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. India’s most significant achievements have been in the broad realm of human resource development. But translation of these capabilities into products and services that can

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

India created a network of engineering education institutions starting in the late 1950s.S. inappropriate choices of priority areas. they were granted 276 U. 3 .S. However.S. While the CSIR laboratories were granted just 25 U.5 Organizationally.4 In the same year. 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 CSIR was granted 191 U. There are other problems related to the government’s direct involvement in research and development. as do other government laboratories. the Indian Institutes of Technology (IITs). 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. it is commonly accepted that the CSIR’s performance is driven by a group of around 8 – 10 of its laboratories.7 and sub-optimal funding hamper the effectiveness of government investments in R&D. patents between 1996 and 2002. and the University of Roorkee was upgraded into the seventh IIT a couple of years ago. and emphasizes procedures over results. 13 institutions of national importance and 16. Most firms preferred to source their technology as tried and tested packages from foreign sources.885 colleges offering higher education in the country. CSIR’s external earnings amounted to Rs.87 billion (approximately US $ 64 million). 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 government’s budget allocation. Prior to economic liberalization. India has one of the largest stocks of scientists. As a result. attrition (particularly among young scientists and engineers) from the government laboratory system is high. engineers and technical personnel in the world. the CSIR faces many challenges.6 Long decision cycles. The government R&D system.3 In 2003-04.8 Strength #2: Large Education Capacity with Several World-class Institutions India has 302 universities/deemed universities. Five IITs were set up in the 1950s and 1960s. patents. patents granted to Indians in India. 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. 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. a sixth IIT in the late 1980s. The best known of these. patents between 1991 and 1995. 2.S.9 Thanks to this large education network. patents granted to the CSIR in 2002 went to just three laboratories. Almost 70% of the U.S. particularly the CSIR. The government does not give enough flexibility to organizations under its control.changes in products without government permission. constituting 69% of the U.10 In parallel with the creation of the R&D institutional base. provide world-class engineering education11 though their research output is not on par with top engineering schools in the United States.

“there has been a complete neglect of research culture in universities.as in the government R&D sector. and a weak accreditation system.2% of the national R&D expenditure in 2002-03.24 The high quality end of the engineering education sector has problems of its own as well. and many of the colleges lack basic infrastructure or adequate qualified faculty.12 Weakness #2: Quality of the Higher Education System While the higher education system is broad in scale and scope.16 Among the 31 countries accounting for 98% of the world’s most cited scientific publications. there were 1.”14 In spite of the large size of India’s R&D and higher education sectors.25 Expanding the present institutes further may not be possible due to constraints of infrastructure and faculty .600 students every year. failure to recruit faculty.32% in 1993-97 and 0. India accounted for only 2.54% in 1997-2001.17 The crisis in the state of the sciences in the universities is matched by an equally serious one in the social sciences.15 India’s share of highly cited scientific publications was 0. but the gap is difficult to bridge and such upgraded institutions will take a long time to equal the quality of the 4 .19 There is little doubt that the rapid expansion of engineering education capacity has taken place without much attention to quality. A recent report of a government committee noted that “barring some exceptions.Since the early 1990s. there is a shortfall at least 18.13% for the period 1997-2001. there has been an explosion in the private provision of engineering education.18 The university system has been adversely affected by inadequate funding. by 2003. The IITs currently constitute only a little over 1% of the undergraduate engineering education capacity. 30 on citation rate per paper. there is scant regard for maintenance of standards. In 1990 there were 337 institutions offering formal degree-level engineering education in India admitting 66.21 The existing policy environment offers few incentives to engineering colleges to upgrade their quality.23 However the actual number of PhD’s in Engineering created per year is small – two-thirds of the 6. The higher education system accounted for just 4. faculty salaries at the IITs are capped by civil service guidelines. its research output is poor. India ranks No.721 students.714 science and technology doctorates produced in the country are in the sciences.000 engineering teachers with PhD’s and 20.000 with master’s qualifications.22 If teacher qualification and teacher-student norms of the AICTE were to be applied uniformly.26 they are still highly dependent on the government for their funding. Though the IITs have increased their earnings through sponsored research and consultancy. political interference.208 engineering colleges with an intake of 359. The result is that the engineering graduates from a large majority of these private engineering institutions have to be re-trained by employers.”20 The accreditation process of the All India Council of Technical Education (AICTE) is weak.13 According to a prominent member of a task force set up by the government to look at basic scientific research in India’s universities. The Government has initiated a programme of upgrading select technological universities to IITs.19% of the world’s scientific publications in 1993-97 and this declined to 2.

