Multinationals and IndiaA plan for progress

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Accenture is a global management This Report has been published for Rajat Agarwalconsulting, technology services and information and illustrative purposes outsourcing company. Combining only and is not intended to serve as Tim Cooperunparalleled experience, comprehensive advice of any nature whatsoever. The capabilities across all industries and information contained and the Svenja Falkbusiness functions, and extensive references made in this Report is in research on the world’s most successful good faith, neither Accenture nor any Mamta Kapurcompanies, Accenture collaborates of its directors, agents or employees

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ForewordThe world has changed significantly safeguarding intellectual property and over the last couple of years. reducing bureaucracy, amongst others. Businesses in developed and emerging It also reveals some of the new growth economies have been shaken by the sector opportunities in India, such as global downturn. Governments, in turn, biotechnology, renewable energy and have scrambled to steady their emerging technological sectors like economies and put them on a path cloud computing and digitization. Last, towards recovery, using fiscal stimuli it highlights those key areas that can and other policy instruments. Now, the contribute to enhancing the nation’s light at the end of the tunnel is overall productivity and how India can beginning to emerge and we are seeing position itself at the heart of the global pockets of recovery in different parts economy by promoting itself more of the world. effectively.

The Indian economy will face a As we look towards the future with the changed global landscape as it enters same optimism that has driven India’s this recovery period. Emerging market growth to date, there is a fresh economies will acquire even greater opportunity for government and significance as the global economy business in India to work together to becomes increasingly multi-polar. India solve some of our common domestic will have to compete more fiercely challenges and build a path towards with its emerging-market peers, many sustainable growth and prosperity. But of whom will be more competitive there are no guarantees or than before. In the political sphere, entitlements about the future, only new governments have recently taken possibilities. Our vision is to help India office in different parts of the engage with the global context around world—presenting new opportunities to us, positioning India as the preferred address long-term challenges such as international destination of investment climate change and international and business activity. We hope this security threats. report will help outline the cooperative

steps that can be taken to make this As this new landscape takes shape,

vision a reality. India has the opportunity to position itself as a leading international hub of investment, human capital and innovation—pushing ahead of rival destinations in both developed and Harsh Manglikemerging economies. Multinational Companies (MNCs) are likely to feature prominently in pursuing this ambition. In the past, we’ve seen India’s ability to attract foreign direct investment from some of the largest companies in the world. MNCs have now embedded themselves as a part of India’s economic fabric. Looking forward, MNCs are looking to play a pivotal role fostering the growth of small, medium and large domestic enterprises across a range of industries and linking them into global supply chains.

But more is possible, and more is required. This report, which draws on interview-based research conducted jointly by Accenture and the Confederation of Indian Industry, reveals some of the ongoing challenges facing multinational businesses in India and underscores priority areas for reform—such as rationalizing taxation,

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References1 23Based on the 9 years of FDI statistics International Energy Agency.

published by Department of Industrial 24 11th Five year plan of Ministry of Policy & Promotion, Ministry of

New and Renewable Energy, Commerce, Government of India.

Government of India.2 Economist Intelligence 25 Technopak Advisors, ‘India

Unit/Accenture survey, 2009.Healthcare Trends’ 2009.

3 World Economic Forum Global 26 IBEF, August 2009. Competitiveness Report 2009-10,

27www.weforum.org IBEF, July 2009. 4 28 Accenture analysis. LABORSTA database, International

Labour Organization.5 United Nations Conference on Trade 29and Development (UNCTAD). UNESCO.

6 30Ibid. NASSCOM Strategic Review 2009.7 31McKinsey, ‘Building India: World Bank, ‘Unleashing India’s

Accelerating Infrastructure Projects’, Innovation’, 2007.2009. 32 Zinnov, ‘R&D Innovation Council’,

8 India Brand Equity Foundation (IBEF), August 2008.August 2009. 33 Evalueserve (2004).

9 Database of the Centre for 34 Migration Policy Institute database.Monitoring Indian Economy (CMIE), 35August 2009. Indian Ministry of Tourism, ‘Tourism

10 Statistics at a Glance’, 2008. Reserve Bank of India, op. cit.

11 Planning Commission, Government of India.

12 CMIE, op. cit.

13 IBEF, September 2009.

14 Rabobank, ‘Indian agri-biotech sector: Emerging scenario, issues and challenges’.

15 CII/KPMG report, ‘India Pharma Inc. – An Emerging Global Pharma Hub’, 2008.

16 IBEF, June 2009.

17 UNCTAD, ‘World Investment Report: Transnational Corporations, Agricultural Production and Development’, 2009, p. 141.

18 CMIE, July 2009.

19 CMIE, August 2009.

20 CMIE, August 2009.

21 Automotive Component Manufacturers Association of India, ‘Global Competitiveness of Indian Auto Component Industry & Its Sustainability’, 2009.

22 Ernst and Young, ‘Renewable Energy Country Attractiveness Indices’, Q4 2007.

ContentsExecutive summary 04

Introduction 08

Chapter one: Laying the foundations 10

Chapter two: Combining old and new 14

Chapter three: Building capabilities for the future 20

Chapter four: Projecting India 26

Conclusions 30

03

With greater integration into the world Achieving success in the next phase of economy, the effectiveness of India’s growth story will require closer policymakers in shaping and cooperation between businesses and implementing policies to increase policymakers than ever before. As the To take a lead in global forums in flows of people, capital, products and world emerges from recession, this order to embed India at the heart of services will, as we have seen, be new model of economic and social the world economyfundamental to securing India’s future governance will be replicated across

To simplify internal bureaucratic growth. To climb the competitiveness the globe. India has a number of ladder, it is crucial for India to focus processes, to rationalize taxation, and strengths that position it well to lead on the following areas: to effectively police intellectual this new global order. Doing so will

property rights require action on a number of fronts, Improve the overall business

from the local to the international, environment by removing the barriers To encourage the free movement of

with a focus on scaling activity more and hurdles that may hinder MNCs and talented labor, and to invest in

effectively and consistently. But with domestic businesses as they seek to transport, technology and social

commitment from business and achieve sustainable growth in India infrastructures

government alike, there are few limits Reduce dependence on, and increase to India’s potential.To focus policy on encouraging

the value of, traditional sectors of the higher-value in traditional sectors economy (e.g. agriculture) as well as (agriculture, manufacturing) and to developing new, higher-value-added invest in innovationindustry sectors such as healthcare,

To align education more closely renewable energy and new with employment opportunity, and to technologiesinvolve business leaders in shaping

Improve India’s productivity by human capital strategybroadening its skills base beyond its current centers of excellence and fostering innovation on a national scale

Place India at the heart of the multi-polar world by increasing the impact it Working with local partner achieves on the global stage through organizations and government to raise linking SMEs to global supply chains, skill levels and invest in higher value-tapping into the Indian diaspora and chain activitiesmaking better use of India’s cultural

Empowering rural populations to heritageopen up untapped labor and consumer

MNCs must play a critical role in marketsachieving these objectives by nurturing

Adopting imaginative responses to a globally integrated business India’s diversity, using technology to ecosystem driven by knowledge, scale operationstechnology and talent. Several MNCs

have established globally significant Exploiting India’s advantages of businesses in India by setting up language and demographics to test manufacturing and R&D facilities, innovative business modelsbuilding and serving consumer markets

Co-operating with government to and establishing India as an export make training and education better base. They have complemented efforts aligned with needsof local governments, institutions and

businesses in imparting skills to local workforces and by promoting a culture of innovation. There is great scope for more to be done.

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For policymakers, the priorities must be

For MNCs the opportunities for growth can be realized by

Conclusions: Overcoming the challenges to growth

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The world has been shaken by the economic infrastructure, education and healthcare. downturn. Developed and emerging However, in the political sphere there are economies alike have felt the full force of new administrations in many countries and its impact. India’s economy has seen a a re-elected Indian government unimpeded slowdown after nearly a decade of by coalition politics. This presents a further unprecedented growth, as its companies window of opportunity for businesses and have been vulnerable to the varying policymakers to work together to develop fortunes of their customers, partners and constructive and collaborative solutions suppliers around the world. As we begin to that capitalize upon the country’s emerge from this crisis, there is a new strengths, develop new opportunities and sense of urgency amongst business leaders address the obstacles to achieving India’s and policymakers to address long-term social and economic growth ambitions.challenges and exploit fresh opportunities.

The Indian economy will enter the recovery period facing changed global competitive dynamics, particularly from other fast-developing economies, as well as the ongoing need to confront persistent domestic challenges in areas such as

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Executive summary

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05

The importance of multinational companies

Major new research

Further potential

of national competitiveness. For example, Innovation: a 2007 study by the World according to the World Economic Bank found that 300 MNCs had set up Forum, India ranks only 49th out of the R&D and technology centers in India, world’s most competitive economies— accounting for 60 percent of the R&D Multinational companies (MNCs) will 23rd when compared only to other off-shoring industry. With these centers feature prominently in efforts to

3comes increased economic growth and emerging economies. And while a overcome these challenges and drive spillover effects into the wider Indian comparable number of the world’s fifty the next phase of sustainable economy (e.g. through knowledge largest companies operate in China economic growth, not least by driving transfer and the flow of new skills). and India, their combined turnover in inward investment, nurturing talent

China is three times their turnover in and encouraging innovation. For In recent years, the relationship 4India. This report attempts to example: between India’s domestic businesses understand and suggest ways to

and multinationals has proved to be a Investment: MNCs have invested over address this shortfall, to set out how 1 unique competitive advantage for the US$100 billion in India since 2000 , the Indian economy can be best

nation, generating a creative dynamics with foreign direct investment (FDI) aligned to encourage these investments, of knowledge transfer, investment and inflows having increased at a rate of and to show how MNCs can support innovation. As a result, India’s businesses about 30 percent as compared to 14 and amplify India’s next phase of growth.are arguably the best adjusted to the percent for all emerging markets.global economy among emerging

Talent: MNCs have been at the heart economies, with a high proportion of of up-skilling the Indian workforce, higher-value and service-sector The report draws on a major research making it one of the most competitive contributions as well as an inclusive project on MNCs operating in India talent pools in the world in a number and global mindset. conducted jointly by Accenture and the of industries (especially information MNC Council of the Confederation of technology). In a recent Accenture Indian Industry. Business leaders from survey of business leaders around the more than a quarter of the MNCs in

More, however, is possible. Although world, India ranked second only to the India were interviewed to gain first-India’s recent growth has been United States in terms of the hand insight on some of the challenges impressive—second only to China since attractiveness of its top management they face and the broader role of

2 mid-2008—the country still does not talent. MNCs in India’s journey towards social rank as high as it could on comparisons

and economic growth.

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Finally, promoting the cross-fertilization emerging economies are catching up of knowledge and capabilities can drive and starting to exploit their cultural new, innovative business models and industries and diaspora population to attract investment. For example, while great effect. Our analysis identifies the India’s growth to date has been driven following levers to realizing growth in in large part by the IT sector, there are this area:opportunities for MNCs in adjacent

Providing incentives for creative industry sectors that can capitalize on

industries and talent to locate in India, this e.g. advertising and digital media.

building on India’s burgeoning creative In developing these industry sectors,

sectors to generate growth and India will not only generate increased

strengthen India’s brandeconomic growth but also enhance even further its brand overseas. The Setting up a government initiative India Brand Equity Foundation has to target and leverage the Indian already undertaken extensive efforts to diaspora more effectively so that they promote ‘brand India’ abroad: the can act as ‘ambassadors’ for talent, markets, growth and investment opportunities, particularly opportunity that exist in the country. in new technology sectors To integrate itself further into the

Using MNC supply chains to connect global economy, India needs to build

local enterprise and global businesseson this and promote India as the new culture capital of the world and hub of new digital industries.

Placing India at the heart of the global economy means building on its existing success in this area: in being open, in being an attractive location for investment and in promoting a strong brand around the world. The key for India is to realize that other

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Figure 10: International tourist arrivals, 2008

France

US

Spain

China

Italy

UK

Ukraine

Turkey

Germany

Mexico

India

8.6

6.29

6.21

5.75

4.63

3.28

2.76

2.71

2.7

2.45

0.58

% of total international tourist arrivals

Source: Indian Ministry of Tourism; ‘Tourism Statistics at a Glance 2008’

Key areas for growth enforcement of IP laws, as well as leading-practice knowledge, while improving the efficiency in the driving advanced engineering skills

Based on Accenture’s interviews with administration of IP rightsInvest in sunrise industries, such as

senior business leaders, supplemented Reduce barriers to the free flow of renewable energy, healthcare and

by extensive research, this report sets people e.g. simplify immigration and pharmaceuticals, new technologies

out four key areas where action is processes for obtaining visas for new (e.g. cloud computing) and cultural

needed to put India on a path to more entrants to India industries (e.g. design, food and

sustainable, inclusive growth:tourism)

Improve infrastructure e.g. upgrade Reinforce the foundations of growth:

railway stations and existing Improve current levels of productivity: enhance the growth prospects of

technologies, including creating India’s make better use of India’s current businesses operating in India by

first high-speed rail network between assets and capabilities to enhance its creating a more predictable and

major metropolitan cities competitiveness in key areas of the enabling environment for business

economy, such as skills and innovation Realize growth in new sectors:

Simplify the bureaucratic experience capitalize on India’s potential in new Promote skills development e.g.

e.g. enhance coordination between the industry sectors as well as improving MNCs should continue to work with

central, state and local governments the value addtion in traditional sectors, local education establishments to

on approval processes for foreign helping the economy move to a more shape curricula and ensure that skills

businesses both before and after set-sustainable growth model are relevant to the workplace

up of operationsReduce dependence on, and increase Increase the proportion of the

Rationalize taxation e.g. improve the value of, agriculture e.g. increase population engaged in education and

awareness and communication with support for agricultural interventions productive employment. Policymakers

business about the mechanisms that (such as irrigation) and employers can bring more women

exist to reduce transaction costs in into the workforce by embracing

taxation and bring in more Develop both basic and high-value flexible working options and putting in

predictability to the tax system manufacturing e.g. MNCs should play a place modernity provisions

significant role in both shaping and Safeguard Intellectual Property (IP)

delivering the training needed to e.g. establish a common body or

supply basic manufacturing workers taskforce to centralize control over the

(see next chapter on education) with

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But beyond this opportunity to reach investors. Indeed, this has already Doing so will require India to focus on new consumers, the diaspora happened in the context of the IT how it can build on its cultural population represents a significant industry, where the government made heritage and creativity. For example, source of potential talent, many of a conscious effort to communicate and other emerging markets have taken whom have been educated in Western interact with the global Indian steps to leverage culture as a means of economies and possess the skills that diaspora with hopes of encouraging making their living environment more MNCs looking to locate in India will investment in the country from those attractive to MNC employees. Abu Dhabi value highly. Indeed, many MNCs in who have emigrated and become has signed deals to develop offshoots India have sought to bring the Indian successful in other nations. A similar of both the Louvre Museum in Paris diaspora back into leadership positions approach must be taken in respect to and the Guggenheim Museums in New where they can combine their India’s new growth industries, York and Bilbao; Singapore is planning knowledge of Western business particularly those related to technology to have the Cirque du Soleil play a key practices and working cultures with an where the existing reputation is strong. role in the new Sentosa cultural appreciation for local norms. This helps district. More active promotion of

Exporting India’s culture: ensure that the Indian economy keeps India’s rich cultural heritage could also pace with the latest developments in help develop its tourism industry. Bollywood and beyond Western business education as well as India’s share of international tourist

