In the wake of India and China posing a great challenge to America's leadership position in technology, the United States has proposed the setting up of Indo-US labs to promote innovation and product development.

Promod Haque, managing partner, Norwest Venture Partners, who has funded several companies across the globe, says this project will be an ambitious one and will benefit, both, India and the US.

"The US-India development labs will work towards jointly developing products with cutting edge technologies," he says.

"People in developing countries die as medicines are not available at cost-effective prices. We can do a lot of work in making drugs affordable to the common masses," he adds in an interview with rediff.com. Excerpts:

Could you tell us about the US-India development labs project?

The plan's focus will be on product development where India and US will work in collaboration to develop next generation technologies. The US-India development labs will work towards jointly developing products. The programme will be supported by the governments of both the countries, private players and universities.

In July 2005, Norwest Venture Partners was invited by Congressman Jerry Lewis to discuss ways to form a long-term strategic alliance to tackle the backlash of outsourcing.

We have had several meetings on setting up Indo-US research labs. There has been a consensus that the JV (joint venture) will be a creative solution to a large problem of outsourcing.

Some of the intricate technologies like integrated circuits and nanotechnology need massive investment.

There is a lot of interest from the US government. The next step would be to talk to Indian government authorities and I'm sure they Indian government would be keen too.

What kind of investment would be required for this and what kind of research will be carried out in these labs?

An investment of $500 million would be required, the bulk of which will come for the US government. The Indian government and private industry can also contribute toward this. This will enable us to start 5 centres to begin with. We will focus on areas where there is no controversy. We won't be talking about nuclear energy companies then everyone gets charged up and nothing happens! People in developing countries die as medicines are not available at cost-effective prices. We can do a lot of work in making drugs affordable to the common masses.

Will the JV be worked out with the talent from universities or entrepreneurs?

It will initially be engineers and talent from universities. The labs would be set up in the US and India. People can work under different projects in a particular field like nanotechnology to develop the next generation technologies.

To what extent do you think that the reverse brain drain is taking place?

It is happening big time, a lot of people are coming back from the US and people are not going as they used to earlier. Now, there are a lot of opportunities in India itself.

A good majority of the US staff is set to retire, and not many engineers are coming out of US colleges. . . so we will see a lot of changes in the US's emigration policy as well so that it becomes much easier for people to come to US.

Which are the hot sectors from a VC's point of view?

Consumer Internet space is very interesting now and will continue to be so in the next few years. This model has worked well in the US and China. India is on the threshold of broadband and wireless technology boom, so it's very interesting.

Outsourced product development is another segment. This is where the US-India labs can help, whether it is the energy sector or more importantly the pharma sector, we can't be just relying on the existing drug companies to reach out to the masses.

Which companies would you be funding in India and what kind of investment have you raised for Indian companies?

We will be looking at the product companies, enterprise software, infrastructure, semiconductor companies and outsourced product development companies. We don't earmark funds, we do it on an opportunistic basis. But for the 20 hybrid companies in India, we have raised $200 million.

Which sector do you think will drive India's growth? Will it be IT or any other sector?

IT is just a part of India's growth. The pharma sector is growing a brisk pace as every person is a consumer of pharma products and all get sick at some point, so India has the ability of becoming both a large consumer and developer in the pharma space.

What factors do you consider before funding a company?

There are various aspects that we look at. First, the size of the opportunity, market opportunity of the company, how different is the what is the company is doing, it is important not to be a copy cat, it must be uniquely differentiated, capability and experience of the entrepreneurs. If they have done it before, then they are more credible, they know how to do it.

What are the qualities that you look at before funding a company?

We look at quality of the entrepreneur, work ethics, leadership, ability to attract and train quality people.

Why do we lag in entrepreneurship?

It is very essential to know the pulse of the consumer. If the company is in the consumer Internet space, you must know what the consumer wants. In the case of product companies, the market's needs are very different. . .  they keep changing, so early adopters are far away from the market. This, of course, will change when the domestic markets become big consumers of technology.

How do you compare the India, China markets?

Both the markets are fine, but India is where China was five years ago. There is a lot of market in the consumer Internet space with great broadband and wireless connectivity. There is a lot of promise in India.

Is product development essential for Indian IT companies to become global powers?

Yes, it is essential. The challenge for product companies is that they are too far away from the markets. So when we fund some product companies, we fund hybrid companies -- cross-border firms where most of the engineering operations are carried out in India while the sales and marketing is carried out in relevant geographies markets in the US and Europe -- so that they are a direct contact with consumers.

We have a hybrid company called Open Silicon, which has a large work force in Bangalore so it is a cross-border company. There is a big scope for hybrid companies. So Indian companies can go for hybrid models to develop innovative products. There will be more competition for companies like Wipro [Get Quote] and Infosys [Get Quote] who are competing on a global level with cheap cost as the differential.

Global companies like IBM are hiring more in India. So Indian firms have to be more innovative and compete hard as there is a lot of opportunity and room for lot of people.

Indian companies are mostly services-oriented which involve using the left side of the brain. How do we change this to use the right side and be more innovative?

Hybrid approach is a way out for this. As the Indian market grows, some innovation will happen in India. The USDIL is one attempt to drive innovation and develop products. We should not just compete in terms of cost, we should lay down the infrastructure for owning next generation technologies so that we can use the right side of the brain and get high-paying jobs.

Will India lose out its BPO advantage to other countries?

India is losing out, a large part of the work goes to countries like the Philippines and Malaysia. . . A survey recently said that salaries across-the-board in Indian IT companies will go up by 15 per cent which is huge. In the US the hike is 5 per cent.

Countries like China and even Brazil and Argentina are catching up. So competing just on the basis of cost won't last long.

What are the challenges that start-up firms face?

Every company is different. The challenge is that the company has to develop what the market demands. Any small firm has to hire the best talent, who is qualified to do the job and it's important to train them. It's very easy to build a product but it's very difficult to build the right products.

To develop what the people want, requires people with appropriate skills. It's essential to keep the customer satisfied. Only then will they buy more.

Do you think that the talent levels are coming down with increasing number of engineering colleges?

I don't think so because you need a good mix of people -- entry-level engineers as well as bright engineers. There are different jobs, which require different skill sets. So engineers from second- and third-tier colleges are fine. Everyone can be trained to do different things in a big project.

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