.g., IT parks) to accelerate ICT export growthand should review international models and guidelines for international carrier agreements.Meetings between TRC and the U.S. Federal Communications Commission (FCC) and othercounterpart regulatory institutions should also be considered. Other activities include

• Devising strategies and reviewing precedents for speeding divestiture by the incumbenttelecommunications carrier of its monopoly, and devising formulas for makingsubmarine cable bandwidth available to resellers on a cost-plus basis;

• Recommending revision of the terms of reference for the regulatory authority tostrengthen its independence and support for private competition in a full range ofservices; and

• Recommending removal or substantial reduction of present high licensing fees for ISPs.

Plan e-government demonstration initiatives and estimate economic and fiscal impact. This effort should focus on planning online systems that will promote ICT growth in thenear term. Possible early “wins” for Sri Lanka in e-government demonstration projectsinclude


• An online company registry,

• An online Technology Visa application to fast-track approvals of entry permits in ITskills (similar to the U.S. H1B Visa), and

• An E-Learning Scholarship Fund (assess potential savings of not sending Sri Lankanstudents overseas).

Projects in these areas will involve designing, evaluating precedents for, and assessing directand indirect fiscal and economic impacts resulting from web-based application andprocessing systems. Online company formation precedents can be studied through tours toDelaware (USA) and offshore domiciles such as Anguilla and Dominica. E-governmentdemonstrations should begin with an orientation visit to e-government innovators in AndraPradesh, Maharashtra, and Singapore, with digitized orientation highlights broadlydisseminated in government, and lead to recommendations for demonstrations of e-government initiatives, especially for streamlined processing of ICT incentives applications.

Review and recommend other policy innovations. Additional innovations should beexamined for the following areas:

• Education policy reform. In reforming compensation policy, the extent of private sector“poaching” of ICT faculty should be determined and ways of supplementing facultyincome through actual or virtual incubators, or adoption of Singapore-style “flexiwage”systems should be assessed. In addition, a workshop on the implications of virtuallearning and policy reform is needed to inform the Ministry of Tertiary Education andTraining about distance learning and recommend internal policy and regulatoryreforms—such as establishment of national scholarship and voucher programs tofacilitate near-term ICT growth, and precedents for their administration by business-oriented, independent private nonprofit organizations.

Elektroteks, a privateprovider oftelecommunicationservices, hopes toattract call centers to anoffice complex beingbuilt near its teleport inColombo. Like otherproviders, its pricecompetitiveness ishindered by rigidregulations.


• Venture capital policy. The potential for online automatic registration for overseascapital investment by Sri Lankan firms should be assessed. India’s model ofnotification—rather than Central Bank approval of offshore investments up to certainannual maximum amount— should be examined. The advantages of adopting thisprecedent and economic impact of doing so should also be assessed. In studying the taxtreatment of venture capital funds, international best practice should be examined andrecommendations on updating incentives, as well as economic/fiscal impact projections,prepared.

• Legal/legislative reform. The Legal Working Group, supported by specialists asdesired, should draft model legislative and regulatory reform provisions, based onsuccessful international precedents, in support of e-government, telecommunications,intellectual property, e-commerce, arbitration, and incentives for ICT firms. A marketsurvey of leading ICT firms in North America can provide input on which legal reformsare likely to have the best investment and outsourcing response.


The success of this initiative can be measured by export sales of ICT hardware and softwareoriginating in Sri Lanka and employment by ICT exporters. Export and employment will bemeasured in absolute numbers and performance judged relative to India’s on a population-adjusted basis. As with other strategic initiatives, it is vital that an independent monitoringsystem be established to provide objective assessments.

ACTIONS

For reforms recommended through each of the following studies, projections of economicand fiscal impacts should be created. See the timeline for policy reform in Figure 5.

• E-government policy study. To promote near-term ICT growth, plan online systems tohandle and streamline applications for and processing of company registration,technology visas, and e-learning scholarships. Conduct an e-government orientationtour of Andra Pradesh, Maharashtra, and Singapore that leads to recommendations fore-government initiatives, including review and approval of ICT incentives applications.

• Infrastructure policy improvement study. The Infrastructure Working Group shouldrecommend strategies for assuring independence for the TRC; for demonopolizing andprivatizing VOIP services, dialup Internet access services, and international cablelanding rights; for introducing competition in local loop telecommunications; and forimmediate, full-scale telecommunications liberalization for IT parks or other “closeduser group” exporter segments. The study should review international models and draftguidelines for model international carrier agreements. The ICT Cluster’s Infrastructure


Working Group may also consider meeting with the U.S. FCC and other similar market-oriented regulatory institutions.