new giants have emerged as companies like Infosys Technologies (computer software). Tatas.2 billion in 20040527 and in the process became the largest constituent of India’s export basket. and have been the winners of top quality awards like the Deming prize. Using cost arbitrage as an entry strategy in an emerging business. and with a healthy growth rate in manufacturing. Indian information technology and software exports grew from US $ 3. While the opportunity arose from the global trend towards outsourcing and the quest of large companies for cost efficiencies. Perhaps the most creditable achievement of India in recent years has been the creation and growth of an export-oriented software industry. Several companies have demonstrated major increases in productivity. the Indian economy has maintained a growth rate in excess of 6% since economic liberalization began.28 The Indian pharmaceutical industry has been another high performance industry. Among the ten entities based in India with the largest number of US patents during 1996-2001 are three Indian pharmaceutical companies. 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 the Mahindras) who have multi-billion dollar business empires. at the same time building more sophisticated organizational capabilities within. licensing of new discoveries to MNCs. Post-liberalization. sponsored research projects at national laboratories with government support. The government has also been reluctant to give the existing IITs the autonomy to chart their own future. the ability to develop and successfully manufacture new products. All these businesses have grown substantially and profitably even though they compete with several of the world’s largest multinational corporations. Propelled by a boom in services.29 The share of the Indian private sector in industrial 5 . the Birlas. About one-third of its 2002 production of $5. Joint R&D initiatives with multinational drug 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%. India has several large business houses (like the Ambanis (Reliance). Ranbaxy (pharmaceuticals). and at the same time ensure on-time delivery at an acceptable level of quality.4 billion in 1999-2000 to US $ 12. they opportunistically expanded their business.original IITs. 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. 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.2 billion was exported to other countries. and Bharti (telecommunication services) have grown into billion dollar-plus businesses.

lack of sophisticated local market demand. lack of the right people and skills. almost 89% of Indian companies did not report any spending on R&D. there are constraints on academic professionals starting their own firms. in aggregate terms. the government recognized the importance of industrial research and development more than three decades ago.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. Even in the era of tight industrial regulation. and the 6 . Established companies are reluctant to make significant investments in genuinely innovative R&D. though even these industries have R&D intensities that are low by international standards.35 Much of the visible innovation is in the pharmaceutical and automobile industries. Though there are several small technology firms. Further. barriers to movement from academia/research institutions to industry and back. while the most efficient companies operate at world-class efficiency levels.38 Strength #4: Government Recognition of the Importance of Industrial R&D In principle. companies could take a 100% write-off on R&D expenditure in the year the expenditure was incurred. and inadequate government support (see Weakness #4 below). This is due to many factors – attractive employment opportunities with salaries increasing 25% yearon-year. absence of seed capital and venture capital support.37 there is no critical mass of dynamic small firms that could form the bedrock of a strong technological capability.34 In the year 2001-02.R&D spending has been rising slowly but steadily.the number of technology transfer agreements signed by Indian companies for import of technology has declined from 661 in 1991 to 307 in 2002. a scheme of recognition of “in-house R&D units” allowed easy import procedures for equipment and consumables used in research and development.30 There is thus clear evidence that Indian entrepreneurial talents are alive and well.33 Efforts to upgrade indigenous technologies through imports show a downward trend . a perception of loss of control by owner-managers in issues related to technology development.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. In many industries. Organizational barriers to innovation include a lack of ambition and vision at the top. inadequate investment in plant and machinery.36 High growth sectors such as software are not really high tech as they spend only about 1% of their sales on R&D. India is considered to be at the low end of dynamic technology adopters. and inadequate infrastructure for incubation and product development and testing. and hierarchical structures. though there is a growing R&D services sector that provides R&D support services to companies in the international market.

