The company’ key competitive advantage has been the intellectual capital of its employees. - Infosys Annual report 2006
India’s blend of entrepreneurship, economic reform, investment in quality infrastructure and strength in intellectual capital created an industry offering IT solutions that were both cost-competitive and world-class.
Intellectual property has always been key to success. But its only now that Indian companies have openly started giving it the due credit and have started allocating resources for intellectual property development and protection. But most Indian companies are yet to show any serious commitment towards developing key intellectual property. For example, in 2006 Infosys spends only 0.01% of its revenue on R&D! In 2005, Infosys spent 1.05% of its revenue on R&D.
Other Indian IT services company Wipro is an equal miser when it comes to R&D expenditure. In 2006, Wipro spent Rs 27.4 crores on R&D or 0.25% of its revenues on Research & development.
Despite this minuscule investments in R&D, Indian IT services companies are able to make huge gains in the global market. Lack of R&D investments does not seem to erode the competitive advantages of Indian companies. All this looks like a paradox or a mystery for a person who does not understand the Indian management styles.
R&D drives Profitability
"In 1999, Dr. Baruch Lev at the University of California at Berkeley and his colleagues found that the R&D investment drove profitability. Analyzing changes in R&D investment against changes in operating income over the two decades from 1980 through 1999, they found that a dollar spent on research, on average, a rate of return of 26.6 percent, or 17 percent after taxes. It typically takes seven years to realize the return, but the amount is enough to compensate for the risk that research.
Moreover, companies in any industry that emphasize basic research — the kind in which
researchers follow their own noses — appear to enjoy higher returns. In other words, having a relatively unfettered basic R&D function is a surefire way to prevent commoditization, as long as you can capitalize on the results. Unfortunately, this causal link between research expense and financial return does not appear on any financial reports in most companies."
While Dr Lev’s observation and theory is true, it is not being reflected in Indian companies. Indian companies seem to challenge Lev’s observation - so it takes a deeper analysis.
Indian Firms have a different approach to Innovation
India is been a land of paradoxes and that hold true to innovation also. Indian companies tend to spend as miserly as possible on R&D. Yet these companies are making giant strides in profitability and are gaining competitive advantage over their global rivals - and make tall claims on IP. This paradox can be explained by looking at how Indian firm’s approach to innovation.
Ever since the liberalization on Indian economy started, Indian companies have steadily grown in their competitive strengths - be it in automobiles, Aerospace, steel, chemicals, pharma, IT, or manufacturing. The success of Indian firms can be attributed to prudent management, cost advantage and innovation.
The Indian approach towards Intellectual property and innovation is rather unique. Indian firms and Indian people in general take a fundamentally very different approach to innovation and intellectual property. For Indians, intellectual property is a creation of an individual that must be shared with the society at large. This fundamental notion is deeply ingrained in the Indian culture - and that happens to be a source of Indian competitive advantage.
Innovation Stems from Individual Creativity
Indian society in general believes in collectivism - where general well being of the collective is more important than that of the individual. Hofstede’s studies in this parameter of individualism Vs collectivism also reaffirms this observation. But this does not give a complete picture. Indians are also highly self-centric and with a view that one must contribute in a positive way to the society. This self-centric mindset encourages creativity and the society encourages creative pursuits - resulting in a symbiotic relationship between the creative individual and the society at large.
The proof of this symbiotic relationships can be seen throughout the Indian history. Indian kings and nobility have always provided and supported creative people. From the days of Ramayana, and Mahabharata, kings have had court appointed artisans: Musicians, dancers, sculptures, poets & writers. In return, the creative works of these individuals happen to become a public property. This system implied that individual creativity was highly encouraged - and so was the copying of this creative work. This led to creation of several books, poems, stories, plays, music, dances, tools, implements, etc., and also led to rapid proliferation of these innovations. The concept of IP protection was never built into the Indian society.
