Pattern of innovation and R&D in select sectors of listed companies of India
Avinash Kshitij, Bikramjit Sinha
Innovation behavior of listed firms is likely to be different from business enterprises that are not listed; amongst them would belong privately held firms, delisted entities, small or family businesses etc. The listing entitles the firms to accessing the capital market, which is believed to be cheaper. Listing also makes it obligatory on the part of firms/companies to divulge performance and investment data beyond what accounting standards require. This part of the study on innovation is mostly based on such data provided by listed firms/companies and as provided by the Prowess database of the CMIE. Most of the financial information is as available in the accounting reports; however, there is non-financial information as well. At present there is data on 21488 firms, large and medium while ten years back the number was about 12000.
Listing as well as accounting practice requires the companies to report on expenses on R&D on both current and capital accounts, and no less importantly, a firm gets tax deductions on this expense and the investors too take into consideration R&D expenditure while rating that firm. The ASI data did not directly provide R&D expenditure data. Based on this current dataset, therefore, we can examine both R&D behaviors and non-R&D innovation behaviors of companies under the condition of reporting. To provide an example of the last condition, most stock exchanges globally and Indian exchanges too have either proved indifferent to or sometimes even proved hostile to expenditure on R&D. Therefore, a company would choose between the following options: (1) report on R&D because of gains in tax savings and because the company perhaps does not require to raise money from capital market or else does not wish to gain from market capitalization or wishes for strategic reasons relating to holding to undermine market capitalization; (2) derisk the listed company by hiving off the vehicle that would undertake R&D and perhaps unlisted but otherwise fully or partly owned by the company; (3) not report on R&D and forgo tax gains but invest in developmental projects; or (4) not undertake R&D or no major developmental project.
In fact several drugs and pharmaceuticals companies faced hostility from the capital market and shareholders on their R&D expenses, which according to Indian standards was rather high. A few of these companies also faced spending money on patent litigations relating to generics also faced disapproving questions from investing community. Such behaviors are reported from most exchanges, however. Simply put the P/E ratio in general behaves badly with doing R&D. A large number of mid-size firms report on R&D for tax gains and because market capitalization as well the volumes traded are both very low for them. A handful of relatively large firms report R&D for both tax gains and for signaling to the competition. Equally opposite, a few large firms do not report on R&D because their business strategy prevents them from disclosing exact amount being spent on developmental R&D, and such cases could be observed amongst the transport sector. Most importantly and as was the case for the ASI databased study a large number of firms are busy in innovative development while not owning a formal R&D set up. In this section therefore we would look into reported cases of R&D without looking into issues of business strategies and we would also look into non-R&D elements of innovation.
Indian companies doing R&D locate the unit/department only at one location, which is not necessarily the head office of the company. Each factory or each division would not often have respective product R&D. Size of a typical R&D is almost always very small and intra-company mobility across factories/ divisions and the R&D unit is rarely institutionalized. Mobility between maintenance, shopfloor, sales outlet, quality and R&D are rare. The head of R&D almost never is in board or often do not report to the chief of the company. In only a few cases the chief has taken personal interest in R&D. A large number of Indian companies belong to family-group or holding companies/entities. Diverse interests of such holding entities, however, have not hastened formation of non-individual company had-office R&D targeted not only for competitive advantage but also for internal restructuring or resources allocation. Much of company R&D appears to be influenced by non-tax policies. Legal institution such as Companies Law, Factories Act, Competition policies or similar others and other fiscal or capital market policies critically influence both R&D behavior/extent and in-company structure and function of the R&D.
Further, few only encourage R&D personnel to publish research papers and especially only in a few cases there have been joint publications, patents or even research with universities or with public R&D. Rather recluse R&D by Indian company rarely encouraged its personnel mobility across companies or public R&D centers/universities. In few cases of large firms one might discover competency centres. Development of joint competency centres with the public bodies is an important area and in germinal form one discovers such centres in designing, skills upgradation, product standards, and similar others.
One area that has received very scant attention from both public and private R&Ds and development initiatives is the undertaking of or development of standards and designs. Much of standards followed initiatives already taken abroad. Companies or even public bodies appear to have overlooked the strategic goals and the potential of market making through innovative standards. Higher value addition through industrial or product designs appear to have been taken up now in areas such as FMCG, automobiles, apparels, albeit very strong initiatives and new policies in this regard need to be taken. Activities under several standards and quality related activities, such as the ISO 9001, ISO 14001, HACCP / IS 15000, Eco Mark, OHSMS / IS 18001, Certification Scheme, and others have grown over recent years, for example, Product Certification Licenses issues were 2506 in 2002/03 and 2678 in next year rising to 4743 in 2006/07; similarly Quality System Cerification issued in 2002 was 1195, in next year it was 1387 and in 2007 it has been 1274.
Public-private partnership in R&D is rather old in India. The ARAI, the textiles group such as the ATIRA, CITRA, et al has been working for several decades under several types of governance structures involving, however, in each case private companies and public R&D. Perhaps lack of strong interests has often weakened instead of strengthening such public-private R&D partnerships. A recent initiative by the CSIR in this regard has been the NMITLI, similarly the DBT and other ministries have taken initiative on partnerships in R&D. Over last few years, a few companies have floated foundations of R&D who in turn have sometimes located respective R&D in universities/IITs and similar places. Apart from physical nearness informal networks exist between R&D personnel of competing companies and the public R&D systems and universities. Such informal networks of exchanges of information and competencies are potentially capable of incubating very rich innovations. However, public-guided cooperative research between competing companies on advanced areas has not been undertaken in the manner especially of the USA, France or Japan. This appears to be an important aspect requiring attention. However, one must also note that over last few years a few companies especially from the drugs and pharmaceuticals sector have hived off respective R&Ds into separate entities; such derisking indicate both (1) looking for potential outsourcing businesses in R&D, and (2) market pressure on limiting or putting down R&D.
