Ironically, though the notion that start-ups are going to be the force of change and the fountainhead of economic growth and job creation is widely seen as the ultimate capitalist idea of our time, the man who first proposed the idea was the Austrian-born Marx-influenced theoretician Joseph Schumpeter. In his 1942 book, Capitalism, Socialism and Democracy, he coined the phrase "creative destruction" to describe how entry by entrepreneurs supplied the disruptive force that sustained economic growth - even as it destroyed the value of established companies and jobs that had enjoyed market power derived from previous technological, organisational, regulatory, and economic paradigms.
Clayton Christensen of the Harvard Business School took a shot at unravelling the mysteries of how and why some innovative businesses break through and become giants. He coined the concept of "disruption": A process by which a product or service first establishes itself in very simple applications at the bottom of a market and then relentlessly moves up the market, eventually displacing established competitors. The examples quoted as illustrations of this theory are cellular phones, which displaced fixed-line phones, and the personal computer, which displaced the mainframe.
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Then, Richard Nelson of Columbia University, by postulating the concept of National Innovation Systems, gave us an understanding of the multiple institutions in a country that play a role: The firms that co-ordinate the creation, manufacture and marketing of the innovation, the universities which both train the engineers and scientists that work in such firms as well as do the basic research that lies at the heart of the innovation, and the governments whose policies influence all of the above.
Prof Nelson and his team pointed out some differences across countries. Affluent countries with large populations (the US, UK, France, and Germany, for example) are different from small population high-income countries (such as Denmark, Australia and Sweden) or other relatively low-income countries, in that they can support a wide range of manufacturing industries. Such countries tend to dominate R&D-intensive industries like aerospace, electronics and chemical products, all of which require large-scale domestic markets to be successful. He says that large defence spending in these large countries also reflect the national security concerns of their elite. Similar security concerns of the elite can result in even small countries like South Korea and Taiwan or even relatively poor countries like Argentina or Brazil allocating disproportionately large amounts for defence R&D.
Such national security concerns sometimes extend to civilian projects such as power and telecommunications, which are then supported by government procurement - as for example in two affluent countries, Canada and Sweden. Again, industries differ in what exactly they need to succeed. For example, success in the electronics industry depends more on capabilities in "reverse engineering" than in basic R&D.
Still another dimension along which country innovation systems differ is in the degree of domestic competition that exists. For example, in Japan, domestic electronics and auto companies intensely compete with each other but international competition is nearly absent. Contrast this with the telecom industries in Sweden and Canada, where Ericsson and Northern Telecom, respectively, have no domestic rivals.
The nature of the public education systems also seems to make a difference in the direction and scale of innovation, and the kind of industries that take root in different countries. Some industries require a supply of literate, numerically competent people from polytechnic-type institutions (as opposed to engineers for R&D from the university system), who are trained in close co-operation with the industries concerned. Germany, Sweden and Japan are examples of countries where such polytechnic/industry-supported training systems serve as the backbone of industrial success.
Does high public spending on defence R&D create always create successful internationally competitive civilian high-tech companies? A recent book, Decoding India's Defence Procurement, has many suggestions on how a possible $120-150 billion (Rs 8-10 lakh crore) defence procurement can be made to do just that.
The international evidence show that this will not happen automatically. The United States spends by far the largest share of industrial R&D on military projects - and this has helped American electronics, aircraft and internet companies dominate commercial markets. But, on the other hand, Britain - which has one of the world's largest military R&D budgets - has not produced any companies which have gone on to be wild successes in the civilian sector. France is another case like Britain, where high military R&D expenditure has yielded little civilian innovation benefits. Can we find the right ingredients in India's defence procurement budget to trigger our massive start-up dream?
Email: ajitb@rediffmail.com