Over the last several decades, there has been a strenuous debate about policies for economic development between the Washington Consensus promoted by the major international financial institutions and the revisionist political economists . Followers of the former view advocate free and unfettered markets buttressed by institutions to protect property rights. The revisionists argue that development involves social and political processes not adequately captured by the narrow prescriptive focus of the Washington Consensus.

In confronting globalization, there is also a new split among the revisionists themselves. Whereas the Washington Consensus welcomes globalization as a boon to developing countries through expanding the scope of market forces, the revisionists divide over the prospects for developing countries under globalization. The optimists, such as Ernst and Saxenian, see transnational networks as providing opportunities for developing countries to continue to learn the skills and competencies necessary to further their progress. The pessimists of the revisionist camp, such as Stiglitz and Strange, see globalization eroding the capabilities of the state or state-societal alliances necessary for development.

Using the case of technological upgrading (one aspect of economic development) in China's information technology (IT) industry, I demonstrate that opportunities for development exist under globalization. These paths to development are not simply the result of picking the right international networks to join nor are they due to the continued efficacy of state action. They also do not arise from well-developed market institutions within China. China's development success in spite of low levels of state industrial policymaking capacity and very incomplete market institutions tells us that other developing countries similarly unequipped can develop even in this globalized world.

In China's IT industry, two local institutional variables, firm operational strategies and state-firm relations, have interacted with the technology flows present in global networks to create opportunities for certain types of firms to upgrade. A firm's operational strategy (OS) determines its motivation to upgrade in China as opposed to doing so elsewhere. The relationship of firms to the state determines their sources of finance i.e. whether or not they can access functioning financial institutions.

The relationship of firms to the state determines their sources of finance and these sources of finance in turn impact their ability to upgrade. Sources of finance that provide credit with hard budget constraints give firms incentives to upgrade. Firms have hard budget constraints when they do not receive free help in covering their own financial obligations. With hard budget constraints forcing firms to meet their financial obligations, firms have to remain competitive to survive. For technology firms, a critical part of their competitiveness is their technology so they have every incentive to improve their technologies to keep pace with competitors. Finance that provides credit with soft budget constraints deprives firms of the incentives and even the capabilities to upgrade. Firms have soft budget constraints when they do not have to pay for some or all of their financial obligations themselves. These firms can rationally expect to survive even if not competitive because others are willing to bail them out. A third possibility is no source of finance. Firms without financing will not be able to invest in technological development.

There are four types of firms in China: the favored domestic firms, the neglected domestic firms, the hybrid foreign-invested enterprises (FIEs) and the regular FIEs. Financing and motivation have varied across firm categories. Due to different state-firm relations, FIEs rely on foreign finance and domestic firms do not. Hybrid FIEs differ from regular FIEs because the hybrids have a China-based operational strategy. This operational strategy (OS) is a mix of interests and ideational factors that causes these firms to perceive China either as the vital center of their operations (the China-based OS) or as just another location among many (the non-China-based OS). Thus, variation in firm-state relations (finance) and operational strategy (motivation) determine the variation in technological upgrading.

This thesis finds that the two types of FIEs are more likely to contribute to upgrading in China than the two types of domestic firms. Among the FIEs, the hybrid FIEs are more likely to contribute than the regular FIEs though the discrepancy is not as large as it is between the FIEs and domestic firms.

The hybrids are the most successful upgraders because they have both disciplined finance (i.e. credit with relatively hard budget constraints) from foreign financial institutions and the motivation to upgrade in China due to their China-based OS. The unsuccessful domestic upgraders lack finance (neglected domestic firms) or financial discipline (the favored domestic firms) due to their particular relationships to the state. The regular FIEs have the capabilities to upgrade due to their financial discipline and access to transnational technology networks, but undertake less upgrading in China than the hybrids because they lack the China-based operational strategy.

Despite a late start, Pakistan's information technology entrepreneurs and the government are hoping to make it big in the global marketplace for outsourcing of IT-enabled services. How have other countries succeeded and where does Pakistan stand?

Naween A. Mangi spoke from New York to Ron Hira, professor of public policy at the Rochester Institute of Technology, and Rafiq Dossani, senior research scholar at the Walter H. Shorenstein Asia-Pacific Research Center at Stanford University.

Software exports, call centres and medical transcription firms have become all the rage over the last three years. Young entrepreneurs are returning after years spent working at major tech firms in the US to start up their own ventures and the government is forecasting that IT will be the next big thing in Pakistan's economy.

