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Over the last two decades, India has become

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a global hub for software development

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and offshoring of back office services, as we call it,

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and what we were interested in finding out was that

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because of this huge industry that has started

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over the last two decades in India,

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offshoring software development and back office services,

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there's been a flight of white collar jobs

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from the developed world to India.

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When this is combined with the loss of manufacturing jobs

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to China, it has, you know, led to considerable angst

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amongst the Western populations.

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In fact, if you look at polls, they show a declining

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trend for support for free trade in the West.

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Now, the Western elites, however, have said

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this fear is misplaced.

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For example, if you have read — I suspect many of you

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have done so — read the book by Thomas Friedman

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called "The World Is Flat," he said, basically, in his book

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that, you know, this fear for free trade is wrong

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because it assumes, it's based on a mistaken assumption

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that everything that can be invented has been invented.

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In fact, he says, it's innovation that will keep the West

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ahead of the developing world,

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with the more sophisticated, innovative tasks being done

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in the developed world, and the less sophisticated,

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shall we say, drudge work being done

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in the developing world.

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Now, what we were trying to understand was,

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is this true?

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Could India become a source, or a global hub,

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of innovation, just like it's become a global hub

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for back office services and software development?

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And for the last four years, my coauthor Phanish Puranam

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and I spent investigating this topic.

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Initially, or, you know, as people would say, you know,

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in fact the more aggressive people who are supporting

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the Western innovative model, say,

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"Where are the Indian Googles, iPods and Viagras,

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if the Indians are so bloody smart?" (Laughter)

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So initially, when we started our research, we went

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and met several executives, and we asked them,

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"What do you think? Will India go from being a favored

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destination for software services and back office services

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to a destination for innovation?"

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They laughed. They dismissed us.

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They said, "You know what? Indians don't do innovation."

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The more polite ones said, "Well, you know, Indians

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make good software programmers and accountants,

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but they can't do the creative stuff."

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Sometimes, it took a more, took a veneer of sophistication,

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and people said, "You know, it's nothing to do with Indians.

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It's really the rule-based, regimented education system

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in India that is responsible for killing all creativity."

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They said, instead, if you want to see real creativity,

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go to Silicon Valley, and look at companies

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like Google, Microsoft, Intel.

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So we started examining the R&D and innovation labs

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of Silicon Valley.

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Well, interestingly, what you find there is,

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usually you are introduced to the head of the innovation lab

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or the R&D center as they may call it,

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and more often than not, it's an Indian. (Laughter)

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So I immediately said, "Well, but you could not have been

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educated in India, right?

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You must have gotten your education here."

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It turned out, in every single case,

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they came out of the Indian educational system.

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So we realized that maybe we had the wrong question,

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and the right question is, really, can Indians

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based out of India do innovative work?

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So off we went to India. We made, I think,

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about a dozen trips to Bangalore, Mumbai, Gurgaon,

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Delhi, Hyderabad, you name it, to examine

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what is the level of corporate innovation in these cities.

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And what we found was, as we progressed in our research,

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was, that we were asking really the wrong question.

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When you ask, "Where are the Indian Googles,

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iPods and Viagras?" you are taking a particular perspective

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on innovation, which is innovation for end users,

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visible innovation.

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Instead, innovation, if you remember, some of you

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may have read the famous economist Schumpeter,

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he said, "Innovation is novelty

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in how value is created and distributed."

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It could be new products and services,

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but it could also be new ways of producing products.

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It could also be novel ways of organizing firms and industries.

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Once you take this, there's no reason to restrict innovation,

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the beneficiaries of innovation, just to end users.

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When you take this broader conceptualization of innovation,

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what we found was, India is well represented

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in innovation, but the innovation that is being done in India

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is of a form we did not anticipate, and what we did was

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we called it "invisible innovation."

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And specifically, there are four types of invisible innovation

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that are coming out of India.

