Action plan to make Karnataka the preferred ER&D destination

In 2019, the global Engineering, Research & Design (ER&D) spend stood at USD 1.45 Trillion. Of this, activities worth about USD 90bn is outsourced. India, with its ER&D sector revenue of about USD 30 billion in FY19 has a 33% share of this outsourcing market.

Assisted by the factors such as: a. Growing acceptance of offshoring as a norm in ER&D, b. Significant investments from global capability centers and service providers in skills, scale and technology and c. Impetus from government and other (traditionally) non-engineering-centric verticals, the ER&D outsourcing market is expected to grow at CAGR of 10% to reach USD160 billion by 2025. India’s ER&D revenue is expected to grow at a CAGR of 12% to reach ~USD 60 billion by 2025. With the right policy measures aimed at improving ease of doing business, IP generation, development infrastructure, alternate skilling, innovative eco systems, corporate accelerators, open innovation platform etc., we expect India’s share of the global outsourcing to reach at USD100Bn and can create 650,000 new ER&D jobs by 2025.

Karnataka has evolved to be the pioneering destination for ER&D in the country and is today home to several MNCs for their product development activities. Currently, Karnataka contributes to around 40% of the India’s ER&D revenues. It competes with several destinations in India and abroad like Vietnam, Mexico, Malaysia, Eastern Europe and China and could continue to remain as the leader in this space. By investing in right programs that catalyse research and innovation by bringing together academia and private sector, the Government can ensure that Karnataka retains its lead on ER&D in the country and also help create 160,000-260,000 new ER&D jobs in Karnataka by 2025.

To realize the above vision, NASSCOM signed a Memorandum of Understanding (MOU) with Karnataka Innovation and Technology Society (KITS), Department of IT & BT and Government of Karnataka on 26th September 2019, to work towards advancement of the ER&D sector in the state in a voluntary, non-exclusive and in a non-binding manner.

To further this objective, we suggest the following action items for the Government of Karnataka.

1.Retain Karnataka’s market leadership position in ER&D in order to create 300,000-350,000 ER&D new employment by 2025

  1. Market the advantages of the state to top ER&D companies
  2. Improve availability of quality talent
  3. Accelerate new IP generation and improve R&D Infrastructure & ecosystem

2. Develop Karnataka as a Global Innovation Power to create knowledge economy and additional employment

  1. Setup Clusters of Innovation to reduce high dependency of the current economy and fiscal budget on the commodity sector and propel future economic growth and accelerates the inflow of foreign investment in the industry due to increased innovation activities
  2. Reinforce Karnataka Innovation Authority (KIA) as a one-stop shop for development of above clusters and policies

1.Retain Karnataka’s market leadership position in ER&D

1.1 Market the advantage of the state to top global ER&D companies

Given that Karnataka contributes about 40% of the India’s ER&D revenue, branding the state as the number one ER&D destination in the country and showcasing Karntak based ER&D companies capabilities is an important step to attract companies to the state. To take this idea forward, the Government of Karnataka should appoint a nodal agency, entrusted with the responsibility of promoting Karnataka as the preferred investment destination for ER&D companies.

The nodal agency will perform the following functions.

  1. Organise a guided tour to top ER&D companies which do not have any presence in India currently, showcase the capability of ER&D companies in Karnataka and the projects executed by these units. To strengthen their experience, setup world-class “Go and See Centres” in Karntaka, Germany and Japan where cutting edge prototypes and demos from Karnataka ER&D GCCs and Service Providers can be showcased.
  2. Handhold companies interested in investing in Karnataka, provide information on the regulations that government new investments and answer their queries on the procedures involved, the incentives available, etc. In brief, the agency should provide all assistance required before an investment application is submitted to the Government of Karnataka.
  3. Host events, conferences and industry meets aimed at demonstrating Karnataka ER&D product/technology innovations to world (e.g.: Global IoT technology exposition demonstrating latest ER&D innovations in IoT held in London).
  4. Participate in important trade events / roadshows abroad, including in new markets like Germany, Japan, China and Eastern Europe.
  5. Publish ER&D case studies, whitepapers, blogs on chosen focus domains to demonstrate thought leadership, promote with analyst publications
  6. Program to Encourage the new establishment of Multinational Companies’ R&D Centers in the Fields of Software Products, Automotive, Consumer Electronics, Semiconductor, Industrial, Energy, Telecom and Healthcare. These companies establishing or expanding MNC R&D Centres in Karnataka with an commitment of setting up minimum 2,500 personals in next 5 years will get following financial aid :
  • Reimburse the rent cost for a total period of 5 years if the company meets yearly agreed employment plan
  • Provide recruitment assistance of Rs.20 lakhs for employing minimum 200 employees in Karnataka
  • Provide investment subsidy equal to 20% of investment upto 2 crores
  • Provide uninterrupted supply of power and exemption from payment of electricity duty