India’s business environment is one of continuing to represent a highly arrivals globally and in the Asia Pacific the most attractive in the emerging attractive location for other MNCs region during 2008 was 0.58 percent world, not least due to the high looking to establish operations in India. and 2.92 percent respectively. Within number of English speakers as well as emerging economies, these figures put

The Indian diaspora can also act as the global mindset exhibited by many India well below China and Mexico ‘ambassadors’ for their home country Indians. However, other emerging (see Figure 10). In spite of the presence through promoting greater economies are catching up. Increased of historical and cultural sites across understanding of the opportunities investment in education in many the country, during 2008, only five of within the Indian economy for emerging economies means that India’s 28 states accounted for around investment and growth. By marketing India’s traditional advantage here is 67 percent of the total foreign tourist actively investment opportunities to 35being eroded. India needs to capitalize visits into India. the diaspora, MNCs can tap into new on this advantage while it still can. sources of growth as well as spreading the word to a larger potential pool of

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Overcome constraints to innovation. Capitalize on India’s culture e.g. Build on the existing excellence and Improving the networks between provide incentives for creative reputation for IT to move into new innovation stakeholders (such as industries and talent to locate in India, technological sectors e.g. cloud business, government and academia) building on India’s burgeoning creative computing and digitizationand developing clusters can help scale sectors to generate growth and

Make best use of India’s innovation over a larger area strengthen India’s brand

demographic and educational This report demonstrates how MNCs advantages to better utilize its Position India at the heart of the are already contributing to growth in workforce, particularly among the global economy: ensure that India these areas, as well as how they can female population and in rural areascontinues to act as a key political continue to build on best practices and player on the global stage and realizes Increase the productivity of the help generate growth in the future. The the full benefit of international flows workforce through enhanced education report also sets out recommendations of investment, talent and technology systems and more support for innovationfor policymakers that will help create

Bridge the gap between local the right regulatory and administrative Capitalize on India’s open position enterprises and global supply chains environment for inclusive growth. in the global economy (in terms of e.g. ensure that rural infrastructure political, economic and cultural linkages) and supply chains are of sufficient in order to maximize flows of FDIquality to facilitate the efficient

These investments will pay dividends in In this new era of changed global transport of goods the future and set India on a path towards dynamics, what will be important for

Tap into the Indian diaspora e.g. set sustainable economic growth. MNCs India as it tries to unleash the next up a government initiative to target will be crucial in all of this, not least in phase of economic growth? The and leverage the Indian diaspora more terms of technology transfer, sharing following imperatives should guide effectively so that they can act as knowledge and skills, and growing new India as it embarks on this journey:‘ambassadors’ for investment opportunities, markets. By working with policymakers

Move existing traditional industry particularly in new technology and as a part of the fabric of Indian sectors up the value chain while society, businesses can help achieve a exploiting potential in new sectors collective vision of prosperity.

Conclusions

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India owes much of its recent Beyond this, there are three areas export their products. The ambition is economic growth to its open position where action can be taken in order to to increase production from 10,000 within the global economy, which has help realize the next phase of tonnes a year at present to 150,000 seen significant levels of inward economic growth. MNCs can act as tonnes by 2020, which would constitute investment and MNCs choosing India facilitators in each of these areas. 3 percent of global cocoa production. as a location for a number of business

Integrating local enterprise Tapping into the Indian functions. India has been among the most attractive destinations for with global business diaspora investment worldwide, ranking second

India has a wealth of small- to India’s population is one of its greatest only to China on the FDI Confidence medium-sized enterprises (SMEs) that assets. While numerous steps are being Index in 2007.can collectively generate significant taken to improve the skills and

However, if India is to maintain and levels of growth to the Indian education of the domestic population, build on this position of strength, it economy. However, the key to realizing the potential afforded by the huge needs to exploit further opportunities their potential is to connect them to Indian diaspora population should not to adopt a more open position and global supply chains through MNCs. be underestimated. With 20 million integrate itself within the global Given India’s size and the number of people of Indian origin in 70 countries,

33economy. At the political level, India small- to medium-sized enterprises India has a pan-continental presence. should utilize the opportunities arising (SMEs) that have developed (particularly Firstly, these populations represent a from its expanding global footprint of in rural areas), integrating these significant consumer market in their interactions and relationships with the enterprises as part of a wider business own right, as well as a potential rest of the world to encourage the ecosystem offers the potential to springboard to test products and enter exchange of knowledge and skills. increase growth at both local and new markets in developed economies. Policymakers can take a lead by global level. For example, Dabur India Limited, ensuring that India is at the heart of which specializes in health and beauty

For example, Cadbury is supporting international forums of decision-making products, sells to customers in the Indian farmers with technical advice to (e.g. the G20, the Doha round of trade United Kingdom and United States, show them how to improve yields of talks and the Copenhagen Summit) as owing to the large Indian populations cocoa. Through this support, it is hoped well as making sure that its businesses in these two countries (a combined that Indian farmers can first achieve 34are fully integrated into global supply total of more than 2 million in 2006). self-sufficiency before starting to chains and investment flows.

Chapter four: Projecting India

After a decade of unprecedented growth, India faces new challenges in the changing world economic order as it emerges from the downturn. The rise of the multi-polar world—where economic power is increasingly diffused across the global economy—presents both a major opportunity and a challenge to the Indian economy.

While India has been at the vanguard of the emerging markets that have redrawn the world’s economic geography, comparisons with other economies confirm that India still faces a number of challenges in achieving greater competitiveness. For example, according to the World Economic Forum’s Global Competitiveness Report 2009-10, India ranks at 49th position. Even when compared to emerging economies alone, India still only ranks at 23rd position (see Figure 1).

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Figure 1: World Economic Forum (WEF) Global Competitiveness Report 2009 –1 0 Rankings

Introduction

Singapore 1 4

Hong Kong SAR 2 11

Taiwan, China 3 12

South Korea 4 19

Qatar 5 22

United Arab Emirates 6 23

Malaysia 7 24

China 8 29

Chile 9 30

Czech Republic 10 31

Emerging economies All economies

India 23 49

Source: World Economic Forum Global Competitiveness Report 2009 –1 0www.weforum.org

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application which allows a single computer The role of MNCs in promoting to run one or more virtual machines, each

innovation with its own operating system.

MNCs are involved in a number of projects Conducting world-leading research: Intel and initiatives to improve the innovative uses India as a base for some of its most capacity of the Indian economy, driving complex innovation. Recently, a pioneering economic growth and generating wider microprocessor was developed by the India spillover benefits in terms of increased R&D team. knowledge and skills transfer. This is

Encouraging the entrepreneurial sprit: JCB occurring in a number of ways:facilitates entrepreneurial activity in India

Undertaking low-cost innovation: through its efforts to create self-employment Microsoft works to develop high-tech opportunities for over 5,000 people. offerings which help bring IT to the largest Consumer goods company Amway’s possible audience, including the poor. For approach encourages entrepreneurial example, one localization program, activity in the broader environment by ‘Bhasha,’ has now made MS Windows and providing free and unlimited training to its MS Office available in 12 Indian languages. distributors to help them grow their Sharing hardware is a good way of keeping businesses. In 2007, over 29,000 training costs down. To help people share PCs, the sessions were held reaching over 1.5 million Microsoft India Development Centre (MIDC) Amway distributors. has recently developed Virtual PC 2007, an

Improving India’s capacity to innovate Positioning India as a test ground is critical to setting the country’s for innovative business models: India trajectory of economic growth. possesses the raw materials – including Innovation capabilities attract a proven track record, English language investment, generate greater returns skills, an entrepreneurial spirit and and set a path for more sustainable large, distinct and varied consumer growth. India possesses many of the groups—to market itself as the world’s raw materials to unleash innovation- pre-eminent test-bed for innovative led growth and we have already seen business models. As with the IT great examples that place India in a services boom, MNCs would play a strong position among emerging critical role in bringing tremendous economies. At the same time, there is technology, knowledge and capital no room for complacency. Concerted spillovers into the economyefforts are required by policymakers, educators and businesses across a number of areas. Important levers for change include the following:

Nurturing an innovation ecosystem: clusters of innovation arise from partnerships between academia, business and financiers, all incentivized by government policy

Getting the scale right: technology can multiply the penetration and reach of business solutions and best practice ideas

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So while significant strides have been made in recent years, there is still some way to go before India can truly take its place at the top table of globally competitive economies. Going forward, MNCs are crucial to the sustained economic growth of India, both in terms of driving inward investment and through the potential positive effects they have on education, skills and innovation. This report analyzes the role of MNCs in the Indian economy, and the ways in which policy initiatives can be aligned to increase co-operation between governments, MNCs and all other stakeholders.

The report is drawn from Accenture’s extensive research into the growth This research and the resulting analysis opportunities facing India and the role outline opportunities for growth in of MNCs in realizing those four areas, and highlight the opportunities. In addition, this report challenges faced in each. These draws on in-depth interviews with key imperatives are set out in the chapters executives from MNCs, officials from of this study, which look in turn at: the Government of India and other foundational factors for growth; the crucial stakeholders, undertaken in co- possibility for growth in new sectors; operation with the Confederation of the drive to improve current levels of Indian Industry (CII). The MNCs productivity; and the ways in which involved in the study account for a India can position itself at the heart of significant portion of revenues of the new multi-polar global economy.MNCs in India and represent a true cross-section of sectors (see Figure 2).

Figure 2: Percentage distribution of survey responses across sectors

5%

15%8%

15%

8%

24%15%

10%

Banking and Insurance

Chemicals and Petroleum

Communication and Entertainment

Industrial Equipment and Systems

Consumer Durables and Other Consumer Products

Food Products and Beverages

Automotive

Business Services*

*Business Services include consulting, software, real-estate and housing services

Source: Accenture/Confederation of Indian Industry Survey

Overcoming constraints to innovative growth

Despite this progress and potential, research activity by domestic Indian companies remains low (see Figure 9). According to World Bank statistics, of the top 50 applicants for patents in India between 1995 and 2005, 44 were foreign firms. Moreover, the innovations and patents emanating from these research centers have evolved almost in isolation from India’s academic institutions. Further, as has been discussed in chapter one, some MNCs are reluctant to invest in R&D in India because of perceived weaknesses in intellectual property administration and enforcement.

With competitive pressures increasing Scaling is also a critical issue. India has

from around the world, there is an sometimes been labeled “a graveyard

urgent need for India to build a more of good ideas” due to the large number

sustainable and healthy innovation of innovative and successful initiatives

ecosystem for future growth. The that are piloted or implemented

national government has recognized without reaching enough scale to

some of this by tripling the R&D make a significant national impact.

allocation in the Eleventh Five Year Multinationals have played an

Plan (2007–2012) with the target of important role in developing successful

bringing R&D investment to 2 percent models that balance the benefits of

of GNP, closer in line with the average global scale and knowledge with local

for developed countries of insight and responsiveness. The best-

approximately 2.5 percent. known examples include the successes

This investment requires buy-in from of consumer goods companies like P&G all stakeholders, however, including and Hindustan Lever in developing government, business and academia. innovative business models that bring There are signs of progress, such as the global products to the most isolated National Entrepreneurship Network Indian communities in a locally (NEN), a non-profit initiative founded relevant way.in 2002 to educate and support the

Looking forward across broader next generation of entrepreneurs in

industry groups, methods of achieving India. Co-founded by five of India’s

scale include the development of premier academic institutions and

clusters of excellence around key collaborating with over 280 Indian

themes, and the utilization of graduate institutions, the NEN helps to

technology to multiply impact and build entrepreneurship programs and

reach. Technology-based solutions are create a pipeline of young innovators.

replicable, scalable, cost-efficient and More recently, the Confederation of

consistent in quality. Moreover, the Indian Industry set up a committee to

application of technology seems establish long-overdue formal

particularly well adapted to India’s communication between its members

need for solutions that reach across and academia. Further efforts are

difficult terrain and long distances and needed to include business in policy

that can easily be tweaked to respond discussions on education, training and

to a diversity of languages and national innovation capacity.

cultures. Multinationals can play a key Multinational companies can play an

role in developing and implementing important role in these discussions,

the technology solutions that can bringing ideas and lessons learned

connect India’s disparate success from other countries.

stories and unlock the country’s innovative potential.

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Figure 9: Percentage of patent applications registered by domestic companies(latest figures percent)

Source: World Intellectual Property Organization

80

70

60

50

40

30

20

10

0

South Korea Russia China India

62%

18%

75% 74%

Just as MNCs have been at the heart of challenges may explain India’s together to address these key India’s growth story to date, so too comparative lagging behind the other challenges. The global economy is now they will play an integral role in BRIC (Brazil, Russia, India and China) inching towards recovery, and financial creating the next chapter of economic economies when measuring the markets are beginning to stabilize. growth. MNCs can be key facilitators volume of FDI inflows. In 2008, India Many MNC executives will now begin of global economic integration and can attracted US$42 billion in FDI, to scan the horizon for the most help link local and global supply compared to US$108 billion in China, attractive destinations for investment. chains. However, policies must be US$70 billion in Russia and US$45 India has the opportunity to be a part

6aligned to allow MNCs to function of this next chapter of global billion in Brazil (see Figure 3).effectively. investment and growth but only by

To propel the Indian economy towards addressing the outstanding obstacles Over the past decade, India has a new phase of growth, policymakers to business confidence.benefited from significant inflows of and business leaders will have to work

Foreign Direct Investment (FDI). MNCs have invested over US$100 billion in India during the last eight years alone. Between 2000 and 2007, FDI inflows into India grew at a compound annual growth rate of 30 percent, compared to an average figure of 14 percent for

5other emerging markets.

However, the Indian economy still faces a number of challenges that continue to act as impediments to investment and growth. Some of these challenges include overly bureaucratic approval processes for foreign MNCs registering in India, as well as difficulties in accessing talent pools and critical infrastructure. These

Chapter one: Laying the foundations

10

India Russia Brazil China

0

20

40

60

80

100

120

2005 2006 2007 2008

813 15

72

20

30

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73

25

55

35

84

42

70

45

108

Figure 3: FDI inflows into BRIC countries, 2005-08 (US$ billions)

Source: United Nations Conference on Trade and Development (UNCTAD)

23

Addressing India’s human capital challenges The role of MNCs in educationand maximizing the opportunities is both

Multinationals are undertaking initiatives complex and urgent. It requires leadership in a variety of areas to help drive and commitment from government (at increased productivity through education, national, state and local levels), business and training and innovation promotion. Some civil society. It also requires innovative of these are as follows: thinking to achieve results at speed and

scale. Beyond the mobilization of resources Supporting basic, and high-value skill

and structuring of initiatives, it requires a levels around the country: recognizing

cultural shift in India’s attitudes and the need to improve basic IT skills across

approaches to learning, as well as its the country, Microsoft set up Project

expectations from the workforce. Important Shiksha (see previous section), which has

levers for change include the following:given IT training to over 350,000 school

!teachers. Intel has instituted programs to Identifying and measuring outcomes: train India’s future software developers. improving productivity requires rigorous The Intel Academic Community, which targets to be set at all levels of the education works with universities in 72 countries, system, accompanied by transparent and launched a Center of Excellence at the consistent performance measurementMSRIT campus in Bangalore with the aim

! Aligning learning objectives: business of training 300 faculties from 155 leaders, including from MNCs, must work institutes of the Visvesvaraya with policymakers in shaping the nation’s Technological University (VTU) as well as human capital strategy, to ensure an influencing the undergraduate curriculum.alignment of needs and objectives

Using technology to up-skill the ! Promoting inclusiveness: the urgency for workforce: Hindustan Unilever is progress in education and skill levels must constantly working to keep its workforce cut across geographies, social groups and equipped with the latest skills. In 2007, genderUnilever introduced an ‘e-learning

platform, which offers 3,000 self-learning ! Creating the innovation mindset: India courses over the internet, allowing them needs an education system that requires to be accessed by any Unilever employee, students to be critical in their thinking and anywhere, at any time. resourceful in driving their own learning

Targeting under-employed segments of the population: JCB, the UK-headquartered manufacturer of engineering vehicles and diesel engines, reaches out to create employment opportunities for under-employed part of the workforce, such as retired army men.

