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Why India needs to protect its technology companies

India has an advantage over China: its engineers are building Silicon Valley’s most advanced technologies and leading many of its companies. And with the protectionist sentiments of the Trump administration and constant anti-immigrant rants, foreign-born people are getting a clear message: Go home; we don’t want you. This is a gift to India and China, because the immigrant exodus is boosting their innovation capabilities.

opinion Updated: Dec 12, 2017 16:19 IST
India must stop the unfair competition using its best weapon: regulation and taxes. Doing so will not stifle innovation but boost it, because Indian startups will be able to copy what they need to and compete on a level playing field
India must stop the unfair competition using its best weapon: regulation and taxes. Doing so will not stifle innovation but boost it, because Indian startups will be able to copy what they need to and compete on a level playing field(AFP)

Ever since the Chinese Government banned Facebook in 2009, Mark Zuckerberg has been making annual trips there attempting to persuade its leaders to let his company back in. He learned Mandarin and jogged through the smog-filled streets of Beijing to show how much he loved the country. Facebook even created new tools to allow China to do something that goes against its founding principles: to censor and suppress content.

The Chinese haven’t obliged. They realised the dangers of letting a foreign company dominate their technology industry. China also blocked Google, Twitter, and Netflix and raised enough obstacles to force Uber out.

Chinese technology companies are now amongst the most valuable (and innovative) in the world. Facebook’s Chinese competitor Tencent eclipsed it in market capitalisation in November, crossing the $500 billion mark. Tencent’s social media platform WeChat enables bill payment, taxi ordering, and hotel booking while chatting with friends; it is so far ahead in innovation that Facebook may be copying its features. Other Chinese companies such as Alibaba, Baidu, and DJI are racing ahead in e-commerce and logistics; artificial intelligence and self-driving cars; and drone technologies. These companies are gearing up to challenge Silicon Valley itself.

The protectionism that economists have long decried, favouring domestic supplies of physical goods and services, limits both opportunity and incentive to innovate and evolve, and so stifles a country’s competitiveness and productivity. When India imposed heavy tariffs on imported cars and electronics, for example, it created monopolies. The companies thus protected from all competition became lethargic, lagged in innovation, and began to offer substandard products and services at high prices, hobbling India’s economy.

Chinese technology protectionism has reaped huge rewards because it creates a fertile ground for local startups without any barriers to ideas and innovations from across its borders, which travel freely by electronic communication.

Over the Internet, knowledge and ideas spread instantaneously. Entrepreneurs in one country can easily learn about the innovations and business models of another country and duplicate them. Technologies are advancing on exponential curves and becoming faster and cheaper. Any technology company, in any country, that does not innovate risks going out of business, because local startups are constantly emerging that have the ability to challenge them.

Even the companies that China has protected face constant threats to their existence; they have to keep innovating and improving services to survive. Their competition comes from within China.

Silicon Valley is also not the role model for free trade and openness. Its moguls openly tout the need to build monopolies and gain unfair competitive advantage by dumping capital. They take pride in having an economy in which money is the ultimate weapon and winners take all. If tech companies cannot copy a technology, they buy the competitor.

Amazon, for example, has been losing money or earning razor-thin margins for more than two decades. But because it was gaining market share and killing off its brick-and-mortar competition, investors rewarded it with a high stock price. With this inflated capitalisation, Amazon raised money at below market interest rates and used it to increase its market share. Uber has used the same strategy to raise billions of dollars to put potential global competitors out of business.

Since losing the China market, both Amazon and Uber have had their eyes set on the consolation prize: India. Facebook has also tried every trick in the book to dominate India’s mobile markets, including offering Free Basics, an Internet walled garden, which would have allowed it to control everything that the user saw.

Just as it stopped Free Basics, India must stop the unfair competition using its best weapon: regulation and taxes. Doing so will not stifle innovation but boost it, because Indian startups will be able to copy what they need to and compete on a level playing field.

This may sound strange, but copying is good for innovation. This is how Chinese technology companies got started: by adapting Silicon Valley’s technologies for Chinese use and improving on them. And that is how Silicon Valley works too.

Steve Jobs built the Macintosh by copying the windowing interface from the Palo Alto Research Center. As he admitted in 1994, “Picasso had a saying, ‘Good artists copy, great artists steal’; and we have always been shameless about stealing great ideas”.

Apple usually lags in innovations so that it can learn from the successes of others. Indeed, almost every Apple product has elements that are copied. The iPod, for example, was invented by British inventor Kane Kramer; iTunes was built on a technology purchased from Soundjam; and the iPhone frequently copies Samsung’s mobile technologies — while Samsung copies Apple’s.

Facebook’s origins also hark back to the ideas that Zuckerberg copied from MySpace and Friendster. And nothing has changed: Facebook Places is a replica of Foursquare; Messenger video duplicates Skype; Facebook Stories is a clone of Snapchat; and Facebook Live combines the best features of Meerkat and Periscope. Facebook copied Whatsapp but couldn’t gain market share, so it spent a fortune to buy the company (again acting on the Silicon Valley mantra that if stealing doesn’t work, then buy).

China opened its doors at first to let Silicon Valley companies bring their ideas there to train its entrepreneurs. And then it abruptly locked them out so that local competition could thrive. It realised that Silicon Valley had such a monetary advantage that local entrepreneurs could never compete.

India has an advantage over China: its engineers are building Silicon Valley’s most advanced technologies and leading many of its companies. And with the protectionist sentiments of the Trump administration and constant anti-immigrant rants, foreign-born people are getting a clear message: Go home; we don’t want you. This is a gift to India and China, because the immigrant exodus is boosting their innovation capabilities.

What India should encourage is foreign investment. There is little disadvantage in sharing the risks with investors who can stomach the failures common in startups. Investors in both Silicon Valley and China perceive huge opportunities in India’s exploding Internet market, and are champing at the bit to invest. They bring valuable experience and contacts with them: just what India’s entrepreneurs need in order to gain the advantage over Silicon Valley.

Vivek Wadhwa is a Distinguished Fellow at Carnegie Mellon University at Silicon Valley and author of The Driver in the Driverless Car: How Our Technology Choices Will Create the Future.

The views expressed are personal