Saturday, April 27, 2013

Where does India Stand on Innovation?

How does India stack up on innovation compared to other countries? Are we getting more innovative over time? These are questions I have been grappling with since I started studying innovation more than two decades ago.

In recent times, the growing importance of innovation to economic growth and prosperity has induced many efforts to measure innovation at the national level. In my book From Jugaad to Innovation: The Challenge for India (Utpreraka Foundation, 2010) [FJ2SI], I cited studies like the UNCTAD Innovation Capability Index, Georgia Tech’s High Tech Indicators and the Economist Intelligence Unit’s Innovation Study to show that India is a laggard as far as innovation performance is concerned.

As I noted in FJ2SI, each of these studies emphasized a different set of variables. The UNCTAD approach was based on human capabilities, and therefore focused on human development indicators. The Georgia Tech approach used high tech exports as a proxy for innovation sophistication. And the EIU used patents as its primary measure.

A few years ago, INSEAD and the World Intellectual Property Organisation (WIPO) launched a joint effort to develop a more comprehensive innovation index. In a short time, this index has gained credibility with policy-makers. The latest report of this Global Innovation Index (GII) came out last June.

India’s Position

India ranked in the middle of GII 2012 with a rank of 64 out of 141 countries. India’s rank remained virtually unchanged from 2011 to 2012. Apart from the GII itself, the GII methodology involves the computation of three other indices – an innovation output index, an innovation input index, and an innovation efficiency index. India was ranked 40, 96, and 2 respectively on these three measures in 2012.

The innovation input index rests on five pillars: institutions, human capital and research, infrastructure, market sophistication, and business sophistication. The innovation output index consists of knowledge and technology outputs and creative outputs. The innovation efficiency index is based on the ratio of innovation output to innovation input.

To get a clearer sense of where India stands, it is useful to compare India with China, as I did in FJ2SI. China does much better on the GII with a 2012 rank of 34. It was ranked 19, 55 and 1 respectively on innovation output, input, and efficiency.

China outclassed India on 3 of the 5 input pillars – human capital & research, infrastructure, and business sophistication - with a rank difference of 40-50 places. I am not surprised by the huge gap on the first two, but I am certainly intrigued by the huge difference in business sophistication (I’ll come back to this shortly). China was marginally ahead of India on the other two input parameters – institutions and market sophistication.

On the output side, China ranked 5 globally on knowledge and technology outputs while India came in at #47. The only measure on which India did better than China was on the output measure of creative outputs.

Digging Deeper

Looking at the raw scores that underlie the ranks, I found a few interesting contrasts:

  • China does much better than India on institutional factors like ease of resolving insolvency and ease of paying taxes;

  • The biggest differences between India and China are on the education-related indices of reading skills (a real shocker – India scores 4.41 against 100 for China; but the ASER reports have been showing this for years), and pupil-teacher ratio;

  • China’s score on Gross expenditure on R&D is twice that of India;

  • China’s score on ISO 14001 environmental certificates is about 7 times that of India (I need to dig into the significance of this number, but I guess the trend is clear enough);
  • China’s higher score on business sophistication comes from the proportion of firms offering formal training to their employees (16% for India vs. 85% for China), R&D performed by businesses (34% for India vs. 72% for China), and high-tech imports (this is, I suppose, more reflective of China’s position in high technology manufacturing vis-à-vis India);

India’s bright spots (vis-à-vis China) are:

  • Press freedom (not a surprise!);
  • Efficiency of energy use;
  • Ease of getting credit, and ease of protecting investors;
  • Services exports (again, hardly a surprise)

What Needs to be done

The GII underlines something we already know - India’s biggest failure as an independent nation is in the arena of literacy and basic education. No other country with which we compare ourselves has such a poor record on this basic pre-requisite of a modern country. While government initiatives like the Sarva Shiksha Abhiyan and the Right to Education Act have belatedly acknowledged this failure, I don’t see a sense of urgency in addressing this problem. This has serious implications not only for innovation but for the very existence and progress of India itself.

While we often rationalize Indian firms not embracing an R&D culture by arguing that perhaps it’s not a business imperative, the fact that Indian firms are laggards on environmental certification as well as training suggests that we are simply not investing enough in the long term future of our enterprises. This is a sobering thought as we contemplate the future of Indian business and the Indian economy, and should be an important subject for reflection by India’s leading industry associations.

