Have you ever wondered why Japanese are good at miniaturization, Germans at perfection, and Americans at devising novel services? Is there something specific with the culture of a place and its edifice that shapes the kind of innovations in which it can excel?
Current research on innovation confirms this assertion. If culture shapes people, and people do innovate, it is then clear that there are only specific types of innovations that can happen in specific parts of the world. The case of low-cost, frugal innovations in India is no surprise then. Let us tease out that why we in India excel in certain types of innovations, and how these approaches bind us further.
To arrive at the factors that shape innovation in a country, let me allude to a very powerful concept- institutions. Institutions are the ‘rules of the game’ that govern human behavior. They are the do’s and don’ts that guide what is supposed to be done and what is possible under a given circumstances. For instance, in India we have a right-wheel drive whereas in most of the West it is a left-wheel drive. That is a rule of the game.
Institutions are not always formal. There are several unstated informal rules, including customs, value systems, notions, and norms of the society that go unquestioned and even un-noticed, and in a very subtle way drive our behavior and action. One informal institution in India is that we are not supposed to question our elderly and that we do not call our parents by their first name. It is not illegal to break these norms, but it is plain bad in the society that we live in. The tone of innovations that are possible in India is set by the institutions that prevail here. Let us first talk about formal institutions.
Weak formal institutions
Formal institutions are the rules and regulations of the land, or the stated laws that govern every day behavior of individuals and groups. In the absence of institutions, one cannot predict the effect of a certain action, let alone act.
Think of an environment where you cannot own private property. In that case, what would be your incentive to invest in forming a business, knowing well that government cannot assure you of any ‘ownership’ of profits? You would not invest. Or, for that matter, knowing very well that there is no judicial system which could provide you adequate relief if your business partner cheats you, would you still get into a business agreement? Perhaps not. Similarly, missing institutions for property rights protection would offer enough disincentives for you to invest your ‘private’ efforts in creating something of intellectual worth. Hence, rights of private property ownership, low costs of transaction, contract enforcement mechanisms, and protection of intellectual property rights, are some of the essential institutional mechanisms that directly influence the efforts towards innovating and the results thereof.
Let us have a look at where India stacks on various formal institutional measures. Table 1 depicts India’s performance on key economic indicators over a period of 8 years, 2006-07 to 2013-14. The Global Competitiveness Index (GCI) by the World Economic Forum identifies various sub-elements of economic health of a nation and compares it across countries.
Table 1: India's performance on various economic factors (Source: World Economic Forum)
Clearly, we perform very poorly in almost all the parameters, expect the market size, and worst still the performance is steadily declining over the years. From a position of 42 out of 125, we have slipped to 60 out of 148 in a matter of eight years. The poor quality of our infrastructure, higher education and healthcare is well known, but not so apparent are the weak institutions and inefficiencies in the good, labor and financial markets. Even though we are one of the largest markets in the world, owing to our huge population, our inefficiencies still keep our GDP per capital at one of the lowest in the world (ranked 115 out of 148 in 2013-14)!
The real question however is: how do institutions shape innovation? For starters, an inefficient labor market makes scouting for right talent costly, and so does an inefficient financial market, when it comes to raising funds for starting a business. The very poor regulatory framework, law enforcement, and ineffective rights protection only make it difficult for people to invest in avenues with high property rights content.
So what is the resort? Indians mostly hone traits that do not require investment in creating enduring intellectual property. Trade comes foremost, and then comes process improvements. Our pharmaceutical, auto-ancillary, and even information-technology industry are full of process improvements and reverse-engineering feats, where no enduring property right is created. Since Indian institutions do not offer sufficient protection against property rights infringement thought strong trademarks and product patents, Indians gravitate towards creating a thing that does not require one. As for India’s standing on intellectual property rights protection, we rank 55 out of 130 countries, four ranks above China, and much lower than most of our trade partners!
A look at the Indian companies amongst the Forbes’ ranking of the World’s Biggest Public Companies reveal that almost all the companies are in trading business, with very limited property rights creation. The top ten names are: Reliance Industries, State Bank of India, Oil & Natural Gas, ICICI Bank, Tata Motors, Indian Oil, HDFC Bank, NTPC, Coal India, and Larsen & Toubro. Except for Tata Motors, maybe, there is hardly any intellectual property rights creation! Even most of work at Tata Motors is around process innovations, as depicted by the production of its Tata Nano. The case with Fortune 500 companies is no different. What however is appalling is to see that none of the names appearing in the Forbes or the Fortune list feature in the Boston Consulting Group’s list of Most Innovative Companies of 2013. In fact there is no Indian company in the list, which had a few Indian names till about recently.
After joining the World Trade Organization, it was only in 2005 that India graduated from an era of process patenting to product patenting, putting a restriction on the now-perfected reverse engineering capabilities of the Indian companies, especially in the pharmaceutical space. While the process patenting regime, right from 1970 to 2005, gave Indian companies a free hand to copy Western innovations, it happened at the cost of building indigenous capabilities of product innovation. Now with the new patent regime, Indian pharma fraternity is fighting tooth and nails to deny patents to foreign firms operating in India, or accruing compulsory licensing for life-saver drugs. While this certainly has a public welfare angle to it, there is hardly any incentive to up the ante in terms of being innovative.
Another unintended-effect of the poor institutional regime in India is our love-affair with frugal innovation or jugaad. These low-cost, good-enough products are not really an effect of well thought out innovation approach, but are the poor cousins of their Western counterparts. Why did a rural mechanic not graduate from making a make-shift motor driven cart (the original jugaad) to making a proper car? Perhaps he did not have the right capabilities, or he was afraid of not making enough from his serious investment, for the fear of imitation.
Even the corporate labs of large multinational enterprises in India abhor doing high-end technology work for the fear of leakage of property rights, or Indian consumers not valuing the intellectual property enough to pay a premium. The limited penetration of Apple’s machines in India is a case in point, or the rapid piracy of music or movies in our country.
While the President of India declared 2011-20 as the ‘Decade of Innovation’, real innovation cannot happen unless we strengthen our formal institutions. If we ease owning of private property in India, safeguard intellectual property rights, lower the transaction cost (especially the contract enforcement cost through our legal system), and smoothen the labor, good and financial market, we might still be slipping on our economic performance. Let me hope that this be a mandate for our new government in the centre, if we wish to be called an Innovative Nation.
In the Part II of this article, I will touch upon the informal institutional dimension and its impact of our innovation capabilities.