Simplifying the bureaucratic ‘experience’

Rationalizing taxation

Our interview-based research suggests that, while MNCs are experiencing an increasing ease in doing business in India, more needs to be achieved in order to enhance the value of their net contribution. In order to attract FDI, central and state governments have been implementing a number of laws and measures to remove regulatory and procedural barriers to the establishment of foreign enterprises. According to the respondents to our survey, while this has made entry by MNCs into India easier, establishing and expanding within India is still a ‘challenging experience’ (see Figure 4).

A significant number of respondents said that the Department for Industrial

the next phase of growth, and position However, many MNCs operating in Policy and Promotion (DIPP) and the

it ahead of the other BRIC economies, India still face a complex network of State Single Window cells provide

further action is needed to enhance tax structures and mechanisms—an initial support for new entrants “but

the overall bureaucratic experience. area where India lags behind Brazil, there is little support thereafter”. Our

Key actions would include: China and Russia. Business executives research also emphasized that time-

operating in India told us that sensitive government bureaucracy is a Enhancing coordination between the

navigating the Indian tax system top factor in determining whether central, state and local governments

remains a significant challenge. MNCs choose to invest and expand in about approval processes for foreign

Around 70 percent of MNCs surveyed India. businesses

and interviewed are of the opinion that Other key bureaucratic challenges in Improving lines of communication the reforms in the tax administration India include the following: between governments and newcomer that have occurred to date, especially

businesses regarding the overall with regards to implementation and There are often approval hurdles

approval processes, including interpretation of tax statutes at the that emerge at state and local

requirements at the central, state ground level, have been inadequate. government level

and local levels Some of the key challenges in the area MNC executives are often surprised of taxation include:

Facilitating support from government by a range of new approval requirements

departments and agencies beyond the Laws are often interpreted in that they did not know existed prior to

initial stage of setting up operations different ways by different tax establishing operations. Moreover,

authorities, as well as by different there is little support from government

officials within the same tax authorityin navigating these additional hurdles

Tax authorities aggressively use their A predictable business environment There are a number of government powers to conduct investigative includes a stable and easily departments and agencies that exist to processes at early stages, and to understandable tax system. Along with aid the overall approval process. pressure companies into paying taxes the process of economic liberalization, However, little is known by business before a full audit is in placeIndia’s complex tax system has been leaders about these support systems

undergoing significant change, bringing There are significant costs and Many of these challenges result in both a rationalization and reduction in business disruptions resulting from the unexpected delays and higher costs for corporate tax rates. The Government of implementation of amendments to tax businesses—discouraging MNCs from India is now undertaking an effort at statutes with retrospective effect setting up and expanding in India. significant tax reform through the Addressing these inhibitors now could Significant delays are often created Draft Direct Taxes Code 2009. The not only spur investments, but also by transfer pricing issues Code is ambitious and represents a help differentiate India from its rival watershed in Indian tax policy, seeking These challenges combine to create a economies. The central and state to promote tax compliance, introduce ‘high-stress-low-trust’ tax governments have already been a single Goods and Services Tax, environment. India must address these implementing a range of laws and simplify tax language, and reduce the challenges in order to attract the measures to remove regulatory and scope for tax disputes. capital and skills needed for the next procedural barriers associated with the establishment of MNCs in India. However, in order to launch India into

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Figure 4: Problems with India’s business environment identified by MNCs and industry bodies

Multiple interpretations of tax regulations

Unfavorable policies and regulations

Procedural delays

Corruption

IPR enforcement

Other issues

72%

59%

46%

36%

28%

28%

Source: Accenture/Confederation of Indian Industry Survey

maximize the reach and impact of their efforts. For example, Microsoft’s ‘Shiksha’ project provides IT education to school teachers, having already made 350,000 teachers technology-literate, able to utilize these skills in their profession and capable of passing them on to their students.

Growing the workforce

India’s productivity is further hampered by the relatively small proportion of the population that graduates from the education system into the skilled workforce. The IT industry, which represents as much as 5.9 percent of the country’s GDP, still employs only 2.23 million of India’s 750 million-strong working-age

30 any time. However, according to the R&D centers account for over 60 population. Further, less than half of 31 percent of the US$9.35 billion R&D World Bank , only 16 percent of Indian female higher-education graduates

off-shoring industry. This is projected manufacturing firms provided in-join the economically active population to grow to be a US$21.4 billion service training to their employees, (see Figure 8), and many of the highest

32compared to 92 percent in China. This industry by 2012. achievers in India’s schools continue to shortfall, if not addressed, will inevitably seek work abroad, even if this trend These centers of innovation have see India losing out in FDI and global has recently slowed. generated the sharing and competitiveness in the longer term.

multiplication of knowledge and skills Action needs to be taken on several across India’s workforce through fronts. For example, policymakers and technology transfer and through employers can bring more women into unplanned technology spillovers. For the workforce by embracing flexible example, Texas Instruments’ advanced working options and proper maternity Alongside the capacity to maximize communication systems helped Indian provisions. Training and education human capital, innovation is a critical companies emulate leading practices must move beyond traditional systems factor in sustaining productivity and move towards the development of characterized by hierarchy to improvements. Typically, successful offshore capabilities. Indian suppliers emphasize critical thinking, personal players in the Indian market use a and partners of multinationals can resourcefulness and teamwork. high-volume, low-margin business learn from MNC best practice, Training and education courses should model, finding fresh and inexpensive generating a virtuous circle of allow participants to test their own ways to deliver existing technologies innovation and wealth creation. ideas and define their own problems to to more people and places: what some

solve. MNCs can play an important role call low-cost innovation. An example Innovation is not restricted to products in bringing innovative learning would be Mango Technologies and marketing, however. In the same techniques and policy launching an Internet-enabled phone way that India has been able to attract recommendations from their disparate designed to achieve maximum investment from around the world to experiences around the world. functionality out of a modest handset set up R&D centers, there is an

with limited memory, lower processing opportunity to position the country as It is in the interests of companies capability, slower data download and an ideal test bed for a variety of across industries continuously to smaller screens. Multinationals in India innovative business models. India’s improve the training of their workers, have been keen to leverage these kinds large and diverse populations, its and to invest in the development of of innovations to bring them closer to proficiency in English and variations in employees and service providers at the country’s massive and growing infrastructure and distribution every skill level. The case studies in this consumer markets. channels allow a variety of business report highlight some of the initiatives

models to be tested in the same being carried out by multinationals in The evidence that India possesses the location; covering mass low-income India. In more enlightened companies, raw materials for innovation can be targets, high-end luxury consumers, innovative models are being utilized to seen in the number of multinational and a variety of tastes, cultures and keep skills continually updated, such as companies that have been attracted to religions.24-hour online training courses and set up research and development

tie-ups with academic institutions. For (R&D) centers in the country. A 2007 example, in 2007, Unilever introduced survey by the World Bank found that an e-learning platform offering a range more than 300 multinationals had set of 3,000 courses accessible by up R&D and technology centers in employees anywhere in the world, at India in recent years. In fact, these

Innovation: the virtuous circle

22

Figure 8: Economically active women in India as a proportion of total female population, 2007 (percent)

Source: International Labor Organization

80

70

60

50

40

30

20

10

0

China Brazil Russia South Korea

57%50%

68%

55%

34%

India

phase of growth. Our analysis suggests Local enforcement authorities often economies, and has become a home to that government could help achieve have limited understanding of IPRs, a large and growing pool of engineers, this by: and central and state governments’ scientists and other professionals.

allocations of resources towards Implementing a ‘grandfathering’ Reducing barriers to the free flow of

building IPR-related capabilities and period where amendments to the tax people is fundamental to maintaining

infrastructure are inadequatecode are made—i.e. a time allocated to a hub of talent excellence in India, enable businesses to restructure their Poor enforcement of IPRs creates since it enables talent to come in from transactions in line with new tax losses for both businesses and tax abroad and move about the country requirements authorities. Intellectual property with relative ease. However, our

piracy has been rising in India, and is research uncovers a number of barriers Improving awareness and

estimated to be worth several billion that continue to block the flow of communication with businesses about

dollars annually. Some of the sectors talent both to and within India. Some the mechanisms that exist to reduce

that traditionally suffer include of the challenges to the free flow of transaction costs in taxation, as well as

business software, pharmaceuticals, talent in India include:bringing in more predictability to the

and the movie and music industries. tax system (such as the Large Tax People moving to India from abroad

But as technology, knowledge, and Payers Unit and Advance Ruling) have difficulty acquiring and renewing

ideas become increasingly important work and residence permits, a process

Clarifying and improving transfer drivers of economic growth in India, so riddled with delays

pricing legislation, specifically with too will IPR protection grow to become regards to provisions for advance a pressing issue for businesses in many A relatively lower quality of social pricing agreements other industries. amenities and infrastructure (e.g.

education, healthcare, living India has already taken a number of

conditions) discourages Indian diaspora significant steps in building its IPR

talent as well as MNC employees from protection capacity through WTO-

working in India or outside the key compliant legal statutes. Additional

Ideas and knowledge are an metropolitan citiespolicy initiatives, developed in

increasingly important part of business consultation with MNCs, would help The quality and extent of

and international trade. Much of the build a more stable and secure communication and power

value of medicines, software and new operating environment. Some of the infrastructure is often not up to the

technologies lies in the invention, actions the international business standard required to support virtual

research and innovation involved in community would welcome include: and real-world flows of talent at an

their production. The protection of affordable cost

intellectual property rights (IPR) is The establishment of a common therefore a key factor for ensuring that body or taskforce to centralize control The financial crisis and recession any economy attracts investment from over the enforcement of IPR laws, as represent an opportunity to redefine MNCs specializing in high-tech, well as improving the efficiency of the India as a destination for talent from knowledge-intensive products and IPR administration around the world. With rising services. unemployment in many Western

The allocation of additional economies, competition for the world’s

There are currently a number of resources towards building IPR-related best and brightest minds is increasing.

challenges relating to IPR protection capabilities and infrastructureReturning professionals are a

that businesses face in India, which Improved capabilities for judicial particularly valuable asset to MNCs

combine to stifle investment and authorities in the area of IPR protection, operating in India, as they bring global

discourage business expansion. The such as fast-track legal processes for experience and act as conduits for the

weak enforcement of IPRs has been the IPR infringement, and the adoption of exchange of new ideas. It is therefore

bane of businesses operating in many deterrent-level sentences of increased significance today that

emerging market economies, but this is policymakers and business leaders act

particularly so in the case of India. Our to address these barriers to talent

research has revealed that some of the flows in India. Such actions might

ongoing challenges in the area of IPR include:

protection include the following:With knowledge becoming an engine

A simplification of immigration and Little focus on the enforcement of of growth across sectors, talent has

processes for obtaining work visas for IPR laws. As a result, penal provisions become a strategic developmental

new entrants to Indiafail to act as a deterrent to asset. India is becoming an infringements increasingly knowledge-intensive Supporting foreign talent acquisition

economy, producing millions of highly- by offering quality-of-life incentives The system of IPR enforcement and

educated graduates every year. The (e.g. healthcare benefits, pensions) to regulation is highly fragmented,

Indian diaspora is also beginning to foreigners and Indians living abroad, as comprising several government

return to India in increasing numbers. the Chinese government is doingdepartments and agencies in disparate

India is thus well-positioned in terms regions of the country

of its talent base when compared to many other emerging market

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Safeguarding intellectual property

Reducing barriers to the free flow of people

12

fundamental to managing change. in Russia and 82 percent in the United Improving skills29Multinationals also play a critical role States. Moreover, Accenture analysis

Driving improvements in basic in India both as drivers of productivity shows that despite spending more on education, including literacy and improvements and as channels for each student in its higher education numeracy, is vital to ensure that the investments and new assets that system than Brazil, China, Russia, groups currently excluded from the improved productivity will attract into South Korea and Singapore, India workforce are able to become productive. the country. This chapter analyses the performs worse than these countries This is particularly urgent in rural areas. challenges and opportunities that can when compared to specific measures Similarly, improvements in vocational engender those advances, focusing on of delivery and innovation, access and training are essential if India’s the two crucial areas in which step- inclusiveness and internationalization infrastructure constraints across the changes in productivity can be realized: of their higher education systems.country are to be addressed. Such projects human capital and innovation.

MNCs continue to play a critical role in require commitment and engagement bringing new ideas and investments from a variety of stakeholders at both into India’s education system. There is national and state levels. A good an inherent self interest for MNCs to example is the Prime Minister's support and build the skills of their National Council on Skill Development, India has three distinct advantages in future employees, suppliers, customers which will launch a public-private its human capital: a young and partners. By investing in the initiative to train 150 million people demographic, English language skills nation’s education levels, MNCs are across the country with the skills needed and a culture that values learning and improving the productivity and growth to work in manufacturing. is open to external influences. At the potential of their business as well as

same time, it is clear that productivity India’s legacy of strong higher- improving the expected returns on and competitiveness are hampered by education institutions has served the their investments in India. MNCs in the education and training infrastructures nation well in building the economic IT industry have been particularly active that are inadequate for the size of the progress of the last decade. But there in encouraging and investing in solutions population and the speed of is no room for complacency, to address India’s education deficit, improvement required for sustainable particularly as only 12 percent of the often partnering with government growth. The deficits can be found at all country’s population enrolls in higher bodies or non-governmental levels, including basic education, education, compared to 30 percent in organizations and frequently utilizing vocational training and higher education. Brazil, 23 percent in China, 75 percent technology-based solutions in order to

The wisest investment: human capital

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Better enabling the virtual flow of Fulfilling the government’s talent and ideas through upgrades to commitment to add power-generation information technology and power capacity and expand electricity access infrastructure in cities as well as rural in rural areasareas

Implementing upgrades to railway stations and existing technologies, including creating India’s first high-speed rail network between major The development of physical metropolitan citiesinfrastructure has long been recognized

as one of the most important factors Developing and implementing a for attracting foreign investment, national IT infrastructure strategy, increasing competitiveness and driving encompassing the expansion of economic growth. Transportation, broadband access beyond the initial energy and Information Technology targets set out in the Eleventh Plannetworks are all prime enablers of productivity and improved economic efficiency.