Some Concluding Remarks on Innovation Indices

One problem with innovation indices such as the GII is apparent from the above observations: they are constructed on the base of very generic parameters. The variables that are used to measure the GII (like the ease of setting up a business or the ease of paying taxes) seem no different from those used to measure competitiveness or the business environment. At the same time, the GII omits relevant measures such as the level of protection for intellectual property in a particular country.

In an effort to use “objective measures,” these indices appear to be measuring phenomena that are somewhat removed from innovation per se. Instead, the simple OECD model that I adapted for use in FJ2SI seems much more relevant to measuring the environment for innovation, and the resultant innovation output. 

Tuesday, April 23, 2013

Indian Companies Should Embrace Open Innovation

In a recent article in The Hindu Businessline, I argued that Indian companies can enhance their innovation output by being more open to collaboration with other organizations. Open innovation is one of the approaches we emphasized for companies to enhance their batting average in 8 Steps to Innovation.

Sunday, April 14, 2013

Is Poor Engineering Design Capability at the Root of India's Problems with Technological Innovation?

I recently read a hard-hitting article titled “40 Years of Innovation” written by Harshwardhan Gupta, a Mumbai-based engineer designer (many thanks to Professor S Rajeev for sending me this article). The crux of Mr. Gupta’s argument is that India has failed to build engineering design capabilities, and, as a result failed to embrace technological innovation since “technological innovation and engineering design go hand-in-hand.” He goes on to argue that we are becoming more backward technologically, and have lost out on this count to practically every other significant country one might think of.

There is a good degree of commonality between what I wrote in From Jugaad to Systematic Innovation, and what Mr. Gupta argues in his article. But there are a number of new points as well in Mr Gupta’s article, and I would like to highlight these and comment on them.

Engineering Design Capabilities in India – Improving or Declining?

Mr. Gupta makes the contentious point that more engineering design happened in India pre-liberalization than after – even if it was based on imitation – because of the import controls that were in place at that time. The outcome of this activity was old-fashioned and over-designed, but good machines. There is probably some truth in this assertion, but it’s difficult to quantify. There were certainly pockets of engineering design capability in that era – my father’s own antenna company was a good example of that. Using locally-based engineering and design skills and the policy support provided by the import substitution policies of the government, he and his colleagues built a whole range of antenna designs that enabled all local requirements of antennas in the UHF and VHF bands to be met. Some other companies across sectors and ownership did develop their own products – I can think of BHEL, Thermax and HHV (that I wrote about in an earlier blog post) as examples – but I wonder whether we really have less engineering design capabilities today. The counter-evidence is the engineering design skills that we provide to the world through companies like QuEST and TCS.

Has CAD hindered rather than helped Engineering Design Capabilities?

A second interesting point Mr. Gupta makes is about how the advent of CAD may have actually weakened our engineering design capabilities. He attributes this effect to a false belief that the possession of CAD skills means that you have machine design skills. This is certainly an intriguing notion. It appears to be true in at least one domain – engineering education. When I joined IIT Kanpur as a student in 1981, I remember our senior batch talking enthusiastically about an engineering design course that they had done in their first year. I also heard about how tough the final year Mechanical Engineering projects could be, and how if students failed to make a working prototype they stood a good chance of failing in their projects. Well, the new core curriculum introduced from our batch onwards did away with the introductory engineering design course; and by the time our batch graduated, the requirement of a working prototype had been removed from the Mechanical Engineering curriculum (a disclosure: I was not in ME, but learnt this from my friends in that discipline). While at that time the reduction of emphasis on design in engineering education was attributed to problems in the institute workshops, by a few years later most engineering design had shifted to simulation and CAD. Few engineering colleges in India today require their students to get their hands dirty. [Interestingly, Mr. Gupta, a graduate of IIT Bombay, mentions that he designed his first machine as a student in 1975. Few contemporary IIT graduates will be able to claim that accomplishment!]

Machine Design & Commercialization of Innovation

Mr. Gupta underlines the importance of machines in commercializing innovation. He has an important point there. Ironically, Indian policy-makers recognized the importance of the machine goods industry way back in the 1950s. Companies like HEC and HMT were set up to provide a strong base in the capital goods industry. However, both HEC and HMT were not able to upgrade their engineering capabilities fast enough over time, and they lost out comprehensively once machines made the shift to CNC platforms.

Attitude towards Automation

Mr. Gupta criticizes the widely prevalent notion that automation is evil, and argues that only automation can provide products at the economic price points that will serve the needs of our people. He points out that mass produced products from China are rapidly pushing out locally produced products because we have not embraced automation effectively. I am quite sympathetic to this argument.

