R&D firms, greatest boon for India

One of the greatest boons for India in recent years has been the growing number of R&D facilities of foreign firms, making it one of the most attractive locations for conducting research.

This development partially overlaps with India's emerging capabilities in software and the two are broadly part of the same trend. But there is a difference. India can and is becoming a key service provider to the world through its IT and BPO capabilities, just as China has become the leading manufacturing capability to the world.

But where do you go from there? It is in looking into the future that the critical role of R&D becomes clear. To keep doing well in software also, it is necessary to spend and concentrate more on R&D instead of simply writing codes and efficiently handling large workforces.

The R&D expenditure of leading Indian software firms is much lower than that of leading pharma companies. The business model of most software services firms is highly beneficial to their current bottom line, but for how long?

The innovative ability of an economy ultimately determines its future and one of the best ways to start if you are a laggard in both economic development and innovation is to have others do their research on your shores.

Something rubs off, and if you have also put in place an adequate legal structure for protection of intellectual property, then the ground is ready to grow the tree of future prowess in R&D. The active need is to so shape policy that the R&D and innovation tree keeps growing well.

The latest World Investment Report of Unctad extensively focuses on the role of global companies in globalising R&D and helps in doing a reality check on India. There is a good deal of loose talk about India having become an IT super power and Bangalore its Silicon Valley (the hallmark of the latter is its innovativeness), but the overall current reality is that India is only a "significant newcomer location for R&D." There is a long way to go.

The Unctad survey of current foreign locations of R&D puts India at sixth, accounting for 25 per cent, with China ahead at third hosting 35.3 per cent. The good news is that the status of both is likely to improve though their relative positions are likely to remain the same--India two rungs behind China.

Global companies' perception of the most attractive prospective (2005-09) R&D locations puts China right on top with a score of 61.8 per cent, followed by the US with 41.2 per cent, and India at third place with 29.4 per cent.

Russia comes sixth, after Britain and Japan (in that order). Malaysia, Korea, Thailand Australia, Brazil, and the Czech Republic take up the 15th to the 20th positions (in that order). So it will take some time to catch up with China, if ever.

The need to run fast is imperative because a 2002 survey shows the pay of Indian chip design engineers ($30,000 per year) to be ahead of Chinese ($24,000-28,000). Things have probably got worse in the meantime and the need to innovate faster to pay for rising costs is imperative.

A few global companies from a few countries dominate business R&D activity and this is mostly in areas like ICT (information and communication technology), automotives and pharma.

The internationalisation of R&D began late (manufacturing, for example, began earlier) but is catching up. India's share of global R&D spend of US companies was low till 2002 but has gone up more recently.

Also, the majority of overseas investment in greenfield R&D projects and jobs created in them during 2002-04 have gone to developing countries and most of them to India and China.

R&D expenditure in India continues to be dominated by public institutions (68 per cent). No Indian company figures among the top 20 developing country R&D spenders, the top three are from Korea, fourth from Taiwan and fifth from China.

Foreign companies play a key role in the patentable outputs of developing countries and a large share of patents granted to their residents is assigned to foreign countries, 63 per cent for China and 40 per cent for India.

This figure for Korea is only 4 per cent! If you match this with the fact that Korean companies are the top R&D spenders among developing economies, then a clear role model emerges.

A comparison of what took labs to China and India is instructive. For China it was talent, the readiness of universities to seek private funding, the IPR deals foreign labs struck with top research institutions, state-sponsored high-tech parks, government incentives and the prospects of cost reduction.

In the case of India, it was also talent and cost but where the two models diverge is that for India local knowledge of English was a plus and government incentives were low and unimportant. In Korea, public research institutions have played a key part in promoting R&D.

In another column we will look at some of the most recent developments in India not captured in the Unctad report and address the crucial issue: Does the government have a role in fostering innovation and R&D, and if so, what?