Knowledge-based industries and the national system of innovation: Experiences from India

1. Knowledge-based industries and the national system of innovation: Experiences from India Anand Patwardhan Executive Director Technology Information, Forecasting and Assessment Council Department of Science & Technology

2. Outline • IT/ITES success story • Linkages with the national system of innovation • Structural changes and reform in the national system of innovation • Towards a knowledge-based economy Anand Patwardhan: Knowledge Economy Forum V

3. IT-ITES business volume (billion $’s) Anand Patwardhan: Knowledge Economy Forum V

4. IT-ITES employment Anand Patwardhan: Knowledge Economy Forum V

5. The IT industry is important in other ways… • Excellence in industrial age was not prerequisite for success in knowledge age • Success in one part of knowledge economy drove development and success in other parts • Creating right environment for a new industry was easier than dismantling / rebuilding for existing industries • Government’s supportive measures enabled the growth (but otherwise the government stayed out of the picture) • First-generation entrepreneurs, often not from traditional business background • Importance of role models • This is perhaps a lasting benefit of the dot-com boom & bust Anand Patwardhan: Knowledge Economy Forum V

6. Sustainable competitive advantage in services outsourcing? • Process quality • Innovation in service delivery • Global scale and reach • Broadening and deepening the services portfolio • From software to ITES and BPO • Knowledge process outsourcing (KPO) – R&D outsourcing • Integrated service offering • Implications of FDI in R&D Anand Patwardhan: Knowledge Economy Forum V

7. Anand Patwardhan: Knowledge Economy Forum V

8. Driving forces • IT industry in India grew on two factors • Historical coincidences • Structural and systemic factors • Historical coincidences brought in the opportunity • Y2K • Internet and dot-com boom • Structural factors built up on these opportunities and aided fast growth of the IT industry in India • Thus the IT industry was able to grow very quickly from retrofitting to coverage across the entire software product life-cycle and beyond Anand Patwardhan: Knowledge Economy Forum V

9. Structural factors • Human resources • Institutional networks (clusters) • The diaspora (non-resident Indians) and the market linkages • Government support Anand Patwardhan: Knowledge Economy Forum V

10. Government support and facilitation • For the most the government was not an active participant in the IT industry growth. Two notable interventions: SEEPZ & STPI • Santacruz Electronics Export Processing Zone (SEEPZ), set up in 1973-74 • Today exports software around $2.5 billion • Infrastructure support • Tax and other fiscal concessions • Procedural support • Software Technology Parks of India (STPI), set up in 1991, extended the SEEPZ model to other cities, including 2nd tier cities • At a time when infrastructure was poor, and procedural formalities very tedious, these were very helpful Anand Patwardhan: Knowledge Economy Forum V

11. SEEPZ • Tax holiday for SEEPZ SEZ units as per the provision of the Income-tax Act. • Duty free import of capital goods and equipment from preferred sources. • Exemption from Customs duty on imported capital goods, raw materials, components, consumables, spares, tooling and packaging materials. • Exemption from Central Excise duties and other levies on products manufactured within the Zone. • Excise exemption on capital goods, raw materials, computers etc. procured from Domestic Tariff Area. • Special dispensations and relaxations in local laws and levies including Octroi, Sales Taxes and Property Tax. • Capital Goods and all other inputs supplied to the Zone from the rest of the country, are treated as Deemed Exports and are eligible for deemed export benefits such as Duty Drawbacks, Terminal Excise Duty and CST Reimbursement. This enables easy availability of materials at International Prices at Zero Inventory. • The SEEPZ Service Centre within the Zone is the One-Stop Shop, which caters to all the needs of the Zone units. The supportive administrative system helps new firms to get down to production within the shortest possible time, concentrate on their export activity and run their operations smoothly. • Foreign Equity upto 100% is permissible in the case of SEEPZ SEZ units. • Remittance of profits and dividends earned by foreign investors in the zone is allowed freely after payment of taxes. Anand Patwardhan: Knowledge Economy Forum V

12. STPI • Started in 1991, the STPI’s aim at promoting export of software and IT services and providing conducive environment and infrastructure facilities for export of software and IT services. • Scheme was not limited to capital cities, but it also spread across to secondary cities like Mysore, Noida and Jaipur, now 20 locations • Offers benefits like: • Income tax holiday as per section 10A of the IT Act. • 100% customs duty exemption on imports of capital equipments. • Equipment can also be imported on loan or lease basis. • All relevant equipment/goods including second hand equipment can be imported (except prohibited items). • 100% excise duty exemption on indigenous items procurement. • Central Sales Tax reimbursement on indigenous items procurement. • Green card enabling priority treatment for government clearances / other services. • 100% foreign equity investment in the companies permissible under the 'Automatic Route' of RBI. • Sales in the DTA (Domestic Tariff Area) up to 50% of the foreign exchange earned by the STP/EHTP unit. Anand Patwardhan: Knowledge Economy Forum V