In India, there has been a lot of discussion and debate on frugal innovation. If you go back in history, the most successful frugal innovations were the result of mass production, whether you look at the textile industry of the British industrial revolution or the automation of the automobile assembly line by Henry Ford that democratized the motor car. In contrast, by failing to embrace mass production in the textile industry, we undermined the competitiveness of what was once a very successful industry in India.

In fact, at the core of the industrial revolution (which was the trigger for modern industrial growth) was automation.

Jugaad, IPR

I was delighted to see Mr. Gupta’s reference to our pride in Jugaadbazi as misplaced vanity. And, his view that complaints about lack of IP protection are just a cover-up for inadequate engineering skills.

Failure to Scale-up

Mr. Gupta’s other observation that I found thought-provoking was that we as a national are collectively incapable of scaling-up betterments but that we scale up bad things extremely fast and efficiently. He doesn’t provide an explanation for this, though he does point out that we as a nation seem to be subject to a naïve optimism that things will get better even when there is no objective reason to believe that this will be the case. He believes that we can’t solve problems unless we first recognize them as such.  My friend and co-author, Vinay Dabholkar, on the other hand usually argues that it’s better to focus on bright spots. I wonder who’s right. 

Saturday, April 6, 2013

Why does India struggle to develop its own complex high technology products like fighter aircraft?

Dr Raghuram Rajan, Chief Economic Adviser to the MoF, GoI, was the chief guest at the IIMB convocation this year. I had the privilege of meeting him briefly before the convocation started. We talked about jugaad, Indian industry's innovation capabilities, and which companies stand out on the innovation dimension.

One question that Dr. Rajan asked was something that I have thought about often: why do we struggle in our large projects that involve the development of complex products like tanks or fighter aircraft? And why are we able to do relatively better in areas like space and missiles? While I gave an immediate response to his questions, these are important enough questions to merit a more elaborate response.

1. Overly-exacting Specifications

The starting challenge for creating defence products from India is the product specifications. One common criticism of our armed forces is that their specs are usually a combination of the best performance on each parameter offered by different vendors. Often, a product with such a combination of characteristics is either unavailable anywhere, or if it exists, is exorbitantly expensive.

There seems to be some truth in this criticism. Consider this example: according to press reports, in the now "under the scanner" Westland deal, there was only one helicopter globally available that met the specs set by the Indian Air Force. Much of the current debate is about who "diluted" the specs to "allow" the Westland chopper to be considered!

2. Lack of Clarity regarding what Local Development means

Designing a product locally does not mean that all components and sub-assemblies have to be made locally. In fact, one of the key decisions to be made is what will be done locally and what will be sourced from elsewhere.

Take the example of Embraer, the Brazilian aircraft company. Embraer retains ownership of design and system integration, but collaborates with other companies as diverse as Hitachi and GE for important sub-systems. Yet, Embraer aircraft are still regarded as Brazilian planes! Their big supplier partners share some of the investment and development risk with Embraer.

Contrast this with the development of the LCA. Much is made of the fact that India has not been able to develop its own engine for the LCA. But most aircraft companies don't design or make engines themselves!  

Most defence products require higher grade components with "MIL" certification. For many components, it’s cheaper to import from existing suppliers than design and manufacture them in India to MIL standards.

A related issue is the definition of the objective of the development project itself. Whenever I have spoken to people involved with the LCA project, they have proudly drawn attention to the number of new technological capabilities ranging from composite materials to advanced avionics that were developed in India as a result of the project. So, even though the LCA itself may not have been inducted into the Air Force so far, India has undoubtedly gained from the LCA project. Of course, this is limited consolation as the country has not got the aircraft we needed for the defence of the country!

3. Lack of Technological competence in Advanced Technologies

Complex products require advanced competence in diverse areas. Often, India does not have companies or institutions that have the required level of competence in each of these areas. Even when available, such skills may be relatively shallow and limited in scope. When the skills exist in the academic or research institutions, they may not be application-oriented.
LCA project head Dr Kota Harinarayana gave some interesting insights into this challenge when I spoke to him some years ago. When the LCA project started in the mid-1980s, we faced serious handicaps in composite materials, avionics and a host of other technologies. Dr. Kota Harinarayana who headed the Aeronautical Development Agency (ADA) that was created for the LCA project realized that it would not be possible to create all the needed expertise within ADA or HAL. He therefore visited all the leading engineering schools in the country, made an assessment of the expertise available, and created a large collaborative platform to rope in this expertise. Very soon he realized that these individual faculty members lacked either the managerial expertise or the interest to manage complex research projects. So, ADA had to work with the professors to break down the problems into more manageable pieces, each of which could be tackled as a Ph.D. or M. Tech. project. ADA funded the creation of physical infrastructure wherever necessary and did the overall programme management and coordination. So, there is a great deal of managerial effort that has to go into working with academic research partners who might have the required technical expertise.