Our research confirms that MNC growth has been held back in India for want of a solid network of roads, efficient railways and a uniform power supply. The country is predicted to lose close to US$200 billion of GDP by 2017 due to delays in infrastructure

7development. As a result, businesses still face a number of challenges in conducting everyday activities in India. Some of these challenges include the following:

Electricity flows run short due to capacity shortages, despite the fact that access to electricity is increasing

Indian Railways face a range of problems, including outdated technologies, under-maintained railway stations and gaps in connectivity to remote areas

India’s IT infrastructure remains comparatively underdeveloped, particularly in the areas of broadband and mobile phone connectivity

MNCs and domestic companies universally welcome the Indian government’s current commitment to improving infrastructure in India. The Planning Commission has targeted an investment of US$20.38 billion in infrastructure over the next two years through its Eleventh Plan, covering areas such as railroads, electrification,

8airports and telecommunications. With continued policy commitments in the infrastructure space, India can establish the foundation required for future investment and growth. Some of the actions that would be welcomed by businesses in India include:

Improving infrastructure

13

Chapter three: Building capabilities for the futureIndia has an abundance of talent and capital; the country’s potential is high, yet productivity levels are notoriously low (see Figure 7). Large sections of society are excluded from the productive workforce, including much of the rural population, the majority of whom are subsistence farmers, and there is a low rate of female workforce participation.

India is home to 20 percent of the world’s people, a third of whom are below the age of 15. This youthful demographic will add about 250 million additional workers to the labor

28pool in the twenty years to 2025. However, if the coming generations are not able to attain dramatically improved levels of education, health and productive employment, their Competitive pressures from fast-emerging Productivity improvements hold the contribution to India’s and to the economies around the world threaten to key to continued investment as well as world’s economic and social welfare erode India’s position in important ensuring higher and more sustainable will be severely threatened. Our higher-value sectors such as IT levels of growth and competitiveness analysis highlights that:

The need to attract overseas investment Policymakers play a critical role in Beyond increasing participation in into targeted growth industries of the defining success. They can reach out to

the productive workforce, India’s future is even more urgent as a wide range of stakeholders to ensure output can also be significantly multinationals are presented with that targets and outcomes are aligned enhanced through productivity increasing options from a disparate with the country’s aspirations for social improvements across the existing range of economies eager to attract and economic growth. Identifying economy capital and skills desired outcomes and setting targets is

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Figure 7: Labor Productivity, 2008 (as a percentage of US levels)

Source: Economist Intelligence Unit

100%

68%

57%

36%32%

23%

11% 8%

US Singapore SouthKorea

SouthAfrica

Russia Brazil China India

20

Note: Labor productivity measured as GDP at constant prices and PPP per person employed

14

Chapter two: Combining old and new The Indian economy has benefited next wave of information technology. immensely in recent years from Huge advances have been made in developments in a number of higher- these areas, often by MNCs working in value-added industry sectors (such as close conjunction with government IT and business process operations) as and local stakeholders, but the well as specific islands of success (such opportunities have only begun to be as automotive parts). These sectors exploited.have driven the spectacular economic

Our research demonstrates that the growth in the decade leading up to the growth that has been set in motion in current downturn. IT and business process operations can

While these engines of growth have be mirrored more widely across the become established in India, however, economy in three key areas: agriculture, the broader population has remained manufacturing and sunrise industries. dependent on traditional sectors, such as agriculture. If the Indian economy is to sustain its growth it is vital that traditional Indian sectors also begin to share the success story. There is tremendous potential in developing traditional industries such as agriculture and manufacturing, particularly if higher value-chain operations can be established within them.

Alongside this investment in traditional industries, our research shows that India is uniquely placed to be at the forefront of growth in new industry sectors, particularly in renewable energy, healthcare and the

17.0%

18.5%

64.5%

Agriculture Industry Services

Figure 5: Breakup of GDP in India, 2008-09 (% of GDP at constant prices)

Source: Annual report, Reserve Bank of India, 2008-09

19

while cloud computing has become the primarily been witnessed through its design. Indian culture is already widely support structure of choice for the music, technology, film, food and appreciated across Asia, with high demand online community worldwide, it has television dramas. for films in particular. This appreciation taken some time to be widely used on for Indian culture can be used to

In similar fashion, India has a rich the subcontinent. Nevertheless, the strengthen ‘Brand India’, improving the

cultural heritage that can be better increasing digitization of content attractiveness of Indian goods and

leveraged in order to realize higher (e.g. by libraries and government services overseas (see chapter four).

levels of economic growth. The impact departments) also affords a huge

of cultural phenomena such as the In order to realize growth in these new opportunity to position India as the

Bollywood film industry demonstrates sectors, a number of actions are needed:global center of digital industries.

the creativity that exists within Indian ! India is making concerted efforts

society that, if combined with India’s Developing cultural industries and progress in the area of renewable strength in IT and digital media, can

energy. In these fields, businesses rely Creative and cultural industries (e.g. also be harnessed to develop new industry on clear regulatory direction from advertising, digital media and sectors. Indeed, the link between high-governments. Clear signals here- coupled entertainment) have in recent years tech media and the high arts provide with incentives for investment in low-become increasingly important direct opportunities for collaboration and carbon technologies - will ensure sources of economic growth among integration between sectors. So, for investment from MNCs and domestic emerging economies, as well as example, Japan’s Sony has moved away companies alikeproviding indirect benefits in terms of from being an electric goods company

enhanced brand awareness. South !to being a music production company To build on its history of IT excellence, Korea has established itself as a leader too. In India, the advertising industry is developments such as ‘cloud’ technologies in South-East Asia in this field. The already becoming increasingly and digitization must be invested in and citys of Seoul has made a concerted competitive. Combined with the latest quickly assimilated. The Indian government effort to attract artists and creative developments in digital media, there is could conduct a feasibility study into talent to locate there and has since the opportunity to create growth in establishing a South Asian cloud in India, been at the epicenter of a cultural new cultural industry sectors. Further, reviewing infrastructure and server wave that has seen Korean culture one of the best ways to improve the capacity. This would ideally be accompanied become increasingly popular around the margins in core consumer industries— by a review of data protection legislation world, especially in Asia. This has including the automotive industry—is to ensure that digitization of records is

to infuse products with cutting-edge feasible

Agriculture: reducing dependence, enhancing value

presently growing at 13.5 percent per MNCs must continue to work with annum against 6.5 percent in 2003–04, local partner organizations and and is certain to be an important driver governments to raise agricultural skill

13 levels and tap into new labor poolsof the Indian economy. Also, the agricultural biotechnology sector,

Increased investment in higher value India’s dependence on agriculture has which has been growing at an chain activities (such as food reduced in recent years. Agriculture extraordinary 30 percent for the last processing and biotechnology) should accounted for about 23.9 percent of five years, is likely to sustain its

9 be facilitated to open up new 14India’s GDP in 1998 , but reduced over growth. A recent report predicts that consumer markets and empower rural the decade to 17 percent in 2008-09 the agricultural biotechnology sector

10 development (see box on rural (see Figure 5). The share of agriculture in India can become a major source of development)in total employment also decreased transgenic rice and several genetically

15from 65 percent in 1983 to around 52 The government must maintain engineered vegetables by 2010. percent by 2004-05, in part as a result support for agricultural interventions

This revival in agriculture has been of increased mechanization and more (such as irrigation) and work to 11 driven in large part by the growth in predictable irrigation. One incentivize investment in growth

public sector investment in farming, consequence of these technological industries such as biotechnologywhich has increased steadily from 1.8 interventions is that, in value-added percent of sectoral GDP in 2000–01 to terms, agriculture has grown at 7.9

163.5 percent in 2006–07. If growth is percent in the decade to 2008 and to be maintained it is clear that recent value-added growth in significant public investment must agriculture has been yet more

12 continue, supplemented by an encouraging at 11 percent.increased commitment to higher

Our analysis suggests that the specific value-chain activities and a greater industry sectors undertaking higher concentration on increasing land yields value-added activity that have grown through modern agricultural significantly in recent years offer great techniques. Further actions to realize future potential. For example, the food growth include the following: processing sector, which already contributes 9 percent to India’s GDP, is

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across the health spectrum. The Indian domestic pharmaceutical market was estimated to be worth US$10.76 billion in 2008 and is expected to grow at a rate of 9.9 percent till 2010 and thereafter at 9.5 percent until 2015. To meet a growing international market in the developing world, India’s global pharmaceutical sourcing industry is destined to become a US$2.5 billion opportunity by 2012, driven by R&D costs and a high-end talent pool in

27India.

New technologies

Increased globalization and the growing ubiquity and power of information and communications technologies (ICT) are radically reshaping the environment for business. Huge developments are

! !either already happening or are on the Digitization of content: more Superfast broadband: the increasing horizon: information is available online than availability of high-speed internet

ever before with many traditional connections is driving increased ! Cloud computing: the delivery of

media (e.g. books, films and music) efficiency for businessestechnical capabilities—hardware,

also making the transitionIndia has the potential to be at the software and storage—through the

! forefront of many if not all of these Internet, across company firewalls and Mobile commerce: mobile devices advances. For example, with its track national boundaries will augment and in many cases record of IT excellence, India can supplant personal computers as the

! Virtualization: the move away from position itself as the natural home of new e-business channel for employees the physical provision of IT infrastructure the ‘South-East Asian cloud’. However, and customers

Figure 6: Total primary energy production and consumption in India (Quadrillion British Thermal Unit)

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

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15

12

9

6

3

0

Total Production Total Consumption

Source: US Energy Information Administration

17

Manufacturing: waking the big sleeper

the turnover of the auto-component Renewable energy and the low-industry is forecast to reach US$40 carbon economybillion—up from US$18 billion in

212007-08. India currently suffers from a shortage Manufacturing has long been of electricity generating capacity. This considered the ‘big sleeper’ of the At the same time, of course, basic means that consumption consistently Indian economy. The share of manufacturing will remain an outstrips production of energy (see Figure 6), manufacturing in India’s GDP has important and a significant employer leading to a high level of oil imports. remained almost static at around 15.5 of lower-skilled workers, particularly

percent for the last decade, though those who have moved out of the However, India has also made significant the share of the manufacturing sector agricultural sector as a result of progress in developing renewable in terms of total employment has increased mechanization. MNCs can sources of energy supply. A recent

18increased from 11.3 percent in 1983 play a significant role both in index of renewable energy technologies to 12.9 percent in 2004-05, bringing employing these workers and in ranks India in third place behind the

22the number of people working in the equipping them with the skills United States and Germany. At a time industry to nearly 50 million. A few necessary to make the transition (see when renewable energy sources comprise segments of the industry represent the next chapter on education). The just 12.9 percent of total energy bulk of this revenue, in particular food challenge for India as a whole, production globally, in India renewables products, chemical products, and the therefore, is to pursue a twin-track account for 40 percent of energy

23heavy machinery and equipment sub- approach: to develop basic production. The Indian government sector. manufacturing in order to absorb has pledged to invest US$21 billion in

lower-skilled workers, but also to renewable-energy generation over a The most significant of these is the enhance higher-value-added five-year period ending in 2012, by latter (which includes automotives), manufacturing. Actions to achieve this which time it has also set an ambitious that has averaged 13 percent growth

19 include the following: target of adding 14.5 gigawatts of from 2004 to 2008. Despite the 24renewable power generation capacity. changing economic climate, it is MNCs should continue to work in

forecast that the automotive sector partnership with local businesses both There are considerable opportunities will grow by 10.9 percent year-on-year to drive efficiencies in manufacturing, for MNCs to drive growth and pioneer in 2009-10, even as overall and to broaden the domestic sourcing sustainable energy sources. India’s manufacturing grows only by 4.5 of vehicles and products climate, scale and geography provide

20percent. MNCs have been—and will the natural resources of the future. MNCs should play a significant role continue to be—at the heart of this Already MNC contributions in this in both shaping and delivering the growth. For example, when the sector have been significant. For training needed by basic manufacturing Japanese carmaker Suzuki partnered example, BP has been an investor in workers (see next chapter on education), with India’s Maruti to become the first India’s alternative energy market for providing knowledge of leading foreign entrant in India’s personal over 15 years. The Tata BP Solar joint practices, as well as driving advanced automobile market, it rapidly gained a venture is a leader in the Indian solar engineering skills70 percent share of the total market. energy market and exports around 60 One of the results of MNC success in The government should help target percent of its products to Europe and automotive manufacturing has been a investment in local, job-specific the United States. It has also benefited massive expansion in jobs, skills, training, which will reduce dependence several million people in rural parts of knowledge and a swathe of ancillary on agriculture and ensure a gradual India with increased access to low-industries, most notably the birth of transition into higher-value-added cost, sustainable energy. India’s globally competitive and activitysuccessful automotive-parts sector. Healthcare and

New growth engines: pharmaceuticalsIndeed, going forward the most investing in sunrise sectorsignificant opportunities exist in high- Healthcare was a US$35 billion

value-added activities in the industry in India in 2008 and is Beyond the traditional sectors of automotive sector such as component expected to reach over US$70 billion agriculture and manufacturing, India is parts. Manufacturers of luxury cars are 25by 2013 and US$285 billion by 2023. extremely well placed to play a crucial increasingly looking at making India a The sector offers immense potential to role in the ‘sunrise’ technologies of the sourcing hub for components, as well MNCs and to national stakeholders as future. Already considerable as building more components for India’s the country attempts to combat a investment has gone into identifying market. Seeing India’s success in this dramatic rise in the incidence of and pursuing these markets, with sector, the Investment Commission has lifestyle-related and other diseases.MNCs working in partnership with set a target of attracting foreign government and local companies. To meet this growing demand, the investment worth US$5 billion for the Some of the most obvious success country is estimated to need US$50 next seven years to increase India's stories are to be found in the billion of investment annually for the share in the global automotive-

26renewable energy industry, but great next 20 years. To take just one components market from the existing advances have also been made in the example, India needs to add 3.1 million 0.9 percent to 2.5 percent by 2015. health-related industries and in hospital beds by 2018 to the existing MNCs are likely to be at the heart of advanced digital technologies. 1.1 million. These trends are reflected this increased investment. By 2015-16,

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TechnologyThe role of MNCs in rural development Connecting communities, opening

consumer markets: As India’s dependence on agriculture Nokia have developed local programs reduces, there is a need to provide and solutions tailored to the needs of alternative means of employment and rural customers in emerging markets. For economic growth in rural areas. While example, Nokia Siemens Networks’ improving basic manufacturing may ‘Village Connection’ is an innovative provide many of these opportunities solution that provides rural people with (see next section), there is a key role access to information and for MNCs to play in developing rural communications technologies while also communities and helping to promote encouraging entrepreneurship. The small- to medium-sized enterprises system provides villages with local (SMEs). Three key areas where MNCs access points, which include all the are playing a key role in developing technology needed to establish a village-rural communities are highlighted level communications network. These below:local networks are run by entrepreneurs

Micro-finance as franchises, reducing costs for network operators.

Creating local entrepreneurs: Hindustan Unilever Limited’s (HUL) InnovationProject Shakti covers 50,000 villages

Moving agriculture up the value chain: (each populated by fewer than 2,000 local partnerships between local entities individuals) and creates profitable and foreign MNCs have ensured the micro-enterprise opportunities for rural transfer of knowledge and expertise that women. Armed with micro-credit, rural is helping move agriculture into higher-women become Shakti entrepreneurs: value-added activity. For example, in the direct-to-home distributors in rural area of food processing, Pepsi Foods Ltd., markets. The products distributed are Nestle India Ltd., and Cadbury India Ltd., some of the country’s most trusted are engaged in product development brands of consumer goods and include a with local research institutes to develop range of mass-market products especially hybrid crops and vegetables as well as relevant to rural consumers. HUL trains new implements that will help improve women entrepreneurs on how to run cropping patterns and raise productivity. businesses. While the Shakti entrepreneur Similarly, in biotechnology, MNCs have program is creating livelihoods among established joint ventures with Indian under-privileged people across several companies, providing access to their states in India, the related Shakti Vani

17proprietary tools and technologies. program focuses on improving the quality of life through health and hygiene awareness initiatives in rural areas.