So far, the numbers tell a less-than-compelling story. In 2004, although the software and IT enabled services business was worth $300 million, (including hardware the figure is $600 million), exports and outsourcing made up for just $33 million of that. By comparison, India logged $12.8 billion in software and services exports in 2004.

Still, the Pakistan Software Export Board, a federal body set up to promote outsourcing, forecasts that the business will grow by at least 45 per cent annually for the next five years. A lot of that growth will come from call centres and business process outsourcing which last year made up one-fourth of total exports. In the next ten years, the PSEB aims to be at the top of the class of tier two global IT companies.

But as experts and practitioners agree, Pakistan will need more than ambitious aims to meet that goal. Prof Ron Hira, whose new book Outsourcing America assesses the impact on the US job market, says the outsourcing industry is set for rapid growth in the next few years and if done right, developing countries like Pakistan could benefit from the boom.

Hira is an expert who has testified before the US Congress on the implications of outsourcing. "Pakistan isn't on the map yet," he says. "India dominates what most people think about [when it comes to outsourcing]."

Rafiq Dossani, an expert on outsourcing and a senior research scholar at Stanford University says there are several reasons for that. First, is the poor quality of infrastructure.

"When the Internet tanked recently, that created a really bad perception that the country has not thought through even the most rudimentary aspects," Dossani says. "Deregulation in this area is too limited." He says that while voice services have benefited from the deregulation, data services are still uncompetitive.

He says there are too many stumbling blocks since bandwidth is more expensive than in other countries. "The costs are outrageous at four or five times what they should be," he says.

Dossani identifies the thin segment of English speakers as a second hurdle in the way of a flourishing outsourcing industry in Pakistan. "Of the 30 per cent of the population that lives in urban Pakistan, one tenth speak English that's good enough to work at a call centre," he says. "And of those five million or so, only about one million are available to come into this field as the rest are working elsewhere."

Then, he says poor marketing also holds the industry back. "You just don't see the trade body [in Pakistan] working like India's Nasscom to project a positive image," he says. "The Pakistani diaspora has done well and there is a great need to better use that network."

He forecasts that the outsourcing business in Pakistan can be at least $1 billion in size but says this is only possible if alliances are formed with countries like India and China.

"The Philippines has done well by understanding that it cannot reach critical mass on its own and therefore forming alliances and pitching themselves as a second location to offset country risk," he says. Dossani also says Pakistan has the advantage of a highly skilled group of entrepreneurs which "is the reason why the tiny industry does exist."

Hira adds that since Pakistan entered into the industry late, playing catch up is an inevitable need. However, the sector can take advantage of the circumstances in other countries. "India has done a lot of things right," he says. "They have been successful at not just attracting foreign investment but also building their own companies and leveraging the large Indian diaspora," Hira says.

"India is also so talked about that people are comfortable doing business there. But since wages are rising, Pakistan can use that as an entry point." He says that while countries like India have accumulated critical mass and scale, others are distinguishing themselves in different ways.

Eastern European wages are slightly higher than Pakistan and companies in that region have specialized in near-shoring by targeting the European market. Russia, meantime, is aiming at the U.S. market in both services and manufacturing while the Philippines and Malaysia are targeting services.

"The question really is how you separate yourself from the pack," Hira says. "You can compete on price to a certain extent but you have to offer something more to distinguish yourself."

He says U.S. companies are now moving from pilot stage outsourcing to full deployment which indicates both the success of the pilot projects and the rapid growth that is likely to come in the outsourcing market for the next few years. "There will continue to be a backlash from U.S. workers, but by and large there has not been any real policy movement to restrict outsourcing so there is still a large opportunity," he says.

Hira admits that the extent to which a growing outsourcing industry ties into the broader economy in terms of job creation remains unclear but he says, other advantages emerge. "In India, for example, it remains unclear that they've been able to link the benefits [from outsourcing] back in, but the big benefit is that they have created world class management which can then move into other sectors."

Therefore, Hira recommends that Pakistan take a long-term vision not for the next three or five years but for the next two decades. "Right now you can try to pick up the low hanging fruit and absorb the excess demand but don't just think about attracting the individual company to come [to Pakistan]," he says. "Think about how this will fit into the larger set of skills for your country so that you can differentiate yourself much later down the road."