J. Service Science & Management, 2010, 3, 218-226
doi:10.4236/jssm.2010.32026 Published Online June 2010 (http://www.SciRP.org/journal/jssm)
An Empirical Analysis on Industrial Organization
Structure of Chinese Software Service Outsourcing
Jiawen Shen1*, Heng Li2
1School of Economics and Management, University of Science and Technology Beijing, Beijing, China; 2Department of Building
and Real Estate, Hong Kong Polytechnic University, Hong Kong, China.
Received February 8th, 2010; revised March 10th, 2010; accepted April 17th, 2010.
ABSTRACT
The global service outsourcing industry has developed rapidly; but how about the software service outsourcing industry
in China? Employing the combination research methodologies of field survey, literature research and analysis of the
collected data from the survey questionnaire using the SPSS statistic software and its relativity tests, this empirical
study analyzed the market structure and performance of Beijing software service outsourcing industry. Based on the
SCP paradigm of the industrial organization theory, the conclusion revealed that the market concentration of Beijing
software service outsourcing industry was on the low level. The industry possesses the characteristics of low risk, low
profit and low product differentiation. There is an apparent trend that increasing profit occurs to the large scale service
organizations. Low level price competition dominates the industry at present. The market performance of the industry is
therefore low, resulting in the low average profit to most service companies; but the average ratal of these firms is on
an upward trend year after year.
Keywords: Industrial Organization, SCP Paradigm, Software, Service Outsourcing, Industrial Structure, Empirical Analysis
1. Introduction
With the rapid development of information technology
and increasing opening of trade environment, a new round
of industry and economy transformation occurs on global
scale, which is reflected by the formation of modern ser-
vice industry, tech-concentrated manufacturing and more
investment in R & D. This change promotes the devel-
opment of outsourcing. Nowadays, the global service
outsourcing industries have been developing rapidly, and
more and more companies are turning into “the company
without walls”. Saying “the world flattens”, Thomas L.
Friedman described vividly this phenomenon in his book,
“The World is Flat”.
The financial tsunami which was triggered by the sub-
loan crisis of USA in 2008 had resulted in the serious
impact on global economy. On the other hand, it has also
made new opportunities for development of the global
service outsourcing industry. Many multinational com-
panies facing to re-shuffle have to reduce costs in order
to preserve their core competencies, and meanwhile, try
to outsource their non-core business. The international
service outsourcing market will have a huge space for
development. At the same time, with the consummation
of market-directed economy system and the decline of
transaction costs of the service outsourcing market, the
domestic service outsourcing market is also about to
form new space for development. In 2007, the global
software and information service industry had reached
the scale of 940 billion U.S. dollars, of which the United
States accounted for 36.5%; the European Union ac-
counted for 27.7%; Japan 9.5% and China 8.7%. In 2007,
China’s software service industry had achieved the value
of 583.4 billion Yuan, of which outsourcing software and
services exports accounted for 10.24 billion U.S. dollars.
[1] The software service outsourcing has been developing
rapidly in many Chinese cities in recent years, which
promoted the upgrading of the industrial structure and
the transformation of economic development models.
Focusing on the Beijing outsourcing industry of software
service, this paper empirically analyzed the status of the
industrial and organizational structure. It provided the
useful results and directions to the future development of
the Chinese service outsourcing industry.
2. Literature Review
With regard to the definition of service outsourcing, ac-
cording to “the notification of Ministry of Commerce on

An Empirical Analysis on Industrial Organization Structure of Chinese Software Service Outsourcing219
the implementation of Qian Bai Si project on service
outsourcing” issued in 2006 of China’s Commerce Min-
istry, the service outsourcing is referred to the business
of information system framework, application manage-
ment and business process optimization, contracted to the
outside service suppliers in order to reduce costs, optim-
ize the industrial value chain and enhance the core com-
petence. In the Business Dictionary, service outsourcing,
which is generally based on the contract of agreed stan-
dards, costs and conditions, transfers the service origi-
nally performed by in-house staff to external organiza-
tions. According to GARTNER, the IT service market is
divided into the discrete service and the service out-
sourcing; whereas the service outsourcing is further di-
vided into information technology outsourcing and busi-
ness process outsourcing.
