Innovation, competition, ambition: Why Indian firms must invest more in R&D

I have often written about the need for Indian industry to invest more in in-house research and development (R&D).  Indian industry invests only 0.3 per cent of gross domestic product (GDP) in in-house R&D, compared to a world average of 1.5 per cent.  Why do we invest so little in R&D?  As the table shows, India has relatively few firms (23) in the top 2,500 firms that invest in R&D.

We have four challenges:

* We have no presence in six of the top 10 industries that invest in R&D: Technology hardware, electronics, construction, health care, general industrials, and industrial engineering.

* Where Indian firms are present, they invest less in R&D than the world average. In auto, the four Indian firms (Tata Motors, M&M, Bajaj, TVS) that figure in the top 2,500 R&D investors spend 3.8 per cent of their global turnover on R&D, which drops to just over 1 per cent without Tata Motors’ JLR subsidiary in the UK.  The world average for auto is 4.8 per cent.  In software, the top Indian firms (TCS, Infosys, HCL) invest 1 per cent of turnover in R&D, compared to a top 2,500 average of 14 per cent.

* In pharmaceuticals, the top five Indian firms invest 6 per cent of sales in R&D.  This is less than the world average of 17 per cent, but higher than any other industrial sector in India.  The problem is that our pharmaceutical firms are relatively small.  The average turnover of our five largest pharmaceutical companies (Sun, DRL, Aurobindo, Lupin, Cipla), at $3 billion, is a fraction of the $45 billion average of the top 20 pharmaceutical firms worldwide. Our top five firms invest an average of $200 million in R&D, compared to an international top 20 average of $7 billion.

* We have a serious gap for our most successful firms (see my “India’s Missing Giants”, Business Standard, March 23, 2023).  Our 10 most profitable non-financial firms make an average profit of 16 per cent of sales, and invest 2 per cent of profit in R&D.  The 10 most profitable non-financial firms in the US, China, Japan and Germany make an average profit between 9 per cent and 25 per cent of sales, and invest between 29 and 55 per cent of profit in R&D.  The difference in R&D spending proportional to profit (20 times) is simply huge.  The problem is not one of sector, profitability, or size.  Our most successful firms just invest little in R&D.

These four challenges — a missing presence in the most technology-intensive sectors, lower R&D intensity in the remaining sectors, limited scale in our most R&D-intensive sector, and a small investment in R&D by our most successful firms — between them result in Indian industry’s low investment in in-house R&D.  What can be done?

Laveesh Bhandari argued in these pages earlier this month (“Innovation is key: Why does India’s private sector not spend more on R&D?”, Business Standard, September 2, 2024) that the problem was competition.  He says that Indian firms do not have an incentive to invest in in-house R&D as they already have continuing high growth in earnings by operating in a protected market.  They need not cope with the uncertainty of R&D outcomes.  This is a persuasive argument, but I would argue that the quality of competition is what really matters.  Simply having more competition can drive efficiency; it need not drive product innovation.  The nature of competition must change, and come from innovative firms that compete on better products, not price. 

Where a firm currently stands also matters.  One of the better recent books on innovation is The Power of Creative Destruction, by Philippe Aghion, Celine Antonin and Simon Bunel.  In a chapter titled “Is competition a good thing”, they argue that firms react to increased competition differently depending on how far from the technology frontier (economist-speak for cutting-edge) they are.  If they are far from the frontier, firms don’t even try to compete.  If they are near the frontier, they respond by innovating more to escape competition.

The other side of protection from imports is competing in export markets.  Selling to international markets has many advantages.  First is scale.  The Indian market may be large, but it is puny relative to the rest of the world. The 15 Asian countries that make up the Regional Comprehensive Economic Partnership (RCEP) free-trade area are eight times our gross domestic product.  The 10-country subset in Southeast Asia alone would be double India’s market.  There are more advantages: Selling in international markets provides great learning opportunities.  Competing with the world’s best is a spur to innovation like no other.  But Aghion & Co argue that an expansion of export markets enhances innovation for firms close to the frontier.  Export orientation does not enhance innovation much for firms far from the frontier.

After hearing Manmohan Singh’s landmark Budget in June 1991, Forbes Marshall decided two things.  First, we figured that the world’s best firms would soon be coming to India, and if we could beat them overseas, we would easily beat them on our home ground.  So, we began exports to drive learning.  And, second, we committed to investing strongly in R&D and develop products we could sell worldwide.  We used the time we had as the Indian market opened up to get as close to the technology frontier as possible.  This opportunity still exists for much of Indian industry.  

When I talk to my friends about why Indian firms invest little in R&D, I often hear a cultural argument, that it is our “trader mentality” or that we are short-sighted and do not see the merit in the long-term play that is R&D.  I think the issue is different.  Many industrialists think there isn’t a problem to solve, that they are already investing adequately in R&D.  So, I’ve made it my mission to show the huge gaps we have in R&D across industrial sectors, in our most successful firms, and overall R&D investment in the country, and all of Indian industry.  Maybe this helps, but what can truly make an impact is the growing visibility of how R&D drives the success of leading firms.  When this combines with a strong export strategy that shows Indian firms succeeding around the world, it becomes really powerful. The success story of a few dozen firms could fire Indian industry to build proprietary technology and deploy it worldwide. It is time we had hundreds of highly ambitious firms, operating at the technology frontier, and seeking enhanced competition from imports and in export markets as a spur to innovate yet more.

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