1.2 Improve availability of quality talent

Availability of quality talent is a important factor that companies consider before setting up a R&D facility or expanding the existing facility in any location. Considering that Engineering colleges in Karnataka already admit about 75000 engineering students every year, the focus should be on churning out top quality, industry-ready engineers. To achieve this objective, the Government should:

  1. Provide financial support to Curate, Design & Develop, Industry-recognized NASSCOM courses & encourage Technical Universities in the state to include courses designed by industry, as part of the curriculum (NASSCOM can work with the industry to design the relevant courses).
  2. Provide financial support to academic institutions to introduce relevant industry led certification courses as part of the engineering degree program. These courses can be introduced as elective courses, to provide students the choice to enrol in courses based on their interest. The government can provide financial support to the institution on a per student basis, based on the certificates issued.
  3. Provide capital grants to the State universities to set up design labs in colleges (including the cost of procuring design tools/software used for engineering design by companies) and other R&D related scientific equipment. Hands on training using design tools should be mandatory for certain engineering degree programs and be part of the regular curriculum.
  4. Introduce a partially funded internship scheme, under which companies can provide internship to students from colleges in Karnataka for a period of three months and the state government will bear 50% of the stipend, capped at Rs.10000 p.m.
  5. Include foreign language training & cultural awareness in Engineering curriculum; especially Chinese, Japanese and German.
  6. Introduce a CM Research Fellowship program in the fields of Engineering & High-technology, under which 200 selected Phd students enrolled in universities in Karnataka will receive monthly scholarships of Rs 30,000 and annual research grants of Rs 1.5 lakh

1.3 Accelerate new IP generation, applied research and improve R&D Infrastructure.

In a modern economy, innovation is the key to success. However, often, due to technological spillover, the company investing in R&D reaps only a part of financial benefit compared to the overall benefit accrued to the market. On top of this, there is high level of risk involved in R&D investments. These market failures (Technological spillover and High risks) act as a disincentive for companies to invest in R&D and as a result, many countries end up with suboptimal level of R&D investment.

The state government shall provide funding platforms to accelerate new IP generation & improve R&D Infrastructure & ecosystem, these schemes will attract companies to set up ER&D centers or expand existing centers in Karnataka due to improved ER&D infrastructure, ecosystem and access to innovation.

After analysing the R&D promotion policies of countries like Korea, Japan, China and Israel, it was found Israel has various schemes to provide financial support to promote R&D in the private sector, which have led to a higher level of innovation. Considering the dismal R&D investment in Karnataka, there is a case for introducing similar programs here too. The following programs which are currently in operation in Israel to be introduced in Karnataka. The details of these schemes have been provided

  1. Provide R&D grants, covering up to 50% of the approved R&D expenditure of Karnataka-based MNCs & Engineering Service Providers, to encourage the performance of commercial R&D programs in Karnataka. Registering new IP in India can be a pre-condition but may be transferred abroad under favourable conditions. The companies that receive financing undertake to repay the received funding to the state government via royalty payments from sales, but only if the project succeeds in reaching the commercialization stage.
  2. Provide financial incentive to encourage and assist Karnataka based MNCs & Engineering Service Providers seeking to meet the challenges and needs of the public sector with innovative technological solutions. The fruits of the incentive program will enable: Improved public-government service for the citizens, Streamlining and enhancement of public sector and public services sector & Improved public accessibility of information. The State Government may allow a “field trial” on a large scale and based on state infrastructure. Success in proving the feasibility and selling to a government customer provides a springboard to other markets in India and the world. Under this scheme, the state government should provide grants up to 80% of approved budget up to INR 6,000,000 for a period of up to 12 months. Sales to the state government companies and public corporations in Karnataka are exempt from paying royalties.
  3. Provide grants for Karnataka based higher education/research institutions, which receives professional support on Applied Research by an MNC or Engineering Service provider (such as a venture capital fund). The Supporting company who serves as partner will fund 10% of the project cost and the state government will fund 90% of the approved budget with a maximum scope of INR 10,000,000 for a period of 12 months, with an option to extend the support up to 15 months. All the rights to the knowledge accumulated in the research are retained by the research institution and the supporting company will have first right to negotiate commercialization of research results with the research institution.
  4. Provide incentives to Karnataka based MNCs and Engineering Service providers engaged in R&D and interested in collaborating with companies from the same industry, for the establishment of R&D infrastructure critical to their activity. The Association, as an independent legal entity, should be provided a grant from the state government up to 66% of the approved budget up to 3 years, with the option for an extension of another 3 years. The remaining 34% is to be funded by the participating companies.
  5. Provide financial incentive to Karnataka based MNCs and Engineering Service Provider, which are interested in establishing open innovation labs, which offer start-ups/entrepreneurs the opportunity to access a unique technological infrastructure and industry expertise to reach proof of concept. The govt should provide funds up to INR 80 million for the lab’s establishment (33% of the costs, 50% in the periphery areas), and up to INR 1,00,00,000 (50% of the approved budget) of the ongoing operating expenditures of the lab, each year up to 3 years, with the option for an extension of another 3 years.

