India: Emerging R&D Hub
ADITYA SHASTRI & IPSHITA BANSAL Banasthali Vidyapith, P.O. Banasthali Vidyapith- 304022(Rajasthan), India. {adityashastri@yahoo.com; ibansalindia@yahoo.co.in}
Abstract India is fast emerging as global R&D hub. The advent of internet and communication technology were motivated to provide across the globe access to western products, but as it turned out it led to outsourcing of services. Riding on the success of BPO industry, India is constantly striving hard to achieve higher value addition in the services and one can observe a distinct trend whereby leading multi-nationals are carrying out their research activities in India. In this paper, we review the current scenario and the potential ahead for India as emerging R&D hub.
India is fast emerging as global R&D hub. The advent of internet and communication technology were motivated to provide across the globe access to western products, but as it turned out it led to outsourcing of services. Riding on the success of BPO industry, India is constantly striving hard to achieve higher value addition in the services and one can observe a distinct trend whereby leading multi-nationals are largely carrying out their research activities in India. In what follows, we shall analyze the current scenario and the potential ahead for India as emerging R&D hub. 1. IT, BPO and New Found Identity There is no denying the fact that the success of IT industry is behind the new found global identity of India. The Economic, Intellectual and Cultural superpower that India was once upon a time lost much if its glitter due to foreign invasions. Things became even worse when India missed the bus during the days of industrial revolution. It is only during the last decade or so that the economies around the world started revolving around service industries. First NASSCOM-McKinsey report came in 1998 and projected a total IT exports from India of more than US$ 80 million by 2008! These figures were under-achieved due to dot.com-bubble-burst, but BPO industry more than made up for the shortfall. The BPO industry is continuously striving for higher value addition and slowly all IT multi-nationals started setting up their R&D centres in India led by IBM who set up IRL within IIT-Delhi premises about a decade back. This was soon follows by Intel, Motorola, Microsoft and many other setting up large bases in India. It is a matter of pride for India the identity its IT industry has been able to create worldwide whereby Indian are typically perceived as high profile technocrats. 2. Overall Scenario across all Sectors India's progress and achievements in the field of science and technology vary in different sectors. In areas such as Space Science, Information Technology and Bio Technology, India is seen by the global community as an emerging R&D hub. The standard and quality of basic research as reflected by research papers published in SCI journals has been increasing in absolute terms over the past 25 years from 14983 in 1980 to 19448 in 2005.
However the share of India as percentage of world publications declined from 2.9% in 1980 to 1.5% in 1995 and then gradually increased to 1.9% in 2005. One of the parameters measured in global science and technology for assessing the quality of publications is the average impact factor per publication. This has registered an increase from 0.748 in 198586 to 1.229 in 2001-02. Its share of top 1% highly cited publications also increased from 0.32 in 1993-97 to 0.54 in 1997-2001. Even the number of US patents granted to Indian inventors has been increasing- from 88 in 2000-01 to 229 in 2004-05. While it's still relatively early in the movement of R&D to India, experts predict big gains ahead because the next big technological innovations could emerge from India, China or Russia, far away from the Silicon Valley. Rafiq Dossani, a senior research scholar at the Stanford University Institute for International Studies, said R&D is simply following the movement of information technology work to India. "You can see it happening as the US information technology giants come to India," Dossani asid. Most US companies use R&D in India to create products that are largely exported to the world. A communications chip designed in India can wind up anywhere. In contrast, R&D in China is primarily designed to create products to sell locally. For instance, Intel's R&D centers in China are focused on speech recognition software and designing hardware that can recognise the characters in the Chinese language. Some examples of how research and development facilities in India are being sought after could be gauged by Motorola's two such facilities in India that has helped produce a sub$40 cellular phone for the emerging markets. Microsoft in January launched its third international research center in India. Intel has 800 India-based engineers working on software and hardware designs for its communication and semiconductor product lines. Other US companies are designing everything from auto parts to consumer electronics in India through outsourcing or setting up their own facilities in Bangalore. After a new product is introduced in the West, it is continuously innovated upon to bring down the price till it is widely affordable. Beyond this, there is little motivation to further bring down the price. All innovations thereafter are geared to improve features while the price is kept constant. Unfortunately, this affordable price level in the West is affordable to only the top few percent of the population in a country like India. To make it affordable to a larger cross-section, innovations different from those pursued in the West are required. The price of the product has to be brought down to a third or a fourth (in the process changing the shape of the product itself) of its price in the West to make it affordable to even 20% of the Indian population. However, 20% of the Indian population is a large market, equal in size to the West, and can fuel unprecedented growth. As the United States and Europe are moving research and development (R&D) operations to India, hopes are high that this could turn the country into a virtual R&D powerhouse These companies have realised that Although the movement of global R&D into India is still in early stages, but it will expand over time. Indian firms are starting to realise that they must become innovators. Their capital outlays are lower than those of their counterparts in the US, but that also makes them more selective about choosing projects. 3. Pharma Sector and CRO India is also gearing to become a large pharmaceutical research and development (R&D) destination with multi national companies realizing that, India is not just a location where clinical trials can be conducted, basic research can also be done there. All the leading pharmaceutical companies have set up research operations in India.
