National governments and the promotion of innovations: the Indian experience

Date: 2014
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Le rôle des autorités nationales dans la production et la diffusion de l'innovation : l'expérience indienne
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Article Index
Growing share of MNCs in the performance of…
Generosity of tax regimes with respect to R&D
The high concentration of investments and…
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What is the role of national and sub-national (local) governments in the generation and diffusion of innovations? Are decisions about the nature and type of technologies to be developed in a specific national economy to be taken in the boardrooms of a multinational corporation (MNC) rather than in the Ministries of Science and Technology of that economy?This chapter considers the case of India's insertion into the increasing globalization of innovation, at a time when foreign entities are responsible for a growing share of the industrial research and development (R''&D) conducted in the country. Since India's entrance into the international division of labour in the performance ofR&D, the Indian government has been engaged in a relentless pursuit of encouraging firms to increase their investments inR&D with a host of instruments and institutions to support the local generation of technology and innovation. How successful have the policies been in India and what are their shortcomings? Has India become an innovative country?

This analysis identifies three major challenges facing the government in terms of increasing India's innovation potential, which exist in addition to other challenges that have been identified in the literature on innovation, such as for instance, improving the quality and quantity of innovations. Policies for promoting innovation have been narrowly interpreting innovation solely in terms of anR&D policy, whereas innovations are not derived fromR&D alone but through a whole host of non-R''&D routes of which the acquisition of new vintages of capital goods is an important one. The second challenge is to engineer positive spillovers from the operations of MNCs and foreignR&D centres to India's National System of Innovation (NSI). This is an issue because at present these centres appear to have little or no connection with the NSI. The third challenge is to make sure that the generation of innovation is spread across a wider range of industries. At present it is concentrated in just five industrial sectors.

Promoting innovations in the globalized India

Until 1991, the Indian economy was relatively closed, with imports of commodities and capital, and with severe restrictions on services, including technical ones. The economy was more or less insulated from the rest of the world through the imposition of high tariffs and quantitative restrictions. During this phase India was one of the world's least internationalized countries.

The increase in the globalization of India's economy is significant, as demonstrated by two indicators: the trade integration (the sum of exports and imports expressed; % of GDP) increased from 19.6% to 37% of GDP from 1998-1999 to 2010-2011, and the financial integration (the sum of gross current and capital receipts) grew from 44% to 109% of GDP during the same period (Rao, 2011).

This all changed in 1991 when the process of economic liberalization was set in motion and then subsequently elaborated and extended to virtually all sectors of the economy. India's integration into the global economy has continued over the last two decades or so, albeit in an unstructured and ad hoc manner, with tremendous growth in several sectors such as information technology (IT) services. Indeed, by 2005 India had become the world's largest exporter of IT services.

Economic liberalization has also transformed India's NSI. The business enterprise sector is now emerging as the core of the NSI, whereas innovation was performed almost only by public entities in 1990 and 1991. Today, business enterprises account for 30% of India's globalR&D expenditure. A growing proportion, almost 30% in 2011 (see Figure 1), of this business enterpriseR&D is now being performed by MNCs. In 2001 this figure was less than 9%. This trend demonstrates the importance of India as a location for MNC innovation. Over the last decade (2000-2010), many of the knowledge assets created in India derive either from MNC branches or subsidiaries. During this period, many Indian companies have become MNCs themselves, of which the conglomerate firm Tata is a fine example, investing abroad to gain access to state-of-the art technologies, markets and in some cases even key natural resources. Since 2000, India has become an investor in industrial assets abroad with outward Foreign Direct Investment (OFDI) from India at almost 60% of the country's inward FDI. This growing outward FDI has helped Indian companies to secure both natural and knowledge assets besides increasing markets for their goods and services abroad. Furthermore it has given some firms the ability to ascend the technology capability ladder by acquiring knowledge assets abroad.

The growing importance of foreign companies in the generation of innovations from India can have positive impacts for the country. For instance, one tangible benefit is that India has become a base for what is increasingly known as frugal innovation (cf. Chapter 12). One domain where frugal innovation is now well established on a larger scale is in the area of medical devices. A number of sophisticated medical devices such as electrocardiograms and scanning machines have been developed through foreignR&D centres. These instruments have the potential of dramatically reducing the cost of diagnostics and health care services in India, a country where health expenditure is mostly privately financed through out-of-pocket payments. Also, given that the traditional channels of technology transfer from MNCs to unaffiliated firms in India have virtually dried up, the growth of MNCs can have a positive impact in terms of a source of technology to the domestic economy. Finally there is the possibility of spillovers to domestic firms. One industry where this has been clearly visible is the automotive industry where after the entry of foreign firms, through the channel of competition, the domestic enterprises have improved their technological capability and moved up the value chain.