In recent years some companies especially from the drugs and pharmaceuticals sector have begun business in outsourced R&D (the CROs) or outsourced R&D based manufacturing (the CRAMs) or even value-add services closer to R&D such as in analytics, clinical research, and similar others. In manufacturing several companies especially from the automobile and auto components sector have shared facilities and competencies to undertake joint product development with firms from other countries.
The non-R&D aspects of innovation would be similar in scope to what has been observed on the ASI databased factories. These aspects will refer to cost containment under energy, for example. A typical Indian firm will often have low cost strategy hence moving down the cost ladder could be part of the innovation. Data on the listed companies, however, provide a few new dimensions not possible through the ASI series. For example, we now have data on license fees paid, royalty paid, foreign exchange earned through services, and similar others. Such data would provide insights into the technology acquisition strategies of companies. In turn technologies acquired or knowledge procured would provide boosters to innovations including in cutting cost. Other crucial aspects of non-R&D developments such as new products, ratio of sales of new products to total sales, new designs, reduction in materials loss or intangibles such as job rotation, information flow network in-company, mobility, competencies and similar others could not be looked into from existing data. Such non-R&D initiatives by companies crucially depend on business scope and business environment including business institutions that are little affected by tax concessions or a few other fiscal instruments.
Constraints on studying innovation by firms are multifold. Firstly, companies often do not report on per product or per division; as a result, information on new products introduced and the ratio of sales of new products to total sales, for example, which is one indicator of innovation, remain unknown. Privileged information divulged to rating agencies are important, however, Indian market for rating agencies are not as competitively positioned as to disclose such information on innovative behaviors.
Similar to the previous study on innovations in the factory sector we could look into the structural dimensions of innovative changes in the economy. In other words we can observe innovative behaviors of individual companies, specific sectors of the economy as reflected through the listed firms, and we can also observe changes in inter sector structure brought about by innovative value adding activities. These three modes in turn provide scope for innovation policy to be designed for, targeted to and in alliances with any of the three tiers of company, sector or inter sector.
Prowess database that has been used here provides firm-level data of large and medium Indian firms. It contains detailed information on over 20,000 companies traded on India’s major stock exchanges and several others including the central public sector enterprises. The companies covered account for around 75% of all corporate taxes and over 95% of excise duty collected by the Government of India.
The investment or expenditure on R&D by a company is the most important indicator of innovation – providing extent of investments in future directed efforts on new products/processes, new designs, novel solutions/discovery, new packaging, etc. or on improving the quality of the services or goods. In other words, it is an important indicator of innovation. This indicator is also the most mentioned. However, as discussed above, R&D reporting entitles a company to saved taxes and most importantly extent and spread/focus of R&D is an important signal to competitors and in particular R&D acts as a deterrent to entry. The following table therefore reports on the cyclic increase and fall in number of companies reporting having R&D. The years 1997 and 2004 had the maximum number of R&D reporting companies. More importantly this table exhibits the fact that companies doing R&D have under them most part of the market, close to 60%, and this share rose from a little under 50% in 1995 to about 60% by 1998. Echoing later Schumpeter large companies dominated R&D undertaking. However, number of companies undertaking R&D constitute a small portion, currently only about 12% down from the 1998 share of 17%.
Table 1: No. companies having R&D Expenditure
Year |
No. of companies spending on R&D |
% age of total listed companies |
% share of total sales turn over to total sales of listed companies |
1995 |
853 |
15.84 |
49.44 |
1996 |
917 |
16.32 |
54.24 |
1997 |
1000 |
18.46 |
59.30 |
1998 |
960 |
17.07 |
58.11 |
1999 |
970 |
15.46 |
56.86 |
2000 |
932 |
13.70 |
57.22 |
2001 |
928 |
13.45 |
58.42 |
2002 |
1068 |
14.64 |
58.62 |
2003 |
1105 |
13.11 |
59.28 |
2004 |
1073 |
12.42 |
56.75 |
2005 |
985 |
11.91 |
59.63 |
The percentage of companies having R&D expenditure was highest in 1997 (18.46%) and the lowest was recorded in 2005 (11.91%). Figure 1 which represents the percentage change in the number of companies doing R&D over the preceding year also shows a highly negative trend except during the years 1999 and 2002. But, it is interesting to note that even though the percentage of the companies investing in R&D is decreasing, their corresponding share of the total sales turn over is almost continuously increasing. Table 2 exhibits detailed data on number of companies reporting R&D, number of sectors reporting R&D, sector-sales percentage share of R&D reporting companies, expenditure and share of own sales spent on R&D. Number of sectors having companies doing R&D remained nearly constant around 100, which often left out about 30 other sectors with no reported R&D. The sectors reporting R&D spanned from drugs and pharmaceuticals, dry cells, dyes & pigments, fertilizer, to industrial machinery, marine foods, synthetic textiles, or tyres and tubes.
Fig 1: Trends in % changeover previous year in numbers of companies doing R&D
R&D expenditure at current prices had steady growth, and even taking care of inflation, the expenditure had steady growth. At current prices 1995 total companies’ R&D expenditure was Rs. 1116 crores, which rose by 2005 current prices to Rs. 6077 crores. The average percentage of own sales turnover spent on own R&D figure rose nearly steadily from about 0.21% in 1995 to about 0.30% in 2005 with a fall in between in 2001 when it had dropped to 0.19%.