On the contrary, In the western world - as early as the Greek civilization, the idea of intellectual property protection can be seen. Greeks and later the Romans had instituted the concept of unique trademarks on pottery/metal products produced by master craftsman - and those who violated this were punished.
Today, Indian society still encourages individual creativity - Indian society actively supports and promotes creative individuals. The society also encourages learning. Though the concept of gurukula way of learning has disappeared, the concept of one-to-one in-depth guru-shishya learning still thrives.
Today, Indian companies have taken over the role of providing patronage to creative individuals - in return the individual’s creative pursuits are aimed for the overall benefit of the organization and society. This implies that a lot of innovative work happens within an organization but it happens at an individual level that cannot be accounted for in the balance sheets. Thus, Infosys can spend only 0.01% of its revenue on R&D and still file 167 patents.
Mentoring & Individual Training
Indian society places a very high emphasis on individual learning and meritocracy. This high emphasis on competitive learning and rewarding the performers on pure merit (i.e., marks scored in competitive exams) is seen everywhere in Indian education system. So at an very early age, Indians learn to be competitive and give importance to learning. In school and colleges, the practice of individual tutors is very common - and the society believes that tutions help the individual.
The same culture is carried forward in the corporate world. Indian companies in general do spend a lot of money on employee training. Indian IT firms probably the leaders in instituting the culture of corporate training.. GE started the idea in the US, but in India Infosys took that idea to heart and created the world’s largest employee training facility. Other companies - both large and small are also following the trend. Large companies tend to rely on internal trainers - and get external industry experts as and when required, while small & mid sized companies rely exclusively on external trainers.
Added to this, the enthusiasm of Indian employee to learn is very high. Almost all employees in India have no qualms of attending a training program on a weekend or on a holiday. Many employees also take private skills training from third party trainers - and even pay for it on their own. The culture of individual learning and meritocracy ensures a competitive environment at workplaces.
Another aspect of Indian culture is the willingness to train/teach others. Indian culture encourages sharing of knowledge. Indians therefore tend to do that at workplace also. Managers or leaders in the organization will take time to teach other employees - thus propagating knowledge faster within the organization. This concept of mentoring is slightly different than the western style where it is more formal and budgeted, while in India it is informal and not budgeted.
Indian style of Innovation
Indian culture and Indian companies have developed a unique style for pursuing innovation. At the very foundation lies the problem statement. The problem statement must the convincing enough and the need for a solution must be strong - this is a must. The problem statement should also be agreed upon by the society or the collective. In case of companies, the problem statement must be agreed upon by the management and by most employees. This will then drive the Indian employees to engage in a large series of creative thinking which will be freely shared with fellow employees and others around them (including employees from competitive organizations). The net effect of this is free flowing creative thinking and bouncing off ideas on each other so as to refine the idea. This activity results in increasing the overall awareness and knowledge about the problem within the society and the organization. This also results in several new & innovative ideas which can become possible solution.
The next stage is the experimentation stage. Once the possible solutions are agreed upon by the society or by the management, the experimentation stage begins. At this stage, the capital expenditure is kept to the minimum by trying to seek low cost solutions - the shortage of investment capital and the risk of failure looms large in people’s minds. Every effort will be made to lower the costs of experimentation while seeking success. For most part, expenses incurred in this stage will not be budgeted or accounted as R&D expenses. Instead this will be shown as operational costs.
Once the idea is proven to work, then the management takes over the responsibility. The role of the management at this stage is to study the cost-benefit of the solution. In case of large social problems - such as water scarcity, or power supply etc., the society will debate the solution at great length before agreeing upon how to implement the solution. In case of organizations, the management will also debate on the benefits and costs involved - and will even approach the board of directors for suggestions. This process may take days or weeks or even years. Once the management agrees on the solution, then the budget for developing the commercial version of the solution or a formal prototype will be approved. And only a small part of this expenditure will be accounted as R&D expenses while the rest is often shown as capital expenditure - which can be capitalized and amortized over a period of time.
