Nagesh Kumar: An innovation-led growth model

R&D subsidy to industry and protecting indigenous innovation can give India competitive edge

The economic growth experience of countries suggests that in the early stages, growth is based on exploitation of natural resources and labour. Subsequently, capital accumulation leads the process. Beyond capital accumulation, the growth process is driven by productivity enhancement through innovation. The innovative activity is widely seen as an important influence on a country’s international competitiveness and growth prospects in an increasingly globalising and knowledge-based world economy.

Theoretical literature has established the role of technological capability in explaining growth and trade performance. Technology has been assigned an important place in the policy framework of most of the industrialised and newly industrialising economies. Governments in these countries aggressively promote innovative or research and development (R&D) activities of national enterprises. As a result of the huge R&D subsidies given by the governments in developed countries, R&D expenditure as a proportion of GDP has risen from 1.85 per cent in 1980 to 2.55 per cent in recent years with the ratio being higher at 2.7 per cent in the US and 3.3 per cent in Japan. In many advanced economies, direct subsidies given to business enterprises by national governments account for a substantial proportion of R&D performed by business enterprises — 28.3 per cent in the US and nearly 20 per cent in Germany. The government’s share in total R&D expenditure in both the countries was close to half. The European Union runs multi-billion euro Framework Programmes such as EURAM, Esprit and Eureka which are geared towards strengthening the technological edge of European enterprises with R&D subsidies. They also take steps to jealously guard the technological capability of national enterprises through various means such as the strengthening of intellectual property protection the world over. These trends have been variously described as technonationalism or technoprotectionism.

Emerging countries have also stepped up their innovative activities, with the Republic of Korea spending 3 per cent of GDP on R&D, Taiwan province of China 2.3 per cent, and China 1.4 per cent.

In India’s case, the spending has risen slightly to 0.9 per cent from 0.8 per cent a decade ago. It is, however, important to note the visible outcomes of the industrial R&D in the country. It is owing to R&D activities geared to developing cost-effective processes of known chemical entities that Indian pharmaceutical companies have emerged as leaders in the generics market in the world. Indian automakers have employed R&D activities to develop world-class vehicles such as the Nano following the Indica, Indigo, Scorpio, Xylo and a host of two-wheelers that are sold in a number of countries.

India needs to increase the spending on R&D to close the technology gap and to exploit the potential of emerging technologies, such as green technologies, for development and employment creation. Furthermore, the public-funded R&D institutions account for the bulk of R&D expenditure in India, with industry accounting for only about a quarter of national R&D expenditure. India needs to focus on enhancing the corporate R&D activity since that would have a direct bearing on competitiveness and productivity improvements.

A recent quantitative analysis of R&D behaviour of Indian enterprises showed that the motivation for R&D activities in the post-reform period has changed. The evidence suggests that R&D activities of Indian enterprises in the post-reform phase are explained by imports of knowledge and their outward expansion, while in the pre-reform period they were largely explained by the availability of tax incentives. It appears that reforms may have pushed the Indian enterprises towards rationalising their R&D activities and making them increasingly focused.

What can be done to boost R&D activities of Indian enterprises? As observed earlier, governments in developed countries spend billions of dollars on R&D subsidies given to national enterprises to shore up their competitiveness. Subsidies up to 50 per cent of project costs have been made non-actionable under World Trade Organisation (WTO) rules. In India, R&D activities have been encouraged mainly through weighted tax deductions in certain industries. It is arguable that more direct support in the form of R&D subsidies for specific projects may be desirable to develop products or processes, thus strengthening competitiveness. Moreover, in the case of subsidies, it is possible to direct the R&D effort of an enterprise in a desirable direction or field.

For instance, it may be used to promote capability building for new products or process innovations for local markets or internationalisation rather than customisation of imported technologies and products. It is also possible to achieve other desirable objectives such as promoting industry’s linkage with public-funded research laboratories and universities through more direct subsidies.

In recent times, the government has set up funds for specific industries, such as pharmaceuticals, to assist R&D activities. These funds have remained underutilised owing to onerous conditions attached. Obviously, there is a need for a generous programme to push R&D activities of enterprises through subsidies for viable R&D proposals of industry to strengthen India’s competitive edge. Besides, products based on indigenously developed technology could be extended production tax concessions (such as those extended to small-scale industry products) and income tax concessions (such as those enjoyed by export turnover) to encourage innovation.

Another policy to promote local innovation could be to protect minor innovations through utility models and industrial designs protection as has been done by a number of east Asian countries such as Japan, South Korea, Taiwan and so on. The patent system fails to encourage minor innovations since the criteria for inventiveness tend to look at the novelty of the invention. The experience of several east Asian countries suggests that petty patents and industrial design patents could be effective means of encouraging domestic enterprises to undertake minor adaptive innovations and foster an innovation-based rivalry among them. India might consider adopting a petty patents regime that provides limited protection to minor incremental innovations made by enterprises and spurs inventive activities.

The author is Chief Economist of UN-ESCAP (United Nations Economic and Social Commission for Asia and Pacific), Bangkok.

The views expressed are those of the author and do not necessarily reflect the views of the UN

Comments are welcome at nkumar@un.org