Regional Economies in a Globalising World Enhancing Intellectual Capacity and Innovation Friday 21 November 2008, Cardif

1. Regional Economies in a Globalising WorldEnhancing Intellectual Capacity and InnovationFriday 21 November 2008, Cardiff University The New California and sub-Sahara in India Sharmistha Bagchi-Sen Department of Geography State University of New York at Buffalo

2. Globalization and Spatial Inequality Innovation-led development /technology-led development Pre-reform – S&T policy Post-reform – recognition of innovation-led growth, FDI, trade Outcomes – role of agglomeration, industrial clustering, regional and intra-regional disparity, slowdown in implementation of reforms Some evidence from auto, software and bio-pharma sectors

3. Innovation-led Development Characteristics • An evolutionary path; resilient industrially advanced areas are strengthened • Non-linear processes / collaborative / alliance capitalism Interaction between firms and other organizations (e.g., research institutes, universities, venture capital, financial organization, labor organizations, industry associations, government and non-government agencies) • Changing role of policy – centrally driven R&D or S&T policy to the recognition of endogenous factors; National Innovation and regional innovation systems (NIS-RIS)

4. Policy Shift S&T to Innovation-led • S&T – stimulate basic research (e.g., the creation of CSIR and research labs), not much emphasis on transfer/dissemination • Innovation-led (NIS and RIS) – focus on industrial creativity (e.g., policies aimed at improving education, infrastructure and institutions, R&D base, entrepreneurship, IP, knowledge exchange) and subsequent development through the promotion of innovation (processes, products, services etc) and an economic structure conducive to innovation.

6. Innovation-led development and Industrial Clustering (geographic) • Porter’s Diamond – demand, supply, competition, related industries • Porter and regions/clusters – “a concentration of ‘inter-dependent’ firms within the same or adjacent industrial sectors in a small geographic area” (Isaksen 2001, p. 104) • Regional Innovation System / RIS is defined as the “cooperation in innovation activity between firms and knowledge creating and diffusing organisations …” (p. 107) • Porter – firm interaction • RIS – interaction among firms and others; firms are embedded in regions, state, international value-chains

7. RIS/Regionalization • Regionalization – the concentration of location-specific knowledge formation processes and capabilities in certain places (Kenney and Florida 2004) • Regionalization of national innovation policy – acknowledgment of local dynamics based on networks, trust, institutional mechanisms • RIS and endogenous growth model (Edquist 2001) Determinants of innovation versus “a region depends on technological development progress and the utilisation of knowledge that is conditioned by location” (agglomeration effects)

8. Regionalized Innovation Policy • Avoid imitation or “off-the-shelf best practice” (Asheim and Coenen 2005) • Avoid one size fits all • Problems with RIS: -Definition of the innovation system -Definition of the boundaries of the region (e.g., state/administrative, functional boundaries) -Determining if local institutions, actors, and relations are sufficient In reality, most RIS have elements of an open structure that promotes innovation through linking trans-territorial actors and institutions that have cognitive/knowledge proximity

9. Economic Development in India Old Model (Planned Economy) -Government-driven (State is entrepreneur and regulator) -Private sector regulation through controls (industrial licensing, import quota, use of foreign exchange, financial markets, pricing structure) -Incentives to enterprises -State directing resources to backward areas (goal -> reduce regional inequality) New Model (post 1990-1991 reform) -Private sector driven, lesser role of the state -Collaborative with government, research institutions, etc -Private sector is attracted to areas with developed infrastructure/already industrially advanced economy/agglomeration economies

10. Agglomeration Economies Marshall (1920) • The sharing of inputs whose production involves internal increasing returns to scale • Labor market pooling that allows a better match between employer’s needs and a worker’s skills • Knowledge spillovers between workers • Other sources of agglomeration – home market effects, economies of consumption (Kar 2006)

11. Five Regions North India, South India, West India, East India, North East India Infrastructure - highlights Himachal Pradesh, Goa and Punjab -electricity to almost almost 100% of their households -50% have no electricity in West Bengal, Orissa, Uttar Pradesh, Jharkhand, Assam and Bihar Kerala - 84% of its resident families own a “pucca” house compared to 12% in Tripura Tamil Nadu has topped in having the lowest number of persons in each household to be 3.5 Urban-Rural dichotomy everywhere

12. India – Regional Differences • Regional differences in growth reflect differences in marginal productivity of investments by sub-sector • Urban-focused as well as ports (Mumbai, Kolkata, Chennai and Kandla in Gujarat – international trade) • A clear East-West divide; no obvious north-south divide • Rain-fed agricultural regions are lagging behind (low productivity) • Some benefit from international remittances - Punjab, Haryana, Kerala (industrial progress is slow: long-term communist govt, labor union, resource-based ind.) • Within state variation is less in Punjab, Haryana, Karnataka, Kerala (lagging behind) • Intra-regional disparity in Andhra Pradesh, MP, Maharashtra (rural to urban migration) • Poorest states – BIMARU (Bihar, MP, Rajasthan, UP)