Multinational companies such as Merck and Eli Lilly are moving projects to India related to oncology, diabetes, mental health, cinical studies etc. Domestic companies such as GVK Biosciences and Jubilant Organosys investing in providing related services. Speaking to Business Line on the sidelines of the World Economic Forum, D.S. Brar, Chairman, GVK Biosciences, said: "We are providing R&D services to 20 pharma and seven biotech companies. We have already set up pharma KPO (knowledge process outsourcing) centres in Chennai and Delhi. In future, we could enter into collaborations with other companies in drug discovery on a risk-reward sharing arrangement." The company has invested about Rs 60 crore in the business and will invest an equal amount in the coming months. India is quickly becoming a global leader in new vaccine development enabled by abundant natural and human resources and a growth in collaboration between academic and research institutes.In 2002, the industry for clinical trials in India was $ 70 million. This market is growing at a rate of 20% per annum. According to experts, it will be an industry worth anywhere between $500 million to $1.5 billion by 2010. The global R&D spend is to the tune of $60 billion, of which the non-clinical segment accounts for $21bn and the clinical segment accounts for $39bn. In terms of Indian prices, this translates into $7bn (at 1/3rd of US/EU costs) and $7.8bn (at 1/5th of US/EU costs) respectively. This constitutes a total potential of $14.8bn for the Indian pharma companies. Clinical traits ought to be cheaper and faster than those in western markets as control research organization can hire researchers, nurses and computer staff at less than a third of western wages. Many global pharmaceutical majors are looking to outsource manufacturing from Indian companies, which enjoy much lower costs (both capital and recurring) than their western counterparts. Many Indian companies have made their plants cGMP compliant and India is also having the largest number of USFDA-approved plants outside USA. The Pharma companies are going for compliance with International regulatory agencies like USFDA, MCC etc. for their manufacturing facilities. Indian companies are proving to be better at developing APIs than their competitors from target markets and that too with non-infringing processes. Indian drugs are either entering in to strategic alliances with large generic companies in the world of off-patent molecules or entering in to contract manufacturing agreements with innovator companies for supplying complex under-patent molecules. Some of the companies like Dishman Pharma, Divis Labs and Matrix Labs have been undertaking contract jobs for MNCs in the US and Europe. Even Shasun Chemicals, Strides Arcolabs, Jubilant Organosys, Orchid Pharmaceuticals and many other large Indian companies started undertaking contract manufacturing of APIs as part of their additional revenue stream. Top MNCs like Pfizer, Merck, GSK, Sanofi Aventis, Novartis, Teva etc. are largely depending on Indian companies for many of their APIs and intermediates. The Boston Consulting Group estimated that the contract manufacturing market for global companies in India would touch $900 million by 2010. Industry estimates suggest that the Indian companies bagged manufacturing contracts worth $75 million in 2004. Large number of drugs going off patent in Europe and in the US between 2005 to 2009 (approx. $80 billion) offers a big opportunity for the Indian companies to capture this market. Since generic drugs are commodities by nature, Indian producers have the competitive advantage, as they are the lowest cost producers of drugs in the world. Clinical development cost are estimated at 40-60% less than in the west.
