R&D: An inside job

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

Research and development (R&D) is a large global enterprise. The world invests a little over 2 per cent of gross domestic product (GDP) in R&D. This spending is hugely concentrated.  Of the $2 trillion spent on global R&D, the top five (of over 180) countries — the US, China, Japan, Germany and South Korea — account for three-quarters.  In-house spending by industry accounts for a little over two-thirds of all R&D investment, with the balance split 60:40 between higher education and government laboratories. Within industry, the top five industries — pharmaceuticals, automobiles, technology hardware, software and electronics — account for 73 per cent of all industrial R&D.  And within those industries, it is highly concentrated in a few companies, with the top 20 companies accounting for 22 per cent of global industrial R&D (think about it, 20 firms spend over 20 per cent of what millions of firms do worldwide).

Where does India fit? On all these measures, India lags.  As prominently advertised, we are now the world’s fifth largest economy. But in total R&D investment we rank 16th, below Israel, a country with a GDP one-sixth ours, and a population under one-hundredth of ours. In-house R&D by industry lags even further behind, with $7 billion in investments and ranking 22nd between Poland and Singapore. The net effect is that Indian firms invest 0.3 per cent of GDP in in-house R&D, compared to a world average of 1.5 per cent.

The European Commission each year gives us a very helpful table that lists the top 2,500 investors in R&D worldwide. These firms account for around three quarters of the global industrial R&D, so are representative of the complete picture.  India has 24 firms among the 2,500, against 822, 678, 233 and 114 from the US, China, Japan and Germany, respectively. Considering the Centre for Technology, Innovation and Economic Research (CTIER) list of top 100 R&D spenders, there would be 31 Indian firms in the global 2,500 R&D spenders.

Why India lags? There are two reasons we lag.  First, we are simply not present in some of the most technologically dynamic industrial sectors. As the table shows, India has no firms in five (technology hardware, electronic equipment, aerospace, general industrials, construction materials) of the 10 top industrial sectors, and just one firm in two (chemicals and industrial engineering).  We have a limited presence in three of these 10 sectors (pharmaceuticals, software and auto). 

Second, and most strikingly, we are missing even one giant investor in in-house R&D. Our top ranked firm, Tata Motors, with an annual R&D spend of $3.5 billion globally, clocks in at number 58 ($400 million of this is in India).  The most telling comparison is that each of the top seven firms invests more than all of India (every firm, university and government laboratory put together).  And even firms #24 (Honda), #25 (Qualcomm) and #26 (Bosch) each invest more in R&D than all Indian industry combined at over $7 billion each.

Our most profitable firms are in financial services, petrochemicals, metal-processing and software (see table).  In software, we have some of our most prominent and profitable companies, but seriously lag in R&D, investing 1 per cent of sales to a global average of 10 per cent.  One often hears the argument that our software firms are service firms to the world’s product firms.  But most of the top 10 Chinese software firms are also service firms.  Our top 10 software firms invest 1 per cent in R&D to 8 per cent in China. So, too, in petrochemicals and steel: As in software their investments in R&D are a fraction as a per cent of sales relative to their international counterparts. Our financial services firms are simply missing from the R&D league tables; financial services is increasingly reliant on technology; we should expect our fintech firms to appear in the R&D league tables.

The China comparison: The comparison with China is particularly telling. When I first constructed the table, for a book edited by Rakesh Mohan, data for 2014 showed that India had 26 firms to China’s 301.  The latest data, for 2021, shows that China now has 678 firms to our 24. Consider how different industries have moved over the last few years.  In pharmaceuticals, India has gone from 8 to 11 firms, China from 21 to 79; in chemicals, India 0 to 1 firm, China 10 to 33; Auto, India 6 to 5 firms, China 28 to 45; software, India 5 to 2 firms, China from 32 to 73. 

So what’s to be done?  A homework assignment:  I argued in my book, The Struggle and the Promise, that we need to drive change in our industrial structure, use trade policy to force competition on our firms, and drastically reform our public research system.  But let us leave those macro-changes for another article, and focus here on what we as existing Indian firms, must do, and do now. 

Start with a benchmarking exercise for your firm of interest:

1. What is the R&D spend, as a per cent of sales? How does this compare with the top 10-20 firms in the same industry worldwide?

2. How many engineers/scientists in R&D? How does this compare with any of the top 10-20 firms in the industry worldwide?

3. What role does export play?  As per cent of turnover?  What role do new products play in exports? A higher or lower share than the overall export share?

4. New products as a per cent of turnover? Do new products sell at a higher or lower gross margin than the average? 

A programme we are running for future R&D managers between Ahmedabad University, CTIER and CII is currently discussing just these questions.

And a task: Almost every firm overseas is struggling to recruit talent; we have an abundance of talent.  Our fresh engineers need training and exposure, but the raw material is there.   Foreign firms recognise our talent; of the 100 top investors in R&D, two-thirds have R&D centres in India.  A hundred Indian firms must match GE, Bosch and Emerson, each employing thousands of engineers in R&D in India. 

And finally, let’s raise the profile of investment in in-house R&D in each of our firms.  Let’s include an update on this benchmarking exercise at every board meeting.  Our lag in technology investments, in sector after sector, should be on the agenda of every board and policy discussion in India.

ndforbes@forbesmarshall.com.  The writer is co-chairman of Forbes Marshall, past president of CII, chairman of Centre for Technology Innovation and Economic Research and Ananta Aspen Centre. His book, The Struggle and the Promise, has been published by HarperCollins