A weighted tax deduction of 125% is allowed for sponsored research in approved national laboratories and institutions of higher technical education. A company whose principal objective is research and development is exempt from income tax for ten years from its inception. 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. Japan and any country of the European Union. While TePP provides small grants to individual innovators. the other schemes essentially offer low cost loans to industry for the development.domestic patent law encouraged Indian firms to find new process routes for existing drugs. 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. there were no government schemes that provided financial support for R&D by private industry. However. TDB and NMITLI schemes is of the order of just US $ 30 million per year and this support is spread too 7 . the government has created schemes for the financial support of local industrial research and development. The HGT and PATSER schemes explicitly encourage industry to work with national laboratories or science/engineering education institutions to adapt. Specifically39. prior to 1991. HGT. Programme Aimed at Technological Self Reliance (PATSER). the Home Grown Technologies Programme (HGT). Prominent among these are the Technopreneur Promotion Programme (TePP). PATSER. Both revenue and capital expenditure on R&D are 100% deductible from taxable income under the Income Tax Act. The scale and scope of the schemes and programmes to support industrial R&D remain small. Accelerated depreciation is allowed for investment in plant and machinery made on the basis of indigenous technology. the United States. Weakness #4: Limited Impact of Government Support Programmes Government policy initiatives in India are plagued by implementation problems and the government’s initiatives in the arena of science and technology are no exception. scaling-up and commercialization of industrial technologies. The total outlay of the government on the TePP. 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. improve and implement technologies developed by the latter. Customs and excise duty exemptions for capital equipments and consumables required for R&D. and the Technology Development Board (TDB). 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. Since 1991.

The TDB’s single largest project is a rare outright grant to a civil aircraft development project of the National Aerospace Laboratories. 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. 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. In fact some of the most prominent recipients of support under these schemes have been large companies such as Tata Consultancy Services (India’s largest software company). Even this amount is tightly controlled by a centralized bureaucracy in Delhi and difficult to access by small firms spread all over the country. Around 230 multinational corporations have set up R&D centres in India. a constituent of the CSIR. and Tata Motors. India seems well positioned to take advantage of the accelerated pace of the internationalization of R&D. both Indian companies and multinational corporations are expected to step up R&D investments.43 A number of Indian firms 8 . 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. 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. the Indian political establishment has consistently expressed confidence in the Indian scientific establishment. (However it remains to be seen how well IPR protection will be enforced on the ground. senior scientists have access to the government. With this framework in place. and the Scientific Advisory Council to the Cabinet.41) With a strong human resource base.42 with about 77 companies setting up directly-owned subsidiaries between 1998 and 2001 itself. 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.thin.40 Strength #5: Influence of Scientists in Policy-making Cutting across political lines. 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. both part of the highly profitable Tata conglomerate. Through bodies such as the Scientific Advisory Council to the Prime Minister (SAC-PM). and how the government addresses the ambiguities in the new law that have already been pointed out.

The main benefits of foreign R&D investments to the country seem to be in the area of human resource development. Of course. and intolerance of failure. what is evident is that the software development work undertaken by multinationals in India is largely for their global operations or products. the Indian employees enhance their technical skills and sometimes their general management skills.6 billion in 2003-04. As a result. catering. The sensing of the market. a hesitation to specialize. Corruption is likely to dissuade capable entrepreneurs from starting new enterprises. and is not specifically targeted at Indian applications.45 Decades of poverty and under-development have led to a number of societal barriers to innovation. Weakness #6: Low Magnitude of Spillovers of Foreign R&D Investment So far. etc. It is not clear to what extent this software development involves significant research. 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.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. Unless the poor urban infrastructure in the major locations of industry is addressed quickly.) that is created by the investment. for obvious reasons. much of the investment in “R&D” by foreign companies has been in the area of software. there is likely to be a slow down in foreign investment. These include an ambivalent attitude towards knowledge. utilities. Some preliminary indicators suggest that inequality has reduced in the states reporting fast economic growth. the local economy gains from the taxes paid by employees and the demand for local services (cleaning. These are compounded by disturbing signs of a declining respect for diversity and dissent. It is widely believed that there is a link between corruption and the poor quality of the new engineering education infrastructure. a “knowing-doing gap”. 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.47 However.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. development or innovation content. the divergence 9 . a static view of technology. and grew at 44% over the previous year.46 The distribution of the benefits of the growth of the economy and its impact on addressing poverty are not yet clear. However. 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.

