Can India become an Innovation Powerhouse? Rishikesha T.

Krishnan Professor, Corporate Strategy & Policy Area Indian Institute of Management Bangalore Bangalore 560076 India rishi@iimb.ernet.in Sustained economic growth over more than a decade has raised visions of India becoming one of the largest and most important economies in the world. The outsourcing of important business activities such as software development to India has also brought up the possibility of India becoming one of the leading countries in knowledge-based industries. It is widely recognized that innovation plays a critical role in leadership in such industries. In this paper, we investigate whether India can realize this potential and actually become an innovation powerhouse. To pursue this objective we use the concept of the innovation system developed originally by Lundvall, Freeman and other scholars of the economics of innovation. The paper is organized in four parts. We start with an analysis of the strengths and weaknesses of the Indian innovation system. This is followed by a summary of recent events that will have a significant impact on the innovation system. We then make predictions for the short and long term evolution of the Indian innovation system. We conclude by drawing implications of these alternate scenarios for the catch-up of India in different industrial sectors. Strengths and Weaknesses of the Indian Innovation System The Indian innovation system appears to have many features that would enable dynamic innovative output. These include a broad-based network of government-supported research and development laboratories with multi-disciplinary expertise, a large education capacity with several high-quality institutions like the Indian Institutes of Technology, a large and growing private sector industrial base, recognition by the government of the importance of industrial R&D, influence of the scientific community in government policy-making, WTO-compliant intellectual property laws accompanied by increasing foreign investment in R&D, and a growing confidence of the nation in its abilities. Yet, deeper examination suggests that within these apparent strengths are embedded a number of limitations such as a lack of dynamism of the government R&D system, poor research output of the higher education system, absence of a vibrant hightechnology sector, limited scope and impact of government support programmes for R&D, a science-technology divide, and inadequate spillovers of foreign direct investment in R&D. Indias most significant achievements have been in the broad realm of human resource development. But translation of these capabilities into products and services that can

capture international markets, or into continuous improvements in shop floor productivity that could drive industrial competitiveness has been sketchy.

Strength #1: A Network of Government-supported R&D Laboratories with Expertise in a Variety of Disciplines Under Prime Minister Nehru, India started creating a set of national laboratories in the 1950s at a time when few developing countries lacked a similar vision. The Central Government continues to play a major direct role in R&D and accounted for 62% of the national expenditure on R&D in 2002-03; much of this funding is directed to work done in government laboratories. About 84% of the central governments spending on R&D was through twelve major scientific agencies. Amongst the major agencies, the Defence Research & Development Organization (DRDO) accounted for a little over 30% of the expenditure on R&D.1 The other major central government R&D networks are, in decreasing order of funding, the Department of Space (DOS), the Indian Council of Medical Research, the Department of Atomic Energy (DAE) and the Council of Scientific & Industrial Research (CSIR). One estimate suggests that the government runs around 400 research establishments.2 The CSIR network of 38 laboratories works in areas corresponding to basic disciplines (Physics, Chemistry, Metallurgy, Molecular Biology, etc.), regions (Regional Research Laboratories), or products (scientific instruments, leather, marine chemicals, etc.). The CSIR is a civilian research organization, and its laboratories are expected to earn a part of their budget from doing work for industry. The civilian spin-offs of strategic R&D programmes have not been significant. If we keep aside the strategic outcomes of the government research networks such as the missiles and nuclear capability developed by the DRDO and the Departments of Atomic Energy and Space, the most significant outcome of the government laboratories has been the human resource base that it has created. In its formative years, the Indian software industry drew heavily on the base of computer-literate manpower available in government research laboratories. Indias recent foray into R&D services has also been benefited by the availability of these people. Weakness #1: Lack of Dynamism of the Government R&D System The reason we consider that the government systems major contribution to be human resource development is that only a small proportion of its output has been translated into industrial application. Historically, the government R&D system tended to work in isolation and on its own agenda. The lack of technology transfer was a result of a lack of understanding of industrys requirements and the absence of an incentive system within the laboratories that emphasized industrial application. Further, until economic liberalization started in right earnest in the early 1990s, the demand pull was weak in a highly regulated economy, firms were under little pressure to improve their products and services or launch new ones; in fact, in many cases, government regulations forbade

changes in products without government permission. Most firms preferred to source their technology as tried and tested packages from foreign sources. Prior to economic liberalization, foreign companies were willing to license their technology to Indian firms as they did not have direct access to the Indian market and technology licensing gave them at least some additional revenue from the Indian market. The government R&D system, particularly the CSIR, became more business-oriented in the 1990s in the face of economic liberalization and government policies that required the CSIR laboratories to earn at least one-third of their budget from outside the governments budget allocation. While the CSIR laboratories were granted just 25 U.S. patents between 1991 and 1995, they were granted 276 U.S. patents between 1996 and 2002.3 In 2003-04, the CSIR was granted 191 U.S. patents, constituting 69% of the U.S. patents granted to Indians in India.4 In the same year, CSIRs external earnings amounted to Rs. 2.87 billion (approximately US $ 64 million). However, it is commonly accepted that the CSIRs performance is driven by a group of around 8 10 of its laboratories. Almost 70% of the U.S. patents granted to the CSIR in 2002 went to just three laboratories.5 Organizationally, the CSIR faces many challenges, as do other government laboratories. The most significant of these is that the salaries of scientists and engineers in the government system are capped by overall civil service salary levels. The growth of the software industry and the emergence of India as an R&D hub (for export of R&D services) have opened up a number of job opportunities and these attract people from the government R&D sector. As a result, attrition (particularly among young scientists and engineers) from the government laboratory system is high. There are other problems related to the governments direct involvement in research and development. The government does not give enough flexibility to organizations under its control, and emphasizes procedures over results.6 Long decision cycles, inappropriate choices of priority areas,7 and sub-optimal funding hamper the effectiveness of government investments in R&D.8 Strength #2: Large Education Capacity with Several World-class Institutions India has 302 universities/deemed universities, 13 institutions of national importance and 16,885 colleges offering higher education in the country.9 Thanks to this large education network, India has one of the largest stocks of scientists, engineers and technical personnel in the world.10 In parallel with the creation of the R&D institutional base, India created a network of engineering education institutions starting in the late 1950s. The best known of these, the Indian Institutes of Technology (IITs), provide world-class engineering education11 though their research output is not on par with top engineering schools in the United States. Five IITs were set up in the 1950s and 1960s, a sixth IIT in the late 1980s, and the University of Roorkee was upgraded into the seventh IIT a couple of years ago. Seventeen Regional Engineering Colleges (now re-named as National Institutes of Technology) set up jointly by the Central Government with the state governments constitute the second tier of engineering education.

