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Innovation in the time of slowdown

January 21, 2009 11:20 IST
A recent study has given India a poor ranking in a global innovation league table.  Different rankings, not just by different organisations but in sequential studies by the same organization, are not comparable but the broad message is indisputable.

Given its emerging economic size and stock of soft resources, India is a laggard when it comes to innovation.

This inadequacy matters more during an economic downturn (during a boom growth comes easily) and the combination of IT skills and low innovation score gives it the persistent image of a technical sweat shop.

To get the innovation agenda right it is necessary foremost to get rid of a few misconceptions.

Often, spending on R&D is used as a proxy for innovation effort. R&D spend is only a part of the story. In particular, R (research) is somewhat remotely connected with innovation, the linkage with D (development) being stronger.

The classical example of this is Britain in the last century, high on R (scientific discovery) but low on D or innovation. There is as yet no sign that the US will in this century give up its global innovation lead which was only briefly challenged by Japan in the eighties.

In the current economic scenario the innovation and economic strength of Germany appears considerable and in the near future the three are likely to have to share the high table with Korea and Israel.

The big issue is who among the other three - Brazil (India buys VIP jets from Embraer, a Brazilian company), China and India - will join the high table and in which order. Currently there is no dispute that India is third among the three.

For a society to be innovative it must have several things that make up an innovation ecosystem. The most deep-rooted element in this is cultural - is a society hierarchical and risk-averse or not?

Japan's hierarchical society is currently giving way and it has never been risk-averse. Indian society has also been hierarchical but loosening up, and contrary to another misconception, is not risk-averse. It has had several entrepreneurial traditions which have thrived on risk-taking.

What is more, in the last sixty years it has been powerfully innovative through the reverse engineering route. What the Indian mindset does lack is the ability to tolerate failure.

There is also a reluctance to sell and exit a business, unlike in the Silicon Valley model where technology startups often set out with the clear goal of taking the development upto a point and selling out for a good gain. Indians' risk-taking entrepreneurial drive was clearly visible in the expansion plans and acquisitions that marked the boom years.

This recent experience provides a useful backdrop for an understanding of what are the missing elements in the current innovation ecosystem. One is the innovation agenda in Indian firms.

Interestingly, two automobile firms come to mind foremost - Tata Motors with its Nano and the Mahindras with the succession of product upgrades leading upto the recent launch of Xylo, a multi-utility vehicle, with the US market in mind.

These can be considered as firms which have adopted an innovation agenda along well-defined lines - the way other firms have done elsewhere.

On the other hand, the innovation traction of India's IT firms has been generic, somewhat instinctive and maybe even part happenstance. Indian IT firms have discovered the offshored development model but they never quite set out to do so.

Having stumbled upon it, they of course thereafter went about innovating processes that have enabled them to keep raising productivity despite rising wage costs. But Indian IT firms are not really innovation-driven, as a study by the Boston Consulting Group for Nasscom has determined.

Their innovation profile in most cases is loosely managed and they measure innovation sporadically, if at all. On the other hand, it is widely agreed that innovation holds the key to getting out of linearity (effort multiplied by wage rate) and insulates, to the extent possible, against the cyclical nature of business.

Innovation is also the cornerstone on which an IT product business is built. The key driver for this is the technology startups, as in Silicon Valley, and for them to sprout early stage funding is vital.

The long-term shortage of this has been partly mitigated by the arrival of venture capital funding in India in the last few years. But funding for the truly early stage of business, upto the proof of concept stage, remains a largely missing element.

Typically, such funding is channelled through successful technology entrepreneurs who have existed at a profit and now wish to invest their capital in newer ideas. This is by definition a second generation phenomenon. It is the last generation's successes who become the next generation's 'angels'.

This brings us to another element in the ecosystem which is still largely missing - the academic institutions, the MITs and the Stanfords - whose corridors the angel investors stalk in search of ideas to support.

In India, clusters like Bangalore and Hyderabad have come up without the core educational institutions.

This gap links up with another key ecosystem gap - the beneficial rope of government which has to fund institutions with a strong research agenda, provide seed capital for startups, provide the infrastructure and be the driver for clusters.

The conventional wisdom after the 1980s Sematech experiment in the US failed to meet the Japanese semiconductor challenge was that governments are no good in promoting industry-level innovation.

But the success of the intergovernmental effort Eureka in the European Union is seeking to rewrite the rules for the role of government. Both Europe and Israel offer successful models that need to be studied to arrive at the role of government in India to support innovation.

Subir Roy
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