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Serving Sri Lanka

This web log is a news and views blog. The primary aim is to provide an avenue for the expression and collection of ideas on sustainable, fair, and just, grassroot level development. Some of the topics that the blog will specifically address are: poverty reduction, rural development, educational issues, social empowerment, post-Tsunami relief and reconstruction, livelihood development, environmental conservation and bio-diversity. 

Tuesday, March 20, 2007

R&D investment – key to economic growth

The Island: 20/03/2007"

Whilst the world is congratulating Sri Lanka for outstanding economic growth, we cannot sustain this growth if we do not increase the R&D investment from the current 0.16% of GDP when countries like South Korea are investing 2% of GDP for R&D, says Rohantha Athukorala
Sri Lanka received many accolades from all over the world early this year for the 7 per cent plus economic growth in the year 2006,
Unemployment declined to 6 per cent. Exports grew at 8 per cent and little Sri Lanka attracts over US $ 2 bn in foreign remittances placing the country fourth in the select band of developing countries in that category.
The FDI flow exceeded 500 million dollars with a record level of use of donor funds at US $ 1 bn. Whilst the country is focused on mega infrastructural projects, the challenge is how are we to make the existing industries competitive. This can only be achieved if we take the global learning of successful economies– strategic investment on Research & Development.
Inflationary pressure
The strong agricultural performance and the continued tsunami reconstruction activities with a robust service sector performance helped mitigate the impact from the sky high oil prices that we experienced in the year. However, inflationary pressures are building with January registering a 20 percent plus inflation due to the fast credit growth, increased wages and pension payments and passing down of oil prices.
A greater degree of tightening monetary and financial policies to stabilize the economy is the need of the hour, but this requires striking a balance between the short-term realities and long-term objectives the country has set. Another way forward is to channel investment on technology to drive productivity up and thereby pass the benefits to the consumer. This can only be done with strategic investment on Research and Development (R&D).
Whilst the country is driving on infrastructural growth with projects like Upper Kotmale hydro power plant, the Puttalam and Trincomalee coal power projects, the Kerawalapitiya power plant, Colombo South port, Galle port, the new international airport, Hambantota international convention centre and national road projects like the Southern Highway and the Northern Expressway, we need to also invest in Research and Development on the existing engines of growth so that we keep Sri Lanka abreast with the changing global arena. Some may call this the knowledge- based economy.
Whatever the term used, the end result is making a particular industry more competitive globally. This can be done with a marketing-oriented approach. If we take one of the key industries of Sri Lanka – tea – we will be left behind if we do not invest on R&D and develop new clones that give a better yield. If a balance is not struck between infrastructural growth and making current industries competitive with R&D investment, Sri Lanka will not be able to maintain its current rate of economic growth.
The current spending on R&D in Sri Lanka is 0.16 per cent of GDP down from the 0.30 spent, way back in 1996. This is even below the investment by countries like Bangladesh. South Korea, which experienced phenomenal growth in the last two decades, has increased spending from 0.2 percent to a fantastic 2.8 percent of the GDP value, which explains the strategic thinking to make a country ride the industrial revolution.
Scandinavian countries spend nearly 4 per cent of GDP on R&D, whilst India has increased the investment to 1 per cent of the gigantic economy. Indian Prime Minister Man Mohan Singh once remarked that R&D investment is the only way to make a country compete with the Western world.
Sri Lanka
Sri Lanka’s long-term economic growth and stability depends heavily on the future of the country’s exports. The expansion and diversification of the export sector is of paramount importance in order to have a healthy balance of payments in the near future and sustain higher economic growth.
The government set up an economic growth target of 8 per cent in the medium- term with the objective of resolving the economic issues of poverty alleviation, but if we look at the hard reality, the unit labour costs in industry appear to be increasing and profitability decreasing. Productivity growth in 2005 declined by 5.6 per cent which, together with increases in a firm’s costs arising from higher domestic interest rates, oil prices and wages, is sure going to attack the bottom line of corporate Sri Lanka in the near future. The solution is to drive technology up and increase productivity.
SMEs and role of IT
On the estimated 694 billion rupee export earnings in 2006, the SME sector will account for a sizable chunk with a growth of over 18 per cent. It is estimated that the small enterprises will double its business turnover in the next two years, and the government has set up the SME Bank specifically to look into the needs of this sector. IT companies with assistance from the government should target this segment and carefully understand the needs of each of these organizations and invest in technology with customized software solutions, keeping in mind that they are SMEs.
The objective of IT companies should be initially to simplify their businesses by scanning the best technologies of the world so that cost could be controlled. It is only once that confidence is established, that one needs to develop systems to drive competitiveness.
As Sita Yahampath, the owner of Kandygs Handlooms, once told me: "IT came in handy at the time of the company’s diversification from spinning to dying, printing and garmenting. As we grew, we were getting more orders and needed intricate IT tools to serve our customers. It has also brought in more transparency in data and information management." Hence, we see the importance of R&D and technology investment for Sri Lanka’s economy
Sri Lankan SMEs - IT driven
Besides, IT systems also enable companies to respond faster and more effectively to customer requirements. Chaminda Tilakumara, the GM of a leading financial service provider which launched an online portal, said: "We needed a robust, dependable IT software system as with the increasing customer and overall business requirements, and considering that technologies in the financial services area get outdated quickly, we need a platform that was robust and dependable. We chose an IT platform that was able to deliver a complex infrastructure in a challenging environment, fitting our ambitious growth strategy. Which explains the importance of research and development and the technology transfer required to compete in today’s world."