Since the early 1990s, there has been an explosion in the private provision of engineering education. In 1990 there were 337 institutions offering formal degree-level engineering education in India admitting 66,600 students every year; by 2003, there were 1,208 engineering colleges with an intake of 359,721 students.12 Weakness #2: Quality of the Higher Education System While the higher education system is broad in scale and scope, its research output is poor. The higher education system accounted for just 4.2% of the national R&D expenditure in 2002-03.13 According to a prominent member of a task force set up by the government to look at basic scientific research in Indias universities, there has been a complete neglect of research culture in universities.14 In spite of the large size of Indias R&D and higher education sectors, India accounted for only 2.19% of the worlds scientific publications in 1993-97 and this declined to 2.13% for the period 1997-2001.15 Indias share of highly cited scientific publications was 0.32% in 1993-97 and 0.54% in 1997-2001.16 Among the 31 countries accounting for 98% of the worlds most cited scientific publications, India ranks No. 30 on citation rate per paper.17 The crisis in the state of the sciences in the universities is matched by an equally serious one in the social sciences.18 The university system has been adversely affected by inadequate funding, failure to recruit faculty, political interference, and a weak accreditation system.19 There is little doubt that the rapid expansion of engineering education capacity has taken place without much attention to quality. The result is that the engineering graduates from a large majority of these private engineering institutions have to be re-trained by employers. A recent report of a government committee noted that barring some exceptions, there is scant regard for maintenance of standards.20 The accreditation process of the All India Council of Technical Education (AICTE) is weak, and many of the colleges lack basic infrastructure or adequate qualified faculty.21 The existing policy environment offers few incentives to engineering colleges to upgrade their quality.22 If teacher qualification and teacher-student norms of the AICTE were to be applied uniformly, there is a shortfall at least 18,000 engineering teachers with PhDs and 20,000 with masters qualifications.23 However the actual number of PhDs in Engineering created per year is small two-thirds of the 6,714 science and technology doctorates produced in the country are in the sciences.24 The high quality end of the engineering education sector has problems of its own as well. The IITs currently constitute only a little over 1% of the undergraduate engineering education capacity.25 Expanding the present institutes further may not be possible due to constraints of infrastructure and faculty - as in the government R&D sector, faculty salaries at the IITs are capped by civil service guidelines. Though the IITs have increased their earnings through sponsored research and consultancy,26 they are still highly dependent on the government for their funding. The Government has initiated a programme of upgrading select technological universities to IITs, but the gap is difficult to bridge and such upgraded institutions will take a long time to equal the quality of the

original IITs. The government has also been reluctant to give the existing IITs the autonomy to chart their own future. Strength #3: Large Private Sector Industrial Base The Indian private sector survived the decades of a relatively closed economy and a cumbersome regulatory structure to blossom and flower after economic deregulation started. Propelled by a boom in services, and with a healthy growth rate in manufacturing, the Indian economy has maintained a growth rate in excess of 6% since economic liberalization began. Perhaps the most creditable achievement of India in recent years has been the creation and growth of an export-oriented software industry. Indian information technology and software exports grew from US $ 3.4 billion in 1999-2000 to US $ 12.2 billion in 20040527 and in the process became the largest constituent of Indias export basket. While the opportunity arose from the global trend towards outsourcing and the quest of large companies for cost efficiencies, Indian software companies built on a strong human resource base to create organizational processes to quickly absorb new technologies and ramp-up internal delivery capabilities in a short time to meet customer requirements, and at the same time ensure on-time delivery at an acceptable level of quality. Using cost arbitrage as an entry strategy in an emerging business, they opportunistically expanded their business, at the same time building more sophisticated organizational capabilities within.28 The Indian pharmaceutical industry has been another high performance industry. About one-third of its 2002 production of $5.2 billion was exported to other countries. Among the ten entities based in India with the largest number of US patents during 1996-2001 are three Indian pharmaceutical companies. These pharmaceutical companies are seeking to move from imitative research and reverse engineering to the discovery of new molecules and drug delivery systems and their R&D intensity is more than 5%. Joint R&D initiatives with multinational drug companies, licensing of new discoveries to MNCs, sponsored research projects at national laboratories with government support, and the creation of international marketing networks in the hope of future exploitation of such networks to sell newly developed novel drugs are some of the developments in this area. India has several large business houses (like the Ambanis (Reliance), Tatas, the Birlas, and the Mahindras) who have multi-billion dollar business empires. Post-liberalization, new giants have emerged as companies like Infosys Technologies (computer software), Ranbaxy (pharmaceuticals), and Bharti (telecommunication services) have grown into billion dollar-plus businesses. All these businesses have grown substantially and profitably even though they compete with several of the worlds largest multinational corporations. Several companies have demonstrated major increases in productivity, the ability to develop and successfully manufacture new products, and have been the winners of top quality awards like the Deming prize.29 The share of the Indian private sector in industrial

