Saturday, August 25, 2012

Time to Start Thinking: Not only for the US, but for India as well!

Poor school education; resources fragmented across different government programmes; mismatches between the skills needed and the skills available; venture capitalists who tend to follow the herd because they lack independent conviction; complex regulation that retards agility and responsiveness… sounds like India? But, these are some of the barriers to innovation in the United States that Financial Times correspondent Edward Luce identifies in his insightful new book Time to Start Thinking: America and the Spectre of Decline (Hachette India, 2012).

Theme of the Book

The main theme of this book is that the United States has lost its way. Highly polarized partisan politics and checks and balances gone wild have resulted in a paralysis of decision-making. America’s huge middle class which was a product of a growing industrial economy of the 20th century is now getting hollowed out. The middle class emerged worse off at the end of the last business cycle compared to when it started, while the top ten per cent of the American population got visibly richer. With the exodus of manufacturing jobs to China, the only new jobs are relatively poorly paying ones in the services sector (I found this statistic particularly telling – a “median job” 50 years ago in General Motors paid about 60,000 current US dollars; today’s “typical” job at Walmart pays only $ 17,000).

Though many of the “creative” and “intellectual” jobs at the upper end of the value chain are still in the US, Luce sees these slipping away as innovation moves to where the markets and manufacturing are – to Asia, in general, and China, in particular. I found the example of Applied Materials quite instructive – this leading producer of advanced manufacturing equipment for the semiconductor and solar panel industries moved its CTO to China recently as China emerged as the global hub of semiconductor manufacturing, and the Chinese government invested in creating a research hub for emerging clean energy technologies.

Implications for India

Given its history of pragmatism, and its track record of finding the right leadership when confronted by crisis, a country as prosperous as the United States may be able to ride out its current predicament. But, as I read Luce’s book I kept thinking that India can’t afford the same luxury.

One clear implication of the US experience is that we simply can’t continue with the indifferent attitude towards manufacturing that has characterized much of Indian policy-making in the last 20 years. Not only is manufacturing essential to create the jobs that will allow us to take advantage of the much touted demographic dividend, a strong manufacturing base is essential to attract the R&D and innovation investments that will allow us to ride future waves of industrial development. As Edward Luce reminds us, in the early years of its founding the United States used a variety of “pragmatic tactics” to bring the benefits of technological development under the industrial revolution from Britain. Today, China displays policy pragmatism in using its financial clout to attract the world’s leading semiconductor companies to set up manufacturing facilities in China (according to Luce, China’s subsidies and support amount to US$ 1 Billion, 12.5% of the $8 Billion needed to set up a semiconductor fab). And, the R&D of companies like Applied Material follows…

In setting up the National Innovation Council (NIC) two years ago, we were spot on in recognizing the importance of innovation in achieving the future dreams of our country. But, the NIC’s self-imposed focus on social innovation alone is unnecessarily limiting. While I readily acknowledge that the government should not be involved in picking technology winners, surely we need to create platforms for R&D and innovation in technologies that are intimately linked to the future of India such as clean energy. We can’t afford to work on all emerging technology areas, but careful choice of a few sectors should put us in a good position to build technology hubs for the future.

A Window of Opportunity

The current mess in the United States so vividly portrayed by Luce in his book presents a unique opportunity for us. That country has lost some of its inherent self-confidence and “can-do” attitude. I have a feeling that it will bounce back, but that will take some time. Europe is facing recession and is focused internally on itself except for a few countries like Germany. This is the time for us to upgrade and enhance our innovation system.

One caution from Luce’s account of the United States is particularly relevant to us. This is the adverse effect of the dominant culture of Wall Street, and the tight coupling of the interests of Wall Street and economic/political decision makers. I recall my wonderment seven years ago when a presentation on the Indian economy made at a board meeting I attended contained only graphs pertaining to financial flows, almost as if goods and services didn’t matter. We could fall into the same trap; instead, we should keep our focus firmly on value added in the economy and the forces of productivity underlying such value addition.


Reading Luce’s book is strongly recommended to anyone who has an interest in how the world will evolve in the next decade or two.

No comments:

Post a Comment