Indias invisible innovation Nirmalya Kumar

over the last two decades India has

become a global hub for software

development and offshoring of back

office services as we call it and what

we were interested in finding out was

that because of this huge industry that

has started over the last two decades in

India offshoring software development on

back office services there’s been a

flight of white-collar jobs from the

developed world to India then this is

combined with the loss of manufacturing

jobs to China it has you know led to

considerable angst amongst the Western

populations in fact if you look at polls

they show a declining trend for support

for free trade in the West now the

Western elites however have said this

fear is misplaced for example if you

have read I suspect many of you have

done so read the book by Thomas Friedman

called the world is flat he said

basically in his book that you know this

fear for free trade is wrong because it

assumes is based on a mistaken

assumption that everything that can be

invented has been invented in fact he

says it’s innovation that will keep the

West ahead of the developing world with

the more sophisticated innovative task

being done in the developed world and

the less sophisticated shall we say

drudge work being done in the developing

world now what we were trying to

understand was is this true could India

become a source or a global hub of

innovation just like it’s become a

global hub for back-office services and

software development and for the last

four years

my co-author furnished puranam and I

spent investigating this topic initially

all you know as people would say you

know in fact the more aggressive people

who are supporting the Western

innovative model say where are the

Indian Google’s iPods and viagra’s if

the Indians are so bloody smart

so initially when we started our

research we went and met several

executives and we asked them what do you

think will India go from being a favored

destination for software services and

back office services to a destination

for innovation they laughed they

dismissed us they said you know what

Indians don’t do innovation the more

polite one said well you know Indians

make good software programmers and

accountants but they can’t do the

creative stuff sometimes it took a more

book a veneer of sophistication and

people said you know it’s nothing to do

with Indians it’s really the road based

regimented education system in India

that is responsible for killing all

creativity they said instead if you want

to see real creativity go to Silicon

Valley and look at companies like Google

Microsoft Intel so we started examining

the R&D and innovation labs of Silicon

Valley well interestingly what you find

there is usually your head introduced to

the head of the innovation lab or the

R&D center as they may call it and more

often than not it’s an Indian so I

immediately said well but you could not

have been educated in India right you

must have gotten your education here it

turned out in every single case they

came out of the Indian educational

system so we realize that maybe we have

the wrong question and the right

question is really can Indians based out

of India do innovative work so off we

went to India we made I think about a

dozen trips to Bangalore Mumbai Google

Delhi Hyderabad you name it to examine

what is the level of corporate

innovation in this country in these

cities and what we found was as we

progressed in our research was that we

were asking really the wrong question

when you ask where are the Indian

Google’s iPods and viagra’s you are

taking a particular perspective on

innovation which is innovation for

end-users visible innovation instead

innovation if you remember some of you

may have read the famous economist sham

Peter

he said innovation is normal T in how

value is created and distributed it

could be new products and services but

it could also be new ways of producing

products

it could also be normal ways of

organizing firms and industries once you

take this there is no reason to restrict

innovation the beneficiaries of

innovation just to end-users when you

take this broader conceptualization of

innovation what we found was India is

very represented in innovation but the

innovation that is being done in India

is of a form we did not anticipate and

what we did was we called it invisible

innovation and specifically there are

four types of invisible innovation that

are coming out of India the first type

of invisible innovation out of India is

what we call innovation for business

customers which is led by the

multinational corporations which have in

the last two decades there have been 750

R&D centers set up in India by

multinational companies employing more

than 400,000 professionals now when you

consider the fact that historically the

rnd center of a multinational company

was always in the headquarters or or in

the country of origin of that

multinational company to have 750 R&D

centers of multinational corporations in

India is truly a remarkable figure when

we went and talked to the people in that

in those innovation centers and asked

them what are they working on they said

we are working on global products they

were not working on localizing global

products for India which is the usual

low role of a local R&D they were

working on truly global products and

companies like Microsoft Google Astra

Zeneca General Electric Philips have

already asked answered in the

affirmative the question that from their

Bangalore and Hyderabad R&D centers they

are able to produce products and

services for the world but of course as

an end user you don’t see that because

you only see the name of the company not

where it was developed the other thing

we were told then was yes but you know

the kind of work that is coming out of

the Indian R&D center cannot be compared

to the kind of work that is coming out

of the US R&D sentence so my co-author

finished puranam who happens to be one

of the smartest people I know said he’s

going to do a study what he did was he

looked at those companies that had an

rnd

Center in USA and in India and then he

looked at a patent that was filed out of

the US and a similar patent filed out of

the same company subsidiary in India so

he is now comparing the patterns of R&D

centers in the US with R&D centers in

India of the same company to find out

what is the quality of the patents filed

out of the Indian centers and how do

they compare with the quality of the

patents filed out of the US Centers

increasingly what he finds is and by the

way the way we look at the quality of a

patent is what we call forward citations

how many times does a future patent

reference the older patent you find

something very interesting what we find

is that the data says that the number of

forward citations of a patent filed out

of the US R&D subsidiary is identical to

the number of forward citations of a

patent filed by an Indian subsidy of the