R&D spending has been rising slowly but steadily.30 There is thus clear evidence that Indian entrepreneurial talents are alive and well.31 Weakness #3: Absence of a Vibrant High-technology Sector The success of the software industry and the growth in private sector industrial R&D spending however masks highly uneven technological capability building. In many industries, while the most efficient companies operate at world-class efficiency levels, in aggregate terms, India is considered to be at the low end of dynamic technology adopters.32 A study by the McKinsey Global Institute shows that the labour productivity of the modern sectors of the Indian economy is only 15% of the globally highest levels.33 Efforts to upgrade indigenous technologies through imports show a downward trend - the number of technology transfer agreements signed by Indian companies for import of technology has declined from 661 in 1991 to 307 in 2002.34 In the year 2001-02, almost 89% of Indian companies did not report any spending on R&D.35 Much of the visible innovation is in the pharmaceutical and automobile industries, though even these industries have R&D intensities that are low by international standards.36 High growth sectors such as software are not really high tech as they spend only about 1% of their sales on R&D, though there is a growing R&D services sector that provides R&D support services to companies in the international market. Though there are several small technology firms,37 there is no critical mass of dynamic small firms that could form the bedrock of a strong technological capability. This is due to many factors attractive employment opportunities with salaries increasing 25% yearon-year; absence of seed capital and venture capital support; lack of sophisticated local market demand; and inadequate government support (see Weakness #4 below). Further, there are constraints on academic professionals starting their own firms, barriers to movement from academia/research institutions to industry and back, and inadequate infrastructure for incubation and product development and testing. Established companies are reluctant to make significant investments in genuinely innovative R&D. Organizational barriers to innovation include a lack of ambition and vision at the top, a perception of loss of control by owner-managers in issues related to technology development, inadequate investment in plant and machinery, lack of the right people and skills, and hierarchical structures.38

Strength #4: Government Recognition of the Importance of Industrial R&D In principle, the government recognized the importance of industrial research and development more than three decades ago. Even in the era of tight industrial regulation, companies could take a 100% write-off on R&D expenditure in the year the expenditure was incurred; a scheme of recognition of in-house R&D units allowed easy import procedures for equipment and consumables used in research and development; and the

domestic patent law encouraged Indian firms to find new process routes for existing drugs. However, prior to 1991, there were no government schemes that provided financial support for R&D by private industry. Since 1991, the government has created schemes for the financial support of local industrial research and development. Prominent among these are the Technopreneur Promotion Programme (TePP), the Home Grown Technologies Programme (HGT), Programme Aimed at Technological Self Reliance (PATSER), and the Technology Development Board (TDB). While TePP provides small grants to individual innovators, the other schemes essentially offer low cost loans to industry for the development, scaling-up and commercialization of industrial technologies. The HGT and PATSER schemes explicitly encourage industry to work with national laboratories or science/engineering education institutions to adapt, improve and implement technologies developed by the latter. A recent programme to support public-private partnerships is the New Millennium Indian Technology Leadership Initiative (NMITLI) of the CSIR that seeks to support joint work between Indian companies and the government laboratory network to create technology leadership positions in industries/technologies where India has a potential competitive advantage in global markets. Fiscal incentives for R&D include tax breaks for R&D expenditure and exemption from excise duty for products developed indigenously for which international patents have been obtained. Specifically39, Both revenue and capital expenditure on R&D are 100% deductible from taxable income under the Income Tax Act. A weighted tax deduction of 125% is allowed for sponsored research in approved national laboratories and institutions of higher technical education. A weighted tax deduction of 150% is allowed on R&D expenditure by companies in government-approved in-house R&D centres in selected industries. A company whose principal objective is research and development is exempt from income tax for ten years from its inception. Accelerated depreciation is allowed for investment in plant and machinery made on the basis of indigenous technology. Customs and excise duty exemptions for capital equipments and consumables required for R&D. Excise duty exemption for three years on goods designed and developed by a wholly owned Indian company and patented in any two countries out of: India, the United States, Japan and any country of the European Union.

Weakness #4: Limited Impact of Government Support Programmes Government policy initiatives in India are plagued by implementation problems and the governments initiatives in the arena of science and technology are no exception. The scale and scope of the schemes and programmes to support industrial R&D remain small. The total outlay of the government on the TePP, HGT, PATSER, TDB and NMITLI schemes is of the order of just US $ 30 million per year and this support is spread too

thin. Even this amount is tightly controlled by a centralized bureaucracy in Delhi and difficult to access by small firms spread all over the country. In fact some of the most prominent recipients of support under these schemes have been large companies such as Tata Consultancy Services (Indias largest software company), and Tata Motors, both part of the highly profitable Tata conglomerate. The TDBs single largest project is a rare outright grant to a civil aircraft development project of the National Aerospace Laboratories, a constituent of the CSIR. Many of the schemes are actually biased against small firms and start-ups as they require a proven track record or R&D recognition by the Ministry of Science and Technology.40 Strength #5: Influence of Scientists in Policy-making Cutting across political lines, the Indian political establishment has consistently expressed confidence in the Indian scientific establishment. Through bodies such as the Scientific Advisory Council to the Prime Minister (SAC-PM), and the Scientific Advisory Council to the Cabinet, senior scientists have access to the government. At the time of the recent nuclear agreement with the United States, the government made a very public show of consulting senior scientists in the atomic energy establishment and obtaining their concurrence before signing the deal. Scientists are hence in a position to have significant influence over policy-making and they can potentially use this influence to further the development of science and technology capabilities within the country. Weakness #5: The Science-Technology Divide Whether the scientific establishment uses this influence to shape policy in such a way as to benefit the economy as a whole is another matter. Recent evidence (the government of India recently accepted the recommendations of the SAC-PM to (1) set up an NSF-type body to expand and control research project funding in academia and (2) set up new institutes for Science education at Kolkata and Pune) suggests that the scientific establishment is focused on basic scientific research as opposed to science and technology that have industrial applications. Strength #6: Changes to Patent Laws & Increased Foreign Direct Investment in R&D Recent amendments to the Patents Act have brought Indian laws in line with the intellectual property rights (IPR) regimes prevalent in much of the industrialized world. With this framework in place, both Indian companies and multinational corporations are expected to step up R&D investments. (However it remains to be seen how well IPR protection will be enforced on the ground, and how the government addresses the ambiguities in the new law that have already been pointed out.41) With a strong human resource base, India seems well positioned to take advantage of the accelerated pace of the internationalization of R&D. Around 230 multinational corporations have set up R&D centres in India,42 with about 77 companies setting up directly-owned subsidiaries between 1998 and 2001 itself.43 A number of Indian firms