The research of outsourcing service in economics can
be summarized as follows. Firstly, it proposes the per-
spective of transaction cost such as the Coase’s theory of
transaction costs. Coase (1937), the leader of the field,
first introduced the concept of transaction costs to the
analysis of internal and external activities, and brought
forward to that the number of transactions between manu-
facturers with service providers would be increased with
the deepening of Socio-professional division of labor. If
the marginal revenue of social division of labor is greater
than the marginal growth of transaction costs, then the
division of labor would be deepened to promote the im-
provement of manufacturing efficiency. Secondly, it pro-
poses the perspective of the international division of la-
bor such as the theory of comparative advantage, re-
source endowments theory. Thirdly, it proposes the per-
spective of economies of scale such as Krugman’s new
trade theory that the intra-industry trade of the division of
labor benefits from the economies of scale. Fourthly, the
perspective of company management, such as the theory
of company’s core competitiveness, supply chain and
value chain theory.
Under the less market-oriented status, the service
business such as the R & D, information, logistics, op-
erations, marketing, was supplied usually by the various
departments of a company. With the development of spe-
cialization and the scale of economy, as well as the de-
cline of market transactions cost, these services have now
been gradually outsourced. Gradually, the service out-
sourcing industry is formed. The outsourcing improves
the efficiency of resources allocation and the market
value of social production. It strengthens the core com-
petence of the outsourcing organization. The main objec-
tives of the outsourcing company include to reduce oper-
ating costs, to improve the core competitiveness, to im-
prove the level of international performance, to obtain
the external resources, to improve the profit of business
restructuring, to divestiture the business in difficulty
management and to share the risks with others, etc.
On the research of industrial organization theory, acc-
ording to the different theoretical basis and research me-
thods and choosing a different focus, scholars proposed
numerous ideas in different times. Harvard University
advocated the structuralism of antitrust and anti-concen-
tration, which is based on monopolistic competition the-
ory, by the statistic methodology of empirical study, and
focusing on market structure. Chicago University used
company performance as a judging criterion. The theory
is based on the competitive market and focuses on mar-
ket performance of an organization. The new industrial
organization theory advocated the behaviorism which
objects unfair conducts and is based on the transaction
cost theory by the deductive methodology of reason-
ing-based. [2] Market structure and market performance
are the main fields of the Harvard Theory. It advocates
that market structure rests with market conduct and that
the market conduct rests with market performance, that is,
S→C→P. The SCP paradigm of the Harvard Theory
established the basic analytical framework for the early
theoretical studies of industrial organization. The Har-
vard Theory mainly puts the empirical studies on the
relationship of market structure and performance, such as
the Bain's concentration, concluding that the entry barri-
ers were positively correlated with the profitability. The
Chicago Theory focuses on the price conduct. The new
industrial organization theory focuses on the company
conduct.
The literature research over internet did not find the
academic literature based on the industrial organization
theory for the software outsourcing. It is perhaps due to
the fact that the software service outsourcing is a new
industry.
3. Research Methodology and Data Sources
Guided by the industrial organization theory and employ-
ing the qualitative and quantitative analytical method, the
combination of theoretical research and questionnaire
survey, the correlation test of statistical methods and the
application of SPSS statistical analysis software, we sur-
veyed 200 software service outsourcing companies based
in Beijing. Sixty nine (69) questionnaires returned which
formed the basis of our data analysis. The research re-
vealed the overall status of software service outsourcing
industry in Beijing.
The data retrieved from the following files: “the Rep-
ort of China Software Industry Development Research
2008”, “the Blue Book of Beijing Software Industry De-
velopment 2008”, “the Statistical Communique of Bei-
jing National Economic and Social Development in
2007”, and the Statistics data of questionnaire to Bei-
jing's service outsourcing firm in 2008.
From the industry organization theory point of view, it
is the first time to exercise the methods of combination of
the empirical research and the expanded SCP paradigm to

An Empirical Analysis on Industrial Organization Structure of Chinese Software Service Outsourcing
220
the software service outsourcing industry at present.
4. The Industry Organization State of
Software Service Outsourcing in
Beijing
It is necessary to describe the industry organization status
of software service outsourcing in Beijing before the
SCP paradigm analysis of industry organization. Accord-
ing to the statistical result of the survey questionnaire and
the relevant information, we analyzed the industry state
from four aspects: industry overview, firm kinds, firm
size, and human resource structure.
4.1 Industry Overview
An upward trend shows that the Beijing software service
outsourcing industry contributes to the City’s economy
growth year after year. In 2007, the Beijing software in-
dustry had 241,000 employee and more than 5000 ser-
vice companies. [3] According to the data published by
the Beijing statistic bureau, Beijing’s GDP in 2007 was
900.62 billion Yuan, of which 82.48 billion Yuan was
contributed by the information transmission, computer
services and software industry. In 2007, the total busi-
ness income of Beijing software service industry was
125.2 billion Yuan, a 44.3 billion Yuan increase or a
28.8% growth over 2006. Its weight in Beijing’s GDP
increased from 2.6% in 2006 to 4.9% in 2007. [4] Ac-
cording to the statistics of the Beijing Customs and the
Beijing Commerce Bureau, the export value of software
by Beijing-based companies reached 459 million U.S.
dollars in 2007. The rapid development of software ser-
vice outsourcing industry promoted the optimization and
upgrading of Beijing economic structure.
