020_Harini

INDIAN INSTITUTE OF MANAGEMENT KOZHIKODE

Impact of Innovation on the Growth of

Indian Economy

Business Research Methods Proposal

Harini Ravishankar

PGP/16/020

Impact of Innovation on the Growth of Indian Economy

1

Abstract

This paper examines the contribution of Innovation towards growth in India. Given the fact

that the Indian Economy has been growing at 6-8% per annum, this is possible only with a

combination of factors like rising capital, productivity of labour, enabling environment,

innovation and improved quality of good and services. While other countries primarily rely

on innovation, that is not the case in India. Initial problem structuring involved the analysis of

“Behaviour over Time” which included key variables like Innovation Capacity Index, Quality

of Research institutions, Number of researchers and engineers, Utility Patents per million

people and Public Procurement of Advanced Technology. The paper also includes a rich

theoretical framework in terms of the academic research done on the effect of Innovation in

growth of India. The research would make use of both Primary and Secondary Data from

firms throughout India – both small scale and large scale firms. Both public and private sector

enterprises would be covered. The nature of data collected would be qualitative as well as

quantitative in nature. The paper looks into the key trends in growth and innovation,

contribution by various sectors and the barriers to innovation. The paper concludes by saying

that to realize India’s full potential in Innovation, a lot of parameters such as systematic

reformation of higher education, cumulative synergies of industries, government and mostly

importantly innovation at grass root level needs to be worked on.


2

Introduction (Problem Description)

India has been known for its pioneering innovations from time immemorial. These

innovations have been in various fields like art, culture, science and technology, mathematics,

philosophy and have survived through all these generations. However in the recent times, the

path of innovation has been slightly skewed with the desire to imitate the western models of

innovation instead of focusing on the needs of the society as a result of which the

contribution of innovation towards growth of this country has not been very significant.

Problem Definition

The rise in innovations in India can be attributed to a lot of factors like:

Improvement in India’s rank in the Global Innovation Index

Innovations in the service and health care sectors

Increase in the knowledge intensity

Growing competitiveness in hi-tech areas

Increase in FDI flows into the country

All these factors imply that innovation has been concentrated or limited to very few sectors

like pharmaceuticals and software as a result of which the contribution of innovation towards

growth unlike other nations like Brazil and China has been very low.


3

Problem Structuring

Behaviour over Time Graph

The following are the Variables:

Improvement in rank in Global Innovation Index

Availability of institutes

Availability of scientists and engineers

Increase in Knowledge intensity

Increase in FDI

Contribution of innovation towards growth

Theoretical Explanation of the BOT Graph

It is observed that from 2007 till now, there has been a steady increase in the availability of

scientists and engineers, good institutes, knowledge intensity, improvement in the ranking in

the Global Innovation Index and increase in FDI which has led to increase in innovation in

the country. However unlike other countries like Brazil, China, USA and Japan where

innovation has been a major contributor towards growth, such has not been the case in India.

Infact the contribution of innovation towards growth has been decreasing.


4

Diagrammatic Representation on the BOT Graph

TIME


5

Research Objective and Research Questions

Research Objective

The overall objective of this research is to suggest ways to improve the contribution of

Innovation towards the growth of the country which has been declining and much skewed

over the past 5-6 years.

Research Questions

What are the factors which provide a conducive environment for innovation in a

particular sector?

What are the barriers to innovation in India?

What is the role of innovation in the growth of an economy of a developing country

like India?

What measures are needed to be taken to fully realize India’s innovation potential?


6

Literature review

One of the major factors for the development of the country is investment in innovation

across all sectors. The survey conducted by Ernst and Young states government policies and

the stimulation of the innovation culture as the main reasons for the poor contribution

towards growth. Also the study conducted by them suggests that the vision of India’s

innovation capacity is solely dependent on the sector. For example, in the survey conducted

by Ernst and Young respondents from the life sciences and technology believe that India will

become the innovation destination for those sectors than respondents from sectors like

agriculture and consumer products. In order to address these issues, it is necessary that

innovation is used as a tool to address the issues of growth; employment and poverty which

will in turn lead to sustainable development. Innovation needs to go beyond Research and

Development of a firm and should include organisational processes and service mechanisms.

