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TEDxLondonBusinessSchool

Nirmalya Kumar: India's invisible innovation

April 27, 2012

Can India become a global hub for innovation? Nirmalya Kumar thinks it already has. He details four types of "invisible innovation" currently coming out of India and explains why companies that used to just outsource manufacturing jobs are starting to move top management positions overseas, too. (Filmed at TEDxLondonBusinessSchool.)

Nirmalya Kumar - Professor
Nirmalya Kumar is a professor of Marketing at the London Business School and a passionate voice for new entrepreneurs in India. Full bio

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Over the last two decades, India has become
00:15
a global hub for software development
00:18
and offshoring of back office services, as we call it,
00:21
and what we were interested in finding out was that
00:25
because of this huge industry that has started
00:30
over the last two decades in India,
00:34
offshoring software development and back office services,
00:36
there's been a flight of white collar jobs
00:39
from the developed world to India.
00:41
When this is combined with the loss of manufacturing jobs
00:45
to China, it has, you know, led to considerable angst
00:48
amongst the Western populations.
00:52
In fact, if you look at polls, they show a declining
00:55
trend for support for free trade in the West.
00:58
Now, the Western elites, however, have said
01:03
this fear is misplaced.
01:06
For example, if you have read — I suspect many of you
01:08
have done so — read the book by Thomas Friedman
01:11
called "The World Is Flat," he said, basically, in his book
01:14
that, you know, this fear for free trade is wrong
01:17
because it assumes, it's based on a mistaken assumption
01:21
that everything that can be invented has been invented.
01:24
In fact, he says, it's innovation that will keep the West
01:28
ahead of the developing world,
01:31
with the more sophisticated, innovative tasks being done
01:33
in the developed world, and the less sophisticated,
01:36
shall we say, drudge work being done
01:39
in the developing world.
01:40
Now, what we were trying to understand was,
01:43
is this true?
01:47
Could India become a source, or a global hub,
01:50
of innovation, just like it's become a global hub
01:53
for back office services and software development?
01:57
And for the last four years, my coauthor Phanish Puranam
02:00
and I spent investigating this topic.
02:04
Initially, or, you know, as people would say, you know,
02:08
in fact the more aggressive people who are supporting
02:12
the Western innovative model, say,
02:14
"Where are the Indian Googles, iPods and Viagras,
02:16
if the Indians are so bloody smart?" (Laughter)
02:19
So initially, when we started our research, we went
02:23
and met several executives, and we asked them,
02:25
"What do you think? Will India go from being a favored
02:27
destination for software services and back office services
02:30
to a destination for innovation?"
02:33
They laughed. They dismissed us.
02:36
They said, "You know what? Indians don't do innovation."
02:38
The more polite ones said, "Well, you know, Indians
02:41
make good software programmers and accountants,
02:43
but they can't do the creative stuff."
02:46
Sometimes, it took a more, took a veneer of sophistication,
02:49
and people said, "You know, it's nothing to do with Indians.
02:53
It's really the rule-based, regimented education system
02:56
in India that is responsible for killing all creativity."
02:59
They said, instead, if you want to see real creativity,
03:04
go to Silicon Valley, and look at companies
03:06
like Google, Microsoft, Intel.
03:08
So we started examining the R&D and innovation labs
03:11
of Silicon Valley.
03:14
Well, interestingly, what you find there is,
03:16
usually you are introduced to the head of the innovation lab
03:18
or the R&D center as they may call it,
03:21
and more often than not, it's an Indian. (Laughter)
03:23
So I immediately said, "Well, but you could not have been
03:27
educated in India, right?
03:30
You must have gotten your education here."
03:31
It turned out, in every single case,
03:33
they came out of the Indian educational system.
03:37
So we realized that maybe we had the wrong question,
03:41
and the right question is, really, can Indians
03:43
based out of India do innovative work?
03:46
So off we went to India. We made, I think,
03:50
about a dozen trips to Bangalore, Mumbai, Gurgaon,
03:52
Delhi, Hyderabad, you name it, to examine
03:55
what is the level of corporate innovation in these cities.
03:58
And what we found was, as we progressed in our research,
04:03
was, that we were asking really the wrong question.
04:05
When you ask, "Where are the Indian Googles,
04:08
iPods and Viagras?" you are taking a particular perspective
04:10
on innovation, which is innovation for end users,
04:14
visible innovation.
04:19
Instead, innovation, if you remember, some of you
04:20
may have read the famous economist Schumpeter,
04:24
he said, "Innovation is novelty
04:26
in how value is created and distributed."
04:28
It could be new products and services,
04:32
but it could also be new ways of producing products.
04:34
It could also be novel ways of organizing firms and industries.
04:36
Once you take this, there's no reason to restrict innovation,
04:39
the beneficiaries of innovation, just to end users.
04:43
When you take this broader conceptualization of innovation,
04:47
what we found was, India is well represented
04:50
in innovation, but the innovation that is being done in India
04:53
is of a form we did not anticipate, and what we did was
04:57
we called it "invisible innovation."
05:00
And specifically, there are four types of invisible innovation
05:02
that are coming out of India.
05:05