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The first type of invisible innovation out of India

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is what we call innovation for business customers,

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which is led by the multinational corporations,

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which have -- in the last two decades, there have been

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750 R&D centers set up in India by multinational companies

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employing more than 400,000 professionals.

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Now, when you consider the fact that, historically,

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the R&D center of a multinational company

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was always in the headquarters, or in the country of origin

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of that multinational company, to have 750 R&D centers

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of multinational corporations in India

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is truly a remarkable figure.

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When we went and talked to the people in those innovation

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centers and asked them what are they working on,

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they said, "We are working on global products."

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They were not working on localizing global products

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for India, which is the usual role of a local R&D.

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They were working on truly global products,

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and companies like Microsoft, Google, AstraZeneca,

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General Electric, Philips, have already answered

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in the affirmative the question that from their Bangalore

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and Hyderabad R&D centers they are able to produce

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products and services for the world.

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But of course, as an end user, you don't see that,

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because you only see the name of the company,

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not where it was developed.

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The other thing we were told then was, "Yes, but, you know,

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the kind of work that is coming out of the Indian R&D center

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cannot be compared to the kind of work that is coming out

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of the U.S. R&D centers."

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So my coauthor Phanish Puranam, who happens to be

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one of the smartest people I know, said

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he's going to do a study.

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What he did was he looked at those companies

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that had an R&D center in USA and in India,

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and then he looked at a patent that was filed

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out of the U.S. and a similar patent filed out of the same

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company's subsidiary in India,

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so he's now comparing the patents of R&D centers

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in the U.S. with R&D centers in India of the same company

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to find out what is the quality of the patents filed

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out of the Indian centers and how do they compare

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with the quality of the patents filed out of the U.S. centers?

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Interestingly, what he finds is

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— and by the way, the way we look at the quality of a patent

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is what we call forward citations: How many times

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does a future patent reference the older patent? —

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he finds something very interesting.

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What we find is that the data says

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that the number of forward citations of a patent filed

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out of a U.S. R&D subsidiary is identical to the number

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of forward citations of a patent filed by an Indian subsidiary

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of the same company within that company.

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So within the company, there's no difference in the forward

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citation rates of their Indian subsidiaries versus

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their U.S. subsidiaries.

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So that's the first kind of invisible innovation coming out of India.

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The second kind of invisible innovation coming out of India

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is what we call outsourcing innovation to Indian companies,

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where many companies today are contracting

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Indian companies to do a major part of their product

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development work for their global products

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which are going to be sold to the entire world.

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For example, in the pharma industry, a lot of the molecules

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are being developed, but you see a major part of that work

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is being sent to India.

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For example, XCL Technologies,

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they developed two of the mission critical systems

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for the new Boeing 787 Dreamliner,

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one to avoid collisions in the sky,

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and another to allow landing in zero visibility.

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But of course, when you climb onto the Boeing 787,

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you are not going to know that this is invisible innovation

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out of India.

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The third kind of invisible innovation coming out of India

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is what we call process innovations, because of an injection

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of intelligence by Indian firms.

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Process innovation is different from product innovation.

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It's about how do you create a new product or develop

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a new product or manufacture a new product,

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but not a new product itself?

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Only in India do millions of young people dream

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of working in a call center.

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What happens — You know, it's a dead end job in the West,

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what high school dropouts do.

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What happens when you put hundreds of thousands

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of smart, young, ambitious kids

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on a call center job?

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Very quickly, they get bored, and they start innovating,

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and they start telling the boss how to do this job better, and

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out of this process innovation comes product innovations,

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which are then marketed around the world.

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For example, 24/7 Customer,

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traditional call center company, used to be a traditional

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call center company. Today they're developing

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analytical tools to do predictive modeling so that before

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you pick up the phone, you can guess

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or predict what this phone call is about.

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It's because of an injection of intelligence into a process

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which was considered dead for a long time in the West.

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And the last kind of innovation, invisible innovation

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coming out of India is what we call management innovation.