At this stage, the company is ready to fully implement the solution. And the innovation is ready to go commercial. All expenditure needed for going commercial will be budgeted and shown as capital expenditure or as operational expenses.
This style of innovation results in lower R&D expenditure and also ensures a high rate of success in innovation. Therefore if one were to study the financial statements of Indian companies, one will see a very small figure under "R&D Expenses", yet the company would have filed a large number of patents and would have released a lot of innovative solutions/products.
In case of service industry - IT, BPO, ITES etc., the innovation process is often well merged with the actual operations - such that it is hard to differentiate the two from the accounting perspective.
Summing up, Indian Innovation process can be illustrated as:
Closing Thoughts
Indian style of innovation relies heavily on individual creativity, idea sharing and solution consenses. The entire organization will be involved in the innovation process - and is not limited to R&D departments only. According to Indian accounting procedures R&D expenditure is often incurred only when the idea is being tested or when the prototype is being developed. Thus by western standards, Indian companies may be spending very little on innovation and R&D. But this style of innovation results in greater competitive advantage and lower expenditure. Recent success of Indian innovation: Reva, Scorpio, Saras, Tejas, Tata Ace, Indica, Bajaj Pulsar, TVS Victor, Wockhardt’s Wosulin etc., all have shown how cost efficient Indian companies are at innovation. The general thought process of Indian R&D can be summarized as "minimum input for maximum output".
A major drawback of this style of innovation is that Indian companies will not be able to create a truly breathtaking invention. The need to achieve consensus regarding the problem statement and the proposed solution will ensure that radical and drastically different solutions will be weeded out first. Also another drawback is that, Indian companies will rapidly lose competitive advantage in the market as the Indian culture does not encourage intellectual property protection - and the society believes that the knowledge must be shared. To protect against such losses of IP, Indian companies must realize the importance of patents, copyrights, and other legal methods of IP protection.
India’s blend of entrepreneurship, economic reform, investment in quality infrastructure and strength in intellectual capital created an industry offering IT solutions that were both cost-competitive and world-class.
Intellectual property has always been key to success. But its only now that Indian companies have openly started giving it the due credit and have started allocating resources for intellectual property development and protection. But most Indian companies are yet to show any serious commitment towards developing key intellectual property. For example, in 2006 Infosys spends only 0.01% of its revenue on R&D! In 2005, Infosys spent 1.05% of its revenue on R&D.
Other Indian IT services company Wipro is an equal miser when it comes to R&D expenditure. In 2006, Wipro spent Rs 27.4 crores on R&D or 0.25% of its revenues on Research & development.
Despite this minuscule investments in R&D, Indian IT services companies are able to make huge gains in the global market. Lack of R&D investments does not seem to erode the competitive advantages of Indian companies. All this looks like a paradox or a mystery for a person who does not understand the Indian management styles.
R&D drives Profitability
"In 1999, Dr. Baruch Lev at the University of California at Berkeley and his colleagues found that the R&D investment drove profitability. Analyzing changes in R&D investment against changes in operating income over the two decades from 1980 through 1999, they found that a dollar spent on research, on average, a rate of return of 26.6 percent, or 17 percent after taxes. It typically takes seven years to realize the return, but the amount is enough to compensate for the risk that research.
Moreover, companies in any industry that emphasize basic research — the kind in which
researchers follow their own noses — appear to enjoy higher returns. In other words, having a relatively unfettered basic R&D function is a surefire way to prevent commoditization, as long as you can capitalize on the results. Unfortunately, this causal link between research expense and financial return does not appear on any financial reports in most companies."
While Dr Lev’s observation and theory is true, it is not being reflected in Indian companies. Indian companies seem to challenge Lev’s observation - so it takes a deeper analysis.
Indian Firms have a different approach to Innovation
India is been a land of paradoxes and that hold true to innovation also. Indian companies tend to spend as miserly as possible on R&D. Yet these companies are making giant strides in profitability and are gaining competitive advantage over their global rivals - and make tall claims on IP. This paradox can be explained by looking at how Indian firm’s approach to innovation.