16

17

Manufacturing: waking the big sleeper

the turnover of the auto-component Renewable energy and the low-industry is forecast to reach US$40 carbon economybillion—up from US$18 billion in

212007-08. India currently suffers from a shortage Manufacturing has long been of electricity generating capacity. This considered the ‘big sleeper’ of the At the same time, of course, basic means that consumption consistently Indian economy. The share of manufacturing will remain an outstrips production of energy (see Figure 6), manufacturing in India’s GDP has important and a significant employer leading to a high level of oil imports. remained almost static at around 15.5 of lower-skilled workers, particularly

percent for the last decade, though those who have moved out of the However, India has also made significant the share of the manufacturing sector agricultural sector as a result of progress in developing renewable in terms of total employment has increased mechanization. MNCs can sources of energy supply. A recent

18increased from 11.3 percent in 1983 play a significant role both in index of renewable energy technologies to 12.9 percent in 2004-05, bringing employing these workers and in ranks India in third place behind the

22the number of people working in the equipping them with the skills United States and Germany. At a time industry to nearly 50 million. A few necessary to make the transition (see when renewable energy sources comprise segments of the industry represent the next chapter on education). The just 12.9 percent of total energy bulk of this revenue, in particular food challenge for India as a whole, production globally, in India renewables products, chemical products, and the therefore, is to pursue a twin-track account for 40 percent of energy

23heavy machinery and equipment sub- approach: to develop basic production. The Indian government sector. manufacturing in order to absorb has pledged to invest US$21 billion in

lower-skilled workers, but also to renewable-energy generation over a The most significant of these is the enhance higher-value-added five-year period ending in 2012, by latter (which includes automotives), manufacturing. Actions to achieve this which time it has also set an ambitious that has averaged 13 percent growth

19 include the following: target of adding 14.5 gigawatts of from 2004 to 2008. Despite the 24renewable power generation capacity. changing economic climate, it is MNCs should continue to work in

forecast that the automotive sector partnership with local businesses both There are considerable opportunities will grow by 10.9 percent year-on-year to drive efficiencies in manufacturing, for MNCs to drive growth and pioneer in 2009-10, even as overall and to broaden the domestic sourcing sustainable energy sources. India’s manufacturing grows only by 4.5 of vehicles and products climate, scale and geography provide

20percent. MNCs have been—and will the natural resources of the future. MNCs should play a significant role continue to be—at the heart of this Already MNC contributions in this in both shaping and delivering the growth. For example, when the sector have been significant. For training needed by basic manufacturing Japanese carmaker Suzuki partnered example, BP has been an investor in workers (see next chapter on education), with India’s Maruti to become the first India’s alternative energy market for providing knowledge of leading foreign entrant in India’s personal over 15 years. The Tata BP Solar joint practices, as well as driving advanced automobile market, it rapidly gained a venture is a leader in the Indian solar engineering skills70 percent share of the total market. energy market and exports around 60 One of the results of MNC success in The government should help target percent of its products to Europe and automotive manufacturing has been a investment in local, job-specific the United States. It has also benefited massive expansion in jobs, skills, training, which will reduce dependence several million people in rural parts of knowledge and a swathe of ancillary on agriculture and ensure a gradual India with increased access to low-industries, most notably the birth of transition into higher-value-added cost, sustainable energy. India’s globally competitive and activitysuccessful automotive-parts sector. Healthcare and

New growth engines: pharmaceuticalsIndeed, going forward the most investing in sunrise sectorsignificant opportunities exist in high- Healthcare was a US$35 billion

value-added activities in the industry in India in 2008 and is Beyond the traditional sectors of automotive sector such as component expected to reach over US$70 billion agriculture and manufacturing, India is parts. Manufacturers of luxury cars are 25by 2013 and US$285 billion by 2023. extremely well placed to play a crucial increasingly looking at making India a The sector offers immense potential to role in the ‘sunrise’ technologies of the sourcing hub for components, as well MNCs and to national stakeholders as future. Already considerable as building more components for India’s the country attempts to combat a investment has gone into identifying market. Seeing India’s success in this dramatic rise in the incidence of and pursuing these markets, with sector, the Investment Commission has lifestyle-related and other diseases.MNCs working in partnership with set a target of attracting foreign government and local companies. To meet this growing demand, the investment worth US$5 billion for the Some of the most obvious success country is estimated to need US$50 next seven years to increase India's stories are to be found in the billion of investment annually for the share in the global automotive-

26renewable energy industry, but great next 20 years. To take just one components market from the existing advances have also been made in the example, India needs to add 3.1 million 0.9 percent to 2.5 percent by 2015. health-related industries and in hospital beds by 2018 to the existing MNCs are likely to be at the heart of advanced digital technologies. 1.1 million. These trends are reflected this increased investment. By 2015-16,

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!

!

TechnologyThe role of MNCs in rural development Connecting communities, opening

consumer markets: As India’s dependence on agriculture Nokia have developed local programs reduces, there is a need to provide and solutions tailored to the needs of alternative means of employment and rural customers in emerging markets. For economic growth in rural areas. While example, Nokia Siemens Networks’ improving basic manufacturing may ‘Village Connection’ is an innovative provide many of these opportunities solution that provides rural people with (see next section), there is a key role access to information and for MNCs to play in developing rural communications technologies while also communities and helping to promote encouraging entrepreneurship. The small- to medium-sized enterprises system provides villages with local (SMEs). Three key areas where MNCs access points, which include all the are playing a key role in developing technology needed to establish a village-rural communities are highlighted level communications network. These below:local networks are run by entrepreneurs

Micro-finance as franchises, reducing costs for network operators.

Creating local entrepreneurs: Hindustan Unilever Limited’s (HUL) InnovationProject Shakti covers 50,000 villages

Moving agriculture up the value chain: (each populated by fewer than 2,000 local partnerships between local entities individuals) and creates profitable and foreign MNCs have ensured the micro-enterprise opportunities for rural transfer of knowledge and expertise that women. Armed with micro-credit, rural is helping move agriculture into higher-women become Shakti entrepreneurs: value-added activity. For example, in the direct-to-home distributors in rural area of food processing, Pepsi Foods Ltd., markets. The products distributed are Nestle India Ltd., and Cadbury India Ltd., some of the country’s most trusted are engaged in product development brands of consumer goods and include a with local research institutes to develop range of mass-market products especially hybrid crops and vegetables as well as relevant to rural consumers. HUL trains new implements that will help improve women entrepreneurs on how to run cropping patterns and raise productivity. businesses. While the Shakti entrepreneur Similarly, in biotechnology, MNCs have program is creating livelihoods among established joint ventures with Indian under-privileged people across several companies, providing access to their states in India, the related Shakti Vani

17proprietary tools and technologies. program focuses on improving the quality of life through health and hygiene awareness initiatives in rural areas.

16

Agriculture: reducing dependence, enhancing value

presently growing at 13.5 percent per MNCs must continue to work with annum against 6.5 percent in 2003–04, local partner organizations and and is certain to be an important driver governments to raise agricultural skill

13 levels and tap into new labor poolsof the Indian economy. Also, the agricultural biotechnology sector,

Increased investment in higher value India’s dependence on agriculture has which has been growing at an chain activities (such as food reduced in recent years. Agriculture extraordinary 30 percent for the last processing and biotechnology) should accounted for about 23.9 percent of five years, is likely to sustain its

9 be facilitated to open up new 14India’s GDP in 1998 , but reduced over growth. A recent report predicts that consumer markets and empower rural the decade to 17 percent in 2008-09 the agricultural biotechnology sector

10 development (see box on rural (see Figure 5). The share of agriculture in India can become a major source of development)in total employment also decreased transgenic rice and several genetically

15from 65 percent in 1983 to around 52 The government must maintain engineered vegetables by 2010. percent by 2004-05, in part as a result support for agricultural interventions

This revival in agriculture has been of increased mechanization and more (such as irrigation) and work to 11 driven in large part by the growth in predictable irrigation. One incentivize investment in growth

public sector investment in farming, consequence of these technological industries such as biotechnologywhich has increased steadily from 1.8 interventions is that, in value-added percent of sectoral GDP in 2000–01 to terms, agriculture has grown at 7.9

163.5 percent in 2006–07. If growth is percent in the decade to 2008 and to be maintained it is clear that recent value-added growth in significant public investment must agriculture has been yet more

12 continue, supplemented by an encouraging at 11 percent.increased commitment to higher

Our analysis suggests that the specific value-chain activities and a greater industry sectors undertaking higher concentration on increasing land yields value-added activity that have grown through modern agricultural significantly in recent years offer great techniques. Further actions to realize future potential. For example, the food growth include the following: processing sector, which already contributes 9 percent to India’s GDP, is

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1518

across the health spectrum. The Indian domestic pharmaceutical market was estimated to be worth US$10.76 billion in 2008 and is expected to grow at a rate of 9.9 percent till 2010 and thereafter at 9.5 percent until 2015. To meet a growing international market in the developing world, India’s global pharmaceutical sourcing industry is destined to become a US$2.5 billion opportunity by 2012, driven by R&D costs and a high-end talent pool in

27India.

New technologies

Increased globalization and the growing ubiquity and power of information and communications technologies (ICT) are radically reshaping the environment for business. Huge developments are

! !either already happening or are on the Digitization of content: more Superfast broadband: the increasing horizon: information is available online than availability of high-speed internet

ever before with many traditional connections is driving increased ! Cloud computing: the delivery of

media (e.g. books, films and music) efficiency for businessestechnical capabilities—hardware,

also making the transitionIndia has the potential to be at the software and storage—through the

! forefront of many if not all of these Internet, across company firewalls and Mobile commerce: mobile devices advances. For example, with its track national boundaries will augment and in many cases record of IT excellence, India can supplant personal computers as the

! Virtualization: the move away from position itself as the natural home of new e-business channel for employees the physical provision of IT infrastructure the ‘South-East Asian cloud’. However, and customers

Figure 6: Total primary energy production and consumption in India (Quadrillion British Thermal Unit)

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

18

15

12

9

6

3

0

Total Production Total Consumption

Source: US Energy Information Administration

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Chapter two: Combining old and new The Indian economy has benefited next wave of information technology. immensely in recent years from Huge advances have been made in developments in a number of higher- these areas, often by MNCs working in value-added industry sectors (such as close conjunction with government IT and business process operations) as and local stakeholders, but the well as specific islands of success (such opportunities have only begun to be as automotive parts). These sectors exploited.have driven the spectacular economic

Our research demonstrates that the growth in the decade leading up to the growth that has been set in motion in current downturn. IT and business process operations can

While these engines of growth have be mirrored more widely across the become established in India, however, economy in three key areas: agriculture, the broader population has remained manufacturing and sunrise industries. dependent on traditional sectors, such as agriculture. If the Indian economy is to sustain its growth it is vital that traditional Indian sectors also begin to share the success story. There is tremendous potential in developing traditional industries such as agriculture and manufacturing, particularly if higher value-chain operations can be established within them.

Alongside this investment in traditional industries, our research shows that India is uniquely placed to be at the forefront of growth in new industry sectors, particularly in renewable energy, healthcare and the

17.0%

18.5%

64.5%

Agriculture Industry Services

Figure 5: Breakup of GDP in India, 2008-09 (% of GDP at constant prices)

Source: Annual report, Reserve Bank of India, 2008-09

19

while cloud computing has become the primarily been witnessed through its design. Indian culture is already widely support structure of choice for the music, technology, film, food and appreciated across Asia, with high demand online community worldwide, it has television dramas. for films in particular. This appreciation taken some time to be widely used on for Indian culture can be used to

In similar fashion, India has a rich the subcontinent. Nevertheless, the strengthen ‘Brand India’, improving the

cultural heritage that can be better increasing digitization of content attractiveness of Indian goods and

leveraged in order to realize higher (e.g. by libraries and government services overseas (see chapter four).

levels of economic growth. The impact departments) also affords a huge

of cultural phenomena such as the In order to realize growth in these new opportunity to position India as the

Bollywood film industry demonstrates sectors, a number of actions are needed:global center of digital industries.

the creativity that exists within Indian ! India is making concerted efforts

society that, if combined with India’s Developing cultural industries and progress in the area of renewable strength in IT and digital media, can

energy. In these fields, businesses rely Creative and cultural industries (e.g. also be harnessed to develop new industry on clear regulatory direction from advertising, digital media and sectors. Indeed, the link between high-governments. Clear signals here- coupled entertainment) have in recent years tech media and the high arts provide with incentives for investment in low-become increasingly important direct opportunities for collaboration and carbon technologies - will ensure sources of economic growth among integration between sectors. So, for investment from MNCs and domestic emerging economies, as well as example, Japan’s Sony has moved away companies alikeproviding indirect benefits in terms of from being an electric goods company

enhanced brand awareness. South !to being a music production company To build on its history of IT excellence, Korea has established itself as a leader too. In India, the advertising industry is developments such as ‘cloud’ technologies in South-East Asia in this field. The already becoming increasingly and digitization must be invested in and citys of Seoul has made a concerted competitive. Combined with the latest quickly assimilated. The Indian government effort to attract artists and creative developments in digital media, there is could conduct a feasibility study into talent to locate there and has since the opportunity to create growth in establishing a South Asian cloud in India, been at the epicenter of a cultural new cultural industry sectors. Further, reviewing infrastructure and server wave that has seen Korean culture one of the best ways to improve the capacity. This would ideally be accompanied become increasingly popular around the margins in core consumer industries— by a review of data protection legislation world, especially in Asia. This has including the automotive industry—is to ensure that digitization of records is

to infuse products with cutting-edge feasible

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Better enabling the virtual flow of Fulfilling the government’s talent and ideas through upgrades to commitment to add power-generation information technology and power capacity and expand electricity access infrastructure in cities as well as rural in rural areasareas

Implementing upgrades to railway stations and existing technologies, including creating India’s first high-speed rail network between major The development of physical metropolitan citiesinfrastructure has long been recognized

as one of the most important factors Developing and implementing a for attracting foreign investment, national IT infrastructure strategy, increasing competitiveness and driving encompassing the expansion of economic growth. Transportation, broadband access beyond the initial energy and Information Technology targets set out in the Eleventh Plannetworks are all prime enablers of productivity and improved economic efficiency.

Our research confirms that MNC growth has been held back in India for want of a solid network of roads, efficient railways and a uniform power supply. The country is predicted to lose close to US$200 billion of GDP by 2017 due to delays in infrastructure

7development. As a result, businesses still face a number of challenges in conducting everyday activities in India. Some of these challenges include the following:

Electricity flows run short due to capacity shortages, despite the fact that access to electricity is increasing

Indian Railways face a range of problems, including outdated technologies, under-maintained railway stations and gaps in connectivity to remote areas

India’s IT infrastructure remains comparatively underdeveloped, particularly in the areas of broadband and mobile phone connectivity

MNCs and domestic companies universally welcome the Indian government’s current commitment to improving infrastructure in India. The Planning Commission has targeted an investment of US$20.38 billion in infrastructure over the next two years through its Eleventh Plan, covering areas such as railroads, electrification,

8airports and telecommunications. With continued policy commitments in the infrastructure space, India can establish the foundation required for future investment and growth. Some of the actions that would be welcomed by businesses in India include:

Improving infrastructure

13

Chapter three: Building capabilities for the futureIndia has an abundance of talent and capital; the country’s potential is high, yet productivity levels are notoriously low (see Figure 7). Large sections of society are excluded from the productive workforce, including much of the rural population, the majority of whom are subsistence farmers, and there is a low rate of female workforce participation.

