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INTRODUCTION



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India's Changing Innovation System: Achievements, Challenges, and Opportunities for Cooperation: Report of a Symposium I INTRODUCTION

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India's Changing Innovation System: Achievements, Challenges, and Opportunities for Cooperation: Report of a Symposium India’s Changing Innovation System Achievements, Challenges, and Opportunities for Cooperation India is a rising economic power and an increasingly important locus of innovation. Spurred by competition unleashed by a liberalization of once stifling regulations, India’s private-sector firms are fast improving the quality of their products and services and are rapidly expanding their global presence. At the same time, U.S. and other multinational companies are increasingly locating their advanced research and development (R&D) operations in India to draw on the nation’s highly trained scientists, engineers, and managers. In the process (and despite the endemic challenges of poverty) India is changing from a locus of low-cost contract research and reverse engineering to a global center of high-value, indigenously generated innovation. To sustain this transformation, Indian policy makers increasingly recognize the need for continuing economic reforms, new public investments in the nation’s infrastructure, and new policy initiatives and institutions to encourage innovation, expand the skills and knowledge base of its population, and facilitate entrepreneurship. As India grows as a center of global innovation, a new U.S.–India relationship is emerging—one where India is seen as both a partner and an effective competitor to the United States in the global marketplace. At the National Academies’ June 2006 conference on India’s Changing Innovation System, Ralph Cicerone, the president of the National Academy of Sciences, noted that advances in information and communications technology are creating new opportunities for the United States and India to benefit from the complementarities in their innovation systems.1 1 See address by Under Secretary of State Nicholas Burns on “U.S. Policy in South Asia” to the Asia Society, on November 27, 2006, on the growing bilateral relationship with India. See also ad

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India's Changing Innovation System: Achievements, Challenges, and Opportunities for Cooperation: Report of a Symposium These technological advances encourage companies, individuals, and public institutions alike to adapt or be left behind. One of National Academies’ own recent reports, addressed to the U.S. Congress, stressed that with the pace of global competition increasing, the United States must adjust its policies and institutions if it is to compete successfully in the future world economy.2 And the United States is hardly alone in needing to adapt. Countries around the world, India included, are seeking to accelerate the transfer of scientific knowledge from universities, laboratories, and individuals into the marketplace. “In this process we must learn from each other,” said Dr. Cicerone, calling this the “the entire premise” of the conference. The conference, convened at the National Academies on June 17, 2006, examined many dimensions of the new U.S.–India innovation partnership. At the bilateral level, India and the United States have launched a new strategic relationship that specifically identifies science, technology, and innovation as a major focus of future relations.3 This follows a variety of initiatives by the private sector in both countries to invest in promising firms, to make strategic acquisitions, and to draw on the distinct advantages of each other’s innovation systems. The conference also highlighted key developments within India, such as the dramatic improvements in the performance of India’s national laboratories, and sampled some of the public debate ongoing in India concerning how the nation can expand its knowledge economy in a way that is socially inclusive as well as internationally competitive. The conference also drew attention to opportunities for collaboration that can both help build India’s innovation system and strengthen innovation in the United States. To maximize the positive potential of this relationship, India’s Science and Technology (S&T) Minister, Kapil Sibal, emphasized the need for participants in India and the United States to learn from each other’s policy initiatives and experiences. This introduction captures some of the key themes of this conference. The next section provides a detailed summary of the presentations and discussions of the National Academies’ high-level conference on India’s Changing Innovation System. dress by David H. McCormick, Under Secretary of Commerce for Industry and Security at the World Economic Forum 2005 Summit on “India and the United States: An Emerging Global Partnership.” He notes that changing geopolitics following the Cold War, the expansion of global markets, the information and communications technological revolution, and India’s recent economic growth and economic openness are the foundations of a growing U.S.–Indian strategic partnership. 2 NAS/NAE/IOM, Rising Above the Gathering Storm: Energizing and Employing America for a Brighter Economic Future, Washington, D.C.: The National Academies Press, 2007. 3 The White House, “Fact Sheet: United States and India: Strategic Partnership,” March 2, 2006 Press Release.

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India's Changing Innovation System: Achievements, Challenges, and Opportunities for Cooperation: Report of a Symposium BOX A Innovation Systems and Development Popularized by Richard Nelson, the term National Innovation System (NIS) refers to a network of institutions in the public and private sectors, whose activities and interactions initiate, develop, modify, and commercialize new technologies.a The NIS concept highlights the linkages and knowledge flows among multiple and dispersed public and private organizations, including universities, research laboratories, and large and small businesses.b Bringing innovative ideas to market involves complex interlinkages among industry, academia, and government within multiple overlapping “innovation ecosystems.” This ecosystems approach emphasizes the importance of creating and improving institutions to interweave the different parts of a nation’s innovation system. In the context of a developing country such as India, innovation can provide a channel to both increase growth and reduce poverty. By applying knowledge in new ways to production processes, more, better, or previously unavailable products can be produced at prices that all Indians can afford. Public policies to enhance pro-growth innovation include improving higher education and creating new public–private partnerships as well as pursuing broad economic reforms that create the appropriate environment for investment in and commercialization of research. Bolstering inclusive innovation includes efforts to harness creative efforts for the poor; to promote, diffuse, and commercialize grassroots innovations; and to help the informal sector better absorb existing knowledge.c    aSee Richard R. Nelson and Nathan Rosenberg, “Technical Innovation and National Systems,” in National Innovation Systems: A Comparative Analysis, Richard R. Nelson, ed., Oxford: Oxford University Press, 1993, p. 4. Nelson notes that the idea of a “national innovation system” captures “a new spirit of what might be called ‘techno-nationalism’ … combining a strong belief that the technological capabilities of national firms are a key source of competitive prowess, with a belief that these capabilities are in a sense national, and can be built by national action.” In Nelson, National Innovation Systems, op. cit., p. 5. The National Innovation System model appeals to policy makers because it provides an interpretive scheme that focuses on the nation as a unit of analysis. For a critique of the nation as a unit of analysis, see John de la Mothe and Gilles Paquet, “National Innovation Systems, ‘Real Economies’ and Instituted Processes,” Small Business Economics, 11, 101–111, 1998.    bThe emerging NIS literature draw attention to the presence of interactions and flows among public- and private-sector organizations in initiating, modifying, and diffusing new technologies. See P. Patel and K. Pavitt, “National Innovation Systems: Why They Are Important and How They Might Be Compared?” Economic Change and Industrial Innovation, 1994. See also C. Endquist (ed.) Systems of Innovation: Technologies, Institutions, and Organizations, London: Pinter, 1997.    cSee World Bank, Innovation Systems: World Bank Support of Science and Technology Development, Vinod Kumar Goel, ed., Washington, D.C.: World Bank, 2004. A NEW STRATEGIC PARTNERSHIP IN INNOVATION Recognizing a need for deeper, more collaborative relationships among Indian and U.S. businesses, academic institutions, and governmental organizations,

