Indo-U.S. K T I Rollout
November 29, 2001, New Delhi

Leveraging the Knowledge Economy : A Blueprint for Indo - U.S. Cooperation
Remarks by Dean R. O'Hare, Chairman and CEO, The Chubb Corporation
U.S. Chairman, Indo-U.S. Knowledge Trade Initiative

Mr. Thibault, Mr. Chirayu Amin, Mr. Sunil Mittal, Ambassador Frank Wisner and esteemed colleagues:

It is an honour to be with you today at FICCI - friend of the USIBC for more than 26 years and partner for the last twelve months in the Indo-U.S. Knowledge Trade Initiative or "KTI."

Launched during President Clinton's historic visit to India, the KTI has been an ambitious undertaking to assess the prospects and identify the opportunities, for developing Indo-American leadership in promoting the free flow of ideas, information, people and resources of all kinds between our two nations and around the world.

More than 150 experts from both countries participated in meetings, video and telephone conferences, exchanges of papers and the intensive preparation of the report that we are releasing today.

We first introduced the concept of "knowledge trade" several years ago at our annual Indo-US conference in Chennai to capture a growing dimension of global commerce that we felt was missing from both the bilateral and multilateral policy debates and agendas.

Our deliberations covered a wide range of issues, including e-commerce regulation and taxation, finance, human capital development, intellectual property rights, personnel mobility, trade in services and the communications infrastructure on which they all depend.

We particularly explored in depth two areas where we see large opportunities for Indo-U.S. commercial cooperation. The first is biotechnology and the second is e-entertainment, or what we refer to as "digital media."

Finally, we also looked closely at how to use new technologies to overcome persistent problems of development and create what we have come to call "digital opportunities."

What is Knowledge Trade?

In discussing the substance of the report, let me begin by explaining that we defined "knowledge trade" to refer to any process of exchange, movement or flow across borders that produces a transfer of knowledge. It is not the nature of the industry that determines whether an exchange is an example of "knowledge trade", but the transfer of ideas, information and know-how that occurs because of that exchange.

Transfer of knowledge can take place in myriad ways.

It can be through introduction of new goods with knowledge embedded in technology and design, through the provision of a wide variety of knowledge-based services, through the movement of people, through the mutual recognition of qualifications and professional standards, through scientific and professional exchanges, through educational cooperation, through creative innovation and extension of technologies to traditional problems of human development. It can also occur through patent application and review, through joint ventures and perhaps most systematically through foreign direct investment. It is a fact that 50 percent of all technology transfer across borders takes place within the same firm. We refer to all of these processes as forms of "knowledge trade."

Why knowledge trade?

In the 21st century, the continuous acquisition and development of knowledge is, of course, indispensable. Product differentiation and quality improvement, sophistication in manufacturing process controls, investment in resource efficiency and environmental friendliness, innovation in materials, structure and design, adding value and extended product durability or longevity are all vital aspects of dynamic and competitive industries, whether they are part of the "old" or "new" economy. All are dependent upon the continuous acquisition of knowledge.

For a developing country such as India, knowledge trade offers special advantages. The principal opportunities for economic growth - and the major drivers behind investment and trade - are the opportunities to overcome the knowledge gap. Improved access to new ideas and information, more rapid technology transfer and diffusion in the home market, opportunities to send workers abroad both to achieve higher earnings and to improve skill sets, easier access to world product markets and more efficient financial intermediation and easier access to financial resources, especially venture capital - all come with an opening to trade from which we believe India is well-suited to benefit.

The Missing Dimension

Recognizing India's unique and large contributions to the American and world economies through the production and circulation of knowledge and the world-class entrepreneurial leadership that has been demonstrated both by the native Indian IT industry and by the success of Indian-Americans in the United States, we began to ask the following kinds of questions:

• Is India's success in IT services sustainable and can it be extended to other industries?
  
• What role can foreign investment play in this process?
  
• What are the regulatory and political impediments to expansion of the knowledge base of Indian industry?
  
• How strong is India's human resource base and what steps can be taken to improve India's human capital development?
  
• Does the infrastructure exist to support a rapidly growing expansion of information flows?
  

As we considered these questions, we also examined the potential for Indo-U.S. cooperation in each area, including whether it could serve as a model for bilateral and multilateral cooperation.

What is to be done?

Well, what has to be done? As its title suggests, the KTI report, "Leveraging the Knowledge Economy: A Blueprint for Indo-U.S. Cooperation," defines a working agenda, outlining key problems and proposing a series of initial recommendations for policy action. In a few moments, several of our colleagues representing both Indian and U.S. perspectives will discuss the principal findings and recommendations of the report. For now, I will only highlight some of the principal policy conclusions of the report by area of focus.

Regarding E-commerce, we've found that India can gain substantially from this kind of activity if it has the right regulatory and tax framework. Consequently, for the short run, we've recommended an extension of the tax moratorium. We also found that developing international standards of privacy, encryption, liability, copyright and patent protection is vital if India is to benefit both at home and in the emerging virtual world of e-commerce. Finally, we concluded that governments have a special role in developing an e-culture by offering easy access to information, services and resources and by increasing the transparency of decision-making.