Table 2: Number of companies having R&D expenditure and their sales
Year |
No. of Company |
No. of R&D doing Companies |
Total Sales (Crore) of all companies |
Total R&D Expenditure (Crore) |
Total Sales of R&D doing Company |
No. of Sectors |
% of own sales invested in R&D |
1995 |
5384 |
853 |
529124.75 |
1116.14 |
261595.2 |
100 |
0.210941 |
1996 |
5619 |
916 |
650055.22 |
1590.24 |
352590.6 |
102 |
0.244632 |
1997 |
5416 |
1000 |
718342.69 |
2080.04 |
425988.4 |
102 |
0.289561 |
1998 |
5623 |
960 |
777512.63 |
1785.69 |
451824.6 |
96 |
0.229667 |
1999 |
6274 |
969 |
877892.83 |
2951.24 |
499201.8 |
100 |
0.336173 |
2000 |
6803 |
933 |
1026388.22 |
2219.34 |
587294.1 |
96 |
0.216228 |
2001 |
6901 |
929 |
1225380.46 |
2446.86 |
715867.3 |
99 |
0.199682 |
2002 |
7297 |
1068 |
1303342.71 |
3004.63 |
764000.8 |
103 |
0.230533 |
2003 |
8430 |
1105 |
1455759.93 |
3874.78 |
862976.6 |
102 |
0.266169 |
2004 |
8636 |
1073 |
1709541.15 |
5099.84 |
970177.2 |
103 |
0.298316 |
2005 |
8256 |
985 |
2015143.71 |
6076.93 |
1201531 |
100 |
0.301563 |
Looking at sectors reporting R&D is very revealing. The drugs and pharmaceuticals sector tops the list, rising nearly steadily from 93 companies in the year 1995 to 112 in 2005. Other sectors exhibiting considerable interest and participation in R&D are dyes & pigments, fertilizers, generators transformers & switchgears, general purpose machinery, glass & glassware, industrial machinery, inorganic chemicals, machine tools, minerals, miscellaneous electrical machinery, steel, sugar, synthetic textiles, tea, trading, wires & cables, vegetable oils & products and tyres & tubes.
Knowledge acquisition including acquisition of licenses against payment is an important dimension beyond R&D that needs a look. The R&D doing companies when examined were found to be spending on license fees, royalty and fees for technical knowhow. Figure-2 exhibits the trend in terms of percentage changes over previous year. This Figure also exhibits import of capital goods, which too represent building up of innovative capacity. The percentage increase in expenditure on R&D was much higher in the year 1998-99 than that in 2002. During the year in which there is a negative growth in R&D expenditure, there is corresponding increase in the expenditures in royalty, technical know-how and license fee paid (Figure 2). For instance, during 2000 R&D expenditure shows about 30% fall than that in 1999, while the expenditure in royalty, technical know how and license fee paid in 2000 shows around 180%, 300% and 450% increase over the expenditure during 1999.
Fig 2: Trends in percentage changes over previous year in expenditure in different R&D related parameters
Figure 3 exhibits trends in earning of foreign exchange for both goods and services, and that of the total sales turnover of all listed companies through percentage change over previous years. For a large number of companies and in particular for companies from drugs and pharmaceuticals forex earning through services represent earning from contract research.
Fig 3: Trend of forex transactions and sales in all listed companies
Forex earning through export of goods would represent both capability to manufacture quality goods and the economy’s global connectedness and both these are important aspects of a country’s innovativeness. For both forex earning on services and goods the absolute values rose substantially but in current prices during this period.
R&D as well as non-R&D innovations are expected to increase future earning and value addition. Innovation bears another remarkable feature – by undertaking innovation one enhances vis-à-vis other firms and other sectors the relative strength to price and that results in higher earning as well as brings in cheaper or more capital. All this inform us that innovation causes a structural shift both within a sector and inter-sector. A very simple and non-robust method we adopted here to examine inter-sector restructuring that involves measuring the shift in a sector’s share of sales in total sales of listed companies over ten years period. A gain or a loss in this relative share might indicate, although this approach is weak and liable to mistake, relative gains or loss of a sector.
The performance of the different industrial sector has been evaluated in simple terms of the sector’s share in the total industrial sales turn over during a particular time or period of time. Refinery, trading, steel and electricity generation sectors has remained the top four contributing sectors during 1995 as well as in 2005, when seen in terms of their percentage share of total sales turn over. The sectors which were among the top 10 contributing sectors in 1995 but could not make out among the top 10 during 2005 are cement, diversified and cotton & blended yarn sectors. The new entrants among the top 10 in 2005 are telecommunication services, computer software and automobile sectors.
Table 3: Ten top performing industrial sectors in terms of % share of total sales turn over
S. No. |
1995 |
% share |
2005 |
% share |
1 |
Refinery |
14.64 |
Refinery |
20.97 |
2 |
Trading |
8.59 |
Trading |
9.32 |
3 |
Steel |
6.47 |
Steel |
6.03 |
4 |
Electricity generation |
4.19 |
Electricity generation |
4.58 |
5 |
Fertilizers |
3.19 |
Telecommunication services |
3.32 |
6 |
Crude oil & natural gas |
2.76 |
Crude oil & natural gas |
2.62 |
7 |
Cement |
2.47 |
Computer software |
2.32 |
8 |
Drugs & pharmaceuticals |
2.33 |
Drugs & pharmaceuticals |
2.05 |
9 |
Diversified |
2.01 |
Fertilizers |
1.99 |
10 |
Cotton & blended yarn |
2.01 |
Automobile ancillaries |
1.86 |
All the sectors, to evidence, new entrant computer software continued R&D expenditure as percentage of sales turnover from 1.77 in 1995 to 1.11 in 2005, telecommunications services continued the same at 0.23% in 1996 to 0.72 in 2005, automobile ancillaries from 0.76% in 1995 to 1.17% in 2005; similarly, refinery continued R&D from 0.03% in 1995 to 0.05% in 2005, steel from 0.30% in 1995 to 0.17% in 2005 and similarly. Contrarily, cement had spent in 1995 0.20% of sales turnover that dropped to 0.11% in 2005, the diversified dropped from 0.34% in 1995 to 0.21% in 2005, and cotton & blended yarn from 0.16% in 1995 to 0.15% in 2005.
Banking services sector was the least contributing sector during 1995 while during 2005 it was irrigation sector which contributed the least to the total sales turn over. Among the 10 least contributors of 1995, sectors like media broadcasting, ITES and media content has performed well and are out of the least 10 of 2005 and are replaced (not exactly in terms of position) by the three sectors, namely other leather products, non-banking financial companies and animation content provider. As in above listing of top sales performers, in this case too, the sectors other leather dropped its expenditure as percentage of sales turnover from 0.74% in 1995 to zero in 2005, the non-banking financial companies continued with zero, and animation dropped from the high of 10.59% in 1995 to zero in 2005 and similarly, however, media broadcasting or media content continued to spend zero R&D and ITES dropped from 0.10% in 1995 to zero in 2005.
