Innovation In India- Waiting To Get Out Of The Box

Innovation in India- Waiting to get out of the box* Ritka Mankar Indicus Analytics

Introduction If there were two identical nations with the same human and physical resources at their disposal, what would distinguish one from the other is the rate of innovation. The ability to innovate is to be able to translate an original and economically beneficial concept into a commercial reality. Though ‘innovative thought’ is yet to be fully deciphered at the synaptic level and can be deemed exogenous to that extent; undeniably a certain institutional framework can prove facilitative. Innovation works through channels that are transparent and mysterious but its role in economic development cannot be overlooked. Empirical studies expound the role played by new machines, methodologies and technology in increasing output. On the consumption side, new and improved goods and services are constantly redefining utility. Myriad odes have been dedicated to the emergent Indian economy. However no analysis of the growth potential of the Indian economy can be complete without taking into account the contribution of the disguised driver of growth, namely innovation. Innovation in the economic sense refers to the composite process of inventing a ‘new to the world’ product or process (operational or managerial) and hence its successful monetization resulting in value addition. The term new to the world leads to the exclusion of imitation, replication or reverse engineering as a source of innovation. This paper undertakes a SWOT analysis of the Indian Innovation ecosystem after understanding its current status. Though India has an advantage in terms of its strong base, the innovational edifice is yet to be built and reckoned as a force. Current Scenario Unlike other variables like the rate of capital formation or consumption, the rate of innovation in a country cannot be easily quantified. However, several efforts have been made to put a figure on innovation. The ‘Standard & Poor and Business Week Innovation Index’1 2008 rates Apple, Google and Toyota as the top three global innovators. Only one Indian Company features on this index while USA and Japan lead the pack. The ‘Global Innovation Rankings’2 of 132 countries for 1995 published by the World Bank places India at the 82nd slot. A more recent study called the ‘Global Innovation Scoreboard Report’3 compares the innovation performance of 25 European nations to that of other major R&D performing countries in the world. This study places India at the bottom of the list as it falls in the group of ‘lagging countries’. *

Ritika Mankar is a final year MA Economics student at Gokhale Institute of Politics and Economics, Pune, and has interned at Indicus Analytics, New Delhi (www.indicus.net)

However the findings of this study with respect to India are questionable. The innovation rating can be disaggregated into five parameters. Though India’s poor performance on the education front reflects reality; its underperformance in terms of innovation application is particularly dubious. This is because the ‘application’ parameter is judged on the basis of the technology quotient in the manufacturing sector only. This clouds the picture for an economy like India where the ‘services’ industry and innovation there-in has given a major fillip to the growth rate. Given the issues associated with the inappropriate quantification of an innately immeasurable phenomenon, one must rely on qualitative observations. Moreover the measurements mentioned so far have been based on stock variables (like the number of researchers or the number of patent applications in a particular country on a particular date). This paper aims to undertake a forwardlooking analysis of the innovational eco-system in India. The study reveals that things are set to change and at an accelerating pace; as is evident in a number of factors. Advantage India •

Economic System

The early Nehruvian policies with a pungent socialist flavour eventually gave way to the evolution of India into a mixed economy with greater stress on capitalism. Today, the state acts as a referee and occasional monopolist. Market forces and private players are given due respect with the government playing a residual role. In a mixed economy system with a strong capitalistic framework, individual incentive in economic activity keeps the machinery humming. In a strict socialist setup, things are different. Socialism is an economic system that attempts to carry out fishing without the bait in the hope that the fishes will develop apathy for the fisherman. Though a conclusive experiment can never be carried out to prove the superiority of socialism or capitalism, the latter with its focus on individuals and incentives seems more conducive to innovation. 4 Moreover, capitalism frees thought of political perversion. Erstwhile USSR is a classic example5. Though USSR’s breakthrough in terms of space research and technology were significant, politics and research were never separated. For instance the study of cybernetics, chemistry, pedology and psychiatry were banned as ‘bourgeoisie pseudo sciences’ in erstwhile USSR and research in these fields was actively suppressed by the state. A capitalistic framework allows the protagonist of the innovation story i.e. the Schumpeterian 6 entrepreneur to be born. The possibility of an ephemeral monopoly and its associated rents is what inspires a potential entrepreneur. It is important to note that the term ‘entrepreneur’ does not exclude collective effort as that is a case when individual innovators unite or an aspiring innovator promotes a technically competent body to facilitate innovation. •