The R&D expenditure in the industry is projected to reach Rs 1,500 crore by 2010 from Rs 220 crore in 1997-98. Many pharma companies in India are spending over 8% of their revenues in R&D. Custom synthesis, medicinal chemistry and clinical studies remain the primary focus in the R&D area. New drug discovery research can be conducted in India at a cheaper rate. A case in point which can be mentioned here is Eli Lily, which conducts clinical trials in India at a large scale. Biotech in India accounted for almost 2% of the global biotech market in 2003. Over the next five years it is estimated to capture 10% of the global market. The biotech research plan outlay which was only Rs 6.2 billion in the ninth five-year plan has been doubled to Rs 14.5 billion in the tenth-plan. Indian biotech R&D market is slated to touch $3 billion by 2010. Companies like Biocon, Shantha Biotechniques, Avesthagen Gengraine, Panacea Biotech, Nicholas Piramal and Reametrix are making a global name for themselves. Sensing the opportunity, India’s largest company, Reliance has also jumped onto the Biotech R&D bandwagon with its $25 million project - Reliance Life Sciences. 4. More on IT and ITES All this has been facilitated by fast growth of IT industry in India. The software and ITES exports from India grew from US$12.9 billion in the year US$ 17.7 billion in 2004-2005. Strong demand over the past few years has placed India amongst the fastest growing IT markets in the Asia- Pacific region. Strong demand over the past few years has placed the India amongst the fastest growing IT markets in the Asia-Pacific region. The Indian software and ITES industry has grown at a CAGR of 28 percent during the last five years. The industry's contribution to the national GDP has risen from 1.2 percent to a projected 4.8 percent during 2005-06. Recognizing the advantages of multi-country service delivery capabilities to better manage evolving customer requirements and execute end-to-end delivery of some new services, Indian companies are enhancing their global service delivery capabilities through a combination of Greenfield initiative, cross-border M&A, partnerships and alliances with local players. Global software product giants such as Microsoft, Oracle, SAP, etc., have established their captive development centres in India. The total number of IT and ITES- BPO professionals employed in India is estimated to have grown from 284,000 in 1999-2000 to 1,287,000 in 2005-06, growing by 230,000 in the last year alone. In addition, Indian IT - ITES is estimated to have helped create an additional 3 million job opportunities through indirect and induced employment. Export target for IT products and services of $50 billion a year, making India the number one IT design centre, and the number one provider of IT products, are indeed goals to cherish. Before commenting on what needs to be done to move towards such goals and to discuss whether the IT report points in the right direction, let us take a brief look at where we are today.The production and growth trends during the last five years have been as follows: Year 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 Production (Rs. Crore) 68,850 80,124 97,000 118,290 152,420 185,660 Growth (Percentage) 31.3 16.4 21.1 18.2 28.8 21.8
According the data from ministry of communication and information technology, the ITES-BPO industry has grown by about 54 per cent with export earnings of US$ 3.6 billion during 2003-04. Output of the Indian electronics and IT industry is estimated to have grown by 18.2 per cent to Rs.1,14,650 crore in 2003-04. The share of hardware and non-software services in the IT sector has declined consistently every year in the recent past. The share of software services in electronics and IT sector has gone up from 38.7 per cent in 1998-99 to 61.8 percent in 2003-04. However, there has been some welcome acceleration in the hardware sector with a sharp deceleration in the rate of decline of hardware's share in electronics and IT industry. Output of computers in value terms, for example, increased by 36.0, 19.7 and 57.6 percent in 2000-01, 2002-03, and 2003-04, respectively. All the sub-sectors of the non-software component of electronic and IT industry grew at over 8 per cent in 2003-04, but this was far below the rate of growth of software services. Overall, after declining precipitously from 61.4 per cent in 1998-99 to 40.9 percent in 2001-02, the share of hardware in this important industry declined only marginally to 38.2 percent in the two subsequent years. Export markets continue to dominate the domestic segment. The size of the domestic market in software relative to the export markets for Indian software, which was 45.2 percent in 1998- 99, after declining rapidly to 29.8 percent in 2001-02, fell only to 29.1 percent and 27.7 per cent in the two subsequent years. Value of software and services export is estimated to have increased by 30 percent to US$12.5 billion in 2003-04. The Software Technology Parks of India have reported software