India’s Innovation System: Achievements, Challenges and Opportunities Presentation at Asian Science and Technology Forum Innovative India and the United States Carl J. Dahlman Georgetown University December 5, 2006 [Do not circulate without Author ’ s permission]

Structure of Presentation  India in the Global Stage  India in the Global Knowledge Economy  Achievements  Challenges  Opportunities  The Indian Economy  Stylized Structure  Productivity Differentials  Sources of Technology  The Indian Innovation System  Formal foreign Innovation Inputs  Informal foreign innovation inputs  Formal domestic innovation effort  Informal domestic innovation effort  The Indian S&T System  Organization  Main Players  Scorecard Comparison with China and US  Summary and Conclusions

India’s Position on the Global Stage  17 percent of the world’s population  11 th largest economy in the world in 2004 (using nominal exchange rates)  But only 1.7 percent of the world’s GDP  And only 0.8 percent of world trade  Faces increased competition from China and other countries

The Four Pillars of the Knowledge Economy Education Innovation Information Infrastructure Economic and Institutional Regime EIR provides incentives for the efficient creation, dissemination, and use of existing knowledge An educated and skilled population that can use knowledge effectively Innovation consisting of organizations that can tap into the stock of global knowledge, assimilate and adapt it and create local knowledge To facilitate the effective communication, dissemination, and processing of information. Knowledge Economy Framework Interconnected Interdependent

Knowledge Assessment Methodology  KAM: 80 structural/qualitative variables to benchmark performance on 4 pillars  Variables normalized from 0 (worst) to 10 (best) for 128 countries   Basic scorecard for 14 variables for two points in time, 1995 and most recent  Knowledge economy index (KEI) which includes 3 variables for each of the four pillars: economic and institutional regime, education, innovation and ICTs.

India, China and US Most 1995 (weighted)

India, China and US Most Recent (weighted)

India, China and US Most Recent (un weighted)

Deterioration in India’s Relative Overall Global Position in Knowledge Economy

India In Global Innovation Index (weighted)

India In Global Innovation Index (un weighted)

India's Achievements  India has made tremendous strides in its economic and social development in the past two decades.  Average growth of GDP  :6.0%  %  Last 3 years8.0%.  Such sustained acceleration needed to provide opportunities for India’s growing population and its even faster-growing workforce.

Real GDP Projections

India’s Strengths  Large large domestic market  Young and growing population  Critical mass of educated and skilled English speaking knowledge workers  Strong public and private R&D infrastructure  Strong science and engineering capabilities centered on pharmaceutical and software areas

India’s Strengths-2  Becoming world ’ s service center for software development, and back office offshore sourcing  Becoming host for R&D centers by MNCs  Network of successful Indian Diaspora in US, Europe and Asia, providing access to markets, technology, finance  Relatively deep financial markets  Strengthening export orientation and seeking strategic alliances

India’s Challenges-1  Large and rapidly growing population  1,080 million  Av. Annual growth rate :1.7% actual :1.4% estimated  Low average educational attainment  Illiteracy of 52% for women, 27% for men  4.8 Av. years of education for adults  Low per capita income  $620 — 159 th in world

India’s Challenges-2  Over regulated economy  Poor physical infrastructure  Electricity  Roads, ports, and airports  Competing in very demanding global economy with rapidly changing windows of opportunity

A Special Window of Opportunity  India has important window of opportunity to undertake key reforms to leverage its strengths  Has all the critical ingredients--what is holding it back is itself  Needs to leverage its strengths to improve competitiveness and improve well being of its people  Time is of the essence  Choices matter © K4D, WBI

India’s Choice Set in Determining Future Growth Path

Stylized Structure of Indian Economy

Structure of Employment

Labor Productivity

Productivity Dispersion

Productivity Calculations

Sources of New Technology

Innovation in the Context of a Developing Economy  Innovation in developing country should not be confined to pushing back the global technological frontier but also as adopting products, processes, business and organizational models that are new to the domestic environment