Table 4: Bottom 10 performing industrial sectors in terms of % share of total sales turn over
S. No. |
1995 |
% share |
2005 |
% share |
1 |
Tourism |
0.011 |
Other leather products |
0.021 |
2 |
Media-broadcasting |
0.009 |
Railway transport |
0.016 |
3 |
Irrigation |
0.007 |
Tourism |
0.015 |
4 |
Floriculture |
0.005 |
Banking services |
0.015 |
5 |
ITES |
0.004 |
Non-banking financial cos. (NBFCs) |
0.008 |
6 |
Brokers |
0.001 |
Animation content provider |
0.007 |
7 |
Media-content |
0.001 |
Floriculture |
0.003 |
8 |
Housing finance services |
0.001 |
Housing finance services |
0.002 |
9 |
Railway transport |
0.000 |
Brokers |
0.002 |
10 |
Banking services |
0.000 |
Irrigation |
0.001 |
The above observation is based on the respective contribution of each industrial sector in both the years separately. But one would like to know about the relative positions of the sectors during the period 1995-2005. A completely different picture emerges when the relative growth or decline of the sectors during the period 1995-2005 are considered.
In terms of net difference in the percentage share of total sales turn over, refinery sector retains the top position while the sector of electricity generation occupies the 10th position. This positioning is independent of the scale of contribution of a sector in the respective years. For instance, the two and three wheelers sector had shares of 0.41 % and 0.80 % in 1995 and 2005 respectively; the overall growth of 0.40% makes it to occupy the overall 9th developing sector.
Table 5: Sectoral share in total sales turn over
Sector |
Share in total sales turn over (%) |
Net difference in share (%) |
|
1995 |
2005 |
||
Best performing sectors (top 10) |
|||
Refinery |
14.64 |
20.97 |
6.34 |
Telecommunication services |
1.43 |
3.32 |
1.90 |
Computer software |
0.50 |
2.32 |
1.82 |
Coal & lignite |
0.33 |
1.81 |
1.48 |
Electricity distribution |
0.15 |
1.50 |
1.34 |
Trading |
8.59 |
9.32 |
0.74 |
Automobile ancillaries |
1.38 |
1.86 |
0.48 |
Gems & jewellery |
0.45 |
0.91 |
0.46 |
Two & three wheelers |
0.41 |
0.80 |
0.40 |
Electricity generation |
4.19 |
4.58 |
0.39 |
Least performing sectors (bottom 10) |
|||
Steel |
6.47 |
6.03 |
-0.44 |
Tractors |
0.70 |
0.22 |
-0.48 |
Wires & cables |
0.76 |
0.27 |
-0.49 |
Cloth |
1.18 |
0.55 |
-0.63 |
Cement |
2.47 |
1.69 |
-0.78 |
Tea |
1.01 |
0.20 |
-0.80 |
Synthetic textiles |
1.71 |
0.79 |
-0.92 |
Diversified |
2.01 |
1.06 |
-0.94 |
Cotton & blended yarn |
2.01 |
0.93 |
-1.08 |
Fertilizers |
3.19 |
1.99 |
-1.20 |
Whereas, the steel sector with shares as high as 6.47 % in 1995 declined to 6.03% during 2005 dropped from 3rd contributor of total sales turn over to the 10th least developing sector. A quick review of the R&D expenditures of these sectors during these two periods partially confirm that sectors spending on R&D are likely to improve relative positions vis-à-vis other sectors. To evidence both supportive and a few contrary positions we might refer to the following Table. Rather often than not relative upward shift of a sector appears to be positively influenced by the sector’s increase or continuation of R&D expenditure.
Table 6: R&D as % of sales and inter-sector restructure
Sector |
R&D as % of sales in 1995 |
R&D as % of sales in 2005 |
Top ten |
|
|
Coal & lignite |
0.02 |
0.01 |
Electricity distribution |
0 |
0.20 |
Two & three wheelers |
0.58 |
0.87 |
Electricity generation |
0.12 |
0.08 |
Bottom ten |
|
|
Tractors |
0.70 |
1.38 |
Cloth |
0.12 |
0.09 |
Synthetic textiles |
0.53 |
0.19 |
Wires & cables |
0.28 |
0.40 |
Non-R&D innovation and R&D in select industry sectors based on listed companies
It makes sense to identify sectors that influence the trend of R&D expenditure in the overall industries. The following figure provides a view of the percentage change in the R&D expenditure of selected sectors of industry. It is apparent that the steep rise in industrial R&D expenditure during 1999 was due to the high expenditure in software R&D and the moderate growth in R&D expenditure durikng 2002 contributed by the automobile sector.
Fig 4: Percentage change in R&D expenditure by listed companies in selected sectors of manufacturing industries
All Manufacturing Industries
In the overall manufacturing industries, forex earning is significantly lower than forex spending. However, over the period 1995-2005, forex earning has improved slightly while forex spending has come down only marginally, a stalemate indicating overall improvement in the earning from foreign exchanges. Simultaneously, the expenditure on R&D is also showing a continuous increase during the period under consideration. Lower forex spending happens because of lower import of capital goods, lower payout for technology, license and knowhow – for a developing economy this might not bode well.
Fig 5: Forex transactions and R&D expenditure in the manufacturing industries in India
Fig 6: Indicators of innovation in the manufacturing industries in India
An over view as in above figure of both R&D and non-R&D innovation by all listed companies cutting across sectors indicates that R&D spend as % of sales remained nearly indifferent over a decade and so has been all payments as % of sales for knowledge, such as for royalty, licenses, knowhow. Though both forex earning as well as forex spending per unit of sales show an increasing trend, forex spending out passes the forex earning indicating increasing global dependence of domestic output. Salaries per unit of sales are decreasing which indicates enhanced labour productivity as well as white collar productivity and a declining consumption of power per unit of sales implies improvement in energy efficiency.