It should be inclusive. Government Incentives for innovation should be explored further. This

is the primary reason for declaring the decade 2010-2020 as the “Decade of Innovation”. [1]

Research indicates that India is a growing hub for Research and Development for various

small and large multinational firms which is mainly due to the availability of skilled labour

who are products of world class institutions. According to the Global Competitiveness

Survey in 2007, India is ranked 3rd

in terms of market potential. In spite of this, India is

unable to achieve high growth rates which can be attributed to its infrastructure and

bureaucratic hurdles. The Government of India has announced massive investment in

infrastructure to achieve a high growth rate in the Eleventh Five Year Plan. [2]

The discussion on India’s innovation and its impact on the growth of the economy has arisen

only due to factors like Improvement in the Global Innovation Index, innovation in service


7

sector especially healthcare, increase in knowledge intensity and increase in FDI inflows

from 2007-08. Even though formal attempts have been made to measure innovation over the

past 50 years, it is only recently with the rising trends has the National Innovation Act been

drafted. There is no single metric which can measure innovation as it involves many

intangible factors such as knowledge which cannot be quantified. However with measures

such as the Global Innovation Index shows that innovation in the industrial sector has gone

up in the post reform period. Hi-tech industries contribute to 5% of India’s GDP. However

this has been confined only to the private sector. Increasing MNC operations in India have

also increased innovation; FDI flows have increased the Research and Development

expenditure. Significant growth is also seen in the Pharmaceutical sector. Although the

supply side factors seem to be productive, in order to sustain this growth in the long run

efforts will have to be made to increase the quantity and quality of scientific manpower. The

government should rethink its financial support schemes in order to reduce distortions which

are present currently in this area. [3]

There is a continuous need for reforms in India’s culture, innovation and infrastructure to

sustain the growth of innovation. A comprehensive analysis is necessary to understand this

which is done both at the regional and national levels. The national level analysis explores the

challenges and opportunities of India’s innovative capacity using a semi-structured

questionnaire. The regional level analysis forms groups within India by mapping firms,

educational/research institutes and innovation parks. This paper brings out the major factors

necessary for building up an innovative system in India which include creating a strong base,

upgrading the existing base and creating and promoting awareness about innovative systems.

[4]


8

Even though India has the capability to be a leader in future economic growth, it has been

unable to do so as growth needs to be supplemented with strong structures and capabilities.

Most of growth in India at present is fuelled only by domestic demand. The report by

Accenture identifies three key trends that hold “enormous promise” for India – emerging

markets surge, rise of new technologies and the growing resource economy. Interaction with

the emerging markets will create new business opportunities in a lot of areas like banking,

health care, trade, tourism etc. Technology is a necessary condition for improvement in

standard of living. It will also foster the innovative culture in the economy which is needed

for growth of the economy. The gap between demand and supply of resources has been

widening and there is an urgent need to exploit renewable sources of energy like wind power,

solar energy, using alternate fuels, building green infrastructure etc. All this requires

innovation which will indeed have a direct impact on the growth rate of India. [5]

If India’s needs to achieve its full potential of growth, it is necessary that growth needs to be

backed by innovation. Sustained economic growth over the past decade has raised questions

as to when India will become the world leader in economic growth. The increasing MNC

operations, inflow of FDI and software exports has brought the vision of India being at the

forefront of economic growth. This requires a detailed analysis of the strengths and

weaknesses of the current innovation system, recent trends in the system, making predictions

for the short term and long term evolution of the innovation system and finally assessing the

implications in the various sectors. [6]

Innovation and innovative solutions will not provide competitive advantage in a market but

also are the path to solve the challenges we face. If Innovation has to become a part of

economic growth, it has spread to all sectors of the economy and to people of all levels. India


