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Innovation has to be the starting point for entrepreneurs

Innovation significantly expands your options, possibilities, and opportunities

That there is enthusiasm about entrepreneurship across India is apparent, and clearly visible. A number of our young citizens are now thinking about starting a business rather than taking up a job. And that’s a good thing, because we need more job creators.

However, in India, innovation is often not the starting point in our thought process for our entrepreneurial journey. Most of our innovators and entrepreneurs are not thinking of how we can solve the problem with a radically different solution or approach. Most of our aspiring entrepreneurs do not think of creating or inventing new products and solutions.

That’s why we see India falling to 76th position this year in the global innovation index. Even within the BRICS nations, we are the lowest-ranked country on this index. Interestingly, while all other BRICS nations have strengthened their position, India has slipped 10 points from 66 last year, to 76 this year.

This has to change.

There is nothing wrong in building a strong me-too business. However, me-too concepts or even incremental innovations on existing concepts limit your own options and opportunities. On the other hand, innovation expands your possibilities, options, and opportunities, significantly. It provides you a fresh new canvas to paint on, rather than trying to fit your signature on a painting that already has other signatures.

But, for innovation to become a part of our mainstream thinking, we need to create an enabling ecosystem and a conducive environment for innovators and entrepreneurs to convert their ideas into products and businesses. I am glad to note that things are improving on this front. A number of private initiatives are creating the infrastructure and resources for entrepreneurs to innovate. Initiatives like Innofest, of which I am a committed patron, which celebrate and showcase innovation, are important to bring innovation at the center of our thought process.

Innofest is a festival of innovation, ideas and inspiration, to be held in Bengaluru on the 22nd of August 2015. I will be there. I hope to see you there too.

#IndiaCanInnovate @Inno_fest

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Can India Arrest the Slide in its Innovation Ranking?

Over the last few years, the Global Innovation Index (GII) compiled annually by INSEAD, WIPO and Cornell University has become the most commonly accepted global indicator of nations’ innovation performance. So, there has been much angst in India over the last couple of weeks once it emerged that India has fallen 10 places in the last year from 66 to 76. 

About the Global Innovation Index

I have written about the GII in this blog before. Just by way of reminder, the GII measures national innovation performance by looking at a whole set of variables related to both innovation input and output. The innovation input index is a function of institutions, human capital and research, infrastructure, market sophistication and business sophistication. The output index considers knowledge and technology outputs as well as creative outputs.

My main reservation about the way this index is computed is that some of the variables are general business climate variables and not specific to innovation per se. I also wonder whether there is a degree of double counting in the index – at the minimum, I suspect some of the variables they measure are strongly correlated with each other.

But the good thing about the GII is that it has now fallen into a pattern, is fairly stable in the way it is compiled year after year, and therefore should give us a sense of broad trends even if the exact score computed is not sacrosanct.

Why are we slipping?

To see why we are slipping, I took a closer look at the scores of India vis-à-vis China. As the two “emerging market” giants, the world often sees China and India as competitors (though we all know, of course, that China has been ahead of India in the economic sweepstakes). And, to make it even juicier, China’s rank on the GII has been improving unlike ours which has been steadily declining!

There is not much difference in scores between India and China as far as institutions are concerned and this has been the case for the last few years. Not surprisingly, China scores much better than India on infrastructure, but many of the infrastructure variables captured in the GII are broad ones like electricity output and logistics performance, and we know that India has a long way to go on these parameters. So, there is no great surprise here.

On market sophistication (credit, investment, trade and competition), India has actually pulled marginally ahead of China in GII 2014, though we trailed China last year. Many of the parameters that go into this metric are again broad ones that would go into any competitiveness study and are not specific to innovation.

On business sophistication (knowledge workers, innovation linkages, knowledge absorption), China is ahead, but the gap has declined marginally from 2013 to 2014. That’s a good sign, and India is even ahead of China on a couple of sub parameters that add up to this score – state of cluster development and joint venture/strategic alliance deals.

Then, where is the slippage and is it a cause for concern?

Yes there is a concern, because the most serious gaps between India and China are on two critical parameters that are linked intimately to innovation: the input parameter relating to human capital and research, and the output parameter relating to knowledge and technology outputs.

Though we keep emphasizing the importance of leveraging the demographic dividend, and both education and skill development have been flagged for some years now as critical issues, India’s Achilles heel continues to be what is represented by the Human Capital and Research (HCR) parameter of GII.

We are behind China on every single component of this parameter. The three main constituents of HCR are (school) education, tertiary education and research and development. On both (school) education and R&D, the gap between India and China is widening fast. Only in tertiary education is the gap narrowing, and that is because of recent improvements in India’s Gross Enrolment Ratio.

School Education

This assessment of (school) education is corroborated by reports like the Annual Survey of Education (ASER). ASER 2013 shows that while the percentage of children out of school has declined, the percentage of children in Standard V who can read a Standard II text has also declined from 52.9% to 47% between 2009 and 2013. While there have been noteworthy efforts to improve school education including the government’s Sarva Shiksha Abhiyaan (which can take some credit for the improvement in school enrolments) and private efforts like that of the Azim Premji Foundation on the quality side, clearly we have a long way to go before we can ensure a foundation of good schooling to our kids.

Research and Development

The R&D issue is more tricky. India’s R&D intensity has remained stubbornly range-bound between 0.9% and 1% for the last two decades. We pride ourselves on our ability to make do with less as exemplified by the achievements of the Space programme in the public sector, and that of automotive and pharmaceutical companies in the private sector. Yet, our adverse trade balance and poor standing in high technology industries (except for a small number of honorable exceptions) show that we have been unable to develop the sophisticated technological capabilities needed to hold our own in global markets.

There is a “chicken and egg” problem here – some firms don’t invest in R&D because they don’t have the right people to do R&D. And, in those companies where they do have the right people, the top management does not have the confidence to put enough resources behind the team. Either way, firms fail to develop a sound R&D and innovation capability.

Given these problems, it is not surprising that India lags on knowledge and technology output as well.

I have my doubts about the GII’s methodology in calculating the other output parameter – creative outputs. GII shows a huge swing from 2013 to 2014 on this parameter with India well ahead with respect to China last year, yet lagging China significantly in 2014. Since a country’s creative outputs can’t change that rapidly, I am inclined to just ignore this parameter.

Conclusion

I am not too optimistic about India reversing this downward trend in GII quickly. Some of the announcements by the new government will help enhance economic institutions, investments and infrastructure if they are pursued seriously. But, it is not clear how and when the slide in human capital and research (as measured by the GII) will be arrested. Some of my pet ideas in this direction are in the slide below.

[The views expressed here are the personal views of the author.]
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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.