and national laboratories undertake contract research for international clients. An important area of captive and contracted R&D is the embedded software and systems market this accounted for exports of US $ 1.6 billion in 2003-04, and grew at 44% over the previous year.44 It is possible that India will pioneer a new model of R&D capability evolution wherein R&D capabilities are first built through foreign direct investment and then eventually percolate into the domestic R&D sector. Weakness #6: Low Magnitude of Spillovers of Foreign R&D Investment So far, for obvious reasons, much of the investment in R&D by foreign companies has been in the area of software. It is not clear to what extent this software development involves significant research, development or innovation content. However, what is evident is that the software development work undertaken by multinationals in India is largely for their global operations or products, and is not specifically targeted at Indian applications. The sensing of the market, and definition of the product is done largely outside India and these skills are rarely learnt by the Indian employees of the development centres located in India. As a result, the Indian employees enhance their technical skills and sometimes their general management skills, but are rarely exposed to the full gamut of skills across the different stages of product development and introduction that would enable them to gain an integrated business perspective. The main benefits of foreign R&D investments to the country seem to be in the area of human resource development. Of course, the local economy gains from the taxes paid by employees and the demand for local services (cleaning, catering, utilities, etc.) that is created by the investment. Weakness #7: Other Barriers to Innovation Corruption and the slow development of infrastructure threaten to slow down the pace of economic development in general and the evolution of the innovation system in particular. It is widely believed that there is a link between corruption and the poor quality of the new engineering education infrastructure. Corruption is likely to dissuade capable entrepreneurs from starting new enterprises. Unless the poor urban infrastructure in the major locations of industry is addressed quickly, there is likely to be a slow down in foreign investment.45 Decades of poverty and under-development have led to a number of societal barriers to innovation. These include an ambivalent attitude towards knowledge, a knowing-doing gap, a hesitation to specialize, a static view of technology, and intolerance of failure. These are compounded by disturbing signs of a declining respect for diversity and dissent.46 The distribution of the benefits of the growth of the economy and its impact on addressing poverty are not yet clear. Some preliminary indicators suggest that inequality has reduced in the states reporting fast economic growth.47 However, the divergence

across states in the incidence of rural poverty has increased since economic liberalization began.48 There are increasing concerns that the benefits of liberalization should be more widespread and that economic growth should be more inclusive. These concerns will help social cohesion and stability, though they may slow down the liberalization process and also make the provision of subsidies and financial support to innovation and R&D more contentious. Another concern is that the Indian economy is dominated by services (accounting for about 53% of GDP). Industry and agriculture account for 22% and 25% respectively. The rural economy is the source of livelihood for about two-thirds of Indias population. Manufacturing is more conducive to growth in rural employment and has greater spillovers to the economy than services. The faster growth in services is likely to accentuate the urban-rural divide and create problems of inequity. Strength #7: We can do it Perhaps the biggest source of strength of the Indian innovation system today is the confidence that has been generated by Indias success in several industries such as software, pharmaceuticals, and automobile components. The diffidence of the past is slowly disappearing. If this confidence is channelized into addressing the weaknesses mentioned above, India may well have a world-beating innovation system. Recent Developments To predict the future trajectory of the innovation system, it is useful to track the new policy initiatives and other developments in the recent past that have implications for the Indian innovation system. Some of the most significant ones are: In mid-2005 the Central Government formed a Knowledge Commission to advise the government on how India can promote excellence in the education system to meet the knowledge challenges of the 21st Century; promote knowledge creation in S&T laboratories; improve the management of institutions generating Intellectual Property; improve protection of IPRs; and promote knowledge applications in agriculture and industry. The Central Government budget for 2005 announced a grant of Rs. 1 billion (about US $22 million) to the Indian Institute of Science (IISc) at Bangalore to help its upgradation into a world-class university. IISc is one of only three Indian universities/institutions ranked among the top 500 in the world.49 In March 2005, the Ministry of Human Resource Development of the Central Government set up a task force on basic scientific research in universities. The report of the task force (accepted by the government) has recommended spending an amount of Rs. 6 billion (approximately US $ 130 million) per year of which two-thirds is to be spent on infrastructure development, and a quarter on setting up ten networking centres in the basic sciences.

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The Central Government budget for 2006 announced special grants to the historically important Bombay (Mumbai), Calcutta (Kolkata) and Madras (Chennai) universities and to the Punjab Agricultural University, a major site of Indias green revolution in the 1960s and 1970s. The same budget also set aside about US $40 million to set up a new drug research centre, a major grant to buy a new research ship for the Antarctic research programme, and enhanced funding for NMITLI. The Central Government has announced its acceptance of the proposal to form a National Science Foundation like body with funding of the order of US $200 million per year. Funds will also be provided to set up new science institutes at Kolkata and Pune. The Government has invited applications from educational institutions and other local bodies to help decentralize the TePP that gives grants to individual innovators. For the first time, India signed an agreement with another country (Israel) to support industrial R&D cooperation between companies in the two countries. (All previous agreements were related to academic or institutional collaboration). New investments in manufacturing by BMW (for automobiles in Chennai) and Nokia (for cellular phone handsets, again in Chennai), followed by strong indications that a semiconductor manufacturing facility will come up in the country, probably in Hyderabad. Announcement of a national programme for nanotechnology development with a budget of about $ 220 million spread over five years. In October 2005, the Department of Biotechnology of the Government of India announced a Small Business Innovation Research Initiative (SBIRI) scheme to provide early stage funding to help create new technology-based businesses by science entrepreneurs. In March 2006, the Department of Biotechnology announced support schemes for colleges starting biotechnology courses, scholarships for students and postdoctoral fellowships to help increase the pool of qualified manpower in biotechnology. An increase in the return of qualified professionals to India about 40,000 professionals are estimated to have returned over the last five years. The major industry associations the Confederation of Indian Industry (CII) and the Federation of Indian Chambers of Commerce and Industry (FICCI) - have shown greater interest in R&D and innovation by sponsoring studies and events.

