Bangalore as Cyber Capital- People Respond to Incentives?

By the late 1990s, the journey of Bangalore to be the Silicon Valley of India was truly under way. Many Information technology companies had set up their shops in Bangalore.  The origins of Bangalore being the Cyber capital lay in establishing the foundations of Electronics City and later the Information Technology Park (ITPL).  Electronics City was developed over 300 acres of land and provided initial impetus to firms setting up their units in electronic production and software.  In the process, it would be interesting to examine why Bangalore became the IT capital.

The government went out of its way and facilitated the IT industry with a host of benefits. These included tax holidays, power at cheaper rates, land at cheaper rates etc. When the firm gets power, water and other utilities at lower than market price; it is able to produce at lower costs of production thus passing on the benefit of lower prices to the customers. Further, the presence of similar industries in clusters has its own benefits. Knowledge spillovers, availability of talent can create demand side economies. As the firm develops a new process or work on improvisation of the existing process, the diffusion is fast across the clusters. Interactions among these firms can result in the diffusion of best practices across these industries. Many of these firms produce similar products and can often be complements or substitutes. This reduces the search costs for the customers. The customers can interact with multiple vendors at a single place thus reducing their costs.  Further the IT firms also need similar vendors at their back end. These vendors too would benefit having to interact with multiple customers at a single location. These benefits can impact positively the costs of production and thus lower prices. Moreover, with lot of engineering colleges in and around Bangalore provides abundant talent pool for these companies to tap into and reduce the recruitment costs. Economies of agglomeration makes industries develop around the clusters. The clusters would expand till such time the economies of agglomeration are overcome by diseconomies of agglomeration. These diseconomies manifest in the form of traffic congestion, lack of space in the cluster, increased distance of commuting for the workers from residence to workplace etc. People respond to incentives as well to disincentives.