Competition

Competition is also an important catalyst for innovation. A market structure embodying monopolistic competition where large numbers of firms offer the same but unique product, acts as the appropriate enabling environment for innovation. One would expect perfect competition with a large number of firms producing and carrying out research and development (R & D) on the same product to be the best market structure suited for

innovation. However, there are two problems associated with this setup with respect to innovation. First and foremost, what drives innovation is competition; and in its absence the motivation to better oneself is absent especially when the price system does not reward. This is much like the problem associated with a socialist economic system. Secondly, even if perfect competition were to exist, it is to a large degree futile due to the parallel7 and exact nature of individual firms’ efforts. A monopoly is inappropriate from the social welfare point of view but at the same time the absence of regulations that allow a brief monopoly can act as a major deterrent to innovative activity and the assumption of business risk. As Schumpeter put it ‘what drives the entrepreneur is the want to prove oneself superior to others’. The New Economic Policy of 1991 marked the opening-up of the Indian economy and ‘competition’- the main driver of innovation arrived in India. Today the Indian economy has emerged as a competitive and globally competent market economy. On one hand the Indian government strives to perform the balancing act of a ‘strong but limited state’ and on the other hand, the invisible hand’s reign is substantially free. According to a survey carried out by the National Knowledge Commission (NKC)8 in 2007 innovation has occurred as a response to specific problems or challenges thrown up by the market or competitors as observed by 65% of large firms and 83% of small and medium enterprises (SMEs) of their sample consisting of 52 large and 78 SMEs respectively. The role of competition in innovation inducement is evident in the fact that areas where India’s global competency lies (pharmaceuticals, biotechnology, information technology software and IT-enabled services) are also the most innovative sectors. This is reflected by the fact that these sectors are the most active in patent application and accounted for more than 80% of applications in the fiscal year 2007-08. It is important to note at this juncture that the relationship between innovation and competition flows both ways. Competition necessitates innovation and innovation enables the establishment of a competitive economic system. Problem areas •

Innovation finance

‘Capital is nothing but the lever by which the entrepreneur subjects to his control the concrete goods which he needs, nothing but a means of diverting the factors of production to new uses or of dictating a new direction to production’, said Joseph Schumpeter. Indeed, innovation finance is like water to a germinating seedling. Its presence is invigorating and absence, terminal. Innovation finance can be private or governmental. Private innovation finance could be via the capital market route or venture capital. The problem in India begins at the stage before the conception of the innovation with the abysmal availability of seed finance. India’s R & D spending as a percentage of GDP is a mere 0.8% as compared to an average of 3.0 % by developed countries9. Consequently, India suffers from a tremendous R & D infrastructure deficit.

On the whole, the scant venture capital and private equity availability is biased towards the later stages of the project i.e. after the seed, early and growth stages10. Inadequate funding at the foundation stages can lead to the improper development or the termination of an innovation. Raising debt or equity in the capital market is not a feasible option for SME’s given the cost of the public issue and the risk of under-subscription11. A problem common with this route as well as venture capital is the informational asymmetries which make the financier less keen on the project than the promoter. Another dampener is the low bargaining power of the promoter as against the financier, as a result of the deficient supply of venture capital. Though there are more than 150 venture capital funds operating in India, innovation funding is heavily biased in favor of information technology and information technology enabled services. Due to the demand-supply mismatch of venture capital only sectors with proven competencies receive finance while other potentially profitable ideas are nipped at the bud. Regional concentration of venture capital funds in Mumbai, Bangalore and Delhi is also a deterrent to the commercialization of a business idea. An underdeveloped bond market along with the absence of long term finance leads to the demise of long term projects. The state has so far played a supportive role towards the growth of innovation finance as is evident in the availability of a host of fiscal incentives and programmes to promote private R & D. However state action has been behind the curve and what is required is a pro-active approach. The government needs to facilitate an innovation finance supply rise directly or indirectly by leading the private sector to do the same. •