Assessment of Indian Innovation System

Comparisons on Acquiring Knowledge

Low Exploitation of Global Knowledge  Analysis  Low Share of Merchandise Trade in GDP: just 25% vs. av of 38% for low income, 58% for lower middle income 60% for China  Low FDI — just 0.7%. Of GDP av FDI inflows ( ) 3.4% for Brazil; 1.9% for Russia, 5.1% for China  Low Absorption of Global knowledge- large informal/subsistence economy  Recommendations  Continue to liberalize trade and FDI  Tap Indian Diaspora  Reduce bureaucracy and corruption  Improve infrastructure  Improve av. educational attainment of population

Indian R&D Expenditures Over Time as % of Indian Gross National Income

India’s R&D Effort in Global Context

Formal Innovation Inputs & Outputs BrazilRussiaIndiaChinaKoreaMexico Researchers in R&D (2003)59,838487,477117,528810,525151,25427,626 Researchers in R&D/million population (2002) , Total expenditures on R&D as % of GDP (2002) Estimated spending on R&D in US billions in ,7054, ,57213,8722,740 Scientific and technical journal articles (2001) 7,20515,84611,07620,97811,0373,209 Millions of R&D$/ Scientific and tech articles* Scientific and technical journal articles/million population. (2001) Patent applications granted by USPTO (2004) Billions of R&D$/patent granted* Patent applications granted by USPTO/million pop. (2004) Manufactured trade as % of GDP (2003) High technology exports as % of man. Trade (2003)

Low Total R&D Expenditure  Analysis  Indian Expenditures on R&D averaged 0.8% of GDP for last 15 years, other developing countries have been increasing share==China as gone from 0.7% in 1995 to 1.4% in 2004  Total Indian expenditures =just 1% of global R&D expenditures, less than total R&D spending of major multinationals  70% of R&D is undertaken by government and bulk of that is on mission programs  Recommendations  Increase public R&D expenditures (but improve allocation and efficiency first--see below)  Get private sector to invest more in R&D (see below for how)  Integrate public and private efforts more into global R&D system [International R&D Fund ala BIRD}

Low Productivity of Public R&D  Analysis  Bulk of public R&D in defense, space, and oceans with little commercial spill over  Main emphasis has been on production of academic papers, relatively little focus on patenting and even less on taking it to the market  Recommendations  Reallocate more funding from defense, space and oceans to more pre-commercial and social areas  Put in place clearer legal, institutional and incentive regime to produce and commercialize knowledge relevant to India ’ s needs [Bayh Dole type legislation]  Strengthen monitoring and evaluation mechanisms Learn from systems in place in US, and other advanced countries Strengthen training in research management in domestic institution Send specialists for training in foreign universities, R&D agencies, labs, and firms  Create special pro-poor innovation fund

Low Private Domestic R&D efforts  Analysis  Only 800O firms in formal sector do any R&D  R&D heavily concentrated in large firms  Fiscal incentives not used much  MNCs may be doing more R&D than domestic private sector  Why isn ’ t domestic private sector doing more R&D?  Recommendations  Support greater R&D effort by private domestic firms Not clear that fiscal incentives have produced much additionality Expand matching grant schemes –Scaled up SPREAD for individual firms or consortia –Scaled up NMITLI for targeted niche projects to attain global leadership  Develop a greater culture of R&D as a business  Subsidize scientists and engineers working for domestic firms  Strengthen Grass Roots Innovation Fund Honeybee and Gians Tepp type program to support innovators in small towns and rural areas

Very little R&D by Universities  Analysis  Very small share of universities in R&D efforts  Few technical publications or patents except for IITs and IIsc  Little incentive for professors to patent or do consulting for real sector  Recommendations  Pass Bayh Dole type legislation to make it legal for universities (and public labs) to commercialize R&D and provide supplementary income to professors and researchers  Develop competitive matching grant fund for research by universities NSF type competitive fund for researchers, with transparent peer review Expanded NMITLI, advanced technology program  Upgrade virtual research network infrastructure  Increase supply of high quality scientists and engineers

Little Interaction Among Firms, Universities, Research Institutes,  Analysis  Little mention of collaboration in firm interviews  Few jointly authored papers  Little mobility of personnel among three institutions  Recommendations  Provide matching funds for collaborative projects involving at least two types of partners Like programs in European Union US: Advanced technology program, SBIR  Facilitate mobility of scientific and technical personnel among three types of institutions  National entrepreneurship fund for stimulating problem solving in civil society

