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  • Crouching Tiger, Hidden Dragon

    The reports of the death of globalization have been greatly exaggerated, if investing trends in venture capital qualify as a compass for the future. According to a survey released June 10 by the U.S.-based National Venture Capital Association, half of the venture capitalists said they would increase investments in China and other Asian countries over the next three years, while 43% of those surveyed said they would invest more in India. (see the survey here)

    Just 17% said North America would see more VC investment. A large number of VCs also expect an upswing in venture fund backers, usually financial institutions and wealthy individuals, coming from abroad. The overarching trend is clearly towards global investing.

    Perhaps reflecting how the rest of the world views Asia, the survey has interesting choice architecture: India has been given a separate standing, while China and the rest of Asia are lumped together. It could have been the other way round, but isn’t. Putting aside compelling arguments derived from history and culture, the distinction also reflects the different economic growth models adopted by India on one side and the Asian tigers and China on the other.

    Since Deng Xiaoping ushered in socialism with Chinese characteristics, Asia’s dragon has established itself as the epicenter of global manufacturing, winning accolades for its efficient factories and seamless infrastructure. In the 1980s, the rise and dominance of Japan was conventional wisdom, and China didn’t really dominate the public discourse. The Chinese state, rather than the citizenry, has catalyzed this transformation, driven by massive public investment.

    India’s development has been more organic, with entrepreneurs usually growing their businesses despite the government rather than because of it. The founder-CEO of a leading India-based power equipment manufacturer once recounted to me how the government hindered his business and powerful bureaucrats extracted rents every step of the way, from the stage where the product left the factory in trucks to the point where it was loaded into containers at ports. The process made a business manager a “pehelwan” or a strong wrestler able to deal with any eventuality, he said. In China, he added, the government assists rather than hinders enterprise.

    Indian entrepreneurs have to beat their competitors and deal with a government that is not the most enterprise-friendly. In an almost Hayekian way, some of India’s self-created barriers to entrepreneurship have made Indians entrepreneurs that much more hardy and competitive, mirroring the aspirational urge of India’s people.

    Besides offering a large labor force of English-speaking people and a democratic system, India is also far more capital efficient than China. Since the early 1990s, India has invested about 25% of GDP and obtained an average GDP growth rate of about 6%, while China has invested over 50% of GDP and obtained an average growth rate of 9%.

    India is a better capital allocator, requiring four units of capital to generate one unit of output, while China consumes about 5 units of capital to generate 1 unit of output. As economist Niranjan Rajadhyaksha puts it, capital efficiency is the reason why India has “few good roads but many world-class companies.”

    For investors, return on invested capital is the metric to watch, and India widely outperforms China on this metric. To make itself an even more attractive investment destination, India has also started taking steps to reform higher education, a key ingredient to drive economic growth through technology and innovation.

    China has invested relentlessly in education over the last three decades, and the seed for change was sown by Deng Xiaoping himself, who resumed in 1977 the Gao Kao entrance examination system suspended by Chairman Mao. University student enrollment has grown nearly 50% and the number of universities has doubled since 2002. In the meantime, India has only succeeded in creating special interest groups competing for admission into premier colleges based on identity rather than merit, and starved its citizens of world-class universities to the point that more Indian youth study abroad than any other nation.

    Education Minister Kapil Sibal has spoken at length on re-organizing the higher-education institutional framework at all levels and reducing government control on education. He sounds like he means business.

    From purely a development standpoint, India needs more investment from abroad in the form of both foreign direct investment and venture capital than China does. Global investors are eager, and Indian entrepreneurs have demonstrated that they are a cut above the rest. It’s now up to the state to ensure that it doesn’t fritter away the merit of the Indian entrepreneur.

    The crouching tiger might spring a surprise.

    Originally Published: http://navam.in/1ouVZhG

  • Harnessing India’s Technological Potential

    Over the last decade, clean technology and nanotechnology have emerged as prominent investment themes in venture capital.

    According to New York-based research firm Lux Research, venture capital investment in cleantech and nanotech has grown at about 40% annually since 1997. Rapid advances in the physical sciences and materials engineering have ushered in everything from hybrid-electric cars and lighter airplanes with substantially enhanced fuel efficiency to eco-friendly specialty chemicals and stain-resistant apparel.

    As China and India industrialize, there is a glaring need for such innovation to ensure that limited natural resources are consumed with high efficiency. Venture capitalists have a key role to play in fostering that innovation.

    VCs typically consider India to be just a technology deployment market. That view is too narrow: India has not just the entrepreneurial competence but also the scientific talent to invent and lead in science-driven innovation.

    The American model for technology commercialization has proven to be highly successful. Corporate giants such as Hewlett-Packard, Genentech and Google took root at universities.

    More recently, President Barack Obama unveiled the government’s biggest infrastructure investment plan since the creation of the U.S. highway system with energy efficiency as its cornerstone.

    Prof. C. N. R. Rao, chairman of the Prime Minister’s Scientific Advisory Council and one of India’s most distinguished scientists, has worked tirelessly for the cause of science education and research, recently obtaining a grant of over $200 million from the central government for fundamental research in materials science and nanotechnology. When I met him in July last year, he lamented the lack of enthusiasm for science and technology in India, and commended China’s nationalist zeal for building prowess in high-technology.

    There is no dearth of scientific ability in India, but Indians prefer to work in laboratories abroad thanks to the lack of cutting-edge infrastructure in their home country. What’s missing here are incentives for innovation and entrepreneurship.

    The Indian government has promoted investment in renewable energy sources such as solar and wind, and these sectors are beginning to see some traction. However, India is still way behind both the U.S. and China.

    Economist Joseph Schumpeter feted the entrepreneur as the growth-driver of an economy, the “wild spirit” who would cause creative destruction by innovation and disruption. A market-based mechanism must be adopted, but the government has a vital role to play in setting effective policies. The government should invest in basic scientific research and introduce reforms in higher education, allowing for the creation of more world-class universities.

    Culturally, Indian scientists are hesitant to partner with entrepreneurs and external investors. For some Indians, the traditional concept of education clashes with the notion of commerce. Profit is still a dirty word in India’s academic circles. This malaise is partly caused by the red tape stifling Indian educational institutions.

    Basic mechanisms for technology transfer are absent or deficient at leading Indian universities. When the appropriate systems are in place and research institutions are forthcoming, venture capitalists and entrepreneurs can license and commercialize technology, moving it from the lab to the market. Taxpayers get a return on their investment in the form of better products and increased productivity if investors and entrepreneurs are able to beat the odds and succeed.

    Otherwise, research remains research. IIT Delhi and IIT Bombay have taken the lead by establishing sophisticated infrastructure for technology transfer and venture incubation. I’ve seen technology transfer offices at some of the world’s leading universities, and the offices at these two Indian institutions are comparable to the best. Others would do well to follow their example.

    The next step should be the establishment of a national group to represent the voice of science-driven innovation, on the lines of the Indian information technology industry’s Nasscom. With prudent government policy and a thriving ecosystem, private capital can kick-start the transformation of laboratory inventions into marketable products.

    India missed the information technology and electronics manufacturing wave. If India is to transform itself from an economy driven by agriculture and services to one with high-technology industry and manufacturing as its bedrock, it should put in place effective policies to ride the new Schumpeterian wave of creative destruction driven by physical sciences-based technology.

    Originally Published – http://navam.in/1iL8eTr