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It's not a new product or a new process

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but a new way to organize work,

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and the most significant management innovation to come

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out of India, invented by the Indian offshoring industry

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is what we call the global delivery model.

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What the global delivery model allows is, it allows you

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to take previously geographically core-located tasks,

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break them up into parts, send them around the world

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where the expertise and the cost structure exists,

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and then specify the means for reintegrating them.

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Without that, you could not have any of the other

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invisible innovations today.

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So, what I'm trying to say is, what we are finding

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in our research is, that if products for end users

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is the visible tip of the innovation iceberg,

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India is well represented in the invisible, large,

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submerged portion of the innovation iceberg.

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Now, this has, of course, some implications,

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and so we developed three implications of this research.

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The first is what we called sinking skill ladder,

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and now I'm going to go back to where I started my

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conversation with you, which was about the flight of jobs.

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Now, of course, when we first, as a multinational company,

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decide to outsource jobs to India in the R&D,

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what we are going to do is we are going to outsource the

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bottom rung of the ladder to India, the least sophisticated jobs,

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just like Tom Friedman would predict.

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Now, what happens is, when you outsource the bottom rung

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of the ladder to India for innovation and for R&D work,

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at some stage in the very near future you are going to have

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to confront a problem,

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which is where does the next step

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of the ladder people come from within your company?

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So you have two choices then:

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Either you bring the people from India into

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the developed world to take positions in the next step

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of the ladder — immigration —

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or you say, there's so many people in the bottom step

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of the ladder waiting to take the next position in India,

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why don't we move the next step to India?

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What we are trying to say is

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that once you outsource the bottom end of the ladder, you --

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it's a self-perpetuating act, because of the sinking skill ladder,

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and the sinking skill ladder is simply the point that

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you can't be an investment banker

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without having been an analyst once.

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You can't be a professor without having been a student.

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You can't be a consultant without having been a research associate.

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So, if you outsource the least sophisticated jobs,

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at some stage, the next step of the ladder has to follow.

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The second thing we bring up is what we call

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the browning of the TMT, the top management teams.

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If the R&D talent is going to be based out of India

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and China, and the largest growth markets

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are going to be based out of India and China,

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you have to confront the problem that

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your top management of the future

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is going to have to come out of India and China,

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because that's where the product leadership is,

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that's where the important market leadership is.

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Right? And the last thing we point out in this slide,

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which is, you know, that to this story, there's one caveat.

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India has the youngest growing population in the world.

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This demographic dividend is incredible, but paradoxically,

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there's also the mirage of mighty labor pools.

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Indian institutes and educational system,

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with a few exceptions, are incapable of producing students

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in the quantity and quality needed

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to keep this innovation engine going,

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so companies are finding innovative ways to overcome this,

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but in the end it does not absolve the government

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of the responsibility for creating this educational structure.

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So finally, I want to conclude

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by showing you the profile of one company, IBM.

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As many of you know, IBM has always been considered

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for the last hundred years to be one of the most

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innovative companies.

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In fact, if you look at the number of patents filed over history,

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I think they are in the top or the top two or three companies

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in the world of all patents filed in the USA as a private company.

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Here is the profile of employees of

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IBM over the last decade.

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In 2003, they had 300,000 employees,

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or 330,000 employees, out of which, 135,000

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were in America, 9,000 were in India.

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In 2009, they had 400,000 employees, by which time

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the U.S. employees had moved to 105,000,

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whereas the Indian employees had gone to 100,000.

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Well, in 2010, they decided they're not going to reveal

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this data anymore, so I had to make some estimates

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based on various sources.

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Here are my best guesses. Okay? I'm not saying

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this is the exact number, it's my best guess.

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It gives you a sense of the trend.

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There are 433,000 people now at IBM, out of which

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98,000 are remaining in the U.S.,

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and 150,000 are in India.

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So you tell me, is IBM an American company,

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or an Indian company? (Laughter)

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Ladies and gentlemen, thank you very much. (Applause)