4.2 Type of Service Companies
According to the statistics analysis on survey question-
naire, the Beijing software services outsourcing industry
made up of the wholly owned companies by foreign
firms (accounting for 52%), the foreign-controlled joint
ventures (accounting for 14%), the joint ventures con-
trolled by Chinese (accounting for 12%) and the Chi-
nese-founded firms (accounting for 22%).
According to the research results of the Japan Industry
Economy Institute, which was also based on a survey
conducted in 2007, the sub-contractors of Japanese in-
formation service outsourcing companies include the
subsidiary of the Japanese companies which accounted
for 37%, the subsidiaries of another Japanese firms
which accounted for 20% and the subsidiaries of over-
seas firms which accounted for 43% [5].
4.3 Firm Scale
According to the survey results, the firms that had 1000~
5000 employees accounted for 12%; the firms having
300~999 employees accounted for 23%; the firms having
100~299 employees accounted for 26%; and the firms
that have no more than 100 employees accounted for
39%. The data shows that the scale of the majority com-
panies of Beijing service outsourcing industry was small,
and there are not the large firms with global-scale com-
petence. At present, Neusoft, which is the largest corpo-
ration of service outsourcing in China, has about 13,000
employees. But, there is not the service outsourcing firm
that has more than 6000 employees in Beijing. The data
from the study shows that the small-sized firms are the
main part of the Beijing software service outsourcing
industry. Those having 100-1000 employees account for
about 49%.
4.4 Human Resource Structure
For the software service outsourcing industry in Beijing,
there is a rich reserve of human resource, a dense loca-
tion of universities and research institutes in science and
technology fields, a high degree of aggregation of indus-
tries, a large amount of employees with high quality and
full features of stamina. The Beijing software service
industry contained 241,000 employees in 2007. It is ex-
pected that this employee team will grow to 32 million
by 2010. From the aspect of education structure, the em-
ployees with undergraduate education accounted for
more than 74%, of which Master’s degree or above ac-
counted for 15%. From the aspect of age structure, the
employees under the age 40 accounted for 90%, of which
those under the age 29 accounted for 62%; those between
30-39-year-old accounted for 28%. [4] Based on the
analysis of survey questionnaire, we found that the tech-
nical staff accounted for 86% in the total number of staff
of the Beijing software service outsourcing firms, of
which project managers (PM) account for 7%, system
engineers (SE) accounted for 26% and programmers (PG)
accounted for 53% of the total number of employees.
5. Analysis of the Software Service
Outsourcing Industry in Beijing
The “Structure-conduct-performance” analysis paradigm
(SCP paradigm) considers that the market structure de-
termines the competition in an industry, the conduct of
business strategy and the performance. The traditional
industrial organization theory utilizes the statistic method
of empirical analysis as its primary research methodol-
ogy. Based on the presupposition that the industrial stru-
cture was given and that the existing differences among
firms are the exogenous variable, it determines the Indus-
trial competitive state, makes statistic cross-section ob-
servation on the actual conduct of both the industry and
each individual firm, and then correlate the analysis re-
sults with the market performance of the firms. The new
industrial organization theory adopts the research meth-

An Empirical Analysis on Industrial Organization Structure of Chinese Software Service Outsourcing221
odology of deductive reasoning. It considers that the tra-
ditional industrial organization theory over relies on em-
pirical statistical analysis and lacks of theoretical basis
and formal models on market analysis so that it is only
suitable for statistic analysis in short term. It is necessary
to penetrate the study of the conduct attributions of par-
ticipants in economic activities in order to understand the
reasons of the formation and change of industry structure.
Our study described in this article is based on the ex-
panded SCP paradigm for the empirical analysis of the
Beijing software service industry.
5.1 Market Structure Analysis
Market structure is a concept of the relationship between
market competition and market monopoly. Here, we
studied the four qualitative criteria such as market con-
centration, entry and exit barriers, product differentiation
and scale economy for quantitative and qualitative analy-
sis of market structure of the Beijing software services
outsourcing industry.
