Monday, May 26, 2014

Will the Ministry of Commerce under the New Government Deliver the Goods?

After a marathon election campaign that started last September, the Bharatiya Janata Party (BJP) emerged victorious on May 16, 2014 winning a clear majority on its own (282 seats out of the total 543 seats in the Lower House of the Indian Parliament). Today the Union Council of Ministers formally took oath, including Ms.Nirmala Sitharaman, who is widely seen as the next Minister of State for Commerce. As most of our readers know, the Department of Industrial Policy and Promotion (DIPP) which is the nodal department for all Intellectual Property-related issues, falls under the Ministry of Commerce and Industry.

Given that the Ministry of Commerce through the DIPP is responsible for formulating manufacturing and innovation-related policies, it’d be interesting to see what the new dispensation does to revive the manufacturing sector and to boost innovation.  On this blog, we had earlier written two posts on a National Innovation Policy and the importance of investment in innovation and research in times of recession. Following are a few relevant extracts from both these posts:

As is wont, the situation today has a macroscopic perspective and a microscopic one. As far as the macroscopic view is concerned, the services sector is a tempting seductress which promises returns in a geometric progression within a narrow time window and is not as infrastructure-intensive as the manufacturing sector. This makes it an easier and “softer” option for economies which do not have the political will to invest in hard infrastructure (Indian economy being a case in point).  

The microscopic view, which is corollarial to the macroscopic one, is that investment in hard infrastructure requires a highly-skilled and reliable industrial workforce, which is willing to constantly learn and adapt to newer technologies and style of functioning (this calls for industry-friendly labour laws as well). This means, besides private enterprise, the government too needs to play a huge role in creating, training and nurturing a workforce, and in chalking out a comprehensive pan-nation industrial innovation policy.

Importantly, the latter again calls for establishment of well-networked innovative institutions which have collaboration-friendly structures to combine their research firepower in good times and in times of dire need to pull out the country’s economy from doldrums. One of the countries which has such an approach at the heart of its innovation policy-making is Germany. Not-so-incidentally, Germany happens to be those rare developed economies which did not buckle under the recession to the extent that US and UK have.

How has Germany’s industrial/innovation policy helped it cocoon itself to a significant extent from the harsh effects of the recession? There is an extremely informative and insightful paper covering the theme of this post and this specific issue. The paper entitled “Can the Relative Strength of the National Systems of Innovation Mitigate the Severity of the Global Recession on National Economies?  – The Case of Selected Developed Economies” was presented by A.Baskaran and M.Muchie this April at the DIME Final Conference at Maastricht, Germany.

On Page 11, the authors of the paper enumerate what they perceive to be the strengths and weaknesses of the German system of innovation vis-a-vis its ability to mitigate the effects of recession. Some of the strengths listed therein are relevant to the post, which are as follows:

(i) In contrast to ‘Anglo-Saxon model’ of growth based on financial services (e.g. the UK) and property market, the German economy is strongly rooted in manufacturing, companies invest in long-term growth, and workers-managers relationship is based more on close cooperation;
(ii) Structural reforms in the labour market and corporate sector before the recession helped the German economy to become more competitive;

(xiii) Germany has developed FDI strategies around incentives and clusters and developed world renowned centres of excellence and developed globally recognized position as leaders in certain growth sectors such as clean technology.  Germany has also developed well recognized excellence in innovation, and has created the best environment for R&D, which continues to attract companies from abroad to work close to the leading German companies and to access the best talents in the country

The above paper apart, what is even more educational is the recommendation of the Commission of Experts (EFI) (a commission established by the German government) to the German government in its 2009 Report. Under the head aptly titled “Education, research and innovation- a particular priority in recession”, the Commission recommends thus in no uncertain terms:

“The Expert Commission suggests that in the course of implementing the second recovery package, more attention should be paid to the concerns of education, research and innovation. If this is not done, there will be a severe shortfall in the funds available in future to improve the competitive position of Germany. Currently, the German innovation system is still competitive in an international comparison. However, competition is becoming considerably more intense as other industrialised countries and some key emerging economies redouble their efforts. Germany‘s position with respect to R&D will therefore come under pressure if the level of expenditure for research and innovation is only maintained at present levels. There is an urgent need to expand education, research and innovation.”
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.”

Taking forward this train of thought, I think it may be important for the HRD Ministry and the Ministry of Commerce to work together to develop a trained workforce and to provide avenues to utilize the skills of the workforce. Further, the National Manufacturing Policy needs to lay stronger emphasis on innovation, IP creation and IP protection. The High Level Committee constituted under the Policy must include an expert on innovation and IP, preferably a committee of MHRD IP Chairs.

Having said the above, it is clear that there’s a lot that can be done and there is no dearth of suggestions coming from all quarters. But if the last ten years have proved anything, it is this- execution above all needs political will, and hopefully the new dispensation has what it takes to once and for all prove that India does not need to cite democracy as an excuse for poor execution each time it is compared with China. Here’s wishing the new Government the very best in its sincere endeavours! 

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