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India's Changing Innovation System: Achievements, Challenges, and Opportunities for Cooperation: Report of a Symposium the joint communiqué following President Bush’s state visit to India in March 2006 called for strategic cooperation in innovation and the development of advanced technologies.4 This strengthened focus on the potential for collaboration between India and the United States to advance scientific research and support the process of innovation underscored the timeliness of the conference. In her opening remarks at the conference, Paula Dobrainsky, the U.S. undersecretary for global affairs stressed that current collaborations between the United States and India in science, technology, and engineering-related research and development are genuine partnerships, not the assistance programs of the past. “India has the scientific and technological base to join the United States as equal partners in pushing forward the frontiers of research,” she said, resulting in “a very positive impact on the lives on all of our citizens.” She added that the key to mutual economic growth and prosperity lies in increasing linkages of the U.S. and Indian knowledge bases: the two nations’ scientists, researchers, academics, and business leaders. Together, these various agreements underscore the commitment of both nations to mutually beneficial cooperation. These linkages have been reinforced by the umbrella Science and Technology Framework Agreement signed in October 2005 by Secretary of State Rice and S&T Minister Sibal. The agreement establishes, for the first time, protocols to observe intellectual property rights, among other provisions necessary to facilitate active collaborative research across a broad range of disciplines. It builds the framework within which Indian and American scientists in government, the private sector, and universities can collaborate in basic and applied research in areas as diverse as information technology, agriculture, health, and energy. Speaking at the conference, Secretary of Energy Samuel Bodman, who co-chairs the U.S.–India Energy Dialogue, noted that India’s participation in the Future-Gen international partnership (whose goal is to create a zero-emission coal-fired power plant) is an example of the type of cooperation that the United States hopes to encourage under this S&T framework. He also cited, as a potential turning point in bilateral relationship, the U.S.–India nuclear agreement, which foresees research cooperation in exploiting the potential of nuclear energy more safely.5 INDIA’S CHANGING ECONOMIC POLICIES India’s new dynamism, and hence these new opportunities for bilateral collaboration, are widely seen to have begun with the policies of economic 4 For a broad overview of the evolution of the U.S.–India strategic partnership, see Teresita C. Schaffer, “Building a New Partnership with India,” Washington Quarterly, 25(2):31–44, Spring 2002. 5 The U.S.–India Peaceful Atomic Energy Cooperation Act was signed into law on December 18, 2006, by President George W. Bush, following overwhelming approval in both the House of Representatives and the Senate.

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India's Changing Innovation System: Achievements, Challenges, and Opportunities for Cooperation: Report of a Symposium BOX B A Partnership Driven by Science and Technology In his remarks, India’s ambassador to the United States, Ronen Sen, noted that science and technology is a major driver of the new U.S.–India Strategic Partnership. Current bilateral initiatives include: The Next Steps in Strategic Partnership: This 2005 bilateral agreement has extended the prospects for cooperation to civilian uses of nuclear, space, and dual-use technologies. A new, 10-year Framework for the U.S.–India Defense Relationship: Concluded in 2005 at the ministerial level, the framework has established a joint Defense Procurement and Production Group. A new U.S.–India Bi-National Science and Technology Endowment Fund: The purpose of this fund is to facilitate joint research projects with potential for industrial application. The U.S.–India Knowledge Initiative on Agriculture: A $100 million fund is bringing together research institutions and corporate entities in both countries to raise agricultural productivity and increase prospects for agroindustrial business in India. The U.S.–India Energy Dialogue: Launched in 2005, it envisages the Agreement on Civil Nuclear Energy Cooperation as well as cooperation in such areas as oil and gas, clean-coal technologies, and renewable energy sources. The U.S.–India Working Group on Civil Space Cooperation: This group is to renew and upgrade cooperation in space. The Agreement on Civil Nuclear Energy Cooperation: The agreement foresees collaboration to help develop more environmentally friendly and proliferation-resistant technologies. liberalization started in the early 1990s and supported by successive national governments. Montek Singh Ahluwalia, the deputy chairman of the Indian Planning Commission, and a key architect of India’s economic reforms, noted that India’s economic liberalization reflects the premise that the private sector is the critical driver of growth.6 By promoting a competitive environment within India, the dynamic effects of the private sector have emerged, where foreign firms are increasingly allowed to participate in the Indian economy, and where private Indian firms are encouraged to compete internationally through new investments and acquisitions of offshore companies. 6 Dani Rodrik and Arvind Subramanian argue that the acceleration in India’s economic performance with the liberalization of 1991 was triggered by an attitudinal shift of the government toward a pro-business approach. See Dani Rodrik and Arvind Subramanian, “From ‘Hindu Growth’ to Productivity Surge: The Mystery of the Indian Growth Transition,” NBER Working Paper 10376, 2004.