5.1.1 Market Concentration
Market concentration is a quantitative criterion of the
market structure to measure the differences in number
and related scale of the firms. The market concentration
denotes the distribution of firm’s relative size and the
competition level of the industry. Following two param-
eters are commonly used:
the absolute concentration Rate (CRn)
1
/
n
i
CRnXi X

 (1)
and Herfindahl Hirschman Index (HHI)
2
1
(/)
n
i
H
HIXi X

 (2)
(/
X
iX, a firm’s market share).
CRn indicates the concentration rate of the largest
firms in the industry, but does not indicate the number
and the scale proportion of all firms in the industry. Al-
though HHI is better than CRn, HHI possesses some
shortcomings in that the intuitive is poor, the weight of
minor-firms is too small, and the data is difficult to col-
lect. Here, we adopt the indicator of CR4 and CR8. The
proportion of the four largest firm and the eight largest
companies accounted for the total output of the industry.
The turnover of the Beijing software service industry
was 125.2 billion Yuan in 2007 [3], of which 459 million
U.S. dollars was from the software exports. Analysis of
the data from the survey questionnaire revealed the eight
largest firms in the Beijing software service outsourcing
industry and the results of calculation for the Beijing
software service outsourcing industry in 2007 are:
CR4 = 27.6%, CR8 = 38.2%.
According to the data, we can draw the conclusion that
the concentration of the Beijing software services out-
sourcing industry is at the low level. According to the
Bain classification and taking into the account of the
number of software exporting firms in Beijing which was
more than 200 in 2007, we concluded that the software
services outsourcing in Beijing belonged to atom-type
markets and was a fully competitive market, of which the
scale economy was lower, so that the firms in the indus-
try would be difficult to accumulate capital to carry out
technology innovation and to form the core competence.
The reasons that resulted in the low concentration of
Beijing software service outsourcing industry may lie in
the following aspects: Firstly, the Beijing software ser-
vice outsourcing industry was still at the stage of low
level competition. The market was at the state of lower
level equilibrium. The firms could not afford to build
strong brands. So the industry concentration was low.
Secondly, the Beijing software and service outsourcing
industry is an emerging industry which is still in the ini-
tial development stage. The small and medium-sized
firms are difficult to expand market rapidly at the stage,
but easy to form a fully competitive industry structure,
thereby affecting the market concentration. Thirdly, the
diversification of market segments results in the decrease
of the industrial concentration. As a result of the needs
for the growing diversity of software service outsourcing
industry, the firms providing software services busi-
nesses paid more attention to market segments and de-
veloped the differentiated products and services. The
increase of market segments resulted in the reduction of
market concentration.
5.1.2 Analysis of Barriers to Entry and Hurdles to Exit
 Analysis of barriers to entry
Barriers to entry refer to the degree that the existing
firms of industry have market dominance in comparison
with the firms that are potentially about to enter or have
just entered the industry. Entry barrier is an important
factor that affects the relationship between market mo-
nopoly and market competition in the industry. It is also
a direct reflection of the market structure. The reasons
for the formation of entry barriers include: economy sc-
ale, necessary capital and buried cost, product difference,
absolute cost, policies and laws and the deferred reaction
of existing firms.
About the entry barriers of Beijing software service
outsourcing industry: First, there are no barriers to enter
the administrative access control. The investment admin-
istration system has the approval power on the macro-
control industries such as iron and steel industries; but
for the software service outsourcing industry, the Gov-
ernment has introduced a number of policies to encour-
age the development of service outsourcing industry. Not
only are there no policy entry barriers, but there are also
many government incentives. Second, overall, technical

An Empirical Analysis on Industrial Organization Structure of Chinese Software Service Outsourcing
222
barriers are lower to enter. Outsourcing services are know-
ledge-intensive industries but there is little difference in
the enterprise management and marketing means. It is
easy to make up through imitating and introducing talent.
The R & D centers and branches of multinational out-
sourcing services companies in Beijing have a great mo-
nopoly in their market segment. Many software service
outsourcing firms, especially those minor-firms, have to
be the taskmaster of software blue-collars. They have to
face competition from a large number of potential en-
trants because they do not grasp the core technology.
Third, for cost barriers, the start-up cost for a company is
low. It is easy for potential entrants to find the starting
point from the entrepreneurial company of tens thou-
sands dollars to large-scale integration corporation of
billions of dollars. Fourth, the dominant oligopoly firms
do not come into being, so there are no androgenic barri-
ers to enter the industry. Fifth, there is no ownership of
discrimination to enter. When the private capitals and
foreign capitals enter industries such as banks, petroleum
and petrochemical, power and others, they will face
many limits to get approval, but this is not the case for
the existing service outsourcing industry. So much more
capitals are attracted especially the foreign capital to en-
ter the industry. In short, the barriers to enter the Beijing
software service outsourcing industry are relatively low.
