Three decades ago, economic historian Joel Mokyr wrote a book titled The Lever of Riches with the subtitle “Technological Creativity and Economic Progress,” describing the nature of the lever—in the physical world, a tool for multiplying force. In Mokyr’s story, innovation is the lever, and economic progress is the accomplishment. If we are in what some have described as the fourth industrial revolution or technological progress, then what should India be doing to ride this wave?
In a paper that opened the annual India Policy Forum held in Delhi recently, Tarun Khanna of the Harvard Business School offered a bold prescription. India’s startup ecosystem has flourished in recent years, with over 65,000 recognised startups, responsible for 700,000 new jobs. The recent milestone of 100 unicorns (private companies with valuations over $1 billion), was much celebrated. But Khanna argues that the success of this ecosystem is far too limited. In particular, “65 of India’s 100 unicorns are in the e-commerce, fintech, and IT services sectors and not a single unicorn is based on advances in the natural sciences.”
There are some general weaknesses in India’s startup ecosystem. The education system is well-known for its emphasis on rote learning rather than creative thinking and problem solving. Regulatory complexity and limited funding are significant barriers to startups. The entrepreneurship-specific institutional infrastructure (incubators and accelerators) is also underdeveloped. For science-based entrepreneurship, there are additional, more specific shortcomings. Here, the extreme shortage of high-quality science and technology education is a major barrier. Acceptance rates at the IITs, even allowing for differences in application processes and application pools, are much lower than top universities in developed countries. This is well known. It is also well known that India invests a much lower percentage of GDP in research and development (R&D), as compared to countries like the US and China. But one might argue that lower availability of education and lower expenditure on R&D merely reflect India’s relative poverty.
Yet, as Professor Khanna emphasises in his analysis, there are relatively low-cost steps that the government can take to promote science-based entrepreneurship. A simple example is the use of competitions and prizes for certain types of specific innovations or breakthroughs. These incentives have a history that goes back centuries, and while they do not guarantee success, they focus on effort and attention, and are low-cost for the government.
Innovation and breakthroughs in basic science may require more than prizes for success. There is a lot of uncertainty in fundamental research, and commercialisation may be many steps away. Basic research is often a classic public good, or in other cases has many of those characteristics. There can be a strong case for government subsidies to basic research, whether in labs, universities, or the private sector. However, Khanna also points out that the private sector’s share of R&D in India, while increasing, is much lower than in countries like Germany and the US. The key question here is whether increased government expenditure catalyses private expenditure rather than substituting for it. Given the different objective functions and risk attitudes of the public and private sectors, it seems plausible that there are complementarities, so the government stepping up more will have positive spillovers. Private firms may often leverage government-funded innovation, as happened with the internet.
Khanna gives a positive example, the Biotechnology Industry Research Assistance Council (BIRAC) under the Department of Biotechnology of the ministry of science and technology, which has funded nearly 500 med-tech companies, helping bring more than 50 products to the market. Other positive examples are the various innovation missions being promulgated through NITI Aayog, and science and technology clusters such as the one at IIT-Delhi. But many more such initiatives are needed. Khanna also sees much more scope for collaborations across disciplines, between government research labs and industry, and across national borders. Each of these requires attention and focus, but not necessarily large sums of money. He provides a back-of-the envelope calculation of the benefits flowing from the Atal Innovation Mission, where spending of less than Rs 2000 crores has generated social returns 5-17 times that amount.
Even if the numbers are optimistic, and subject to diminishing returns with scaling up, Khanna’s central message of suboptimal investment in basic research and science-based entrepreneurship seems very plausible. Digital technology, materials science, and life sciences are all exhibiting rapid innovation. Climate change is increasing the social returns to innovation, since controlling global warming and ameliorating its consequences are global public goods. There seems to be a strategic case for government investment in fundamental research and science-based entrepreneurship, even in the absence of quantifiable financial benefits. Khanna characterises the glass as less than a quarter full in this dimension, but the opportunity for transformative public policy initiatives may be even larger than that. Recent efforts may only be a tenth of what is needed, as suggested by the Director of the Atal Innovation Mission at NITI Aayog.
The writer is professor of economics, University of California, Santa Cruz.