Innovation, Competition and Ambition
Context:
Indian industry invests only 0.3% of GDP in in-house R&D, far below the world average of 1.5% and India has only 23 firms in the global top 2,500 R&D investors.
Four Challenges of Indian R&D
- Absence in Key Sectors: Indian firms have no presence in six of the top 10 global R&D-investing industries (technology hardware, electronics, construction, healthcare, general industrials, and industrial engineering).
- Low R&D Intensity in Existing Sectors: Indian firms in R&D-heavy sectors, like automotive and software, invest less in R&D compared to global peers.
- Indian auto companies (Tata Motors, M&M, Bajaj, TVS) spend 3.8% of turnover on R&D (without Tata Motors’ UK JLR subsidiary, this drops to 1%), while the global average is 4.8%.
- Indian software companies (TCS, Infosys, HCL) spend 1% of turnover on R&D, whereas the global top 2,500 average is 14%.
- Scale Limitations in Pharma: Indian pharmaceutical firms invest more in R&D than other sectors, but their scale is limited.
- India’s top five pharma companies invest 6% of sales in R&D (below the 17% world average), but their average revenue is only $3 billion, compared to $45 billion for the global top 20.
- Low R&D Spending by Successful Firms: India’s most profitable non-financial firms invest only 2% of profits in R&D, compared to between 29% and 55% for firms in the US, China, Japan, and Germany.
Case Study – Forbes Marshall
After hearing Manmohan Singh’s landmark Budget in June 1991, Forbes Marshall made two strategic decisions. First, they anticipated that the world’s leading firms would soon enter India, and believed that if they could outperform these competitors in international markets, success at home would follow naturally. To achieve this, they began focusing on exports as a way to gain valuable learning experiences. Second, they committed to significant investments in R&D to develop products for the global market. During the period of India’s market liberalisation, they used this time to move closer to the technology frontier.
Why Indian Firms Invest Less in R&D?
- Market Protection: Indian firms operate in a relatively protected market, which provides high growth in earnings without the need for R&D investment.
- Quality of Competition: It’s not just about having more competition; it’s about the right kind of competition, with firms competing through product innovation, not just efficiency or price.
Way Ahead
- Competing in export markets can provide scale and learning opportunities, pushing firms to innovate further, especially if they are near the frontier.
- Raising awareness about the gaps in R&D investment, combined with showcasing the success of firms using R&D and exports, can inspire others to follow suit.
- India needs more firms operating at the technology frontier, investing in R&D, and competing in both domestic and global markets to drive innovation.