10 Dec 2009Working Paper Summaries

State Owned Entity Reform in Absence of Privatization: Reforming Indian National Laboratories and Role of Leadership

by Prithwiraj Choudhury and Tarun Khanna

Is privatization necessary? In India and across emerging markets, state-owned entities (SOEs) continue to make up a large proportion of industrial sales, yet they lag behind private counterparts on performance measures. But SOEs may be able to significantly improve performance even in the absence of property rights, according to HBS doctoral candidate Prithwiraj Choudhury and professor Tarun Khanna. As they document, 42 Indian state-owned laboratories started from a base of negligible U.S. patents, yet in the period 1993-2006 (during which the Indian government launched an ambitious privatization program), the labs were granted more patents than all domestic private firms combined. The labs then licensed several of these patents to multinationals, and licensing revenue increased from 3 percent to 15 percent as a fraction of government budgetary support. Findings are relevant to firms and R&D entities around the world that depend on varying degrees of government budgetary support and government control, especially in emerging markets like India, where SOEs control up to one-third of all industrial activity. Key concepts include:

Despite the absence of property rights, 42 Indian state-owned laboratories significantly increased U.S. patents and licensing revenue from multinationals without negatively affecting publication quality and quantity.
This development may be due to incentive policy change and leadership change at the labs. U.S. patents as well as revenue from multinationals increased sharply in response to director changes, an event whose timing was dictated by rigid government employment rules.
Private firms including multinationals can play a catalytic role in driving up revenue at SOEs.
The state-owned labs leveraged the U.S. institutional context in effecting their turnaround. The general point is that organizations in emerging markets can leverage institutions from outside their location of origin, once they have some established source of competitive advantage (in this case, their R&D-generated know-how).
Although the labs were able to commercialize projects without sacrificing publication quality and quantity, a question remains as to whether and why national labs should concern themselves with commercialization.

Author Abstract

The literature on state-owned entity (SOE) reform has been focused on privatization. However, privatization has its limits and has mostly resulted in partial privatization with the state retaining control. In this context, we document a dramatically successful reform effort in India where 42 state owned labs, over a fourteen year period (1993-2006) used licensing of intellectual property to reduce dependence on government budgetary support. This follows incentive policy and leadership change at the labs, the latter event being plausibly exogenous given rigid government employment rules. Alternatives and complements to privatization have been documented in the Chinese context. However, unlike the Chinese examples, collaboration between the state and private sectors formed the engine of the reform in the Indian context. Also, the state-owned Indian labs leveraged the US institutional context in effecting their turnaround. 32 pages.