International Good Practice for establishment of sustainable IT

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International Good Practice for establishment of sustainable IT Parks Roopen Roy, Deloitte Consulting, India January, 2009

Contents Evolution of IT Parks Critical Success Factors Policy Enablers Business Models -1 -

Evolution of IT Parks Initially Science & Technology Parks have evolved around tertiary educational institutions or other research institutions. Evolution US & select European countries first to 1960 s Role of such parks has been to: 1970 s • Recruit and co-locate new and established knowledge-based companies • Promote innovation technologies based on ‘smart’ 1980 s • Provide an interface or shared research environment for research organizations and private industry • Leverage local knowledge resources enhance a region’s economic base 1990 s to -2 - establish dedicated Science Parks • Catered primarily to knowledge or technology intensive sectors like engineering, chemicals & electronics Asian countries like Japan, Korea set up dedicated parks • Focus was primarily on basic research & development activities conducted by Government research & development institutes; Universities Non Government sector started setting up operations in Science Parks • Availed benefits of government supported R&D Developing countries start to establish dedicated Parks for promoting their IT/ ITe. S industry • Constrained by severe infrastructure limitations, it was easier to provide state of the art physical, communication and social infrastructure within a designated area

Contents Evolution of IT Parks Critical Success Factors Policy Enablers Business Models -3 -

Critical Success Factors for establishing successful IT Parks CAPITAL • Ownership • Sources of Debt • Private Equity/ Venture Capital • Anchor Occupants • Business Incubator • While the ownership of IT Parks may be in either Government, Private sector or both, it is essential that they are managed by the private sector – Given private sector’s operational flexibilities and ease of decision making as compared to the requirement of adhering to rules & regulations applicable to Government entities • The success of an IT Park in attracting IT companies to occupy space/ facilities within the park is largely dependent on the reputation & credibility of the anchor tenant – IT Parks like Hitec City India and Singapore Science Park have been able to market the park to occupants based on the strength that reputed organizations like Microsoft, Oracle Corporation and DNV were already present in the park as anchor tenants • Angel investment, venture capital and private equity have been identified as key enablers, specifically for development of start-ups and small & medium enterprises – Singapore, India & China represent some countries that have benefited from such funding • IT Parks offering incubation services help nurture entrepreneurship and development of the SME sector in the local economy and the IT Parks gain when these operations scale up to become regular occupant – ZSP in China, which offers specialized incubator services for overseas Chinese IT professionals seeking to return to China, which has resulted in over 450 start up entities -4 -

Critical Success Factors for establishing successful IT Parks, cont. Hitec City, India IT Park-Hubli, India SSP, Singapore CFZ, Malaysia Taedok Valley, South Korea ZSP, China Ownership PPP Government Originally Government; presently private PPP Private Management PPP Government Private Government Anchor Tenants Large Indian Government Private agencies Companies, Global IT and BPO companies Government & Private companies (mainly R&D) Global IT and Large Korean BPO companies Private Companies, Large public R&D Institutions Global IT and hardware companies, Large Chinese companies No dedicated funds; Fairly matured VC/PE market Vibrant VC/PE market Dedicated Government sponsored VC funds Dedicated VC Fund Dedicated VC funds administered Beijing Municipal Government Provided by STPI-Hubli, limited space Provided- it is Provided one of the focus services Provided through individual universities CAPITAL Access to VC/ No dedicated funds; Fairly PE matured VC/PE market Business Incubation Services Not provided PPP: Public Private Partnership; VC: Venture Capital; PE: Private Equity -5 -

Critical Success Factors for establishing successful IT Parks, cont. LINKAGES • Market • Value Chain • Centers of Excellence • Internal Services • Working relationships with academic institutions like universities, colleges, R&D institutes are essential for IT Parks where primary focus of key occupants is on technology innovations – KAIST & ETRI are located within Taedok Valley; Quinghua University, Beijing University & Chinese Academi of Science are occupants of ZSP; Centre of Wireless Communication and the Institute of Microelectronics are located within Singapore Science Park – Such linkages are usually not critical in IT & BPO Services where focus is on service delivery • Availability of quality manpower resources is key to success & dictates performance of the IT Park – Factors like existing infrastructure and amenities and employment regulations also play a key role in attracting the right competencies from other locations -6 -

