India’s Innovation System: Achievements,

Challenges and Opportunities

Presentation at Asian Science and Technology ForumInnovative India and the United States

Carl J. DahlmanGeorgetown 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

The Four Pillars of the Knowledge Economy

Education

InnovationInformation Infrastructure

Economic and Institutional RegimeEIR 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

InterconnectedInterdependent

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/kamBasic scorecard for 14 variables for two points

in time, 1995 and most recentKnowledge 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.

Real GDP (PPP): Projections 2004-2015 (Using 1991-2003 Average Growth Rates)

0

2

4

6

8

10

12

14

16

2003 2005 2007 2009 2011 2013 2015

Trillions of 1995 international $

India China BrazilCanada France GermanyItaly Japan MexicoRussian Federation United Kingdom United States

India

China

United States

JapanGermany

United Kingdom

France

Italy

Canada

Mexico

Russian Federation

Brazil

Real GDP Projections 2004-2015

India’s StrengthsLarge large domestic marketYoung and growing populationCritical 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-2Becoming 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 marketsStrengthening export orientation

and seeking strategic alliances

India’s Challenges-1Large 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-2Over regulated economyPoor 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 essenceChoices matter

India: Real GDP Per Capita - Alternative Projections 2001-2020

0

500

1,000

1,500

2,000

2,500

3,000

1995 2000 2005 2010 2015 2020Year

1995 US$

Actual

Projection 1: 2.09 % TFP Growth (Actual)

Projection 2: 1% TFP Growth (India 1961-70)

Projection 3: 3% TFP Growth (India 1981-90)

Projection 4: 4.25% TFP Growth (which is Ireland'sactual TFP growth rate for 1991-2000)

Proj 4

Proj 2

Proj 3

Proj 1

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 (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

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

0.830.88 0.91 0.9

0.86

0.79 0.780.76

0.79

0.730.710.720.77 0.79

0.82

0.86 0.82

0.8

0.79 0.77

00.10.20.30.40.50.60.70.80.9

1

85-86

86-87

87-88

88-89

89-90

90-91

91-92

92-93

93-94

94-95

95-96

96-97

97-98

98-99

99-2K

2K-01

01-02

02-03

03-04

04-05

Year

R&

D a

s %

GN

P

India’s R&D Effort in Global Context

Total Gross Domestic Expenditure on R&D (PPP$)

Russia

USA

Japan

China

Germany

France

UK

India

Korea

Brazil

-200

800

1,800

2,800

3,800

4,800

5,800

0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5

R&D expenditure as % of GDP

Researc

hers

per

mill

ion

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

institutionsRecommendations

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 DiasporaImprove 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&DGovernment of

India

Ministry of Science

& Technology

Ministry ofInformation Technology

R&D: $20MM[ 1%]

Ministry of Defence

Department of Atomic EnergyR&D: $270MM

[ 9%]

Ministry of Commerce & Industry

Principal Scientific

Adviser to GoI

Ministry of Agriculture

Ministry of Health and

Family Welfare

Ministry of Human

Resource Development

Department of Scientific

and Industrial Research

Department of Science & Technology

R&D: $110MM[ 4%]

Department of Space

R&D: $490MM[ 17%]

Department of Biotechnology

Department of Ocean

Development

Department of Information Technology

Department of Defence

Research & Development

Department of Industrial

Promotion &Policy

Department of Agricultural

Research & Education

ICMRR&D: $30MM

[ 1%]

University Grants

CommissionIIT Council

IIMs(?)

Ministry of Overseas

Indian Affairs

CSIRR&D: $230MM

[ 8%]

DRDOR&D: $720MM

[ 25%]

ICARR&D: $300MM

[ 4%]

Government ofIndia

Ministry of Science

& Technology

Ministry ofInformation Technology

R&D: $20MM[ 1%]

Ministry of Defence

Department of Atomic EnergyR&D: $270MM

[ 9%]

Ministry of Commerce & Industry

Principal Scientific

Adviser to GoI

Ministry of Agriculture

Ministry of Health and

Family Welfare

Ministry of Human

Resource Development

Department of Scientific

and Industrial Research

Department of Science & Technology

R&D: $110MM[ 4%]

Department of Space

R&D: $490MM[ 17%]

Department of Biotechnology

Department of Ocean

Development

Department of Information Technology

Department of Defence

Research & Development

Department of Industrial

Promotion &Policy

Department of Agricultural

Research & Education

ICMRR&D: $30MM

[ 1%]

University Grants

CommissionIIT Council

IIMs(?)

Ministry of Overseas

Indian Affairs

CSIRR&D: $230MM

[ 8%]

DRDOR&D: $720MM

[ 25%]

ICARR&D: $300MM

[ 4%]

Basic Research By Major Public R&D Performers

Yr SpaceAtomic Energy

DRDO CSIR ICMR ICARIITS IISc.

No. AIFNo.

AIFNo.

AIF

No. AIF No.AIF

No.AIF

No.AIF

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

1.105

1521

1.512 104 2.816

212 1.057

1283

1.159

1999 56 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

1.632 102 2.110

269 1.021

1440

1.455

799 2.071

2003 103

1.317

795

1.609

167

1.150

2273

1.751 136 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

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

245 (23)

Ranbaxy Labs Ltd 185 (34)

Steel Authority of India

178 (36)

Chief Controller (Min. of Defense)

161 (42)

Dr. Reddy’s Research

148 (48)

Growth of Patenting by Universities

0

20

40

60

80

100

120

1995 1996 1997 1998 1999 2000 2001 2002

IIT's and IISc Other Universities & colleges

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

TechnologyGeorgetown University

Email: cjd42 @georgetown.edu