The great innovator Steve Jobs is no more. Despite enormous challenges, he proved to the world that dedication to a task, skillful management and marshalling of available resources, anticipating what the discerning customer wants as well as clever marketing of his innovations could deliver enormous returns to his firm and the economy of his country. Sri Lanka could emulate this example to add value to its products and services to expand exports, (which have plummeted to about 17% of GDP in recent years despite some growth, from about 33% of GDP in the year 2000), in an endeavour to turn our negative balance of trade around.
An innovation is an invention in the form of a new product, a new service, a new market, a new method, a new source of raw material, a new process or technology or even a new idea that creates value for customers by meeting a need that has not been fulfilled so far and therefore generates cash for the inventor, so that he can recoup his investment. An invention on the other hand has no market and therefore does not generate cash.
Innovation inputs include the innovation environment as well as facets such as government fiscal policies and incentives as well as education policy, competition among firms, strategies adopted by firms and Research & Development (R&D) itself to meet customer needs. Outputs include patents, better technologies, improved labour productivity, higher returns to shareholders and of course economic growth. Typically firms work on a number of innovations at the same time to create new technologies to replace current technologies.
The International Innovation Index ranks countries on the basis of innovation inputs as well as outputs/performance. According to the latest Wikipedia page showing the index, Singapore takes first place, while Malaysia and Sri Lanka are ranked 22 and 69th, respectively out of 110 countries.
Competitiveness
It is by improving the competitiveness of an economy that prosperity or economic growth can be achieved. According to the 2011/12 Global Competitiveness Index, Sri Lanka is ranked 52nd out of 142 countries, whereas Singapore occupies 2nd place and Malaysia 21st place, respectively.
ompetitiveness consists of achieving higher productivity or lower unit costs of production plus innovation for creating customer value on the basis of customer preferences for earning higher returns and differentiation of goods and services with the intention of preventing imitation by competitors. Innovation can be realized both by R&D and a specific set of activities to deliver a unique mix of value to a particular segment of customers in a market using market research. An example is the production of the ‘chotu kool’ the low cost refrigerator by Godrej of India for low income customers. Thus innovation alone cannot bring in the ‘bucks’; it has to go hand in hand with reduction of unit costs through improvements in productivity as high priced products may be rejected.
Climate for Innovation
Now the question that arises in the mind of a Sri Lankan is, how best to create a climate for innovation so that the country achieves prosperity and to start with, realizing the doubling of the current per capita income to US$4000 (by 2016) as envisaged by the government? It has to be stated that this income should be realized in real terms or in inflation adjusted terms; hitting the target in nominal terms may not translate into an impact on welfare that could be felt by the people if prices continue to increase fast and erode incomes and purchasing power.
The basic elements of creating a climate conducive to innovation are: (a) investment in the development of human resources (HR) through education and training both by the state and the firms producing goods and services, (b) creation of a policy environment that promotes competitiveness and is conducive to innovation and attraction of investment particularly by reputed FDI with advanced technologies, management expertise and access to global markets, and (c) investment in physical infrastructure mainly an Information Technology network both by the state and the firms concerned, to diffuse knowledge.
Human Resources
Since Sri Lanka is not gifted with critical natural resources such as iron ore and coal used in industries, the emphasis has essentially to be on the development of human resources. Though India does possess vast quantities of natural resources for industrialization, priority was given without a break to the development of HR/education particularly in Science & Technology (S&T) and the teaching of English since independence. In fact countries such as India, Japan, South Korea Japan and even China, made it a point to send thousands of students for higher education in S&T as well as management to leading universities in the West and motivated them to come back after qualifying; they have also invested more on education.
The result is innovation. Sri Lanka has done the opposite up to now. Inexplicably higher education has been neglected, leading to dependence on manual labour in the economy, for example in the leading foreign exchange earning sectors such as tea, garments and overseas remittances. Since about 80% of students who qualify at the A’ Levels are denied entry to our (public) universities and the quality and type of education imparted by them do not ensure employment, about 10,000 students leave Sri Lanka for education abroad every year; most of them never return after qualifying; qualified and experienced persons also leave the country en masse. This appalling situation no doubt has to be arrested with a carefully prepared plan of action after an analysis of reasons for the brain drain, not just by setting up foreign universities. Initiative for innovation for technological advancement for achievement of prosperity will otherwise be a distant dream.
Creating a Supporting Policy Environment
This task consists of,
i. formulating a set of policy reforms, predictable incentives and securing property rights, ability to enforce contracts quickly to motivate innovation as well as good relations with the rest of the world to induce Foreign Direct Investors (FDI -a major source of technological innovation) to locate in Sri Lanka is no doubt the first step in creating a supporting climate. Attracting FDI is an easier way to acquire innovation and technologies than to develop our own capabilities in this area; (the country spends 0.17% of GDP or less on Research & Development, vs India’s 0.61%, Malaysia’s 0.93%, China’s 1.34% and Singapore’s 2.36% of GDP); attracting FDI will also enable us to expand exports as we cannot depend on the tiny domestic market to create demand to drive economic development. However, FDI flows to Sri Lanka have been disappointing (US$ 827 million, $581 million and $516 million 2008, 2009 and 2010, respectively) when compared to other countries such as Taiwan, Thailand, Malaysia and Singapore which have succeeded in attracting billions of US$ worth of FDI. The Budget 2011 has proposed reduction of corporate taxes and exemption of Customs levies on import of machinery/equipment not manufactured here (another form of technological innovation), for encouraging firms to increase investments and extended double deduction of R&D expenses. Competitor countries, however, offer more attractive incentives in addition to social, political and macro economic stability as well as good governance, all factors sought after by reputed FDI. It must be stated here that it is better law and order conditions that ensure the security of property and persons, supported by opportunities to earn enhanced profits and good relations with the rest of the world are the major factors that would induce firms to invest and increase innovation in this country.
ii. Laying greater emphasis on macro economic (budgetary and monetary) management to reduce budget deficits to minimize the costs of inputs and prices of outputs, the erosion of earnings from innovation and relying less on borrowing, ultimately to increase savings for investment e.g. in education and physical infrastructure.
iii. One of the most important requirements is to increase competition among firms particularly by discouraging monopolies and cartels and reducing the degree of protection to domestic enterprises so that they will be compelled to look for ways and means to innovate instead of seeking protection which would make them sluggish and less competitive.
iv. Simplification of the numerous bureaucratic procedures & cumbersome laws as well as strengthening the efficiency of government institutions (GCI rank 49) as in Singapore by recruitment and promotion purely on merit without politicization for improvin the ease of doing business and innovation.
v. “Innovation raises the size of the market; a larger market raises the incentives for innovation”, Jeffrey Sachs (The End of Poverty). Most of the 70% of the poor here live in rural areas. Increasing their level of incomes by improving agricultural productivity, through land reform to give ownership of their land holdings can raise the size of the domestic market.
Investment in Physical Infrastructure/ ICT
The infrastructure development programmes being undertaken do not seem to be prioritized on the basis of costs and benefits, improvement of productivity and contribution to diffusion of innovation. Express ways/ faster railways and an ICT development programme including an advanced fibre network as well as the extension of water and power supply grids to areas away from the Western Province are essential to motivate investors/ innovators to locate in the hinterland as well.
Conclusion
The above constraints, especially the low standard of education and the poor FDI flows, will therefore have to be solved with a single minded determination for the creation of a climate conducive to competitiveness and innovation to increase earnings.
(The writer is an economist).
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