FDI in R&D in India

 

 

A.K.Bharadwaj & Rammi Kapoor i

 

R&D internationalization is not a new phenomenon. It is an activity for resource exploitation and augmentation through various channels beyond the national boundary. It is a global search for talented human resources, conducive research environment and low cost for R&D activities (Elder 2008). Firms have always been in the lookout for newer knowledge to enhance their competitive strength.  It gives firms access to diversified resources.  The ability of the firm to exploit and utilize this for innovation benefit is a firm specific characteristic of internationalization. The implications are global, national and at firm level.

Here, R&D is the economic activity. According to Kafouros et al, degree of Internationalization explains the innovation-performance of firms (Kafours et al 2008). Operating in different markets enhances the ability to reap the benefits from innovation. The process of R&D internationalization can be understood in terms of supply and demand of knowledge resources. Dwindling S&T infrastructure and exorbitant cost of human resources has been one of major factors for the global firms to look outside their home country for the resources. So, the process of internationalization is either, market driven, host country’s S&T capability driven or human resource driven. Internationalization of R&D and innovation, in the present context is encompassing various strategic activities of the firms. Universities, public research institutes and firms are the channels for R&D internationalization. Universities and public research institutes as part of the innovation system enhance the location advantage for the firms.

Globally firms are disaggregating their innovation activities. They are into a global network mode by offshoring, outsourcing and subcontracting various activities, including the R&D activity to network partners in different regions.  As stated by Dieter Ernst “A transformation from global production network to Global Innovation network” is taking place. Firms are expanding their domain of activity by decentralizing their R&D activities to other regions, in addition to their home country to have access to broader knowledge bases, S&T resources and markets.  They are outsourcing and off shoring some of their R&D activities to firms and R&D setups in other countries, mergers and acquisitions of firms are also adopted as means to enhance their R&D and technological capabilities.  According to Economist Intelligence Unit Survey 2007, proportion of their respondents with at least some of their R&D activities being performed overseas was almost 65% which is expected to be around 84% within three years time. For R&D location India is the first choice followed by USA and then China.

MNCs are expanding their domain of R&D activities overseas, in the following three ways:

In addition to this they also subcontract out certain activities and also have certain collaborative projects and programmes.

 

The Focus

The focus is on the following Issues:

Firms are decentralizing their R&D activities to different geographical regions as a part of their business strategy. Why firms are looking beyond their home country for R&D activities is an important issue to understand the global innovation networks.

Global firms are seeking the shores of emerging economies to have access to their S&T resources. More and more R&D centers of global firms are getting set-up in India and China. This brings in a new dimension to the issue of R&D internationalization.

Presence of global firms in R&D activities is growing with more R&D investment coming in various sectors like IT, drugs and pharmaceuticals, biotechnology, Automotive etc. The important aspect here is the pattern of flow of FDI in R&D by various countries in different sectors in India. This has resulted in R&D clusters by MNCs. The other dimension of it has been that many of the Indian firms have also expanded their R&D activities to other regions.

 

Internationalization of R&D

Internationalization of R&D is a phenomenon of late eighties. Many MNCs set up production facilities in the growing markets overseas through their subsidiaries, or through collaborations with local companies. In many cases products have to be modified to suit local tastes, conditions, and also locally sourced material or components. R&D facilities were to be created to address such needs and modification of the products and technologies. The present trend of internationalisation of R&D, however, goes much beyond this practice. The present trend is more about attaining or retaining global competitiveness by having access to R&D infrastructure and capabilities from multiple sources to develop global networks (Howells (1990), Pearce (1999), Reddy 2000), Cantwell (1992)).

 

 

 

 

 

 

 

 

 

 

 

New Trends in R&D Internationalization

Internationalization of R&D has entered a new phase, with MNCs overseas investments increasing in the Asian region. China and India are emerging as the most preferred destinations for MNCs for setting-up their dedicated R&D centers (Ernst, D (2007)).  According to ‘The Economists Intelligence Unit survey, 2007’, India emerges as the most preferred destination for R&D location, followed by US and then China. Now, the firms from India are also going out to expand their R&D, production and marketing activities. 

Main reasons behind this New Trend:

Fig 1: Most attractive prospective R&D locations, 2005-2009 - (Per cent of respondents mentioning the location)

Source: UNCTAD 2005

 

According to Economist Intelligence Unit 2004, out of many reasons, India’s R&D activities and highly skilled labor force have been the reason for FDI destination in India. This gives a new perspective where the emerging economies are sought by the global firms for augmenting their knowledge resources.

