Post-independence Efforts to Create ST Capabilities Role of Industrial Policy

Prosiding Forum Tahunan Pengembangan Iptekin Nasional 2012 2 MANAGEMENT OF FRUGAL INNOVATION: LESSONS FROM INDIAN EXPERIENCES Rishikesha T. Krishnan Professor of Corporate Strategy Policy, Indian Institute of Management Bangalore, India Email: rishiiimb.ernet.in In recent years, India has gained a reputation as a hub of frugal innovation Bound Thornton, 2012. India offers some of the lowest priced mobile phone services in the world, yet, until recently, Indian mobile services companies made healthy profits. Carlos Ghosn, CEO of RenaultNissan coined the term “frugal engineering” after he found that an engineering team in India was able to develop an engineering solution for a problem at one- fifth the cost at which a French team was able to do it Radjou, Prabhu and Ahuja, 2012. But, perhaps the defining moment for frugal innovation in India was the announcement of the launch of the Tata Nano, a car with a price tag of Rs. 100,000 at that time, approximately USD 2,200 in January 2008. This phenomenon raises several important questions that are relevant to India and other emerging economies. 1 How significant is frugal innovation in the overall innovation paradigm in India? 2 What are the factors supporting frugal innovation in India? 3 Are there any lessons we can learn from the Indian experience as to how frugal innovation can be managed effectively? 4 In particular, are there any lessons we can learn from India as to how an innovation system can be shaped to support frugal innovation? These questions are the subject of investigation of this paper. To answer these questions, we need to place the recent attention to frugal innovation in the broader context of the evolution of innovation in India. We therefore start with a brief history of innovation in India. 1. INNOVATION IN INDIA: A HISTORICAL PERSPECTIVE 1.1. Strong Heritage but Missed the Industrial Revolution As an ancient civilization with a rich intellectual and cultural heritage, India was known for seminal contributions to the development of algebra, geometry, and mechanics. This rich heritage was built upon over the centuries with India being a major contributor to the global economy. Some estimates suggest that India accounted for as much as 24 of the world’s GDP in 1700 Maddison, 2007. However, after the entry of the British East India Company into India in the 17 th century, and the subsequent formal annexation of India as a part of the British Empire in the early 19 th century, India was effectively under colonial rule for a few hundred years till its independence in 1947. India became a part of the traditional colonial economic model – a supplier of raw materials and other resources, and a recipient of finished goods from the British. As a result, India largely missed out on the industrial revolution and instead became a supplier of inputs to the British industrial machine. The country became increasingly impoverished and its share of world GDP declined to 4 by 1950 Maddison, 2007. At independence in 1947, India was one of the poorest countries in the world. In addition to missing out on the industrial revolution, India also missed out on the major strides taken in science and technology in the late 19 th and early 20 th centuries, a very fertile period for global science and technology Krishnan, 2010. There were very few scientific or research institutions in India at the time of independence, and the university system was also restricted to a few pockets.

1.2. Post-independence Efforts to Create ST Capabilities

India’s political leadership, particularly India’s first Prime Minister Jawaharlal Nehru who led India from 1947 to 1964, was keen to make up for lost time. Nehru, who had studied at Prosiding Forum Tahunan Pengembangan Iptekin Nasional 2012 3 Cambridge, was aware of the advancements of science and technology in the west. He believed that science and technology could transform India, and was determined that India should join the ranks of the w orld scientific community. Therefore, in spite of India’s precarious financial position, India invested in creating science and technology institutions in the years after independence. The formal innovation system in India grew around these national laboratories set up by the government in different networks – a civilian network around the Council of Scientific Industrial Research; a defence network around the Defence RD Organization; an agriculture research network around the Indian Council of Agricultural Research; the Indian Space Research Organization; and the Department of Atomic Energy. On the academic research front, prominent institutions including five Indian Institutes of Technology were set up in the 1950s and 1960s.Thanks to the establishment of these networks of institutions, India developed a sizeable science and technology workforce.

1.3. Role of Industrial Policy

For the fruits of science and technology to percolate into society, RD has to be translated into improved processes, products or services. Firms play a prominent role in linking invention and discovery to economic outcomes. Some choices made by India in terms of industrial policy had an impact on the extent to which this translation of RD into economic benefits happened. While India adopted a mixed economy framework, the public sector was seen as the bulwark of the Indian economy. Under the Nehruvian development model, the emphasis was on setting up capital intensive, mother industries such as steel, machine tools and other capital goods, and these were set up under public ownership. As the technologies required to set up these industries were not available locally, the technologies had to be sourced from outside the country. Due to geopolitical reasons, the principal source was the Soviet Union and other east European countries Tyabji, 2000. However, none of the local RD institutions were involved in the technology transfer process. The public sector companies themselves enjoyed a high degree of protection, and were therefore under little pressure to improve productivity or expand their range of products. Hence they lacked an incentive to work with the RD system Krishnan, 2010. Even in those industries in which the private sector was present, due to high levels of effective protection for the local economy, and an elaborate licensing system, firms were under little pressure to make improvements or add on new products Krishnan Prabhu, 1999. Symptomatic of this was the production of motor cars in India by two private players whose models remained largely the same for about twenty years after they licensed the designs from European companies. While India developed good science and technology capabilities, particularly by developing country standards, the translation of these capabilities into benefits to the larger economy remained limited. Formal innovation in the industrial sector remained limited with most Indian firms remaining dependent on foreign sources of technology.

1.4. Innovation Outside the Formal Innovation System