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India's Changing Innovation System: Achievements, Challenges, and Opportunities for Cooperation: Report of a Symposium Policy Achievements and Targets Mr. Ahluwalia also noted that India’s economic reforms have deliberately been gradual and cautious.7 In a pluralist democracy such as India’s, he explained, a consensus for change has to be built across the social and political spectrum. Such a consensus, he averred, has taken root and is being reinforced by significant gains in the country’s growth rate; despite these gains, the process of reform remains politically challenging.8 This growth rate has consistently been above 7 percent over the previous 5 years, reaching 8.4 percent in 2005. India’s Planning Commission, targeting continuing acceleration, hopes to push its growth rate to 9.5 percent per annum by the end of the following 5 years, while achieving an annual growth average of 8.5 percent over the entire period. To realize this faster and more broadly based rate of growth, the government recognizes that it needs to improve agricultural productivity, aiming at a second Green Revolution through improved agroprocessing and modern marketing9; invest more in its educational system to provide Indians the marketable skills to integrate and compete in the world economy; build high-quality infrastructure to facilitate investment and promote trade; and focus on improving energy efficiency and security to fuel the growing economy.10 The Two Indias While what has been accomplished in recent years is impressive, T. S. R. Subramanian reminded the audience that India’s development challenges remain daunting.11 Of India’s nearly 1 billion inhabitants, an estimated 350–400 million are below the poverty line, with over three-fourths of the poor living in rural areas. Although the country has made great strides as an emerging knowledge 7 For a sector-by-sector analysis of economic reforms in India, see Montek Singh Ahluwalia, “Economic Reforms in India Since 1991: Has Gradualism Worked?” Journal of Economic Perspectives, 16(2):67–88, 2002. 8 Anand Giridharadas, “Growth Spurt in India Hides Government Gridlock,” International Herald Tribune, Sept. 29, 2006. 9 The second Green Revolution calls for policies to shift India’s rural economy from a reliance on peasant farming to a new focus on agribusiness, thereby encouraging private capital to move from urban to rural areas. Proposed policies would lift distribution controls, allow large retailers to contract directly with farmers, invest in irrigation, and permit the consolidation of fragmented holdings. See Gurcharan Das, “The India Model,” Foreign Affairs, 85(4), July/August 2006. The first Green Revolution in India refers to significant gains in agricultural productivity through the introduction after 1965 of new high-yield varieties of crops. 10 These goals are reflected in the forthcoming 11th Five-year Plan of India’s Planning Commission. See remarks by the Chairman of the Planning Commission, Prime Minister Manmohan Singh, on the October 18, 2006, on the release of the 11th Plan Approach Paper. Access at <http://pmindia.nic.in/speech/content.asp?id=431>. 11 This point is also emphasized in the paper in this volume by Carl Dahlman, a leading World Bank analyst of the knowledge economy, now with Georgetown University.

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India's Changing Innovation System: Achievements, Challenges, and Opportunities for Cooperation: Report of a Symposium economy, only 16 percent of the population has completed high school.12 Real problems continue. Public health needs major improvements and rural infrastructure remains “abysmal.”13 The political consequences of the gulf between the two Indias are troubling, Mr. Subramanian noted. Yet even as modern information technologies increasingly inform the poor about disparities in wealth and opportunity, they also provide a medium for exposure and can be used effectively as a low-cost medium of education as well as encouragement to the poor to compete and strive in a free economy.14 Mr. Subramanian noted that while much of the reforms that Mr. Ahluwalia spoke of refer to India’s federal government, most of what touches the average Indian—including law and order, education, public health, and rural development—falls under the purview of state governments according to India’s Constitution. As a result, Mr. Subramanian said, the winds of change had not yet reached the poor in many places, not because of a lack of awareness but because of a lack of will arising from local political compulsions.15 Patterns of rent seeking and corruption are entrenched in many state governments in India, inhibiting needed reforms.16 At the same time, some state governments have begun instituting their own reforms, working for example to upgrade and support the growth of their manu- 12 Indeed, most Indians still live in a largely subsistence economy, with literacy rates of 73 percent among adult men and 48 percent among adult women, and with 35 percent of the population living below the international poverty benchmark of $1 a day. The World Bank estimates that only 4 percent of India’s workforce is employed in the modern private sector, while 89 percent of the workforce is in the informal sector. Source: The World Bank, World Development Indicators, 2006. Access at <http://devdata.worldbank.org/wdi2006/contents/cover.htm>. 13 Addressing this second challenge, the government of India in 2000 launched a $13.5 billion program of rural road construction that is to connect all habitations that have a population of more than 500 persons. About 160,000 rural habitations are to be covered under this program. Access at <http://www.pmgsy.nic.in/pmgsy.asp>. 14 This note of caution tempering the enthusiasm about India’s growth prospects has been echoed by India’s leadership, including Prime Minster Manmohan Singh and Sonia Gandhi, the leader of the India’s governing coalition, at the World Economic Forum’s 2006 India summit. See Associated Press, “India Shows Confidence, Openness About Risks Confronting Economy,” Nov. 28, 2006. 15 For an examination of factors underpinning the variations in growth within India, see Montek Singh Ahluwalia, “State Level Reforms Under Economic Reforms in India,” Working Paper No. 96, Stanford University, March 2001. For an additional analysis of the link between state and local policies (including restrictive labor policies) and the unequal effects of liberalization in India, see Phillipe Aghion, Robin Burgess, Stephen Redding, and Fabrizio Zilibotti, “The Unequal Effects of Liberalization: Theory and Evidence from India,” Center for Economic Policy Research, March 2003. For an econometric analysis of income differentials at the state level following the 1991 liberalization, see Michelle Baddeley, Kirsty McNay, and Robert Cassen, 2006, “Divergence in India: Income Differentials at the State Level, 1970–97,” The Journal of Development Studies, 42(6):1000–1022. 16 For an incisive analysis of the structure of rent-seeking in some Indian states, see Robert Wade, “The Market for Public Office: Why the Indian State Is not Better at Development,” World Development, 13:467–497, 1985.