 Analysis of barriers for exit
Exit barrier refers to the price to be paid or cost to exit
the industry, such as unused asset, exit cost, strategic
impact, psychological factors, government restriction and
the social obligation. Through the investigation, we dis-
covered following issues for the Beijing software service
outsourcing industry: First, the offices of most firms
were leased. The investment for fixed assets is mainly
concentrated in the office equipment such as computers.
Therefore, the cost of unused assets is relatively low.
Second, the majority of companies used the way of dis-
patch staff. So the resettlement cost of personnel is rela-
tively low. Third, the strategic impact is medium due to
the fact that most firms are wholly-owned or the joint
ventures of multinational companies in Beijing. Exit will
affect multinational corporations. Fourth, psychological
factor play roles. Since the wage level is higher than the
average level of the society, employees in the industry do
not want to leave the industry. Fifth, the Government
actively encourages service outsourcing industry due to
its concern of the unemployment rate and the change in
the pattern of economic development. There would be
some restriction from the Government if it was to exit. In
short, the barriers to exit of Beijing software service out-
sourcing industry are relatively low.
 Conclusion
Beijing software services outsourcing industry is rela-
tively a low risk and low profit industry. According to
the relationship matrix of barriers for entry and barriers
for exit, location of Beijing software service outsourcing
industry in the relationship matrix is as Figure 1.
From the company profits point of view, the high bar-
riers to entry and low barriers to exit will be beneficial to
the development of the Beijing software service out-
sourcing industry, which means the low-risk, high-profit,
easy to accelerate and scale up of service outsourcing
firms. While increasing the entry barriers will lead to the
price distortions, it can prevent the small enterprises with
low efficiency from entering the market so as to increase
the industrial concentration. The whole industry thus
gains access to scale economy, resulting in the decrease
of cost of resources re-allocation. In addition, more entry
barriers and product differentiation will improve the di-
versification of products with more heterogeneity and
overall effectiveness of the community, thereby resulting
in the naissance of many sub-industries.
5.1.3 Product Differentiation
Differentiated products or services affect the firms to
control the market successfully. The software service
outsourcing firms formed different business to meet dif-
ferent demands of consumers, which contains differenti-
ated products and services. According to the question-
naire statistic, we analyzed the three indicators: the core
business, customer distribution and the target market.
The results are listed as follows:
First, looking from the aspect of the main business
types, the firms primarily working on outsourcing of in-
formation services (IT0) accounted for 63.16%; the firms
working on business process outsourcing (BPO) ac-
counted for 5.26%; the firms mainly working on software
development and sales accounted for 26.32%; the firms
mainly working on embedded product development and
sales accounted for 2.63%; and all other firms accounted
for 2.63%.
Second, looking from the aspect of customer industry
differentiation, the IT industry accounted for 65.57%; the
financial industry accounted for 8.11%; the telecommu-
nications industry accounted for 8.11%; the commerce
industry accounted for 5.41%; the advertising industry
accounted for 2.7%; and other industries accounted for
2.7%.
Barriers to entry
Low High
High high risk,
low profit
high risk,
high profit
Barriers to exit
Low
low risk,
low profit
low risk,
high profit
Figure 1. Relationship matrix of barriers for entry & exit

An Empirical Analysis on Industrial Organization Structure of Chinese Software Service Outsourcing223
Third, looking from the aspect of target markets dif-
ferentiation, the firms whose outsourcing contracts were
mainly from Japanese companies accounted for 52%; the
firms whose outsourcing contracts were mainly from US
companies accounted for 35%; the firms whose outsou-
rcing contracts were from EU companies accounted for
7%; and the firms whose outsourcing contracts were fr-
om companies located in Hong Kong accounted for 6%.
Through the comprehensive analysis of the above data,
we could find that the software service outsourcing firms
in Beijing mainly focused on the ITO business from Ja-
pan and USA. The product differentiation was indistinc-
tive on a whole.
5.1.4 Scale Economy
Scale economy is an economic phenomenon, in which
the expansion of production scale of firms conduces to
the constant improvement of product production efficie-
ncy, therefore achieving the economic goals. Returns to
scale is referred to that the output change is proportion-
ally related to the change of input factors, including in-
creasing returns to scale, constant and decreasing. Gen-
erally, the approach to distinguish returns to scale is as
follows: Two input factors have increased in λ-fold, out-
put will increase in h-fold, that is:
hQ = f (λK, λL) (3)
If h = λ, the constant returns to scale; if h < λ, the scale
of diminishing returns; if h > λ, the increase returns to
scale. Here we use the correlation test of statistic, the
application of statistical analysis software SPSS, to test
the correlation between firm scale and firm output of the
Beijing software service outsourcing industry.