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The Future of the Indian Innovation System: Near-term Perspective The recent developments listed above suggest a growing realization that while India may have been able to benefit from the opportunities thrown up by the knowledge economy so far largely due to the large stock of qualified people, further growth will depend on the creation of a supportive policy framework. However, it is an open question as to what extent the governments initiatives will deliver results. This skepticism is prompted by the absence of a systems approach to governments thinking, the governments poor implementation record, and a lack of clarity in governments philosophy. For example, consider the recent special grants announced for universities. The choice of universities has been ad hoc and not specifically linked to their performance; further, there is no process in place to recognize or incentivise universities that improve their quality or to penalize those that do not. Further, though most research in the field suggests that the locus of innovation and technology development should be the firm, the Government of India continues to put its money on the network of government research institutions. Even if laboratories are to form the backbone of the governments strategy, the experience of other countries like Taiwan and China suggests that a more dynamic and purposive governance structure is required to achieve higher levels of performance with clear benefits to the wider economy. The initiatives mentioned above will require sustained financial support from the government. But, economic policy makers in government continue to have the dominant view that governments principal role is to create a conducive climate for business, and that it should not get involved in activities like backing technological development. Social sector programmes for health, primary education and employment will compete for scarce resources. In these circumstances, there is no guarantee that the funds required to support higher education, scientific research, and the creation of innovative capabilities will be forthcoming on a consistent basis. In the absence of a clear philosophy, and a set of coordinated policies across ministries dealing with different subjects, the likelihood of a major transformation of the innovation system in the short run is small. The proportion of GNP spent on R&D will continue to hover around the 0.8% mark. The private sectors share of industrial R&D expenditure will rise slowly. The R&D services export activity is likely to continue to grow at about 30% per year, thus creating a bigger R&D services sector with a larger and deeper workforce. But domestic high technology entrepreneurship will continue to be constrained by the non-availability of seed capital. However, new opportunities will arise if the proposed semiconductor fabrication plant becomes a reality. The Future of the Indian Innovation System: Long-term Perspective If economic growth continues at the present rate, the long-term prognosis of the innovation system is bright. The large number of MNC R&D centres may throw up new entrepreneurs as the years go by. Some among the new set of successful first generation

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entrepreneurs may turn angel investors and venture capitalists.50 Already, there is renewed interest in India from U.S.-based venture capitalists. However, the full potential will be realized only if some key constraints are tackled. The government should move towards making the inception of new high-tech firms easier, reducing their mortality, and facilitating their growth. Some specific steps to facilitate the creation of high-tech firms include seed funding through incubators; allowing scientists and engineers from laboratories and universities to start firms with technologies they have developed; allowing national laboratories (or parts) to morph into industrial units; creating publicly-owned, but privately managed high technology infrastructure in selected industrial parks; making national laboratories and institutional facilities more easily available to small firms; and relaxing collateral requirements for firms. To reduce firm mortality, the government could expand/decentralize government support programmes for technology development and commercialization; allow small firms to bid for research contracts from scientific agencies like DST, ISRO, DRDO; modify public procurement rules to allow short term monopolies on proprietary products; relax prequalification clauses in public procurement; encourage non-resident Indians to start firms in industrial parks; and increase the enforceability of IPRs. Academic and research careers need to become more attractive, mobility between academia and industry easier, and research institutions more accountable for their output. There needs to be a fundamental change in the role of the government in the support of research and higher education. While it should continue to support research and higher education financially, its primary role should be in terms of setting standards and accreditation. Instead, so far, the government has been inclined to protect inefficiency in Indian higher education and restrict supply, rather than promote positive change and growth in a sector that is even more important than energy.51 To prevent the Bangalore Bug, India needs to quickly enhance the availability of skilled resources that are increasingly in short supply. This can be done by removing the barriers that come in the way of Indians and foreigners starting new institutions, improving accreditation procedures, creating new disclosure standards, and allowing government institutions to charge higher fees.52 The government will have to choose between a commitment to existing interests and structures resulting in a slow pace of evolution of the Indian innovation system and a more ambitious process driven by drastic re-structuring of the innovation system. The recent announcements listed in a previous section are more consistent with a gradual change process than a revolutionary one. It is therefore difficult to visualize the emergence of India as an innovation superpower in the next ten years unless there is a dramatic change in the policy environment. Implications for Catch-up In recent years, China appears to have caught up with the developed world in a number of manufacturing industries. Chinas success is based on the Korean model, which itself was based on Japans earlier success. Koreas success was the result of a strategic

