R&D to Give India an Edge in IT, Pharma, & BPO

By: Hari Sud
February 26, 2005

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R&D Will Give India an Edge in IT Services, Pharmaceuticals and BPO

If Microsoft, AT&T, Sonny, GlaxoSmithKline, Pfizer and others are opening or expanding their research laboratories in India, then whom do we have to thank?

The Indian science and engineering graduates!

Reasons – It is their creativity, which is attracting all the above majors and many more to India. To quote Steve Ballmer of Microsoft, “ it is the engineering talent of India we want”. Then again the pharmaceutical companies of the world are examining ways and means to open research labs to plug into the Indian science talent. They are welcome.

Hats off to the Indian universities for turning out graduates who are being sort after by companies. Only a decade back the West bracketed India as a sick economy and generally felt that its universities are turning out second-class graduates. The change of heart took place during the Y2K crisis. It was the Indian software engineers who came to the West and helped them tide over the crisis. Thereafter respect for the Indian talent grew by leaps and bound. The IT business, the BPO and now the R & D is a testament to that. Of course, the governments can also take a share of the laurels, but the key is still the brilliant Indian talent.

It was not like this just a short time ago

Engineers and scientists, who immigrated to UK and US from 1965 to 1985, have had tough time settling down. Jobs were scarce and were given to those who obtained a local post-graduate education. Most immigrating engineers and this author included, went through this process and then only, settled in a working life. It is different today. Indian graduates are either hired in India for a temporary work arrangement in the West or hired to work in India to conduct R & D or IT Services or others. This arrangement has served a twofold purpose:

India has a rich intellectual resource, ready to be exploited.
The West can have the same work done at third of its costs.

Where are we today?

After IT services and BPO services, research & development and technical labs are the next big area to be exploited. R & D outsourced to India is only about $1.3 Billion in 2004. This is a paltry amount, compared to overall R & D expenditure of about $200 Billion in the West. It is expected that this amount will probably grow to $8-10 Billion by 2010. It still is a paltry amount. But its impact on India has been great. In all, about 15,000 patents were filed in India in 2004, compared to 4,000 in 1995. Of which 1,700 applications were filed for US patents compared to 183 in 1997. To complete so much research in the West, especially in the US, it would have cost close to $6 Billion. The star performer in the R & D effort had been Texas Instrument, who in 1985 opened up the first laboratory and since then have filed close to 200 patents. Microsoft is next, followed closely behind by the pharmaceutical majors.

Pharmaceutical Sector

Indian pharmaceutical majors have been on the forefront of R & D, before the West discovered this potential. Now all the worlds leading pharmaceutical companies like Eli Lily, Pfizer and GlaxoSmithKline are opening up shop in India. They are attracted by an efficient drug regulatory system, a talent pool, an experienced drug industry, lower costs, highly trained doctors and hospital system, diversity of people & culture for drug testing etc. They cannot get any better, anywhere else; hence they are opening up to India, but, a bit slowly. The inhibitors are poor infrastructure, security of intellectual property rights and political risks. All the latter are being fixed one by one as the government realizes the importance of R & D. and also to move a notch higher in the value chain.

Another interesting avenue opening up for India is health care. It is a direct result of huge expense involved in elective surgery or other treatments in the US. The same can be inexpensively done in India. Indian doctors are second to none. Some of them are in US and are outperforming in their field. Take the example of Dr. Reddy, who recently undertook a micro heart surgery on a tiny newborn baby in USA. He volunteered to undertake this task and succeeded. He also made a medical history and headline news, apart from thank you from the newborn’s parents. Doctor’s like Dr. Reddy exist in India too. They are willing and able to provide services at a third of the cost than in the West. The handicap in this endeavor is the poor infrastructure to invite the patients from the West, house them, treat them and safely return them back to their home country. Also excessive emphasis on this may also starve the health services of talent to treat the local patients. A balance is to be struck, where foreign exchange is earned together with health services to the local population.

How will R & D Play out in the IT and BPO Field?