4. Inadequate Number & Frequency of Experimentation and Testing cycles

While complex products are today largely designed on the computer (the Boeing 777, for example, was designed predominantly based on simulation through CAD/CAE), some amount of physical prototyping and testing is always required. Rapid testing, using low cost mock-ups and prototypes, wherever possible, is critical to completing the project quickly. But, design of complex systems in India is undermined by inadequate resources for experimentation and testing. This results in overly long development cycles.

I don't have hard evidence, but I am sure the CAG's notion of wasted and infructuous expenditure also hampers adequate experimentation. In 8 Steps to Innovation, we wrote about “failure fallacy” - the purpose of experimentation is testing assumptions and learning, not success and failure! Given our administrative rules and audit procedures (the infamous “Infructuous expenditure” that is the subject of criticism of successive CAG reports!), it appears that our system can easily fall prey to this failure fallacy.
5. Design/Development & Production Gap

After independence, India adopted the Soviet model of separation of design and development from production. As a result, we have a huge network of government owned and operated research and development laboratories and facilities, and a separate network of production units/factories (like the ordnance factories in the case of defence).

The separation between R&D and manufacturing has worked to our disadvantage in multiple sectors. Take the case of telecom, where the Centre for Development of Telematics (CDOT) set up in the 1980s created contemporary digital exchanges that were well suited to the hot and dusty conditions of India and the then prevalent high number of “Busy Hour Calling Attempts.” But as I documented in From Jugaad to Systematic Innovation: The Challenge for India, the separation of the technology provider from the manufacturers (a set of licensees who themselves had limited technological capabilities) meant that CDOT was one step removed from the marketplace and that the licensees never invested in creating their own technological capabilities. As a result, over time, the CDOT technology failed to keep pace with the needs of the market and lost out to products imported from global telecom giants.

The separation of R&D from production is particularly detrimental to the commercialization of new technologically-intensive products. The designers tend to be relatively insensitive to concerns of manufacturability or support, and hence the product can prove difficult to manufacture in large volumes, or at a reasonable cost. The manufacturers have inadequate understanding of the know-how and know-why, and in the process of trying to make manufacturing easier or more streamlined make changes in the product or process that make it deviate from the required specifications.

Commercialization of complex technologies needs close working between R&D, engineering and production, and this becomes more difficult if this involves crossing organizational boundaries. There are major challenges even within the same organization – the success of Samsung in the memory chip industry, for example, is often attributed to the co-location of these three functions as this makes communication and problem-solving much easier.

6. Lack of Tacit Knowledge

Besides, successful productionization or commercialization of products involves the generation and retention of a large amount of tacit knowledge. I am reminded of an experience that was narrated to me by the Chairman of Samtel Color, Mr. Satish Kaura, many years ago. Samtel entered the Colour Picture Tube market in the early 1980s when colour TV was first introduced to India. Samtel sourced its technology from a leading Japanese company. However, they struggled to achieve the same level of productivity of CPTs as the company from whom they sourced the technology. However, a leading Korean company was able to master the technology from the same source. Ironically, Samtel had to hire consultants who were ex-employees of the same Korean company in order to get the tacit knowledge of how to improve the yield of the production line!

Successful product companies build huge internal repositories (both informal and formal) of such tacit knowledge. It is this knowledge that helps them avoid repeating the same mistakes or being able to move ahead rapidly when a project gets stuck. Building this knowledge requires going through multiple product development cycles and finding ways of capturing and building on such knowledge from one project to another. But, if one project takes 30 years, you have a problem! In complex product development like aircraft design, we have not gone through a complete project cycle even once. That is a major disadvantage we face.

Why have we done better in the Space Programme?

My hunch is that we have done better in the space programme because that is a vertically integrated programme, has much clearer strategic objectives, is managed more effectively, and because its not a volume-oriented programme – you don’t have to move to serial production, so many of the productionization and commercialization problems don’t exist.

What needs to be done to improve our ability to build complex engineered products?

This is a big question in itself and I will leave it to a future post!