How To Understand The Software Development Outsourcing Industry In Dalian

Transcription

1 Annals of Business Administrative Science 13 (2014) Available at Online ISSN Print ISSN Global Business Research Center Industrial Cluster Formation and Development: Software Development Outsourcing Industry in Dalian Mizuki KOBAYASHI a) Abstract: Present literatures highlight that the presence of Japanese-speaking human resources in Dalian, China has formed a high-tech agglomeration in Dalian, which attracts many Japanese companies. However, that is a simplistic answer. This paper identifies that the software development outsourcing industry in Dalian is formed by three phases, First, the major role played by Japanese companies in China on the creation of skilled labor in the initial phase of the agglomeration. Second, Chinese companies that have become the core companies of the agglomeration through doing business with Japanese companies developed Japanese-speaking human resources as their own as a means of attracting Japanese customers. Third, new comers can utilize the skilled labor market which is formed by those human resource spun off of foreign-owned firms and core local firms. Keywords: software development outsourcing, industrial cluster formation and development, skilled labor creation, enterprises creation, role of Japanese companies a) Graduate School of Economics, the University of Tokyo, Hongo, Bunkyo-ku, Tokyo, Japan, [email protected] A version of this paper was presented at the ABAS Conference 2014 Winter (Kobayashi, 2014) 183

2 Kobayashi Introduction This paper discusses the formation process of the industrial agglomeration in Dalian, China for the software development outsourcing from Japanese companies. Let us first understand the basic figures of Dalian s software and IT service industry. Dalian s software and outsourcing industry revenues have continued to grow since the founding of the software park there in The software industry comprises approximately 8% of the city s GDP. Dalian s population is 5.88 million, and the workforce is 4.37 million. The software industry accounts for 2.7% of the workforce of the city, and there are about 1,200 companies in the industry. According to Dairenshi Joho Sangyokyoku & Dairenshi Sofutouea Kyokai (2012), Dalian has 31 universities, including vocational schools, with 290,000 students. Students with software-related majors make up 27% of these students. A total of 120,000 people Figure 1. Basic figures of Dalian s software and IT service industry Note: Unit: Hundred million Chinese yuan Source: Created by the author from Dairenshi Joho Sangyokyoku & Dairenshi Sofutouea Kyokai (2012). 184

3 Industrial cluster formation and development work in the software industry, and about half that, or 69,000, work in outsourcing. Core companies that claim to work in Japanese software development outsourcing as their main business have built their own software parks in recent years, and this industry is evolving from the initial sole software park with multiple companies to a concentration of multiple software parks. Of interest here is the fact that more than one-third of the revenues in this industry come from outsourcing, and that 70% of that one-third comes from Japan-related business. The work with Japanese companies is characteristic of the Dalian software industry, and the city has nine universities that develop students with the multiple skill sets of software and Japanese, providing a supply base for the industry. From the perspective of supplying specialized personnel, related companies, and composition of revenue, Japanese-business-centered software development outsourcing industry in Dalian is well established (Zhang & Kawabata, 2012). Little by little, research on the Dalian software industry agglomeration has grown due to the area s deep relationship with Japanese companies. Among the existing research are studies that argue that the formation of the software industrial agglomeration toward Japanese business occurred because of the pool of Japanese-speaking human resources in Dalian (Ando, 2014). Additionally, there are studies that say that the existence of founders of the core companies who had the experience as foreign exchange students in the U.S. or Japan, in addition to the Japanese-speaking resources, contributed to the formation of the local software industry (Zhang & Kawabata, 2012). All studies highlight the formation of the high-tech industry agglomeration in Dalian, though the explanations of the logic behind the agglomeration are lacking. The ability to speak Japanese and develop software are unrelated, and these studies do not identify how the agglomeration formed and where the skilled workforce trained in software development originated. Accordingly, 185