Regulatory framework

Institutional economics dictates that the strength and maturity of a particular institution is dependent upon the strength and maturity of auxiliary institutions. This explains the underdevelopment of the innovation system in India which can be associated with its weak patenting regime. The findings of the NKC reinforce the fact that innovation is positively impacted by the protection of the firm’s intellectual property. The problem in India is two-fold. There is a need to overhaul the IPR related regulations as well as its redressal mechanism. Also, the Indian patenting machinery needs to be made more efficient by increasing the number of qualified examiners as well as generating a comprehensive on-line database. A comparison with the Chinese patenting regime can be instructive in this regard. The Chinese patenting office receives seven times more applications than its Indian counterpart. Domestic companies account for the lion’s share of the total patent applications in China as opposed to India where they constitute a minority. Though absolute variations between the two countries could be discounted to an extent by the fact that China is a much larger economy, the fact remains that India lacks a vibrant innovation environment on account of legal issues. The process of patenting, the cost of maintaining a patent and its protection is a far superior affair in China. Beauty lies in the eye of the beholder and the current scenario can be perceived as a stumbling block or a stepping stone. The Indian state offers reasonable macroeconomic stability, freedom and in principle promotes innovation. A raw but potentially powerful institutional setup is evident. Though the regulatory framework protecting Intellectual Property Rights or IPR is

nascent, the seeds of activism have been sown. India’s want to match international standards is evident in its membership to bodies such as the WTO and the fact that it is a signatory to the Trade Related Intellectual Property Rights (TRIPS). The pending ‘India Innovation Act’ is modeled along the lines of the ‘USA Competes Act’ which formalizes the mandate of increasing research investment; strengthening education opportunities and developing an innovation infrastructure. Conclusion The need to ponder and act over ‘innovation’ stems from the fact that it is a dark-horse in the running and can provide a radical impetus to growth. According to the NKC survey of 2007, innovation has a significant impact on the firms’ ability to increase market share, competitiveness, profitability and reduce costs. Over the last 5 years more than 75% large firms and more than 55% SMEs surveyed conformed to this fact. As expounded earlier, there is a mutual relationship between the rate of innovation and the degree of competition. Thomas Edison quipped ‘To invent, you need a good imagination and a pile of junk’. One can always argue that ‘need is the mother of innovation’ but the fact remains that a rich R & D infrastructure, innovation finance, patenting laws and the consequent innovation culture can do wonders to the rate of innovation in a nation. One often comes across media splattering stories of incredible innovations in the remotest parts of India, which never see the dawn of commercialization due to inadequate means. The entrepreneur spirit and innovation engine of India is ready and revving to go, all it needs is a car. It is said that NASA spent $11 million developing the zero-gravity capable Space Pen, while the Russians decided to use pencils.The common urban legend could be entertained as a fable with an important moral. A suitable institutional setup can facilitate innovations but is not a pre-requisite. As grave as India’s innovation ecosystem’s deficits sound, there is a silver lining to this dark cloud. India is blessed with a sound economic system that enshrines a competitive and reasonably fair private sector with a nurturing government founded on principles of freedom, democracy and secularism. Moreover, signs of governmental recognition of the pivotal role of innovation are evident in the mention of the NKC recommendations in the Budget Speech of 2008-09. Rs.100 crore has been allocated towards the creation of the National Knowledge Network which will inter-connect all knowledge institutions through an electronic digital broadband network. The need of the hour is a pragmatic and hard-hitting national innovation policy. The government needs to install incentive mechanisms as well as actively work towards the creation of an enabling environment for Innovation in India to be able to realize its true potential.

References 1. Global Innovation Index , Standard & Poor/Business Week, 2008 2. Global Innovation Rankings ,World Bank , 1995 3. Hollanders, Hugo and Arundel, Anthony 2006, Global Innovation Scoreboard Report

4. Terborgh , George W , 1950 , Capitalism and Innovation, The American Economic Review 5. Country Studies, 2005, A Country Study: Soviet Union (Former), The Library of Congress 6. Joseph A, Schumpeter , 1969 , The Theory of Economic Development , Oxford University Press 7. Loury, Glen C , 1979 , Market Structure and Innovation , The Quarterly Journal of Economics 8. Innovation in India , 2007 , National Knowledge Commission, India 9. Financial Express , March 2008 , India lags China in R & D Spending, India 10. Unleashing India’s Innovation , World Bank ,2007 11. Indian Planning Commission , Technology, Innovation and Venture Capital, 2006