India and emerging markets' 'innovation paradox': Technology-shy firms

The country will need to create an environment where firms not only see the benefit of investing in innovation but also have the capability to do so

Catching up with the world’s leading economies starts with knowing where you are falling behind. With India seeking to move up the ladder to high middle-income status, and to create more jobs through the Make in India campaign, enhancing productivity will be critical. 

The question is: How can developing economies catch up with the leaders in terms of productivity, and what role can the adoption of technology play in this process?

Surprisingly, despite the vast potential of technology to spur economic growth, global surveys suggest that developing-country businesses do far less than expected to adopt advanced-country techniques to upgrade products, technologies, and business processes. They are also behind the curve on improving management practices and undertaking the basic research and development that is necessary to adapt technologies to the local context. 
 

The paradox is why developing economies do so little to adopt advanced-country techniques. Our new study, The Innovation Paradox, argues that developing-country firms choose not to invest heavily in adopting technology, even if they are keen to do so, because they face a range of constraints that prevent them from benefiting from the transfer.

Developing-country firms are often constrained by low managerial capability, find it difficult to import the necessary technology, to contract or hire trained workers and engineers, or draw on the new organisational techniques needed to maximise the potential of innovation. Moreover, they are often inhibited by a weak business climate. 

Even so, India is well placed to avoid some of these pitfalls. For instance, its educational and research institutions are capable of generating very high human capital. More such institutions, and better linkages between them and the private sector, would further enhance this capability. 
 

In addition, recent improvements in India’s Doing Business rankings suggest that the legal and regulatory environment for investment is becoming more favourable to innovative firms. Since the reforms of the 1990s, greater openness to competition and trade has exposed more Indian firms to new ideas and provided them with incentives to upgrade. 

In other areas, however, the available indicators paint a mixed picture. Although Indian businesses invest more in R&D — 0.7 per cent of GDP — than most countries at India’s income level, this is far below the levels of advanced countries, which typically invest two-to-four per cent of GDP. And, while patenting has been rising sharply — a good sign — recent analysis suggests that in both India and China, much of the patent surge, and hence R&D, is driven by foreign multinationals. How much of this investment ends up benefiting the local economy is unclear.
 

Further, data from the MIT-Stanford World Management Survey finds that Indian firms employ poor management practices on average, impacting their productivity and ability to innovate. While India has a broad range of companies, ranging from basic SMEs to true global leaders, even India’s better-managed firms often trail the better-managed companies in the United States. 

Our research suggests that a sophisticated, highly capable private sector is essential for R&D-centred initiatives to succeed. Firms need to have the ability to respond to market conditions, identify new technological opportunities, develop a plan to exploit them, and then cultivate the necessary human resources. They need to be able to walk before they can run.

The story of the East Asian “miracle economies” shows that they emphasised learning, raising the capabilities of the private sector. In Japan and Singapore, productivity movements made the people conscious of the need to improve quality to promote growth and generate good-quality jobs. 
 

India has shown that such programmes work. A study of 20 textile firms showed that firms which received management consultancy services reported a dramatic increase in the adoption of good management practices, and of productivity. After just one year, these firms saw a ten per cent rise in productivity, enough to cover the full costs of the consultancy. 

In sum, the mere availability of a brilliant new idea for a product or industrial process is not enough. There must also be an ecosystem of firms that are capable of bringing the idea to fruition. 

And such firms can only succeed in a policy environment that creates incentives for them to accumulate the necessary physical, human, and knowledge capital, and also supports entrepreneurship as well as private sector innovation.

Work will therefore need to be done on a number of fronts to create an environment where firms not only see the benefit of investing in innovation but also have the capability to do so.   

The writer is the World Bank Group’s Chief Economist of the Equitable Growth, Finance & Institutions Global Practice. 

With Xavier Cirera, he is co-author of The Innovation Paradox: Developing-Country Capabilities and the Unrealised Promise of Technological Catch-Up