2. Developing Karnataka as a Global Innovation Power:

As Karnataka continues a sustained growth trajectory, the need for a robust Innovation ecosystem coupled with an increased investment both by the private sector and the government in Innovation gains significance. The Karnataka government has been proactive in formulating several support programs and acknowledging the importance of Innovation. However, addressing bureaucratic and risk-averse nature of the government institutions as well as encouraging the private sector to invest more in Innovation will lead to seamless alignment with the needs of the state. To realize the potential and become a global Innovation hub, Karnataka should address the ‘legacy issues’ realize the potential and become a global R&D hub, Karnataka should address the ‘legacy issues’ that has played spoilsport in the growth of the economy.

A state of Karnataka’s size should invest at least 1.5%-2% of GDP on R&D, but this cannot be achieved without the private sector enhancing its investments in technology development. Furthermore, despite global economic turmoil, Karnataka remains one of the fastest growing economy. Thus, a huge opportunity lies for the businesses in Karnataka to enhance their Innovation and commercial efforts. Investing in Innovation will also lead to employment generation and creation of a knowledge economy. Therefore, development of Clusters of Innovation and Innovation corporations should be encouraged as well.

Karnataka  represents a very diverse market, even amongst states in other countries and there are numerous pull factors that make Karnataka a lucrative destination for R&D. Access to technical competencies, young talent pool, cost savings, proactive government support and presence of an indigenous market are some of the significant factors attracting multinational companies to expand their R&D and production operations in Karnataka. The global companies are starting to see this opportunity for improving their own growth by investing and creating a R&D centers in Karnataka. Increasing investments in Innovation would require focused and concentrated efforts from both the government and the private sector.

2.1 Clusters of Innovation

‘Innovation Clusters’ refer to the concentration of interconnected companies and institutions of a particular field within a geographical region. They are also known as “global economic hot spots where new technologies germinate at an astounding rate and where pools of capital, expertise, and talent foster the development of new industries and new ways of doing business”. A cluster is usually developed in order to encourage new technologies among local companies along with research and higher education institutions in order to generate a proper ecosystem to encourage innovation and global connectivity.

The mechanism of the cluster formation in a region is implemented on the basis of the joint efforts and competences of different participants, among which the government plays a central role.

The government is responsible to set-up a collaborative infrastructure platform and provide customized and comprehensive incentives to attract companies to jointly invest, innovate, create and IP that will result in value creation for the entire ecosystem.

Multiple countries have increased their global competitive indices by making cluster initiatives a core part of their development strategies. Silicon Valley in California, Silicon Wadi in Israel and Beijing are prime examples of successful high-tech innovation clusters globally. Consider the case of Zhanjiang, a highly populated city in China with employment issues where the establishment of technological and innovation clusters led to significant improvement in their employment rate. Zhanjiang park, a premier technology cluster in China today has more than 6000 companies and their workforce has grown from 5,000 to 160,000 over the last decade.