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India's Changing Innovation System: Achievements, Challenges, and Opportunities for Cooperation: Report of a Symposium facturing and services sectors.17 Similar positive state-level commitments will be necessary across the country for India to realize the second Green Revolution, said Mr. Subramanian. Alleviating rural poverty will require new methods, management practices, and techniques of delivering technology assistance to farmers. The private sector and voluntary agencies, Mr. Subramanian added, will have to play a key role in this transformation.18 Strengthening India’s Knowledge Economy Acknowledging Mr. Subramanian’s point that India presents an “extreme dual economy,” Carl Dahlman of Georgetown University noted that the country nevertheless possesses unique strengths and now faces new opportunities to leverage these strengths to improve its competitiveness and the well-being of its people.19 India’s fundamental strengths, he said, include its very large domestic market, young and growing population, critical mass of educated people, very strong R&D infrastructure, and strong science and engineering capabilities centered in areas such as chemicals, pharmaceuticals, and software. India is a world center for many digital services, a location where “anything that can be offshored” can be done very cost-effectively. From this base, India is becoming a center for innovation for multinational companies, which have already established around 400 R&D centers in India to draw on its scientists and engineers. The Indian diaspora, strongly represented in the United States, also provides an excellent source of everything from information and advice to access to markets, technology, and financing as India’s activities increase in sophistication.20 India also benefits from 17 The state of Tamil Nadu has, for example, been lauded by the World Bank as one of India’s best-performing states in recent years, based on its institutional reforms and changes in economic policy. See The Hindu, “State Pins Hope on Growth Initiative,” Aug. 4, 2005. 18 Already, initiatives by major Indian corporations, including Reliance and Bharti, are beginning to transform India’s agricultural sector by developing the necessary supply-chain infrastructure linking the farmer to new retail food supermarkets. See Bloomberg News, “The Next Green Revolution,” Aug. 21, 2006. Innovations in supply-chain management are already helping to integrate more of India’s poor into the modern economy. For example, cyber kiosks called e-Choupals, set up in several thousand villages, have transformed the way that farmers transact with industry by giving them power of information, thus eliminating the middlemen. For a case study, see <http://www.digitaldividend.org/case/case_echoupal.htm>. Also, Bharti Tele-Ventures offers some of the lowest phone prices in the world, making telephone services affordable for the first time to many of India’s poor. Based on its innovative business strategy, Bharti has expanded its position as India’s largest mobile service provider. A third example, the development by Tata of a $2,000 car, was described by Mr. Chugh at the conference. 19 For an overview of potential growth trajectories and policy options to foster India’s knowledge economy, see Carl Dahlman, “India’s Knowledge Economy in the Global Context,” in this volume. See also Carl Dahlman and Anuja Utz, India and the Knowledge Economy: Leveraging Strengths and Opportunities, Washington, D.C.: World Bank Institute, 2005. 20 For a discussion of polices for India to capitalize on its overseas diaspora, see Devesh Kapur, “Indian Diaspora as a Strategic Asset,” Economic and Political Weekly, 38(5):445–448.

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India's Changing Innovation System: Achievements, Challenges, and Opportunities for Cooperation: Report of a Symposium relatively deep financial markets, far better than China’s according to Dr. Dahlman, and its private businesses are beginning to strengthen their export orientation, seeking international strategic alliances and making acquisitions abroad.21 Needed Policy Measures To build on these strengths, Dr. Dahlman outlined a series of complementary policy steps. To improve the economic regime, he recommended easing restrictions on firm entry and exit and the hiring and firing of workers. To improve the nation’s infrastructure for primary and secondary education, he suggested greater use of private providers of education and training. To encourage greater innovation, he encouraged the development of partnerships between academia and industry. These partnerships, he noted, can also help increase universities’ awareness of the skills required to create the knowledge workers necessary for economic progress. To close the digital divide, he recommended investments to broaden the penetration and use of innovative information and communications technologies. Finally, to improve the size and efficiency of the nation’s R&D investments, he emphasized the need for policies that help attract more foreign direct investment, motivate greater private investment in R&D, and help entrepreneurs bring new products to the market. Such entrepreneurship can already be seen in India’s information technology, pharmaceutical, and automotive component industries, which are taking significant steps to improve manufacturing quality, increase the level of internal R&D, and develop global strategies for competition. INDIA’S CHANGING INDUSTRY Indian industry has made rapid progress since the economy was liberalized in 1991. In the days of the “License Raj,” elaborate licenses, regulations, and the accompanying red tape were required to set up and conduct business in India. These regulations limited competition, providing Indian industry with little incentive to invest in research and development.22 Many manufacturers engaged in contract manufacturing that required little indigenous innovation. The result was often stale products of poor quality for the domestic market. As R. A. Mashelkar, the president of the Indian National Science Academy, candidly observed at the conference, “there was no competitiveness because we were a closed economy. Industry produced gums that did not stick, yet people bought them. We produced 21 Even so, some leading U.S. venture capital firms are exploring the possibility of taking companies public on Chinese stock exchanges. International Herald Tribune, “Start-ups Explore Abroad for IPOs,” Dec. 25, 2006. 22 See Rodrik and Subramanian, “From ‘Hindu Growth’ to Productivity Surge: The Mystery of the Indian Growth Transition,” op. cit.

