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China and India: Taking it to the next level

By Gordon Orr

26 February 2009

China and India will be important centers of innovation in the coming decades. Not only are both nations producing a rising share of key technological innovations, but they are also pioneering innovations in business models that allow their companies to prosper in low-income markets. These new models tend to be capital light while heavily leveraging technology. The companies employing them produce goods and services at surprisingly low cost and use the vast scale of home markets to create new technology standards. These are practices that companies in developed nations will need to watch closely as they attempt to grow within China and India and as they meet new competitors from both countries in global markets.

There’s no formula for creativity and risk taking but there are conditions that encourage those traits. Many of those conditions are present today in China and India. Start with the basics. When an economy is growing at 8, 10, or even 12 percent a year, the environment for risk taking becomes much more forgiving. Even a moderately good innovation can succeed simply by rising with the tide. For innovations that need scale to pay off, there are few better places than China or India, with their immense populations. New services for mobile phones, for instance, can reach 100 million subscribers within a couple of years. As a result, even lower-margin businesses can generate returns on innovation that exceed those of companies in more developed midsize economies.

Then there’s the talent issue. Education levels are rising in both countries. China and India have world-class technical universities and produce a steady flow of talent at the top of the world’s academic pyramid. In addition, both cultures reward entrepreneurial risk taking. Innovators in China and India resemble first-generation immigrants to the United States or Europe in their drive and desire to succeed. Their commitment and focus on business execution make them notable entrepreneurs on the global stage. It helps that both China and India allow successful people to retain much of the wealth they create, though both governments expect contributions back to broader society from those who become millionaires or even billionaires.

Getting funds to entrepreneurs can still be difficult. China is rich in capital, and larger enterprises have ready access to the banking system. Start-ups can often tap networks of family and friends. The problem is midsize companies, which often need to finance themselves because they fall between the banks and family networks. In India, such self-funding is critical because the pool of domestic capital is smaller. Such constraints do have the benefit of seeding innovations that can flourish where capital is limited.

Similarly, the fact that the masses have some spending power, but not a lot, is actually a spur to new forms of innovation. Extracting revenues from the hundreds of millions in the emerging middle classes of China and India doesn’t work using business models imported from developed markets—the built-in costs are just too high. So flexible local entrepreneurs are creating new models that bake in low-income levels. ICICI Bank is a good example. Making intensive use of technology, it has created a banking model with capital outlays that are one-tenth those of banks in the developed world. ICICI reaches deeply into India’s rural areas using mobile ATMs and simplified Internet banking. It runs a booming and profitable business in remittances at fee levels that undercut Western Union by 70 percent. Health Management Research Institute (HMRI), meanwhile, uses technology to revolutionize medical services. Paramedics rove through rural areas in vans coordinated by GPS. Routine ailments can be efficiently diagnosed with the help of algorithms; more difficult diagnoses can be provided by remote medical experts via a video kiosk in each van. HMRI can already serve over 50 million patients.

Activist government policies give a boost to innovators as well. China selects and invests in what it believes are next-generation sectors—biotechnology, electric vehicles, and clean energy. These are markets where China’s domestic demand could lead the world. The government’s goal is to accelerate the market’s development and nurture national champions. In telecom, where the Chinese market is already one of the world’s largest, the government is encouraging national standards that it hopes will eventually define the global industry. Chinese entrepreneurs have set up a range of mobile services, including a homegrown GPS network and a digital TV service with enough heft to begin competing in European and US markets.

At present, neither India nor China has strong safeguards on intellectual property, though as the ranks of technology entrepreneurs grow, there are signs of improvement. Again, this apparent deficiency has been something of a plus, as it has skewed innovation toward business models that are protected through superior, faster execution rather than patents and licensing fees. The Chinese company Alibaba, for example, combines technology with cheap labor to help its customers—local midsize enterprises—tap international clients. Alibaba moved fast and early to build online services that have kept it ahead of international competitors.

There are lessons here for multinationals. These innovations are by no means limited to Chinese and Indian entrepreneurs and markets. Outsiders can study these models and transform their own innovation efforts. That’s a good reason to set up a “second home” in China or India. And these innovations won’t remain confined to those countries—many are applicable to the developed world, where there is plenty of demand for cheaper products and services.

Can India and China sustain this pace and eventually move to the next level of technological innovation? Absolutely. The talent is there, as are capital and effective government encouragement. With stronger protection and rewards for intellectual property—a likely development as international companies begin to license technology from Indian and Chinese entrepreneurs—the stage will be set for the next step forward.

Comment [9]

Agree? Disagree? Let us know what you think. Please include your full name with your comment. Comments may be edited.

With a core Indian cultural and educational DNA ( Bachelors in Engineering & MBA) , but having worked overseas last 11 years …last 3 of them of them in China, let me add my 2 cents.

China has significant advantages over India in becoming a Innovation hothouse. 3 factors (one of which was touched upon in the article).

