Monday, June 20, 2011

Recession and Industrial Innovation Policy Planning

The general theme of the last post was to emphasize on the need to focus on evolving a long-term innovation policy which gives the industrial sector its due, without necessarily marginalizing the business services sector entirely. In urging for such an approach, I had relied upon some of the recommendations in the 2009 report of the Commission of Experts (EFI), a German Government think-tank.

Among the report's recommendations, the one that was briefly discussed in the last post was the need to finance education, research and innovation in times of recession to ensure that the economy does not retreat into a “safe” mode, which could result in an ill-equipped or inadequately equipped technology workforce.

Innovation and SMEs
To finance innovation, the report implicitly recommends the creation of a vibrant and responsive equity market to fund innovation by Small and Medium-sized Enterprises (SMEs). What is interesting is that in the literature that one has come across thus far, the pervasive opinion is that innovation is primarily churned out of SMEs (and not behemoths, although it is behemoths which typically flaunt their patent filing statistics).

In Germany, the report says, 70% of its employees work in SMEs and 43 % of all SMEs in Germany are innovative. In the report, an SME is deemed as innovative if it brings new or improved products into the market.

The report further observes that investment in innovation by SMEs is integrally dependent on the state of the economy. To ensure that such investment remains insulated from the health of the economy in some measure, the report recommends an innovation-friendly tax system. Even if an innovation-friendly tax system is put in place and an active venture capital market is promoted, how does one generate demand for the products of such innovation?

The question is, what exactly is expected of such innovation? Is innovation during recession meant to create products/processes which can kick-start the economy? Or is it meant to bring back pre-recession growth figures once the recession dies its cyclical death? Or is it meant to reduce future vulnerability to recession by creating a strong post-recession technology base? Can a single approach bring about any or all of these outcomes? I guess that would be entering the realm of a trained economist, which I am not, hence opinions are welcome.

Anyways, the report recommends a combination of topic-independent R&D support in the tax system and project-specific funding, both of which are intended for SMEs.

The University Angle
Among the other recommendations, there are two which deal with universities. The first one is about creating an attractive science/technology labour market. This came as a surprise to me because I did not expect an advanced technology regime such as Germany to have trouble attracting scientific talent. 

Besides working on qualitative development of the German education system, the report recommends creating a framework to encourage retention of home-grown talent and relaxation of immigration norms for highly-skilled foreign nationals (recently, Australia welcomed highly-skilled human resources from India under its Global Non-discriminatory Immigration Programme).

The second recommendation relating to universities was to boost university-industry interaction to “intensify and improve knowledge and technology transfer”. One of the suggested steps, which I felt was nuanced, is to avoid imposing a universally binding technology transfer framework which spell out the minutiae for all research institutions and universities.

It is probably best to lay down a common policy which encourages a culture of research accountability and incentivization, without using a straitjacketed approach that is blind to the dialectics of individual technology sectors. But there is definitely a consensus on the need for universities to play a more active role in facilitating commercial application of their own research, and not restricting themselves to merely providing skilled manpower to the applied sciences industry.

Tapping the Knowledge-intensive Services Industry
The report seeks to tap the under-utilized knowledge-intensive services industry in Germany. “Knowledge-intensive services” refer to provision of services by way of high-end technology and engineering consultancy. This is one sub-sector of the services sector which ensures that there is an area of the economy which, although “soft”, still requires highly-qualified technology professionals, as opposed to other areas such as legal, business and financial consultancy services (the so-called Anglo-saxon model).

The reason knowledge-intensive services are a relatively untapped area in Germany is probably because its business houses are globally-renowned brands for product development, be it the chemicals industry or the auto industry. Considering the fact that exports drive the product-based industries of Germany, and the fact that the Chinese low-wage model makes it difficult to compete price-wise, it is strategically important for Germany to rapidly ramp up the scale of its knowledge-intensive services.

Lessons for India
From my limited understanding, most of the recommendations in the report for the German economy seem applicable to India as well. Given the on-going discussions on the need or otherwise for the Public-Funded Intellectual Property Bill (the so-called Indian Bayh-Dole), I now see the wisdom in  the calls for undertaking a thorough study on the nature of Indian research institutions and universities, and their core-strengths and weaknesses, before introducing a cut-and-dried legal framework.

As for the industrial policy, India must look at increasing the contribution of the manufacturing sector to the GDP, which is currently hovering at around 15%. Although knowledge-intensive services already form a respectable part of the Indian services sector (since quite a few Indian arms of foreign multinationals play the role of engineering services division), it is just not enough to remain content with our role as sidekicks to product developers.

India has the natural resources to play a prominent, if not dominant, role on the global manufacturing scene. Along with China, India too has embarked on a quest for more minerals in African markets; therefore, what now needs to be scaled up along with our quest for natural resources, is the ability to produce goods for domestic and global consumption.

Today our population and its increasing panache for diverse consumption give Indian players a chance to test their manufacturing capabilities before they venture into foreign markets. Indian SMEs in particular must seize the initiative, but I think the hurdle before them is to attract engineering talent which either opts for cushy management positions in business consultancy majors, or gravitates towards non-Indian manufacturing giants.

Is there a way around this challenge? Also, what is the Indian government's policy for promotion of SMEs? We’ll ruminate on these in future posts.

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