• Education and training policy improvement study. The Education and TrainingWorking Group should recommend compensation policy reforms to ease “poaching” ofICT faculty. These reforms could include supplementing faculty incomes through actualor virtual incubators, or adoption of Singapore-style “flexiwage” systems. They shouldalso recommend policy reforms for virtual learning for consideration by the Ministry ofTertiary Education and Training and other interested authorities.

• Venture capital policy improvement study. The Venture Capital Working Group shouldrecommend automatic registration options for overseas capital investment by Sri Lankanfirms; review India’s model of notification up to certain cap (Chandrasekar Report); andstudy tax treatment of venture capital funds, recommending updated incentives.

• Legal policy improvement study. The Legal Working Group should engageinternational specialists to help draft or review model legislative and regulatory reformprovisions, based on international precedents, in support of e-government,telecommunications, intellectual property, e-commerce, arbitration, and incentives forICT firms. It should coordinate efforts with the CINTEC Law Committee, the Legal andJudicial Reform Project, and the IPR Reform Commission. Putting in place an adequateinstitutional framework and sound procedures for the implementation of laws couldalso benefit from specialized assistance. Workshops and targeted technical assistanceshould be available to— Establish a specialized unit in the police or Defense Ministry to investigate and

prosecute IPR offenses and computer crime;— Promote orientations, training, publication, and dissemination of information and

research on the procedures for professional conduct and discharge of responsibilities;

— Assist in curricular development in IT and law within the teaching programs now atlaw schools; and

— Promote the use of online legal databases among members of the legal profession, judges, law schools, and legal researchers.

Figure 5. Timeline for Policy Reform Initiative

Sustaining

Organizational

Cooperation, Progress,

and Value Addition

Because groups such as industry clusters are valuable mechanisms for identifyingand guiding industry-wide initiatives, the ICT Cluster should develop a businessplan to explore how it or a successor can be constituted to ensure that the

organization’s positive impact continues beyond the lifespan of The CompetitivenessInitiative. Financial independence will be important for any such organization, so thebusiness plan should explore prospects—given Government support—for stakeholdinginstitutions to share in revenues from

• Membership and user fees (see the appendix, which discusses the precedent of theSilicon Valley cluster);

• Online company registry programs;

• Technology visas that fast-track approvals of entry permits in key IT skills areas, subjectto annual payment of funds (similar to the U.S. H-1 visa program);

• Electromagnetic spectrum privatization; and

• E-learning scholarship funds in which student loans could be repaid with an agreedpercentage of their earnings for a limited period.

These initiatives could generate significant revenues for the ICT industry and itsstakeholding institutions, including providers of ICT education and training.

The business plan can examine how actual and virtual learning resources affiliated withcenters of excellence could generate revenue in the domestic and international markets. Itcan also explore how the industry can benefit from firms that succeed through the VBIinitiative, examining equity-sharing options and other precedents.


ACTIONS

The following actions can help (1) position the ICT industry for near-term success ingenerating jobs and exports, (2) make Sri Lanka a pacesetter for global competitiveness inemerging information economy markets, and (3) create a foundation for clustersustainability.

• Improve infrastructure operations. The Infrastructure Working Group should design asystem for regular benchmarking of international circuit and Internet access prices withregional competitors; devise a strategic plan for accelerated private delivery of ruralInternet access (VSATs, wireless local networks); and review alternative power suppliesthat could be applied by private entities in Sri Lanka in the near term.

• Improve venture capital operations. The Venture Capital Working Group shouldreview India’s precedents for encouraging investment partnerships between local venturecapital funds and overseas venture capitalists during launch and subsequentcapitalization rounds for new ventures.

• Improve legal operations. The Legal Working Group should provide assistance to BOIand EDB in creating a system for Sri Lankan and overseas firms to submit applicationsonline for incentives, and to the Central Bank for a similar system for online notificationby Sri Lankan ICT firms of their overseas investments.

The ICT Cluster should also extend membership to ICT-related professional societies, ISPs,and universities; create online forums for discussion and consensus building; secureequipment and technical assistance to develop in-country capabilities for digital capture andsharing of workshop and consultancy highlights; enter into leveraging alliances withassociations and institutions; and develop self-sustainability through revenue-generation andcost-sharing programs

Appendix.

