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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 11th 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 Knowledge Economy Framework The Four Pillars of the Knowledge Economy Economic and Institutional Regime EIR provides incentives for the efficient creation, dissemination, and use of existing knowledge Education An educated and skilled population that can use knowledge effectively Interconnected Interdependent Information Infrastructure To facilitate the effective communication, dissemination, and processing of information. Innovation Innovation consisting of organizations that can tap into the stock of global knowledge, assimilate and adapt it and create local knowledge 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 www.worldbank.org/kam 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 1990-2000: 6.0% 2000-2004 6.2% Last 3 years 8.0%. Such sustained acceleration needed to provide opportunities for India’s growing population and its even faster-growing workforce. Trillions of 1995 international $ 16 Real GDP Projections 2004-2015 Real GDP (PPP): Projections 2004-2015 (Using 1991-2003 Average Growth Rates) India Canada Italy Russian Federation 14 China France Japan United Kingdom Brazil Germany Mexico United States China United States 12 10 India France 8 Italy Brazil United Kingdom Russian Federation Mexico Germany 6 Japan Canada 4 2 0 2003 2005 2007 2009 2011 2013 2015 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 • 1990-2004: 1.7% actual • 2004-2020: 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 $620—159th in world India’s Challenges-2 Over regulated economy Poor physical infrastructure Electricity Roads, ports, and airports Competing in very demanding global economy with rapidly changing windows of opportunity A Special Window of Opportunity India has important window of opportunity to undertake key reforms to leverage its strengths Has all the critical ingredients--what is holding it back is itself Needs to leverage its strengths to improve competitiveness and improve well being of its people Time is of the essence Choices matter India’s Choice Set in Determining Future Growth Path India: Real GDP Per Capita - Alternative Projections 2001-2020 1995 US$ 3,000 Actual Proj 4 Projection 1: 2.09 % TFP Growth (Actual) 2,500 Projection 2: 1% TFP Growth (India 1961-70) Proj 3 Projection 3: 3% TFP Growth (India 1981-90) 2,000 Projection 4: 4.25% TFP Growth (which is Ireland's actual TFP growth rate for 1991-2000) Proj 1 1,500 Proj 2 1,000 500 0 1995 2000 2005 Year 2010 2015 2020 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 (1994-2003) • 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 R&D as % GNP Indian R&D Expenditures Over Time as % of Indian Gross National Income 1 0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0 0.88 0.91 0.9 0.83 0.86 0.82 0.79 0.79 0.78 0.76 0.73 0.71 0.72 0.77 0.79 0.8 0.86 0.82 0.79 0.77 85- 86- 87- 88- 89- 90- 91- 92- 93- 94- 95- 96- 97- 98- 99- 2K- 01- 02- 03- 0486 87 88 89 90 91 92 93 94 95 96 97 98 99 2K 01 02 03 04 05 Year India’s R&D Effort in Global Context Total Gross Domestic Expenditure on R&D (PPP$) Researchers per million 5,800 Japan 4,800 USA 3,800 Russia 2,800 France Korea UK Germany 1,800 Brazil 800 China India -200 0.0 0.5 1.0 1.5 2.0 2.5 R&D expenditure as % of GDP 3.0 3.5 Formal Innovation Inputs & Outputs Brazil Russia India China Korea Mexico Researchers in R&D (2003) 59,838 487,477 117,528 810,525 151,254 27,626 Researchers in R&D/million population (2002) 351.78 3,414.59. 119.66 633.02 2978.94 274.01 Total expenditures on R&D as % of GDP (2002) 1.04 1.24 0.85 1.23 2.91 0.43 Estimated spending on R&D in US billions in 2002 4,705 4,297 4.337 15,572 13,872 2,740 Scientific and technical journal articles (2001) 7,205 15,846 11,076 20,978 11,037 3,209 Millions of R&D$/ 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 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 Government of India Principal Scientific Adviser to GoI Ministry of Information Technology Ministry of Science & Technology R&D: $20MM [ 1%] Department of Science & Technology R&D: $110MM Department of Scientific and Industrial Research [ 4%] Department of Information Technology Ministry of Defence Department of Atomic Energy R&D: $270MM Ministry of Commerce & Industry Ministry of Agriculture Ministry of Health and Family Welfare Department of Industrial Promotion & Policy Department of Agricultural Research & Education ICMR R&D: $30MM [ 9%] Department of Defence Research & Development [ 1%] CSIR R&D: $230MM DRDO R&D: $720MM ICAR R&D: $300MM [ 8%] [ 25%] [ 4%] Department of Space R&D: $490MM [ 17%] Department of Ocean Development Department of Biotechnology Ministry of Human Resource Development University Grants Commission IIMs(?) Ministry of Overseas Indian Affairs IIT Council Basic Research By Major Public R&D Performers Yr Space Atomic Energy DRDO CSIR ICMR No. AIF N o. AIF N o. AI F No. AIF No. AI F 1995 47 0.84 5 48 7 1.35 8 13 1 1.0 05 157 6 0.891 101 1.5 89 1996 31 0.89 7 53 1 1.28 8 13 6 1.0 10 162 5 1.264 79 1997 48 0.90 6 53 6 1.57 8 12 4 0.8 75 156 3 1.467 1998 56 0.98 9 61 2 1.47 1 14 2 1.1 05 152 1 1999 56 0.94 8 62 8 1.23 0 11 6 0.8 84 2000 51 1.18 7 59 8 1.69 1 10 2 2001 70 0.96 9 48 6 1.47 4 2002 82 1.50 8 75 8 2003 10 3 1.31 7 2004 10 0 1.29 4 ICAR IITS IISc. AI F No. AI F 156 0.6 49 116 5 1.1 40 1.8 94 189 0.7 81 120 2 1.1 05 88 1.3 26 170 0.8 67 112 0 1.1 93 1.512 104 2.8 16 212 1.0 57 128 3 1.1 59 169 9 1.538 109 1.9 48 234 0.8 39 129 8 1.1 60 1.0 31 166 7 1.520 99 1.8 34 200 0.8 05 127 9 1.2 35 13 7 1.0 09 170 0 1.696 111 1.7 80 215 0.9 07 134 7 1.2 58 845 2.1 51 1.54 6 15 5 1.0 75 194 4 1.632 102 2.1 10 269 1.0 21 144 0 1.4 55 799 2.0 71 79 5 1.60 9 16 7 1.1 50 227 3 1.751 136 2.8 14 257 1.0 23 161 7 1.5 14 879 2.1 92 68 7 1.60 2 20 5 1.2 89 266 8 1.899 226 2.7 12 327 1.0 71 182 9 1.6 60 808 2.3 77 No. No. AI F Source: Bhojwani 2006 p. 38 Public Institutions with Most Patents in Indian Patent System (1995-2005) Institution/organization Number of Patents (rank among top 50) CSIR 2760 (1) Indian Institutes of Technology Ranbaxy Labs Ltd 245 (23) 185 (34) Steel Authority of India 178 (36) Chief Controller (Min. of Defense) Dr. Reddy’s Research 161 (42) 148 (48) Growth of Patenting by Universities IIT's and IISc Other Universities & colleges 120 100 80 60 40 20 0 1995 1996 1997 1998 1999 2000 2001 2002 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 Email: cjd42 @georgetown.edu