     

Table 1: Destination of FDI: Choice of the 500 executives

 

China

Euro area

Japan

Russia

USA

UK

India

New EU entrants

Brazil

New consumer markets

49

9

2

5

7

2

9

15

4

Low-cost Labor

50

2

0

3

1

0

29

12

3

New partnership possibilities

20

22

5

5

14

4

12

14

3

New corporate markets

23

22

3

5

17

3

7

15

4

Access highly skilled labor force

6

22

7

3

14

6

30

10

2

New opportunities in outsourcing

16

9

1

3

7

2

46

12

4

Acquisition opportunities

15

20

2

5

13

5

8

22

9

Research and Development activities

11

20

5

4

22

7

24

6

3

Greater efficiency in supply chain

17

26

6

2

22

5

10

9

3

Source: Economist Intelligence Unit19, The Economist World Investment Prospects 2004

 

 

 

 

Indian Scenario

Foreign R&D Centers in India:

Internationalization of R&D and innovation in the Indian context is the measure of FDI inflow and outflow in R&D as a percentage of total R&D investment in India. MNCS, Indian firms, universities and the public research institutes together contribute to the process of internationalization. It is a measure of the nature and type of R&D activities undertaken by the MNCs in India and also the R&D activities of Indian firms outside India. It is also a measure of the extent of Indian R&D and production system getting linked to the global R&D system, through MNCs R&D activities in India.

According to the TIFAC report (TIFAC, 2005), over 100 foreign organisations (mainly MNCs) have opened R&D centres in India over last decade. The flow of foreign R&D is mainly concentrated in few areas like software development, Auto design, Drug design and Pharmaceuticals, Hardware and product design (Fig 3).  Earlier, many of the MNCs had their R&D set-up as a support to their production unit. Late entrants are opening their dedicated independent R&D centres for taking up R&D activities in new and emerging research in high tech areas. Table 2 presents the scenario of the foreign R&D centers in India. During 1996-2000, more countries have established their R&D centers in India and also countries that were already having their R&D centers have established more during that period.  This has been the phase when India became a center for global R&D activities. There are 16 countries whose MNCs have established their R&D centers in India. US has the maximum number of R&D centers with maximum R&D workers employed. In the following tables & figures country-wise and sector-wise distribution of these R&D centers is presented, to understand the R&D investment and manpower distribution pattern among various sectors. Software development, Auto design, Drug design and pharmaceuticals, Hardware and product design are the areas that have drawn maximum investment in R&D centers by MNCs.  These graphs give an overview of the presence of foreign R&D in India. Based on this data, it needs to be probed further to see how the nature and types of linkages varies in different sectors and to understand the patterns of outcomes and their spillover effect if any.

 

 

 

Country-wise R&D investment

Firms from different countries have been setting up their R&D centers in India. Table 2 and Figure 2; clearly indicate that w.r.t. India the USA is far ahead of all other countries in having the number of R&D centre, R&D investment and also the manpower employment. It is also evident from the table that more R&D centers were established during 1996-2000 when India was emerging as an R&D hub.

 

Table2: Country-wise R&D centers, R&D investment and the R&D workers employed in India: A profile upto 2003

Country

Number of R&D centres

Year of establishment

Number of R&D workers

In R&D centers established

(R&D Investment in million Rs)

 

 

Prior to 1995

!996-2000

Beyond 2000 upto 2003

Prior to 1995

1996-2000

From 2001 and beyond*

Austria

1

1

 

 

50 (100)

 

 

Canada

3

 

2

1

 

539 (400)

55 (110)

Taiwan China

2

 

1

1

 

10 (8)

500(2700)

Denmark

1

 

1

 

 

 

5 (1.5)

France

5

1

2

2

800(900)

150 (18.2)

20 (20)

Germany

7

 

7

 

 

2050 (3452.4)

 

Japan

7

1

3

3

NA

50 (225)

50 (197.2)

Korea

3

 

2

1

 

650 (4500)

NA

Mauritius

2

 

1

1

 

10(5)

255 (510)

Netherlands

3

1

1

1

400 (400)

30  (225)

100 (200)

Norway

1

1

 

 

NA

 

 

South Africa

1

 

1

 

 

50 (30)

 

Sweden

2

1

1

 

60 (12)

20 (40)

 

Switzerland

2

 

2

 

 

170 (340)

 

UK

7

1

2

4

100 (20)

250 (500)

604 (569)

USA

53

12

21

15

6330 (12175)

4940

(11051.3)

2646

(930.01)

Source: TIFAC and N. Mrinalini (Forthcoming)

 

 

Fig 2:  Country-wise foreign R&D Investment Pattern in India (1998-2003)

Source: TIFAC 2005 and N.Mrinalini and Sandhya Wakdikar 2008

 

 

Sector-wise R&D units:

The following figures clearly shows that the global firms have been setting up more R&D units in IT sector followed by automotive, drugs and pharmaceuticals and other sectors. IT sector in that sense has been drawing maximum FDI in R&D compared to other sectors.

 

Fig 3: Sector-wise Global R&D units in India (Last 15 years)

Source: TIFAC 2005, Business news, Company reports

 

Sector-wise foreign R&D investment

The following graph shows that IT sector gets maximum FDI investment in R&D followed by automotive and other sectors.

Fig 4: Sector-wise R&D Investment by global firms

 

Indian IT sector

Indian IT sector has attracted the maximum investment from global firms. This gives an important insight to the issue of R&D internationalization where most of the global IT giants have their R&D operations in India and have linkages with Indian R&D and Production system.