13. Human resources and early choicesregarding investment in education • Emphasis on higher technical education • Technical education given importance ever since 1950 when the first IIT was created in Kharagpur, West Bengal • To follow were the IIT Bombay in 1958, IIT Madras in 1959, IIT Kanpur in 1960, IIT Delhi in 1961 and IIT Guwahati in 1995 and IIT Roorkee in 2001 • Technical education, on an average, has received almost 15 percent of total plan expenditure for education sector in every plan period. • This figure was highest, i.e., between 21-25%, during 1960’s • Expenditure on technical institutes, viz., the IIT’s, IISc, REC’s and AICTE institutes has almost tripled from Rs. 2.7 billion in 1993-94 to Rs. 10.3 billion in 2003-04 Anand Patwardhan: Knowledge Economy Forum V

14. Why Bangalore, Hyderabad and Pune? • Mumbai was important as a starting point (SEEPZ), and remains important today; Delhi, Chennai and Kolkata are not insignificant • But Bangalore, and to a lesser extent, Hyderabad and Pune are the visible symbols of the IT industry • Geographical clustering and institutional networks • Between them Bangalore, Hyderabad and Pune account for almost one-third (of all publicly funded R&D institutions in India, together with a strong base of academia • Corresponding to this clustering of R&D institutions is the large number of engineering institutes in the states of Maharashtra, Karnataka, Andhra Pradesh and Tamil Nadu • Number of engineering degree colleges per million persons in these states range between 2.2 to 3.8 (as against the national average of approx 1.4) • Linkages with the diaspora – composition of the non-resident Indian community Anand Patwardhan: Knowledge Economy Forum V

15. Elements of the national system ofinnovation • Sources of R&D funding • Industry, government • Performers of R&D • Industry, academia, government (publicly funded R&D institutions) • Cross segment flow • Institutional, legal and regulatory environment • Are incentives & motivations aligned? • Markets • Factor markets (labour and capital) • Product markets (early adopters) • Important in India: interface mechanisms and organizations Anand Patwardhan: Knowledge Economy Forum V

16. R&D expenditure of select centralgovernment agencies Anand Patwardhan: Knowledge Economy Forum V

17. R&D in India by performing sector Anand Patwardhan: Knowledge Economy Forum V

18. What is happening in higher education – changing roles for academia? • Creation of human capital • …to provide scientists & technologists of the highest caliber who would engage in research, design and development to help build the nation towards self-reliance in her technological needs…. Pt. Jawaharlal Nehru • Creation of knowledge & intellectual capital • …to be the fountainhead of new ideas and of innovators in technology and science…. IIT-Bombay vision statement (2003) • Creation of wealth? • Supporting the transition from knowledge creation to wealth creation • Technology transfer and new venture creation Anand Patwardhan: Knowledge Economy Forum V

19. Growth of patenting Anand Patwardhan: Knowledge Economy Forum V

20. Characteristics of filers Anand Patwardhan: Knowledge Economy Forum V

21. From patenting to exploitation of IP • Some institutions have adopted formal IPR policies, for example, at IIT-Bombay: • The Institute owns all inventions created with significant use of Institute resources • Revenue sharing: 30-70 between the Institute and inventor (s) • Now a part of the service condition of all employees • A few institutions have experimented by creating dedicated interface structures to work around institutional barriers • FITT, SID, SINE…. • But institutional experience with tech transfer & licensing is limited • Total faculty start-ups are perhaps still in the single digits • But there are at least some (success) stories & role models to talk about • Ashok Jhunjhunwala’s TeNET group at IIT-Madras Anand Patwardhan: Knowledge Economy Forum V

22. What are the constraints for theuniversity system? • Enabling legislation is necessary, but perhaps not sufficient, unless other constraints have been addressed • Role of the Bayh-Dole Act in the US (worked because other elements of a national system of innovation were in place) • Institutional • Procedures • An IPR policy is necessary, but not sufficient • Research infrastructure • Doctoral students? • Protecting IP • Social issues: attitudes, peer pressure • Institutional view of faculty participation in new ventures: active support, passive support, resistance? • Difficulties with doing problem-driven, interdisciplinary research • True early stage funding is still very nascent Anand Patwardhan: Knowledge Economy Forum V

23. Transformation in publicly-funded R&D system: example of CSIR • Council of Scientific and Industrial Research – largest publicly funded chain of industrial R&D institutes • 38 labs, employing 5000 scientists / engineers with 3000 PhD’s/Masters, and a budget of $350 million • Across the breadth of the country, with stakeholders from MNC’s to farmers; and of varying size: 130 to 1200 • Industry orientation • Contract and sponsored R&D • Focus on commercialization • World-class R&D • Council of Scientific and Innovative Research Anand Patwardhan: Knowledge Economy Forum V