The first type of invisible innovation out of India
05:07
is what we call innovation for business customers,
05:10
which is led by the multinational corporations,
05:13
which have -- in the last two decades, there have been
05:16
750 R&D centers set up in India by multinational companies
05:19
employing more than 400,000 professionals.
05:25
Now, when you consider the fact that, historically,
05:29
the R&D center of a multinational company
05:34
was always in the headquarters, or in the country of origin
05:37
of that multinational company, to have 750 R&D centers
05:41
of multinational corporations in India
05:45
is truly a remarkable figure.
05:48
When we went and talked to the people in those innovation
05:50
centers and asked them what are they working on,
05:53
they said, "We are working on global products."
05:55
They were not working on localizing global products
05:57
for India, which is the usual role of a local R&D.
06:00
They were working on truly global products,
06:04
and companies like Microsoft, Google, AstraZeneca,
06:06
General Electric, Philips, have already answered
06:10
in the affirmative the question that from their Bangalore
06:13
and Hyderabad R&D centers they are able to produce
06:16
products and services for the world.
06:20
But of course, as an end user, you don't see that,
06:23
because you only see the name of the company,
06:26
not where it was developed.
06:27
The other thing we were told then was, "Yes, but, you know,
06:31
the kind of work that is coming out of the Indian R&D center
06:34
cannot be compared to the kind of work that is coming out
06:36
of the U.S. R&D centers."
06:38
So my coauthor Phanish Puranam, who happens to be
06:41
one of the smartest people I know, said
06:42
he's going to do a study.
06:45
What he did was he looked at those companies
06:46
that had an R&D center in USA and in India,
06:49
and then he looked at a patent that was filed
06:52
out of the U.S. and a similar patent filed out of the same
06:55
company's subsidiary in India,
06:58
so he's now comparing the patents of R&D centers
07:00
in the U.S. with R&D centers in India of the same company
07:03
to find out what is the quality of the patents filed
07:07
out of the Indian centers and how do they compare
07:10
with the quality of the patents filed out of the U.S. centers?
07:11
Interestingly, what he finds is
07:14
— and by the way, the way we look at the quality of a patent
07:16
is what we call forward citations: How many times
07:19
does a future patent reference the older patent? —
07:22
he finds something very interesting.
07:26
What we find is that the data says
07:29
that the number of forward citations of a patent filed
07:31
out of a U.S. R&D subsidiary is identical to the number
07:35
of forward citations of a patent filed by an Indian subsidiary
07:38
of the same company within that company.
07:42
So within the company, there's no difference in the forward
07:44
citation rates of their Indian subsidiaries versus
07:47
their U.S. subsidiaries.
07:49
So that's the first kind of invisible innovation coming out of India.
07:50
The second kind of invisible innovation coming out of India
07:54
is what we call outsourcing innovation to Indian companies,
07:57
where many companies today are contracting
08:01
Indian companies to do a major part of their product
08:04
development work for their global products
08:07
which are going to be sold to the entire world.
08:12
For example, in the pharma industry, a lot of the molecules
08:14
are being developed, but you see a major part of that work
08:16
is being sent to India.
08:19
For example, XCL Technologies,
08:22
they developed two of the mission critical systems
08:25
for the new Boeing 787 Dreamliner,
08:27
one to avoid collisions in the sky,
08:31
and another to allow landing in zero visibility.
08:33
But of course, when you climb onto the Boeing 787,
08:37
you are not going to know that this is invisible innovation
08:39
out of India.
08:42
The third kind of invisible innovation coming out of India
08:43
is what we call process innovations, because of an injection
08:46
of intelligence by Indian firms.
08:49
Process innovation is different from product innovation.
08:52
It's about how do you create a new product or develop
08:56
a new product or manufacture a new product,
08:59
but not a new product itself?
09:01
Only in India do millions of young people dream
09:03
of working in a call center.
09:08
What happens — You know, it's a dead end job in the West,
09:12
what high school dropouts do.
09:15
What happens when you put hundreds of thousands
09:18
of smart, young, ambitious kids
09:21
on a call center job?
09:24
Very quickly, they get bored, and they start innovating,
09:26
and they start telling the boss how to do this job better, and
09:31
out of this process innovation comes product innovations,
09:35
which are then marketed around the world.
09:38
For example, 24/7 Customer,
09:40
traditional call center company, used to be a traditional
09:42
call center company. Today they're developing
09:44
analytical tools to do predictive modeling so that before
09:46
you pick up the phone, you can guess
09:50
or predict what this phone call is about.
09:53
It's because of an injection of intelligence into a process
09:59
which was considered dead for a long time in the West.
10:02
And the last kind of innovation, invisible innovation
10:05
coming out of India is what we call management innovation.
10:08
It's not a new product or a new process
10:11
but a new way to organize work,
10:12
and the most significant management innovation to come
10:15
out of India, invented by the Indian offshoring industry
10:17
is what we call the global delivery model.
10:21
What the global delivery model allows is, it allows you
10:23
to take previously geographically core-located tasks,
10:26
break them up into parts, send them around the world