India today has only 2% of the World’s IT services and BPO work. But it has given India a significant boost to its exports and economy. Not with standing, the work outsourced to India is of a lower end caliber and of monotonous nature. This otherwise would have cost more to undertake in the West. India is happy with it, because it is better than nothing. As I said above, India has to move up the value chain. The road to this is via innovation, pioneering new products & services, end product branding and cutting edge research. As India moves up the value chain, the West will find it useful to outsource to India, and India alone. With this, challenges mounted by other emerging powers in the IT industry will be minimized. Already there is a bit of a sentiment being expressed in the US about Indian Call Center workers, accent in spoken English. These objections are likely to disappear when the US die-hard nationalists realize that the relevant work belongs in India not because India has the inexpensive manpower but also India has its own technology to undertake it.

India’s Education Hub

Education quality is one of the many factors, which will make India the knowledge based super power. Today, everybody in the West knows the Indian Institutes Of Technology (IITs). Other institutions in the country are equally good but not that well known. The brightest and the best in India are today attracted to science and technology from high school onwards. Parents play a key role in defining a career for their children. Compared to the west, the education in India is almost free. The latter provides a stepping-stone for future scientist, engineers, doctors and researches. Its updated quality and fairness will be an important step forward into the R & D world. Tying up with western universities in the academics and research will improve the quality and provide experience to the locals, which are sorely needed. All this will help India to achieve the knowledge based super power role in the world.

Who else is Doing What in the R & D?

India has to watch out to China while planning all future R & D moves. Although the Chinese cannot have the Call Center jobs because of their poor performance in the language needed to communicate, yet their potential in R & D is great. They have universities and system of higher learning, which is well funded, and has an eye on attracting knowledge based business to them. Thousands and upon thousands of Chinese students have shown up at the American Universities in last fourteen years. Some of them have gone back and are leading research back home. Today their focus is manufacturing, but realizing the value of outsourced research and its upward integration with high end product development and services, they are working hard to outplace India as a leading contender for this business. Chinese have to be watched. They have an advantage, as their infrastructure is better than India’s and their political structure makes decision much quicker than India’s. The disadvantage they have is their inherent draw back to protect intellectual property rights and a non-existent legal system.

Venture Capital or Direct Investment in R & D

A significant component of research in the West is funded by venture capitalists. This is true in the IT field. On the other hand the more difficult R & D in the pharmaceutical industry is mostly corporate funded with a sprinkling of venture capital. In India, it would appear the R & D is being sponsored through the direct participation of corporate budgets. Example of this is the new R& D Centers, which have opened up, in last few years. Microsoft, Texas Instrument, Eli Lily, Sony etc. are corporately sponsored and outsourced facilities. Cost of research is the key factor in their decision. As innovation is completed at these Centers, the parent companies take full credit and benefits out of it. India gets the scientists training and employment. Spin off impact to India is further research as the experience grows. In the venture capitalist sponsored research, the developer owns development with all the benefits. This aspect of research is a small but a significant component in the US patent regime. Today there are a significant number of patents filed and owned by doctors who turned entrepreneurs in US. This also exists in India. A few pharmaceutical research companies undertake applied research and molecular research and sell their development at a profit. India at this moment is no position to exercise any choices. It takes whatever it gets. The corporate funded research in a not too distant future will make India a superstar. Later the emphasis could be shifted to owning the research.

What the Future Holds for R & D in India?

The future is very bright. Indian graduates are second to none. Costs in India of a similar effort in the West will be a third. Hence, how could the West miss out on an opportunity like this? Research has not to be limited to IT, BPO and Pharmaceuticals but to be extended to Auto industry, Telecom, Food Processing, Building & Construction etc. The current projection of $8-10 Billion of research outsourced to India by 2010 is to be exceeded with careful planning as done in the IT Services industry. Government emphasis on infrastructure, cash grants, improved educational standards, security of intellectual property etc. is to be increased to supplement other development effort.

Hari Sud

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