Is this perception of India being unable to handle cutting-edge technology and innovate accurate?
One can point to some successes. The ability to indigenously build a ballistic nuclear-powered submarine is an astonishing accomplishment; only four other countries possess this capability. Our space and missile programmes are truly world class. The Agni VI is a truly intercontinental ballistic missile, and we have built credibility in space launch capability and planetary missions. The fast breeder reactor programme is unique, as is the digital public infrastructure used by millions of Indians.
These are just four examples of true innovation and the ability to handle very complex technologies. What is common to them all is the involvement of government, both as the primary source of funding and in setting out the vision. All took decades to fructify and were national priorities. While the government is far from perfect, it does have a track record of being able to deliver in critical areas of national security where no foreign technology is easily available.
So maybe India’s innovation problem is more a private-sector issue? This is already evident, as, in India, of the money spent on R&D, more than 60 per cent is government-funded, unlike other countries where the private sector is dominant.
If we look at the private sector, one gets a sense that there is enough innovation activity among smaller companies and startups. Talking to venture capitalists, one gets the impression that multiple deep-tech funds are being launched and that there is heavy investment in the areas of space tech, defence, electrification, and additive manufacturing. There is risk capital available from both the government and investors. There are sufficient successful startup role models in India. Our best talent is moving into startups, as we have seen successful monetisation.
Even smaller listed companies exhibit ambition and a willingness to take risks. The entrepreneurs here are willing to invest in capex and pursue new growth vectors, often involving interesting niche technologies and markets.
The real problem seems to be the large Indian companies. Here, innovation seems to be abysmal. I cannot think of much in terms of cutting-edge research or technology. The only exception is pharmaceuticals, where certain companies have shown the ability and the desire to undertake real innovation.
Why do larger Indian companies lag in innovation? Being highly profitable and focused on return on capital, one view is that they are too focused on short-term financial metrics. Senior leadership at these large companies may feel that R&D expenditure in the short term will hurt margins and the stock price.
This is a mistaken interpretation in my view. Properly explained and segregated, the Indian markets today are mature enough to back certain companies and promoters investing in R&D. The market will assign higher multiples to these companies as the period of competitive advantage extends through R&D. This multiple expansion will more than compensate for lower short-term earnings.
The lack of innovation may also be based on the perceived lack of competition. The largest Indian companies are getting more and more entrenched. They have pristine balance sheets and market share dominance. The Herfindahl-Hirschman index is rising across sectors. Given the difficulties in scaling a new business in India, the incumbents don’t see the need to innovate to stay ahead of the competition.
The largest companies and groups are also busy investing in nation building. They have multiple areas in which they can invest large sums. They see no need to spend money on cutting-edge technology when they can invest billions into basic infrastructure at good returns.
Many of the largest groups have moved from founder mode into manager mode, wherein professional executives now run the business, or the next generation of the family is more interested in family office constructs. Founder mode, wherein the founder/family is fully in charge, should normally lead to greater risk appetite. There are many risks that only the founder will have the confidence to take. Their time frame will normally be much longer than professional management. R&D fits this profile. We may need to see greater equity incentives for the management team to act more like founders.
We also have no real role models to emulate. There has been no breakout success of a company using innovation to gain global share in any industry. The obvious potential was in the IT services space, where the global delivery model at scale was a genuine business innovation. These companies became global champions using the new business model. They had the size and resources to make a genuine attempt at innovation. However, instead of using their profits to invest further into technology, they chose to return over ₹6 trillion back to their shareholders over the last decade.
Returning the majority of your profits to shareholders instead of investing is the sign of a maturing industry and today these stocks trade at sub-market multiples due to a challenged growth outlook. These companies had exceptional track records and management teams; investors would not have penalised them for a step-up in R&D.
While resources are an obvious challenge when trying to do R&D and competing with the best, the fact remains that the best R&D is done by small teams with capital constraints. Corporate India does have the scale to compete in certain research disciplines. We as a country definitely have the human talent.
India’s innovation problem is largely a private-sector large business problem. The only way to kickstart this is to enhance competitive intensity across sectors. New players have to enter, whether they be startups or foreign players. Ease of business reforms remains critical to achieve this. Only when their profits and growth are threatened will our largest companies react.
Alternatively, we need to see a big research success, something that can deliver billions of dollars in cash flow. This will be a wake-up call for corporate India and undoubtedly cause heartburn and force comparisons. The asymmetry of returns will be visible. We need more innovation in India, and it is not the fault of the government or markets; large Indian companies have to look inwards. We investors have to disproportionately reward R&D, then our companies will listen. In today’s world, anyone not innovating will ultimately fade away.
The writer is with Amansa Capital
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