exports of Rs. 31,578 crore (US$ 6,947 million) during April - December 200405 as against Rs. 22,678 crore (US$ 4,913) during the corresponding period last year. The annual growth rate of India's software exports has been consistently over 50 percent since 1991. No other Indian industry has performed so well against the global competition. The internet has wielded its magic not only as a great equilizer but also as a weaver of distant places. It has brought India closer to the rest of the world, thereby boosting it’s development efforts. As the markets the world over have grown competition has intensified and there has been increasing pressure, both in terms of pricing, in terms of hiring, developing and retaining skilled staff and in offering a differentiated set of services. This has helped contribute towards the growth of international service providers that have grown from their bases in the dominant U.S. market and, to a lesser extent, Western Europe. Initially, growth in the Indian BPO market was characterized by the setting up of joint ventures between local partners and Western counterparts, usually to serve the needs of the Western partner. Over time, many of these have expanded to address the broader market opportunity and they have been added to by local start-ups encouraged by the success of the first wave of service providers and by the availability of venture capital. By 2008-09 outsourcing will provide 1100000 employment opportunities and revenues of about 18,617$ million. 5. Knowledge Process Outsourcing(KPO) An offshoot of BPO is KPO -- knowledge process outsourcing. Considered by some to be a subset of BPO, KPO includes those activities that require greater skill, knowledge, education and expertise to handle. For example, whereas an insurance company might outsource data entry of its claims forms as part of a BPO initiative, it may also choose to
use a KPO service provider to evaluate new insurance applications based on a set of criteria or business rules; this work would require the efforts of a more knowledgeable set of workers than the data entry would. The current definition of KPO encompasses R&D, product development and legal e-discovery, as well as a number of other business functions. KPO helps companies to create huge business opportunities. Many new business concepts coming day by day in Knowledge Prgement tool for decade. One can safely say outsourcing has evolved:
1960's - time-sharing 1970's - parts of IT operations 1980's - entire IT operations 1990's - alliances/tie-ups 2000's - IT-enabled services
According to a study by Evalueserve (EVS) the entire KPO industry, of which analytics is a part will be worth $12 billion in 2010. In contrast the BPO industry will touch $40 billion. 6. Driving Forces behind Brand India as R&D Hub 6.1 Rich Talent Pool: A population with good computer skills and English-speaking capabilities—among the highest in the world. This can be attributed to the importance of education in Indian families. More than 2 million graduates, including over 20 per cent engineers, annually. More than 0.3 million postgraduates passing out every year. 6.2 Employment opportunities: Higher unemployment in India further lowers attrition rates to as low as 1:7 in comparison to developed countries. Curtailing operational expense is a primary concern to making processes profitable. This positive cost differential advantage always lures the corporate sector into outsourcing business processes in India. Cost of non-technical manpower in a developed country, which is around $2500to $3000, could be reduced to as low as 10 per cent, that is, $200 to $300, in India. Outsourcing to India thus saves cost directly. 6.3 Technological Competency: Earlier the technology gap has been identified and abridged at a faster pace. Now the technology adopted in India is equally competitive to global standards. Mention may be made of the banking and, insurance sector, CRM, HR and software development, and to an extent even manufacturing in this regard. All these higher end technological developments can be attributed to development in the IT and telecom sectors. India administers one of the largest telecom networks in Asia
with 24.3 million telephone lines expanding @ more than 20%per annum and 123,000 route kilometers of fiber optic cable network. Over 8000VSAT’s are installed all over the country by various service providers, private users and Government agencies. Technological advancement in India has witnessed rapid progress in last decade mainly due to privatization or reducing governmental control. This state-of-the-art technology has enabled India to improve the quality of service at a reasonably reduced cost. 6.4 Cheap labor cost: Low labor cost, its lesser by 30-35% as compared to its competitors. The cost of qualified personnel being lower in India than the western countries is attracting several offshore partners to make investments in India. India ranks high in areas such as qualifications, capabilities, quality of work, linguistic capabilities and work ethics.Their rich managerial experience controls and ensures higher productivity. Apart from big corporates, there are other companies established by professionals and backed by venture capitalists like Customer@asset.com and www.24/7customer.com.Further, low cost of educated workforce increases profitability of the project. World Bank funded survey in the US confirmed that vendors have rated India as their No. 1 choice for outsourcing as compared to its other counterparts. 