With so many startup founders, CTOs, high-level engineers, and ­ven­ture capitalists in Si­licon Valley tracing their roots to India, why doesn’t India itself boast a booming high-tech innovation sector? One reason, of course, is that many of the best-trained Indian engineers still find it more exciting to work in the United States and other Western nations. But another, more controversial reason could be the type of business that is booming in India: information technology outsourcing. Some analysts worry that information technology professionals in India are too busy serving their well-paying foreign clients to risk time or capital on developing their own products for the Indian or U.S. markets*.

But the impact of outsourcing on in­dige­nous innovation may not be so clear cut, as is shown by the experiences of two very different Indian companies, Infosys Technologies and Ittiam Systems. Big outsourcing providers like Infosys may not be fountains of innovation, but their presence will have—in fact, is already having—trickle-down effects. Outsourcing, many Indians argue, is training India’s next generation of tech entrepreneurs.

Infosys Technologies, India’s third-largest IT services company, was founded in 1981 to design, develop, and maintain software for U.S. corporate clients in banking, manufacturing, and telecommunications. In the late 1980s, when business was slow, Infosys turned to creating proprietary banking software that is still used today by about 70 percent of Indian banks. But after the Indian government loosened economic controls in 1991, the software services industry took off, and in the mid-1990s Infosys decided to drop further product development. “We did not want to conflict with our clients,” says Kris Gopalakrishnan, Infosys’s cofounder and chief operating officer. Infosys’s services strategy has been enormously successful; the company’s revenues have climbed by 30 to 40 percent since 2001. But now, most of the intellectual property it generates goes back to its clients.

But outsourcing can have indirect be­nefits. Take Ittiam Systems. A crew of ­former Texas Instruments (TI) employees—led by Srini Rajam, the former ­managing director of TI India and now ­Ittiam’s CEO—founded the startup in 2001 to make better and cheaper digital signal-processing systems. The company secured $11.5 million in venture capital financing and by 2004 was earning profits of $1 million annually. Rajam, who worked for the giant Indian outsourcing firm Wipro Technologies before joining TI’s India division, sees himself and his company as a child of the outsourcing phenomenon. “Outsourcing will help innovation,” says Rajam. “It gives people confidence and experience”—not to mention the high salaries that free them to take risks on new ventures.

Indeed, Ittiam isn’t the only example. Alumni of outsourcing companies like Wipro have launched dozens of startups in India, a few of them funded by JumpStartUp, a small venture capital firm based in Bangalore and Santa Clara, CA. One explanation for this trend, says JumpStartUp cofounder Sanjay Anandaram—himself a former Wipro employee—is that skilled and experienced Indians are returning home from abroad to provide leadership. Another is that people who’ve worked for Indian outsourcing firms serving multinational clients gain critical experience managing global operations.

But perhaps most important is a gradual change in attitudes in a culture where entrepreneurs were once seen as loners who couldn’t hold down regular jobs, and business failure was traditionally equated with personal failure. Today “a startup is no longer viewed as a no-no,” says Rajam. “It is in fact viewed very positively.” At least some of this change can be credited to outsourcing, says Ashish Arora, a professor of economics and public policy at Carnegie Mellon University. “If India has any kind of successful product development, it will be because of the success of the software services sector.”