Critical Success Factors for establishing successful IT Parks, cont. LINKAGES Hitec City, India IT Park. Hubli, India SSP, Singapore CFZ, Malaysia Taedok Valley, ZSP, China South Korea Product & Services IT & BPO services R&D, hi-tech products; IT services BPO services Telecommunicat ion technologies, R&D IT goods & services, Chinese language software for domestic market Forward & Backward Linkages Export market oriented Mainly domestic market oriented, few companies export oriented Domestic and export market oriented Export market oriented Domestic and export market oriented Value added Services by Park Management None Business development support, marketing support None Marketing and Sales support, R&D support None Centres of Excellence None R&D Institutions, NUS, S&T Parks outside Singapore Multimedia University R&D Institutions, KAIST, ETRI, ICU, Chungnam University Beijing & Tsinghua University, Chinese Academy of Science, Chinese Academy of Engineering, R&D Institutions -7 -

Critical Success Factors for establishing successful IT Parks, cont. INFRASTRUCTURE • Land • Physical Infrastructure • Good Infrastructural facilities are essential prerequisites for a successful IT Park • Infrastructure includes: – Availability and relative cost of land / space – Urban Infrastructure – Road connectivity; remoteness from nearest urban centre • Communication Infrastructure – Proximity to airports • Social Infrastructure – Virtual infrastructure in terms of state of the art data & voice connectivity • Environment – Social amenities for recreation & sports – Political stability and law & order

Critical Success Factors for establishing successful IT Parks, cont. INFRA Hitec City, STRUCTURE India Electricity Supply- IT Park Government, dedicated electricity line backup facilities present Telecommun- Competitive Market ication IT Park-Hubli, SSP, India Singapore CFZ, Malaysia Taedok Valley, South Korea ZSP, China Government, dedicated electricity line, subsidized price, backup facilities present Competitive Market Reliable supply, service level contract present Government, dedicated supply Competitive Market Internet Service Providers Government and Private Private dominated Government & Private Road Connectivity Good Fair Excellent Urban & Social Infrastructure Leveraging the quality infrastructure of Hyderabad, one of the largest cities of India Inadequate, given that Hubli is nonmetropolitan city Leveraging the quality infrastructur e of Singapore Good, integrated commercial and residential clusters Good, integrated township with commercial , residential & other land uses -9 -

Critical Success Factors for establishing successful IT Parks, cont. • Availability of qualified & skilled manpower is essential PEOPLE – IT Parks in developing countries like India, China and Malaysia have the capacity to generate employment for educated population in the local economy leveraging the low cost of skilled human resources as compared to developed countries • Quality • Salary • Quality educational institutes in the vicinity of IT Parks is an essential factor for ensuring quality manpower resources • Throughput Hitec City, India Engineering Throughput per year IT Park-Hubli, SSP, Singapore India CFZ, Malaysia Taedok ZSP, China Valley, South Korea >20, 000 from Hyderabad (90, 000 from AP) 1100 from Hubli (75, 000 from Karnataka) 14, 000 from Singapore 13, 000 from CFZ 40, 000 – 50, 000 20, 000 – 25, 000 7, 000 15, 000 Annual Average 9, 000 – 11, 000 4400 - 6600 Salary (USD) for middle management employees Employment within Park 80, 000 300 - 10 - 30, 000 from Taedok Valley 100, 000 from ZSP 10, 000 – 12, 000 >25, 000 650, 000

Critical Success Factors for establishing successful IT Parks, cont. OTHER FACTORS • Having the right product-services mix is critical – Successful IT Parks largely focus on products & services in which their countries of operation have a competitive edge • A supportive and proactive government is key – Encouraging innovation & promoting investments through appropriate policy enablers and regulatory framework • A vibrant and pro-active IT park management team represents an added advantage – Parks promoted and managed by groups/ companies with requisite expertise are found to outperform other parks - 11 -

Contents Evolution of IT Parks Critical Success Factors Policy Enablers Business Models - 12 -

