Igniting a new fire: Why innovation must be Sri Lanka’s new priority

Tuesday, 12 March 2013 00:44 -     - {{hitsCtrl.values.hits}}

Sri Lankans have proven to be a creative and innovative group of people. Whether in the past – the world-leading irrigation systems during the reign of the kings or more recently – the trailblazing telecom industry that beat India in introducing GSM and 3G – Sri Lanka has proven itself.

But our priorities seem to have shifted lately. The structure of the economy, and consequently the interests of the workforce, appears to be shifting more towards domestic non-tradeable activities like construction and retail and taking the focus somewhat away from export-oriented manufacturing and services, as evidenced from recent trade data.

The Sri Lankan economy cannot achieve faster growth and sustain it without a heavy focus on exportable knowledge-driven economic activities with innovation at its core. In an increasingly troubled external economic climate, Sri Lanka will need to develop world-class products by a world-class workforce.

As stated in the ‘Sri Lanka: Emerging Wonder of Asia’ document, “Sri Lanka’s successful integration with the global economy and its sustained success in international competition will depend increasingly on effective combinations of science, technology and innovation” (p.126). This article looks at the imperative for innovation and the policy priorities for Sri Lanka.


Innovation for growth – Not just in the developed world

There is a wide body of literature that demonstrates the role of innovation in economic development. For instance, the report ‘Innovation and Economic Growth’ by Goldman Sachs (2011) shows a clear statistical link between innovation and gains in the standard of living. Fostering innovation cannot simply be measured in terms of university degrees and patents awarded. Rather, the national goal should be to use the basic research and creativity inherent in our nation’s people and to translate these into innovative products and services through development and commercialisation initiatives.

Andrew Grove, the former Chairman of Intel, and Eric Schmidt, Executive Chairman of Google, encouraged the need for “translational innovation”. It is this type of approach that will enhance returns to investment, boost economic growth and help create productive, well-paying jobs. Innovation is as relevant in the developing part of the world as elsewhere. Innovation was earlier seen as an activity to be carried out by highly educated labour in R&D intensive companies that have strong links to leading centres of excellence in the scientific world.

From this view point, innovation appears to be typically a “first world” activity. But, this view is flawed. Innovation – the effort to transform ideas into new and improved products or processes – is an aspect applicable to economies at all levels of development.


Sri Lanka’s performance

Given that innovation is widely considered a primary source of economic growth, policies to facilitate firm-level innovation are high on the agenda in most countries. Sri Lanka too needs to focus on innovation to achieve national economic prosperity and an improved quality of life.

A country’s high-tech exports are a significant measure of a country’s ability to innovate and commercialise scientific findings effectively. In Sri Lanka, the value of high-tech exports has drastically declined in recent years. The share of high-tech exports out of the total manufactured exports which just 2.2% in 2001 fell to 1% by 2010. While Sri Lanka recorded an average 1.8% of high-tech exports share each year in the last decade, Korea recorded 75%, Thailand 27%, and Singapore and Malaysia over 50%. Sri Lanka’s performance was poorer even when compared to countries in the region like Pakistan and India (see Figure 1).

Sri Lanka’s weak innovation inputs could be a leading cause of this. For example Sri Lanka’s Gross Expenditure on R&D (GERD) as a proportion of GDP was just 0.11% in 2008 – a drop from 0.21% in 2004. The number of R&D scientists has also decreased from 4,062 in 2004 to 4,037 by 2008. Meanwhile, the expenditure on R&D by the private sector, out of total R&D expenditure, is remarkably low. Unlike in most developed countries where much of the R&D expenditure is by the private sector (over 65% in most cases), in Sri Lanka it is a mere 18%. The bulk of R&D expenditure in Sri Lanka is by the State sector (57%). This has strong implications on the rate of commercialisation of science and technology research.


Innovation is beyond research

Yet, innovation is distinct from just research and it doesn’t autonomously result from it. The nexus of industry-research collaborations, appropriate financing options, and support for commercialisation are vital drivers to move research to innovation. Unlike in most developed countries, many universities in developing countries like Sri Lanka have not established sufficiently strong linkages with industry. Industry obtains access to university laboratories, talents research scientists and a pool of potential recruits. Universities receive industry’s financial support, necessary to conduct their work and expand their resources, and they also receive feedback from industry to adapt research to the needs of the economy.

The Five Year Strategy of the Ministry of Technology and Research observes that “at present very few knowledge intensive companies and very little R&D that is required for innovation, is taking place in the private sector. On the other hand, most of the R&D undertaken by Sri Lankan scientists end up as mere publications in scientific journals with very few research outputs yielding a commercial product or a process” (p. 31).

Very few noteworthy examples of industry-research linkages exist in Sri Lanka today. The most prominent one is the Sri Lanka Nanotechnology Center (SLINTEC). In its first full year of operations alone, SLINTEC was able to secure five international patents on nanotechnology products. This is impressive when compared with Sri Lanka’s historic average of 1.8 total international patents per year. Similar industry-research partnerships in areas aside from nanotechnology need to be cultivated, drawing lessons from SLINTEC’s business model.