4 Kobayashi this paper supplements the pitfall in existing research by focusing on the heretofore-ignored process of the creation of a skilled workforce. One new finding in this study is that the Dalian industrial agglomeration has formed through the following phases: (1) Japanese companies played a major role in creating a skilled workforce in the early stages of the local Japanese-speaking software development outsourcing industry agglomeration; (2) core local companies that had grown through doing business with Japanese companies led the efforts to develop Japanese-speaking resources on their own as a means to attract Japanese companies; and (3) there is currently a labor market for skilled labors as they were spun off of local core companies and foreign-owned firms. This paper s composition is as follows. Section 2 discusses research design, Section 3 describes the process of human resource creation using specific case studies, and Section 4 discusses the academic contribution of this paper. 2. Research Design This paper analyzes data from fieldwork conducted in 2009, 2012 and 2013 in Dalian, China. Interviews were conducted at universities, Japanese companies, Chinese companies, and associations, for a total of nine places. Interviews were conducted in a semi-structured format, with questions composed along three lines. The first concerns the local software development outsourcing environment. The second deals with basic information on company products and systems locally created, as well as background information related to entering the Chinese market. The third is with regard to the division of labor with suppliers (or customers). Interviews lasted between one and two hours, and were with one to three interviewees. Prior to introducing our case studies, it shall be provided, in brief, a basic knowledge of software development as a background. There 186

5 Industrial cluster formation and development Figure 2. General Software Development Process Source: Created by author. was an increasing call at an early stage for more systematic method of software development due to the creation of large-scale systems and limitations of methods that rely on individual ability and experience. Many Japanese companies use the V model as demonstrated in Figure 2. System requirement: determines the functionality of products and systems with the customer Software basic design: considers software structure to achieve functionality Software detailed design: designs software specifications and determines details such as the language used Programming: creates software. Validated in phases to provide early detection of issues Unit test: generally speaking, this is a test performed once programming is completed. Mistakes that are discovered in the test are assumed to have been created during the programming phase. This implies that reprogramming is sufficient to solve the problem, rather than examining other phases. However, it is possible that the discovered mistakes can be attributed to 187

6 Kobayashi mistakes in the design phase. Integration test: a test to validate the operation of the overall system by integrating all modules required for the system functionality. System test: a test performed by running the system at the customer s site. During the programming phase, code is written based on design documents. Therefore, this is regarded as a simple phase within the development process. The higher level of development process means that more than a certain amount of business knowledge and software knowledge are required. Thus, the acquisition of overall knowledge 1 is required to participate in design phases. 3. Case Study The Dalian software park was established in Although there were at the time government policies to promote the human resource development, as well as science and engineering programs in local universities, there was an extreme shortage of skilled labors who could develop software for Japanese companies (Kobayashi, 2012). We shall conduct our analysis with a focus on the creation of these skilled labors using several case studies Skilled-labor training Company J1 and Company C1 J1 is a Japanese manufacturer of electronic components for automobiles. The company s products must instantly respond to use in various situations, and thus have severe constraints in the 1 See Nakagawa (2011) for a similar concept. Product knowledge categories are closely related to product architecture; see Ge and Fujimoto (2004), Fukuzawa (2008), and Fujimoto (2012) for more information on product architecture. 188

7 Industrial cluster formation and development software development that is the basis of the products functionality. J1 went to China in the latter half of the 1980s to find a base for production, and discovered the high technological level of the founder of C1, a Chinese company. They subsequently formed a joint venture of approximately tens of employees to develop software. Individual software developers were highly skilled. However, the company struggled with development projects. J1 trained C1 developers and entrusted them with more advanced tasks. When J1 and C1 began their joint project, C1 was conducting downstream process, coding, and unit testing, the most basic activities within software development. C1 had basic software development technology, but had no concept for quality, cost, or delivery ( QCD ), which caused problems during the execution of projects. At the time, J1 dispatched several developers to the site of joint development. C1 learned the development style of its partner, beginning to understand the need for development management that focused on QCD, and not just on technologies used in development. In addition to these downstream processes, J1 continued to entrust to C1 the midstream testing processes of detailed software design and a prototype product, as well as the development of various functions and products. During this period, the J1 manager (one expatriate) directed C1 to develop software as instructed. C1 continuously worked on QCD in its development projects, in addition to acquiring software technologies, and instilled within its organization a system to provide regular feedback regarding various reports, as is the practice within Japanese companies. J1 further entrusted the upstream process of basic software design to C1, whose developers focused on acquiring hardware and product knowledge on the job, as required for development. During this period, C1 had sufficient project manager expertise to execute projects on its own. Beginning in 2003, J1 and C1 together began full-fledged product 189