Automobile industries
In the automobile sector, there were around 60 companies doing R&D during 1995 which increased to more than 100 companies by 2005. The most striking feature in this sector is the drastic increase in the number of companies paying royalty, license fee etc from mere 04 numbers in 1995 to more than hundred during 2005.
Fig 7: Number of listed automobile industries engaged in R&D
Consumption of power per unit of sales is decreasing indicating energy efficiency. An increasing trend in both R&D expenses as well as royalty paid per unit of sales indicates emphasis on innovation.
Fig 8: Indicators of innovation in the automobile industry
There appears to be competition among the individual industries in the automobile sector which is apparent from the highly fluctuating number of units in the top 10 percent of turnover-based size while the bottom 10 percent though shows improvement but is almost steady. Number of companies doing R&D among the top 10 percent is declining while it is almost absent among the bottom 10%. Among the bottom 10 percent, number of companies paying royalty is absolutely nil while there were very few firms who earned from export of service mainly during 2000-04.
Fig 9: Performance of top & bottom 10% companies (based on sales turnover) in the automobile sector
And among the companies in the middle 80 percent, number of companies doing R&D and as well as those earning from export of services is declining while the number of companies paying royalty has remained almost constant over the period 1995-2005.
Fig 10: Performance of the middle 80 percent companies (based on sales turnover) in the automobile sector
Tool Manufacturing
There were more than 40 companies in the tool manufacturing sector doing R&D during 1995 but by 2005 the numbers have come down to less than 40. However, companies paying royalty, license fee etc shows a drastic increase especially beginning 2000. And the number of companies earning from foreign exchange is also on the rise.
Fig 11: Number of listed tool manufacturing industries engaged in R&D
In the tool manufacturing sector, consumption of power per unit of sales is decreasing especially after 2001 indicating increased efficiency. This decreasing power consumption is accompanied by an increasing expenditure in R&D as well as in royalty, license fee etc.
Fig 12: Indicators of innovation in the tool manufacturing industry
Number of enterprises in both the top and bottom 10 percent band of turnover-based size distribution in this sector has slightly increased and exhibit almost a similar pattern of growth. In the upper 10 percent, number of companies doing R&D and those earning from export of service show a very inconsistent trend while in the case of the bottom 10 percent it is almost nil. There are few companies in the top 10 percent who are paying royalty while not a single company in the bottom 10% is paying royalty.
Fig 13: Performance of top & bottom 10% companies in the tool manufacturing sector
In the central 80 percent band, though the numbers of companies are slightly increasing both the number of companies doing R&D and those earning from export services are decreasing drastically. The number of companies paying royalty appears to be almost constant during the period 1995-2005.
Fig 14: Performance of the middle 80% companies in the tool manufacturing sector
Paper Industry
In the paper industry sector, the number of companies doing R&D has remained almost constant during the period 1995-2005. Up to 1998, however, not a single paper industry was paying royalty, license fee etc.
Fig 15: Number of listed paper industries engaged in R&D
Total forex expenditure peer unit of sales has almost remained constant over the period 1995-2006 while forex earning per unit of sales is increasing, though it is slightly declining after 2003, indicating net increase in export. Power consumption per unit of sales is also declining which indicates improved efficiency. In this sector, R&D expenditure as well as royalty paid per unit of sales appears to be very negligible indicating lack of innovation.
Fig 16: Indicators of innovation in the paper industry
Cement Sector
In the cement industry sector, number of companies doing R&D has continuously increased during the period 1995 to 2005. Likewise, number of companies paying royalty, license fee etc also shows an increasing trend. However, number of companies earning from foreign exchanges has slightly decreased over the same period.
Fig 17: Number of listed cement industries engaged in R&D
Consumption of power in the cement industry shows an increasing trend indicating use of more power per unit of sales. There is no significant variation in R&D expenses per unit of sales. However, royalty paid per unit of sales shows a slight improvement especially after 1999.
Fig 18: Indicators of innovation in the cement industry
Steel Sector
In the steel industry sector, the number of companies doing R&D shows a decreasing trend over the period 1995-2005. Even in a particular year, only a few of the total companies are involved in R&D. However, companies paying loyalty, license fee shows an increasing trend.
Fig 19: Number of listed steel industries engaged in R&D
There is declining trend in the consumption of power per unit of sales indicating more efficiency of the processes employed. There is no significant variation in the R&D expenditure per unit of sales. Royalty paid, though exhibited an increasing trend from 1998 but it is again continuously declining
Fig 20: Indicators of innovation in the steel industry
Drug & Pharmaceutical Industries:
Forex earning in the drug and pharmaceutical sector have increased considerably while forex spending have remained almost constant during the period 1995-2005. However, in all the years, forex earning has been lower than forex spending. R&D expenditure is showing an increasing trend which indicates that the sector is investing in order to be innovative.
Fig 21 : Forex transactions and R&D expenditure in the drug and pharma industries in India
In the drug and pharma sector, both forex earning as well as forex spending per unit of sales has been on the rise. But the rise in earning is very high especially after 2000. In fact, this is one of the sector where earning is higher than spending.
Fig 22: Indicators of innovation in the drug & pharma industries in India
Forex earning indicates increasing outsourced R&D services to domestic firms. This therefore indicates enhanced R&D capability. Similarly, R&D expenses also exhibit an increasing trend from 2000 onwards. However, payment of royalty, license fee has remained almost negligible. Power consumption and salaries per unit of sales does not exhibit any significant variation over the period 1995-2005.
In the top 10 percent band, numbers of enterprises are on the rise while numbers of enterprises doing R&D as earning from export services are contrastingly declining. And virtually there is no enterprise which is paying royalty.
Fig 23: Performance of the top and bottom 10 percent companies (based on sales turnover) in the drug and pharma sector
Fig 24: Performance of the middle 80 percent companies (based on sales turnover) in the drug and pharma sector
On the other hand though the numbers of enterprises are increasing in the bottom 10 percent band also there were only 2 firms each in the year 1998 and who were involved with some kind of R&D. However, there was only one firm which was earning from export services except during the year 1998; and absolutely royalty paying company.
