R&D: India's missing giants

India needs some giant investors in in-house R&D. Let's start with our most successful firms

In “R&D: An Inside Job” (Business Standard, February 16, 2023), I showed that India lags the world in R&D: As the fifth largest economy we rank 16th, and the key gap is in-house investment by industry. I argued that Indian industry must invest at least five times more in R&D as a share of gross domestic product (GDP) if we are to have any chance of building an innovative economy. How will this happen?

It’s about giants: Large firms worldwide dominate investment in technology. The top 20 investors in industrial R&D account for over 20 per cent of the total industrial R&D done by millions of firms worldwide. The 26th largest investor in industrial R&D worldwide (Bosch) invests more in R&D than all of Indian industry combined. Where could India’s giant investors in in-house R&D come from?  To address this question, Dipti Singhania at the Centre for Technology Innovation and Economic Research constructed a table of the 10 most profitable firms in the five largest economies. We excluded banks and other financial services, shipping, logistics and trading services from the analysis — they dominate the profitability rankings in all economies, including ours, but almost everywhere invest very little in R&D.

A few overall trends emerge from the summary table (see the online version of this article for the full listing, or email me). Note the dominance of a few sectors. Of 50 firms, one third are in software (8) and oil and petrochemicals (6). Auto (6) shows strongly in Germany and Japan and construction and materials (2) in China. Pharmaceuticals (4), industrial metals (3) and chemicals (2) show up here and there.

The firms are, by definition, not only large but profitable: Profit to sales is at 7 per cent in China, 9 per cent in Japan and Germany, 16 per cent in India, and 24 per cent in the US. R&D investment as a per cent of profit is much more interesting: It is 37 per cent in the US, 29 per cent in China, 43 per cent in Japan, and 55 per cent in Germany.  In India, we are at 2 per cent. Our most successful firms are reasonably large and profitable by international standards; they just invest very little in R&D.

In search of India’s giants:  Let us look at the Indian firms more closely.


Our two software firms invest 0.5 and 1.4 per cent of sales in R&D to a range of 6.5 to 21 per cent in the other four countries. Oil and petrochemical firms are everywhere miserly in investing in R&D; our three firms are no exception. Firms in the steel industry are also not particularly strong investors in R&D, though both our firms could do a lot more. Our pharmaceutical firms and auto firms, which dominate our R&D data, are not big enough or profitable enough to rank in our top 10 profitable firms. In short, we are simply missing the technology giants (Alphabet, Microsoft, Apple, Meta, Tencent, Alibaba, SAP) or manufacturing champions (Toyota, Honda, Ford, Mercedes, BMW, Volkswagen, Siemens) that we see heading the lists of our peer countries. So what must we do?

Is it about brands? Shekhar Gupta wrote an article in these pages, “Conglomerates and brandless growth” (Business Standard, March 18), arguing that our large groups have failed in building a single global brand. He blames a mentality of outsourcing: “The Modi government’s manufacturing push is very good and necessary, but basically it is pushing Indian manufacturing in the same direction as our software (services) industry: Outsourcing.”  Is he right? The international firms in our profitability list would seem to say so: Apple, Microsoft, Sony, BMW are globally associated with great products in particular industries. The brands they have built provide global reach and a premium positioning that delivers great profitability. But these global brands also reflect decades of innovation, marketing and investment in building an international presence. How does one break into this hallowed circle?

My first book, co-authored with David Wield, From Followers to Leaders, looked precisely at this issue. We followed the economist Michael Hobday, whose Innovation in East Asia, told the story of how firms in South Korea and Taiwan had built global brands as latecomers to industrialisation. Firms like Samsung, Hyundai, LG, TSMC and Acer did not start as global brands. They began with outsourcing, as original equipment manufacturers or OEMs, building manufacturing operations of global scale. They used their demanding buyers as a source of technology that made them world-competitive. But they did not stop there. They invested in R&D, as process innovation, to make manufacturing more efficient. They then offered their buyers products with new and improved design, moving up the scale to own design and manufacture or ODM, claiming a piece of the innovation rents that came from better products.  This required them to invest in substantial product design capabilities, which over time completely outclassed and replaced the design capabilities of their buyers. And, finally, with world-competitive manufacturing and leading-edge product design in place, they made the shift to own brand manufacture or OBM, launching their own brands, going beyond their home market, spreading step by step into the world. This is the story of Samsung in microwaves and semiconductors, LG in TV sets, Hyundai in cars and excavators, TSMC in microprocessors, and Acer in laptops. 

This OEM to ODM to OBM story is one of continuous learning. But it is also one of global ambition and building technological capability. As firms like Hyundai, Samsung, TSMC and Acer moved up the OEM to OBM chain, their investment in in-house R&D multiplied. Samsung has consistently ranked among the world’s five largest investors in R&D, investing $18 billion a year, more than all of India (every firm plus government laboratory plus university) combined.

I share Shekhar Gupta’s quest for global brands: All Indians would. But the way to fulfil it requires a long-term entrepreneurial outlook with investment in technology at its heart. It means building a world-competitive industry so our current manufacturing policy must be judged only on whether our firms continue to thrive when the production-linked incentive or PLI ends and protection vanishes. It means a lot of learning. Doing so from demanding buyers is best, so outsourcing is to be greatly respected, not criticised. It means investing strongly in design, as an inherent deliverable of the PLI subsidy so that we can continue to compete when they end.  And it means a few giant investors in R&D must emerge in India. We should look to our most profitable firms to get us there — in software, among the five conglomerates Shekhar cites, in consumer goods and industrial products. And if they don’t, then there is space available for some scrappy new entrants to build world-leading firms based on investments in technology — and replace them in a future listing of our most profitable firms.

 

ndforbes@forbesmarshall.com. The writer is co-chairman Forbes Marshall, past president 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