improve the management of institutions generating Intellectual Property. 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. India may well have a world-beating innovation system. IISc is one of only three Indian universities/institutions ranked among the top 500 in the world. The faster growth in services is likely to accentuate the urban-rural divide and create problems of inequity. - - 10 .48 There are increasing concerns that the benefits of liberalization should be more widespread and that economic growth should be more inclusive. Recent Developments To predict the future trajectory of the innovation system. and automobile components. it is useful to track the new policy initiatives and other developments in the recent past that have implications for the Indian innovation system. the Ministry of Human Resource Development of the Central Government set up a task force on basic scientific research in universities. The Central Government budget for 2005 announced a grant of Rs. 6 billion (approximately US $ 130 million) per year of which two-thirds is to be spent on infrastructure development. These concerns will help social cohesion and stability. The rural economy is the source of livelihood for about two-thirds of India’s population. improve protection of IPRs. If this confidence is channelized into addressing the weaknesses mentioned above. 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. promote knowledge creation in S&T laboratories.49 In March 2005. Manufacturing is more conducive to growth in rural employment and has greater spillovers to the economy than services. and a quarter on setting up ten networking centres in the basic sciences. 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 India’s success in several industries such as software.across states in the incidence of rural poverty has increased since economic liberalization began. The diffidence of the past is slowly disappearing. and promote knowledge applications in agriculture and industry. 1 billion (about US $22 million) to the Indian Institute of Science (IISc) at Bangalore to help its upgradation into a world-class university. Industry and agriculture account for 22% and 25% respectively. The report of the task force (accepted by the government) has recommended spending an amount of Rs. pharmaceuticals. Another concern is that the Indian economy is dominated by services (accounting for about 53% of GDP).

a major grant to buy a new research ship for the Antarctic research programme. (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. The Government has invited applications from educational institutions and other local bodies to help decentralize the TePP that gives grants to individual innovators. In October 2005. the Department of Biotechnology announced support schemes for colleges starting biotechnology courses. India signed an agreement with another country (Israel) to support industrial R&D cooperation between companies in the two countries. probably in Hyderabad. scholarships for students and postdoctoral fellowships to help increase the pool of qualified manpower in biotechnology.have shown greater interest in R&D and innovation by sponsoring studies and events. The major industry associations – the Confederation of Indian Industry (CII) and the Federation of Indian Chambers of Commerce and Industry (FICCI) . In March 2006. 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. For the first time. Announcement of a national programme for nanotechnology development with a budget of about $ 220 million spread over five years. 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. An increase in the return of qualified professionals to India – about 40. The same budget also set aside about US $40 million to set up a new drug research centre. again in Chennai). a major site of India’s green revolution in the 1960s and 1970s.- The Central Government budget for 2006 announced special grants to the historically important Bombay (Mumbai). and enhanced funding for NMITLI. Funds will also be provided to set up new science institutes at Kolkata and Pune. followed by strong indications that a semiconductor manufacturing facility will come up in the country.000 professionals are estimated to have returned over the last five years. - - - - - - - - - 11 . Calcutta (Kolkata) and Madras (Chennai) universities and to the Punjab Agricultural University.

8% mark. Some among the new set of successful first generation 12 . there is no process in place to recognize or incentivise universities that improve their quality or to penalize those that do not. In these circumstances. thus creating a bigger R&D services sector with a larger and deeper workforce. and that it should not get involved in activities like backing technological development. though most research in the field suggests that the locus of innovation and technology development should be the firm. economic policy makers in government continue to have the dominant view that government’s principal role is to create a conducive climate for business. Even if laboratories are to form the backbone of the government’s strategy. The private sector’s share of industrial R&D expenditure will rise slowly. the government’s poor implementation record. The choice of universities has been ad hoc and not specifically linked to their performance. it is an open question as to what extent the government’s initiatives will deliver results. primary education and employment will compete for scarce resources. However. The R&D services export activity is likely to continue to grow at about 30% per year. But domestic high technology entrepreneurship will continue to be constrained by the non-availability of seed capital. Social sector programmes for health. and the creation of innovative capabilities will be forthcoming on a consistent basis. The proportion of GNP spent on R&D will continue to hover around the 0. Further. the likelihood of a major transformation of the innovation system in the short run is small. 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. further. new opportunities will arise if the proposed semiconductor fabrication plant becomes a reality. and a set of coordinated policies across ministries dealing with different subjects. 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.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. and a lack of clarity in government’s philosophy. The Future of the Indian Innovation System: Long-term Perspective If economic growth continues at the present rate. consider the recent special grants announced for universities. For example. This skepticism is prompted by the absence of a systems approach to government’s thinking. The initiatives mentioned above will require sustained financial support from the government. there is no guarantee that the funds required to support higher education. In the absence of a clear philosophy. However. scientific research. the Government of India continues to put its money on the network of government research institutions. further growth will depend on the creation of a supportive policy framework. But.

