I first met Sanjay Anandaram in Silicon Valley. He had been sent to the U.S. by Wipro Ltd., one of India's leading software companies. When I next heard from him, Sanjay and several Indian colleagues had left Wipro to start an Internet company. In his words: "Being in Silicon Valley is infectious. Everyone catches the entrepreneurial bug." In 1997 they started Neta, a company that develops software for e-commerce merchants. While they based the business in Silicon Valley, they sourced software development from India.

Sanjay's career -- and that of scores of other Indian engineers I interviewed in the 1990s as part of my ongoing research on Silicon Valley's immigrant entrepreneurs -- confirmed my pessimistic prognosis for the Indian software industry. Wipro was one of a small group of domestic computer companies protected by extremely high tariff barriers through the 1980s. Engineers spent entire careers in these large corporations. While the opening of the Indian information technology market in 1991 attracted scores of foreign companies to exploit its low-cost, English-speaking programmers -- and regions like Bangalore boomed -- young engineers preferred working for American companies in hopes of a U.S. transfer. It appeared that India would remain a provider of low-end software services, while its best and brightest continued to leave the country.

By the end of ten days of research in Bangalore, I realized that Sanjay's story was not exceptional. Rather it reflected far-reaching changes in the Indian economy -- long written off as hopeless by the business mainstream. Socialist, bureaucratic, and miserably poor, postwar India did not welcome entrepreneurs, Silicon Valley-style wealth creation, or foreign investment. Talented technologists typically left home, where they succeeded admirably: Indians now run more than 750 technology companies in Silicon Valley, including approximately 10% of those started since 1995. Dozens of Indian companies have gone public in the U.S., while others, like Hotmail, have been acquired. But India's Orwellian bureaucracy and backward infrastructure made it difficult for overseas engineers to return home or even to invest in Indian companies.

I first met Sanjay Anandaram in Silicon Valley. He had been sent to the U.S. by Wipro Ltd., one of India's leading software companies. When I next heard from him, Sanjay and several Indian colleagues had left Wipro to start an Internet company. In his words: "Being in Silicon Valley is infectious. Everyone catches the entrepreneurial bug." In 1997 they started Neta, a company that develops software for e-commerce merchants. While they based the business in Silicon Valley, they sourced software development from India.

Sanjay's career -- and that of scores of other Indian engineers I interviewed in the 1990s as part of my ongoing research on Silicon Valley's immigrant entrepreneurs -- confirmed my pessimistic prognosis for the Indian software industry. Wipro was one of a small group of domestic computer companies protected by extremely high tariff barriers through the 1980s. Engineers spent entire careers in these large corporations. While the opening of the Indian information technology market in 1991 attracted scores of foreign companies to exploit its low-cost, English-speaking programmers -- and regions like Bangalore boomed -- young engineers preferred working for American companies in hopes of a U.S. transfer. It appeared that India would remain a provider of low-end software services, while its best and brightest continued to leave the country.

Imagine my surprise when I visited India last December to learn that Sanjay had returned. I met him in my hotel in Bangalore along with the co-founders of his new company, JumpStartUp Ventures. Their unlikely goal is "to celebrate entrepreneurship and wealth-creation in Indian society ... to JumpStart Start-Ups!" He and his partners explained how they will draw on their contacts and experience in both countries to serve as role models, mentors and advisers, as well as financiers for Indian technology ventures.

By the end of ten days of research in Bangalore, I realized that Sanjay's story was not exceptional. Rather it reflected far-reaching changes in the Indian economy -- long written off as hopeless by the business mainstream. Socialist, bureaucratic, and miserably poor, postwar India did not welcome entrepreneurs, Silicon Valley-style wealth creation, or foreign investment. Talented technologists typically left home, where they succeeded admirably: Indians now run more than 750 technology companies in Silicon Valley, including approximately 10% of those started since 1995. Dozens of Indian companies have gone public in the U.S., while others, like Hotmail, have been acquired. But India's Orwellian bureaucracy and backward infrastructure made it difficult for overseas engineers to return home or even to invest in Indian companies.

Today, however, entrepreneurship is rife in India. Venture capitalist Sudhir Sethi, director of Walden-Nikko India and another Wipro veteran, told me that two or three start-up companies are established each day in India. To keep up, Mr. Sethi meets with two or three entrepreneurs a week. Meanwhile, established high-technology companies, threatened by the loss of senior managers, are now spinning off independent, venture-funded subsidiaries.