8 Kobayashi development. C1 managed the software development as well as worked on reducing working hours and providing input on decisions, affecting new production functionality and specifications. Through the above process of nurturing and development, C1 learned how to manage development products for Japanese companies and gained software technology experience. They developed unique management systems, in addition to the development infrastructure and management systems they learned from Japanese companies in the company s early phase. Simultaneously, J1 conducted development at a higher level, working with the advanced development of products for local markets. Company C2 and its Japanese client C2 is a software development outsourcing company that works with Japanese companies, and was privatized by the municipal government in At that time, the company was on the small side at a dozen of employees, but has since grown to become a core company with almost 4,000 employees. It is involved primarily in the development of industry systems and application software. In the latter half of the 1990s, it created a Japan-related development business that now accounts for approximately 80% of its work. As with C1, C2 also learned project management and human resource development through development of products with Japanese companies, and then created its own development and management structures. When starting development with Japanese companies, C2 took over the task of programming from its customers because that was the simplest part of the process. As certain Japanese companies gradually entrusted the company with more development tasks, C2 learned from these companies the technology and business knowledge required for these further responsibilities. It currently does work on conceptual design up until integration testing. It still 190

9 Industrial cluster formation and development does joint development work with the Japanese companies it has worked with over the course of many years, but also has its new hires participate in new employee training provided by customers. It would be difficult for C1 and C2 to manage development products and company growth with simply having Japanese-speaking resources alone. Over a long period, they learned about project management and human resource development systems through the development work with Japanese customers, and have continued to grow and develop their own management systems Development of human resource and key enterprises Enterprise-driven higher education In July 2001, C1 created the C School, 2 the first university that focused on developing IT personnel in Dalian. While Japanese work has increased and business has expanded, Dalian had relatively few IT resources, and the technology industry was small. C1 aimed to supplement its own resources and become a 10,000-person IT company, and began working on developing its own resources to that end. The C School had approximately 1,500 students and 200 faculty members when it established, but it has since grown to 14,000 students and approximately 700 faculty members. One of the main features of the school is that classes are individually created to meet specific needs of the client, called order class. For example, if a company wants to hire 20 technology students graduating in two years, the school will develop a test for comprehensive abilities and select excellent students in their third or fourth year. In addition to continuously learning about basic software technologies, these students can also study the technologies they will primarily be using in the client company. Companies also dispatch teachers to the school at their own expense to impart 2 Jointly invested by C1 and one large real estate company in Dalian. 60 % of investment was by C1. 191

10 Kobayashi firm-specific knowledge to the students. The goal is to integrate the knowledge learned at school and required in the workplace so that graduates can quickly adapt to the new work environment. The primary purpose for creating the C School was to provide employees to C1, the parent company. However, the school also had a major impact on the personnel supply strategies of local companies, as well as the coursework of the local universities. For example, in 2003, C2, another core company, created a human resource development center in cooperation with its Japanese customers to create a supply of IT resources, because of the local shortage of IT resources and increasing work from Japanese companies. This order class system aims at securing required IT personnel. However, the need for Japanese-speaking individuals with software knowledge often discussed in prior studies has been dealt with by local universities, which have taken specific action in response to demand for such workers by companies. C1 has increased business with Japanese customer J1, and aims to do business with other Japanese firms. In light of this, the developers were well aware of the need to fulfill their role as interpreters. The C School created a system that allowed students to select Japanese as their primary or secondary language major, and study both language and technology. C2 also felt the need to create Japanese-speaking human resources with knowledge of software as a means of expanding their Japan-related business. They created courses to accomplish this from the outset of the company s development center. Currently, nine universities in Dalian have created courses for software and Japanese in an effort to create resources with these multiple skills. As can be seen from the above descriptions, C1 and C2 accumulated competencies from their work with certain Japanese companies, and were able to expand their business. On the other hand, because of the extreme lack of local IT professionals, the companies worked on creating their own resources, and have grown 192

