Returns on Human Capital Investments in Offshore IT Services Industry: A Firm Level Analysis

The revenue growth model of IT services firms has been historically been based on scaling of firm size by adding new employees. Speculation exists that revenue growth is linear in nature; however no rigorous examination of this fact exists in the literature. In this paper, we investigate the nature of growth of firms in the Indian IT services industry. In addition to scaling firms have been looking at other levers, especially employer funded training, that may be positively linked to firm productivity. We use a panel dataset of small-to-medium sized Indian IT services firms’ training investments and performance to examine the nature of growth and the returns to training investments on firm productivity. We use a combination of econometric methodologies to eliminate the endogenous choice of inputs that are common in estimating production functions. We find that the average firm has can be characterized as having sub-linear revenue growth as it adds new employees, and that training is indeed a very important ingredient to overcome the productivity drag through sheer scale. We find that increase in training investments is significantly linked to increase in revenue per employee. Further marginal returns to training are increasing in firm size.