India holds strengths in product, component, and process design, pharmaceuticals, and automobile and aircraft parts.

Legal frameworks for innovation have undergone major changes in the past 10 years and are still evolving. Intellectual property systems in both countries have evolved toward international standards, although weaknesses remain. In China the enforcement system lags behind modernization and expansion of the patent administration system. India’s patent system is experiencing backlogs and delays. China recently enacted a new anti-monopoly law and is making a major effort to develop and promote its own technical standards in the IT sector. There is some ambiguity about the extent to which either or both of these developments and others such as the recently announced government procurement policy will be applied to favor indigenous firms over multinationals and foreign competitors.

U.S.-based multinationals are investing heavily in China and India, including in R&D operations, although in most cases on a larger scale in China. Some of these affiliates work to adapt proprietary designs to local markets; others are working at the technological frontier on advanced products for world markets. The inducements to expand operations in the two countries are diverse – less expensive skilled labor, market access, opportunities to collaborate with world class scientists and engineers in academic and research institutions, and government grants and tax concessions. China has a more developed policy of subsidizing enterprises to promote regional economic development. In India, geographical dispersion is hampered by inadequate infrastructure. In both cases, there is a lack of experienced native-born managers.

Within China and India there is ambivalence about the role of international firms. They are seen as contributing to the broadening and deepening of the overall level of technology in the economies, but they are also suspected of monopolizing key technologies, crowding out opportunities for indigenous firms, and siphoning off top talent. Multinationals are responding to pressures to follow a more collaborative innovation model. Representatives of US-headquartered global firms emphasized the high level of labor turnover, making skills available to local enterprises, but they also acknowledged a tension between sharing of intellectual property to facilitate collaboration and building capabilities of indigenous firms that become competitors.

Four breakout sessions addressed recent changes in innovation capacity in important sectors of the Chinese and Indian economies—information technology and telecommunications, transport equipment, pharmaceuticals and biotechnology, and energy.

A theme of the IT session was the importance to innovation of a proximate population of highly skilled users. Although Chinese and Indian IT firms are gaining in scale and scope and certainly in manufacturing capability (for example, in semiconductors and personal computers), significant innovation, especially in software, is handicapped by the lack of a sophisticated customer base compared to those of the United States, Europe, and Israel. However, this gap may close within a decade or two.

Both China and India have ambitious plans to upgrade and expand domestic aircraft and automotive industries and become significant players in global markets. A key factor in both countries is the growing sophistication of engineering and design services, from fuselage design and avionics to passenger car platforms. The movement of design services to both countries has in large part been a function of cost differentials; but increasingly, it reflects a pursuit of talent. The Chinese and Indian automobile industries have moved from copying western designs to licensing technology and joint venturing with multinational companies (MNCs). The growing emphasis on indigenous innovation is illustrated by the Tata low-cost car for mass markets with wide income disparities. To become a significant supplier to western markets, the Chinese industry will have to overcome fragmentation and lack of brand identification.

As in other sectors, the roles of Chinese and Indian firms in pharmaceuticals and biotechnology reflect partly the breakdown of the self-contained innovation chain in western multinationals and partly the long-standing strengths in particular research, development,



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