 Test method
Correlation analysis is a statistical method to examine
the relation between the different variables; whereas the
correlation coefficient measures the linear relationship
and direction between two variables. The linear correlation
analysis is a mathematics tool involved in the correlation
coefficient to study the linear of the two variables. Due to
the fact that sampling error always exists in sample data,
the sample correlation coefficient between two variables,
if not zero, must pass the test. The assumption of the test
is that the correlation coefficient between the two vari-
ables is zero. In general, assuming the probability P is
true when the domain value is 5%, if P < 5%, the original
hypothesis false, or accept the original hypothesis.
 Indicators and data source
Based on the characteristics of software service out-
sourcing industry, the total number of employees in any
firm is generally the main indicators to measure the firm
scale. The study takes the number of employees of out-
sourcing firms as dependent variable, and takes the turn-
over which is the key indicators of a firm’s output as
independent variables. Due to the fact that the service
outsourcing is an emerging industry, it is difficult to col-
lect its time-series data but the cross-section data is rela-
tively easy to obtain. According to the 2008 survey ques-
tionnaire, we take the statistic on the number of employ-
ees of firms and their turnovers in 2007, through the sta-
tistical analysis software SPPS for the correlation test on
the data.
 Descriptive Statistics is shown as Table 1
 T Test of single sample is shown as Table 2
From Table 2, the result of T test is as follows, df = 58,
P = 0 < 0.05, so the sample is statistically significant.
 Result of Correlation test is shown as Table 3
From Table 3, The result of correlation test shows that
the Pearson correlation coefficient is 0.455 and P = 0.
Overall, the assumption of zero correlation coefficient
between the two variables is rejected. Significant correla-
tion occurs on the 0.01 level (bilateral). Therefore, a
strong positive linear correlation exists between the firm
employee number and the firm turnover.
Table 1. Descriptive Statistics of Employee number and
Turnover of firms
Mean Standard N
Employee number 476.9 869.797 58
Turnover 4764.41 7498.641 58
Table 2. T Test of single sample
Test Value = 0
95% Confidence Interval
of the Difference
t df Sig.
(2-tailed)
Mean
difference Lower Upper
Employee 4.369580.000 360.78571 195.2981 526.2733
Turnover 4.572580.000 4583.7568 2574.47196593.0417
Table 3. Result of Correlation test
Employee
number Turnover
Pearson correlation 1 0.455**
Significant（Bilateral） 0
Employee
number
N 58 58
Pearson correlation 0.455** 1
Significant (Bilateral) 0 Turnover
N 58 58
**. Significant correlation on the 0.01 level (bilateral)

An Empirical Analysis on Industrial Organization Structure of Chinese Software Service Outsourcing
224
 Conclusion
Through the above correlation test, it can be judged:
The scale economy of software service outsourcing in-
dustry in Beijing was taking on the significant increasing
returns to scale, with which the firm earning grows with
its production expansion and the increasing of firm earn-
ing in turn promotes the firm production expansion. The
different scales of production will lead directly to the
differences in economic and social benefits. According to
the statistic analysis of questionnaire, the result shows
that the firms whose turnover in 2007 was more than 100
millions Yuan accounted for 12%; the firms with 10~100
million Yuan turnover accounted for 63%; the firms with
less than 10 millions turnover accounted for 25% of the
total samples, increasing returns to scale. Through the
questionnaire survey on the software service firms in
Beijing, we found that the average employee number is
476 persons per firm. Therefore, it should be encouraged
that the Beijing software service outsourcing firms carry
out mergers, restructuring and integration. To improve
scale economy of the industry, it is also important to speed
up the formation of large groups and software outsourc-
ing service outsourcing industry alliance.
5.2 Analysis of Market Conduct
Market conduct refers to that the firm takes adjustment
actions to meet market requirement to achieve its stated
objectives. A firm’s market conduct mainly includes mar-
ket-competitive conduct and market co-ordination con-
duct. Market-competitive conduct includes the pricing
conduct with the characteristics of controlling and influ-
encing price, mergers and acquisitions conducts with the
characteristics of property right change and organization
adjustment, sales promotion conducts with the purpose of
enhancing competitiveness and expanding market, as
well as advertising, research and development, and so on.
Market coordination conduct mainly includes cooperate
competitive behavior such as firms strategic alliances.