9

today has a number of strengths like good Research and Development, a strong base of

academic institutes, talent pool and a stable macro-economic environment which are

conducive for innovation. The Indian innovation strategy should not merely look at creating a

competitive advantage. It has to focus on inclusive growth and mostly importantly reaching

the people at the bottom of the pyramid. This is necessary to have sustainable growth in the

long run and move from a subsistence economy to a knowledge based economy. [7]

Another important factor that has been ignored for a considerably long period of time is the

Disruptive innovations made at the bottom of the pyramid (BOP). If India wants to achieve

holistic growth, organisations should not only cater to the innovations made for the Top of

the Pyramid but should also focus on those made at the bottom. A scenario planning model is

used to determine the significant impact on sustainability that could arise on account of

innovations happening at both the levels of the pyramid. An ambidextrous approach is

required to be taken by organisations to detect early innovations at the top and bottom of the

pyramid in their industry. [8]

Innovation in a country can also be looked at from the perspective of research undertaken.

India’s research output is growing faster than the world’s research output. India ranks second

amongst its peer research countries, first being China (Brazil, Russia, South Korea and

Singapore). However the quality of research work is done is not of good standard as the

citation impact of Indian research is below world average. Moreover research has been

confined to only very few areas like Pharmacology, Physics and Material Science etc. There

has also been a decrease in the number of Indian research papers published in journals.

Another important factor which is to be noted here is that India has very little international

collaboration which is surprising given its emerging research diversity and capacity. All these


10

areas need to be worked upon as Research and Development in all areas is necessary for

inclusive growth in the economy. [9]

India has considerable potential in the field of science and technology, but it is far from

realizing its potential. Growth in the area of science will lead the way forward for India. Even

though at schooling level, there is a lot of enthusiasm for science, the same is not carried

forward as only very few opportunities are available. One of the main advantage for India is

the large youthful population. However only 13% of the youth (90 million) are enrolled for

higher education. It is only development in the field of science which has led to striking

discoveries and innovation. If that has to happen in India, there needs to be a change in the

overall innovation eco- system. Reformation in the education sector by emphasising the

importance of science education at the early stages is required. A national or international

council is to be set up to monitor the technical education system. Considerable attention

needs to be given to teachers by providing mass continuing education programmes. Other

measures to change the innovation eco system include easy access to Venture Funding for

projects, Tax Incentives, Less bureaucratic government, Changes in education curriculum,

Strengthening Intellectual property laws and providing packages for small business

initiatives. [10]

The Indian economy today is a product of the ancient scientific achievements, colonial rule

and the post-independence nationalisation. Innovation led growth needs a systematic link

between education, research and commercial activities because there is a constant pressure to

meet the basic needs of one section of the society and to keep up with world class and science

and innovation simultaneously. Innovation should not be an activity associated only with the

elite for it to impact the growth of the economy. One of the major drawbacks in the country is


11

the disjointedness between education and research. Other factors which act as a barrier to

inclusive innovation are variability in the quality of education, bureaucratic system, varying

cultures across the country and lack of infrastructure. India should not only work on

improving these areas but should also capitalize on the fact that it has the largest talent pool

in the world. [11]

India needs to provide a conducive environment for innovation. In spite of increase in

investment in research and development and the growth of the IT sector, entrepreneurial

ventures are on the lower end. Trade and FDI barriers along with administrative red tapes

seem to be the barriers to innovation. This is the primary reason for announcing 2010-20 as

the Decade of Innovation. India should also aim at achieving green security in order to meet

the issues of food security and energy conservation. The key recommendations made by the

OECD committee include reforming and improving the R&D system, enhancing international

operations and increasing investment in R&D and innovation as a share of GDP. [12]

Growth backed by innovation will lead to reduction in poverty and a rise in the standard of

living of people. However in India, innovation in both the formal and informal sector of the

economy seems to be concentrated to a small portion of the economy. 90% of the workforce

is employed in the informal sector which is associated with low productivity and skills.