10:29
where the expertise and the cost structure exists,
10:32
and then specify the means for reintegrating them.
10:34
Without that, you could not have any of the other
10:37
invisible innovations today.
10:39
So, what I'm trying to say is, what we are finding
10:41
in our research is, that if products for end users
10:44
is the visible tip of the innovation iceberg,
10:49
India is well represented in the invisible, large,
10:52
submerged portion of the innovation iceberg.
10:56
Now, this has, of course, some implications,
11:01
and so we developed three implications of this research.
11:06
The first is what we called sinking skill ladder,
11:10
and now I'm going to go back to where I started my
11:14
conversation with you, which was about the flight of jobs.
11:16
Now, of course, when we first, as a multinational company,
11:19
decide to outsource jobs to India in the R&D,
11:23
what we are going to do is we are going to outsource the
11:25
bottom rung of the ladder to India, the least sophisticated jobs,
11:29
just like Tom Friedman would predict.
11:32
Now, what happens is, when you outsource the bottom rung
11:35
of the ladder to India for innovation and for R&D work,
11:38
at some stage in the very near future you are going to have
11:43
to confront a problem,
11:46
which is where does the next step
11:48
of the ladder people come from within your company?
11:50
So you have two choices then:
11:53
Either you bring the people from India into
11:56
the developed world to take positions in the next step
11:58
of the ladder — immigration —
12:01
or you say, there's so many people in the bottom step
12:04
of the ladder waiting to take the next position in India,
12:06
why don't we move the next step to India?
12:09
What we are trying to say is
12:13
that once you outsource the bottom end of the ladder, you --
12:15
it's a self-perpetuating act, because of the sinking skill ladder,
12:20
and the sinking skill ladder is simply the point that
12:23
you can't be an investment banker
12:26
without having been an analyst once.
12:28
You can't be a professor without having been a student.
12:30
You can't be a consultant without having been a research associate.
12:32
So, if you outsource the least sophisticated jobs,
12:35
at some stage, the next step of the ladder has to follow.
12:38
The second thing we bring up is what we call
12:42
the browning of the TMT, the top management teams.
12:44
If the R&D talent is going to be based out of India
12:47
and China, and the largest growth markets
12:50
are going to be based out of India and China,
12:52
you have to confront the problem that
12:54
your top management of the future
12:56
is going to have to come out of India and China,
12:58
because that's where the product leadership is,
13:01
that's where the important market leadership is.
13:02
Right? And the last thing we point out in this slide,
13:05
which is, you know, that to this story, there's one caveat.
13:07
India has the youngest growing population in the world.
13:11
This demographic dividend is incredible, but paradoxically,
13:15
there's also the mirage of mighty labor pools.
13:19
Indian institutes and educational system,
13:22
with a few exceptions, are incapable of producing students
13:25
in the quantity and quality needed
13:27
to keep this innovation engine going,
13:30
so companies are finding innovative ways to overcome this,
13:33
but in the end it does not absolve the government
13:36
of the responsibility for creating this educational structure.
13:38
So finally, I want to conclude
13:43
by showing you the profile of one company, IBM.
13:46
As many of you know, IBM has always been considered
13:49
for the last hundred years to be one of the most
13:52
innovative companies.
13:54
In fact, if you look at the number of patents filed over history,
13:55
I think they are in the top or the top two or three companies
13:58
in the world of all patents filed in the USA as a private company.
14:00
Here is the profile of employees of
14:04
IBM over the last decade.
14:06
In 2003, they had 300,000 employees,
14:10
or 330,000 employees, out of which, 135,000
14:13
were in America, 9,000 were in India.
14:17
In 2009, they had 400,000 employees, by which time
14:21
the U.S. employees had moved to 105,000,
14:26
whereas the Indian employees had gone to 100,000.
14:28
Well, in 2010, they decided they're not going to reveal
14:32
this data anymore, so I had to make some estimates
14:35
based on various sources.
14:37
Here are my best guesses. Okay? I'm not saying
14:38
this is the exact number, it's my best guess.
14:41
It gives you a sense of the trend.
14:42
There are 433,000 people now at IBM, out of which
14:44
98,000 are remaining in the U.S.,
14:49
and 150,000 are in India.
14:51
So you tell me, is IBM an American company,
14:55
or an Indian company? (Laughter)
14:58
Ladies and gentlemen, thank you very much. (Applause)
15:02
Translator:Thu-Huong Ha
Reviewer:Jenny Zurawell

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Nirmalya Kumar - Professor
Nirmalya Kumar is a professor of Marketing at the London Business School and a passionate voice for new entrepreneurs in India.

Why you should listen

Nirmalya Kumar has taught at Harvard Business School, IMD-International Institute for Management Development  in Switzerland, and the Kellogg School of Management at Northwestern University. He is currently a Professor of Marketing and Co-Director of Aditya Birla India Centre at London Business School. Kumar has served as a consultant to over 50 Fortune 500 Companies, worked on the board of five Indian firms, and has published six books -- including, most recently, India Inside: The emerging innovation challenge to the West. In 2011, Thinkers50 named him number 26 of the “50 most influential management gurus.”

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