SME growth and link to R&D
Adopting IT solutions helps SMEs in managing growth says Asoka Hettigoda, MD of Siddalepa. " As businesses start growing, rudimentary enterprises planning, especially manual, won’t be able to keep pace with on-going development. A fully fledged business infrastructure is needed. While software and IT solutions have been around for along time, we need support with focused research and development assistance so that we can differentiate the company’s brand in the global marketplace."
The convenience comes at a price.
SMEs have to investmoney on R&D and technology to be competitive in to- day’s world. It will make life simpler, but efficient. The typical investment would be around Rs. 200,000 depending on the solution to be provided. But the cost can be recovered through savings resulting from cutting down on losses that are incurred due to slow response. With the increasing industrial zones emerging in different parts of the country that offer tax incentives, an enterprising SME will have three to four manufacturing facilities in different parts of the country. In such a situation, it will be nearly impossible to manage inventory without a good soft ware solution.
Raw materials need to be managed efficiently to reduce working assets. The software solution will also help in an efficient management information system that can drive quicker decision-making thereby encouraging stronger growth.
Coconut sector
Apart from the SME sector, if we take, for instance, the coconut industry, a key challenge that local industry faces is competition from exporting countries. Sri Lanka can counterattack this strategy by investing on R&D and launching products like coconut paste, virgin oil, low fat coconut flour, innovative creams/ pastes/ non-dairy products/ confectionaries/bakery products and beverage products. barrister brushes, coconut water-based products for sports and energy drinks so that the magical mark of 25 billion rupees in export earnings can be crossed. That is case in point on how R&D can spruce up the Sri Lankan economy.
Let’s take up HACCP certification required for the 150 DC millers. Once again R&D leading to technology transfer will give a boost by opening up entry into EU countries which have enormous opportunities for growth. The current incentives given to modernize the DC millers will sure have an impact on the productivity of this sector in the long-term, but strategic investment in R&D can propel the industry to a new height, say industry experts.
Tea industry
The clear success story for the country in 2006 was the tea industry. The strong growth momentum seen in exports in the year has ended the year at a record performance of Rs. 91 billion foreign exchange earning, which has captured the attention of the policy makers. However, we cannot rest on our laurels as this performance is mainly due to the higher prices Sri Lankan teas fetched on account of the severe drought experienced in Kenya. From a R&D point of view, it’s important to note that the output of tea has declined to 310 million kg., down from the 2005 mark of 317 million kg. The challenge is whether R&D coulddrive the introduction of new clones into the industry so that with the same extent of land we have a higher output. That can drive the industry to the magical number of Rs. 150 billion in the years to come.
World experience
If we were to examine the best practices of the world, like in Japan and South Korea we can see that research, development and commercialization are separate functions. The research agencies are linked to the university system. Developing houses is linked to the business world. The cycle makes the university system align the curriculum to satisfy business needs. Hence, naturally the graduates are in demand by the business world. Sri Lanka needs to take a cue from this factor if we are to solve the unemployment issue of graduates.
Another learning is that development houses are funded by the government so that strategically the government directs which industry should be developed. For instance, in Brazil, the direction will be to make the coffee industry competitive. We need to take a decision on which industry Sri Lanka needs focused strategic investment. Is it the tea industry or the apparel industry? We also must take the global learnings on which investment will bring the best returns to Sri Lanka. The return does not have to be only from a monetary sense, but also from a social-economic point of view, namely, employment.
Sri Lanka and Knowledge Economy
To conclude, let me share the new term that will encapsulate Research and Development investment of a country – Knowledge Economy. A typical knowledge economy drives competitive advantage with technology than age-old practices like what we see in the Sri Lankan coconut and tea sectors.
With strategic investment, one can find new ways to improve productivity and breakthrough innovations. This can move Sri Lanka to a new plain in the global business arena like what Samsung has done to South Korea. Samsung has destroyed the Japanese iconic company – Sony.
With deep pockets, the South Korean giant Samsung realized that if it wants to set itself apart, like creating novel products of its own, especially if it wants to stay ahead of fast rising Chinese rivals, the company must invest on Research & Development (R&D).
Samsung has won over consumers with clever designs and multi-functional gadgets, like camcorders that download songs and refrigerators that also surf the internet. It has swept upwards for cellphone designs that look like dashboards, tuxedos or pebbles in a stream.
Last year, the company had a $ 59.2 billion in sales and a reported profit of $7.9 billion – 13 times as much the 2005 earnings forecast by rival Sony. Whilst the company has become an outstanding company for refining other people’s inventions, it was a strategy that worked well for the moment.
Sri Lanka needs to take these global learnings and drive R&D investment to at least 1 per cent of GDP in the near future, so that the current ‘engines’ of growth that help generate a 7 per cent plus economic growth. If we do not follow the Vietnams of the world, who simply copy Sri Lankan products, but invest in a more cost-effective platform, we will recapture the markets that we have commanded for years. The world in moving fast and Sri Lanka needs to keep up or else be left behind very badly.
The writer is an award winning marketer turned Economic Strategist, who has given leadership to several business sectors in the country in 2005/6 for the achievement of a record 7.4% GDP growth. He currently is Director, Economic Affairs in the Secretariat for Co-Ordinating the Peace Process (SCOPP), whilst reading for his doctoral degree.

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