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In many developing countries, firms confront a highly adverse business environment. In these cases, development ‘should not’ occur and observers tend to recommend government policy reform. The World Bank ranks India 116th out of 155 countries according to the ease of ‘doing business’. Indian managers spend a great deal of their time dealing with government regulations and bureaucracy. However, despite these difficulties there has been an explosion of technology-based entrepreneurship in India’s software and IT industries. In theory, the Indian software industry ‘should not’ have developed in the way it did. This paper shows how Indian software entrepreneurs overcame institutional barriers to development and how they themselves initiated institutional change, despite Government’s restrictive policies. Contrary to conventional wisdom, Indian software firms were able to circumvent government imposed restrictions to growth and lead institutional reform in India. If India’s entrepreneurs can do it perhaps others can too. © 2010 Inderscience Enterprises Ltd.