- Cultural diversity : Brilliant People from all over the world are not flocking to Mumbai or Bangalore the way they are to Shanghai. A wide variety of talented ( i.e experienced technically as well as commercially & managerially) people are now based in China and are developing or thinking of different kinds of Innovations, which will first prove themselves as viable propositions in China and then might potential disrupt the value equation in more developed markets.

The role hard and soft ( security, leisure options) infrastructure plays in attracting a diverse cultural mix is not to be under-estimated. India is behind on both fronts.

- Technological advancement : The penetration of technology in daily life across all strata of society is much deeper in China than it is India. Much higher literacy is perhaps translating into a higher comfort with using technology/net. This provides the much needed scale to commercialise innovations.

- Design & creative environment : The overall “design & creative” scene is also much more evolved and has deeper penetration in China than India. This is a useful and needed layer on top of technological innovation, as it can provide the foundation for “branding & communication” skills. A basic aesthetic sensibility and a recognition of “design” as a driving force is still lacking in India.

Educational infrastructure, funding/capital access , policy support IP protection will never be perfect or at the same level as West in these 2 countries, even in mid-term.

But both countries have “natural enterprise & ingenuity” in their cultural DNA which cannot be dulled by a “learn by rote” academic system. Pvt enterprises are stepping up to fill the gaps in educational system and the extensive immigrant community is now “giving back” via venture and angel investing.

Posted 13 August 2009, 01:27 by asit gupta
I tend to support earlier observations by Wei Zhao.

China in particular has vast potential with a rapidly growing pool of highly educated citizens. Many educated in the theoretical sense with a need to shift from theory to ground level reality in order to increase velocity around innovation.

It’s also appropriate to note that the country is experiencing a rapid paradighm shift from central government guidance in terms of operational behavior (within a business) to a more market based view as would be seen in western and certain eastern countries.

As the shift continues to gain momentum and education levels continue to rise, innovation will become more readily apparent, obvious and widespread. Innovation that will certainly contribute to safety, environmental protection and productivity improvement.

Posted 16 July 2009, 16:50 by Randall Miller
This article would make many Indians happy, BUT …

NUMBERS like “growth rate” are certainly impressive, but I’m not sure if they will translate to innovations. For example, while India produces huge NUMBERS of science and engineering grads every year, there are very few world-level contributions to fundamental science or in terms of new-to-the-world inventions.

A fundamental reason, based on my India-based experience as an innovator and change leader, is we do not have a CULTURE of innovation.

While “innovation” is a term used rampantly in corporate India today, few companies really mean it. Corporate managers are not “trained” to spot or reward innovators. Often, the agenda for in-house innovation champions or groups is simply to be a trend-watcher and a trainer. At a 2-day Innovation event I attended last year in India, some of the best presentations were not really about true innovations — rather they were about progress made in the country in terms of better transport system, etc. Having taken courses both in India and the US, I would say that the education system is one of the biggest challenges in India — the typical student’s target is merely to score high marks that would get them jobs or admission to higher courses.

So, as the author says, several factors are certainly in place, but for his predictions to come true, CULTURE needs an overhaul.

Posted 14 July 2009, 08:29 by Pradeep Henry
I think this is an unduly optimistic article. I can speak of India only. The poverty alleviation is showing no signs of improvement. The rich are getting richer, the middle classes, thanks to burgeoning salaries in the govt. sector are ‘ rich ‘, by Indian standards. Primary education is the bane, teacher abseentism, neglected schools, untrained teachers are the order of the day. If primary education is not on a sound footing, then secondary and tertiary levels cannot be strengthened. Street children, children affected by floods and ethnic/ religious violence are the areas of concern. Little or no empathy seems to be shown in this regard. There are however silent social workers and NGOs attempting to ameliorate their distress. But concerted efforts from the govt and others seem to be lacking. There is a serious paucity of inner feeling and empathy.
That is not to detract the true insights that the article has made. Yes banks are penetrating rural areas and are using telephony and the mobiles, just as the govt is for development. This is correct. Added to this are organisations with a social cause. True also that the mobile has become accessible. But it is a pyramidical structure with the base, in terms of poverty , illiteracy and dogmatism which is simply not rising to the ‘ top ‘ of the pyramid. Those safely ensconced on it are secure and further climbing the rungs of the social ladder so to speak. And mind you the problems of militancy and separatism seem insoluble especially in Kashmir and in the North East.
So two cheers for ‘ progress ‘ not three!

Posted 8 June 2009, 13:42 by Ananya S Guha
Innovation and flexibility are the twin virtues which can enhance the reach of the organisations in low income sections of India or China.I wish to cite a very convincing example of Indira Gandhi National Open University (http://www.ignou.ac.in/)which has demonstrated the immence power of innovation to drive growth .Any body who is familiar about higher education set up of India can understand the constraints in reaching out to people .However this University which started it’s work with just 5000 students in 1987 has presently about 20,000,00 students on it’s rolls.