Even in the middle 80 percent band, number of companies is slightly increasing while the number of companies doing R&D is sharply declining. Number of enterprises earning from export services has remained almost constant and there is absolutely no royalty payment in this band.
Trading Sector
In the trading sector, it is interesting to note that a lot more companies are engaged in R&D though the number is showing a decreasing trend over the period 1995-2005. Even the number of companies paying royalty, license fee is also in the rise. Considerable number of companies are also earning from forex transaction in this sector.
Fig 25: Number of listed trading industries engaged in R&D
In terms of per unit of sales, forex expenditure is comparatively higher than earning though both exhibit an increasing trend. Power consumption per unit of sales is decreasing which indicates more efficiency. The declining trend of R&D expenses appears to be compensated by the steep rise in the amount of royalty paid per unit of sales especially beginning 2000.
Fig 26: Indicators of innovation in the companies involved in trading
Software Industries
Till 1998 very few companies in the software sector were into forex transactions. Beginning 1999 there is a sharp rise in their number which, however, again starts to decline from 2003. Nevertheless, the difference between the number of companies having forex earning and those having forex spending is very less. In fact, the trend is reversing since 2004. Interestingly, the number of companies spending on R&D is also increasing.
Fig 27: Forex transactions and R&D expenditure in the Software industries in India
From the figure below it is clear that total forex earning from services in term of sales is having maximum contribution in total forex earning by software companies in the time period of 1995-2005. R&D expenditure done by software companies is almost constant except in 1999. Power consumption by these companies is almost constant.
Fig 28: Indicators of innovation in the software industries in India
In the software industry, there is a quantum increase in the number of companies in the upper 10 percent category though the number of companies doing R&D has remained almost constant accompanied by a considerable increase in the number of companies earning from export of services and almost no companies paying royalty. On the other hand in the bottom 10 percent as expected there is virtually no R&D, payment of royalty though some earning from export is seen beginning 1999.
Fig 29: Performance of the top and bottom 10 percent companies (based on sales turnover) in the software sector
Fig 30: Performance of the middle 80 percent companies (based on sales turnover) in the software sector
In the middle 80 percent category, there are very few R&D doing companies and the number is gradually declining. Royalty payment is also very negligible in this band. The more striking feature of the software companies whose sales turnover falls in the central 80 percent category is the heavy reduction in the number of companies earning from export services. It has decreased by more than 50% during the period 1995-2005.
Regional Performances sector-wise & based on listed companies
Having seen the pattern of innovation of the listed companies in general and also the performances of different sectors, we might now examine whether there are differences in the performances between different regions of the country. In order to answer this, we looked into the dominant sectors in a state. The pattern of innovation of the listed industries in four states selection based on their traditional reputation of being the industrious states, viz. Maharashtra, Tamil Nadu, Gujarat and Punjab follows.
Regional aspect of innovation would be important because of several reasons, and these are: (1) there is competition between states based on differences in industry and tax policies and each state wishes to attract higher investment; (2) however, domination by incumbent companies and sectors could distort future innovations; (3) spatial spillover could influence both formation/attraction of new companies and innovation; (4) there are large differences in state’s endowments of human resources, infrastructure and especially S&T infrastructure; and (5) regional specialization including endogenous aspects of rebooting of skills, knowhow, linkages and spillover. Regional in particular competition between several governance units of federal governmental set-up has been very influencing factor in many countries and competition between states/ regions appears to be important in India as well. However, regional governments in countries such as China have exercised much higher degree of competitive autonomy resulting in both gains and perhaps distortions especially in fiscal areas.
Maharashtra: Broadly speaking, in Maharashtra, more and more companies are going for R&D and are increasingly paying royalty which probably led to a corresponding increase in the number of companies earning forex reserves from export services. The most spectacular increment is in the number of companies paying royalty specially beginning 2000 and this is followed by the number of sectors covered by the above features, although the number of sectors has remained almost constant in terms of companies doing R&D and paying royalty. The point to be noticed here is that a downward trend in all the parameters is evident since 2004.
Fig 31: Status of the listed companies of Maharashtra in terms of R&D
Maharashtra accounts for around 30% of the listed companies in the country though it has recorded a slight decline from 30.16% in 1995 to 29.12% in 2005. However, these 30% companies contribute around 39% percent of the national sales turn over from listed companies and this share has been fairly constant throughout the period.
Table 7: Selected indicators of innovation among the listed companies of Maharashtra
Parameter |
1995 |
1996 |
1997 |
1998 |
1999 |
2000 |
2001 |
2002 |
2003 |
2004 |
2005 |
No. of companies (% of national companies) |
30.16 |
28.81 |
28.99 |
30.36 |
30.65 |
30.81 |
30.27 |
29.61 |
29.86 |
32.56 |
29.12 |
Total state sales (% of national sales) |
38.89 |
37.94 |
40.62 |
40.89 |
41.10 |
41.78 |
41.75 |
41.29 |
41.52 |
40.19 |
38.54 |
Number of royalty paying comp (% total state comps) |
0.74 |
1.30 |
1.46 |
3.16 |
4.16 |
14.84 |
16.66 |
15.18 |
15.14 |
14.15 |
13.19 |
Number of export earning comp (% total state comps) |
14.78 |
15.38 |
15.99 |
16.17 |
16.64 |
13.98 |
14.94 |
15.96 |
17.32 |
16.79 |
17.14 |
The number of royalty paying companies has recorded a huge improvement from mere 0.74% of the total state companies in 1995 to 13.19% in 2005. And the share of export earning companies to total state companies has increased from 14.78% in 1995 to 17.14% in 2005.
Details of companies doing R&D: The number of companies doing R&D has increased from 287 in 1995 to 327 in 2005 while the number of sectors covered by these companies has remained at 77 indicating more and more companies are opting for in-house R&D perhaps driven by the urge to improve the quality of product and services.