India is home to 20 percent of the world’s people, a third of whom are below the age of 15. This youthful demographic will add about 250 million additional workers to the labor

28pool in the twenty years to 2025. However, if the coming generations are not able to attain dramatically improved levels of education, health and productive employment, their Competitive pressures from fast-emerging Productivity improvements hold the contribution to India’s and to the economies around the world threaten to key to continued investment as well as world’s economic and social welfare erode India’s position in important ensuring higher and more sustainable will be severely threatened. Our higher-value sectors such as IT levels of growth and competitiveness analysis highlights that:

The need to attract overseas investment Policymakers play a critical role in Beyond increasing participation in into targeted growth industries of the defining success. They can reach out to

the productive workforce, India’s future is even more urgent as a wide range of stakeholders to ensure output can also be significantly multinationals are presented with that targets and outcomes are aligned enhanced through productivity increasing options from a disparate with the country’s aspirations for social improvements across the existing range of economies eager to attract and economic growth. Identifying economy capital and skills desired outcomes and setting targets is

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Figure 7: Labor Productivity, 2008 (as a percentage of US levels)

Source: Economist Intelligence Unit

100%

68%

57%

36%32%

23%

11% 8%

US Singapore SouthKorea

SouthAfrica

Russia Brazil China India

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Note: Labor productivity measured as GDP at constant prices and PPP per person employed

phase of growth. Our analysis suggests Local enforcement authorities often economies, and has become a home to that government could help achieve have limited understanding of IPRs, a large and growing pool of engineers, this by: and central and state governments’ scientists and other professionals.

allocations of resources towards Implementing a ‘grandfathering’ Reducing barriers to the free flow of

building IPR-related capabilities and period where amendments to the tax people is fundamental to maintaining

infrastructure are inadequatecode are made—i.e. a time allocated to a hub of talent excellence in India, enable businesses to restructure their Poor enforcement of IPRs creates since it enables talent to come in from transactions in line with new tax losses for both businesses and tax abroad and move about the country requirements authorities. Intellectual property with relative ease. However, our

piracy has been rising in India, and is research uncovers a number of barriers Improving awareness and

estimated to be worth several billion that continue to block the flow of communication with businesses about

dollars annually. Some of the sectors talent both to and within India. Some the mechanisms that exist to reduce

that traditionally suffer include of the challenges to the free flow of transaction costs in taxation, as well as

business software, pharmaceuticals, talent in India include:bringing in more predictability to the

and the movie and music industries. tax system (such as the Large Tax People moving to India from abroad

But as technology, knowledge, and Payers Unit and Advance Ruling) have difficulty acquiring and renewing

ideas become increasingly important work and residence permits, a process

Clarifying and improving transfer drivers of economic growth in India, so riddled with delays

pricing legislation, specifically with too will IPR protection grow to become regards to provisions for advance a pressing issue for businesses in many A relatively lower quality of social pricing agreements other industries. amenities and infrastructure (e.g.

education, healthcare, living India has already taken a number of

conditions) discourages Indian diaspora significant steps in building its IPR

talent as well as MNC employees from protection capacity through WTO-

working in India or outside the key compliant legal statutes. Additional

Ideas and knowledge are an metropolitan citiespolicy initiatives, developed in

increasingly important part of business consultation with MNCs, would help The quality and extent of

and international trade. Much of the build a more stable and secure communication and power

value of medicines, software and new operating environment. Some of the infrastructure is often not up to the

technologies lies in the invention, actions the international business standard required to support virtual

research and innovation involved in community would welcome include: and real-world flows of talent at an

their production. The protection of affordable cost

intellectual property rights (IPR) is The establishment of a common therefore a key factor for ensuring that body or taskforce to centralize control The financial crisis and recession any economy attracts investment from over the enforcement of IPR laws, as represent an opportunity to redefine MNCs specializing in high-tech, well as improving the efficiency of the India as a destination for talent from knowledge-intensive products and IPR administration around the world. With rising services. unemployment in many Western

The allocation of additional economies, competition for the world’s

There are currently a number of resources towards building IPR-related best and brightest minds is increasing.

challenges relating to IPR protection capabilities and infrastructureReturning professionals are a

that businesses face in India, which Improved capabilities for judicial particularly valuable asset to MNCs

combine to stifle investment and authorities in the area of IPR protection, operating in India, as they bring global

discourage business expansion. The such as fast-track legal processes for experience and act as conduits for the

weak enforcement of IPRs has been the IPR infringement, and the adoption of exchange of new ideas. It is therefore

bane of businesses operating in many deterrent-level sentences of increased significance today that

emerging market economies, but this is policymakers and business leaders act

particularly so in the case of India. Our to address these barriers to talent

research has revealed that some of the flows in India. Such actions might

ongoing challenges in the area of IPR include:

protection include the following:With knowledge becoming an engine

A simplification of immigration and Little focus on the enforcement of of growth across sectors, talent has

processes for obtaining work visas for IPR laws. As a result, penal provisions become a strategic developmental

new entrants to Indiafail to act as a deterrent to asset. India is becoming an infringements increasingly knowledge-intensive Supporting foreign talent acquisition

economy, producing millions of highly- by offering quality-of-life incentives The system of IPR enforcement and

educated graduates every year. The (e.g. healthcare benefits, pensions) to regulation is highly fragmented,

Indian diaspora is also beginning to foreigners and Indians living abroad, as comprising several government

return to India in increasing numbers. the Chinese government is doingdepartments and agencies in disparate

India is thus well-positioned in terms regions of the country

of its talent base when compared to many other emerging market

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Safeguarding intellectual property

Reducing barriers to the free flow of people

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fundamental to managing change. in Russia and 82 percent in the United Improving skills29Multinationals also play a critical role States. Moreover, Accenture analysis

Driving improvements in basic in India both as drivers of productivity shows that despite spending more on education, including literacy and improvements and as channels for each student in its higher education numeracy, is vital to ensure that the investments and new assets that system than Brazil, China, Russia, groups currently excluded from the improved productivity will attract into South Korea and Singapore, India workforce are able to become productive. the country. This chapter analyses the performs worse than these countries This is particularly urgent in rural areas. challenges and opportunities that can when compared to specific measures Similarly, improvements in vocational engender those advances, focusing on of delivery and innovation, access and training are essential if India’s the two crucial areas in which step- inclusiveness and internationalization infrastructure constraints across the changes in productivity can be realized: of their higher education systems.country are to be addressed. Such projects human capital and innovation.

MNCs continue to play a critical role in require commitment and engagement bringing new ideas and investments from a variety of stakeholders at both into India’s education system. There is national and state levels. A good an inherent self interest for MNCs to example is the Prime Minister's support and build the skills of their National Council on Skill Development, India has three distinct advantages in future employees, suppliers, customers which will launch a public-private its human capital: a young and partners. By investing in the initiative to train 150 million people demographic, English language skills nation’s education levels, MNCs are across the country with the skills needed and a culture that values learning and improving the productivity and growth to work in manufacturing. is open to external influences. At the potential of their business as well as

same time, it is clear that productivity India’s legacy of strong higher- improving the expected returns on and competitiveness are hampered by education institutions has served the their investments in India. MNCs in the education and training infrastructures nation well in building the economic IT industry have been particularly active that are inadequate for the size of the progress of the last decade. But there in encouraging and investing in solutions population and the speed of is no room for complacency, to address India’s education deficit, improvement required for sustainable particularly as only 12 percent of the often partnering with government growth. The deficits can be found at all country’s population enrolls in higher bodies or non-governmental levels, including basic education, education, compared to 30 percent in organizations and frequently utilizing vocational training and higher education. Brazil, 23 percent in China, 75 percent technology-based solutions in order to

The wisest investment: human capital

21

Simplifying the bureaucratic ‘experience’

Rationalizing taxation

Our interview-based research suggests that, while MNCs are experiencing an increasing ease in doing business in India, more needs to be achieved in order to enhance the value of their net contribution. In order to attract FDI, central and state governments have been implementing a number of laws and measures to remove regulatory and procedural barriers to the establishment of foreign enterprises. According to the respondents to our survey, while this has made entry by MNCs into India easier, establishing and expanding within India is still a ‘challenging experience’ (see Figure 4).

A significant number of respondents said that the Department for Industrial

the next phase of growth, and position However, many MNCs operating in Policy and Promotion (DIPP) and the

it ahead of the other BRIC economies, India still face a complex network of State Single Window cells provide

further action is needed to enhance tax structures and mechanisms—an initial support for new entrants “but

the overall bureaucratic experience. area where India lags behind Brazil, there is little support thereafter”. Our

Key actions would include: China and Russia. Business executives research also emphasized that time-

operating in India told us that sensitive government bureaucracy is a Enhancing coordination between the

navigating the Indian tax system top factor in determining whether central, state and local governments

remains a significant challenge. MNCs choose to invest and expand in about approval processes for foreign

Around 70 percent of MNCs surveyed India. businesses

and interviewed are of the opinion that Other key bureaucratic challenges in Improving lines of communication the reforms in the tax administration India include the following: between governments and newcomer that have occurred to date, especially

businesses regarding the overall with regards to implementation and There are often approval hurdles

approval processes, including interpretation of tax statutes at the that emerge at state and local

requirements at the central, state ground level, have been inadequate. government level

and local levels Some of the key challenges in the area MNC executives are often surprised of taxation include:

Facilitating support from government by a range of new approval requirements

departments and agencies beyond the Laws are often interpreted in that they did not know existed prior to

initial stage of setting up operations different ways by different tax establishing operations. Moreover,

authorities, as well as by different there is little support from government

officials within the same tax authorityin navigating these additional hurdles

Tax authorities aggressively use their A predictable business environment There are a number of government powers to conduct investigative includes a stable and easily departments and agencies that exist to processes at early stages, and to understandable tax system. Along with aid the overall approval process. pressure companies into paying taxes the process of economic liberalization, However, little is known by business before a full audit is in placeIndia’s complex tax system has been leaders about these support systems

undergoing significant change, bringing There are significant costs and Many of these challenges result in both a rationalization and reduction in business disruptions resulting from the unexpected delays and higher costs for corporate tax rates. The Government of implementation of amendments to tax businesses—discouraging MNCs from India is now undertaking an effort at statutes with retrospective effect setting up and expanding in India. significant tax reform through the Addressing these inhibitors now could Significant delays are often created Draft Direct Taxes Code 2009. The not only spur investments, but also by transfer pricing issues Code is ambitious and represents a help differentiate India from its rival watershed in Indian tax policy, seeking These challenges combine to create a economies. The central and state to promote tax compliance, introduce ‘high-stress-low-trust’ tax governments have already been a single Goods and Services Tax, environment. India must address these implementing a range of laws and simplify tax language, and reduce the challenges in order to attract the measures to remove regulatory and scope for tax disputes. capital and skills needed for the next procedural barriers associated with the establishment of MNCs in India. However, in order to launch India into

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Figure 4: Problems with India’s business environment identified by MNCs and industry bodies

Multiple interpretations of tax regulations

Unfavorable policies and regulations

Procedural delays

Corruption

IPR enforcement

Other issues

72%

59%

46%

36%

28%

28%

Source: Accenture/Confederation of Indian Industry Survey

maximize the reach and impact of their efforts. For example, Microsoft’s ‘Shiksha’ project provides IT education to school teachers, having already made 350,000 teachers technology-literate, able to utilize these skills in their profession and capable of passing them on to their students.

Growing the workforce

India’s productivity is further hampered by the relatively small proportion of the population that graduates from the education system into the skilled workforce. The IT industry, which represents as much as 5.9 percent of the country’s GDP, still employs only 2.23 million of India’s 750 million-strong working-age

30 any time. However, according to the R&D centers account for over 60 population. Further, less than half of 31 percent of the US$9.35 billion R&D World Bank , only 16 percent of Indian female higher-education graduates

off-shoring industry. This is projected manufacturing firms provided in-join the economically active population to grow to be a US$21.4 billion service training to their employees, (see Figure 8), and many of the highest

32compared to 92 percent in China. This industry by 2012. achievers in India’s schools continue to shortfall, if not addressed, will inevitably seek work abroad, even if this trend These centers of innovation have see India losing out in FDI and global has recently slowed. generated the sharing and competitiveness in the longer term.

multiplication of knowledge and skills Action needs to be taken on several across India’s workforce through fronts. For example, policymakers and technology transfer and through employers can bring more women into unplanned technology spillovers. For the workforce by embracing flexible example, Texas Instruments’ advanced working options and proper maternity Alongside the capacity to maximize communication systems helped Indian provisions. Training and education human capital, innovation is a critical companies emulate leading practices must move beyond traditional systems factor in sustaining productivity and move towards the development of characterized by hierarchy to improvements. Typically, successful offshore capabilities. Indian suppliers emphasize critical thinking, personal players in the Indian market use a and partners of multinationals can resourcefulness and teamwork. high-volume, low-margin business learn from MNC best practice, Training and education courses should model, finding fresh and inexpensive generating a virtuous circle of allow participants to test their own ways to deliver existing technologies innovation and wealth creation. ideas and define their own problems to to more people and places: what some

solve. MNCs can play an important role call low-cost innovation. An example Innovation is not restricted to products in bringing innovative learning would be Mango Technologies and marketing, however. In the same techniques and policy launching an Internet-enabled phone way that India has been able to attract recommendations from their disparate designed to achieve maximum investment from around the world to experiences around the world. functionality out of a modest handset set up R&D centers, there is an

with limited memory, lower processing opportunity to position the country as It is in the interests of companies capability, slower data download and an ideal test bed for a variety of across industries continuously to smaller screens. Multinationals in India innovative business models. India’s improve the training of their workers, have been keen to leverage these kinds large and diverse populations, its and to invest in the development of of innovations to bring them closer to proficiency in English and variations in employees and service providers at the country’s massive and growing infrastructure and distribution every skill level. The case studies in this consumer markets. channels allow a variety of business report highlight some of the initiatives

models to be tested in the same being carried out by multinationals in The evidence that India possesses the location; covering mass low-income India. In more enlightened companies, raw materials for innovation can be targets, high-end luxury consumers, innovative models are being utilized to seen in the number of multinational and a variety of tastes, cultures and keep skills continually updated, such as companies that have been attracted to religions.24-hour online training courses and set up research and development

tie-ups with academic institutions. For (R&D) centers in the country. A 2007 example, in 2007, Unilever introduced survey by the World Bank found that an e-learning platform offering a range more than 300 multinationals had set of 3,000 courses accessible by up R&D and technology centers in employees anywhere in the world, at India in recent years. In fact, these

Innovation: the virtuous circle

22

Figure 8: Economically active women in India as a proportion of total female population, 2007 (percent)

Source: International Labor Organization

80

70

60

50

40

30

20

10

0

China Brazil Russia South Korea

57%50%

68%

55%

34%

India

Just as MNCs have been at the heart of challenges may explain India’s together to address these key India’s growth story to date, so too comparative lagging behind the other challenges. The global economy is now they will play an integral role in BRIC (Brazil, Russia, India and China) inching towards recovery, and financial creating the next chapter of economic economies when measuring the markets are beginning to stabilize. growth. MNCs can be key facilitators volume of FDI inflows. In 2008, India Many MNC executives will now begin of global economic integration and can attracted US$42 billion in FDI, to scan the horizon for the most help link local and global supply compared to US$108 billion in China, attractive destinations for investment. chains. However, policies must be US$70 billion in Russia and US$45 India has the opportunity to be a part

6aligned to allow MNCs to function of this next chapter of global billion in Brazil (see Figure 3).effectively. investment and growth but only by

To propel the Indian economy towards addressing the outstanding obstacles Over the past decade, India has a new phase of growth, policymakers to business confidence.benefited from significant inflows of and business leaders will have to work

Foreign Direct Investment (FDI). MNCs have invested over US$100 billion in India during the last eight years alone. Between 2000 and 2007, FDI inflows into India grew at a compound annual growth rate of 30 percent, compared to an average figure of 14 percent for

5other emerging markets.

