India’s innovation problems

India’s innovation problems

A recent New York Times (NYT) story raised an interesting question. Why has India not produced a Google or an Apple? The question can be reframed broadly: Why is India a laggard when it comes to innovation?

There is probably no single answer. The stifling environment for the first four decades after Independence (others will say the problem dates back to ancient India), lack of funding opportunities for innovators and easy availability of off-the-shelf technologies are some of the contributing factors. Each of them is a story in itself.

Today, there is no shortage of innovators who want to create new products. NYT noted the case of Sloka Telecom in Bangalore. The company is developing a new range of radio systems that are less expensive than those used by companies today. One could say the future belongs to such innovations. Yet, companies such as Sloka Telecom have difficulty in finding venture capital funding.

One reason for this problem could be the absence of deep financial markets that permit funnelling of money into risky ventures. This is to be distinguished from risk-taking. After all, Indian investors are hardly risk-averse when it comes to equity market investments. The problem here is that of time horizons of investors. Investing in a risky product is very different from investing in a risky stock. Liquid financial markets can make a difference here.

This is one end of the Indian innovation problem. The other side is probably more complicated. Why have Indian companies preferred to buy ready-made technologies instead of producing them at home? For the first 40 years after Independence, India was a closed economy, one that did not have to export goods for its survival. The result was that returns from scientific research, which yields innovative products, were much lower than outright purchase of technology. Lack of export markets virtually killed innovation at home. In all other “late industrializing" economies such as South Korea and Taiwan, innovation was the driver of growth. India never took that road.

Now, of course, the bitter fruits of that past are ripe. Companies such as Sloka Telecom worry where the money will come from while export markets will require a repertoire of innovations that India does not have, for the moment. For India, the time is short and the road to innovative products long.

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