13. Three distinct Indian S&T phases 1947-66: Nation’s Trust in Science and Investment • Power of science to solve real life problems • invested significantly beyond the means of a developing nation 1967-86: Nation’s Demands on Science and Delivery • Science and technology provided viable solutions • Self-reliance 1987-2006: Challenge and Introspection • use of knowledge for generation of wealth and development of economy (Aiyagiri 2007)

14. Regional Factors in Sectoral Growth

15. Auto Clustering in India 1957 – import substitution strategy Birla – Hindustan Motors in Kolkata Doshi – Premier Auto in Mumbai Standard Motors – Chennai *TELCO now TATA Motors – Jamshedpur *Ashok Leyland - Chennai Restrictive policy until the mid 1980s Restriction of FDI in Auto 1963 Monopolies and Restrictive Trade Practices Policy Mid 1980s – JV with Suzuki Motors

16. Chennai Historical – TVS group (in business since 1911) set up an industrial enclave (parts and components) in Padi outside of Chennai in the post-indep period. It now has 29 companies. Political – Local firms were supported by state politicians in getting licenses Agglomeration – TVS, MRF, Ashok Leyland, Standard Motors, and the Rane Group (e.g., MRF’s start was in a toy ballon plant in 1946 in a chennai suburb; in 1952 – rubber mfg; in 1961 – technical collaboration with US Mansfield Tire and Rubber Co.; 1967- exports to the US; access to ports incl. all-weather Tuticorin Recent FDI – Ford, Hyundai, Mitsubishi

17. Evolution of the Auto Sector in Chennai (i) TVS’ Wheels India Ltd – a JV with Dunlop-UK (1960) Lucas – TVS – a JV with Lucas Variety Group-UK (1961) Other 1960s JVs with the UK are major exporters of parts and components 1980s, 1990s – Germany, Japan, and the US TVS-Suzuki – 100cc motorcycles in 1984; 1999-2000 – TVS-Suzuki folded into Aundaram Auto Engineers Ltd and in 2000-2001, Suzuki ceased to be a shareholder (ii) Rane Group’s Rane Engine Valve Ltd was estd in 1959; its companies continue to lead in valves; Japanese 50-50 collaborations for steering etc.; (iii) Ashok Leyland – estd in 1948 (used to assemble Austin parts; 1955 – agreement with Leyland Motors UK; Ashok Leyland and TVS’ Sundaram Industries have a JV with Spain’s Irizar group to manufacture bus bodies in India

18. Evolution contd … 1. IT firms in Chennai – IT enabled systems for OEMs and their suppliers (GM and Ford) 2. US government discourages forging and casting firms, MNEs started to outsource, Chennai has been the recipient of many contracts 3. Passenger car production and assembly by MNEs -Hyndai ($1billion), Ford ($400 million), and Hindustan Motors-Mitsubishi ($150 million) combined capacity of 230,000 cars; Hyundai is 2nd now to Maruti; Ford and Hyundai export; Hyundai has 100% owned subsidiary (estd 1998) and brought 14 component manufacturers; all have local content sourcing to some extent 4. State govt invested in industrial estates to promote SMEs earlier on; skilled labor formation/spillover

19. National Capital Region - NCR 1982 – Maruti Udyog Ltd. – a JV with Suzuki – a greenfield operation; 2nd plant (1992) in the same location (Gurgaon) and a 3rd in NOIDA in 1999; largest manufacturer 2003 – set up a foundry plant Suzuki Metal Ltd. 1990s – Daewoo and Honda but Daewoo failed and Honda just started production in 2000-01 Maruti’s suppliers are clustered in the same region: -central govt is the partner -local content requirement -focused on domestic market -attracted domestic supplier such as the TV group -exchange rate (increased value of Yen in early 80s) -early JIT system

20. Chennai and NCR NCR – Anchor firm led cluster development; The role of the central govt; Proximity to the Capital region; Chennai – Auto components sector in existence from pre-independence period; Role of indigenous business groups; Local politicians; More FDI than NCR Both have access to engineering graduates and the supply of skilled labor force

21. IT Clusters

22. Pharmaceuticals The pharmaceutical firms are mainly located in Maharashtra, Gujarat, TamilNadu, and Andhra Pradesh. Cases: MNE roots and indigenous firms • Glaxo – estd 1924 in Maharashtra and now a plant in Karnataka (started to distribute baby food) • Cipla – estd in 1935 – Maharashtra – bulk drugs • Nicholas Piramal – estd 1947 – Maharashtra-Gujarat and now in TamilNadu and Andhra (in 1947, it was a subsidiary of British Schering but was acquired by Piramal in 1988) • Ranbaxy (1961) – NCR and Punjab – a JV with Eli Lilly • DRL (1984)– Andhra and in London, Yorkshire, Goa, and Pondicherry; strong in-house R&D