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partnership between the state and industry in which national champions were allowed to take on high levels of debt and provided protection but were in return expected to develop a strong export orientation and, later, focus on technology development53. Local firms created an absorptive capacity within themselves, and created technological capabilities through leveraging partnerships with a wide variety of international players. More importantly, the firms did not remain content with absorbing what they learnt from their partners but went on to improve upon these technologies and become global players in their own right54. The Taiwanese story is similar except that large national champions are replaced by networks of smaller companies and a greater role is seen for public sector technology organisations (such as ITRI) in absorbing and diffusing technologies. Common to both Korea and Taiwan is the creation of an institutional capacity to promote the absorption and diffusion of diverse capabilities55. A third variant of this model is that of Singapore which has been able to attract top multinationals to set up manufacturing facilities and hopes to use its Economic Development Board and state-sponsored venture capital to diffuse capabilities to local firms. Mathews and Cho propose that industries having characteristics of rapid turnover of products and high levels of competition, predictability of technology trajectories, availability of product and process technologies, and the availability of leverage tradeoffs are likely to be good candidates for application of the leverage-based approach.56 While the lack of resources could be an impediment to industrialisation and market access could be another barrier, latecomers can have certain advantages as well. For one, they are not locked into existing technologies or different forms of organisational and institutional inertia. Support from the state and the creation of new institutions can help newcomers leapfrog existing players as demonstrated by France and Russia in the nineteenth century.57 Changes in global markets for goods and services also provide opportunities for companies from NICs. As competition has become more intense, there has been strong pressure on companies to focus on those activities that they are best at doing and to outsource all other activities. For example, the shoe company Nike focuses on shoe design and the entire chain of marketing activities in which it believes it can create maximum value. It gets all its manufacturing done by companies in low wage cost economies and only supervises the quality of production. In hyper-competitive conditions, no company can afford to be uncompetitive at any stage of value chain. Firms from NICs have seized this opportunity to become part of the global value chain of buyers. Mathews has sought to identify the process of evolution of latecomer multinational enterprises companies that have in a short span of time established themselves as significant global players in spite of the lack of resources faced by them in their countries of origin.58 Their ability to capitalise on the opportunities offered by globalisation has been enhanced by their willingness to experiment with a number of strategic and

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organisational innovations. According to Mathews, latecomer multinationals are not constrained by the inertia that besets incumbent multinationals. Since they are practically born global they do not have to contend with some of the tricky tradeoffs confronted by the incumbents either, such as those between global integration and local responsiveness. While incumbents are preoccupied with how to protect their competitive position, latecomers are nimble and adaptable at making use of new opportunities, often arising from the same incumbents! Latecomers rapidly create a global presence and then use this presence to gain access to resources they would otherwise not have. While incumbents advantage is built around inimitable resources, latecomers seek out, from the same incumbents, resources that are imitable, substitutable and transferable and use these to build their own resources and competencies. The Indian software story is different from that of the Korean, Singapore or Taiwanese stories. The low cost, high quality customised software development services offered by Indian software services companies have created a win-win situation for their global clients who are under tremendous pressure to keep costs under control and yet exploit the potential benefits of advances in information technology. Strategic innovations include the move into business process outsourcing to secure customer lock-in through better integration with customers global value chains, and organisational innovations the creation of dedicated Offshore Development Centres and, more recently, Proximity Development Centres. Indian software companies also realised early the importance of processes and quality thanks to their interaction with a number of top global multinationals such as General Electric, Citibank and Reebok. They have built further on this client-inspired learning to establish global standards of delivery and quality, confirmed by independent certification. Smaller Indian companies have learnt from the larger ones, though often by imitation and movement of people rather than direct interaction. Indian software companies display the three features of the Mathews model linkage, leverage and learning. However, the linking and learning has been more in terms of process capabilities than in terms of technology. In fact it is a moot question whether Indian software companies can at all be classified as high technology companies. What they have been able to display is the ability to quickly absorb new technologies and ramp-up internal delivery capabilities in a short time to meet customer requirements, and at the same time deliver on-time with a reasonable level of in-built quality. They have proved quite adept at generating business from Fortune 1000 companies.. Thus the Indian software industry model can be described as using cost arbitrage as an entry strategy in an emerging business and opportunistically expanding this business while at the same time building more sophisticated organisational capabilities within. This has been facilitated by the fact that the services model does not involve too many irreversible commitments to investments in areas like research and development or product development and that the basic skills required are fairly generic. The availability of skilled manpower in adequate numbers has been made possible by the growth of the Indian higher education system, particularly in engineering, as mentioned in an earlier section. Also, demand for software services has generally outstripped supply, preventing a downward spiral in rates.

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China, India, and even Korea, have so far failed to catch-up in any science-based, high technology sector. The present trajectory of the Indian innovation system with its declining output in scientific research makes it even more unlikely that India will catchup in new science-based industries such as biotechnology or nanotechnology. The only exceptions may be certain niches (such as the production of bio-generics) where some of Indias distinctive advantages such as a high degree of biodiversity and low labour costs may permit the country to be competitive. Infrastructural constraints may prevent India from catching-up in those industries where large-scale manufacturing and cost efficiencies play a major role, such as those in which China and Korea have succeeded. However, Indias skills and innovation system may be suited to industries where specialized manufacturing based on design and engineering inputs is important or where organizational and managerial innovations are required (such as service industries like back-office operations). Other industries in which clever process innovations need to be combined with managerial capabilities and the ability to innovate around the regulatory system such as generic drugs may also be good candidates to build on the strengths of the Indian innovation system.

Notes & References

Department of Science and Technology (DST), Government of India Research and Development Statistics at a Glance 2004-05, New Delhi: DST, October 2005. 2 India R&D 2005: The Worlds Knowledge Hub of the Future. Background Paper, prepared by Evalueserve for Federation of Indian Chambers of Commerce & Industry (FICCI), p. 6. 3 B. Bowonder, V. Kelkar & N.G. Satish R&D in India. ASCI Issue Paper No. 9, March 2003, Hyderabad: Administrative Staff College of India 4 From CSIR Annual Report 2003-04. Downloaded from Hhttp://www.csir.res.in/csir/external/heads/aboutcsir/annual_report/2003-04/Overview.htmH on 23rd March 2006. 5 See Table 13, p. 9 in B. Bowonder, V. Kelkar & N.G. Satish R&D in India. ASCI Issue Paper No. 9, March 2003, Hyderabad: Administrative Staff College of India 6 See Catalyst man cometh: Interview with Dr. Paul Ratnasamy, Director, National Chemical Laboratory, Pune, The
Times of India, Bangalore edition, November 11, 1999, p. 10 for a critique of the constraints placed by the government on the functioning of national laboratories.
1