Sustainability of

Cluster Functions—

A Silicon Valley

Precedent

As an economic force, Silicon Valley developed over a long period and greatlybenefited from (1) its proximity to Stanford University and the University ofCalifornia at Berkeley; (2) business from defense and NASA contracts; (3) a 30+

year history of entrepreneurship and new business generation (and even industries) fromcompanies such as Xerox, Fairchild Semiconductor, Hewlett Packard, and other establishedfirms; and (4) very active funding of new ventures. At present, Silicon Valley has ten high-technology industries that are more concentrated than the U.S. national average. High-technology industries account for 37 percent of its economic activity, and drive more thanhalf of its total economy once indirect effects are included. Unsurprisingly, technology isfour times more important there than in the U.S. national economy. Its extensive venturecapital network—accounting for approximately one-third of all U.S. venture capital—is oneof Silicon Valley’s greatest assets and distinguishes the region from all others.1 Silicon Valleyis the high-technology cluster against which all others are judged.

Exemplifying Silicon Valley “cluster power” is the Software Development Forum (SDF).Formed through the merger of the Center for Software Development and the SoftwareForum, the SDF (www.sdforum.org) is the oldest and largest software organization in theBay Area. It is a nonprofit cluster economic development organization created, funded, andoperated solely by industry participants. It started as a testing lab where developers loggedtime on state-of-the-art machines and servers, but is now a training ground where

1Ross C. DeVol, Director, Regional and Demographic Studies, “Creating Silicon Valleys in Europe: CanAnyone Pull it Off,” Presented to the Global Investors in European Real Estate Summit, September 14,2000. http://www.milkeninstitute.org


entrepreneurs learn about business, attend monthly one-on-one meetings with venturecapitalists, and attend semi-annual startup showcase events.

With more than 2,000 members, SDF hosts 20 to 30 events attended by approximately1,000 people each month. It is a one-stop shop for information, education and connection,with a monthly dinner, 13 special interest groups, venture capital one-on-one meetings, acurriculum of entrepreneurial seminars, and a multivendor testing and porting lab. It alsohas 4,500 subscribers to its monthly newsletter and more than 8,000 unique emailsubscribers to one or more of its 16 email lists. Many of these subscribers live in other inother high technology regions of the United States.

The following companies benefited from SDF’s services at an early stage:

• HotMail founder Sabeer Bhatia attended SDF’s “Soup to Nuts” seminars in 1996 whenhe was trying to raise money for HotMail. Over the next two years he spoke in theseminars as he raised money from Draper Fisher Jurvetson and ultimately sold hiscompany to Microsoft.

• Calico Commerce used SDForum lab resources to do the benchmark testing thatenabled it to establish its relationship with Dell. Calico is now a publicly traded on theNASDAQ Stock Exchange.

• Liquid Audio founder Gerry Kearby met Ann Winblad of Hummer Winblad VenturePartners at a SDForum VC One-on-One. Hummer Winblad invested in Liquid Audiosoon after, and in 1999 Liquid Audio was the first SDForum member company toobtain initial funding through SDForum and go public.

SDF is supported by membership fees ($135 for individuals, $325 for startups, and $1,000for companies with more than 25 employees), user fees for using lab resources, event fees,and cash and in-kind sponsorships from Silicon Valley corporations, venture capital firms,and law firms. Current and past sponsors include Apple, Microsoft, IBM, Compaq, Palm,PriceWaterhouseCoopers, New Enterprise Associates, Silicon Valley Bank, Garage.com,Exodus Communications, Sevin Rosen Fund, Panasonic Digital Concepts Center, GoldmanSachs, Novell, Draper Fisher Jurvetson, and Wilson Sonsini Goodrich & Rosati. SDF hasalso received grants from the San Jose Redevelopment Agency.

The example of Silicon Valley and SDF is a reminder that most clusters exist on the basis ofprivate location decisions and interdependencies. Such clusters do not need official sanctionor certification to become competitive. The economic engine that is Silicon Valley developedwithout the help of any government and has continued despite high state taxes, labor costs,housing costs, office space costs, and traffic congestion. No government entity can claimresponsibility for the development of Silicon Valley. In fact, minimal regulation and lack ofgovernment involvement contributed significantly to its development.

BOI Board of Investment

CINTEC Council for Information Technology

EDB Export Development Board

FCC Federal Communications Commission (U.S.)

GIS geographic information systems

ICT information and communications technology

IPR intellectual property rights

ISP Internet service provider

IT information technology

LAN local area network

R&D research and development

SDF Software Development Forum

SEA Software Exporters Association

SLASI Sri Lanka Association of the Software Industry

SLIIT Sri Lanka Institute of Information Technology

SLT Sri Lanka Telecommunications

TCI The Competitiveness Initiative

TRC Telecommunications Regulatory Commission

TRIP Trade Related Intellectual Property

UNDP United Nations Development Program

USAID United States Agency for International Development

VBI virtual business incubator

VOIP Voice Over Internet Protocol

Glossary

Documents

ICT Industry - NathanThe Information and Communications Technology (ICT) Industry Cluster believes that Sri Lanka can achieve $1 billion in total ICT export services by 2006—with