“India can’t make it to the top ranks among innovative nations.” This was the pessimistic forecast I heard from a middle-aged entrepreneur who is setting up a high technology manufacturing company in India at a Confederation of Indian Industry innovation conference last week. In the past, when I expressed similar sentiments, this triggered heated discussions about the definition of innovation. Many people have also asked me how can India not be considered innovative when our people come up with so many creative solutions to the myriad problems they face?
Innovation = Technological Innovation
Some insights into the reasons behind this polarized debate between those who think India is innovative and those who think it’s not came from a wonderful conference on innovation, intellectual property and competition (IIPC) organized by the Indian Institute of Management Bangalore (IIMB) recently. Top economics scholars at the conference pointed to the significant contribution of technological change to the growth of the world economy over the last century. Providing the complementary argument at the firm level, strategy guru David Teece underlined the importance of intangible assets and dynamic capabilities (such as the ability to continuously create new technologies and products) for sustained competitive advantage.
In short, in the scholarly world, innovation is practically equated with technological innovation as far as economic progress is concerned. And, there is a premium on big-ticket innovation, the kind that is often called radical or disruptive. In this perspective, incremental innovation like process improvements can help you move closer to the technology frontier but is unlikely to help you make what economists call supernormal profits.
So far, I guess we would all have to agree that Indian companies have stayed quite some distance away from such radical technological innovation.
Does Absence of Technological Innovation Matter?
But, some would argue that Indian companies have done quite well so far without taking on the risks inherent to big-ticket innovation. When the Indian economy opened up 25 years ago, there were dire predictions about the future of Indian industry. Yet, Indian companies have survived, and many of them have even prospered without making large irreversible investments in technological innovation.
At least in some industries though, the limitations of failure to invest in the development of technology are now becoming apparent. The chief executive of a large Indian company which is a leader in its domain recently told me that it’s becoming more and more difficult to source technology from other leaders in their field as they used to do in the past. These companies are essentially their largest competitors, and with the Indian market becoming one of the largest in this space, they would rather have a direct slice of the pie than earn limited income through royalties from licensing technology. This Indian company is now scrambling to strengthen its technological capabilities but faces an uphill task.
India’s stand at the Paris Climate Change talks shows that our failure to develop “clean” technologies is clearly preventing us from taking on more aggressive emission control targets.
But, there are differences across industries. One possible reason why Indian companies have gotten away without significant investments in technology is that hardly any of them are in technologically advanced industries like semiconductors or nanotechnology. But this also means that we are losing out on the huge growth opportunities such industries represent.
In other industries—the motorcycle industry is a good example—technology is available from third parties or can be integrated from small vendors as companies like TVS and Hero MotoCorp have demonstrated. But, this approach is expensive and leaves you vulnerable as an important dimension of your competitive advantage lies with someone else.
Innovation and Capital Markets
Interestingly, some large companies have realized the importance of technological innovation and are investing relatively quietly in this area. Reliance is a case in point.
This rectitude about investing in technology may seem strange. But there is a reason for this. The Indian capital markets have not gained the sophistication to appreciate the value of technological innovation that is manifested in the company as intellectual property (IP) assets. As Kiran Mazumdar-Shaw of Biocon told the IIPC at IIMB, “Indian investors don’t buy into IP. Why are you wasting so much money on R&D, on IP, they ask.”
This underlines the fact that while most discussion on innovation in India focuses on the supply side (availability of risk capital, our education system, etc.), as I wrote in my book From Jugaad to Systematic Innovation: The Challenge for India, the demand side is critical too—competition, growth opportunities, and both customers and markets valuing innovation are needed for significant innovation to happen.
Kiran Mazumdar-Shaw made a couple of other important points in her talk. One is that our IP filings are not commensurate with India’s talent. As a result, India ranks 131 out of 180 countries on IP. Taking a closer look at our filings, cutting-edge patents are few and far between.
The second is that economic growth in India was based on mimicking others, reverse engineering was considered the way to go. Her implication was that we have not outgrown this paradigm.
This raises an interesting question. After all, starting with reverse engineering is not unusual. Japan did that, so did Korea and, more recently, China. But, all of them moved on to embrace innovation after two or three decades. (Admittedly, China is a work in progress, but there are many signs that China is serious about this shift.) Why is India an exception?
There are many possible explanatory factors including the high cost of capital, the absence of a “thick” environment that facilitates collaboration with academia and research institutes, and protection from competition. But the more important reasons could be issues related to ownership and control, aspiration and capabilities.
Indian Conglomerates and Technological Innovation
As Kiran Mazumdar-Shaw remarked at the IIPC, “Large Indian conglomerates have never invested in innovation in a big way.”
To my understanding, this is because the owners of India’s conglomerates have never had deep expertise or interest in technology. They have, with a few well-known exceptions, never had the aspiration to be technological leaders, and never made the sustained investments required to develop internal capabilities. They have preferred the steady returns of financial services or hospitals to the risky path of innovation in new drugs. They have made big-ticket investments in innovation only when the owners themselves have been willing to roll up their sleeves and work in the trenches like an Anand Mahindra or a Ratan Tata.
In the final analysis, India’s failure to build high-level innovation capabilities is a failure of entrepreneurship and leadership. It’s increasingly apparent that we will need a new generation of tech-savvy firms to change this. Entrepreneurs reading this article—are you ready to take up this challenge?