The percentage share of the R&D doing companies to total state companies, however, shows a declining trend which may be due to the coming up of non R&D doing companies in the state. The percentage share of these R&D doing companies to total state sales turn over has increased from around 54% in 2005 to around 77% in 2005, which indicates increased productivity of these R&D doing companies. The export earning by the R&D doing companies as percentage of state earning from export shows an increasing trend especially beginning 2002 after an inconsistent share till 2001. The percentage share of these R&D doing companies to total state royalty payment is also increasing since 1999.
When compared at the national level, the percentage share of the R&D doing companies in Maharashtra to national R&D doing companies has remained almost constant; though the percentage share of the sales turn over shows an improvement from around 43% in 1995 to around 50% in 2005.
Fig 32: Trend of the R&D doing listed companies in Maharashtra
When observed across different sectors, drug and pharmaceutical sector has maintained the dominance over the period 1995-2005. Pesticide sector has moved from 5th position to 2nd position while other chemicals have decreased from 1st position to 3rd position. Two sectors, other electronics and trading which were among the top 10 performing sectors during 1995 are out, and two new sectors-diversified and plastic tubes & sheets make into the top 10 performing sectors of 2005.
Table 8: Dominant industrial sectors (top 10) in terms of no. of companies doing R&D
S. No. |
1995 |
No. of companies |
2005 |
No. of companies |
1 |
Drugs & pharmaceuticals |
41 |
Drugs & pharmaceuticals |
59 |
2 |
Other chemicals |
11 |
Pesticides |
15 |
3 |
Dyes & pigments |
10 |
Other chemicals |
13 |
4 |
Industrial machinery |
10 |
Automobile ancillaries |
13 |
5 |
Pesticides |
9 |
Dyes & pigments |
12 |
6 |
Organic chemicals |
9 |
Organic chemicals |
12 |
7 |
Other electronics |
9 |
Industrial machinery |
10 |
8 |
Automobile ancillaries |
8 |
Cosmetics, toiletries, soaps etc |
9 |
9 |
Cosmetics, toiletries, soaps etc |
8 |
Diversified |
8 |
10 |
Trading |
8 |
Plastic tubes & sheets etc |
8 |
Tamil Nadu: The number of companies doing R&D shows a slight improvement while the number of sectors covered by these companies has remained more or less constant. The number of companies earning from export services have increased considerably from 54 units in 1995 to 115 units in 2005 which is also accompanied by an increase in the number of sectors covered from 34 to 43 during 1995 and 2005 respectively. The most spectacular improvement is in the areas of royalty payment, the number of enterprises has increased from mere 9 units in 1995 to as high as 150 units 2005; accompanied by a corresponding increase in the number of sectors. However, in all the three parameters there appears to be a declining trend beginning 2003.
Fig 33: Status of the listed companies of Tamil Nadu in terms of R&D
The contribution of Tamil Nadu to the national industrial sector appears to be comparatively less in comparison to Maharashtra. The state is maintaining a constant percentage share (11%) of the national companies and the state sales turn over accounting for around 7% of the national sales turn over. Around 1.5% of the state companies paid royalty during 1995 which increased to about 17% by 2005. Similarly, the percentage share of the companies earning from export services have increased from 9% in 1995 to about 13% in 2005.
Table 9: Selected indicators of innovation among the listed companies of Tamil Nadu
Parameter |
1995 |
1996 |
1997 |
1998 |
1999 |
2000 |
2001 |
2002 |
2003 |
2004 |
2005 |
No. of companies (% of national companies) |
11.09 |
11.16 |
11.61 |
11.12 |
11.22 |
11.52 |
11.51 |
12.25 |
12.98 |
11.68 |
10.72 |
Total state sales (% of national sales) |
6.62 |
6.99 |
6.69 |
6.70 |
7.21 |
7.44 |
7.26 |
7.09 |
7.21 |
6.41 |
6.73 |
Number of royalty paying comp (% total state comps) |
1.51 |
1.75 |
2.38 |
3.84 |
7.39 |
17.73 |
19.02 |
20.13 |
18.19 |
17.24 |
16.95 |
Number of export earning comp (% total state comps) |
9.05 |
8.93 |
9.22 |
10.72 |
10.80 |
8.55 |
9.70 |
11.07 |
11.70 |
12.69 |
12.99 |
Details of companies doing R&D: The percentage share of the number of R&D doing companies to the corresponding national companies has remained almost constant while the percentage share of the sales turnover of these R&D doing companies to the corresponding national sales turn over has decreased slightly. Though the percentage share of the R&D doing companies to total state companies is decreasing, percentage share of the sales turnover of the later by the former is increasing. Two drastically decreasing features of the R&D doing companies are their percentage share in terms of state export earning and state royalty payment.
Fig 34: Trend of the R&D doing listed companies in Tamil Nadu
In terms of sectoral performances, automobile ancillaries remain in the top during the period under consideration, however, as high as 5 of the top 10 sectors of 1995 could not make out in the top 10 sectors during 2005. Biggest loser is the sector of industrial machinery and sugar sector is the biggest gainer.
Table 10: Dominant industrial sectors (top 10) in terms of no. of companies doing R&D
S. No. |
1995 |
No. of companies |
2005 |
No. of companies |
1 |
Automobile ancillaries |
21 |
Automobile ancillaries |
26 |
2 |
Drugs & pharmaceuticals |
8 |
Sugar |
8 |
3 |
Industrial machinery |
5 |
Drugs & pharmaceuticals |
6 |
4 |
Other electronics |
4 |
Other electronics |
5 |
5 |
Organic chemicals |
3 |
Cement |
5 |
6 |
Tyres & tubes |
3 |
Computer software |
4 |
7 |
Domestic electrical appliances |
3 |
Organic chemicals |
3 |
8 |
Misc. electrical machinery |
3 |
Tyres & tubes |
3 |
9 |
Paper |
2 |
Misc. electrical machinery |
3 |
10 |
Electricity generation |
2 |
Cotton & blended yarn |
3 |
Gujarat: It is very strange to note that the number of companies doing R&D in Gujarat is decreasing accompanied by a corresponding decrease in the number of sectors involved in R&D. However, the number of companies earning from export services is showing an increasing trend even though the number of sectors involved are decreasing. And the numbers of companies paying royalty show a sharp increase since 2000, it again started declining from 2004 though it is much higher than the 1999 level; but the number of sectors involved in royalty payment is declining which indicates more and more companies are paying royalty.