The bulk of industrialR&D in India is still performed by domestic companies (which account for as much as 72% of the total industrialR&D performed in the country) but this share is rapidly decreasing, at an accelerating rate, with the growth of foreign companies in India. The share of foreign companies engaged inR&D in India experienced a significant increase in 2009 - immediately after the financial crisis. It appears that, perhaps owing to the financial crisis, more and more MNCs are outsourcing larger amounts ofR&D to India. Most MNCs distribute theirR&D activities across a range of countries and the prime reason for choosing a specific location is essentially dictated by the availability and cost of the human resource in addition to other facilitating factors, such as the strength of the intellectual property regime in that location, availability of fiscal incentives forR&D, etc.

The Indian government has been extremely active in promoting innovation and the shift in NSI. Generous tax incentives have been the main instrument used to increaseR&D investment.(Figure 2) Almost a quarter of the industrialR&D performed in India is subsidized through these tax incentives and the subsidization rate has been increasing during a time when technology generation has been globalizing. Moreover, the government has launched a series of policies targeting the economy as a whole, such as the 2003 Science and Technology Policy and its more recent refinement the 2013 Science, Technology and Innovation Policy. The government has sought to improve both the quality and quantity of scientists and engineers that are available to industry, and have taken a number of steps to increase investment in scientific research. Sectoral policies have been set by the government that target specific industries: automotive, biotechnology, electrical equipment, electronics, IT services pharmaceutical, telecommunications and semiconductor.

India has one of the most generous incentive regimes forR&D, almost a quarter of industrialR&D performed in India is subsidized through these tax incentives. The extent of subsidization of the Business Expenditure onR&D (BERD) by the government through itsR&D tax incentive schemes has increased from 15% in 2006-2007 to 26% by 2011-2012.

High concentration of innovation activity across sectors and regions in India

The liberalization process and the set of public policies implemented by the government have been successful in increasingR&D activities in India. Business Enterprise Expenditure onR&D (BERD) in India has registered robust growth rates of over 15% per annum in nominal terms (Mani, 2013c) and the average research intensity of domestic firms has actually increased from 0.65% in 1996 to 0.82% in 2010.

Nevertheless, about two thirds of BERD is distributed across just three industries: pharmaceutical, IT and automotive and as such the performance ofR&D is not distributed across a range of industries. In fact, the concentration of BERD distribution has actually increased, which means that theR&D subsidies have really failed to support the spread of anR&D culture among firms in the manufacturing sector. Furthermore, even within these three industries much of the innovative efforts are concentrated in a few firms. In short, the majority of industries and the firms within them have not taken innovation seriously enough to warrant spending sizeable chunks of their sales revenue on the performance of intramuralR&D.

Behind the bright picture of MNCs being a source of technology to the domestic economy, and the possibility of spillovers to domestic firms, not all sectors have been as successful as the automotive industry. India has not become innovative but rather she has become an important location for innovative activity to occur. Very few spillover effects have been registered. If one considers patent ownership, the share of foreign companies in India has increased quite significantly over the years (Figure 2). The surge of Indian patenting in the US is to be attributed to the activities of foreignR&D centres (Mani, 2009). In the information and communications technology (ICT) sector, almost all companies active in patenting from India are of US origin. In pharmaceuticals, the only company that has patented its research output from India is the hitherto Indian company, Ranbaxy, which since 2008 has been part of Daiichi Sankyo, the Japanese pharmaceutical MNC. Despite India's full compliance with the provisions of the WTO's Agreement on Trade Related Aspects of Intellectual Property Rights on 1st January 2005, the outsourcing of patent-yieldingR&D projects by MNCs has yet to be conducted in India. There are of course a number of international pharmaceutical companies outsourcing portions of largeR&D projects to Indian entities, but it is clinical trials that are the most common type of suchR&D outsourcing in India.

The geographical concentration of innovation in India is the third shortcoming highlighted in this paper. Although manufacturing and industrial activity take place in many sites across India, such activity tends to be concentrated into a few specific areas. This means that most of the country is not involved in manufacturing nor in the generation of innovations in a significant manner. This situation has arisen despite the continued efforts of central government to disperse industries, especially to the so-called backward regions, through various policy instruments and notably the industrial licensing policy. Such concentration is merely a reflection of the availability of physical and indeed human resource infrastructure. In fact the state governments have been vying with each other to attract substantial investments, especially to their respective regions, by offering a variety of fiscal and other concessions.

