1. 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]

2. 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

3. India’s Position on the Global Stage
17 percent of the world’s population
11th largest economy in the world in (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

4. The Four Pillars of the Knowledge Economy
Knowledge Economy Framework
The Four Pillars of the Knowledge Economy
Economic and Institutional Regime
Education
EIR provides incentives for the efficient creation, dissemination, and use of existing knowledge
An educated and skilled population that can use knowledge effectively
Interconnected
Interdependent
EIR that provides incentives for the efficient use of existing and new knowledge and the flourishing of entrepreneurship
Innovation
Information Infrastructure
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.

5. 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.

6. India, China and US Most 1995 (weighted)

7. India, China and US Most Recent (weighted)

8. India, China and US Most Recent (un weighted)

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

10. India In Global Innovation Index (weighted)

11. India In Global Innovation Index (un weighted)

12. 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 years 8.0%.
Such sustained acceleration needed to provide opportunities for India’s growing population and its even faster-growing workforce.

13. Real GDP Projections

14. 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

15. 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

16. 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—159th in world

17. 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

18. 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

19. India’s Choice Set in Determining Future Growth Path

20. Stylized Structure of Indian Economy

21. Structure of Employment

22. Labor Productivity

23. Productivity Dispersion

24. Productivity Calculations

25. Sources of New Technology

26. 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

27. Assessment of Indian Innovation System

28. Comparisons on Acquiring Knowledge

29. 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

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

31. India’s R&D Effort in Global Context

32. Formal Innovation Inputs & Outputs
Brazil
Russia
India
China
Korea
Mexico
Researchers in R&D (2003)
59,838
487,477
117,528
810,525
151,254
27,626
Researchers in R&D/million population (2002)
351.78 3,
119.66
633.02
274.01
Total expenditures on R&D as % of GDP (2002)
1.04
1.24
0.85
1.23
2.91
0.43
Estimated spending on R&D in US billions in 2002
4,705
4,297
4.337
15,572
13,872
2,740
Scientific and technical journal articles (2001)
7,205
15,846
11,076
20,978
11,037
3,209
Millions of R&D$/ Scientific and tech articles*.
653
271
392
742
1257
854
Scientific and technical journal articles/million population. (2001)
41.80
109.47
10.73
16.49
233.13
32.29
Patent applications granted by USPTO
(2004)
161
173
376
597
4671
102
Billions of R&D$/patent granted*
29.2
24.8
11.5
26.1
3.0
26.9
Patent applications granted by USPTO/million pop. (2004)
0.9
1.21
0.35
0.46
97.03
0.98
Manufactured trade as % of GDP (2003)
15.10
17.83
13.52
51.32
48.65
45.99
High technology exports as % of man. Trade (2003)
11.96
18.86
4.75
27.10
32.15
21.34

33. 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}

34. 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

35. 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

36. 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

37. 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

38. 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

39. 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

40. 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

41. 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)

42. 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

43. S&T System In India

44. Key Public Institutions In R&D

45. Basic Research By Major Public R&D PerformersYr
Space
Atomic Energy
DRDO
CSIR
ICMR
ICAR
IITS
IISc.
No.
AIF
1995 47
0.845
487
1.358
131
1.005
1576
0.891
101
1.589
156
0.649
1165
1.140
1996 31
0.897
531
1.288
136
1.010
1625
1.264 79
1.894
189
0.781
1202
1.105
1997 48
0.906
536
1.578
124
0.875
1563
1.467 88
1.326
170
0.867
1120
1.193
1998 56
0.989
612
1.471
142
1521
1.512
104
2.816
212
1.057
1283
1.159
1999
0.948
628
1.230
116
0.884
1699
1.538
109
1.948
234
0.839
1298
1.160
2000 51
1.187
598
1.691
102
1.031
1667
1.520 99
1.834
200
0.805
1279
1.235
2001 70
0.969
486
1.474
137
1.009
1700
1.696
111
1.780
215
0.907
1347
1.258
845
2.151
2002 82
1.508
758
1.546
155
1.075
1944
1.632
2.110
269
1.021
1440
1.455
799
2.071
2003
103
1.317
795
1.609
167
1.150
2273
1.751
2.814
257
1.023
1617
1.514
879
2.192
2004
100
1.294
687
1.602
205
1.289
2668
1.899
226
2.712
327
1.071
1829
1.660
808
2.377
Source: Bhojwani 2006 p. 38

46. Public Institutions with Most Patents in Indian Patent System (1995-2005)
Institution/organization
Number of Patents (rank among top 50)
CSIR
(1)
Indian Institutes of Technology
(23)
Ranbaxy Labs Ltd
(34)
Steel Authority of India
(36)
Chief Controller (Min. of Defense)
(42)
Dr. Reddy’s Research
(48)

47. Growth of Patenting by Universities

48. Innovation Scorecards: China-India

49. Innovation Scorecard: US-India

50. 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

51. 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

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