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India's Changing Innovation System: Achievements, Challenges, and Opportunities for Cooperation: Report of a Symposium said, Nicholas Piramal employs about 1,000 workers at its three manufacturing facilities in the United States. Dr. Piramal noted that her company’s pipeline is rich, and its dream is to develop new drugs for the global market for $50 million—a relative bargain compared to the $1 billion cost of similar efforts in the United States. In India, she noted, Nicholas Piramal can buy “a lot of scientific horsepower” for the money. What is more, the company’s new R&D investments appear to be bearing fruit; she reported that between January and June 2006 Nicholas Piramal filed 14 patents for New Chemical Entities. Underscoring the new confidence of Indian industry, Dr. Piramal announced that on June 15, 2006, two days before the National Academies’ conference, Nicholas Piramal had signed an agreement to acquire from Pfizer a 450-employee facility in Morpeth in the United Kingdom, providing Nicholas Piramal access to Pfizer’s global sourcing network. This acquisition, she said, is consistent with Nicholas Piramal’s intent to become a global leader in custom manufacturing across the pharmaceutical value chain.28 The Indian automotive component industry has similar global ambitions. M. P. Chugh of Tata Auto Component Systems (TACO) noted that Tata’s vision of making a $2,000 car for the Indian mass market calls for the company to develop not only an innovative automobile but also an innovative business model to bring this vision to reality. This business model would “not only use the engineering talent in India, but leverage the engineering talent in India for a global business market.” When TACO was formed in 1996, the cutting-edge technologies required to produce advanced automotive components were not found in India. To overcome this hurdle, TACO has formed 16 global partnerships, including alliances with Johnson Controls and Visteon, to coordinate the efforts of engineers around the globe to conduct research and development around the clock. TACO, he reported, has also established 4 advanced engineering centers (including a center in the United States) and 16 manufacturing plants that produce components such as interior plastics, seating systems, exteriors and composites, and wiring harnesses. The key to the success of the Tata’s joint ventures with U.S. companies such as Johnson Controls, he noted, lies in coordinating the efforts of engineers spread around the world as they carry on work on a given product development program. TACO’s aspirations are global. The company, Mr. Chugh said, believes that it needs to be not only in Asia, but also in the North American and European markets. He noted that while Chinese manufacturers are better at “shoot and ship”—that is, manufacturing a product given a drawing and design—Indian auto manufacturers aim to have the capacity to design, test, and validate as well as 28 Associated Press Financial Wire, “Indian Drug Maker Nicholas Piramal in Deal to Acquire Pfizer’s UK Facility,” June 15, 2006.

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India's Changing Innovation System: Achievements, Challenges, and Opportunities for Cooperation: Report of a Symposium manufacture automotive parts. Describing TACO’s design capability as its core strength, Mr. Chugh noted that his company is committed to building a deep engineering and R&D base that would enable it to develop new technologies and innovative solutions for customers around the world. Together, these three presentations by representatives of Indian industry underscore the global reach, current accomplishments, and aspirations of India’s leading private corporations.29 U.S. investments in India complement these developments, as they seek access to top-level talent and India’s large domestic market. Together, the investments being made on both sides demonstrate that U.S.–Indian collaboration in innovation is a “two-way street.” U.S. Private-Sector Investments in Indian R&D Facilities U.S. high-technology corporations have initiated major investments in India to draw on India’s innovation potential. Representatives from Google, General Electric, and IBM noted in their conference presentations that conducting world-class R&D in India is seen as a major opportunity to serve the Indian market while permitting more rapid development cycles that help them remain globally competitive. Kenneth Herd of General Electric noted that the most compelling reason for General Electric to develop its R&D capability in India is the country’s strong intellectual capital, embodied in its pool of talented engineers and scientists. By being on the ground in India, GE is able to take its place in India’s vibrant innovation infrastructure, which includes more than 200 national laboratories and research institutes, 1,300 industrial R&D units, and over 300 universities with a strong student pipeline. To capture these benefits, GE has invested over $80 million in the John F. Welch Technology Center in Bangalore. This facility, which houses state-of-the-art laboratories, employs over 2,500 engineers and scientists. To date the Welch Center has filed for over 370 patents, 44 of which have been issued. Mr. Herd noted that its R&D in India is on par with the world’s best and that products developed in India, such as those related to diagnostic imaging, ultrasound sensing, and advanced plastics, help GE compete worldwide. Ram Shriram, an Indian-born U.S. entrepreneur who is a founding board member of Google, similarly noted that Google believes that by leveraging India’s innovation potential—in particular its scientific and engineering talent—it will help it to create new products such as Google Finance. Google has recently created two R&D centers in India, located in Bangalore and Hyderabad, which hire the top graduates from the Indian Institutes of Technology (IIT) and other 29 As noted in the Preface, this 2006 National Academies’ conference focused on India’s emerging strengths in the automotive component manufacturing and pharmaceutical sectors rather than on India’s more widely known accomplishments in the software and business service sectors.

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India's Changing Innovation System: Achievements, Challenges, and Opportunities for Cooperation: Report of a Symposium leading schools in India. The reason to go local, Mr. Shriram said, was that not all talent resides in Silicon Valley, nor does everyone want to move there. Far from considering India a labor-arbitrage, cost-saving destination, Mr. Shriram noted that Google views its operations in India to be on par with those at its headquarters in Mountain View, California. One indication of this parity is that the company’s new global product, Google Finance, was developed by two researchers at its Bangalore laboratories. Ponnai Gopalakrishnan of IBM noted that his firm is drawn to India not only for its skilled workforce, but also because India represents a very large market. India has unique market requirements, noted Dr. Gopalakrishnan, which call for designing systems and solutions for the high end as well as the mass market at the low end. Stating unequivocally that IBM’s technological research and innovation in India matches the level and quality of its U.S. and other research laboratories, Dr. Gopalakrishnan noted that IBM’s already large presence in India will grow even stronger with a planned $6 billion investment to develop a telecom research center in Delhi. Finally, Eli Lilly’s Robert Armstrong noted that India’s embrace of intellectual property rights protections have not only created value for domestic industries such as Nicholas Piramal but also have enabled multinationals such as Lilly to consider undertaking high-end research and development activity in India. He noted that while the decision to outsource routine research functions to India was initially motivated by expectations of cost savings, Western pharmaceutical companies such as Lilly soon discovered that “embedded in that cost reduction is a lot of innovation in processes and focus on delivering products,” which effectively reduces not only cost but the time to bring new products to market. Given the high cost and high uncertainties inherent in drug development, he said, developing high-end research and development capabilities in India, including alliances with Indian firms, are important vehicles for American pharmaceutical firms to improve the probability of technical and commercial success. INDIA’S CHANGING LABORATORIES AND UNIVERSITIES In addition to the rapid growth of corporate research laboratories, India’s growing R&D capability is also reflected in the remarkable performance of its national laboratory system. According to R. A. Mashelkar, the director general of the Council of Scientific and Industrial Research (CSIR), India’s national laboratories are rapidly evolving to link top-notch research with the needs of industrial competitiveness, social imperatives, and national benefits. This substantial improvements in the performance witnessed recently in India’s national laboratory system is all the more significant given the size of this system. CSIR represents the world’s largest chain of publicly funded industrial research and development organizations. It includes 38 national laboratories as well as numerous other research institutes located in all regions of India.