Policy Enablers & impact on success of IT Parks • Adopting a holistic approach to policy development is key • Efficient institutional and implementation mechanisms are critical • Focused policies for IT Park development are critical for “developing” ICT economies • Encouraging private sector participation is critical • Flexible land-use policies providing the developers more choice • Linking incentives/ subsidies with identified strengths/ core competencies of domestic companies • Effective co-ordination with other ministries / departments • Having the right policy mix is essential for maximizing spill over benefits • Fostering efficient linkages with other economies is essential • Additional flexibilities exist for policy formulation in a federal structure of Government • For countries aspiring to offer offshore BPO services, formulation of a Data Protection Act is a necessity • - 13 -

Policy Enablers & impact on success of IT Parks, cont. Fiscal policy highlights for different countries China India Malaysia Singapore South Korea tax • 100% Corporate Direct Tax • Reduced income • Income Tax holiday on • 100% exemption for income tax concessions & tax rate of 10% profit from exports for key software • Higher rate of MSC Status pioneer status exemption for 7 waivers enterprises depreciation on companies for 10 companies identified by the computers & software years • Tax on profit state • IT Parks under the SEZ • 100% deduction from export of policy enjoys 100% IT on capital services break for 5 years, 50% expenditure exempted tax exemptions for next five years and upto 50% of the profits ploughed back for next 5 years Indirect Tax • No customs duty • Duty free imports by • Duty-free import of multimedia concessions & and import VAT STPI units for software • CST reimbursement on equipment waivers companies importing capital equipment including technology Subsidies, Grants and other financial support purchases from DTA • Rebate in cost of land by state governments • Subsidy for creating > 2000 jobs - 14 - • 50% cost of • Equity support feasibility studies for start-up and business enterprises planning to under the SEEDs SMEs scheme years • 100% exemption from dividend withholding tax, foreign investment in technology • Exemption from custom duties, VAT, special excise tax, for companies set up with foreign investment

Policy Enablers & impact on success of IT Parks, cont. Innovation policy highlights for different countries China India Malaysia Singapore South Korea amount • Free space, software • Up to 70% cost of • 200% deduction • Special R&D Research and • Any projects on R&D expenses promotion funds development exceeding 3% of tools & patent cost R&D VAT paid on sale of reimbursement for reimbursed under • R&D grants under • Tax credit for support software products to high end R&D IGS, MGS and be refunded companies at state DAGS provided it is used level • CRDF to support for R&D • 100% IT deduction on R&D investments capital expenditure with respect to scientific research Intellectual property rights protection RISC, ICS, IDS schemes expenditure & investment in R&D facilities • Tax exemption from technology transfer income • Patent Law and • Amended Indian • Amended • Copyright Act in • Amendments to Copyright & Copyright Act in Malaysian line with TRIPS Copyright Act, Trademark Laws conformity with TRIPS Copyright Act in Computer revised in line with TRIPS Program TRIPS. Protection Act & Trademark act in line with TRIPS • Almost all IT Parks • Government run • National Incubator • EDB runs 7 • Small & Medium Providing have incubation country-wideincubation Network (NIN) HOTSpots Business incubation under the TDF incubation Administration facilities & facilities supported centers under STPI by provincial / local program centres, with along with Ko. BIA services Government academic institutions & sponsored Government - 15 - by management support from NSTB provides SME & start-up support

Policy Enablers & impact on success of IT Parks, cont. Human Capital policy highlights for different countries China India IT focused educational policies & curriculum • Specific laws on Training & capacity building initiatives • R&D institutes based in Facilitating employment creation and attracting talent • Simplified visa regulations • Employment Malaysia • Private sector • 2 nd S&T policy focuses popularization of and participation ensuring progress of • Compulsory science and technology English from • Entry of foreign players in primary level in higher education on a many states case to case basis Beijing are encouraged to run schools/ training institutes jointly with colleges, universities and scientific research institutes qualified for training post-graduates • IT focused • Computer on making curricula education at more innovation school level oriented, involvement of • Existence of a private sector in setting large number curricula of international / foreign universities • Operations of Skills training centres supported by various state Governments Singapore Development Fund augmented under 2 nd S&T policy to support industry training programs, leveraging existing industrial training facilities • MSC K-Workers’ Development Institute set up by Finance Ministry • ITF, CITREP run by IDA and Education Ministry • MDe. C empowered to • Simplified visa approve visa / work permit applications regulations • Entrepass foreigners setting up business linked financial incentives • Simplified Visa regulations - 16 - South Korea • IT literacy drive through ‘ 10 million informatization program’ • e. Campus Vision 2007 for encouraging use of ICT in universities • Specialized organizations like NCA, IITA, ETRI, etc to promoting R&D in high technology • Simplified visa regulations

