Wednesday, February 22, 2012

Will "India Inside" be as successful as "Intel Inside"?

At first glance, this book looks like yet another book of the “India and China are changing the world” genre since it talks about familiar phenomena such as outsourcing/offshoring, the movement of jobs to India, and the global delivery model that were made a part of everyday vocabulary by people like Thomas Friedman. Its title– India Inside - is enigmatic. But the subtitle – “The Emerging Innovation Challenge to the West” – is a clear indicator that this is a book focusing on innovation in India.

This book can be read at various levels ranging from a superficial phenomenological one to the more interesting and deep observations Nirmalya Kumar and Phanish Puranam make about the forces and trends underlying the phenomena, and the implications of these for multinational corporations and the developed world.

The main argument that Nirmalya and Phanish make is that innovation is gathering momentum in India, but because it’s largely in the B2B context or embedded in intermediate steps of the value chain, it’s not easily visible. Thus, rather than looking for innovation with a “Made in India” label, “India Inside” (like “Intel Inside”) is a better description of the innovation emanating from India.

Nirmalya and Phanish categorise this “invisible” innovation in four buckets: (1) the globally segmented innovation that happens when the R&D/technology centres of established multinationals in India work on specific slices of the value chain; (2) the “outsourcing innovation” that happens when Indian companies undertake R&D and product engineering services for external clients; (3) the process innovation undertaken by Indian BPO and KPO firms where they bring in fresh knowledge and advanced analytical techniques (they call it an “injection of intelligence”) to change the way business is done in many traditional industries; and (4) the management innovation in the form of approaches like the global service delivery model that are changing the way work is done across industries. There is also a chapter on one “visible” dimension of innovation from India – the frugal engineering reflected in products like the Tata Nano.

Nirmalya and Phanish end the book by identifying potential showstoppers to the Indian innovation story – the failure of the talent pool to expand adequately in terms of both quality and quantity; a failure to protect intellectual property; and an inadequacy of venture capital.

These observations are not, by themselves, new. The more insightful contribution of this book is in the underlying trends and their implications for the future of multinationals and the future economic geography of the world.

The Skill Ladder Argument
Nirmalya and Phanish argue that the location of the lower rungs of the skill ladder today in India and China means that some years down the line the higher rungs will also have to be located in India and China because only they will have the requisite expertise and experience. So, over time, higher rung jobs and roles will also tend to shift to China and India. But my own suspicion is that this will not be that straightforward. Let’s first look at a technical career path. Only a few software engineers become software architects because the skillset required for a technical architect is quite distinctive. Managerial career paths are not much different – the skills required by a project manager are different from that of a program manager, and the latter are different from that of a business manager. Major disruptions in technology and business models also have the potential to disturb a linear career progression model. But, there is no doubt there is going to be an interesting dynamic playing out.

Already, in Germany, where the number of local engineers available to the top automotive companies is declining, there is talk of moving much of the design activity to India and China, but with control still resting with Germans in Germany. In the US, thanks to more liberal immigration policies, the ethnic mix in the parent R&D labs of US MNCs is changing fast with Chinese, Indians, Koreans and East Europeans fast filling the ranks. These changes will influence decision-making in myriad unpredictable ways.

Reversal of Cultures?

I found another observation that Nirmalya and Phanish make quite fascinating, but under-explored. They point to the difference in dynamism and optimism in the east and west today to suggest that there has been a “reversal of cultures” with the traditional cultures of the east embracing the protestant values that spurred the growth of capitalism in the west. I think they got the phenomenon right but not the process.

Several books on China in recent years have attributed the departure from Confucian thought to the systematic destruction of respect for the family and other related Confucian values that happened during the Chinese Cultural Revolution. This set the stage for the unbridled spirit of capitalism and materialism that appears to have gripped China. Other reports suggest that this has been made accentuated by the one-child policy that has spawned a generation of self-centered individuals. In India, several observers including Pavan Varma have observed that Indian cultures never had a serious objection to the accumulation of wealth or materialism. Further, as Tarun Khanna and others have pointed out, India has a long history and tradition of entrepreneurial communities.