allowing scientists and engineers from laboratories and universities to start firms with technologies they have developed. making national laboratories and institutional facilities more easily available to small firms. ISRO. encourage non-resident Indians to start firms in industrial parks. modify public procurement rules to allow short term monopolies on proprietary products. improving accreditation procedures. 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. Korea’s success was the result of a strategic 13 . To reduce firm mortality. China’s success is based on the Korean model. which itself was based on Japan’s earlier success. reducing their mortality.S.” 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. relax prequalification clauses in public procurement. the government has been inclined to “protect inefficiency in Indian higher education and restrict supply. DRDO. but privately managed high technology infrastructure in selected industrial parks. mobility between academia and industry easier. allowing national laboratories (or parts) to morph into industrial units. and facilitating their growth.”51 To prevent the “Bangalore Bug. there is renewed interest in India from U. creating publicly-owned. and research institutions more accountable for their output. creating new disclosure standards.-based venture capitalists.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. and allowing government institutions to charge higher fees.entrepreneurs may turn angel investors and venture capitalists. Instead. its primary role should be in terms of setting standards and accreditation. The government should move towards making the inception of new high-tech firms easier. allow small firms to bid for research contracts from scientific agencies like DST. While it should continue to support research and higher education financially. China appears to have “caught up” with the developed world in a number of manufacturing industries. the full potential will be realized only if some key constraints are tackled. and relaxing collateral requirements for firms. Some specific steps to facilitate the creation of high-tech firms include seed funding through incubators. There needs to be a fundamental change in the role of the government in the support of research and higher education. Implications for Catch-up In recent years.50 Already. the government could expand/decentralize government support programmes for technology development and commercialization. Academic and research careers need to become more attractive. so far. However. and increase the enforceability of IPRs. rather than promote positive change and growth in a sector that is even more important than energy. The recent announcements listed in a previous section are more consistent with a gradual change process than a revolutionary one.

availability of product and process technologies. there has been strong pressure on companies to focus on those activities that they are best at doing and to outsource all other activities. no company can afford to be uncompetitive at any stage of value chain. 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. For example. Local firms created an absorptive capacity within themselves. Common to both Korea and Taiwan is the creation of an institutional capacity to promote the absorption and diffusion of diverse capabilities55. It gets all its manufacturing done by companies in low wage cost economies and only supervises the quality of production.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. they are not locked into existing technologies or different forms of organisational and institutional inertia. and the availability of leverage tradeoffs are likely to be good candidates for application of the leverage-based approach. For one. the shoe company Nike focuses on shoe design and the entire chain of marketing activities in which it believes it can create maximum value. More importantly. As competition has become more intense. 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.56 While the lack of resources could be an impediment to industrialisation and market access could be another barrier. 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. focus on technology development53. In hyper-competitive conditions. 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 right54.58 Their ability to capitalise on the opportunities offered by globalisation has been enhanced by their willingness to experiment with a number of strategic and 14 . latecomers can have certain advantages as well. and created technological capabilities through leveraging partnerships with a wide variety of international players. later. predictability of technology trajectories.57 Changes in global markets for goods and services also provide opportunities for companies from NICs. 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. Mathews and Cho propose that industries having characteristics of rapid turnover of products and high levels of competition.