The market-competitive conduct of the Beijing soft-
ware service outsourcing industry could be divided into
three types: First, R & D centers established in Beijing
by multinational outsourcing services corporations whose
main businesses are from the parent corporations. They
basically do not participate in market-competition. Sec-
ond, the branches opened in Beijing by the multinational
corporations. They are mainly engaged in the business of
the China market. Due to the high entry barriers such as
technology, capital, brand, performance, these branches
keep the oligopoly in the market segments and have
much more competition advantage than domestic firms.
Third, the Chinese firms which are engaged in overseas
service outsourcing business. Most of them are wholly
foreign-owned and joint-venture; some are subsidiary of
institutes; and a few of private enterprises. These firms
mainly participate in the international market-competi-
tion of service outsourcing by taking the advantage of the
large amount of high-quality, inexpensive software tal-
ents in Beijing. Due to the considerations of the technical
control by the multinational corporations, the internaliza-
tion of core technology is becoming clear with character-
istics of the processing trade of low-tech and labor-in-
tensive, while increasing the outsourcing of labor-inten-
sive and low technology content, for example, the out-
sourcing projects from Japanese firms are generally the
sub-modules which were disassembled basically by the
general contractor through systematic design and struc-
ture analysis. Due to the lack of core technology, many
Beijing’s service outsourcing companies have to be the
passive sub-contractors under the general contractor of
overseas software service outsourcing, and are in the
embarrassment position of taskmasters of the software
blue-collar. Therefore, the market competition was so
high. The pricing becomes an issue in the throat-cutting
competition, which often adopts the head-count method
that is based on the quoted labor costs in order to earn the
low profit via the salary difference between the domestic
market and foreign market.
From the aspect of pricing conduct, the low industrial
concentration led to the full competition conduct. The
present pricing is primarily controlled by the overseas
contractors who generally denominate the market as they
are attracted by the low labor costs. At present, the con-
duct of Beijing service outsourcing enterprises to im-
prove the price competitiveness mainly reflect in high-
tech qualification, industry qualification certification and
management certification. Based on the statistic of the
questionnaire, in the Beijing software service outsourcing
industry, the firms that have high-tech certification ac-
counted for 83%; the firms that have CMMI certification
accounted for 33%; the firms having CMM certification
accounted for 43%; the firms having ISO20000 certifica-
tion accounted for 8%; the firms having BS7799 certifi-
cation accounted for 3%; the firms having ISO27001
certification accounted for 16%; and the firms having
2-soft certification accounted for 8%. According to the
statistic data of the Beijing software and information
promotion centre, the combined numbers of firms that
got the CMM/CMMI certifications were 152 in 2007,
accounting for 24.9% and thus becoming No. 1 in the
country; the numbers of firms that got the ISO20000 cer-
tification were 7 in the same year, accounting for 50% in
the country; the firms having obtained the ISO27001
certification added up to 22, accounting for 21.5% in the
country. These data shows that the Beijing software ser-
vice firms improve the price competitiveness through
strengthening enterprise management certification.
Overall, the market conduct of the Beijing software
service outsourcing has more, low level price competi-
tion, but uses few of non-price competition strategy.
Looking from the aspect of mergers acquisitions conduct,

An Empirical Analysis on Industrial Organization Structure of Chinese Software Service Outsourcing225
although the Beijing government encourages mergers
acquisitions, industry restructuring and the alliances, there
have not been any firms or unions formed in the Beijing
software service outsourcing industry with international
competitiveness until now.
5.3 Analysis of Market Performance
Market performance reflects the ultimate economic suc-
cesses such as the price, firm scale, production capacity,
cost, profit, production quality, varieties and technology
progress, which is the result of the given market conduct
in the given market structure. The market performance
indicates the market efficiency on resources allocation.
The scholars represented by Bain advocated the financial
indicators; whereas Lerner and other scholars preferred
to the market power indicators. There are analysis indi-
cators such as profit ratio, Bain index, the efficiency of
resource allocation, Lerner index, rate of return, Tobin's
q ratios and so on. Here, we adopt the indicators of the
profit ratio and the ratal of firms to quantitatively analyze
the market performance of the Beijing software service
outsourcing industry.
5.3.1 Analysis of Firm Profit Ratio
Based on the survey results obtained from the Beijing
software service outsourcing firms, we carried out the
statistic analysis on the firm profit ratios in 2005, in 2006,
and in 2007, respectively, using the SPSS statistic analy-
sis software. The statistical results are described as Table
4.