6.5 Quick turnaround time: The time zone difference between India and US is used to advantage for providing quick turnaround time. India's unique geographic positioning makes this possible. While the US sleeps, India works. This effectively gives a 24 hr working environment. 6.6 Highly cost efficient as compared to Western countries: By outsourcing to India an organization can save as much as 40-50% percent of costs compared to what it would cost in the western countries thus allowing an organization a great competitive edge. 6.7. Better track record on Information Security: India's record on information security ranks better than most locations. The authorities in India are maintaining a keen emphasis on further strengthening the information security environment in the country. Specific initiatives underway include enhancing the legal framework through proposed amendments to the IT Act 2000, increasing interaction between industry players and enforcement agencies to help create greater awareness about information security issues and facilitate mutual support. A majority of companies in India have already aligned their internal processes and practices to international standards such as ISO, CMM, six sigma, etc., which has helped to establish India as a credible sourcing destination. As of December 2005, over 400 Indian companies had acquired quality certifications with 82 companies certified as SEI CMM Level 5- higher than any other country in the field. 6.8 Government support: The Indian government and various state governments have initiated several steps to promote India as a major destination for companies worldwide. These include a proposal to set up an 'India Brand Marketing Fund', the creation of infrastructure in various parts of the country. The Government of India, on its part, has taken a number of steps to rejuvenate and promote scientific research in universities and other scientific institutes of excellence. The Plan Allocation of scientific departments has been doubled from about Rs.12000 crore in the IX Plan to about Rs.25000 crore in the X Plan. XIth plan programme for science & technology seeks significant increase in the budget outlay. The Research Infrastructure programme of DST is a targeted programme to upgrade the laboratory infrastructure in universities and other higher educational institutions. Several institutions, centres of excellence and facilities in emerging and frontline areas have also been established; for example, in the areas of Brain Research, Marine Biotechnology, Stem Cell and Tissue Engineering, Soft Computing, Water Resources Development, Nanophosphors,
Display Technology, Fuel Cell Technology, Ultrafast Processes, Protein Research, etc. More recently, two new Indian Institutes of Science Education and Research (IISERs) have been set up at Kolkata and Pune which, apart from carrying out frontline and internationally competitive research, would offer M.Sc. programmes in a multidisciplinary and academically flexible and research-oriented environment. Various agencies of Government of India have now attractive scholarship, fellowship and research support schemes for scientific manpower of all ages starting right from the school level. 7. Restraining Forces 7.1 Feeble Infrastructure: Despite of more than five decades of independence, India’s reliability is at stake especially in segments like power and telecom, thanks to halfhearted bureaucratic measures. Any company intending to have a base in India has to provide for an alternative source of power generation in case of power failure and scheduled power cuts. This increases the cost of production. Even the cost of communication in India is comparatively dearer than other neighboring or competing countries, which accounts for their garnering a number of orders instead of India. 7.2 Cultural Diversity: The productivity of India was never questioned, but cultural diversity pose questions due to the number of festival holidays. The corporate clock ticks 24×7;in fact, it never stops. In India festivals or other occasions affect regularity, resulting in absenteeism and in turn hamper productivity. Festivals are not restricted to specific periods, but fall throughout the year. In case of other competing countries with single cultural identities, there are few festivals in a year and that too seasonal .In India organizations hire extra manpower to manage work in case of festival induced absenteeism. Though absenteeism is temporary in nature, the cost of extra manpower is permanent. That in turn reduces productivity per person. 