 

 

 

 

 

 

The following figure shows that the top 7 globally spending IT firms have their R&D operations in India. They have set-up their dedicated R&D centers. Top global IT firm, HP is seventh global R&D spending IT firm

 

 

 

 

 

 

Many of the top global IT firms established their R&D centers in India around 2000. Some of the new entrants after 2003 have been again the firms from USA like, HP Microsoft etc. Many of these firms are now expanding their R&D activities by setting up newer centers.

 

 

 

 

Linkages with Indian Production and R&D system

The nature and type of linkages and also the extent of this have implications on the host country’s R&D and production system. Similarly, a study on Shanghai innovation system, has presented some preliminary evidence to show that technology spillover is there from MNCs to the local economy. Here, the spillover is in the form of setting-up of Joint research Labs, with local universities and this has triggered off similar joint research labs being set-up by some of the local large firms with the universities. The other observed effect has been the spin-off firm from the MNCs R&D centre (Chen 2006). There are studies, which are indicative of the possible benefits to the host country’s innovation system, but not much is known about their impact (Reddy 1997, UNCTAD2005b, Dirk, 2004, UNCATD,2006, Chen,2006). According to Narula, to reap the benefits from foreign R&D, it is essential for the host country to have the basic technological capability to absorb the spill-over from their activities (Narula 2003).

The following typology is indicative of the types of linkages and their probable outcomes (N.Mrinalini and Sandhya Wakdikar, 2008)

 

 

Fig 5: Linkages between Foreign R&D and Host country’s production and R&D System

Source: N.Mrinalini and Sandhya Wakdikar (2008)

 

The following table presents the glimpses of linkages that are observed in India between the foreign R&D centres and the Indian production and R& system. The interesting observation is that the foreign R&D centres have not only linkages with some of Indian firms but they also have linkages with certain research institutions like Indian institute of Science, IITs etc. This gives a new dimension to the issue of linkages where it indicates the search for knowledge resource by the global firms in India. This is a deviation from the earlier understanding where the global firms mostly sought the emerging economies for marketing their products processes. 

 

Table 3: Examples of foreign R&D linkages in India

Foreign R&D and Indian Institutions Linkages

Mode of linkages

Du Pont-RIL

New centre

Alliance for DuPont’s entry into Indian market. R&D for process and product technologies in India

Du Pont-CSIR

DuPont Setting up knowledge centre

Research agreement, DuPont to have access to CSIR facility and get its talent

Emerson-Tata Liebert

Emerson buys over Tata’s stake to form new firm

Joint venture

Ericsson-WIPRO

WIPRO takes over R&D

Total R&D outsourcing, WIPRO acquires resources- professionals, assets. WIPRO to provide R&D consultancy service to Ericsson.

Ericsson-TCS

New development centre

Pact for telecom solutions

General Electric- TCS

Creating New facility

to cater to GE’s global operations, enhancing TCS capabilities,

GE-Satyam Computer Service Ltd

New facility for GE’s global activities

Joint venture

Hewlett Packard-IIT Chennai

New facility

Research to help HP’s global efforts

HP- IISc Banglore

Joint research

New product development

Synopsys-View Logic System Inc

Synopsys setting up new center

Partnering for getting work done for Synopsys.

Diebold-Tata Infotech

Contract agreement,

manufacturing and marketing Diebold’s product,

G E International- TCS

Creating new facility

to cater to GE’s global operations, Facility utilised for both firm’s customers.

G E - Satyam Computers Services

New facility

New product development

Lucent-Finolex

New plant

Finolex gets technology from Lucent

Toyota-IICT

New lab set up.

Contract research to IICT

Caterpillar and IIT Chennai

Centre of excellance

To train highway design engineers

CISCO with NIIT and IIHT

Training partnership

To generate highly skilled manpower for CISCO’s global requirement

CISCO with WIPRO, Infosys, Satyam, HCL, and Zensar

Joint development centre

Product development

Source: N.Mrinalini and Sandhya Wakdikar (2008) and N.Mrinalini ( forthcoming)

 

Indian firms in IT sector

Foreign R&D has been maximum in the IT sector. The Indian IT firms performance would be seen in this context.

Total R&D Expenditure for the year 2006-07 was Rs. 429.99 crore, 30 firms  have invested in R&D out of 296 companies as per CMIE Database in IT sector

 

Fig 5: R&D expenses of Top 10 Companies for the year 2006-07

 

 

Figure 5 shows that the top 10 firms together have R&D expenditure to the tune of 87.8 percent of the total of R&D expenditure by the Indian firms in this sector. Issues to be looked into are the following:

Fig 6: R&D expenses of top 10 companies as % of total R&D Expenses of Indian Firms

                                   

In 1997 the R&D expenditure was basically from the top 10 firms but over a period of 10 years other firms are also spending on R&D.

 

Table 4: R&D Expenditure in Information Technology by Top Indian Firms (Rs. Crores)

 

 

References:

 

  i Ms Pushpa Singh (Project Assistant) and Mr Rahul Sarda ( BIT-Pilani Student) helped in the work

 

 

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