R&D: An inside job – For innovation to power economic growth, Indian industry must raise its investment in in-house R&D five-fold

Source: The post is based on the article “R&D: An inside job – For innovation to power economic growth, Indian industry must raise its investment in in-house R&D five-fold” published in the Business Standard on 16th February 2023.

Syllabus: GS 3 – Development and employment.

Relevance: About R&D investment in India.

News: India lags in Research and development (R&D) investment both on the government side and industrial side.

About the R&D investment around the globe

The world invests a little over 2% of gross domestic product (GDP) in R&D. Of the $2 trillion spent on global R&D, the top five (of over 180) countries (the US, China, Japan, Germany and South Korea) alone account for three-quarters.

On the industries side, the top five industries (pharmaceuticals, automobiles, technology hardware, software and electronics) account for almost 73% of all industrial R&D. Within industrial R&D top 20 companies account for 22% of global industrial R&D.

About R&D investment in India

India is now the world’s fifth largest economy. But in total R&D investment, India ranked 16th, below Israel.

Note: Israel is a country with a GDP of one-sixth India’s, and a population under one-hundredth of India’s.

On the industrial R&D investment scale, with $7 billion in investments India is ranked 22nd between Poland and Singapore. In short, Indian firms invest 0.3% of GDP in in-house R&D, compared to a world average of 1.5%.

The European Commission report stated that India has only 24 firms among the top 2,500 investors in R&D worldwide. On the other hand, 822, 678, 233 and 114 firms are from the US, China, Japan and Germany, respectively.

What are the reasons for low industrial R&D investment in India?

India’s limited presence in top sectors: Based on the Centre for Technology, Innovation and Economic Research (CTIER) list, India has no firms in five (technology hardware, electronic equipment, aerospace, general industrials, construction materials) of the 10 top industrial sectors.

Note: India’s most profitable firms are in financial services, petrochemicals, metal processing and software.

Missing giant investor: India is missing one giant investor in in-house R&D. For instance, India’s top-ranked R&D investment firm is Tata Motors with an annual R&D spend of $3.5 billion globally. But at the global level, it stands only at the 58th position.

Lacks government investment: Each of the top seven global firms invests more than all of India’s R&D investment, this includes every firm, university and government laboratory put together.

How does India’s industrial R&D investment compare to that of China?

Low service sector investment: Indian software firms are service firms to the world’s product firms. But most of the top 10 Chinese software firms are also service firms. India’s top 10 software firms invest only 1% in R&D compared to 8% in China.

Data for 2014 industrial R&D investment showed that India had 26 firms to China’s 301. But in 2021, China has 678 firms to India’s 24.

What needs to be done to improve R&D investment?

Change governance structure: India needs to drive change in industrial structure, use trade policy to force competition between Indian firms, and drastically reform India’s public research system.

Utilise talent: India has an abundance of talent. This is visible from the 100 top investors in R&D as two-thirds of them have R&D centres in India. Hence, India should train and expose fresh engineers.

Overall, India should raise the profile of investment in in-house R&D in each of the firms.