As CEO of a major international insurance company, the topic of services trade is near to my heart. The services sector is the fastest growing area of the world economy and a recent study by the World Bank has demonstrated that developing countries stand to gain the most from liberalized trade in services.

Removal or reduction by India of equity caps on foreign ownership of service companies, especially financial services, could unlock large investment flows and encourage development of the soft infrastructure of India's modernizing economy.

And creation of a new multilateral visa regime would allow India's IT and IT-enabled service providers to gain greater ability to move knowledge workers across borders and compete more effectively in the developed countries.

Turning to intellectual property rights, the AIDS pandemic and the new threat of bioterrorism have caused us to acknowledge the need for greater flexibility in the enforcement of patent rights.

At the same time, as Indian pharmaceutical companies have begun to reach the point where they are able to develop new molecules, Indian firms have recognized the need to develop strong patent protection to encourage greater research in India.

We believe that a close, reasoned consultation between Indian and U.S. private sector and government leaders on patent and other intellectual property issues could help to strengthen and extend the international consensus that must exist for cutting-edge research and development to become fully globalized.

On the subject of human capital development, we concluded that to broaden India's already large human capital base, it is important to recognize the role that trade can play.

The highly successful Indian Institutes of Technology, alma mater of many of America's finest scientists, engineers, business leaders and professionals, were established through strong international cooperation and are an early example of the potential of knowledge trade.

India's educational system should be opened up to foreign investment and other kinds of joint ventures, and active and aggressive efforts to develop stronger institutional links between leading research institutions need to be made.

But perhaps the most significant action to foster more rapid learning will be for the United States and India to work together to promote greater acceptance of personnel mobility.

Giving companies greater control over visas and allowing companies to move individuals with lower skills across borders, can increase the benefits of on-the-job training, reduce manpower costs in developed countries and shift the movement of persons away from migration to circulation.

On financial sector reforms, we found that India's relatively large and sophisticated capital market is not adequately accessible to the early stage companies in the knowledge-based industries that have limited real assets.

U.S. venture-capital companies could bring capital, experience, know-how, networks and education that could help spur the development of a domestic venture capital industry.

But this will require more flexible exit options for investors, greater transparency in corporate governance, and prudent relaxation of norms barring pension funds from participation in venture capital funds.

With regard to "Digital Opportunities," it is clear that India is a world leader in the application of information and communication technologies for both community and individual development.

A key is to provide widespread access to communications infrastructure at affordable costs, breaking down language barriers in the Internet world and assuring access to training across India. Governments need to devote a greater share of resources to Internet-based provision of services through distance learning, telemedicine and e-governance.

But we argue that the potential of partnerships between community organizations and for-profit entities have barely been tapped and the benefits they could provide cannot be achieved without sustained focus on serving the needs of lower-income individuals.

Concerning information infrastructure, access to low-cost, reliable and reasonably secure communications is the critical enabler of knowledge trade.

Considerable progress has been made in India toward developing a regulatory framework that favours competition and lowers consumer prices, does not impede technological innovation and encourages foreign investment. Yet we find several areas where there is more work to be done to achieve these goals.

High license fees, comparatively high import tariffs on equipment, restrictions on foreign ownership, tax rules and fee arrangements that discriminate between public and private entities and uncertainties in the regulatory framework, all need to be overcome to assure the full international market response to India's important innovations and to unleash India's own home-grown engineering and entrepreneurial talent.

Needed: A Global Framework ...

While creating tremendous opportunity, the rise of knowledge trade presents challenges to governments and business for which the global trading system, which was constructed around the exchange of tangible goods, is ill-prepared to deal. New and rigorous standards for intellectual property, for assuring freer movement of people, and for securing access and benefits to peoples in both developed and developing nations are needed.

Due to the global nature of knowledge trade, the importance of the development of international consensus on these issues become paramount.

... and Indo-U.S. Leadership

New rules of the game and a new mindset will be required to fully capture the potential for knowledge trade. I believe India and the United States can lead this process in three ways:

• First, bilaterally, by working together to remove from our own laws and regulations a wide variety of formal and informal impediments to the two-way flows of information, ideas, people and money.
  
• Second, multilaterally, by developing a strong collaboration between Indian and U.S. negotiators at the WTO, APEC and elsewhere to advance global discussions on thorny but vitally important issues such as intellectual property, personnel mobility and trade in services. Where India and the United States find strong agreement on these issues, we probably have the working basis of a global consensus.
  
• Third and most generally, by establishing a model of Indo-U.S. collaboration, we would show other nations how to overcome the divisions between developed and developing countries that could be useful in other contexts.
  

India is well positioned to take advantage of the movement towards knowledge-based industries. Ensuring access to other markets by providing access to its own market will be an effective and necessary tool if India is to exploit its competitive advantage in global markets. Such access, I am convinced, will benefit India greatly.

But the ability of India's firms to compete for services markets overseas will also provide valuable benefits to all those countries that gain access to India's great human and intellectual endowments.

Thank you.