There is high rank correlation between FDI inflows and patents as most of the patent applications in India are by MNCs (Figure 3). A surprising find amongst the data is Gujarat's low level of FDI despite its second place ranking in terms of Manufacturing Value Added (MVA). Gujarat is often presented as an industry-friendly state but for some reason MNCs have shied away from investing here. In fact, India's highly concentrated production and innovation activities show that although many policies on these matters are decided at the national level, it is at the local level that policies are implemented and therefore the commitment and capability of the local or state level governments have an important bearing.

Nevertheless, promotion of innovation is thus very much centralized at the level of the federal government. Although explicit policies to decentralize innovation were undertaken through the creation of state councils of science technology in 1971, only a few states have active and working councils in place. Most councils are primarily concerned with incentivizing public sector research and do not work directly with private sector enterprises, which as we have seen above is becoming the core of the country's NIS. In short, innovation policy generally remains centralized at the national level. Some efforts are in the offing to decentralize innovation policymaking to the state and city levels; but the only area where tangible progress is being made is in the popularization of a patenting culture and perhaps the promotion of some basic research through the establishment of state-level government research institutes.

India's innovation policy seems to be independent from other important economic development strategies like the National Plan for Climate Change. The government is encouraging power generation through various renewable energy programmes, such as wind, biomass, solar and small hydro, and has set a mix of fiscal and financial incentives and other policy/regulatory measures aimed at attracting private investment.

These include capital/interest subsidy, accelerated depreciation and nil/concessional excise and customs duties. Under the Electricity Act 2003, it has been made obligatory for State Electricity Regulatory Authorities to fix a minimum percentage for the purchase of electricity from renewable sources, taking into account local factors. A preferential tariff for grid-interactive renewable power is given in most states where possible, following the provisions made under the National Electricity Policy 2005 and the National Tariff Policy 2006.

Once again, all this is taking place at the central government level (only three Indian states, namely Gujarat, Rajasthan and Karnataka have separate solar policies) and has been quite independent to industrial development.

Towards a new innovation strategy for India?

Over the last few years and specifically since 2010, there appears to have been a paradigm change in India as far as the promotion of innovation is concerned. There are numerous signs of a renewed emphasis on increasing innovation as a way to promote economic growth, in particular: the announcement of a decade of innovations (2010-2020), the initiation of a new Science, Technology and Innovation Policy in 2013, and the increased allocation of $28 billion for science and technology in the 12th Five Year Plan. Furthermore, a proposal to set up 50 centres of excellence within existing public and private universities, and the establishment of a number of new innovation-promoting policies, such as Innovation in Science Pursuit for Inspired Research (INSPIRE), provide further evidence of this paradigm change. However, the major change has been the implementation of specific policies for specific industries, a move that has been triggered by dissatisfaction with the previous one-size-fits-all policy. Thus India now has specific innovation policies for the automotive, biotechnology, chemical, electrical equipment, electronics, ICT, pharmaceutical, semiconductor and telecommunications industries.

India's National Manufacturing Policy, issued in late 2011, explicitly refers to government-issued compulsory licences for green technology in cases where patent holders charge unreasonable rates, or where domestic demand is not being met in a satisfactory manner. Also, the Indian Fund for Sustainable Energy, which is a unique venture capital fund, focuses on investing in and mentoring early-stage start-ups in the sustainable energy sector.

It is clear that the role of government in promoting innovation has actually increased in India, becoming more clearly articulated at a time when technology generation in the country has globalized. However, there has been very little decentralization in the implementation of policies to promote innovation. The role of state governments has been minimal, with the exception of the promotion of new technology-based industries such as IT and biotechnology. Some state governments have improved their proficiency in taking out intellectual property rights on new inventions, which is beginning to show results in terms of increased patenting at the state level.

Conclusion

This paper identifies three major challenges facing policymakers involved in the promotion of innovation. The first is that a broader understanding is required on the routes through which innovations are obtained. A new line of thinking in India is calling for non-R''&D routes for innovation generation to be encouraged. However, an examination of the recent innovation policy pronouncements and specifically the Science, Technology and Innovation Policy of 2013 shows thatR&D is still regarded as the main route for innovation. Almost all policy instruments are therefore directed solely towards incentivizingR&D. The second challenge is that there are hardly any policies for engineering positive spillovers from MNC operations to local companies. There are only policies for encouraging FDI; and states have even been competing with each other on this front. However the third challenge appears to have been met with the formulation of successful policies that are more specific and targeted at certain industries. This has the potential of raising innovative activity in these specific fields, which include a fairly large number of technology-based industries. What is left for the policymakers is to forge a clearer link between the former two challenges.

Growing share of MNCs in the performance of business enterprise R&D in India

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Generosity of tax regimes with respect to R&D

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The high concentration of investments and activities in India

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