A tangible gain of two decades of economic reform is that a growing number of global companies have decided to make India their research hub or have scaled up their research and development (R&D) presence in the country considerably. This is, after all, the era of disruptive reverse innovation and frugal engineering in which products developed for the bottom of the pyramid in emerging economies, like India and China, are sold even in developed countries. A case in point is the $1,000 portable, handheld electrocardiogram device and $15,000 PC-based ultrasound machines developed by American giant General Electric.
Knowledge@Wharton, the online journal of the Wharton Business School, earlier ran a series of articles on India’s rise as a global R&D power and suggested that “if R&D in India were a three-act play, advanced development for products would be in the first act. Basic research, the software engineering and development to support other labs, is probably in the second act, according to experts…As the number of companies from the US and Europe moving R&D operations to India rises, hopes are high that the third act will be a grand finale that potentially could turn the country into an R&D powerhouse.”
The truth is that all these acts appear to be playing out simultaneously as various factors drive global R&D towards India. Global R&D is changing because the process has become less vertically-integrated. GE, for instance, spends billions of dollars on R&D but there has been a splintering of their research divisions all over the world. Earlier, this was centralised in its headquarters and focused on developing products for wealthy countries. Over the last few decades, however, the priority is setting up R&D centres in fast-growing India and China to develop low-cost innovations that can be sold globally.
All of this is good news, but the bad news is the limited number of studies of this trend. What is the research focus of these foreign R&D centres? What are the budgets of these centres? Are they having any beneficial spill-over effects on local education and research institutes? From a policy perspective, the big question is what are the various ways of incentivising foreign R&D centres to generate such effects? For starters, although R&D offshoring took off in 1984 with Texas Instruments setting up its centre in Bangalore, there are no reliable estimates of the number of such centres here.
A recent working paper of IIM-Ahmedabad by Professors Rakesh Basant and Sunil Mani titled “Foreign R&D Centres In India: An Analysis of Their Size, Structure and Implications” is a serious effort to answer some of these questions. For starters, they suggest that 639 such centres as on January 2010 is a good enough number to begin with. A primary survey of 120 of these institutes indicates that half of these are located in Bangalore. They are relatively young since the bulk of them were set up after 1990. They are small with a low capital investment and the vast majority is controlled by multi-national corporations.
India’s advantage for being a global R&D hub is the sheer profusion of its scientific and technical (S&T) manpower, as it has a large stock of graduates in science and technology. The number of doctoral degrees awarded in science and engineering is 9,000. Such a competitive edge in S&T manpower attracts corporations keen on harnessing India’s knowledge power. Though global giants, thus, are resource-seeking in nature, they are here to develop technologies for different markets than modifying existing technologies for local markets. Their R&D effort, thus, is also knowledge augmenting in nature.
Much of this R&D activity results in innovations in product development. According to Basant and Mani, these centres undertake all kinds of research and this is not restricted to adaptation of important processes and products. In fact, new product development, basic and advanced research is reported to be the three most important foci of work in these centres. As a corollary, foreign R&D centres seem to have become the locus for creating “reverse innovations” that are created first here and then exported back to the parent to be exported globally. GE’s medical devices are a case in point.
But the striking fact is that the linkages of these centres with local counterparts and institutions are limited for performing R&D and solving research problems. Knowledge spill-overs for the local economy emanating from their activities is, therefore, somewhat limited according to the authors. The big challenge on the policy front is to ensure that this happens. The problem, however, is that there are no explicit polices to promote foreign direct investment in R&D.
There is also a clear need to incentivise more investments by Indian industry in R&D to encourage spill-overs. Prime Minister Manmohan Singh is clear that public-private partnerships are necessary to step-up funding for research in frontier S&T areas. The best and brightest in the S&T graduate stream also must be incentivised to pursue research as a career option. Perhaps only then will the hopes of India becoming a global R&D powerhouse come to pass in the third act.
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