Ever since the liberalization on Indian economy started, Indian companies have steadily grown in their competitive strengths - be it in automobiles, Aerospace, steel, chemicals, pharma, IT, or manufacturing. The success of Indian firms can be attributed to prudent management, cost advantage and innovation.
The Indian approach towards Intellectual property and innovation is rather unique. Indian firms and Indian people in general take a fundamentally very different approach to innovation and intellectual property. For Indians, intellectual property is a creation of an individual that must be shared with the society at large. This fundamental notion is deeply ingrained in the Indian culture - and that happens to be a source of Indian competitive advantage.
Innovation Stems from Individual Creativity
Indian society in general believes in collectivism - where general well being of the collective is more important than that of the individual. Hofstede’s studies in this parameter of individualism Vs collectivism also reaffirms this observation. But this does not give a complete picture. Indians are also highly self-centric and with a view that one must contribute in a positive way to the society. This self-centric mindset encourages creativity and the society encourages creative pursuits - resulting in a symbiotic relationship between the creative individual and the society at large.
The proof of this symbiotic relationships can be seen throughout the Indian history. Indian kings and nobility have always provided and supported creative people. From the days of Ramayana, and Mahabharata, kings have had court appointed artisans: Musicians, dancers, sculptures, poets & writers. In return, the creative works of these individuals happen to become a public property. This system implied that individual creativity was highly encouraged - and so was the copying of this creative work. This led to creation of several books, poems, stories, plays, music, dances, tools, implements, etc., and also led to rapid proliferation of these innovations. The concept of IP protection was never built into the Indian society.
On the contrary, In the western world - as early as the Greek civilization, the idea of intellectual property protection can be seen. Greeks and later the Romans had instituted the concept of unique trademarks on pottery/metal products produced by master craftsman - and those who violated this were punished.
Today, Indian society still encourages individual creativity - Indian society actively supports and promotes creative individuals. The society also encourages learning. Though the concept of gurukula way of learning has disappeared, the concept of one-to-one in-depth guru-shishya learning still thrives.
Today, Indian companies have taken over the role of providing patronage to creative individuals - in return the individual’s creative pursuits are aimed for the overall benefit of the organization and society. This implies that a lot of innovative work happens within an organization but it happens at an individual level that cannot be accounted for in the balance sheets. Thus, Infosys can spend only 0.01% of its revenue on R&D and still file 167 patents.
Mentoring & Individual Training
Indian society places a very high emphasis on individual learning and meritocracy. This high emphasis on competitive learning and rewarding the performers on pure merit (i.e., marks scored in competitive exams) is seen everywhere in Indian education system. So at an very early age, Indians learn to be competitive and give importance to learning. In school and colleges, the practice of individual tutors is very common - and the society believes that tutions help the individual.
The same culture is carried forward in the corporate world. Indian companies in general do spend a lot of money on employee training. Indian IT firms probably the leaders in instituting the culture of corporate training.. GE started the idea in the US, but in India Infosys took that idea to heart and created the world’s largest employee training facility. Other companies - both large and small are also following the trend. Large companies tend to rely on internal trainers - and get external industry experts as and when required, while small & mid sized companies rely exclusively on external trainers.
Added to this, the enthusiasm of Indian employee to learn is very high. Almost all employees in India have no qualms of attending a training program on a weekend or on a holiday. Many employees also take private skills training from third party trainers - and even pay for it on their own. The culture of individual learning and meritocracy ensures a competitive environment at workplaces.
Another aspect of Indian culture is the willingness to train/teach others. Indian culture encourages sharing of knowledge. Indians therefore tend to do that at workplace also. Managers or leaders in the organization will take time to teach other employees - thus propagating knowledge faster within the organization. This concept of mentoring is slightly different than the western style where it is more formal and budgeted, while in India it is informal and not budgeted.
