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India Learns To Innovate

India is regarded as the world’s outsourcing center and a production powerhouse for generic drugs. Information technology and pharmaceutical companies have lent the India story a rich layer thanks to their reputations for efficiency. Aside from creating hundreds of thousands of jobs at home, these industries have helped train a domestic labor force that suffers at the hands of a broken higher-education system. Above all, Indians who have worked at these companies have been filled with a confidence to strike out on their own, and the seeds of cutting-edge innovation are now taking root in the Indian economy.

For a long time, India’s economy was starved for capital. Its best scientific talent went abroad because there were no opportunities at home. Monopolistic companies found their products to be in permanent demand because of artificial shortages created by government policy, so they never felt the need to invest in innovation. But business realities have changed dramatically over the last decade as India transforms into an urbanized, industrial economy. An increasingly discerning consumer base and competition in the marketplace are forcing companies to innovate for the home market. One example is Tata Motors, the builder of the $2,500 Nano car, which changed automobile design fundamentally and invented new ways for automobile manufacturing. Nano factories use “smart” technologies and automation to manage supply chains in real-time and minimize the consumption of energy and resources during production.

Economic turmoil in developed nations and stringent immigration policies have made the prospect of returning home more attractive for expatriate Indians. Vivek Wadhwa, who researches innovation, showed that more than 60 percent of the returnees to India cited better economic opportunities as a key reason for making the shift. These individuals bring with them not just experience and skills, but a culture and professional network that is catalyzing innovation in India. Indeed, moving up the value chain this way is imperative for the economy to maintain its growth momentum and create jobs.

Seeing the quality of people flocking to India, global investors have eagerly set up shop. India has never seen the availability of so much financial risk capital — yet it isn’t enough, and it is spread rather unevenly. Many investors believe that India is still limited when it comes to product innovation and are hesitant to back innovation-driven ventures. Instead, they choose to play it safe by focusing on outsourcing-oriented businesses, a formula that has been known to work well.

As an entrepreneur and venture capitalist in India, I see that my nation is at a tipping point. India has always failed to achieve its potential when it comes to commercializing technology, but with the return of talent from abroad and the emergence of a large domestic market, it now has momentum.

I have found that companies that create knowledge and commercialize scientific research can attract engineers and scientists from across the globe. Two companies that I’ve invested in include founders who used to be expatriates.

India can be a chaotic and difficult place to do business, consistently getting a low ranking in the World Bank’s reports on the ease of doing business. Opening bank accounts or working with the government’s tax and regulatory agencies entail mounds of paperwork and can drag on for weeks. Still, it makes sense to invest in innovation because of India’s superior capital efficiency, which mitigates financial risks. Niranjan Rajadhyaksha, an economist, has shown in his book “The Rise of India” that India requires four units of capital to generate one unit of output, while China consumes five units of capital to produce one unit of output.

There are lessons here for policymakers as well — competition for talent and capital is now global. Nations that champion openness and freedom will be able to compete and prosper, while those that remain insular will fall behind. A lot remains to be done to cultivate such an environment in India. Outdated labor laws constrain the development of manufacturing, and the higher-education system needs large investments for expansion along with a boost in autonomy.

India has rapidly moved on from its rigidly socialist past, setting the stage for more openness and freedom. An older colleague in his sixties remarked to me that my generation of Indians was fortunate to be able to build companies from the ground up. In earlier times, India’s economy remained so tightly controlled by the government that this would have simply been impossible. The government can encourage entrepreneurship by making it easier to run businesses, enhancing access to finance and building transportation infrastructure and new cities.

India doesn’t have to be just the world’s back office. It can also be the innovation engine.

Originally Published: The New York Times International Weekly