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July 17, 2013

Development Strategy

Towards 2050: Technological Dynamism

By Nitin Desai

  

Sustaining high growth will require three things – continued outward orientation so that we do not slip into stagnation behind protective walls, promoting a competitive environment locally so that successful companies outpace laggards and technological dynamism. 

This technology factor is perhaps the most important as it underlies the other two.  Maintaining outward orientation requires both productivity improvements and innovation which is directly connected to technological capacity. It also matters for maintaining a competitive environment as firms must move from competing for regulatory leverage (which is the case still, despite liberalisation) to competing for markets and capital market presence and that too depends on a firm’s perceived technological capacity.

Indian industry has done well in terms of reverse engineering, cost cutting and efficient project implementation.  But as we look to 2050 this will not be enough. An industrial sector that is 20-30 times larger than at present will be one of the largest in the world and it cannot count on easy access to foreign technology. More than that, its presence in global markets will require innovation that goes beyond cost cutting as it progresses to middle income status and beyond. One must also recognise that a growing Indian market will require locally relevant products, processes and business models.

Innovation gives firms a first mover advantage that can create new markets at home and abroad. One saw this in the role that innovation in consumer electronics and fuel efficient cars played in Japan's high growth phase.  The spin off effects on the wider economy from major innovations can run deep. The classic example is the role of Internet innovations in creating hundreds of thousands new jobs, initially in the USA and later the world over. A more diffuse impact can come from the boost to overall growth because of faster productivity gains.

The big question is how this transition from an imitative to an innovative industrialisation can be fostered.  At present India spends about 0.9% of its GDP on R & D which is well below the level in developed countries and even in China.  In absolute terms our expenditure on R & D is about a fourth of what China spends. About two-thirds of this expenditure is by the Government and only a third by the private sector.  If one looks at the list of the 1500 corporations that account for some 90% of global R & D expenditure only 15 Indian companies figure in it, the highest ranking one, Infosys, being placed at 330.  About half of the 15 are pharma companies and only 2 are from the public sector.

This has to change. With the sort of commitment that the Government is now showing the challenge is not funds for publicly financed R & D.  The real challenge is to broaden and widen the private sector commitment, forge closer links between S & T policy and industrial policy and address the human resource needs.

Many foreign companies have set up R & D facilities here partly because of the generous incentives and partly because of the lower cost of personnel. Indian corporates have shown some interest in expanding their R & D presence lately and this can be seen in the acquisition of foreign companies that provide access to R & D.  For instance the Tata acquisition of Corus gave them the rights to 80 patents and some 1000 researchers.  But inorganic growth is not enough; organic growth in corporate R & D is necessary. Competitive pressures will increase the pressure to invest in R & D. But something more than relying on the natural evolution from imitation to innovation will be required. 

The main instrument we use at present for stimulating R & D in the private sector is the tax incentive.  The economic case for this is that study after study has shown that the social returns to R & D, mainly on account of the spill over effects, is much larger than the private returns and a tax subsidy helps to close the gap. The present incentive is the most generous in the world allowing a 200% write off of current expenses and equipment costs from the year’s profits. There is no case for increasing this though some tweaking to make it more directed may be useful, for instance by linking the incentive not just to the level but also the growth in R & D expenditure. 

One instrument that can be used is the public procurement programme, defence purchases in particular. For this the defence services will have to recognise that sometimes the “immediate threat” argument for imports must give way to the need to build an indigenous defence industry. No country has become a great power on the strength of imported arms. This move towards developing an indigenous defence industry in the public and private sector has started; but much more needs to be done to push it further.

The Government spends a fortune supporting publicly funded R & D in CSIR institutes, science and technology institutes and elsewhere. We must connect these research institutions with industrial research by setting up a commercial arm in each one to mobilise industrial support for institutional R &D, package consultancy services of research staff for providing services to industry, incubating start-ups by research staff and commercialising in-house technology developments.

Innovation is as likely to come from small start-ups as from large corporates. We need an ecosystem for venture capital connecting technologists, entrepreneurs and early stage investors to provide a funding window for start-ups that experiment with new products, processes and business models. A deeper capital market with private equity players and low cost listing for small companies will help.

Finally we need to make research jobs more attractive so that more post graduate students come from the universities.  Today some 75% of engineering graduates end up doing low skill jobs in the IT sector. To some extent an expansion in corporate interest in R & D investment will help to correct this.  But the Government also needs to do much more in improving the quality of science and technology education.

Our corporates must recognise that they have at best a decade before their access to foreign technology on the cheap dries up and if they have not established their own R & D capacities at home they will perish.

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