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. 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. However. Also. such as those between global integration and local responsiveness. preventing a downward spiral in rates. confirmed by independent certification. They have built further on this client-inspired learning to establish global standards of delivery and quality. 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. 15 . latecomers are nimble and adaptable at making use of new opportunities. resources that are imitable. the linking and learning has been more in terms of process capabilities than in terms of technology. The Indian software story is different from that of the Korean.organisational innovations. Indian software companies display the three features of the Mathews model – linkage. While incumbents are preoccupied with how to protect their competitive position. demand for software services has generally outstripped supply. According to Mathews. Proximity Development Centres. substitutable and transferable and use these to build their own resources and competencies. though often by imitation and movement of people rather than direct interaction. While incumbents’ advantage is built around inimitable resources.”. as mentioned in an earlier section. Singapore or Taiwanese stories. more recently. particularly in engineering. The availability of skilled manpower in adequate numbers has been made possible by the growth of the Indian higher education system. 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. and organisational innovations the creation of dedicated Offshore Development Centres and. The low cost. Citibank and Reebok. from the same incumbents. Smaller Indian companies have “learnt” from the larger ones. latecomers seek out. 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. 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. They have proved quite adept at generating business from “Fortune 1000 companies. and at the same time deliver on-time with a reasonable level of in-built quality. Since they are practically “born global” they do not have to contend with some of the tricky tradeoffs confronted by the incumbents either. latecomer multinationals are not constrained by the inertia that besets incumbent multinationals. Strategic innovations include the move into business process outsourcing to secure customer lock-in through better integration with customers’ global value chains. leverage and learning.

No. 10 for a critique of the constraints placed by the government on the functioning of national laboratories. 2001. Krishnan Barriers to Innovation & the Creation of a Knowledge Society in India. 8 See Rishikesha T. 10.: The World Bank. Kelkar & N. Director. However. India. prepared by Evalueserve for Federation of Indian Chambers of Commerce & Industry (FICCI). 2 India R&D 2005: The World’s Knowledge Hub of the Future. 7 16 . Basavarajappa “Technological Innovation & Economic Development: Choices & Challenges for India. Paul Ratnasamy. such as those in which China and Korea have succeeded. pp. 36. 60. 1 See S. V. 48. p.China. 5. New Delhi: DST. 9. 5 See Table 13. Satish R&D in India. World’s 3rd best tech universities. Chandrashekar & K. high technology sector. 3239-3245. 9 Department of Science and Technology (DST). No. pp. Bangalore edition.csir. p.” Downloaded from Hhttp://in. Washington D.G. Hyderabad: Administrative Staff College of India 6 See “Catalyst man cometh: Interview with Dr. March 2003. Rao). 6.com quotes a Times Higher Education Supplement report that the IITs are the world’s third best tech universities. 9. New Delhi: DST. National Chemical Laboratory. Hyderabad: Administrative Staff College of India 4 From CSIR Annual Report 2003-04. 9 in B.P.R. p. 2005. Notes & References Department of Science and Technology (DST). Vol. November 11. 1211-1219. September 2003. 12 Revitalizing Technical Education: Report of the Review Committee on AICTE (Chairman: U. 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.rediff. October 2005.htmH on 23rd March 2006. have so far failed to “catch-up” in any science-based. India’s 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). October 2005. India and the Knowledge Economy: Leveraging Strengths and Opportunities. V. 11 A report on an Indian portal rediff. IIM Bangalore Working Paper No.G.34.” Current Science. March 2003. Bowonder.C. 82. Ministry of Human Resource Development. August 25. Satish R&D in India.” Economic & Political Weekly. and Ashok Parthasarathi “Priorities in Science and Technology for Development: Need for Major Restructuring. The only exceptions may be certain niches (such as the production of bio-generics) where some of India’s distinctive advantages such as a high degree of biodiversity and low labour costs may permit the country to be competitive.in/csir/external/heads/aboutcsir/annual_report/2003-04/Overview. p. ASCI Issue Paper No. p. 1999. 243. Government of India Research and Development Statistics at a Glance 2004-05. 2002. February 2006. May 25. Background Paper. See “IITs. Bowonder. 10 Carl Dahlman & Anuja Utz. 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. Downloaded from Hhttp://www.” The Times of India. p.htmH on 23rd March 2006.com/money/2005/oct/10iit. Kelkar & N. and even Korea. Infrastructural constraints may prevent India from catching-up in those industries where large-scale manufacturing and cost efficiencies play a major role. 3 B. Government of India. Government of India Research and Development Statistics at a Glance 2004-05.res. Vol. Pune. ASCI Issue Paper No.

