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
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.
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
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
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’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
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
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.
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
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.
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.