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India's Changing Innovation System: Achievements, Challenges, and Opportunities for Cooperation: Report of a Symposium Dr. Mashelkar traced CSIR’s positive transformation over a period of 10 years beginning in 1995 (when he was appointed as its director general) from an inward-looking organization to one significantly more forward in outlook and commercial in orientation.30 Illustrating how CSIR is realizing its mission to serve India’s people while advancing the commercial potential of research, he cited the development of a method of silver sulfadiazine microencapsulation on collagen-based biomaterial by researchers at India’s Central Leather Institute. This technology, developed to advance India’s leather industry, has been found to have a significant application in the treatment of burn victims. Another application that has promising commercial applications as well as addressing the needs of India’s poor is a water filter developed by India’s National Chemical Laboratory. This filter, the object of a 2005 U.S. patent, can screen out bacteria and even viruses from water at low cost. It is already being deployed across India to provide rural populations with safe potable water. Dr. Mashelkar pointed out that CSIR’s new emphasis on commercialization has not compromised CSIR’s scientific credentials. As gauged by the Science Citation Index, the number of basic science papers published by CSIR researchers between 2001 and 2005 rose from 1,700 to 3,018 with one in six Indian papers published in internationally peer-reviewed journals coming from authors employed by CSIR’s laboratories and institutes. Also, the number of U.S. patents granted to CSIR has increased from single digits through most of the 1990s to 145 in 2002 and close to 200 in 2005. According to Dr. Mashelkar, numerous changes in the structure and administration of CSIR explain CSIR’s dramatic improvement. To capture scale effects, the small projects of the past gave way to large, networked projects, with CSIR’s many laboratories no longer behaving as independent entities. To foster a more commercial orientation, marketing teams were created in each laboratory, decision making was devolved, specialized businesses consultants were brought in, senior CSIR staff were allowed to serve on the boards of directors of private-sector firms, and awards were given for marketing and business development. CSIR also created financial incentives under a new strategy for intellectual property rights to motivate scientists, as well as established laboratory reserve funds that allowed laboratories to carry forward surpluses based on earnings that could then be used to fund additional research and development in future budget cycles. Underlining these changes, noted Dr. Mashelkar, was an effort to foster leadership in the laboratories by appointing individuals of exceptional merit who would stand tall in science, but who also have a realistic view of the continuity between knowledge and wealth creation. 30 Dr. Mashelkar is internationally recognized for changing CSIR’s bureaucratic culture to a more performance-driven, research and development organization over his 11 years as chairman. Among his numerous honors, Dr. Mashelkar was elected as a Foreign Associate to the National Academy of Sciences in 2005.

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India's Changing Innovation System: Achievements, Challenges, and Opportunities for Cooperation: Report of a Symposium These accomplishments notwithstanding, Dr. Mashelkar argued that Indian attitudes about knowledge have still to evolve toward a more commercial perspective. Commercial spin-offs of the scale seen in Canada and the United States still do not occur in India. This may be due in part to a widespread cultural proclivity that separates knowledge—as represented by the Hindu goddess Saraswati—from wealth—personified by the goddess Lakshmi. Unlike in the United States, he said, “we have never understood the route from Saraswati to Lakshmi.” Challenges in Growing India’s Knowledge Workforce India also faces the challenge of growing the size and versatility of its knowledge workforce. Recently, a report by McKinsey warned that India will need an additional 1 million people to join the information technology and business process outsourcing workforce by 2010 in order to maintain its current market share.31 This skills shortfall, the report warned, could threaten India’s position as the leading offshore outsourcing location. As Dr. Mashelkar and others noted, expanding India’s infrastructure for higher level technical education and preparing more students for the demands of the global workplace is a national priority. The era of modern technical education in India began about 150 years ago, when the British established institutions of higher learning to train Indians to help its colonial administration. These were teaching rather than research universities.32 Formal interest in technical education coupled with research emerged only after India won independence from Britain in 1947. India, in this postindependence period, made major investments in its scientific and technical infrastructure, including the founding of the Indian Institutes of Technology. In his presentation, P. V. Indiresan, a former director of IIT-Chennai, expressed gratitude to the United States for its assistance in the 1950s in building India’s university research infrastructure. He recognized, in particular, the contributions of Professor Norman Dahl of MIT who introduced a number of American institutional practices to the IIT system, including the semester system, continuous evaluation, and the credit system.33 Technical cooperation offered by the United States also trained many among a new generation of scientists and engineers who on their return helped to build India’s science and technology base. The IITs today are internationally recognized as centers of excellence, not 31 Domain-b, “Nasscom-McKinsey: India to Face Skilled Workers’ Shortage by Next Decade,” Dec. 12, 2005. Access at http://www.domainb.com/organisation/nasscom/20051217_shortage.html. 32 Deepak Kumar, Science and the Raj: 1857–1905, New Delhi and New York: Oxford University Press, 1995. 33 See Stuart W. Leslie and Robert Kargon, “Exporting MIT,” Osiris, 21:110–130, 2006. Wishing to diversify India’s educational portfolio by establishing IITs on several university models in addition to the IIT in Kanpur based on the MIT model, Prime Minister Nehru secured agreements for additional IITs in Bombay (in partnership with the USSR) in Madras (with the West Germans) and in New Delhi (with the British.).