This ferment is beginning to transform technology regions like Bangalore and Hyderabad. No longer simply sources of abundant low-cost labor, they are poised to become centers of design and engineering skill -- following Taiwan, only a decade later, and in software rather than hardware. Foreign companies are now using Indian programmers for sophisticated programming tasks, a far cry from the "bodyshopping" or low-level code-writing and Y2K work of the past. And homegrown companies are also doing increasingly complex design as well, for leading corporations around the world.

Scholars never anticipated these developments. Content to study the liberalization of world markets, the expanding reach of multinational corporations and the national policies that mediate globalization, they ignored the impact of footloose engineers whose long-distance professional networks allow technology entrepreneurship to flourish far from world centers of wealth and skill.

These engineers have turned the "brain drain" of the past into "brain circulation." Successful entrepreneurs like Hotmail's Sabeer Bhatia are the role models of this new generation. (Mr. Bhatia is such a celebrity in India that he attracts crowds of hundreds when he appears in public.) And these new global entrepreneurs can transfer skills, management models, and technical know-how much faster and more efficiently than most large corporations.

Take T.S. Rajesh, the 30-year old CEO of Graycell, a company that enables Internet-to-wireless communications. He travels regularly between Bangalore and a newly established office in Silicon Valley. Mr. Rajesh told me in a series of e-mails between flights that he likes to be able to take advantage of both the high-end design skills now available in India as well as the sophisticated customers and investors that can only be found in Silicon Valley.

These same returning engineers have also helped plant the seeds of a Silicon Valley business culture in India:

-- Angel investing: Some of Silicon Valley's most prominent Indian entrepreneurs, such as K.B. Chandrasekar, founder of Exodus Communications and Mr. Bathia of Hotmail have invested in several promising Indian start-ups. And chapters of a Silicon Valley Indian networking association are popping up in India to provide contacts, role models, information, and access to start-up funds.

-- Venture capital: There are now 25 venture capital companies in India managing a total of $1.3 billion of start-up capital -- a 25-fold increase in one decade. This doesn't include corporate investors, like Intel and GE Capital, which are actively funding India's software start-ups. Nor does it include the recently formed fund, Infinity, established by Indians in Silicon Valley to invest in Internet startups. The successes of Infosys and Satyam Infoway on Nasdaq and the escalating valuations of technology companies on the Indian stock exchanges (IT companies now account for 60% of aggregate trading, up from 30% a year ago and only 2% in 1994) will no doubt continue to attract both domestic and foreign investors.

-- Public policy: Even the Indian government is responding faster than anyone predicted. Prime Minister Vajpayee's claim that IT stands for "India's Tomorrow" reflects the commitment to change, as does the formation of an IT Ministry and a Cabinet committee on information technology.

Few Indian entrepreneurs have confidence in their country's sluggish and often corrupt bureaucracy. Sanjay tells me that "India is a functioning anarchy." He echoes a widespread sentiment when he says that the software industry's progress has taken place in spite of the government. And as anyone who has spent time in a crowded Indian city like Bangalore recognizes, roads, telephones, power, and Internet connections are rarely reliable. This makes it all the more impressive that McKinsey & Co. recently forecast that India's IT industry will generate $87 billion in annual revenues, $225 billion in market value, and 2.2 million jobs by the year 2008.

Stunning as these developments appear, the most significant aspect of India's move up the technology ladder will come if entrepreneurs focus on developing products uniquely suited to the Indian market. Bangalore's Innomedia Technologies, for example, has developed a low-cost technology for interactive television that involves using existing cable-TV infrastructure to provide viewers with video on demand, interactive media and online shopping. And a handful of spin-off companies from the Indian Institute of Technology Madras have developed telecommunications systems that will make the Internet affordable and accessible to large segments of the Indian population.

Information technology has created a confidence and hope in India that did not exist before -- largely because India and Indians have participated in it. Today, these entrepreneurs could be the catalyst for the growth of a dynamic domestic market -- while also providing affordable technology and a model for many other "hopeless" countries around the world.

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AnnaLee Saxenian is a Senior Fellow at the Stanford Institute for Economic Policy Research, on leave from the University of California at Berkeley. She is the author of Regional Advantage: Culture and Competition in Silicon Valley and Route 128.

Credit: Special to The Asian Wall Street Journal