Policy Enablers & impact on success of IT Parks, cont. Investment Climate policy highlights for different countries China India Malaysia • Ministry of Information • Department of Simplified Industry as the policy Information institutional making & Technology for and implementation administrative agency, policy making & with supportive role administering framework from provincial Governments • Mo. U between government and Microsoft Facilitating cross border trade and investments benefits • Central Government schemes like STPI for single window services • IT considered essential services in many states • 100% FDI allowed in • 100% FDI in IT & Singapore • MDe. C acts as a • IT regarded as a one stop agency for investors in MSC. • Software development a “Pioneer Status” industry. • The 1 st 5 year NCP formulated as early as 1980 • IDA formed in 1999 • MATRADE set • 100% FDI in IT & BPO companies, IT up in 1993 under BPO companies, IT Parks MITI IT Parks • DTAAs with around 65 • DTAAs with • Tax treaties with • FTAs with USA, countries developed and Japan, South Japan, India, developing countries Korea, Germany, Korea, Europe and France, UK etc others • 100% FDI in IT & • DTAAs with more BPO companies, than 60 countries IT Parks - 17 - South Korea • Focused initiatives like ‘Cyber Korea 21 initiative’ & ‘IT Korea vision 2007’ to develop a world leader in ICT • DTAA with over 60 countries

Policy Enablers & impact on success of IT Parks, cont. Investment Climate policy highlights for different countries, cont. China Enabling e. Commerce Malaysia • Electronic Signature • Formation of Cyber Law passed in 2005 Appellate Tribunal • Digital certification under IT Act, 2000 • Recent interest from Access to Venture Capital global VC funds • Government supported existing VC funds at provincial / IT Park level Enabling Infrastructure development India • Presence of • Communications Venture Capital funds like MSCVC and TPMVF • Competitive telecom • National Telecom market with dominance of state owned players • Public private partnership (PPP) for physical infrastructure development Policy , 1999 opened Policy passed in up 1994 telecommunication • PPP for market to private infrastructure players development • PPP for infrastructure development - 18 - • Computer Misuse & Multimedia Act, Act and Electronic Digital Signature Transaction Act and enacted in 1998 Computer Crimes Act enacted in late 90’s • Dedicated established global VC funds • No tax on income from a VC undertaking Singapore South Korea • Electronic Signature Act enacted in 1999, Protection of Information Infrastructure Act 2001. • Financial hub of • Govt. backed Asia with global VC funds • Tax • No tax on income concessions from divestment of to VC funds share by a VC fund • National Telecom • Telecommunicatio n market liberalized in 2000 • PPP for infrastructure development • IT 839 strategy for overall development

Contents Evolution of IT Parks Critical Success Factors Policy Enablers Business Models - 19 -

Comparison of Business Models adopted by various IT Parks - 20 -

© Deloitte Touche Tohmatsu 2009. All rights reserved. Deloitte refers to one or more of Deloitte Touche Tohmatsu, a Swiss Verein, its member firms, and their respective subsidiaries and affiliates. As a Swiss Verein (association), neither Deloitte Touche Tohmatsu nor any of its member firms has any liability for each other’s acts or omissions. Each of the member firms is a separate and independent legal entity operating under the names “Deloitte”, “Deloitte & Touche”, “Deloitte Touche Tohmatsu”, or other related names. Services are provided by the member firms or their subsidiaries or affiliates and not by the Deloitte Touche Tohmatsu Verein. © 2008 Deloitte & Touche Consulting, India

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