Stimulating innovation for sustained high growth

Sri Lanka’s expenditure on R&D has been on the decline since 2004. This factor is placing us far behind other middle income countries in terms of high-tech manufacturing potential as well as innovation. The State of the Economy 2012 report, the Institute of Policy Studies’ annual flagship publication, discusses these concepts further. The following is an abstract from the report:

With technological transformations continuing at a rapid pace, innovation is becoming the determinant of faster and sustained export growth. It has been at the heart of the economic transformation of the world’s leading economies. With the end of the armed conflict, Sri Lanka too hopes to position itself as a dynamic global hub, with rapid and sustained economic growth.

As stated in the Sri Lanka: Emerging Wonder of Asia documenti, “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).

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 share of high-tech exports out of the total manufactured exports is low, recording just 2.2% in 2001 and falling to 1% in 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%ii. Sri Lanka’s performance was poorer even when compared to countries in the region like Pakistan and India.

Reaping what you sow

This is a direct symptom of Sri Lanka’s weak innovation inputs, for example, a very low level of national R&D investment as a proportion of GDP – a key determinant of innovation in a country. As a percentage of GDP, Sri Lanka’s Gross Expenditure on R&D (GERD) was just 0.21% in 2004, 0.17% in 2006, and 0.11 percent in 2008.iii The number of R&D scientists has also decreased from 4,062 in 2004 and 4,520 in 2006, to 4,037 in 2008.iv

Meanwhile, the expenditure on R&D by the private sector, out of total R&D expenditure, is also 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.

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.

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).

Linking for success

Very few noteworthy examples of industry-research linkages exist in Sri Lanka today. The most prominent one is the Sri Lanka Nanotechnology Center (SLINTEC) – a first-of-its-kind initiative that brings together leading private sector firms with leading Sri Lankan nanotechnology scientists. In its first full year of operations alone, SLINTEC was able to secure five international patents on nanotechnology products, including carbon nano tubes, nano fertiliser and nano rubber. Similar industry-research partnerships in areas aside from nanotechnology need to be cultivated, drawing encouragement from SLINTEC’s successes.  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 not only for increasing general science and technology literacy, but also to build up a critical mass of scientists, researchers and engineers. Yet, very few students are engaged in science and engineering courses at Sri Lankan universitiesv.

Compared to a distinct knowledge-led economy like Singapore, where the majority enrolment of nearly 30% is in engineering sciences, in Sri Lanka the majority enrolment with over 30%, is in the Arts. This is a direct reflection of the fact that only 10 per cent of all secondary schools in the country have the facilities to teach science stream at the A/L (Grades 12-13)vi. This naturally restricts the number of students who are able to gain admission to science and engineering programmes in university. Eventually this leads to the low numbers of qualified-professionals – Sri Lanka records only 237 researchers per million people, well below the developing country average of 374vii.

Setting up for change

Budget 2012 was a watershed moment for incentivising innovation in Sri Lanka. In it, 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 groupsviii. 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.

Fostering a forward-looking innovation system, that supports knowledge-interaction among various parties, and commercialisation, is critical if Sri Lanka is to achieve higher value exports. 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.

For a 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 or Prime Minister which can drive the innovation policy agenda at a national, strategic-level.

Footnotes

i Ministry of Finance and Planning (2010)

ii Ministry of Technology and Research (2010)

iii National Science Foundation (2008)

iv Ibid.

v This is of course, aside from the broader challenge of expanding tertiary education in Sri Lanka, where at present of more than 1000,000 deserving students only around 15 percent who gain the necessary A/L qualification are able to enter into university (Source: IPS, 2011).

vi IPS (2011)

vii World Bank (2008)

viii “National Chamber commends the 2012 Budget proposals”, Island, November 22, 2011 http://www.island.lk/index.php?page_cat=article-details&page=article-details&code_title=39577 [accessed on 1 May 2012].