Indian style of Innovation
Indian culture and Indian companies have developed a unique style for pursuing innovation. At the very foundation lies the problem statement. The problem statement must the convincing enough and the need for a solution must be strong - this is a must. The problem statement should also be agreed upon by the society or the collective. In case of companies, the problem statement must be agreed upon by the management and by most employees. This will then drive the Indian employees to engage in a large series of creative thinking which will be freely shared with fellow employees and others around them (including employees from competitive organizations). The net effect of this is free flowing creative thinking and bouncing off ideas on each other so as to refine the idea. This activity results in increasing the overall awareness and knowledge about the problem within the society and the organization. This also results in several new & innovative ideas which can become possible solution.
The next stage is the experimentation stage. Once the possible solutions are agreed upon by the society or by the management, the experimentation stage begins. At this stage, the capital expenditure is kept to the minimum by trying to seek low cost solutions - the shortage of investment capital and the risk of failure looms large in people’s minds. Every effort will be made to lower the costs of experimentation while seeking success. For most part, expenses incurred in this stage will not be budgeted or accounted as R&D expenses. Instead this will be shown as operational costs.
Once the idea is proven to work, then the management takes over the responsibility. The role of the management at this stage is to study the cost-benefit of the solution. In case of large social problems - such as water scarcity, or power supply etc., the society will debate the solution at great length before agreeing upon how to implement the solution. In case of organizations, the management will also debate on the benefits and costs involved - and will even approach the board of directors for suggestions. This process may take days or weeks or even years. Once the management agrees on the solution, then the budget for developing the commercial version of the solution or a formal prototype will be approved. And only a small part of this expenditure will be accounted as R&D expenses while the rest is often shown as capital expenditure - which can be capitalized and amortized over a period of time.
At this stage, the company is ready to fully implement the solution. And the innovation is ready to go commercial. All expenditure needed for going commercial will be budgeted and shown as capital expenditure or as operational expenses.
This style of innovation results in lower R&D expenditure and also ensures a high rate of success in innovation. Therefore if one were to study the financial statements of Indian companies, one will see a very small figure under "R&D Expenses", yet the company would have filed a large number of patents and would have released a lot of innovative solutions/products.
In case of service industry - IT, BPO, ITES etc., the innovation process is often well merged with the actual operations - such that it is hard to differentiate the two from the accounting perspective.
Summing up, Indian Innovation process can be illustrated as:
Closing Thoughts
Indian style of innovation relies heavily on individual creativity, idea sharing and solution consenses. The entire organization will be involved in the innovation process - and is not limited to R&D departments only. According to Indian accounting procedures R&D expenditure is often incurred only when the idea is being tested or when the prototype is being developed. Thus by western standards, Indian companies may be spending very little on innovation and R&D. But this style of innovation results in greater competitive advantage and lower expenditure. Recent success of Indian innovation: Reva, Scorpio, Saras, Tejas, Tata Ace, Indica, Bajaj Pulsar, TVS Victor, Wockhardt’s Wosulin etc., all have shown how cost efficient Indian companies are at innovation. The general thought process of Indian R&D can be summarized as "minimum input for maximum output".
A major drawback of this style of innovation is that Indian companies will not be able to create a truly breathtaking invention. The need to achieve consensus regarding the problem statement and the proposed solution will ensure that radical and drastically different solutions will be weeded out first. Also another drawback is that, Indian companies will rapidly lose competitive advantage in the market as the Indian culture does not encourage intellectual property protection - and the society believes that the knowledge must be shared. To protect against such losses of IP, Indian companies must realize the importance of patents, copyrights, and other legal methods of IP protection.
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1 comment:
Your break up of the Indian style of innovation made interesting reading, but I think that to make a connection between that and why Indian companies dont invest in R&D is rather tenuous.
R&D investments is a concept alien to India - because our companies have been, until very recently, mostly, recepients of technology. It is only now that there is some movement in the other direction and as that goes up, you will see R&D spend go up.
Perhaps pioneering companies like Tejas Networks or a DRL (15% of sales) are better examples here - not service industries.
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