Building a talent pool

Meanwhile, building a qualified pool of individuals geared towards S&T and R&D will be critical to Sri Lanka’s innovation ambitions. Education – especially science education at all levels – is important. The importance of STEM subjects (Science, Technology, Engineering, and Mathematics) in building this workforce is now firmly on the education agenda globally. It is recognised that gearing a workforce towards an innovation-driven economy means giving young people an enhanced STEM education.

While the e-Sri Lanka initiative has certainly helped bridged the digital divide, the situation of science education is alarming. Nine out of every 10 schools in the country do not have the facilities to teach science stream subjects at A/Ls. Young boys and girls living as far off as Anuradhapura, Kantale and Vavuniya are travelling to Kurunegala to attend A/L science tuition classes. Very few students are engaged in science and engineering courses at Sri Lankan universities. Compared to a distinct knowledge-led economy like Singapore, where the majority enrolment is in engineering sciences of nearly 30%, in Sri Lanka the majority enrolment is in arts of over 30%.


Incentivising firms

Government policy has a role to play in incentivising innovation at the firm-level. In fact, Budget 2012 was a watershed moment in this regard. In Budget 2012, a range of tax incentives were announced, including: reduction of income tax on research income from 24% to 16%; reduction in personal income tax of all those engaged in research and technology from 24% to 16%; reduction in income tax on all institutions engaged in research and technology to 20% and such institutions are exempt from Value Added Tax (VAT); triple deduction in relation to research and development expenditure undertaken by enterprises through Government institutions, to promote private institutions to use Government research facilities; and so on. These measures have been commended by private sector groups.

However, interviews with leading industrialists reveal that several issues may constrain these incentives: (1) the small number of suitable Government research institutions capable of catering to industry needs (the ITI was the only one mentioned by those interviewed); and (2) the limited capacity in, and low-industry orientation of, Government research facilities. However, this is a vicious cycle and needs to be broken. Government research institutions cannot develop greater industry-orientation without kick-starting this process. Meanwhile, Sri Lanka’s private sector needs to be given confidence in the abilities of Government research institutions, and for this their financial and human resource capacities need to be expanded.


Policy priorities moving forward

Sri Lanka’s weak performance on innovation is a symptom of the low priority given to S&T and R&D investment over the past several years. This may be largely attributed to the distraction of fighting a war. In post-war Sri Lanka, reversing this it will be a key determinant of our competitiveness and rapid export growth.

A key point that needs emphasising is that innovation is beyond just research. Innovations come from the entrepreneurs who make them happen and ultimately depend on a society’s responsiveness and ability to transform research into higher exports, into things that add value to people’s lives and to the economy. Encouraging these entrepreneurs with appropriate policy support true entrepreneurship is important, for example by setting a conducive business environment, better access to finance through venture capital, incentivising commercialisation of inventions, etc.

For successful innovation policy to kick-in, it will need the firm backing of top leaders, to lend credibility to the vision and facilitate the adoption of key measures for removing bureaucratic hurdles. It is time that Sri Lanka set up a powerful ‘National Innovation Council’ chaired by the President which can drive the innovation policy agenda at a national level.

Meanwhile, Sri Lankan private sector leaders and public officials must take a close look at current examples of product and process innovation in the country to distil lessons from their experience and figure out how to multiply such enterprises. Enterprises like, for instance, Lanka Harness, have bucked the trend and become best-in-class through product and process innovation. Lanka Harness is now the world’s leading supplier of impact sensor harnesses for automobile airbags and seat belts to top automobile brands like Toyota, Honda, Ford and GM, with an impressive ‘1 Part Per Million’ quality standard.

Emerging economies that were poorer performers than Sri Lanka only a few decades ago are moving forward at a rapid pace. South Korea’s Hyundai and Kia manufacture the most fuel-efficient cars in the world today. Brazil’s Embraer is one of the leading jet manufacturers and has partnerships with the market leaders, Boeing and Airbus. Taiwan’s Acer and Asus are now two of the leading notebook manufacturers in the world. Innovation was at the heart of propelling these firms, and their countries, into the global spotlight.

Innovation is multifaceted and Sri Lanka doesn’t need to follow a set course in how the country engages with it. Yet it is clear that there needs to be a step-change in our priorities. While sectors like tourism certainly offer ‘low-hanging fruits’ capable of delivering quicker prosperity island wide; sustained, rapid and dynamic growth will only come from a ruthless focus on innovation.

A Sri Lanka that ignites the fire of innovation across sectors and across regions will be a vastly different Sri Lanka to one that chooses to follow a more conservative ‘business-as-usual’ path. This new ‘fire of innovation’ must be ignited by every corporate boardroom and every government agency. This fire, if ignited without delay and without exclusion, can power Sri Lanka’s ambitions of greater prosperity for its people.

(The writer is a Research Economist at the Institute of Policy Studies of Sri Lanka and Editor of the ‘Talking Economics Digest’ (www.ips.lk/talkingeconomics). The latest issue of the Digest contains a special edition on Innovation. Anushka can be contacted on anushka@ips.lk.)

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