Public policy aids tech innovation but not silver bullet

Markets such as China benefiting from strong government support for indigenous innovation whereas lack of public policies and tools mean Indian companies rely on business overseas to grow, analysts note.
Written by Vivian Yeo, Contributor

Aggressive government incentives to spur indigenous technology creation have helped markets such as China, but homegrown innovation cannot be pegged solely to public policies. The flipside is that without a pro-local IT policy framework, companies will have to look abroad to grow their businesses, analysts stated.

China, the world's most populated nation, has had a history of favoring domestic products and services over foreign brands. In 2006, the Chinese government unveiled a science and technology masterplan through to 2020, where the guiding principle for investment was "indigenous innovation".

According to a document hosted on the U.S. Chamber of Commerce Web site, among the goals of the detailed strategic plan: to increase China’s gross expenditure on R&D (research and development) from 1.3 percent of GDP (gross domestic product) in 2006 to 2.5 percent by 2020, and to reduce overall reliance on foreign technology to less than 30 percent, from an estimated 60 percent in 2006. The country also targeted to rank among the top five in the world by 2020, for the number of patents and academic papers from natives.

Following the launch of the masterplan, measures were introduced to ensure government entities paid greater attention to locally-developed technologies, such as the establishment of a national product catalog to guide government procurement. In June this year, however, China's Ministry of Finance did a U-turn by voiding three measures that would delink public sector procurement with indigenous innovation.

According to Leo Wang, business analyst at China Market Research Group (CMR), the Chinese government has "strong policy support" for the IT sector. Aside from government procurement, there are policies around taxation, office rent, residency permit, as well as local government loans to encourage development of indigenous innovation.

The latest move by the Chinese government, he noted in an e-mail, should not be interpreted as ceasing of support for indigenous innovation, but an attempt to encourage homegrown products and services in "a more effective way".

Wang explained: "The problem with the previous procurement policy is that only brands that had strong relationships with the government really benefited. So, if anything, Chinese innovation will continue to become stronger [with this development, and] it will be based more on practical applications."

He added that the move shows the Chinese government is more interested in having an open and healthy ICT market, which is "definitely good news" for foreign IT vendors and will serve to strengthen local firms as well.

Bryan Wang, vice president and principal analyst at Forrester Research, observed that policies around indigenous innovation have been created to boost China's patent ownership. For instance, the number of patents registered is a KPI (key performance indicator) for the Ministry of Science, he cited in an e-mail to ZDNet Asia.

According to the World Intellectual Property Organization (WIPO), the number of patent filings by China soared to 241,367 in 2009, from 16,223 a decade earlier. It is already ranked No. 5 in the world for the number of patents in force.

Forrester's Wang added that many current tech innovations in the country are skewed toward the development aspect of R&D. "With very limited research innovation--from both the hardware and software perspective--it is difficult to build core competency for local firms and the local industry," he pointed out.

The funding program for core technology, high technology and fundamental technology projects, which is one of the main elements of the detailed masterplan, sought to address that, he said. Linux-related projects, he added, can receive government funding of between 20 million RMB (US$3.1 million) and 100 million RMB (US$15.6 million)--about four times the typical grant.

"We think this is a good move to encourage local firms to invest on real innovation," said Wang. "But it is always a challenge in terms of execution of the program. Some local firms are cheating government funding and the monitoring process is not very tight for now."

CMR's Wang also noted that despite government intervention in the form of policies, there remains challenges for China's ICT innovation progress. "The first is that there is a strict and complex approval process for new technology which may prevent some innovations from getting off the ground.

"The second is that enforcement of copyrights is still developing which makes companies cautious to spend on R&D due to a fear that competitors will copy their products."

India lacks policies, but local innovation outlook rosy
Conversely, India is one market in which support for homegrown innovation is very limited. According to Frederic Giron, Forrester Research's vice president and principal analyst, this situation is likely a result of a lack of policies, tools and financial mechanisms to reach startups at the local level.

Organizations such as the National Association of Software and Services Companies (Nasscom) are making efforts to support and make local startups more visible, he acknowledged. However, "a very large majority" of these companies' revenues come from abroad due to a lack of government policies and enterprises in India lacking the maturity to tap local innovation.

That said, Giron, who is also the research firm's country manager for India, noted that globalization and innovation from "bottom of the pyramid", or businesses catering to the rural and low-end market segments, are some of the factors that have put indigenous innovation on a growth path.

Large government projects such as the UIDAI (Unique Identification Authority of India) and the e-commerce boom within the country are also expected to play a part, he added.

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