Solving India’s innovation puzzle

Insights from behavioural economics can nudge Indian innovation, besides helping solve the Indian innovation puzzle. Here’s how.
Behavioural economics can help nudge Indian innovation. (Representational Image)
Behavioural economics can help nudge Indian innovation. (Representational Image)

The prime minister, in his recent interactions with technical institutions, has emphasised the need to prepare our youth for continuous disruptions and changes, keeping in mind the fourth industrial revolution. This builds on India’s pre-commitment to usher in innovation at the ground level. Insights from behavioural economics can nudge Indian innovation, besides helping solve the Indian innovation puzzle. Here’s how.

India’s innovation puzzle, as highlighted in the recent Economic Survey 2020-21, refers to the under-performance of Indian firms (contributing 37% to the total gross expenditure on research and development in the country) as compared to its peers in other top 10 economies (average of 68%). This contributes to India performing lower than expected on innovation despite the country’s firms having ample access to equity finance and more generous tax incentives than other countries.

At the firm level, first, a pre-commitment to innovate can help overcome an uncertainty aversion and promote long-term horizon for undertaking innovative R&D investment. For instance, Google employs a 70/20/10 model, whereby it pre-commits 70% projects to be dedicated to core business, 20% projects related to core business, and 10% unrelated to core business. This ensures that new innovations are allocated time, resources and opportunity to grow into future core business.

Second, establishing a social norm of innovation will be helpful. Google started the 20% project—allowing employees to use 20% of paid time for personal innovative projects. Such default “innovation time” for highly skilled and creative employees, and allowing opting-out, nudges employees to be creative without feeling forced into doing so.

Third, giving employees a platform to regularly discuss innovative ideas and collaborate can create an action bias in the minds of employees towards innovation. Welcoming and implementing new ideas can generate even more innovative behaviour from employees.

Fourth, firms can attract highly skilled and creative employees, minimise staff attrition, and boost efficiency by offering an exciting, fulfilling and comfortable work environment besides offering competitive pay packages. Highly coveted Silicon Valley employers are known to have office campuses catering to employees’ social needs, making work spaces an extension of home environments. This creates an anchoring bias in the minds of employees, especially fresh recruits, in favour of these companies. Moreover, it nudges employees to spend more time at the workplace and augments the likelihood of creative collaborations.

On the policy front, first, by strongly emphasising and publicising “Innovate India”, a mental model can be created in the minds of Indians that innovation is essential to survive, and thrive, irrespective of any future challenges (including pandemics).

Second, companies can crowd-source solutions to some of their complex challenges and reward the best among them. Wider publicity of innovation awards given to companies, higher education institutions, practitioners and students, as well as their awarded innovations, may help capture public imagination further. This would emphasise the social norm to innovate, boosting further innovation.

Third, disclosing successful outcomes of Indian innovation, and reinforcing them repeatedly, can help overcome failure bias (which predisposes one to expect defeat) in the minds of people. For instance, India’s successful development of an indigenous Covid vaccine and our manufacturing sector’s successful scaling-up of production processes to emerge as the second largest supplier of PPE kits have saved millions of lives globally. These and other Indian innovation successes need to be publicised widely. This will make people believe in their ability to innovate and the value of such innovations, thereby creating a virtuous cycle.

Fourth, trying a default option to pursue one internship during college (including non-technical education) and giving credit for this practical training component can help students gain valuable work-experience, develop better understanding of real-world demands, exercise critical thinking and actively make curriculum choices to develop desired skills.

To sum up, economic theory highlights the critical role of technological progress in economic growth. India needs to boost innovation, especially by the business sector, to catapult itself on a higher growth trajectory towards becoming the third largest economy in current US$ terms as it is on PPP terms. Behavioural economics can help nudge Indian innovation.

(Views are personal)

Neha Singh
Indian Economic Service (2015) officer

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