7.3 Legal Lacuna: Security of information and data is the prime concern for companies before outsourcing their business processes. India has still not taken major initiative towards data protection and privacy, especially for cyber crimes. Legal control on e-practice is still in its nascent stage. MNCs have security concerns regarding their data. In fact, it is the most important consideration that determines the destination of a BPO. Company’s like Progeon and, Spectra mind sign non disclosure agreements with their workers, but it is still a concern for the country as a whole that it is yet to meet customer expectations for security. 7.4 Competition: Earlier, the Philippines, Ireland, Malaysia and a other few countries were competing where India had quite a sustainable strategic advantage. Now other countries like China have emerged as strong competitors. At the moment language is one positive factor benefiting India, but gradually China is trying to overcome that shortcoming by adopting international languages like English as mode of their global business 8. India vis-à-vis China The reasons for Chinese competitive advantage are: The electricity costs are lower in China as compared to India. The power costs range from Rs.1.50 to 2.50 per KWH as against Indian cost of Rs.4.5 to 6.0 per KWH. The Chinese workers cost 15% less than equally qualified Indians More favourable labour policies like policy of hire and fire in China. On the whole China is more cost competitive in manufacturing sector.
China has already implemented clear intellectual property laws and data exclusivity rules that take it one step ahead of India in attracting foreign players. In 1992, a pact was signed with US, which heralded the Product patent regime coming in force in China. China has established a large number of profit oriented research and development institutions, which are today independent of government funding in contrast to institutions in India, which are mostly dependant on government funding. The Chinese government provides an income tax holiday of 100 per cent for the first two winning years (profit making years) and 50 per cent for the next three years. The companies are also allowed duty free import of capital equipment. Lower turnaround time for ships at Chinese ports make it conducive as a base for exports. 9. Challenges Ahead
Saikat Chaudhuri, a Management Professor at Wharton, believes India faces three crucial challenges as it strives to become a global R&D player. The first impediment, which is steadily improving, is the intellectual property regime, or perhaps its perception," he says. The second challenge, according to Chaudhuri, is the brain drain. "Even though this has come down substantially (only 30 per cent of IIT graduates now leave India, vs 70 per cent earlier) and we see many reverse brain-drain cases, the fact remains that the very best people often choose to stay abroad, because they perceive opportunities in India at the highest levels of research not to be on par with the West (for example, being a professor at IIT is still not the same as being one at MIT). The third obstacle, said Chaudhuri is the lower levels of basic research. "This can be achieved by investing in R&D facilities and improving the research atmosphere in Indian universities," he added. "While there is a set of top universities that teach and research well, it is not sufficient for a country of India's size. Many other universities teach well, but are not sufficiently motivated to pursue top research. Even the Indian Institutes of Management suffer from this problem today. Funding and policy changes would be required to effect a change here," he said. Other countries like China and South Korea, however, have progressed much faster. South Korea and China received private sector contribution to the tune of 60-65% of the total outlay for R&D. Public-Private-Partnership in R&D support in S. Korea and China is significant. In India, private sector contribution to overall R&D outlay is only to the tune of 25% of the total outlay. The number of scientists per thousand population in China is about 6 times that of India. Therefore, China may have higher quantum of papers but India does not suffer from quality shortfalls. While centrally funded research institutions and some central universities are doing internationally competitive research, state of research in most other universities is highly unsatisfactory. Universities are the mainstay of scientific research all over the world, but, in our country, universities have been suffering because of a variety of financial and governance problems leading to, among other things, depletion of faculty, impoverishment of research infrastructure and lack of opportunities for the faculty for updating their knowledge. Most universities fall in the domain of State Governments and they need to address the problems urgently. Among other things, there is a need to increase the funding for research and teaching in educational institutions.