See S. Chandrashekar & K.P. Basavarajappa Technological Innovation & Economic Development: Choices & Challenges for India, Economic & Political Weekly, Vol. 36, No.34, August 25, 2001, pp. 3239-3245; and Ashok Parthasarathi Priorities in Science and Technology for Development: Need for Major Restructuring, Current Science, Vol. 82, No. 10, May 25, 2002, pp. 1211-1219. 8 See Rishikesha T. Krishnan Barriers to Innovation & the Creation of a Knowledge Society in India, IIM Bangalore Working Paper No. 243, February 2006. 9 Department of Science and Technology (DST), Government of India Research and Development Statistics at a Glance 2004-05, New Delhi: DST, October 2005, p. 5. 10 Carl Dahlman & Anuja Utz, India and the Knowledge Economy: Leveraging Strengths and Opportunities, Washington D.C.: The World Bank, 2005, p. 60. 11 A report on an Indian portal rediff.com quotes a Times Higher Education Supplement report that the IITs are the worlds third best tech universities. See IITs, Worlds 3rd best tech universities, Downloaded from Hhttp://in.rediff.com/money/2005/oct/10iit.htmH on 23rd March 2006. 12 Revitalizing Technical Education: Report of the Review Committee on AICTE (Chairman: U.R. Rao), Ministry of Human Resource Development, Government of India, September 2003, p. 48.

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Department of Science and Technology (DST), Government of India Research and Development Statistics at a Glance 2004-05, New Delhi: DST, October 2005, p. 3. 14 Professor Goverdhan Mehta, former Director of the Indian Institute of Science. Quoted in Research Booster Plan, Education World, July 2005. Downloaded from Hwww.educationworldonline.netH on 23rd March 2006. 15 David A. King The Scientific Impact of Nations, Nature, Vol. 430, 15th July 2004, Table 1, p. 312. 16 David A. King The Scientific Impact of Nations, Nature, Vol. 430, 15th July 2004, Table 1, p. 312. 17 David A. King The Scientific Impact of Nations, Nature, Vol. 430, 15th July 2004, Table 2, p. 313. 18 See Bhanoji Rao Standards of Teaching and Research in Economics, Economic & Political Weekly, 1st May, 1999; V. Subramanian Doctoral Work in Social Sciences: Some Reflections, Economic & Political Weekly, 16th October 1999; Biswanath Debnath Crisis of Indian Anthropology, Economic & Political Weekly, 30th October 1999; Rajen Harshe & Sujata Patel Identity Politics & Crisis of Social Sciences, Economic & Political Weekly, 8th February 2003. 19 See Rishikesha T. Krishnan Building World Class Universities, Economic & Political Weekly, Vol. 40, No. 7, April 23-29, 2005, pp. 1681-1683. 20 Revitalizing Technical Education: Report of the Review Committee on AICTE (Chairman: U.R. Rao), Ministry of Human Resource Development, Government of India, September 2003, p. 25. 21 Indias audit watchdog, the Comptroller and Auditor General of India audited 171 new institutions set up after accreditation by the All India Council of Technical Education and found that each one of these institutions was deficient on at least one of the pre-requisites (classrooms, basic facilities, library, laboratory equipment, and faculty). See Goswami, U. New engg colleges fail to meet AICTE norms, The Economic Times, Bangalore, May 27, 2003, p. 5. 22 Admissions to engineering colleges and the levels of fees that can be charged are controlled by state governments. The fees are fixed without any reference to the quality of education being offered. The AICTE has three schemes to upgrade infrastructure in engineering colleges: (1) Modernization and Removal of Obsolescence to equip technical institutions, laboratories, and workshops with better infrastructure; (2) a Research & Development Scheme to promote R&D by faculty members; and (3) a Thrust Area Programme in Technical Education to promote research in identified thrust areas. In 2002-03, the total grant released under these schemes was Rs. 351 million (approximately US $ 8 million). But only 11% of this amount went to self-financing colleges. See Revitalizing Technical Education: Report of the Review Committee on AICTE (Chairman: U.R. Rao), Ministry of Human Resource Development, Government of India, September 2003, Chapter 6. In addition, the Central Government (through the Technology Information Forecasting and Assessment Council) has a programme called REACH that part finances the creation of centres of excellence within engineering colleges. 23 Revitalizing Technical Education: Report of the Review Committee on AICTE (Chairman: U.R. Rao), Ministry of Human Resource Development, Government of India, September 2003, p. 77. 24 This figure is for 2002-03 and is from Department of Science and Technology (DST), Government of India Research and Development Statistics at a Glance 2004-05, New Delhi: DST, October 2005. 25 In 2006, the IITs will admit 3,890 students through their Joint Entrance Examination. Computed from Hhttp://www.jee.iitm.ac.in/seats.phpH on 19th March 2006. 26 In 2002-03, IIT Kanpur earned Rs. 302.5 million (about US $ 6.7 million) from sponsored research and Rs. 57.4 million (US $ 1.3 million) from consultancy; in the same year, IIT Madras earned Rs. 180 million (US $ 4 million) from sponsored research and Rs. 66 million (US $ 1.5 million) from consultancy. This data was obtained directly from the two institutes. 27 Source: National Association of Software and Service Companies (Nasscom). Downloaded from Hwww.nasscom.orgH on 25th March 2006. 28 See Rishikesha T. Krishnan, A. Gupta and V. Matta Biotechnology & Bioinformatics: Can India Emulate the Software Success Story? Paper presented at Workshop on the Indian Development Experience, Department of Management Studies, Indian Institute of Science, Bangalore, March 3-5, 2003, and S. Athreye The Indian Software Industry and its Evolving Service Capability, mimeo, Open University, U.K., June 2002. 29 See Rishikesha T. Krishnan The Evolution of a Developing Country Innovation System during Economic Liberalisation: The Case of India, paper presented at the first Globelics conference on Innovation Systems & Development Strategies for the Third Millennium, Rio de Janeiro, Brazil, November 3-6, 2003.