What to do About R&D by MNCS?  Analysis  Positive Externalities Training Indian scientists and engineers Providing demonstration effect  Negative Externalities Tapping India ’ s most valuable human capital and driving up salaries which raises problems for domestic users Siphoning off many of these brains for own needs elsewhere  What Should Policy be?  Provide same treatment as to domestic firms? or Give them special incentives as proposed by some? Subsidize researchers working for local firms, or impose a surtax R&D working for MNCs?  More importantly Strengthen support infrastructure for spin-off firms Increase the limited supply of high quality scientists and engineers

What to do about Constraints on Supply of Scientist and Engineers?  Analysis  Output of prestigious IITs is less than 7000 graduates per year  Recent study shows growing supply gap  Salaries of graduates of prestigious institutions is rising rapidly  Experienced R&D managers likely to become key constrain in public and private R&D  Recommendations  Expand output of top quality institutions What will it take to do this? Can they have autonomy in salary levels? Can they received donations?  Improve quality of other higher level institutions Is it possible to move upgrade quality of others ” ?Can student tuitions be charged to address financial constraint  Allow private sector to set up quality higher level institutions  Make big push on training R&D managers At Indian IMTs At foreign universities In foreign public research labs and universities

What to do about Weak IPRs?  Analysis  While India has become compliant with WTO Trips regulations, there as stills some pending issues  Concern in interviews with foreign investors in India about pending issues and more generally on enforcement  Recommendations  Set up intellectual property think tank  Maintain maximum flexibility in IPR issues by exploiting any remaining degrees of freedom  Modernize patent office  Provide more IPR training  Consider establishment of special patents appeal court

Strengthening Innovation - 1  Tap into growing stock of global knowledge, through increased trade, FDI, technology licensing, personnel movements  Attract FDI more effectively by removing regulations on FDI and encouraging FDI R&D.  Make more effective use of Indian Diaspora  Improve efficiency of public R&D resources  Monitor S&T efforts and institutional performance to identify what works well  Redeploy resources to programs that have a proven track record of success.  Strengthen university-industry programs (through matching grants and other initiatives)

Strengthening Innovation - 2  Create attractive environment to motivate private R&D investments including  Better tax incentives  favorable tax and other incentives.  Strengthen supporting institutions such as  S&T park and incubators  Early stage financing and venture capital  Metrology, standards and quality control  Enforce IPR to create confidence among domestic and foreign innovators on protection of their innovations..  Strengthen support for grass roots innovation  Make stronger effort to use formal innovation system to improve conditions for the poor  Increase intake of students into S&E and improve quality

S&T System In India

Key Public Institutions In R&D

Basic Research By Major Public R&D Performers YrSpace Atomic Energy DRDOCSIRICMRICAR IITSIISc. No.AIF N o. AIF N o. AI F No.AIFNo. AI F No. AI F No. AI F No. AI F Source: Bhojwani 2006 p. 38

Public Institutions with Most Patents in Indian Patent System ( ) Institution/organizationNumber of Patents (rank among top 50) CSIR2760 (1) Indian Institutes of Technology 245 (23) Ranbaxy Labs Ltd185 (34) Steel Authority of India178 (36) Chief Controller (Min. of Defense) 161 (42) Dr. Reddy ’ s Research148 (48)

Growth of Patenting by Universities

Innovation Scorecards: China-India

Innovation Scorecard: US-India

Opportunities for US-India Cooperation  Foreign Investment  US firms into India for Production R&D  Indian firms to US  Increased strategic alliances in production, R&D and services  Basic research  Pharmaceuticals  Software  Auto parts  Increased trade in goods and services  Cooperation in education and training  Joint degrees  Distance education

Conclusion  India has made great progress, but faces daunting challenges  India has the potential to leverage its strengths to improve competitiveness and welfare  Needs to continue reforms and develop effective knowledge strategies  Needs a three pronged innovation strategy  Become more effective in tapping into global knowledge, disseminating and absorbing it  Harness formal domestic R&D capability to address needs of the poor  Improve public and private innovation capabilities for the modern sector  There is tremendous potential for increased US/India cooperation across many areas

Carl J. Dahlman Luce Professor of International Relations and Information Technology Georgetown University