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India's Changing Innovation System: Achievements, Challenges, and Opportunities for Cooperation: Report of a Symposium least because they select students based on highly competitive merit-based admissions.34 Only about 2 percent of applicants qualify for entrance—that is approximately 5,500 admissions out of 300,000 applicants. Examining IIT’s legacy, Professor Indiresan praised the institutes for producing in India world-class designers and analysts—many of whom are being sought after today by companies such as Google and General Electric in India and abroad. He noted, however, that they had done less well in innovation.35 He suggested several reasons for this circumstance, including inadequate research budgets and cultural barriers (such as those noted by Dr. Mashelkar) that traditionally have segregated the intellectual castes (Brahmins) from the business castes (Vaishyas.) He also cited a complacent business mentality (shaped by long years under the License Raj) that, in the absence of meaningful competition, shunned innovation, though he affirmed that this attitude is now changing. Liberalizing Education Exploring IIT’s future and the scope for India to expand the size of its globally competitive workforce, Professor Indiresan identified several constraints. First, he noted that heavy bureaucratic control by the Ministry of Science and Technology continues to stifle the potential of India’s top research institutes and universities to expand and improve by growing their financial base. For example, he noted, the IITs are not allowed to accept donations directly from their alumni abroad, including a $1 billion gift that was offered at the height of the dot-com surge. Professor Indiresan called for the government to deregulate the academic sector, much as it has liberalized the business sector, saying that this would encourage competition and innovation in India’s higher education system. He noted that the IIT Act, which was inspired by the U.S. model, was the only act of the government of India that grants the level of autonomy that—ideally—all educational institutions in India should enjoy. Yet, even the IITs continue to depend on the government for their budgets since outside sources of funding are not normally allowed. The Impact of the Reservations Policy Second, he cited India’s new reservations policy that seeks to address social inequalities by admitting students from traditionally underprivileged castes into the nation’s elite institutions even though their marks fall below the minimum 34 See Kanta Murali, “The IIT Story: Issues and Concerns,” Frontline, 20(03), Feb. 1–14, 2003. Accessed at <http://www.flonnet.com/fl2003/stories/20030214007506500.htm>. 35 For a discussion of the commercialization challenges facing IIT, see Financial Times, “India’s Islands of Excellence Under Pressure,” Feb. 21, 2003.

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India's Changing Innovation System: Achievements, Challenges, and Opportunities for Cooperation: Report of a Symposium standards for admission.36 Although this provides some poor but brilliant children an opportunity to rise, Professor Indiresan worried whether the IITs could maintain their world-class standards under this policy. Promoting Excellence in Science and Research Third, he noted that qualified senior professors—even at the IITs—are underpaid, commanding roughly the same salary as an intern in one of India’s rising business firms. Poor pay leads to a short supply of qualified instructors and research investigators, with critical implications for the education of future generations of students. Professor Indiresan also called for an increase in university research budgets, noting that the small size of current allocations amounted to “making a suit from a six-inch length of cloth.” Establishing science and technology parks of sufficient scale outside India’s cities, where land is cheaper, he added, could also help support world-class research universities in India. Expanding Opportunities for Quality Education Finally, Professor Indiresan noted that India’s elite technical institutions lack adequate competition at their level, which leads to a dulling effect on these institutes and universities in innovating their own structures and programs to meet the changing demands of globalization. India’s higher education system is two-tiered. Marquee institutions, such as the Indian Institutes of Technology and the Indian Institutes of Management, as well as selected private colleges, produce world-class graduates. Meanwhile, students at India’s second tier of colleges and universities receive markedly inferior training. Legacies of the colonial model of education, many of these institutions still stress rote learning over the development of critical thinking, presentational, and problem-solving skills and teaming called for in today’s employment market.37 To address India’s emerging shortage of qualified graduates, Dr. Mashelkar stated that the country’s entire system of science and engineering education is in the process of being overhauled.38 Recalling that the IITs only accepted 2 per- 36 This reservations policy is a topic of heated public debate in India at the time of the conference as the government of India planned to extend caste-based reservations to the country’s premier universities and professional institutes, which previously had been exempt. See The Press Trust of India, “Government Preparing to Reply to Supreme Court on Quotas,” June 16, 2006. 37 Anand Giridharadas, “In India’s Higher Education, Few Prizes for 2nd Place,” International Herald Tribune, Nov. 16, 2006. 38 These reforms, however laudable, thus far do not seem to address Indiresan’s views with regard to the need for more fundamental reform, particularly with regard to greater privatization. The proposed reforms also do not appear to address the issue of easier market entry for foreign educational institutions.

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India's Changing Innovation System: Achievements, Challenges, and Opportunities for Cooperation: Report of a Symposium cent of applicants, he noted that there remains an upper band among those not admitted to IIT who can show great promise if educated in a way that realizes their potential. This makes the case, he said, for upgrading many of the nation’s better regional engineering colleges into National Institutes of Technology funded by the government of India. Other second-tier colleges and universities also are being targeted for improvement, Dr. Mashelkar noted, some with support from the World Bank. These and others, he added, could benefit from public–private partnerships that can link their curricula to the needs of India’s increasingly buoyant private sector. TOWARD A STRONGER U.S.–INDIA INNOVATION PARTNERSHIP Greater understanding of India’s changing innovation system—its challenges as well as opportunities—is needed if the United States and India are to realize the full scope of their new strategic relationship. An important theme of the conference reported in this volume is that the United States and India can both gain from a stronger innovation partnership and that there is significant scope for cooperation across many areas. Strengthening Global Research Collaboration The United States sees cooperation to improve India’s knowledge infrastructure as enhancing its own innovation potential. As Thomas Weber of the National Science Foundation (NSF) noted, current research challenges are more complex than those of the past, requiring teamwork by researchers from various disciplines and from various parts of the world. International collaboration enables the United States, and India, to leverage resources that might not otherwise be available—data, experience, equipment, and infrastructure, among them—even as it furthers the U.S. goal of using its research grants to build a globally engaged scientific community. “Global collaboration—among scientists, engineers, educators, industry, and governments—can speed the transformation of new knowledge into new products, processes, and services, and in their wake produce new jobs, create wealth, and improve the standard of living and the quality of life worldwide.” Dr. Arden Bement, August 2005 Material Networks Symposium, Cancun, Mexico