24. DRIVERS FOR CHANGE • INTERNAL • STAKEHOLDERS PRESSURE • FINANCIAL STRINGENCY • NATIONAL • DEREGULATION OF ECONOMY & TECHNOLOGY FLOWS • TNCS LOCATING R&D/TECHNICAL CENTRES IN INDIA • INTERNATIONAL • WTO : HARMONISATION OF IPR REGIMES • ICT REVOLUTION Anand Patwardhan: Knowledge Economy Forum V

25. THE TRANSFORMATION PHASES Anand Patwardhan: Knowledge Economy Forum V

26. PATENTS PORTFOLIO Anand Patwardhan: Knowledge Economy Forum V

27. EARNINGS FROM COMMERCIALISATION Anand Patwardhan: Knowledge Economy Forum V

28. Mechanisms • Technology development • NMITLI, CAR • Technology transfer • HGT • Academia-industry interaction for human resource development • Mission REACH • Technology commercialization • HGT, PATSER • Innovator support • TePP Anand Patwardhan: Knowledge Economy Forum V

29. New Millennium Indian Technology Leadership Initiative (NMITLI) • Public-private partnership scheme, 37 projects involving 240 partners (175 public sector and 65 private sector) and a $60 million outlay over a 3 year period • Financial support: grant-in-aid to public institutions and soft loan (3% interest) to industry partners • Unsecured loan, but with fixed repayment • The on-going projects cover diverse areas ranging from liquid crystals to decentralized power packs; mesoscale modelling to nano-material catalysts; microbiological conversions to biotech molecules; functionalization of alkane to advanced nano-materials and composites; defunctionalization of carbohydrates to biodegradable plastics; novel office computing platform to low-cost horizontal axis wind turbine; and new targets and markers for cancer to advanced drug delivery system Anand Patwardhan: Knowledge Economy Forum V

30. NMITLI –Biosuite • Biosuite – a success story ! • Versatile portable software for Bioinformatics- developed for the first time in India • Multi-purpose tool for carrying out diverse bio-analysis ranging from gene-analysis to comparative genomics launched both in US and India • Consists of 170 algorithms, 700,000 lines of C++ code, written for maintainablity and upgradability as hardware and software platforms change. • Covers all the major functional areas like sequence and genome analysis, comparative genomics, 3D structure modeling and analysis of proteins, biological macro-molecular simulations and drug design modules Anand Patwardhan: Knowledge Economy Forum V

31. The CAR initiative andpre-competitive R&D consortia • CAR: Core Advisory Group on Automotive R&D, forum for academia/R&D and industry interaction • Forum for interaction • Technology road-map • Development of pre-competitive, collaborative R&D consortia • Where might they work • Capability acquisition in areas of general interest to the industry (catch-up) • Areas that are not in the immediate product development pathway for industry • Generations ahead (long-term) • Not in core automotive disciplines but in complementary fields or industries with unanticipated crossover possibilities • Approaches • Industry-led and academia supported (Japanese) • Academia-led with industry involvement (US) • Regardless… • Companies collaborate with each other and with academia, and contribute • IPR and know-how created by the consortia is available to all members • Consortia formation process is open • We expect consortia to have upwards of 6-8 members Anand Patwardhan: Knowledge Economy Forum V

32. Towards a knowledge-based economy • Spreading the base • From services to manufacturing and new ventures in high-tech areas • Establishing competitiveness • In several sectors have gone through one cycle of industrial reform and restructuring • Automotive & auto components • Pharma • Measures of competitiveness • Between 2000-04, 9 Indian companies have bagged the Deming award • In 2004, Indo-Gulf Fertilisers, Lucas-TVS and SRF received the award • Innovation is now the challenge • Patenting activity • New product launches Anand Patwardhan: Knowledge Economy Forum V

33. Key issues for policy • The government as a customer • How do we make public-private partnership work? • How do we leverage and use the publicly funded R&D institutions? • Ultimately a national system of innovation will be effective only when there is coherent synergy amongst different elements • Focus on interface structures, mechanisms and organizations Anand Patwardhan: Knowledge Economy Forum V

34. Closing quotes… ‘India-The next knowledge power’: “The impact of the IT industry on the economy has been enormous….India has a thriving pharmaceutical industry. And biotech is taking off. The hope among some senior scientists and officials is that India can short-cut the established path of industrial development and move straight to a knowledge economy.” New Scientist, 19 March 2005 ‘India-Future Factories’: “Lately India’s manufactured exports have risen…as multinationals invest more heavily in India as a manufacturing base. In India, the early players are interested in the talent pool of chemists, designers and engineers, not low-skilled labour” - Newsweek, 7 March 2005 Anand Patwardhan: Knowledge Economy Forum V