Posted 6 June 2009, 02:19 by Umesh Chandra Pandey
I’d like to talk a bit about China, since I am not qualified to comment on India:

If we approach the innovation capacity of China from a macro level (national innovation system, innovation institutions, S&T statistics, etc.) we see evident advance. These things are well showed by the article. But these are only ‘potentials’ of innovation, or even the fragmented elements of innovation.

Innovation is fundamentally a process at micro level happening with firms. So during the past more than 10 years we visited large amount of firms in China, and inquired inside their projects, since innovation is normally the outcome of the execution of those projects. We don’t find good, extrodinary outcomes of the projects. At the projet level (which often of course links different entities such as universities, technical centers, govts., suppliers), the main effort is technological learning, instead of innovation. You have time to time the grand programmes announced by govt. (often by central govt.), but then these programmes are assimilated at micro-level by technological learning (from importing machines, to negotiating a license). I can bet here that Chinese firms (economic actors) bearly know how to develop real innovation PROJECTS, especially when most of firms don’t kown how to master the market. Few of them are exceptions, but most of them know only follow very well their clients (foreign companies) or just closed their eyes and get huge public investment in technology development, without knowing who and why will buy the outcome in the future.

So the country has innovation potential, but the people just don’t know how to turn the potential in reality.

Posted 29 April 2009, 10:21 by Wei ZHAO
Regarding China, I would argue that the impact will be even farther reaching:

- the whole country although heavily developed in low-cost production, is on the juncture to high-tech/innovation-led phase of development (like Japan 60’s) + start up phase of internationalization – huge home market permitted the creation of giants, and now these, in each industrial sectors (from pharma, telecom, banking/insurange, retailing, sportwares, shipping, etc, etc…) are gaining momentum in the Fortune 500 – like the US in 1870-1930, China is emerging as the next industrial superpower…only on a larger scale

Missed point: – as the locus of innovation, industrial/financial power moves, so does the center of cultural innovation and creation….the coming 100 years will be global but also chinese in spirit…from moving, music, pop-art, publicity, fashion to trends…

This tsunami cannot be opposed, it needs only to be embraced !
It really is an exciting new era !

Posted 17 March 2009, 17:58 by F Duchastel
I perfectly agree with Gordon. Very well thought and much appreciated. But there are few important points that the author seems to have missed. Most importantly education system, culture and public-private partnership. My points are more targeted towards India and less towards China though applicable at both to varying extent.

EDUCATION
After myself experiencing (Technical Grad from Punjab Engineering College, India, MBA from Oxford University UK and work experience in US) the differences in the education systems of various parts of the world, I feel that I have at least something to share. Though there are lot of world class technical universities but there is a severe lack of uniformity across institutions in terms of infrastructure and culture. Some top institutes such as IITs have excellent infrastructure but second and third tier institutes are still struggling to acquire the infrastructure beyond teh very basic. The culture at the institutes is also vary a lot. Students generally (with few exceptions) are not driven by the impact they are going to create but by the fat salaries they are going to get.

SOCIAL CULTURE
I disagree with the author that the social culture embraces innovation and risk taking in India. Because before 1991 (When India came out of “license raj” – “rule of licenses) people were mostly interested in the government jobs that posses lowest risks. Though this philosophy is changing but still very deep rooted. The lack of any social safety net is also a key hindrance in risk taking that is essential in promoting innovation apart from other factors such as IP protection.

PPP
Another factor that I believe is also missing in the public-private partnership. Some of the companies like Infosys, TCS, Reliance, Bharti etc are emerging as the key drivers of this trend but there is a long way to go. This lack is biting most in the education , R&D and “innovation funding”. Neither the institutes (Except very few) are funded by the private companies nor the government is promoting such activity through tax breaks etc. So it should be a collaborative effort of the institutes, multinationals and government to foster the innovation culture.

Posted 4 March 2009, 15:27 by Parmender Dahiya
The article highlights key aspects those will govern the pace of innovation in China and India. There are two more issues which are equally significant here.

1. Lack of diversity and cultural fusion: various studies have indicated that cultural diversity is a key driver of innovation. Both of the countries still lack multiethnic and multicultural workforce. If observed carefully, the workforce at the bottom of the pyramid is heavily oriented towards producing output using standardized and channelized processes. In contrast, this is the workforce which has highest potential to bring breakthrough innovation due to its skills and exposure directly to the products, customers and business contexts.

2. Shortfall of research and educational infrastructure: The industries and technologies in areas such as manufacturing, chemical, pharmaceutical and hi-tech need exceptional research capabilities and new ideas as a result. As indicated by Prabhakar Raghavan – head of Yahoo! Research, in his article on Forbes.com, the quality of graduate research in India lags significantly behind the U.S. and Europe, with a few rare exceptions. Perhaps it is also true with China.

Multinationals, universities and governments all together needs to take responsible role to foster the innovation culture. The model developed by Hong Kong government to promote innovation in the business culture could be taken as an example and further adopted by both of the countries – China and India.

Posted 3 March 2009, 21:09 by Vishwanath Desai

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