"I have a different perspective on this, having built a product company (Zoho Corp) in India for the past 13+ years. Basically India's emerging IT industry coincided with the global credit bubble of the past 2 decades, which simply inflated the IT services industry to monster proportions, in the process sucking the oxygen of talent out of the system. So product start-ups that could have been never got off the ground.I have been discussing the impact of easy money with friends for a while now and while it's a crucial factor, it's important to keep in mind that countries like Israel have chosen not to take the services route. The availability of easy money must have dovetailed with something else for software services (popularly known as body shopping) to take off in a big way in India. Dharmesh Shah, a successful serial startup guy makes some an great point in his post Why There Aren't More Software Startups In India:
This is the mirror image of the process in the US that funneled talent towards the financial complex, which meant the IT industry had to import talent or outsource the work. A good percentage of the talent came from India, and a lot of the outsourced work went to India. In that environment of easy money flowing into services, product companies found it hard to recruit talent (which the author of the post also alludes to).
This process basically derailed the emergence of product-based IT industry in India. Some of the Indian services giants of today (Wipro and HCL in particular) were product companies originally. They built some innovative products in India (an x86 based Unix well ahead of Linux, an IP concentrator/router for ISPs in early, to quote two examples) in the late 80s/early 90s. But once the 90's boom got underway, they found it far more lucrative to rent out the talent than to build products.
In Economics, it is impossible to argue "what might have been", but I believe the configuration of IT industry in India points to how the bubble massively distorted an industry."
At the risk of drawing stereotypes, I think Indians in general are a little impatient and like to see quicker “payback” periods on their investments; There are a few number of them (than in the U.S.) that are willing to spend the 2+ years it might take to build a product, see how the market responds and “tweak” the business as necessary to get it to a successful state;Product companies are also more “random” and difficult to control the outcome of;They involve a large number of “creative” factors that will largely influence whether the product succeeds or not. I’ve found Indians to be almost overly practical (in the short-term sense) and not passionate about some of the softer things (like user experience, marketing, branding and other things) which in today’s world are large contributors to future outcomes of software startups;They’d much rather work on the “harder” stuff that they can better control and predict;This is a bit of a “squishy” argument, but it’s a squishy issue;I guess the evidence of progress I’d like to see is a cool software product coming out of an Indian startup along the lines of an Adobe Photoshop or even a 37signals Basecamp.An example of the impatience, inability to tweak the business, and overly practical attitude that Dharmesh talks about, is a Bangalore based company that's not too happy with it's clients for which it is currently developing and testing IPhone and Android applications (They inherited these customers after taking over a smaller company). The US based clients that outsource to them are mostly small to medium sized companies with relatively low billing rates. A lot of people would kill to get into IPhone and Android development now, but this Bangalore based company is very unhappy that they are not able to maintain their 60% plus boom era margins doing mobile application development. No attempt is being made to convert the expertise developed so far into a product making strategy. As a friend who works there observed, "They are only interested in projects that involve billing a hundred people or more".