MNCs have responded to the lower cost challenge from India by putting up their development centers here and offering much higher salaries to pull away people from the Indian companies. It helps them in two ways 1. It somewhat destabilizes the challengers (Indian companies) and 2. It gives them a lower cost base for serving their customers and compete with Indian companies. Indian companies have responded by quickly upping their own salary levels (foolish but somewhat difficult to avoid for now) and pushing out towards cheaper destinations (not altogether a bad choice).
The right long-term choice however lies in training, improved processes and investment in brand building.
Currently a large part of India's potential workforce is poorly trained or unemployable (thanks to the dysfunctional education system in India). The resulting scarcity of qualified people is driving up the salary levels, quickly eroding much of the low cost advantage. If Indian businesses instead actively choose to invest in training the larger set of the not so well trained people to enable them to become more capable and employable, they will continue to have a good supply of low cost workforce. Extending their low cost advantage over a longer period of time. More importantly it can enable a huge number of people to enter the job market, lifting their earning potential. It will also force the ‘better trained’ people towards improving their performance and capability. Which would in turn benefit the industry and economy as a whole. What comes to ones mind is the excellent work done by Telco (in Pune) and Reliance (in Jamnagar) in transforming essentially agrarian local people into a very capable industrial workforce
Secondly Indian businesses must improve their processes to be able to take work form relatively junior/inexperienced staff and ride over disruptions that may be caused due to attrition. The Pioneering work done by Infosys on this stands out as an example for all to replicate.
Thirdly Indian companies must invest in building their own alternatives products and brands over a longer term to take the war to the enemy camp.