23. Biotechnology - Bangalore RIS: Science, Markets and Institutions -IT cluster – integrated chip design, telecom and system softwares -Local educational and research institutions (e.g., IISc) -Venture capital -State offers tax breaks, uninterrupted power supply, electricity tariff, permissive labor law (employing women at night), single window agency to clear projects -Biotech Parks (i) University of Agricultural Sciences and (ii) Karnataka U – Dharwad (a marine biotech park closeby) -Biotech corridor – IISc to U of Agricultural Sciences -Vision Group of Biotech and taskforces -Secoral specialization - Genomics, Biofuels, CROs, Bioinformatics (AstraZeneca, Biocon, Cadilla, Wockhardt, SmithCline)

24. Small-Scale Industries - clusters Horizontal, large-unit based, vertically integrated, mixed Organic (market or resource based) or infrastructure (electronics, software, floriculture, and biotechnology) Sectors: machinery, cotton text, chemical, metal, hosiery/garments, food, non-metallic mineral, electrical machinery, wool-silk-synthetic, transport equipment Location: mainly in the N and W urban (Maharashtra, Gujarat, Punjab, Rajasthan, UP, Haryana, WB, TamilNadu, Himachal P – industrialized states) Artisan-based clusters: low energy use, local markets One-third of India’s exports: (i) gems and jewelry - Surat, (ii) textiles – Panipat, (iii) garments – big cities, (iv) leather – Agra, (v) handicrafts - Moradabad

25. NIS and RIS for SSI Clusters Institutions (NIS) – many institutions set up to ease financing, provide training and marketing; separate provision for non-modern small units – e.g., small Industries Development Bank of India RIS (state-level) – institutions to provide infrastructure, finance, export and technical assistance, and training (entrepreneurship development) – e.g., State Co-op Banks District level – clearances, licenses, certificates under one roof (e.g., District Industries Center)

26. Linking systems for financing State Financial Corporations and State Industrial Development corporations have been set up to cater to long-term needs and to participate in ventures through equity stake. These units get refinancing from SIDBI (national insttn). The state units can also generate their own funds through state govts, commercial borrowings. Both national and state insttns now provide working capital. Like commercial banks, state financial corporations have remained a source of credit for small and medium enterprises.

27. Conclusions Industrialized states have strengthened their place Auto – some old clusters are doing well (Chennai) Auto – new cluster in NCR (state + Suzuki) In IT, Mumbai lost its place to Bangalore In Pharma, Mumbai is still important but Bangalore and Hyderabad are capitalizing on their RIS In biotech, imitative policymaking to develop RIS is observed – almost every state has a biotech policy Urban areas are doing better compared to rural (mainly because agriculture has been left behind in the reform era) – however property rights issues becoming critical FDI focused regions are expected to do well HDI – state and central governments are investing to improve sub-Sahara conditions in education and health (malnutrition) NIS and RIS coordination is important for innovation-led development in India

28. Future • Investment in physical infrastructure and finance – e.g., control of central government over regional infrastructure was a problem • Investment in human capital, health and education, to raise productivity especially in backward states • Clusters are difficult to engineer but their existence indicate the presence of competitive advantage • Policies have usually focused on individual enterprises • Sector/cluster-specific services emphasizing the whole business system: (i) information provision, (ii) technology support, (iii) common facilities (iv) cluster-specific credit/financing for example for those dependent on seasonal fluctuations in raw material supply

29. S&T Policy (latest 2003) 1. Science and Technology Governance and Investments 2. Optimal Utilization of Existing Infrastructure and Competence 3. Strengthening of the Infrastructure for Science and Technology in Academic Institutions 4. New Funding Mechanisms for Basic Research 5. Human Resource Development 6. Technology Development, Transfer and Diffusion 7. Promotion of Innovation 8. Industry and Scientific R&D 9. Indigenous Resources and Traditional Knowledge 10. Technologies for Mitigation and Management of Natural Hazards 11. Generation and Management of Intellectual Property 12. Public Awareness of Science and Technology 13. International Science and Technology Cooperation 14. Fiscal Measures 15. Monitoring 16. The New Vision

30. Industrial Policy – selected points Liberalisation of the Locational Policy • No industrial approval is required from the Government for locations not falling within 25 kms of the periphery of cities having a population of more than one million except for those industries where industrial licensing is compulsory. • Non-polluting industries such as electronics, computer software and printing can be located within 25 kms of the periphery of cities with more than one million population. Policy for Small Scale Industries • Industrial undertakings with an investment upto rupees one crore are within the small scale and ancillary sector. A differential investment limit has been adopted since for 41 reserved items. In total, 749 items are reserved for manufacture in the small scale sector.

31. References A complete list of citations is available upon request for this review article/presentation. Many references are consulted and used to prepare this presentation. Due to space limitations, individual details are not provided.