28 See Rishikesha T. and workshops with better infrastructure. 15th July 2004. p. 3. June 2002.phpH on 19th March 2006.3 million) from consultancy. 430. pp. Government of India Research and Development Statistics at a Glance 2004-05.” mimeo. Rio de Janeiro. Matta “Biotechnology & Bioinformatics: Can India Emulate the Software Success Story?” Paper presented at Workshop on the Indian Development Experience. The AICTE has three schemes to upgrade infrastructure in engineering colleges: (1) Modernization and Removal of Obsolescence to equip technical institutions. 24 This figure is for 2002-03 and is from Department of Science and Technology (DST). p. In 2002-03. p.” Economic & Political Weekly. But only 11% of this amount went to self-financing colleges.” Economic & Political Weekly. New Delhi: DST. October 2005. Biswanath Debnath “Crisis of Indian Anthropology..” Nature. 302.R. Downloaded from Hwww. the IITs will admit 3. Ministry of Human Resource Development. Table 2. See Goswami. Brazil.” Economic & Political Weekly. V. 13 17 . Bangalore. 2003. Department of Management Studies. 27 Source: National Association of Software and Service Companies (Nasscom). 25. U. 66 million (US $ 1. 20 Revitalizing Technical Education: Report of the Review Committee on AICTE (Chairman: U. the total grant released under these schemes was Rs. 2003.in/seats. 15th July 2004. 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. See Revitalizing Technical Education: Report of the Review Committee on AICTE (Chairman: U.7 million) from sponsored research and Rs. p. Krishnan. Government of India Research and Development Statistics at a Glance 2004-05. 57.netH on 23rd March 2006. laboratory equipment. April 23-29. Quoted in “Research Booster Plan. Government of India. The fees are fixed without any reference to the quality of education being offered.” Education World.” The Economic Times. 7. Table 1. September 2003. In addition. laboratories. 77. 29 See Rishikesha T. “New engg colleges fail to meet AICTE norms.ac. Athreye “The Indian Software Industry and its Evolving Service Capability. Government of India.” paper presented at the first Globelics conference on Innovation Systems & Development Strategies for the Third Millennium. Vol. 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. 21 India’s audit watchdog.nasscom. September 2003. 19 See Rishikesha T. October 2005. Gupta and V. 16th October 1999.K. May 27.R. July 2005. and faculty). p. 18 See Bhanoji Rao “Standards of Teaching and Research in Economics.iitm. 16 David A. Downloaded from Hwww. p.890 students through their Joint Entrance Examination. A.” Economic & Political Weekly. Rajen Harshe & Sujata Patel “Identity Politics & Crisis of Social Sciences. King “The Scientific Impact of Nations. Vol. 25 In 2006.orgH on 25th March 2006. Krishnan “Building World Class Universities.jee. 312. Government of India. 8th February 2003. basic facilities. library. Ministry of Human Resource Development. Open University. 15th July 2004. March 3-5. 1681-1683. September 2003. 5. 2003. in the same year. and (3) a Thrust Area Programme in Technical Education to promote research in identified thrust areas. 313. 30th October 1999. Table 1. Indian Institute of Science. Rao). Chapter 6. p.” Economic & Political Weekly. and S.” Nature. 17 David A. 2005.4 million (US $ 1. Vol. No. Vol. IIT Madras earned Rs. New Delhi: DST.5 million (about US $ 6. 430. 23 Revitalizing Technical Education: Report of the Review Committee on AICTE (Chairman: U.” Nature. 26 In 2002-03. 180 million (US $ 4 million) from sponsored research and Rs. November 3-6. 430. This data was obtained directly from the two institutes. 14 Professor Goverdhan Mehta. Ministry of Human Resource Development. Computed from Hhttp://www.5 million) from consultancy. 15 David A. Rao). former Director of the Indian Institute of Science. 40. King “The Scientific Impact of Nations. 1st May. King “The Scientific Impact of Nations. (2) a Research & Development Scheme to promote R&D by faculty members.Department of Science and Technology (DST). Subramanian “Doctoral Work in Social Sciences: Some Reflections. 1999. Bangalore. 312. U.R. IIT Kanpur earned Rs. 351 million (approximately US $ 8 million).educationworldonline. 22 Admissions to engineering colleges and the levels of fees that can be charged are controlled by state governments. Rao). Krishnan “The Evolution of a Developing Country Innovation System during Economic Liberalisation: The Case of India.

