Indian Innovation System Before and after Economic Liberalization

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1 Indian Innovation System Before and after Economic Liberalization Varun Aggarwal MIT India Reading Group Dec 22, 2006

2 Sources R. T. Krishnan, The Evolution of a Developing Country Innovation System During Economic Liberalization: The Case of India, First Globelics Conf., Nov. 2003

3 Past and Future Protected Economy (Before 1991) Progress in strategic sectors like Space Research and Atomic energy Not in industrial sector, why? Economic Liberalization (After 1991) Effect on innovation system

4 India s Economic Policy (<1991): Public Sector Self Reliance: Broad production base Inefficient attention to efficiency and productivity Public Sector: 2/3 of fixed capital investment in factory Not high growth: cost and time overruns, high costs, lack of tech dynamism

5 Private Sector (<1991) Private Sector trends: How effect innovation? Tight regulations on inward capital flow, expansion, diversification, imports Regulated technology imports: progressive indigenization Physical constraints on imports and high import duties Industrial Licensing: Barrier to Entry Constraint on growth Encouragement to small-scale: Imitative products, economic benefits No incentive to grow Why would a company innovate?

6 Govt. Research (<1991) 80% of total research in govt labs Strategic Sector: Leaders in devloping nations Energy Defense Space Research 40 CSIR labs (Council of Scientific and Industrial Research) Not much tech transfer Effort in 1970 s to reform, didn t work. C-DOT in 1980s: Tech. for small digital electronic telephonic exchange, Successful Clear Objectives Requisite resources, considerable flexibility Visionary leadership (?)

7 Higher Tech. Edu. (<1991) IITs and RECs (Now NITs) at Central Level State-level govt. funded colleges of engineering Limited private colleges IITs: Good faculty, good students Good but not outstanding Research; Limited interaction with industry IIT graduates: Limited opportunities to use knowledge in industry Emigration/Research Labs/Management

8 Post 1991: Reforms Industrial policy statement of Govt. of India, 1991: A few statements associated with innovation injecting the desired level of technology dynamism in Indian industry development of indegeneous competence for effective absorption of foreign technology Hope that greater competitive pressure will also induce our industry to invest much more in research and development than they have been doing in the past"

9 Post 1991: Reforms Most industries don t require industrial licensing Lowering Bar to Entry Automatic approval to FDI in many industries Physcial constraints (?) on imports removed and duties lowered. Restriction on tech. import removed Extend to states: Infrastructure generation Removal of barrier to use of land Env. Clearances and local taxation reforms Inter-state competition.

10 Post 1991 reforms: Boon or Curse for innovation? Is it Decline and subordination by interests of centre i.e. MNCs OR Benefit from more FDI, innovation in local industry to survive competition

11 Post 1991: Relative growth and size of sectors Service Industrial Agriculture (%) Growth Growth (%) Manufacturing growth: India: 6.8% China 12.8% Malaysia: 11.2%

12 Post 1991: FDI Stats Actual flow: Rs. 1157B (~ $30B), less than 10% that of China

13 Post 1991: FDI Stats Actual flow: Rs. 1157B (~ $30B), less than 10% that of China 1/3: Power Sector

14 Post 1991: FDI Stats Actual flow: Rs. 1157B (~ $30B), less than 10% that of China ½: Telecom 1/6: Computer Services

15 Innovation: Govt Support Before liberalisation, Support to private research: Recog. Of R&D in company simplified imports for capital goods and others. Income tax concessions Post Liberalization: Various programs with goals: Support absorption of imported tech. Develop and demonstrate indegenous tech. Indiv. Innovators to tech. based enterpreneurs Commercialize indegenious techs. Collaboration between tech. institutions and industrial enterprises Specific programs targetted at drug development and instrumentation Industry involvement and spin-offs in atomic energy and space prog. (govt.) New Millenium Indian Technology Leadership Initiative

16 Innovation: Govt programs

17 Innovation: Govt programs

18 Innovation: Govt programs 2002: 25 projects completed 7 commercialized 7 in process 6 couldn t be commercialized 5 never to be commercialized

19 Innovation: Govt programs

20 Innovation: Govt programs

21 Innovation Expenditure not much inc. rising Research Intensity is 0.52% What is research intensity?

22 Other govt. measures Included tax breaks for R&D expenditure Exemption of excise duty for products developed indigenously with patents E.g.: R&D exp. 100% deductible from taxable income E.g. Company with principle objective R&D is exempt from IT for 10 years E.g. Custom and excise duty exemption

23 Liberalization: Effect on innovation in different sectors Manufacturing Service Research Labs and Higher Education

24 Effect of liberalization: Manufacturing Change in behavior Aimed at higher growth and return Increased scale of operation Diversification: new products and markets Expanded geographical base Sharing of tangible and intangible resources among divisions and business units Consultancy from big Intl firms

25 Manufacturing: Some success stories Tata Iron and Steel No. 1 in Intl survey of steel makers (2001) Historical and location adv Low cost iron ore and coking coal 10 years of internal reforms Flatter structure, in-house fabrication, increased raw material consumption efficiency Sundaram Clayton TVS Motor Company

26 Manufacturing: Innovation Tata Motors Passenger cars in 1990 s Launch of Indica Indica sold as Rover in Europe Mahindra launched Scorpio TVS Motor Company: Joint between TVS Group and Suzuki Motor Company Launched Victor, 600,000 sales Demonstrates production, investment and innovation capability

27 Manufacturing: Innovation Pharmaceutical Companies: High performers 1/3 of 2002 production of 5.2B exported : 3 pharma companies in top 10 highest US patents by Indian company Average R&D intensity is 2% Joint R&D with MNCs, licensing, sponsored research, intl marketting Dr. Reddy s Laboratory R&D firm launched in 1992 Invested Rs 1.12B over 8 yrs Filed 55 US patents, 19 granted, Total Revenue of $8M upto June 2001 Licensed 3 molecules to foreign drug firms Others: Ranbaxy, Cipla, Wockhardt, Sun Pharma

28 Manufacturing: Innovation Big Picture Total factor productivity (?) declined in first have of 1990 Labour productivity 15% of global level What differentiates successful from nonsuccessful? Family run businesses Access to latest tech. more difficult. MNCs don t license any more.

29 Research Labs & Higher Edu.: Innovation CSIR 310 (133) Indian patents vs. 120(76) in (38) Intl patents in vs. 11(0) patents in Rs 2040M ext. cash flow: Rs. 370M from private ind. And Rs. 150M from foreign sources NCL, National Chemical Labs: 90% of US patents of all CSIR

30 IITK: Innovation

31 IITM: Innovation

32 Left-over Service Sector Software industry Role of MNCs Innovation and Learning Other dimensions Engineering Education Entrepreneurship Conclusive Remarks Future

33 Follow up Rest of the present paper Compare to other countries? Research in IITs, IIScs, RECs How these schemes have worked?

GLOBALISATION IN INDIA - GATEWAYS AND PITFALLS

GLOBALISATION IN INDIA - GATEWAYS AND PITFALLS International Journal of Management (IJM) Volume 7, Issue 1, Jan-Feb 216, pp. 132-14, Article ID: IJM_7_1_14 Available online at http://www.iaeme.com/ijm/issues.asp?jtype=ijm&vtype=7&itype=1 Journal Impact