However, the Indian economy still faces a number of challenges that continue to act as impediments to investment and growth. Some of these challenges include overly bureaucratic approval processes for foreign MNCs registering in India, as well as difficulties in accessing talent pools and critical infrastructure. These

Chapter one: Laying the foundations

10

India Russia Brazil China

0

20

40

60

80

100

120

2005 2006 2007 2008

813 15

72

20

30

19

73

25

55

35

84

42

70

45

108

Figure 3: FDI inflows into BRIC countries, 2005-08 (US$ billions)

Source: United Nations Conference on Trade and Development (UNCTAD)

23

Addressing India’s human capital challenges The role of MNCs in educationand maximizing the opportunities is both

Multinationals are undertaking initiatives complex and urgent. It requires leadership in a variety of areas to help drive and commitment from government (at increased productivity through education, national, state and local levels), business and training and innovation promotion. Some civil society. It also requires innovative of these are as follows: thinking to achieve results at speed and

scale. Beyond the mobilization of resources Supporting basic, and high-value skill

and structuring of initiatives, it requires a levels around the country: recognizing

cultural shift in India’s attitudes and the need to improve basic IT skills across

approaches to learning, as well as its the country, Microsoft set up Project

expectations from the workforce. Important Shiksha (see previous section), which has

levers for change include the following:given IT training to over 350,000 school

!teachers. Intel has instituted programs to Identifying and measuring outcomes: train India’s future software developers. improving productivity requires rigorous The Intel Academic Community, which targets to be set at all levels of the education works with universities in 72 countries, system, accompanied by transparent and launched a Center of Excellence at the consistent performance measurementMSRIT campus in Bangalore with the aim

! Aligning learning objectives: business of training 300 faculties from 155 leaders, including from MNCs, must work institutes of the Visvesvaraya with policymakers in shaping the nation’s Technological University (VTU) as well as human capital strategy, to ensure an influencing the undergraduate curriculum.alignment of needs and objectives

Using technology to up-skill the ! Promoting inclusiveness: the urgency for workforce: Hindustan Unilever is progress in education and skill levels must constantly working to keep its workforce cut across geographies, social groups and equipped with the latest skills. In 2007, genderUnilever introduced an ‘e-learning

platform, which offers 3,000 self-learning ! Creating the innovation mindset: India courses over the internet, allowing them needs an education system that requires to be accessed by any Unilever employee, students to be critical in their thinking and anywhere, at any time. resourceful in driving their own learning

Targeting under-employed segments of the population: JCB, the UK-headquartered manufacturer of engineering vehicles and diesel engines, reaches out to create employment opportunities for under-employed part of the workforce, such as retired army men.

09

So while significant strides have been made in recent years, there is still some way to go before India can truly take its place at the top table of globally competitive economies. Going forward, MNCs are crucial to the sustained economic growth of India, both in terms of driving inward investment and through the potential positive effects they have on education, skills and innovation. This report analyzes the role of MNCs in the Indian economy, and the ways in which policy initiatives can be aligned to increase co-operation between governments, MNCs and all other stakeholders.

The report is drawn from Accenture’s extensive research into the growth This research and the resulting analysis opportunities facing India and the role outline opportunities for growth in of MNCs in realizing those four areas, and highlight the opportunities. In addition, this report challenges faced in each. These draws on in-depth interviews with key imperatives are set out in the chapters executives from MNCs, officials from of this study, which look in turn at: the Government of India and other foundational factors for growth; the crucial stakeholders, undertaken in co- possibility for growth in new sectors; operation with the Confederation of the drive to improve current levels of Indian Industry (CII). The MNCs productivity; and the ways in which involved in the study account for a India can position itself at the heart of significant portion of revenues of the new multi-polar global economy.MNCs in India and represent a true cross-section of sectors (see Figure 2).

Figure 2: Percentage distribution of survey responses across sectors

5%

15%8%

15%

8%

24%15%

10%

Banking and Insurance

Chemicals and Petroleum

Communication and Entertainment

Industrial Equipment and Systems

Consumer Durables and Other Consumer Products

Food Products and Beverages

Automotive

Business Services*

*Business Services include consulting, software, real-estate and housing services

Source: Accenture/Confederation of Indian Industry Survey

Overcoming constraints to innovative growth

Despite this progress and potential, research activity by domestic Indian companies remains low (see Figure 9). According to World Bank statistics, of the top 50 applicants for patents in India between 1995 and 2005, 44 were foreign firms. Moreover, the innovations and patents emanating from these research centers have evolved almost in isolation from India’s academic institutions. Further, as has been discussed in chapter one, some MNCs are reluctant to invest in R&D in India because of perceived weaknesses in intellectual property administration and enforcement.

With competitive pressures increasing Scaling is also a critical issue. India has

from around the world, there is an sometimes been labeled “a graveyard

urgent need for India to build a more of good ideas” due to the large number

sustainable and healthy innovation of innovative and successful initiatives

ecosystem for future growth. The that are piloted or implemented

national government has recognized without reaching enough scale to

some of this by tripling the R&D make a significant national impact.

allocation in the Eleventh Five Year Multinationals have played an

Plan (2007–2012) with the target of important role in developing successful

bringing R&D investment to 2 percent models that balance the benefits of

of GNP, closer in line with the average global scale and knowledge with local

for developed countries of insight and responsiveness. The best-

approximately 2.5 percent. known examples include the successes

This investment requires buy-in from of consumer goods companies like P&G all stakeholders, however, including and Hindustan Lever in developing government, business and academia. innovative business models that bring There are signs of progress, such as the global products to the most isolated National Entrepreneurship Network Indian communities in a locally (NEN), a non-profit initiative founded relevant way.in 2002 to educate and support the

Looking forward across broader next generation of entrepreneurs in

industry groups, methods of achieving India. Co-founded by five of India’s

scale include the development of premier academic institutions and

clusters of excellence around key collaborating with over 280 Indian

themes, and the utilization of graduate institutions, the NEN helps to

technology to multiply impact and build entrepreneurship programs and

reach. Technology-based solutions are create a pipeline of young innovators.

replicable, scalable, cost-efficient and More recently, the Confederation of

consistent in quality. Moreover, the Indian Industry set up a committee to

application of technology seems establish long-overdue formal

particularly well adapted to India’s communication between its members

need for solutions that reach across and academia. Further efforts are

difficult terrain and long distances and needed to include business in policy

that can easily be tweaked to respond discussions on education, training and

to a diversity of languages and national innovation capacity.

cultures. Multinationals can play a key Multinational companies can play an

role in developing and implementing important role in these discussions,

the technology solutions that can bringing ideas and lessons learned

connect India’s disparate success from other countries.

stories and unlock the country’s innovative potential.

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Figure 9: Percentage of patent applications registered by domestic companies(latest figures percent)

Source: World Intellectual Property Organization

80

70

60

50

40

30

20

10

0

South Korea Russia China India

62%

18%

75% 74%

After a decade of unprecedented growth, India faces new challenges in the changing world economic order as it emerges from the downturn. The rise of the multi-polar world—where economic power is increasingly diffused across the global economy—presents both a major opportunity and a challenge to the Indian economy.

While India has been at the vanguard of the emerging markets that have redrawn the world’s economic geography, comparisons with other economies confirm that India still faces a number of challenges in achieving greater competitiveness. For example, according to the World Economic Forum’s Global Competitiveness Report 2009-10, India ranks at 49th position. Even when compared to emerging economies alone, India still only ranks at 23rd position (see Figure 1).

08

Figure 1: World Economic Forum (WEF) Global Competitiveness Report 2009 –1 0 Rankings

Introduction

Singapore 1 4

Hong Kong SAR 2 11

Taiwan, China 3 12

South Korea 4 19

Qatar 5 22

United Arab Emirates 6 23

Malaysia 7 24

China 8 29

Chile 9 30

Czech Republic 10 31

Emerging economies All economies

India 23 49

Source: World Economic Forum Global Competitiveness Report 2009 –1 0www.weforum.org

25

application which allows a single computer The role of MNCs in promoting to run one or more virtual machines, each

innovation with its own operating system.

MNCs are involved in a number of projects Conducting world-leading research: Intel and initiatives to improve the innovative uses India as a base for some of its most capacity of the Indian economy, driving complex innovation. Recently, a pioneering economic growth and generating wider microprocessor was developed by the India spillover benefits in terms of increased R&D team. knowledge and skills transfer. This is

Encouraging the entrepreneurial sprit: JCB occurring in a number of ways:facilitates entrepreneurial activity in India

Undertaking low-cost innovation: through its efforts to create self-employment Microsoft works to develop high-tech opportunities for over 5,000 people. offerings which help bring IT to the largest Consumer goods company Amway’s possible audience, including the poor. For approach encourages entrepreneurial example, one localization program, activity in the broader environment by ‘Bhasha,’ has now made MS Windows and providing free and unlimited training to its MS Office available in 12 Indian languages. distributors to help them grow their Sharing hardware is a good way of keeping businesses. In 2007, over 29,000 training costs down. To help people share PCs, the sessions were held reaching over 1.5 million Microsoft India Development Centre (MIDC) Amway distributors. has recently developed Virtual PC 2007, an

Improving India’s capacity to innovate Positioning India as a test ground is critical to setting the country’s for innovative business models: India trajectory of economic growth. possesses the raw materials – including Innovation capabilities attract a proven track record, English language investment, generate greater returns skills, an entrepreneurial spirit and and set a path for more sustainable large, distinct and varied consumer growth. India possesses many of the groups—to market itself as the world’s raw materials to unleash innovation- pre-eminent test-bed for innovative led growth and we have already seen business models. As with the IT great examples that place India in a services boom, MNCs would play a strong position among emerging critical role in bringing tremendous economies. At the same time, there is technology, knowledge and capital no room for complacency. Concerted spillovers into the economyefforts are required by policymakers, educators and businesses across a number of areas. Important levers for change include the following:

Nurturing an innovation ecosystem: clusters of innovation arise from partnerships between academia, business and financiers, all incentivized by government policy

Getting the scale right: technology can multiply the penetration and reach of business solutions and best practice ideas

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Overcome constraints to innovation. Capitalize on India’s culture e.g. Build on the existing excellence and Improving the networks between provide incentives for creative reputation for IT to move into new innovation stakeholders (such as industries and talent to locate in India, technological sectors e.g. cloud business, government and academia) building on India’s burgeoning creative computing and digitizationand developing clusters can help scale sectors to generate growth and

Make best use of India’s innovation over a larger area strengthen India’s brand

demographic and educational This report demonstrates how MNCs advantages to better utilize its Position India at the heart of the are already contributing to growth in workforce, particularly among the global economy: ensure that India these areas, as well as how they can female population and in rural areascontinues to act as a key political continue to build on best practices and player on the global stage and realizes Increase the productivity of the help generate growth in the future. The the full benefit of international flows workforce through enhanced education report also sets out recommendations of investment, talent and technology systems and more support for innovationfor policymakers that will help create

Bridge the gap between local the right regulatory and administrative Capitalize on India’s open position enterprises and global supply chains environment for inclusive growth. in the global economy (in terms of e.g. ensure that rural infrastructure political, economic and cultural linkages) and supply chains are of sufficient in order to maximize flows of FDIquality to facilitate the efficient

These investments will pay dividends in In this new era of changed global transport of goods the future and set India on a path towards dynamics, what will be important for

Tap into the Indian diaspora e.g. set sustainable economic growth. MNCs India as it tries to unleash the next up a government initiative to target will be crucial in all of this, not least in phase of economic growth? The and leverage the Indian diaspora more terms of technology transfer, sharing following imperatives should guide effectively so that they can act as knowledge and skills, and growing new India as it embarks on this journey:‘ambassadors’ for investment opportunities, markets. By working with policymakers

Move existing traditional industry particularly in new technology and as a part of the fabric of Indian sectors up the value chain while society, businesses can help achieve a exploiting potential in new sectors collective vision of prosperity.

Conclusions

26

India owes much of its recent Beyond this, there are three areas export their products. The ambition is economic growth to its open position where action can be taken in order to to increase production from 10,000 within the global economy, which has help realize the next phase of tonnes a year at present to 150,000 seen significant levels of inward economic growth. MNCs can act as tonnes by 2020, which would constitute investment and MNCs choosing India facilitators in each of these areas. 3 percent of global cocoa production. as a location for a number of business

Integrating local enterprise Tapping into the Indian functions. India has been among the most attractive destinations for with global business diaspora investment worldwide, ranking second

India has a wealth of small- to India’s population is one of its greatest only to China on the FDI Confidence medium-sized enterprises (SMEs) that assets. While numerous steps are being Index in 2007.can collectively generate significant taken to improve the skills and

However, if India is to maintain and levels of growth to the Indian education of the domestic population, build on this position of strength, it economy. However, the key to realizing the potential afforded by the huge needs to exploit further opportunities their potential is to connect them to Indian diaspora population should not to adopt a more open position and global supply chains through MNCs. be underestimated. With 20 million integrate itself within the global Given India’s size and the number of people of Indian origin in 70 countries,

33economy. At the political level, India small- to medium-sized enterprises India has a pan-continental presence. should utilize the opportunities arising (SMEs) that have developed (particularly Firstly, these populations represent a from its expanding global footprint of in rural areas), integrating these significant consumer market in their interactions and relationships with the enterprises as part of a wider business own right, as well as a potential rest of the world to encourage the ecosystem offers the potential to springboard to test products and enter exchange of knowledge and skills. increase growth at both local and new markets in developed economies. Policymakers can take a lead by global level. For example, Dabur India Limited, ensuring that India is at the heart of which specializes in health and beauty

For example, Cadbury is supporting international forums of decision-making products, sells to customers in the Indian farmers with technical advice to (e.g. the G20, the Doha round of trade United Kingdom and United States, show them how to improve yields of talks and the Copenhagen Summit) as owing to the large Indian populations cocoa. Through this support, it is hoped well as making sure that its businesses in these two countries (a combined that Indian farmers can first achieve 34are fully integrated into global supply total of more than 2 million in 2006). self-sufficiency before starting to chains and investment flows.