Bowonder. 41 See K.inH 42 Source: Nasscom. 1107-8.74% in 1998. See B. 43 See B. 2000.” The Financial Express. Washington D. India and the Knowledge Economy: Leveraging Strengths and Opportunities. 3. Krishnan. Hyderabad: Administrative Staff College of India. pp. For details.3% in 2002-03. 2000. 44 Source: Nasscom. ASCI Issue Paper No. 46 See Rishikesha T. and Calcutta University are the three Indian institutions listed in Shanghai Jiao Tong University’s ranking of the top 500 universities in the world. 93. then the private sector’s share of industrial R&D increased from 41% in 1985-86 to 67% in 1998-99. Vol.According to DST statistics. 2005 Downloaded from Hwww.” Economic & Political Weekly.” paper presented at India-Israel Workshop on Technology Innovation and Finance. Bangalore. March 11. 48 See Raghbendra Jha. has become an angel investor and supported more than 15 new enterprises. p. IIM Bangalore Working Paper No. 4.” Foreign Policy. 47 See Raghbendra Jha. the share of private industry in national R&D expenditure has gone up from 13. 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.orgH on 25th March 2006. 39 See Department of Scientific & Industrial Research (DSIR).nasscom.: The World Bank.89%. 243.epw. February 2006.ft. July/ August 2003. V.nasscom. Kelkar & N. Satish R&D in India. 2005. March 11. However it is noteworthy that the pharmaceutical industry R&D intensity was just 0. Research and Development in Industry: An Overview. “Growth. Krishnan “Indian Entrepreneurship on a High.com/print. p. 40 According to sources in the Ministry of Science & Technology. February 23. Washington D. Indian Institute of Technology Kharagpur.: The World Bank.org. pp.C.orgH on 25th March 2006. “Growth. March 2003. 2006. Bowonder. 2001. V.financialexpress. Mr. and Wipro have made public announcements that they will not be expanding in Bangalore. 45 A number of prominent companies (foreign and Indian) including Siemens.” paper presented at India-Israel Workshop on Technology Innovation and Finance.S. 2005. 38 See Rishikesha T. see Rishikesha T. Government of India. 191-203. 74-81 and Rishikesha T.89% in 2002 and that of the pharmaceutical industry 1. Raghavan. p. 9. March 2003.” Economic & Political Weekly. Tables 3 & 4. March 23. 2004. 32 Carl Dahlman & Anuja Utz. 23rd March 2006. unless infrastructure is improved.comH 30 18 . See Sunil Mani “Performance of India’s Innovation System since 1991. N. Downloaded from Hwww.” Financial Times. 33 For a summary of the report and a critique. February 2006. “Prescription for 10 Per Cent Growth: Food for Thought.C. 34 See Sunil Mani “Performance of India’s Innovation System since 1991.” Interdisciplinary Science Reviews. see Hhttp://ed. pp. Inequality and Poverty in India: Spatial and Temporal Characteristics. 922. Inequality and Poverty in India: Spatial and Temporal Characteristics. Biocon.sjtu. 17th March 2006. India and the Knowledge Economy: Leveraging Strengths and Opportunities. the capital of India’s hi tech industry. Satish R&D in India. 9. there is pressure from the Audit wing of the government to require collateral security for loans under these schemes. April 9. this will further bias the schemes against start-ups. 2006. 2002.edu. 31 See Yasheng Huang & Tarun Khanna. 4 36 The R&D intensity of the Indian automobile industry was 0. p.php?content_id=121290H 52 Raghuram Rajan & Arvind Subramanian “India Needs Skill to solve the Bangalore Bug. “Can India Overtake China?. IIM Bangalore Working Paper No. 37 Carl Dahlman & Anuja Utz. 923. 26. 49 The Indian Institute of Science. Downloaded from Hwww. If introduced. Downloaded from Hwww. p.” The Hindu Businessline.cnH 50 One of the founders of Infosys Technologies. p. 35 See B.G.M.” Economic & Political Weekly. Hyderabad: Administrative Staff College of India. Krishnan Barriers to Innovation & the Creation of a Knowledge Society in India. November 2000.8% in 1990-91 to 20. New Delhi: DSIR. Bangalore. No. February 23. 243. Bowonder “Globalization for R&D: The Indian Experience and Implications for Developing Countries. ASCI Issue Paper No. 51 Nirvikar Singh “The Bottomline on Learning from China.G. May 29. private enterprises and by government research institutes in areas relevant to industry. Kelkar & N. Downloaded from Hhttp://www. 78. Krishnan Barriers to Innovation & the Creation of a Knowledge Society in India. Gopakumar & Tahir Amin “Patents (Amendment) Bill 2005: A Critique” Economic & Political Weekly.

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