same company within that company so

within the company there is no

difference in the forward citation rates

of the Indian subsidiaries versus the

u.s. subsidiaries so that’s the first

kind of invisible innovation coming out

of India second kind of energy visible

innovation coming out of India is what

we call outsourcing innovation to Indian

companies where many companies today are

contracting Indian companies to do a

major part of the product development

work for their global products which are

going to be sold to the entire world for

example in the pharma industry a lot of

the molecules are being developed well

you see a major part of that work is

being given sent to India for example

HCL technologies they developed two of

the Mission Control critical systems for

the new Boeing 787 Dreamliner one to

avoid collisions in the sky and another

to allow landing in zero visibility but

of course when you climb onto the Boeing

787 you are not going to know that this

is invisible innovation out of India the

third kind of invisible innovation

coming out of India is what we call

process innovations because of an

injection of intelligence by Indian

firms only process innovation is

different from product innovation it’s

about how do you create a new product or

develop a new product or manufacture a

new product but not a new

wrap itself only in India do millions of

young people dream of working in a call

center what happens you know it’s a

dead-end job in the West where high

school dropouts do what happens when you

put hundreds of thousands of smart young

ambitious kids on a call center job very

quickly they get bored and they start

innovating and they start telling the

boss how to do this job better and out

of this process innovation comes product

innovations which are then marketed

around the world for example 24/7

customer traditional call center company

used to be a traditional call center

company today they’re developing

analytical tools to do predictive

modeling so that before you pick up the

phone you can guess or predict what this

phone call is about is because of an

injection of intelligence into a process

which is considered dead for a long time

in the West and the last kind of

innovation innovation coming our

invisible innovation coming out of India

is what we call management innovation is

not a new product or a new process but a

new way to organize work and the most

significant management innovation to

come out of India invented by the Indian

offshoring industry is what we call the

global delivery model

well the global delivery model allows it

it allows you to take previously

geographically co-located tasks break

them up into parts send them around the

world where the expertise and the cost

structure exists and then specify the

means for reintegrating them without

that you could not have any of the other

invisible innovations tooling so what

I’m trying to say is what we are finding

in our research is that if products for

end-users is the visible tip of the

innovation iceberg India is very

represented in the invisible large

submerged portion of the innovation

iceberg now this has of course some

implications and so we developed three

implications of this research the first

is what we call sinking skill ladder and

now I’m going to go back

where I started my conversation with you

which was about the flight of jobs now

of course when we first as a

multinational company decide to

outsource jobs to India in the rnd what

we are going to do is we are going to

outsource the bottom rung of the ladder

to India the least sophisticated jobs

just like Tom Friedman would predict now

what happens is when you outsource the

bottom rung of the ladder to India for

innovation and for R&D work at some

stage in the very near future you are

going to have to confront a problem

which is where does the next step of the

ladder people come from within your

company so you have two choices then

either you bring the people from India

into the developed world to take

positions in the next step of the ladder

immigration or you say there are so many

people in the bottom step of the ladder

waiting to take the next position in

India why don’t we move the next step to

India what we are trying to say is that

once you outsource the bottom end of the

ladder you it’s a self-perpetuating act

because of the sinking skill lager and a

sinking skill ladder is simply the point

that you can’t be an investment banker

without having been an analyst once you

can’t be a professor without having been

a student you can’t be a consultant

without having been a research associate

so if you outsource the least

sophisticated jobs at some stage the

next step of the ladder has to follow

the second thing we bring up is what we

call the browning of the TMP the top

management teams

if the rnd talent is going to be based

out of India and China and the largest

growth markets are going to be based out

of India and China you have to confront

the problem that your top management of

the future is going to have to come out

of India and China because that’s where

the product leadership is that’s where

the important market leadership is and

the last thing we point out in this

slide which is you know that to the

story there’s one caveat India has the

youngest growing population in the world

this demographic dividend is incredible

but paradoxically there’s also the

Mirage of mighty labor pools

Indian Institutes and educational system

with a few exceptions are incapable of

producing students

the quantity and quality needed to keep

this innovation engine going so

companies are finding innovative ways to

overcome this but in the end it does not

absolve the government of the

responsibility for creating this

educational structure so finally I want

to conclude by showing you the profile

of one company IBM as many of you know

iBM has always been considered for the

last hundred years to be one of the most

innovative companies in fact if you look

at the number of patents filed over

history I think they are in the top or

the top two or three companies in the

world of all patents filed in the USA as

a private company here is the profile of

employees of IBM over the last decade in

2003 they had 300,000 employees or 330

thousand employees out of which 135,000

were in America 9,000 were in India in

2000 and in 2009 they had 400,000

employees by which time the USM flies

had moved to 105 thousand whereas the

Indian employees had gone to 100,000

well in 2010 they decided they’re not

going to reveal this data anymore so I

had to make some estimates based on

various sources here are my best guesses

okay I’m not saying this is the exact

number it’s my best guess it gives you a

sense of the trend there are four

hundred and thirty three thousand people

now at IBM out of which 98 thousand are

remaining in the US and 150 thousand are

in India so you tell me is Ibn an

American company or an Indian company

ladies and gentlemen thank you very much

you