Pakistani IT companies must invest in R&D! Here’s Why?

Written by Usman Asif

Apr 2, 2024

April 2, 2024

For years, Pakistan’s corporate sector has portrayed itself, to varying levels of success, as a hub for cheap labour which can be leveraged by global companies to save on costs. It’s a model that has done wonders for many other developing economies, including neighbouring India and China.

There’s no denying that such labour arbitrage opportunities can create great economic value for Pakistan, from growing the manufacturing sector to providing employment to millions of people, not to mention the precious foreign exchange inflows. However, given the massive leaps artificial intelligence has taken over the last couple of years, at least some of the benefits of this model are going to subside as technology replaces people for routine tasks.

Whenever that happens, we as a country need to be prepared. How will the economy cope when traditional IT services and manufacturing jobs start evaporating? What new industries can absorb the displaced workforce? The answer lies in innovation. Pakistan urgently needs to boost research and development spending to drive the next-generation of economic growth engines.

Pakistan currently spends just 0.16% of its gross domestic product on research and development, which translates into PKR 135 billion or $542 million. For context, the 10 biggest companies on NASDAQ collectively spent $222 billion on R&D in 2022. Of course, it’s not fair to compare a developing country with the giants of the industry. However, this ratio is well below the global average of 2.71% as well as lower than many of our regional peers like Indonesia or Philippines.

 

This lack of focus towards research has serious implications for both our innovation ecosystem and the economy at large. Just consider how severely Pakistan lags when it comes to patenting technology and processes. In 2021, only 993 were filed across the country, from residents and non-residents combined. Contrast this to Indonesia which recorded 8,800 applications and the Philippines at 4,393.

Traditionally, patents are believed to have a strong impact on the economic growth of a country through productivity gains at both company and national level. For Pakistan, the need is actually dire as we have spent more than $1.8B on import payments related to intellectual property charges. That’s valuable foreign exchange we could have had in the central bank reserves.

All is not lost though. Despite numerous challenges in the education sector, our academia has held well and contributed over 17,000 scientific and technical journal articles, miles ahead of both Bangladesh and the Philippines. At least there is intellectual rigour and human capital — the two ingredients critical to a healthy R&D ecosystem.

The bigger missing piece is obviously the financial resources, where the education sector needs all the support. This is one of the many reasons why Pakistan’s technical talent often moves abroad as their skill set is valued appropriately, both in monetary and non-monetary terms. That’s where the industry needs to step up and create strong linkages with academia. After all, they will be the ones benefiting from it the most through not only better productivity but also possibly cutting-edge products and processes.

Imagine if we could convert even 1% of the findings from the scientific and technical journals into patents, our IP would increase by 17%. If the industry could play a role in providing financial support to these researchers, it may open up 170 possible commercial ventures which can potentially be new lines of business.

 

Fig: Pakistan’s IP Related Payments Over the Last Decade

Needless to say, fostering this R&D culture is not only the industry’s responsibility. The government must play its part and if anything, it should be incentivizing the private sector — through subsidized financing schemes, grants and more importantly, strengthening the institutional frameworks. In other words, it needs to ensure that intellectual property infringements, which are unfortunately too common, are penalized and its owners aren’t short-changed for abiding by the law.

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