11 Industrial cluster formation and development to as many as 10,000 employees. These core companies were central figures in the successful development of large-scale offshore development in Dalian; as a result, Japanese and other foreign firms have continued to make investments there. 3.3 Formation of skilled-labor market The rise of Dalian s software industry began in In the 15 years since, a market for skilled labors has formed as employees of core companies and foreign-owned companies changed jobs. Companies that later entered the market are receiving the benefits of this agglomeration. For example, C1 has the highest number of embedded software professionals, and C2 is said to be second. C3, whose main business is Japan-related offshore development and work, was created in It has many developers who came from C1 or who have experience in foreign companies. This company has grown to about 2,000 employees, and is a core company that hired hundreds of new graduates in recent years. J2 is an offshore development base of a Japanese company that moved into Dalian in The company takes on software development and related work for automobile electronics, primarily from its Japanese headquarters. The development of embedded software comes with many constraints, such as operation responsiveness, accuracy, and functional diversification. Five years is a short amount of time to have entered China, but the company has many Japanese-speaking human resources who have knowledge of embedded software and business. J2 has about 200 employees who work on upstream development processes. However, the entire operation is managed by only two expatriate employees. When J2 began, many employees were hired from other companies to work on development projects, and it is said that the resources accumulated by C1 and other core companies contributed to the local skilled labor market. J2, which is positioned as an offshore site of the Japanese 193

12 Kobayashi parent, aims to add more values to its work in the future. 4. Conclusion In high technological industry clusters, companies do not necessarily have a business relationship with each other, and neither is the local economy a marketplace for them. The formation of these clusters cannot be explained (Fukushima, 2013) by the agglomeration effect proposed by Marshall (1920). 3 Using data derived from fieldwork and prior studies, this paper focused on the creation of skilled labors as it considered the process of industrial agglomeration for Dalian s Japan-related software development outsourcing companies. Silicon Valley in the U.S., which was the focus of Saxenian (1994) and the typical high technological industry research of Fukushima (2013), which focused on Austin, Texas, assumed industrial agglomerations oriented toward innovation, and argued for an agglomeration process that took the existence of engineers and core companies for granted. However, in the case of Dalian s industry cluster for software development outsourcing, skilled labors did not exist prior to personnel and companies spinoff stage, and the formation of the cluster required a phase for resource creation. That said, prior studies on Dalian s high technological industry (Ando, 2014, etc.) conclude that the industry there formed due to the existence of Japanese-speakers and people familiar with Japanese business practice. The ability to speak Japanese and develop software are completely unrelated; prior studies do not identify the process for creating skilled labors required for the software development that is the point of the studies, the above argument has only less-persuasive explanation for the agglomeration of the high 3 See Inamizu and Wakabayashi (2013) for more information on typical industry agglomeration discussions, including Marshall (1920). 194

13 Industrial cluster formation and development technological industry in Dalian. Based on the above discussion, we are led to conclude the following with regard to the issues of how skilled labors are trained and how agglomerations are formed. First, Japanese companies in China played a major role in the creation of a skilled workforce in the initial phase of an agglomeration. Developers from C1 and C2 could not deal with Japan-related duties with only the knowledge of software they had studied in university. However, they gained skills and development- project management knowledge through their work with Japanese customers. In the process, they also learned about human resources, management systems, and development systems of Japanese companies, developing the ability to create their own management systems and subsequently grow their business. Second, the Chinese companies that turned into core software companies through their development work with Japanese companies created universities and development centers that focused on providing themselves with a supply of IT professionals. These Chinese companies leveraged the success stories with their Japanese customers to gain further business from other Japanese and foreign firms. Third, resources from foreign firms and core companies have grown in scale, and have spun off and formed a market for skilled labors. That contributes to the agglomeration effect for later companies entering the market. The Dalian software industry agglomeration was formed by these three phases. Acknowledgement My deepest appreciation goes to the companies and organizations in Dalian, China offering me the chances for the inverviews and my special thanks to Kobayashi Setsutaro Fellowship Also I am deeply grateful to the reviewers for constructive comments and encouragement on ealier 195

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