Is Frugal Innovation Fundamentally Different?
Nirmalya and Phanish have an interesting chapter on frugal innovation (typified by the Nano) where they have made an attempt to characterize this approach to innovation. They are not the first to do so - other authors have been trying to capture this phenomenon of resource-constrained innovation under rubrics such as Gandhian innovation (Prahalad and Mashelkar) and Jugaad innovation (Jaideep Prabhu). I am still not convinced that there is anything fundamentally different in this form of innovation. In a market with limited purchasing power and a keen sense of value, customer-driven innovation would need to be governed by the discipline of keeping within a target cost. The methods used by Tata Motors in the case of the Nano as described in The Small Wonder suggest a faithful adherence to the well established principles of “design to cost” and “design for manufacturing” rather than a fundamentally different approach to innovation.

On Potential Showstoppers
While acknowledging that there are several weaknesses of the Indian innovation system, Nirmalya and Phanish propose (albeit, without much justification) that three of them constitute the largest threat to the Indian innovation story. I can’t disagree with their point about the availability of talent – there is no doubt at all that if we fail to upgrade and scale up our education and vocational training systems quickly, we will fail to take advantage of India’s demographic dividend. Availability of adequate early stage funding and investors who understand the challenges of creating new businesses will be critical to create a new mass of technologically sophisticated firms – I underlined this point in From Jugaad to Systematic Innovation. But the story on intellectual property protection is not as clear.

Nirmalya and Phanish categorically state that “India’s IP regime has not offered robust protection for novel ideas” (p. 42). But is this true in the post-2005 patent regime? Raghav Raghunathan, Vikram Naryal and I have been investigating the question of how effective the intellectual property protection is in India post-2005 and all the WTO-induced amendments. We have interviewed several IP attorneys, corporate IP heads, and others familiar with intellectual property protection issues in India.

Interestingly, when you leave aside the pharmaceutical domain, though there is some unease about the quality of IP protection, there is surprisingly limited articulation of what exactly the problem is. Due to the limited case law generated since the new statutes came into place, the judicial interpretation of the boundaries of IP law is still not clear. However, it appears that India does not have the same degree of egregious counterfeiting and intellectual property theft that has been reported in China (see, for example, the celebrated case of American Superconductor ). Anecdotal evidence suggests that many foreign companies are considering shifting more sensitive parts of their R&D to India from China.

The pharmaceutical story is different. Nirmalya and Phanish cite the Novartis Gleevec case to suggest that IP protection in India is weak but don’t follow that up with a detailed justification. Since the 1960s, India has been concerned about the power of the pharmaceutical industry and maintaining basic health care at affordable cost levels. The Indian Patents Act of 1970 was successful in achieving the latter objective. Consistent with this position and yet adapting to the changing global situation, while restoring product patents in the pharmaceutical arena in the post-WTO arena, the government decided to put constraints on evergreening and the extension of patent protection through such methods. This was done by laying down more stringent conditions for what constitutes an inventive step in drug development. It’s perhaps unfair to characterize our intellectual property protection system as inadequate merely on the basis of this exercise of our sovereign right to prevent drug companies from extending their monopoly through patent extension tactics.

A Useful Addition...
But, overall, this book has many things going for it. At 154 pages, it’s short and to the point. It provides several examples and interviews with key players. It draws attention to recent research on the global distribution of work. By addressing itself to the leaders of multinational companies outside India and the leadership of other countries, it makes the India innovation story more accessible to a foreign audience. In short, this is a good addition to our understanding of how innovation is evolving in India.

One only hopes that “India Inside” will be as successful as Intel Inside….

1 comment:

  1. Can something be done at school level to foster innovation? I think by the time most students reach college, their creative sparks have been subdued - thanks to our rote learning based education system