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According to DST statistics, the share of private industry in national R&D expenditure has gone up from 13.8% in 1990-91 to 20.3% in 2002-03. Sunil Mani has argued that if expenditure on R&D in industry is computed as the sum of the expenditure on R&D by public sector enterprises, private enterprises and by government research institutes in areas relevant to industry, then the private sectors share of industrial R&D increased from 41% in 1985-86 to 67% in 1998-99. See Sunil Mani Performance of Indias Innovation System since 1991, paper presented at India-Israel Workshop on Technology Innovation and Finance, Bangalore, February 23, 2006. 31 See Yasheng Huang & Tarun Khanna, Can India Overtake China?, Foreign Policy, July/ August 2003, pp. 74-81 and Rishikesha T. Krishnan Indian Entrepreneurship on a High, The Hindu Businessline, May 29, 2004, p. 4. 32 Carl Dahlman & Anuja Utz, India and the Knowledge Economy: Leveraging Strengths and Opportunities, Washington D.C.: The World Bank, 2005, p. 78. 33 For a summary of the report and a critique, see Rishikesha T. Krishnan, Prescription for 10 Per Cent Growth: Food for Thought, Economic & Political Weekly, March 23, 2002, pp. 1107-8. 34 See Sunil Mani Performance of Indias Innovation System since 1991, paper presented at India-Israel Workshop on Technology Innovation and Finance, Bangalore, February 23, 2006. 35 See B. Bowonder, V. Kelkar & N.G. Satish R&D in India. ASCI Issue Paper No. 9, March 2003, Hyderabad: Administrative Staff College of India, p. 4 36 The R&D intensity of the Indian automobile industry was 0.89% in 2002 and that of the pharmaceutical industry 1.89%. However it is noteworthy that the pharmaceutical industry R&D intensity was just 0.74% in 1998. See B. Bowonder, V. Kelkar & N.G. Satish R&D in India. ASCI Issue Paper No. 9, March 2003, Hyderabad: Administrative Staff College of India, Tables 3 & 4. 37 Carl Dahlman & Anuja Utz, India and the Knowledge Economy: Leveraging Strengths and Opportunities, Washington D.C.: The World Bank, 2005, p. 93. 38 See Rishikesha T. Krishnan Barriers to Innovation & the Creation of a Knowledge Society in India, IIM Bangalore Working Paper No. 243, February 2006. 39 See Department of Scientific & Industrial Research (DSIR), Government of India. Research and Development in Industry: An Overview. New Delhi: DSIR, November 2000. 40 According to sources in the Ministry of Science & Technology, there is pressure from the Audit wing of the government to require collateral security for loans under these schemes. If introduced, this will further bias the schemes against start-ups. 41 See K.M. Gopakumar & Tahir Amin Patents (Amendment) Bill 2005: A Critique Economic & Political Weekly, April 9, 2005 Downloaded from Hwww.epw.org.inH 42 Source: Nasscom. Downloaded from Hwww.nasscom.orgH on 25th March 2006. 43 See B. Bowonder Globalization for R&D: The Indian Experience and Implications for Developing Countries, Interdisciplinary Science Reviews, Vol. 26, No. 3, pp. 191-203, 2001. 44 Source: Nasscom. Downloaded from Hwww.nasscom.orgH on 25th March 2006. 45 A number of prominent companies (foreign and Indian) including Siemens, Biocon, and Wipro have made public announcements that they will not be expanding in Bangalore, the capital of Indias hi tech industry, unless infrastructure is improved. 46 See Rishikesha T. Krishnan Barriers to Innovation & the Creation of a Knowledge Society in India, IIM Bangalore Working Paper No. 243, February 2006. 47 See Raghbendra Jha, Growth, Inequality and Poverty in India: Spatial and Temporal Characteristics, Economic & Political Weekly, March 11, 2000, p. 922. 48 See Raghbendra Jha, Growth, Inequality and Poverty in India: Spatial and Temporal Characteristics, Economic & Political Weekly, March 11, 2000, p. 923. 49 The Indian Institute of Science, Indian Institute of Technology Kharagpur, and Calcutta University are the three Indian institutions listed in Shanghai Jiao Tong Universitys ranking of the top 500 universities in the world. For details, see Hhttp://ed.sjtu.edu.cnH 50 One of the founders of Infosys Technologies, Mr. N.S. Raghavan, has become an angel investor and supported more than 15 new enterprises. 51 Nirvikar Singh The Bottomline on Learning from China, The Financial Express, 23rd March 2006. Downloaded from Hhttp://www.financialexpress.com/print.php?content_id=121290H 52 Raghuram Rajan & Arvind Subramanian India Needs Skill to solve the Bangalore Bug, Financial Times, 17th March 2006. Downloaded from Hwww.ft.comH

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Amsden, A. The Rise of the Rest. New York: Oxford University Press, 2001 Mathews, J.A. & Cho, D-S. Tiger Technology: The Creation of a SemiconductorIndustry in East Asia. Cambridge: Cambridge University Press, 2000. 55 Mathews, J.A. & Cho, D-S. Tiger Technology: The Creation of a SemiconductorIndustry in East Asia. Cambridge: Cambridge University Press, 2000.
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Mathews, J.A. & Cho, D-S.Tiger Technology: The Creation of a Semiconductor Industry in East Asia. Cambridge: Cambridge University Press, 2000. 57 Gerschenkron, A. Economic Backwardness in Historical Perspective. Cambridge: The Belknap Press of Harvard University Press, 1962. 58 Mathews, J.A. Dragon Multinational: A New Model for Global Growth. New York: Oxford University Press, 2002.

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