From Table 4, the analysis result shows that the aver-
age profit ratio of the Beijing-based software service
outsourcing firms dropped down from 17.05% in 2005 to
6.39% in 2007. It could be explained by the fact that the
competition in the industry was becoming fierce year
after year, which led to the decline of profit ratio on mar-
ket performance. The reasons maybe lie in: Firstly, the
market concentration of industries was also dropping
year after year, resulting in the change of the pricing con-
duct, further leading to the decline of profit ratio. Sec-
ondly, due to the appreciation of the RMB exchange rate
in recent years, the competitive advantage of the Beijing
software service outsourcing industry was weakened, res-
ulting in the decrease of the profits of the service out-
sourcing firms that take the foreign exchange as their
major settlement payment. In addition, according to “the
China Statistic Yearbook”, the average cost-profit ratio
of all state-owned, large-size companies of the country is
7.43% in 2007. Therefore, the profit ratio of the industry
should be improved because the software and informa-
tion service outsourcing is an emerging industry. If the
profit ratio of the industry was lower than average profit
ratio of the society for a long time, it would be detrimen-
tal to the effective concentration and configuration of
resources.
5.3.2 Analysis of Firm Ratal
Still based on the survey results obtained from the soft-
ware service outsourcing firms in Beijing, we carried out
the statistic analysis on the firm’s ratal in 2005, in 2006,
and in 2007, respectively, by SPSS statistic analysis soft-
ware. The results are displayed as follows:
From the statistical results in the Table 5, we can see
that the average firm ratal of Beijing software and infor-
mation services outsourcing industry showed an upward
trend year after year. The average ratal was 1,523,700 Yuan
every firm in 2005; it became 2,037,100 Yuan every firm
in 2006 and 2,491,900 Yuan every firm in 2007. From
the calculated data, it could be seen that the ratal growth
rate was 33.69% in 2006 and 22.32% in 2007. Therefore,
we could draw following conclusions: Although the av-
erage profit ratio of the industry was declining, the aver-
age ratal of the firms was increasing year after year. The
reason is that industry output (turnover) was growing and
the industry scale was expanding rapidly.
6. Conclusions
Based on the SCP paradigm of the industrial organization
theory, the study empirically analyzed the criteria of mar-
ket structure, market conduct and market performance of
the software service outsourcing industry in Beijing th-
rough the field survey, literature search, making use of
the SPSS statistic software and its relativity tests. Fol-
lowing conclusions can be drawn from the study:
Firstly, on the aspect of market structure, the market
concentration of software service outsourcing industry in
Beijing is very low at present. The barriers to entry and
exit are relatively low and belonging to the industry of
lower risk and lower profit. The product differentiation is
not high. It mainly focuses on the ITO business from the
Table 4. Descriptive Statistics of profit ratio
N Mean Standard
Deviation
Year Statistics Statistics Standard
error Statistics
2005 37 17.05 2.94 17.883
2006 44 6.55 4.564 30.271
2007 48 6.39 6.896 47.78
Table 5. Descriptive Statistics of firm ratal
N Mean Standard
Deviation
Year Statistic Statistic Standard
error Statistic
2005 39 152.37 39.642 247.563
2006 44 203.71 46.829 310.629
2007 47 249.19 61.568 422.091

An Empirical Analysis on Industrial Organization Structure of Chinese Software Service Outsourcing
226
Japanese and American companies. The industry shows
increasing returns to scale, but the scale economy of the
industry has still not been incarnated.
Then, on the aspect of market conduct, the low market
concentration led to the fierce market competition. Ex-
cept for the R & D centers and branches owned by the
multinational companies that have strong pricing power,
all local software service outsourcing firms are involved
in the fierce market competition as demonstrated specifi-
cally by the very low industry concentration and the very
low average scale of firms. The price competitiveness of
the whole industry is still weak and the price-competitive
conduct seems to be disordered. The non-price competi-
tion strategy is not becoming prevalent. Super powerful
companies with internationally recognized competence
have still not existed yet at present in the Beijing soft-
ware service outsourcing industry.
Finally, on the aspect of the market performance, the
firm profit rate of the Beijing software service outsourc-
ing had been declining year after year. The average profit
rate is low, but the average firm ratal shows upward trend.
The reasons of this phenomenon might primarily lie in
the low level of price-competition caused by the low in-
dustry concentration and the rapid expansion of the in-
dustry scale.
7. Acknowledgements
Author would like to thank Prof. Jingfu Bai of University
of Science and Technology Beijing, and Dr. Jim Zhang
of JZMed Inc of New York in USA for their valuable
advices during preparation of the paper.
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