Technology leadership in India - problems and solutions This is the second in a three part series. To read the first in series click here. In this article, the author focuses on encouraging innovation. BY RAJEEV NANDA 29th October, 2005 On my way from hotel to the airport in Shanghai I pulled out the departure card and started filling in the details. I was able to fill it out without a single squiggle on the form even though the car was moving at 100 km/hr. As we approached the airport, I tried telling the driver what airlines I was flying on and after repeated attempts I gave up because he could not understand even a single word of English! Contrast that to India where you may not be able to keep your butt on the seat on your way to the airport because of broken roads and bumps, but even the auto-driver will know enough English to have a meaningful conversation. As I was standing in the check-in line at Shanghai airport, the only thought that came to my mind is – God help India if China learns English! So, what role does the government play in establishing a nation’s leadership? A lot! Infrastructure development is one of the critical factors that is directly under its control. Although the factors discussed below are also under its control, in most cases, the government would act as influencer rather than controller. The government of India starting giving out tax incentives to software industry in early 1990s and it is largely assumed that these incentives are the only reason why the software industry boomed. While there is some element of truth to it, it is not the whole truth. Going into the depth of those reasons is beyond the scope of this article but the fact of the matter is that our progress in software, and for that matter in many other areas, has been in spite of the government rather than because of it but that does not need to continue. The government can very easily set the tigers free by providing the right incentives for innovation and technology advancement. Unfortunately, unlike God, the government opens one door and closes many others that leads to mixed results at the end. The best way the government can help the hi-tech industry is by staying out of its way and putting in some checks and balances that provide a mechanism for self-regulation and control, rather than having bureaucratic control processes that breed corruption. While this may remove the hurdles to hi-tech ventures and enable growth, it still may not provide any incentive for new industry and ideas. So, how to encourage innovation? Many a time, people say that innovation and research cannot be bound by time or motivated by money and true researchers are always driven by the intrinsic need to innovate similar to an addict that is driven by addiction. What baloney, I say! If that were true, then how come the same Indians and Chinese innovate like crazy in US, while failing to demonstrate similar results in their homeland? The best answer to this question can be found by reading an excellent essay by Gary S. Becker that goes by the title - The Economic way of looking at human behavior. Consider the fact that startups with limited time and funds innovate much faster and better than government departments that are money pits! The bottom line of the essay is to prove that human behavior is driven by economics or in other words Money makes the mare go! If government puts in place some policies and incentives to promote a certain behavior, you are bound to see flurry of activity that will maximize the gains (monetary) for the individuals involved. That was one of the reasons why so many software companies mushroomed when the government brought in tax incentives to that industry. So, what kind of incentives will help innovation in technology? Here are some ideas that may work well. Make it profitable to invent and innovate If you ask anyone on the street what are the biggest hurdles to innovation and progress, the most common answer would be the bureaucracy and process roadblocks. But, is that really so? What if all these hurdles were removed, will that automatically increase the number of innovations? The answer is no. Just removing the hurdles is not enough. Creating incentives to innovate completes the equation. The question becomes how and what kind of incentives can the government create that will encourage the entrepreneurial innovation? General tax incentives are OK, but let's make these incentives tied to innovation. So, if a company files for patent in their area of technology, the company should be able to get a tax rebate, say 10% of net profits. If the company acquires a patent, then the ante should be upped to 25%. Finally, to encourage the patents to be turned into products a tax rebate of 50% should be allowed on all profits generated by the product for the first five years. A formula can be devised such that the more a company innovates, the more profit it is allowed to take home. As of today, we innovate and invent for the MNCs we work for. According to one of the published surveys, MNCs account for 85% of patents filed from India. Even if 50% of these patents had been filed by Indian companies, consider the turn-around in technological leadership position of India few years down the road. The government should focus on targeting key upcoming technologies that will help sustain and improve our leadership position in hi-tech. This means it should sponsor an independent body, in collaboration with industry, to identify upcoming technologies where current innovation will lead to better leadership position in the future. In today's context, the technologies on everyone's horizon should be Nanotechnology, Fuel cells, Wireless (not just cell phones, but broadband on wireless), bio-technology, MEMS and similar others. The indirect benefit of India taking leadership in innovation will be low cost products in hi-tech, because the licensing fees can be drastically reduced and will still generate enough foreign exchange for us that it becomes a win/win situation for the entire world. Today, the licensing cost of a technology whose patent is held by the company in high cost region like US or Europe, is high enough to stall product adoption in low cost countries like India and China. If a low-cost country like India holds the patent, the licensing cost structure can be devised such that it is pennies for countries like US, while in paise for India. Make it profitable to take risk It is often said - India is the richest poor nation! Consider the billions locked into personal savings and bank lockers (some of which may be tainted, but we are not counting political money here) and you will soon realize the truth behind the statement. Even if we can mobilize 50% of these savings, we will never have to go begging for FDI in hi-tech or for that matter any other area and India can have much higher GDP growth than what we are used to. One of the key reasons behind excess capital during the Internet bubble is often overlooked. During the dizzy heights of US stock markets, millions of people took out money from their savings and retirement accounts and took second mortgages on their homes to pour into hi-tech companies. This includes not just people whose retirement was many years away, but also older people who had already retired! Yes, many lost at the end, but let's not forget lot many more who doubled or tripled their retirement nest by riding the wave. The easy access to money not only helped foster entrepreneurship but also motivated individuals and companies to come up with cool new products and ideas that helped US take the quantum leap in technology leadership. We can do something similar but to counter our culture's risk-averseness, the government can reduce the capital gains tax drastically. In fact, in the short term, we should reduce the capital gains tax to zero. If this is too difficult for the leaders to digest, let's target this reduction only on capital gains from investment in hi-tech sector or wherever we want to establish a leadership position. Full steam ahead There are many other ideas that can help entrepreneurship and innovation. The government has to be willing and determined to make India a technology powerhouse over the next decade. It will be too late to do anything by 2010, by when the world will be knocking down China's doors to move their call centers, development centers, ITeS and BPOs from India to up north. The government itself cannot squeeze out innovation and leadership from the industry. All it can do is encourage and motivate a certain behavior by policies and incentives. The industry and individuals will need to do their share of hard work to make the quantum jump. I'll discuss some key ideas about it in the next column, and will like to end this one with the following food for thought - India has the largest number of ISO & CMM certified companies in the world but did not contribute a single killer app for Internet; while Israel may not boast about certifications but has contributed two killer apps - instant messaging and VoIP/ Internet telephony - that have revolutionized communications over Internet. BY RAJEEV NANDA (About the author: Rajeev is the author of e-verything.com: How to map out a viable e-strategy published by Tata McGraw-Hill. He can be reached at rajeev.nanda@indiatimes.com. Opinions expressed are his own )