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India's Changing Innovation System: Achievements, Challenges, and Opportunities for Cooperation: Report of a Symposium Dr. Weber noted that greater collaboration between U.S. and Indian scientists is being stimulated by NSF study grants, by exchange of scholars between U.S. and Indian research institutions, and by links among research institutions. Currently, for example, students at MIT have the opportunity to spend a summer as a research intern at an IIT, complementing the more familiar phenomenon of Indian students studying and conducting research in the United States. International networking can also be facilitated through forums such as the Material Research Network that brings U.S. and Indian scientists together. The International Center for Materials Research at the University of California at Santa Barbara is, for example, strongly linked with leading Indian institutions including the Nehru Center, the Indian Institute of Science, and the Indian Institute of Technology in Mumbai. Such collaborations can be extended and improved, Dr. Weber concluded, through improving (among other factors) broadband connections in India, agreeing on the rules of intellectual property rights and ensuring their enforcement, and reducing bureaucratic obstacles on both sides. Growing Collaboration Across Innovation Systems These ongoing real-world collaborations reflect an important way by which the United States and Indian scientists can collaborate to the mutual benefit of both countries. India’s Science and Technology Minister Kapil Sibal noted in his keynote address that India needs to collaborate with the United States across a wider agenda, including an exchange of policy experience in the area of innovation and entrepreneurship. Such exchanges, he added, are in the interest of both countries. Introducing Minister Sibal, Dr. John Marburger, of the White House Office of Science and Technology Policy noted that Americans would not be able to see the course of their future relationship with India by examining the trajectory of past interactions. The present differs too radically from anything known before, he cautioned, noting that new times require new approaches to collaboration. “We should be particularly eager to work with India, which is the world’s largest democracy and is increasingly important to our own innovation economy, to magnify our mutual capacity to address our respective problems,” he said. In his remarks, Minister Sibal predicted that the 21st century will differ from the past in that a capacity to innovate in order to compete in global markets will increasingly determine the course of change and the wealth of nations. As nontangible intellectual assets become increasingly valuable in this 21st century paradigm, India’s store of knowledge capital—embedded in its scientists and engineers—will be increasingly sought after. The challenge for India, he said, is to collaborate with the United States, while continuing to grow its own innovative potential. India, he said, needs to collaborate with the United States to address global challenges such as energy sustainability as well as to address the needs of its poor.

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India's Changing Innovation System: Achievements, Challenges, and Opportunities for Cooperation: Report of a Symposium To do this, the minister said, India is taking active steps to enhance its own innovation system. A product patent regime now in place is already spurring the pharmaceutical sector to switch from making copycat generic drugs to exploring new options such as making generic drugs for booming export markets and new drug research. Legislation along the lines of the Bayh–Dole Act has been introduced to Parliament, he said, with the goal of encouraging the commercialization of intellectual property found in India’s educational institutions. In addition, the government plans to set up special economic zones and science and technology parks.39 Also, a biotechnology development strategy is being implemented that will allow government funding for start-up companies. “We are going to public–private partnerships in a big way,” he declared, “giving money to small- and medium-scale enterprises to make sure that they do new kinds of research for new products.” CHANGING INDIA’S INNOVATION SYSTEM Economic liberalization has awakened Indians to their nation’s potential, and particularly its capacity to innovate. This innovation potential is in no small part a result of major national investments made by India’s postindependence leadership in setting up the Indian Institutes of Technology and the national laboratory system, among other core institutions. Drawing on India’s substantial knowledge base, Indian industry has rapidly become internationally competitive in many sectors, while U.S. high-technology firms increasingly find it attractive to conduct advanced research and development in India. Growth based on innovation has increased standards of living and reduced the number of Indians living in poverty. However, despite pockets of innovative activity in both formal and informal sectors, most innovation activity and productivity gains remain concentrated in a small segment of the Indian economy. As noted by several speakers at the conference, this dualism poses a serious challenge. India’s political and business leaders today recognize that for the country to continue its rapid development, new investments in the country’s innovation infrastructure are necessary. While seeking to adopt global best practice with regard to policies and mechanisms that encourage pro-growth innovation, they are also aware that this changing innovation system must be inclusive if it is to be sustainable.40 The presentations at the National Academies’ conference on India’s Changing Innovation System underscore both the recognition of India’s new window 39 For an analysis of the potential and the challenges of these Special Economic Zones, see The Economist, “India’s Special Economic Zones,” Oct. 12, 2006. 40 A multifaceted innovation agenda appears to be gaining currency in India. See Surinder Kapur, “Nurture New Technology and Innovation, Stay Competitive,” The Financial Express, Nov. 16, 2006.

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India's Changing Innovation System: Achievements, Challenges, and Opportunities for Cooperation: Report of a Symposium of opportunity as well as the significant challenges that must be overcome. As Montek Singh Ahluwalia noted, the agenda for changing India’s innovation system includes continuing economic reforms through expanding the consensus on reform, and investing in the nation’s hard infrastructure so that the benefits of reform touch all Indians. As R. A. Mashelkar and P. V. Indiresan affirmed, the agenda for changing India’s innovation system includes a greater focus on commercializing the results of research conducted in India’s universities and laboratories for commercial and social benefit, as well as expanding India’s education base in a way that rewards merit while also being more socially inclusive. Growing India’s manufacturing base also translates the benefits of a growing economy more broadly. As Surinder Kapur noted, this involves focusing India’s business culture on quality production and practice, ready to adapt to new ways of doing things in order to be internationally competitive. Finally, as Minister Kapil Sibal observed, changing India’s innovation system to meet India’s development needs calls for enhanced cooperation with the United States, particularly given the growing interdependencies among the two large knowledge economies. The United States can play a constructive role in facilitating the development of Indian capabilities by continuing to expand cooperative scientific exchange, demonstrating the value of a policy framework that facilitates the development and expansion of globally competitive R&D infrastructure, and, not least, by sharing best practices on innovation policies needed to unleash India’s enormous pool of talent. This cooperation, in turn, can accelerate scientific advance and provide a positive environment for the expansion of the very real synergies that exist between two of the world’s great democracies.