Productivity is low in the formal sector too. Given the dualism of the Indian economy, the

country should focus on implementing the following strategies to achieve growth led by

innovation – building a competitive environment for industries, taking more efforts to create

and commercialize knowledge and encouraging innovation at the grass root levels to achieve

holistic growth. India’s strategy for innovation should be based on building on the

“complementarities between knowledge creation and commercialization, knowledge


12

diffusion and absorption and explicit promotion of inclusive growth supplemented by

enhanced skills, better infrastructure and enhanced innovation finance.”[13]

Most of the innovation strategy at India focuses on improving Research and Development in

the formal sector and development of the formal sector in total. However India is a

heterogeneous economy and most of the workforce is employed in the informal sector. When

efforts are concentrated in improving the formal sector, the inequalities are bound to rise

unless special efforts are taken to address the issue of the poor. Mere provision of basic

facilities will not suffice. It is important to open up employment opportunities which are

sustainable in the long run. The innovative capacity of the poor is limited by lack of skills,

inadequate services, no access to markets and high risks. Efforts should not only be taken to

improve the innovative capacity of the poor but should also focus on building strong

incentives, policies and institutions. This requires community collaborations, public

investment in research and development, involvement of NGOs and better global networks.

[14]

The role played by innovation in growth has been very small, but significant. The Innovation

Intensity or the percentage of revenue derived from products/services which are less than

three years old has increased for large, small and medium enterprises but the portion being

higher for the small and medium sized firms. Although innovation intensity is higher for

manufacturing vis a vis service sector, but the intensity has been higher for the service sector

as a result of the IT exports.Innovation has been concentrated in the areas of operations, sales

and marketing and the drivers of innovation are competitiveness, profitability and reduction

in costs. The external barriers to innovation are lack of focus on industrial innovation,

problem solving skills, design, experimentation; few collaborations with research and


13

development institutes and government regulations. The internal barriers are lack of focus on

innovation strategy, improper knowledge management systems and poor understanding of

consumer mind set and market dynamics. Innovation led growth requires reformation of the

education system, creating a sync between the efforts of education system, Research and

Development and consumer demand and most importantly this should spread to all sectors of

the economy.[15]


14

Proposed Methodology and Methods

Methodology

The research would make use of both Primary and Secondary Data from firms throughout

India – both small scale and large scale firms. Both public and private sector enterprises

would be covered. The nature of data collected would be qualitative as well as quantitative in

nature. The methods of collection would include questionnaires and personal interviews.

Methods

1. Personal Interviews

A total of around 60 firms across various sectors would be interviewed. Personal

interviews would be conducted with the Research and Development heads of the various

companies and the average time period per interview would be approximately an hour.

The interview would gauge the following:

Level and scope of innovation

Reasons for innovation in the particular sector or otherwise

Investment in Research and motives behind the investment

Crucial factors for selecting India as the hub for innovation

Strategies followed by the company for innovation

Barriers and constraints to innovation and further scope for improvement


15

2. Questionnaires

Detailed questionnaires would be sent through mail to firms across sectors and of various

sizes as taking an interview for all firms is not possible. These questionnaires will analyse

the investment trends in innovation, the attitude of firms with respect to investment in

innovation, the benefits derived from innovation, scope for improvement, barriers in the

sector and amount spent in innovation over the years. This will give an insight into what

the ground reality is, what firms are willing to spend and what actions does the

government need to take to foster innovation led growth in the economy.

3. Secondary Data

In addition to the primary data collected, the research would require secondary data based

on the reports published by the National Knowledge Commission, Accenture, Ernst and

Young and other government departments in order to analyse data with respect to impact

of innovation on GDP, numbers of firms involved in innovation, rising trends in

innovation, amount spent on research, talent pool and institutions available and

inclination to invest in research.


16

Significance of the Study

Innovation is a key driver of growth in the economy. Innovations not only require inputs and

capacity but also political economy of reforms. This means that a constituency for innovation

needs to be created with the joint participation of the government, citizens, industries and

academicia.

