The More Enduring Way To Tackle Chinese Aggression

If our neighbours-often with scarce natural resources, territorial hardships, and language barriers-could surpass us, what has stopped us, that too with several obvious advantages?
The More Enduring Way To Tackle Chinese Aggression
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Founder, Inflexion Point
7 min read
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We sign-off from Chinese apps, and even stop using ‘Made in China’ products, for a while, and then what? These are all kneejerk reactions to a more enduring concern—the loss of India’s competitiveness. How did we get to this state? First, China took over large-scale production of commodities, such as steel and cement, and then slowly they inched towards producing more value-added products, such as automobiles, laptops, mobile phones, and now they have encroached into the domains of software, services and equity funding.

It is a case of moving up the value chain, something the US bitterly saw Japan doing, and Japan saw South Korea perfecting. Within one generation, the likes of Samsung, LG, and Hyundai have emerged as leaders in their fields, leaping from good imitators to world-class innovators.

If our neighbours—often with scarce natural resources, territorial hardships, and language barriers—could surpass us, what has stopped us, that too with several obvious advantages? Instead of blaming our neighbours or adopting myopic deflection tactics, it is time for us to do some introspection, get our priorities straight, and put ourselves into the act of ‘creation’.

In this article, I offer three measures that would offer India an ensuing competitive advantage over China, and possibly other nations which might be our allies today. These measures include, firstly, upping our investment in research and development (R&D), both at an institutional and firm level; and secondly, having incentives and processes to move from imitation to innovation, and thirdly, focusing on design, engineering, and manufacturing at scale. These are not just meant for the policymakers, but also for organizations and even individuals.

Upping the ante on R&D spending

One must realize that economic power is ‘the’ power, and that’s why India must fear Chinese aggression more than that from Pakistan or any neighbour. Why couldn’t Soviets take on the Americans for long? It was the diminishing economic might of the Soviets and now the grown prowess of Chinese that the US is embracing. The so called ‘soft power’ that India wields is only a sliver on the hard power that we must learn to command. And this would come from investing in the future, moving from imitation to innovation.

For far too long, Indian companies, be it pharmaceuticals, automobile, or IT services, have enjoyed imitation. Even the WTO-TRIPS (Trade-Related Aspects of Intellectual Property Rights) could not encourage such global industries to embrace product innovation, and consequently, we are unable to command a premium on our labour or the intellectual property. This could squarely be attributed to a lack of focus on R&D.

For India, R&D spending as a percentage of the GDP stands at a mere 0.6 per cent, as against 2.15 per cent for China and 4.55 per cent for South Korea.  In 1996, we had spent 0.64 per cent of our GDP in R&D, the figure peaked at 0.86 in 2008, and has been in decline ever since. How do we plan to take over the world, if we don’t choose to invest in future? The situation on corporate front is no different. One of India’s largest employers and foreign exchange generators, the IT services industry, is not a big spender on R&D. TCS spends a mere 1.1 per cent of its revenues on R&D, as against 0.6 per cent at Infosys, and 0.7 per cent for Wipro.

For the automobile industry, the numbers are equally dismal. Hero Motor Corp spends 1.6 per cent of its revenues in R&D, 1.7 per cent for TVS Motor Company, and around 4.3 per cent for Mahindra Group. Though the pharmaceutical industry does spend on research in the 5 per cent plus range, with Sun Pharma at 6.9 per cent and Dr. Reddy’s at 10.1 per cent, a disproportionate amount still goes into product extension and not new drug discovery, as indicated by a low numbers of NCEs (New Chemical Entities) filings. These numbers need to go up both at the country level and also for individual firms, especially those in export-oriented sectors.

Incentivizing innovation over imitation

A spending in R&D is only as good as the incentives to create and mechanisms to protect the creation. Imagine, if a company can survive with the same old product range while being insulated from competition, why should it innovate? That was the scenario pre-liberalization in India, and remains so in several tertiary industries in India, where neither the competition nor the customer demands innovation. Incentives play a very important role in pushing for innovation, and one such incentive is ‘export promotion’. Instead of creating policies and capabilities around ‘import substitution’, an orientation towards export promotion would help the industries and firms become globally competitive.

Singapore is a testimony of how a small domestic market led the nation to aggressively pursue export promotion and no sooner the city became a benchmark on financial institution, shipping, and other hi-tech industries. Setup in 1961, the Economic Development Board of Singapore is instrumental in attracting talent, foreign investment, domestic market creation, and that of support institutions to make the country of about 5 million people a magnate of south Asia in trade, commerce, education, financial services, healthcare and manufacturing. A similar export promotion stance helped Taiwan, South Korea, and Malaysia develop rapid competency. Let India’s domestic market not overshadow the efforts to tap into emerging markets.

Another dimension of the intervention is the intellectual property rights protection. No competitive individual or an organization would invest in innovation if the state cannot guarantee a protection against intellectual property infringement. Some of the most innovative and competitive countries have very strong property rights protection. The issue with India is not rule, but enforcement, both from a judiciary perspective as well as on accounts of individual awareness and means available to defend the hard earned intellectual property. According to the International Property Rights Index, India ranks at 55 out of 129 nations on account of the strength of property rights. In comparison, China is marginally better at 49, however, the country scores high on patent protection, a parameter that matters in the realm of innovation.

Design, engineering, and manufacturing at scale

The story of China is that of large scale manufacturing. Some of the world’s largest manufacturing plants, of that of automobiles, solar cells, batteries, mobile phones, construction materials and equipments, and toys are in China. Manufacturing contributes around 40.5 per cent to China’s GDP, and number for India is 23 per cent. There is a general assumption that as economies progress, the share of service rise at the cost of agriculture and industries, but that’s not necessarily true. For instance, Germany still maintains a good 30.7 per cent of its GDP as coming from manufacturing and allied industries, and the number for Japan is 30.1 per cent. Little doubt, some of the largest automobile companies, electronics makers, and sophisticated industrial producers come from Japan and Germany. As compared to services, manufacturing has a far higher employment multiplier effect. For every 100 people employed in core manufacturing, over 700 indirect jobs are created, whereas the figure for services is in the 150 to 400 range.

A whole lot of secondary and tertiary small and medium manufacturing enterprises spur up and that leads to a wider employment generation, provided such enterprises embrace productivity improvement measures. Manufacturing also ensures that the nation is resilient in terms of meeting its own demands, especially during an epidemic such as COVID-19, where a host of developed nations are forced to import medicines, protective equipments, ventilators and other necessities, as their domestic capacities remained underdeveloped. Manufacturing capacities would necessitate strides in design and engineering, and this would further make India more resilient and take a position of export promotion.

In summary, an enduring way to take on the aggression of China is to increase India’s competitiveness, and investment in R&D, both at institutional and firm level, and to generate incentives for graduating from imitation to innovation is critical, and so is bringing back the focus on manufacturing. Afterall, innovation is all about getting things done. 

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