Chapter four: Projecting India

Key areas for growth enforcement of IP laws, as well as leading-practice knowledge, while improving the efficiency in the driving advanced engineering skills

Based on Accenture’s interviews with administration of IP rightsInvest in sunrise industries, such as

senior business leaders, supplemented Reduce barriers to the free flow of renewable energy, healthcare and

by extensive research, this report sets people e.g. simplify immigration and pharmaceuticals, new technologies

out four key areas where action is processes for obtaining visas for new (e.g. cloud computing) and cultural

needed to put India on a path to more entrants to India industries (e.g. design, food and

sustainable, inclusive growth:tourism)

Improve infrastructure e.g. upgrade Reinforce the foundations of growth:

railway stations and existing Improve current levels of productivity: enhance the growth prospects of

technologies, including creating India’s make better use of India’s current businesses operating in India by

first high-speed rail network between assets and capabilities to enhance its creating a more predictable and

major metropolitan cities competitiveness in key areas of the enabling environment for business

economy, such as skills and innovation Realize growth in new sectors:

Simplify the bureaucratic experience capitalize on India’s potential in new Promote skills development e.g.

e.g. enhance coordination between the industry sectors as well as improving MNCs should continue to work with

central, state and local governments the value addtion in traditional sectors, local education establishments to

on approval processes for foreign helping the economy move to a more shape curricula and ensure that skills

businesses both before and after set-sustainable growth model are relevant to the workplace

up of operationsReduce dependence on, and increase Increase the proportion of the

Rationalize taxation e.g. improve the value of, agriculture e.g. increase population engaged in education and

awareness and communication with support for agricultural interventions productive employment. Policymakers

business about the mechanisms that (such as irrigation) and employers can bring more women

exist to reduce transaction costs in into the workforce by embracing

taxation and bring in more Develop both basic and high-value flexible working options and putting in

predictability to the tax system manufacturing e.g. MNCs should play a place modernity provisions

significant role in both shaping and Safeguard Intellectual Property (IP)

delivering the training needed to e.g. establish a common body or

supply basic manufacturing workers taskforce to centralize control over the

(see next chapter on education) with

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But beyond this opportunity to reach investors. Indeed, this has already Doing so will require India to focus on new consumers, the diaspora happened in the context of the IT how it can build on its cultural population represents a significant industry, where the government made heritage and creativity. For example, source of potential talent, many of a conscious effort to communicate and other emerging markets have taken whom have been educated in Western interact with the global Indian steps to leverage culture as a means of economies and possess the skills that diaspora with hopes of encouraging making their living environment more MNCs looking to locate in India will investment in the country from those attractive to MNC employees. Abu Dhabi value highly. Indeed, many MNCs in who have emigrated and become has signed deals to develop offshoots India have sought to bring the Indian successful in other nations. A similar of both the Louvre Museum in Paris diaspora back into leadership positions approach must be taken in respect to and the Guggenheim Museums in New where they can combine their India’s new growth industries, York and Bilbao; Singapore is planning knowledge of Western business particularly those related to technology to have the Cirque du Soleil play a key practices and working cultures with an where the existing reputation is strong. role in the new Sentosa cultural appreciation for local norms. This helps district. More active promotion of

Exporting India’s culture: ensure that the Indian economy keeps India’s rich cultural heritage could also pace with the latest developments in help develop its tourism industry. Bollywood and beyond Western business education as well as India’s share of international tourist

India’s business environment is one of continuing to represent a highly arrivals globally and in the Asia Pacific the most attractive in the emerging attractive location for other MNCs region during 2008 was 0.58 percent world, not least due to the high looking to establish operations in India. and 2.92 percent respectively. Within number of English speakers as well as emerging economies, these figures put

The Indian diaspora can also act as the global mindset exhibited by many India well below China and Mexico ‘ambassadors’ for their home country Indians. However, other emerging (see Figure 10). In spite of the presence through promoting greater economies are catching up. Increased of historical and cultural sites across understanding of the opportunities investment in education in many the country, during 2008, only five of within the Indian economy for emerging economies means that India’s 28 states accounted for around investment and growth. By marketing India’s traditional advantage here is 67 percent of the total foreign tourist actively investment opportunities to 35being eroded. India needs to capitalize visits into India. the diaspora, MNCs can tap into new on this advantage while it still can. sources of growth as well as spreading the word to a larger potential pool of

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05

The importance of multinational companies

Major new research

Further potential

of national competitiveness. For example, Innovation: a 2007 study by the World according to the World Economic Bank found that 300 MNCs had set up Forum, India ranks only 49th out of the R&D and technology centers in India, world’s most competitive economies— accounting for 60 percent of the R&D Multinational companies (MNCs) will 23rd when compared only to other off-shoring industry. With these centers feature prominently in efforts to

3comes increased economic growth and emerging economies. And while a overcome these challenges and drive spillover effects into the wider Indian comparable number of the world’s fifty the next phase of sustainable economy (e.g. through knowledge largest companies operate in China economic growth, not least by driving transfer and the flow of new skills). and India, their combined turnover in inward investment, nurturing talent

China is three times their turnover in and encouraging innovation. For In recent years, the relationship 4India. This report attempts to example: between India’s domestic businesses understand and suggest ways to

and multinationals has proved to be a Investment: MNCs have invested over address this shortfall, to set out how 1 unique competitive advantage for the US$100 billion in India since 2000 , the Indian economy can be best

nation, generating a creative dynamics with foreign direct investment (FDI) aligned to encourage these investments, of knowledge transfer, investment and inflows having increased at a rate of and to show how MNCs can support innovation. As a result, India’s businesses about 30 percent as compared to 14 and amplify India’s next phase of growth.are arguably the best adjusted to the percent for all emerging markets.global economy among emerging

Talent: MNCs have been at the heart economies, with a high proportion of of up-skilling the Indian workforce, higher-value and service-sector The report draws on a major research making it one of the most competitive contributions as well as an inclusive project on MNCs operating in India talent pools in the world in a number and global mindset. conducted jointly by Accenture and the of industries (especially information MNC Council of the Confederation of technology). In a recent Accenture Indian Industry. Business leaders from survey of business leaders around the more than a quarter of the MNCs in

More, however, is possible. Although world, India ranked second only to the India were interviewed to gain first-India’s recent growth has been United States in terms of the hand insight on some of the challenges impressive—second only to China since attractiveness of its top management they face and the broader role of

2 mid-2008—the country still does not talent. MNCs in India’s journey towards social rank as high as it could on comparisons

and economic growth.

28

Finally, promoting the cross-fertilization emerging economies are catching up of knowledge and capabilities can drive and starting to exploit their cultural new, innovative business models and industries and diaspora population to attract investment. For example, while great effect. Our analysis identifies the India’s growth to date has been driven following levers to realizing growth in in large part by the IT sector, there are this area:opportunities for MNCs in adjacent

Providing incentives for creative industry sectors that can capitalize on

industries and talent to locate in India, this e.g. advertising and digital media.

building on India’s burgeoning creative In developing these industry sectors,

sectors to generate growth and India will not only generate increased

strengthen India’s brandeconomic growth but also enhance even further its brand overseas. The Setting up a government initiative India Brand Equity Foundation has to target and leverage the Indian already undertaken extensive efforts to diaspora more effectively so that they promote ‘brand India’ abroad: the can act as ‘ambassadors’ for talent, markets, growth and investment opportunities, particularly opportunity that exist in the country. in new technology sectors To integrate itself further into the

Using MNC supply chains to connect global economy, India needs to build

local enterprise and global businesseson this and promote India as the new culture capital of the world and hub of new digital industries.

Placing India at the heart of the global economy means building on its existing success in this area: in being open, in being an attractive location for investment and in promoting a strong brand around the world. The key for India is to realize that other

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Figure 10: International tourist arrivals, 2008

France

US

Spain

China

Italy

UK

Ukraine

Turkey

Germany

Mexico

India

8.6

6.29

6.21

5.75

4.63

3.28

2.76

2.71

2.7

2.45

0.58

% of total international tourist arrivals

Source: Indian Ministry of Tourism; ‘Tourism Statistics at a Glance 2008’

The world has been shaken by the economic infrastructure, education and healthcare. downturn. Developed and emerging However, in the political sphere there are economies alike have felt the full force of new administrations in many countries and its impact. India’s economy has seen a a re-elected Indian government unimpeded slowdown after nearly a decade of by coalition politics. This presents a further unprecedented growth, as its companies window of opportunity for businesses and have been vulnerable to the varying policymakers to work together to develop fortunes of their customers, partners and constructive and collaborative solutions suppliers around the world. As we begin to that capitalize upon the country’s emerge from this crisis, there is a new strengths, develop new opportunities and sense of urgency amongst business leaders address the obstacles to achieving India’s and policymakers to address long-term social and economic growth ambitions.challenges and exploit fresh opportunities.

The Indian economy will enter the recovery period facing changed global competitive dynamics, particularly from other fast-developing economies, as well as the ongoing need to confront persistent domestic challenges in areas such as

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Executive summary

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ContentsExecutive summary 04

Introduction 08

Chapter one: Laying the foundations 10

Chapter two: Combining old and new 14

Chapter three: Building capabilities for the future 20

Chapter four: Projecting India 26

Conclusions 30

03

With greater integration into the world Achieving success in the next phase of economy, the effectiveness of India’s growth story will require closer policymakers in shaping and cooperation between businesses and implementing policies to increase policymakers than ever before. As the To take a lead in global forums in flows of people, capital, products and world emerges from recession, this order to embed India at the heart of services will, as we have seen, be new model of economic and social the world economyfundamental to securing India’s future governance will be replicated across

To simplify internal bureaucratic growth. To climb the competitiveness the globe. India has a number of ladder, it is crucial for India to focus processes, to rationalize taxation, and strengths that position it well to lead on the following areas: to effectively police intellectual this new global order. Doing so will

property rights require action on a number of fronts, Improve the overall business

from the local to the international, environment by removing the barriers To encourage the free movement of

with a focus on scaling activity more and hurdles that may hinder MNCs and talented labor, and to invest in

effectively and consistently. But with domestic businesses as they seek to transport, technology and social

commitment from business and achieve sustainable growth in India infrastructures

government alike, there are few limits Reduce dependence on, and increase to India’s potential.To focus policy on encouraging

the value of, traditional sectors of the higher-value in traditional sectors economy (e.g. agriculture) as well as (agriculture, manufacturing) and to developing new, higher-value-added invest in innovationindustry sectors such as healthcare,

To align education more closely renewable energy and new with employment opportunity, and to technologiesinvolve business leaders in shaping

Improve India’s productivity by human capital strategybroadening its skills base beyond its current centers of excellence and fostering innovation on a national scale

Place India at the heart of the multi-polar world by increasing the impact it Working with local partner achieves on the global stage through organizations and government to raise linking SMEs to global supply chains, skill levels and invest in higher value-tapping into the Indian diaspora and chain activitiesmaking better use of India’s cultural

Empowering rural populations to heritageopen up untapped labor and consumer

MNCs must play a critical role in marketsachieving these objectives by nurturing

Adopting imaginative responses to a globally integrated business India’s diversity, using technology to ecosystem driven by knowledge, scale operationstechnology and talent. Several MNCs

have established globally significant Exploiting India’s advantages of businesses in India by setting up language and demographics to test manufacturing and R&D facilities, innovative business modelsbuilding and serving consumer markets

Co-operating with government to and establishing India as an export make training and education better base. They have complemented efforts aligned with needsof local governments, institutions and

businesses in imparting skills to local workforces and by promoting a culture of innovation. There is great scope for more to be done.

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For policymakers, the priorities must be

For MNCs the opportunities for growth can be realized by

Conclusions: Overcoming the challenges to growth

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ForewordThe world has changed significantly safeguarding intellectual property and over the last couple of years. reducing bureaucracy, amongst others. Businesses in developed and emerging It also reveals some of the new growth economies have been shaken by the sector opportunities in India, such as global downturn. Governments, in turn, biotechnology, renewable energy and have scrambled to steady their emerging technological sectors like economies and put them on a path cloud computing and digitization. Last, towards recovery, using fiscal stimuli it highlights those key areas that can and other policy instruments. Now, the contribute to enhancing the nation’s light at the end of the tunnel is overall productivity and how India can beginning to emerge and we are seeing position itself at the heart of the global pockets of recovery in different parts economy by promoting itself more of the world. effectively.

The Indian economy will face a As we look towards the future with the changed global landscape as it enters same optimism that has driven India’s this recovery period. Emerging market growth to date, there is a fresh economies will acquire even greater opportunity for government and significance as the global economy business in India to work together to becomes increasingly multi-polar. India solve some of our common domestic will have to compete more fiercely challenges and build a path towards with its emerging-market peers, many sustainable growth and prosperity. But of whom will be more competitive there are no guarantees or than before. In the political sphere, entitlements about the future, only new governments have recently taken possibilities. Our vision is to help India office in different parts of the engage with the global context around world—presenting new opportunities to us, positioning India as the preferred address long-term challenges such as international destination of investment climate change and international and business activity. We hope this security threats. report will help outline the cooperative

steps that can be taken to make this As this new landscape takes shape,

vision a reality. India has the opportunity to position itself as a leading international hub of investment, human capital and innovation—pushing ahead of rival destinations in both developed and Harsh Manglikemerging economies. Multinational Companies (MNCs) are likely to feature prominently in pursuing this ambition. In the past, we’ve seen India’s ability to attract foreign direct investment from some of the largest companies in the world. MNCs have now embedded themselves as a part of India’s economic fabric. Looking forward, MNCs are looking to play a pivotal role fostering the growth of small, medium and large domestic enterprises across a range of industries and linking them into global supply chains.

But more is possible, and more is required. This report, which draws on interview-based research conducted jointly by Accenture and the Confederation of Indian Industry, reveals some of the ongoing challenges facing multinational businesses in India and underscores priority areas for reform—such as rationalizing taxation,

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References1 23Based on the 9 years of FDI statistics International Energy Agency.

published by Department of Industrial 24 11th Five year plan of Ministry of Policy & Promotion, Ministry of

New and Renewable Energy, Commerce, Government of India.

Government of India.2 Economist Intelligence 25 Technopak Advisors, ‘India

Unit/Accenture survey, 2009.Healthcare Trends’ 2009.

3 World Economic Forum Global 26 IBEF, August 2009. Competitiveness Report 2009-10,

27www.weforum.org IBEF, July 2009. 4 28 Accenture analysis. LABORSTA database, International

Labour Organization.5 United Nations Conference on Trade 29and Development (UNCTAD). UNESCO.

6 30Ibid. NASSCOM Strategic Review 2009.7 31McKinsey, ‘Building India: World Bank, ‘Unleashing India’s

Accelerating Infrastructure Projects’, Innovation’, 2007.2009. 32 Zinnov, ‘R&D Innovation Council’,

8 India Brand Equity Foundation (IBEF), August 2008.August 2009. 33 Evalueserve (2004).

9 Database of the Centre for 34 Migration Policy Institute database.Monitoring Indian Economy (CMIE), 35August 2009. Indian Ministry of Tourism, ‘Tourism

10 Statistics at a Glance’, 2008. Reserve Bank of India, op. cit.

11 Planning Commission, Government of India.

12 CMIE, op. cit.

13 IBEF, September 2009.

14 Rabobank, ‘Indian agri-biotech sector: Emerging scenario, issues and challenges’.

15 CII/KPMG report, ‘India Pharma Inc. – An Emerging Global Pharma Hub’, 2008.

16 IBEF, June 2009.

17 UNCTAD, ‘World Investment Report: Transnational Corporations, Agricultural Production and Development’, 2009, p. 141.

18 CMIE, July 2009.

19 CMIE, August 2009.

20 CMIE, August 2009.

21 Automotive Component Manufacturers Association of India, ‘Global Competitiveness of Indian Auto Component Industry & Its Sustainability’, 2009.

22 Ernst and Young, ‘Renewable Energy Country Attractiveness Indices’, Q4 2007.

Multinationals and IndiaA plan for progress

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