December 9, 2009, NY TIMES

In India, Anxiety Over the Slow Pace of Innovation

By VIKAS BAJAJ
BANGALORE, India In the United States and Europe, people worry that their wellpaying, high-skill jobs will be, in a word, Bangalored shipped off to India. People here are also worried about the future. They fret that Bangalore, and India more broadly, will remain a low-cost satellite office of the West for the foreseeable future more Scranton, Pa., in the American television series The Office, than Silicon Valley. Even as the rest of the world has come to admire, envy and fear Indias outsourcing business and its technological prowess, many Indians are disappointed that the country has not quickly moved up to more ambitious and lucrative work from answering phones or writing software. Why, they worry, hasnt India produced a Google or an Apple? Innovation is hard to measure, but academics who study it say India has the potential to create trend-setting products but is not yet doing so. Indians are granted about half as many American patents for inventions as people and firms in Israel and China. The countrys corporate and government spending on research and development significantly lags behind that of other nations. And venture capitalists finance far fewer companies here than they do elsewhere. The same idea, if its born in Silicon Valley it goes the distance, said Nadathur S. Raghavan, a investor in start-ups and a founder of Infosys, one of Indias most successful technology companies. If its born in India it does not go the distance. Mr. Raghavan and others say India is held back by a financial system that is reluctant to invest in unproven ideas, an education system that emphasizes rote learning over problem solving, and a culture that looks down on failure and unconventional career choices. Sujai Karampuri is an Indian entrepreneur who has struggled against many of these constraints. His Bangalore-based company, Sloka Telecom, has developed award-winning radio systems that are more flexible, smaller and less expensive than equipment used by phone companies today. Mobile phone companies and larger telecommunications equipment suppliers are buying and testing his products, but he has not been able to interest Indian venture capitalists. For the last five years he has run his firm on $1 million he raised from acquaintances. I can only afford to trial with one customer at a time and that takes three months to materialize, said Mr. Karampuri, who has considered moving the company to the United States to be closer to venture capitalists who specialize in telecommunications. You are always worried about paying next months salary to people. Should you keep the money for this trial or next months salary? Companies like Sloka Telecom are important, analysts say, because they are more likely to create the next wave of jobs than large, established Indian technology companies, many of

which are experiencing slower growth. These companies could also help offset some of the outsourcing jobs the country will likely lose because of greater automation and competition from countries where costs are even lower. There are historical reasons that starting a business in India is difficult. During British rule, imperial interests dictated economic activity; after independence in 1947, central planning stifled entrepreneurship through burdensome licensing and direct state ownership of companies and banks. Businesses found that currying favor with policy makers was more important than innovating. And import restrictions made it hard to acquire machinery, parts or technology. Inventors came up with ingenious ways to overcome obstacles and scarcity a talent Indians used the Hindi word jugaad (pronounced jewgard) to describe. But the products that resulted from such improvisation were often inferior to those available outside India. We were in an economy where, forget innovation, expansion was discouraged, creating wealth was frowned upon, there was no competition to speak of, said Anand G. Mahindra, who heads the Mahindra & Mahindra business group and has spoken about the need for more innovation. Indian leaders began embracing the free market in the 1980s and stepped up the pace of change in 1991 when the country faced a financial crisis. Those changes increased economic growth and made possible the rise of technology companies like Infosys and Wipro, which focused on providing services for American and European corporations. Yet, the government still exerts significant control, especially in manufacturing, said Rishikesha T. Krishnan, a professor at the Indian Institute of Management in Bangalore. To start a services company it really takes you just two or three days to get going, said Mr. Krishnan, whose book, From Jugaad to Systematic Innovation: The Challenge for India, is to be published next year. The moment you are looking at manufacturing, there are hundreds of inspectors and regulations. Raising money is one of the biggest challenges entrepreneurs face. Venture capital funds have flocked to India in recent years, but they are more likely to invest in established businesses than young firms. In the United States, Israel and elsewhere, the initial, or seed, capital for many start-ups comes from rich individuals known as angel investors. But most rich Indians prefer to invest with family members or close friends because its considered safer and provides assurance that the lender will be able to borrow from relatives in the future. If you want to raise $3 to $4 million, its doable, said Sumir Chadha, who co-heads Sequoia Capitals Indian operations. But its difficult if you want to raise $300,000 or $400,000, a typical investment at the early stages of a companys life. When Cellworks Group, which has most of its operations in Bangalore, was looking to raise money last year, executives talked to venture capitalists here and abroad. But the company raised all of the money it needed in the United States, because most local investors did not have the expertise to evaluate the biotech firm, said Taher Abbasi, the chief executive. Cellworks has planted its corporate headquarters and a small staff near San Jose so it can be close to investors and American universities for research collaboration on cancer drugs.

To really kick off entrepreneurship without local money is very difficult, Mr. Abbasi said. Still, he said, India has its advantages. Engineers and biologists are plentiful, though they need to be trained more than their counterparts elsewhere. And operating costs are a lot lower than in the San Francisco Bay Area, which was critical more than two years ago when he and his partners started the company with their own money. There may yet be hope for Indian innovation. Some are looking to fill the venture fund vacuum. A group called Mumbai Angels holds Saturday meetings every two months at which entrepreneurs pitch ideas to affluent investors. Members of the group have invested in about 20 companies, said Prashant Choksey, a co-founder. Separately, N. R. Narayana Murthy, the chairman of Infosys, recently sold $38 million worth of shares in his company to start a new venture capital fund. Mr. Raghavan, the former Infosys executive, has invested about $100 million in start-ups like Connexios Life Sciences, which is developing drugs to treat diabetes and other diseases. Many Indian universities have also started entrepreneurship programs and classes. Vivek Wadhwa, a former technology entrepreneur who now researches innovation, said the climate for start-ups in India was a lot better than it was a few years ago. It should continue to improve, he said, in part because companies like General Electric have hired tens of thousands of engineers in India to work in research and development. Once they have been working on these projects for a few years they will outgrow the companies that they are working for, he said. They will hook up with these entrepreneurs that failed on previous start-up attempts and create new companies. Another change may augur well. Until early this decade, the Indian market was too small and isolated to make it very lucrative for businesses to develop products here, so most technology companies focused on selling services to the West, said Girish S. Paranjpe, joint chief executive of Wipros information technology business. That will change dramatically because the Indian market has become bigger, he said. In the last eight years, the size of the Indian economy has roughly doubled along with the importance of foreign trade. There could still be something to envy and fear.