India has made momentous progress over the last 10 years, but it has done so primarily by reverse engineering products introduced in the West, imitating solutions invented elsewhere, and being a low-cost outsourcing hub. If the country is going to continue to grow, it will have to learn a new set of tricks. It will have to become more innovative. Fortunately, India is a young country. Half its population is under the age of 25. These young people are creative, bright and optimistic about the future. Sadly, their opportunity to contribute to the Indian economy is barred by a number of obstacles at both the corporate and policy levels. Only through a judicious choice of interventions at both levels can India realise its ambition of becoming an economic superpower.

My co-author, Chris Trimble, and I studied dozens of corporations over five years (Ten Rules for Strategic Innovators: From Idea to Execution, Harvard Business School Press, 2005). Our research indicates the biggest barrier to encouraging innovation in large corporations is their management orthodoxies that support existing businesses; they get in the way of encouraging breakthrough new businesses.

There are, of course, exceptional Indian success stories. For example:

• Using the power of digital technologies, ITC's e-choupal project has transformed the rural sector, both to dramatically increase farm productivity and to help farmers realise better prices;
• Aravind Eye Hospitals provide world-class eye care at a very low cost to millions by fundamentally reengineering the healthcare value chain;
• Tata Motors has led the way in designing, engineering and manufacturing a high-quality automobile, Indica, cost competitively using 100 per cent indigenous resources;
• ICICI has radically changed the rules of the game in the financial services industry through such innovations as internet banking and electronic payment systems.

Large Indian corporations have tremendous advantages in creating fundamentally new businesses-assets like brands, customer relationships, core competencies and manufacturing capacity. Independent entrepreneurs might spend years building these things from scratch. The trick for large companies is to lend their assets to breakthrough new businesses without stymieing the newcomers with irrelevant thinking. ITC's e-choupal and Tata's Indica are good examples of how to do that.

Building a new business unit must be approached carefully if a breakthrough idea is to have a chance. The new business must be designed to overcome three fundamental challenges, specifically, forgetting, borrowing and learning. That is, it must forget the parent company's success formula, borrow the parent's resources, and learn how to succeed in a new environment.

Most large companies underestimate just how difficult it is for an organisation to shake itself loose from its past. Organisations, understandably, become very complex machines-machines hardwired to excel in the current game. As a company grows bigger, employees become more specialised, and the number of people who understand how the machine works as a whole dwindles. Then along comes an idea for an innovative new business. Step one in building it is to destroy the hardwiring. In creating the new business unit, which we'll call NewCo, you must question every assumption about the way the core business, aka CoreCo, works. That's a tall task that we call "forgetting".

NewCo (e.g., ITC's e-choupal) has a business model that differs fundamentally from CoreCo (e.g., ITC's tobacco business). The challenge of "forgetting" is to ensure CoreCo's success formula is not imported to NewCo. This is much easier said than done. In our research, we observed many cases in which NewCo's managers could clearly articulate the differences between NewCo's and CoreCo's business models, but still exhibited behaviours more befitting CoreCo.

An organisation's DNA contains many reinforcers of behaviour. NewCo's DNA must differ from CoreCo's, and that means a different approach to hiring, promotion, leadership style, planning, assigning status and authority, defining relationships between groups, evaluating business performance, and more. For NewCo to succeed, it should be mostly staffed with outside hires at both the operational and management levels. It is unrealistic to expect CoreCo's long-term employees will easily abandon its business definition unless they are regularly challenged by an outside perspective. Only outside hires can give this external perspective. Therefore, large Indian corporations must rethink their "promotion from within" policy when it comes to staffing NewCo.

Even while it is trying to distinguish itself from CoreCo, NewCo must borrow from it. CoreCo's wealth of resources and assets endows NewCo with its biggest advantage over competition. Thus, the challenge of "borrowing" is to provide NewCo with access to these resources in a way that does not damage CoreCo's own commitment to excellence. This involves creating a small number of carefully selected links between new and parent companies and assigning the CEO responsibility for managing these links. The CEO must ensure NewCo can access CoreCo's resources without readopting the latter's DNA, thus, securing both CoreCo's competitive position and NewCo's future.

NewCo's business is highly uncertain. It must systematically resolve the specific unknowns as quickly as possible and zero in on the best possible approach. "Learning" is not easy. Many innovators figure if they are brave enough to face their failures without flinching and evaluate them rationally and dispassionately, they will learn. But learning is much more likely when innovators implement a disciplined process for articulating and testing hypotheses about how their new business will succeed.

Indian corporations must rethink their performance evaluation systems. They should evaluate leaders of NewCo based on their ability to learn and make good decisions, rather than on results. Though accountability to plans is an effective practice in mature businesses, it can be crippling in new high-potential businesses.

Tackling these three challenges-forgetting, borrowing and learning-creates stress. Learning leads to stress because it requires a distinct approach to planning, with an analytical discipline that is much different from the operational discipline of execution and performance. Likewise, forgetting and borrowing are always in tension. At these points of interaction, stress naturally arises because of the differences in business models, values, styles and priorities. Managing these tensions productively is job #1 for Indian CEOs.

Corporate change, while essential, is not enough to cultivate a nation of innovators. India must commit to substantive changes on a larger scale, particularly in the areas of education, capital markets, bureaucracy and infrastructure.

First, India's education system focuses too much on "left-brain" thinking: too much emphasis on imparting knowledge by rote. Rote memorisation develops brilliant engineers who are world-class in reverse engineering. However, what the country needs is not just people who "do", but those who "dream", who imagine new industries and open up new possibilities-people like Vikram Sarabhai, J.R.D. Tata, N.R. Narayana Murthy and Verghese Kurien. Without losing the emphasis on factual knowledge, we should promote "right-brain" thinking in our educational institutions through case studies and Socratic method, where students are encouraged to critically question the status quo, promote out-of-the-box thinking, engage in creative problem solving, and challenge the orthodox and conventional ways of doing things. Ultimately, Indians who are educated in both facts and critical thinking will be more willing to take risks and embrace new ideas and experimentation.

Secondly, we need to create a vibrant and well-functioning venture capital market, along the lines of Silicon Valley, which provides risk capital to entrepreneurs with breakthrough ideas. An efficient market for capital encourages more creative ideas to surface. Additionally, Indian bankruptcy laws need to be reinvented along the lines of the West. For instance, businesses that fail should have the opportunity to restructure and shed debts. After all, entrepreneurship implies pushing the envelope, taking risks and perhaps failing. Reforming bankruptcy laws might be one way to remove the stigma of failure. Unless people know they may have a second chance, they are unlikely to think big.

Third, we need to remove barriers that impede innovation, most especially red tape and bureaucracy. Even if someone has a breakthrough idea, it takes tremendous perseverance to work through India's government machinery. There is an urgent need to streamline the governmental processes. This will require the Indian government to accelerate the ideological revolution started in the 1990s and remove anticompetitive government regulations that protect large and inefficient state institutions.

Finally, we need a major push to dramatically upgrade transportation-roads, airports, ports, etc.-and communications infrastructure-bring fibre optics to every part of India. India's manufacturing sector has the potential to become world class through radical process innovations, but there is little incentive to do so if the bottlenecks with the logistics and transportation continue.

India is a country full of talented people with tremendous potential. That is truly India's core competency. With the right policies in place at the corporate and national level, we can turn them loose-and we can all benefit.

Vijay Govindarajan is a Professor at Dartmouth College's Tuck School of Business