The Innovation Intensity or the percentage of revenue derived from sales of products which

are less than three years old has significantly increased over the years. There has been an

increase in the investment in innovation as well. However the contribution towards the

growth of the economy has been very low.

When compared with countries like Japan, USA, Brazil and China; India has a larger pool of

researchers and engineers and many good institutes and patents; however the global

innovation capacity index has been very low. Moreover the innovation is very skewed

towards sectors such as pharmaceuticals and health care. The external barriers to innovations

like excessive government regulation, inefficient pricing power and internal barriers such as

poor understanding of customer needs and market dynamics have been studied in detail.

In order to impact the growth of India, Innovation strategy needs to be balanced across all

sectors. It needs to focus on providing sustainable and quality solutions for the various

problems faced by the economy such as poverty, education, health care, agriculture, energy

etc. Innovation needs to be initiated at the grass root levels. Reformation of the education

system is also required to promote innovation.


17

Limitations of the Study

The study is proposed to study the quantitative and qualitative aspects of the impact of

innovation on the growth of the economy. Large samples are required and there are logistical

difficulties present in gathering large samples. Moreover using large samples will increase

the cost of research. The interviews taken would be very rigid as quantitative analysis will not

allow for flexibility.

Factors specific to a particular industry or location which affect innovation might be ignored

while analysing the data collected. As the research uses secondary data, knowledge produced

might be too abstract and general for direct application to specific local situations, contexts,

and individuals.

Another major disadvantage is that participants in the research will become familiar with the

outcome and remember responses for later testing. Influences due to time outside of

experimental treatment might be ignored. The results cannot be generalized to past or future

situations. The research cannot be generalized to individuals who do not have characteristics

of the participants and to individuals in other settings.

It is difficult to form a sample which is large enough and representative of the population as it

has to cover the entire country across various sectors and industries. Moreover firms of large,

medium and small sizes need to be taken into account as the contribution of each of these

firms to innovation needs to be analysed.


18

References

1. Growing beyond Ready for the transition- Ernst & Young's 2012 attractiveness survey

India

2. India’s National Innovative system: key elements and Corporate Perspective: Cornelius

Herstatt, Rajnish Tiwari, Dieter Ernst, and Stephan Buse, 2011

3. Is India becoming more innovative since 1991?Some disquieting factors: Sunil Mani,

2009

4. India's National and Regional Innovation Systems: Challenges, Opportunities and

Recommendations for Policy Makers: Pankaj Sharma, Srinivasa .B.S. and Anubhav

Sharma, 2011

5. New Waves of Growth for India Unlocking Opportunities: Accenture, 2011

6. Can India become an innovative power house: Rishikesha T Krishnan, IIM Bangalore,

2009

7. Creating a roadmap for a decade of innovation: Towards a more inclusive and innovative

India, Office to advisor to Prime Minister, Department of Public Information and

Infrastructure, 2011

8. Disruptive innovations at the bottom of the pyramid: Can they impact on the

sustainability of todays companies? Baiyere Aboyami and Roos Jaspar, University of

Tilburg, Netherlands, 2011

9. Bibiliometric analysis to support the mapping of research and innovation in India:

Research Councils UK Consortium, 2012


19

10. India as a global leader in science: Science advisory council to the Prime Minister, 2010

11. India: the uneven innovator, Kirsten Bound, Demos (www.demos.co.uk), 2012

12. India sustaining high and inclusive growth, Organisation for Economic Co-operation and

Development (OECD), 2012

13. Unleashing India’s innovation: Towards sustainable and inclusive growth, Mark A Dutz,

Editor, The World Bank – Washington D.C., 2007

14. Promoting inclusive innovation (India): Anuja Utz and Carl Dahlman, World Bank

Institute, 2007

15. Innovation in India, National Knowledge Commission, 2007

http://www.demos.co.uk/


20

THANK YOU

020_Harini

Documents

Transcript of 020_Harini