2.1 Cluster of Innovations (CoI) in context of Karnataka

Karnataka, known for its frugal innovation approach, has delivered significant results in traditional science and technology research through close public-private partnerships. The supportive policy regimes and initiatives by the government have also spurred high investments and employment growth in ER&D. However, with emerging digital engineering technologies such as such as IoT, 5G, robotics, AI/ML, mobility, cloud, automation, data & analytics, blockchain, and AR/VR, it is imperative for policy to focus more on driving innovation, cross-industry collaboration and fostering entrepreneurship. Additionally, the commitment of the government to increase Karnataka’s standing as both a global innovation power and attractive manufacturing hub necessitates the set-up of Innovation Clusters across the State.

Innovation Clusters are uniquely differentiated in its structure and operating model. They also have a greater ability to create value to participating entities due to following advantages:

  1. Unlike traditional industrial clusters, Cluster of Innovation (CoI) represent a system of close relationships not only between companies, suppliers and regulators, but also includes institutions of knowledge, including research centers and universities. Interactions among a wider range of participating members fosters greater levels of collaborative knowledge sharing and co-innovation
  2. The joint approach to R&D substantially reduces the financial burden on individual companies
  3. Interactions facilitated by the innovation cluster results in unique ‘Outside-In’ perspectives that companies can leverage to their combined advantage
  4. Cluster structures create positive effects not only for the cluster association and its members, but also for the home regions: An increase in employment, the growth of wages and profits, intensification of entrepreneurial activity, etc. Cluster structures provide economic growth for the region, not only for cluster members, improving the welfare of the entire population, acceleration of regional scientific and technological progress, improving the regional innovation system;
  5. Ability to coordinate efforts and financial resources to create new products and technologies, and output them to the market within the cluster, it is possible alignment of supply chain, from product creation to its production and to market;
  6. The establishment within innovation clusters mainly export-oriented products and technologies, i.e. intra-cluster competitive advantages are significant on an international scale;
  7. Creating a sustainable distribution system of new technologies, knowledge, products, so-called technological network, which is based on a joint scientific base;
  8. Ability to carry out internal specialization and standardization, minimizing the cost of innovation;

2.1.1 Value Proposition for establishment of ‘Clusters of Innovation (CoI)’

The intent of this report is to recommend the set-up of dedicated, specialized innovation hot-beds across key growth areas, and facilitate accelerated development of ‘enabling solutions and technologies’ that can easily be adopted across the entire state.

Cluster structures set-up regionally will successfully cater to the combined interests of government, businesses and academia in the following ways:

  1. Government:
    • Helps reduce the high dependency of the current economy and fiscal budget on the commodity sector and propel future economic growth by leveraging opportunities offered by high-tech
    • Accelerates the inflow of foreign investment in the industry due to increased innovation activities
    • The ‘Co-opetition’ between stakeholders in the cluster leads to greater specialization and results in the formation of new businesses thus increasing profitability of regional companies, facilitates higher levels of infrastructure investment and greater employment levels
  2. Business:
    • Aids the networking of companies, leading to cross pollination of ideas and initiatives
    • Creates additional competitive advantages due to the ability to implement standardization and specialization which also reduces cost of innovation
    • Participants, especially SMEs, get access to greater technology know-how and can respond more accurately and quickly to their customer needs
    • Accelerates the creation of new IP through joint investment in technology, information, infrastructure, and education
  3. Universities and Research Academia:
    • Facilitates opportunities to work on wider range of research initiatives
    • Offers potential access to research funding from other members within the cluster
    • Facilitates greater networking and career opportunities for participating student communities

Formation and development of state clusters contributes to the effective integration of intellectual and financial resources, both inside and outside the cluster. Thus, the cluster model can create a new generation of innovative businesses. It is important that the cluster is based on fundamental principles of ‘collaboration, co-opetition and mutual value creation’ and operated through the synergistic efforts by all participating stakeholders.

2.2 Reinforce Karnataka Innovation Authority (KIA) as a one-stop shop for development of above clusters and policies

According to the World Economic Forum’s 2016-2017 Global Competitiveness Report, Israel is the second most innovative country in the world. The study ranked 138 countries in terms of competitiveness, and Israel moved up three steps this year, to hold a place in the top 25, demonstrated consecutive years of GDP growth, as well as boasted a 5% unemployment rate which is one of the world’s lowest.

The Karnataka state government formally launched “Karnataka Innovation Authority” to protect consumer-friendly technology businesses that are operating under hazy regulations. It has powers to exempt or relax provisions of any law enacted by the State Legislature to promote innovation and it can be reinforced further to develop clusters of as a one-stop shop for development of above clusters by adopt Israel Innovation Authority framework which is currently in operation in Israel.



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