Author: Murali Nair | Senior Project Manager | Bertelsmann Stiftung
First published in July 2017
Germany’s position at the forefront of global innovation can no longer be taken for granted for three main reasons. Firstly, demographic shifts and a low birth rate have resulted in an ageing population, which puts pressure on the availability of highly skilled labour. Germany’s population is expected to decline from 82 million in 2012 to 74.5 million in 2050, and even more worrying, “the percentage of Germans under 15 is forecast to fall to 13%, one of the world’s lowest. Germany would need an influx of 470,000 immigrants each year until 2040 to offset the demographic decline. Secondly, Germany’s performance in innovation, while solid, has not featured within the top 10 in the Global Innovation Index in the past five years, and has been behind that of several peers from the EU, such as Switzerland, Sweden, Netherlands, Finland, Ireland, Luxembourg, and Denmark. Thirdly, emerging countries, such as India and China, with their large young populations and abundance of skilled labour are also innovating. Germany stands to gain from understanding what these countries have to offer in the context of innovation, and where possible, identifying mutually beneficial areas of cooperation with emerging markets, such as China and India.
Much has been said and written on innovation in India. One the one hand, India is touted as one of the most attractive destinations for R&D – the country is home to nearly one thousand R&D centers for leading multinationals. Bangalore is globally recognized as a preferred destination for large companies and start-ups for technology and innovation. On the other hand, India’s spending on R&D as a percentage of GDP is still significantly lower than that of global peers (0.9% of India’s GDP vs. 1.95% of China’s GDP). Moreover, despite a slight improvement in some rankings, India ranks relatively low on a variety of innovation and related indicators.
Our study “Innovation in India” (Bertelsman Stiftung, 2017) sheds light on the ‘real picture’ in India. The study is a result of more than 80 interviews with stakeholders form India and Germany from the field of business, academia and government. It attempts to provide a realistic representation of India in the context of innovation, identify its key characteristics, the types of organizations undertaking innovation in India, identify where India’s strengths lie, and which areas need improvement. Moreover, we try to identify the impact of this on Germany and outline how corporate executives, researchers and policy makers across India and Germany can collaborate to develop partnerships.
Key findings of the Innovation in India Study
- “Innovative imitation” is a key feature of many successful Indian companies. It involves adapting products and services offered in developed markets to a heterogeneous and underpenetrated Indian market. Innovative imitation is inevitable; indeed, many developed economies, such as South Korea, China, Japan and even Germany imitated others early on in their economic development.
- Innovation in India is typically “frugal”. Firms create sometimes radically new products, services and business models with limited resources. As a structured approach to innovation, frugal innovation clearly focusses on delivering customer value at predetermined price points. Our interviews with Indian firms show companies of all types – Indian and multinational companies, large and small companies, established firms and start-ups – employing frugal approaches to innovation.India is rapidly becoming both the lead market and global hub for frugal innovation. Resource constraints and the desire to open untapped markets to products and services through adequate price points and acceptable value-for-money propositions are driving frugal innovation forward. We believe that frugal innovation will play a key role for decades in the innovation landscape of emerging markets. Emerging markets are expected to be the source of some 95% of global population growth and 70% of global GDP growth until 2030. 7 of these markets will feature varying but nonetheless high levels of resource scarcity, institutional voids and low disposable incomes. Companies will need to innovate for these emerging markets, and India, given its large customer base, is ideal for both Indian and foreign multinationals to test frugal solutions.
- India offers many opportunities to German companies. It is a large market for German goods and services. It is a competitor in frugal innovation especially in other emerging markets. It is a collaborator for joint research as well as manufacturing projects. It is a hub for talent, especially in the field of IT. It is also a dynamic ecosystem for German companies to be present and to benefit from the innovation and entrepreneurship spirit.
Below are the recommendations for small and medium sized German companies.
View India as more than a mere marketplace and leverage India’s R&D capability
- Leverage India’s diversity to develop, test, and launch innovative products and solutions for a variety of market segments
- Set up R&D presence in India
- Gradually increase scope of responsibility
- Leverage Indian innovation ecosystem strengths and provide greater responsibility to Indian captives
- Monitor emerging market competitors
- Develop capability to build and manage global innovation networks. This can be done by adapting global delivery model to the organization’s context, exchanging people across geographies, and by ensuring a common understanding
- Encourage Indian subsidiary/ set-up to conduct low-cost experiments on products/ services developed for emerging markets
- Demand innovation from Indian R&D centers (for those companies that already have R&D set-ups in India) rather than focusing purely on cost savings
- Collaborate with other stakeholders in India’s vibrant innovation ecosystem
Leverage and learn from India’s competitive advantage: frugal mindset
German companies have much to gain from adopting frugal innovation approaches. Currently, according to a study underway by the Fraunhofer-Zentum für Internationales Management und Wissensökonomie, more than 90 per cent of Germans are unaware of the concept of frugal innovation. By adopting this approach, these companies can develop a range of products and services for emerging markets (which constitute six billion consumers) and prepare themselves for disruptive innovations arising out of developing countries, such as India and China. Moreover, a frugal innovation approach is not only important to develop products and services for emerging markets. It helps companies to focus on what is most important: the customer.
- Develop frugal innovations which can be sold in emerging and developed markets
- The resulting frugal products and services can be offered in India as a complete product line (in addition to the original products) to meet the needs of different segments of consumers
- The innovations can be offered in other budget-constrained, emerging markets as well as in price-sensitive niche segments of developed markets
- the companies should be open to using clean slate approaches to solve new and old problems with new technology – better to cannibalize your own sales than have your competitors erode your market share
- Balance technology push with market pull. While German products are considered high-tech and high-quality, they can be ‘over-engineered’, and sometimes fail to meet the core requirements of customers in terms of being easy-to-use and operate, sustainable, and competitively priced
- Co-innovate with their Indian counterparts to identify synergistic innovation partnerships – for instance, alternative models such as licensing frugal products could be a potential approach
- Examples such as the co-innovation laboratory of Biocon, Syngene, and Bristol-Myers-Squibb could be leveraged
We hope that German stakeholders, particularly in the business sector will realize the opportunity that awaits them and that the recommendations provide a guideline on how to proceed. The complete version of the study gives detailed analyses and recommendations for various stakeholders. It can be downloaded for free at https://www.bertelsmann-stiftung.de/de/publikationen/publikation/did/executive-summary-india-innovation-study/