Fig 35: Status of the listed companies of Gujarat in terms of R&D
In 1995, companies of Gujarat accounted for around 11% of the national companies which has come down to 7% during 2005 though there is not much decrease in the sectors covered. However, the percentage share of national sales has remained almost same which means there might have been improvement in productivity and efficiency. The percentage share of companies paying royalty to total state companies paying royalty was only 0.35% during 1995 which increased drastically to as high as 8.75% during 2005. Also the percentage share of companies earning from export services shows an improvement over the period.
Table 11: Selected indicators of innovation among the listed companies of Gujarat
Parameter |
1995 |
1996 |
1997 |
1998 |
1999 |
2000 |
2001 |
2002 |
2003 |
2004 |
2005 |
No. of companies (% of national companies) |
10.51 |
10.80 |
10.58 |
10.01 |
9.39 |
8.76 |
8.48 |
8.96 |
7.97 |
6.90 |
7.34 |
Total state sales (% of national sales) |
5.89 |
5.74 |
5.83 |
6.01 |
6.01 |
5.90 |
7.83 |
5.16 |
4.89 |
5.21 |
5.66 |
Number of royalty paying comp (% total state comps) |
0.35 |
0.66 |
1.05 |
1.60 |
2.04 |
8.72 |
10.43 |
9.94 |
10.71 |
9.90 |
8.75 |
Number of export earning comp (% total state comps) |
5.83 |
6.10 |
7.33 |
7.64 |
7.13 |
5.03 |
5.30 |
5.50 |
6.10 |
7.21 |
7.59 |
Details of companies doing R&D: The R&D doing companies of Gujarat accounts for around 7.5% of the national R&D doing companies, though it is slightly declining. But the respective share in the sales turn over of national R&D doing companies is just 4% which is again decreasing.
Fig 36: Trend of the R&D doing listed companies in Gujarat
Within the state, the percentage share of the companies doing R&D to total state companies is also declining. But the corresponding percentage share in the state sales turn over though declining is much higher than the share in number of companies. And most interesting feature is that during 1996 royalty paid by the companies doing R&D accounted for the complete (99.76% to be precise) state royalty paid. But it has declined to almost nil in just 2 year’s time and after 2001, it is showing slight improvement.
Drugs and pharmaceutical sector have remained the dominant sector in the state in terms of number of companies doing R&D. Other chemical and construction equipment are two new entrants in the list of top 10 sectors in 2005.
Table 12: Dominant industrial sectors (top 10) in terms of no. of companies doing R&D
S. No. |
1995 |
No. of companies |
2005 |
No. of companies |
1 |
Drugs & pharmaceuticals |
11 |
Drugs & pharmaceuticals |
14 |
2 |
Dyes & pigments |
7 |
Organic chemicals |
5 |
3 |
Organic chemicals |
6 |
Dyes & pigments |
4 |
4 |
Polymers |
5 |
Polymers |
3 |
5 |
Industrial machinery |
4 |
Industrial machinery |
3 |
6 |
Diversified |
3 |
Inorganic chemicals |
3 |
7 |
Generators, transformers & switchgears |
2 |
Diversified |
2 |
8 |
Inorganic chemicals |
2 |
Cement |
2 |
9 |
Cement |
2 |
Other chemicals |
2 |
10 |
Trading |
2 |
Construction equipment |
2 |
Punjab: In Punjab, both the number of companies doing R&D as well as the number of companies earning from export of services is declining which is accompanied by corresponding decrease in the number of sectors covered under each parameter. However, the number of companies paying royalty has drastically increased from almost none in 1995 to more than 15 during 2005, accompanied by a corresponding increase in the number of sectors covered..
Fig 37: Status of the listed companies of Punjab in terms of R&D
Table 13: Selected indicators of innovation among the listed companies of Punjab
Parameter |
1995 |
1996 |
1997 |
1998 |
1999 |
2000 |
2001 |
2002 |
2003 |
2004 |
2005 |
No. of companies (% of national companies) |
2.28 |
2.30 |
2.36 |
2.19 |
2.12 |
1.96 |
1.77 |
2.06 |
1.72 |
1.54 |
1.78 |
Total state sales (% of national sales) |
1.86 |
1.87 |
1.98 |
1.90 |
1.99 |
1.68 |
1.41 |
2.33 |
2.27 |
1.28 |
1.57 |
Number of royalty paying comp (% total state comps) |
0.81 |
1.55 |
0.78 |
2.44 |
2.26 |
6.77 |
7.38 |
7.33 |
10.34 |
12.03 |
10.88 |
Number of export earning comp (% total state comps) |
7.32 |
3.88 |
4.69 |
4.07 |
4.51 |
1.50 |
0.82 |
2.00 |
2.76 |
5.26 |
2.72 |
The percentage share of the number of companies doing R&D in Punjab to the total national companies is very low and so also is the percentage shares in the national sales turn over. Though the percentage share of the companies earning from export services to total state companies is declining drastically, it is the reverse in the case of the companies paying royalty which records an increase from mere 0.81% in 1995 to around 11% in 2005.
Details of companies doing R&D: The relative contribution of the companies doing R&D in Punjab to the sales turn over of the national R&D doing companies is lower than those in terms of the percentage share of the national R&D doing companies. At the state level, sales turn over of the R&D doing companies’ accounts for around 40-60% of the total sales turn over of the state. Royalty paid by the companies doing R&D accounted for almost all the royalty paid by the state during 2000 but it is declining slowly. But, percentage share in terms of state earning from export services is 100%.
Fig 38: Trend of the R&D doing listed companies in Punjab
Table 14: Dominant industrial sectors (top 10) in terms of no. of companies doing R&D
S. No. |
1995 |
No. of companies |
2005 |
No. of companies |
1 |
Cotton & blended yarn |
7 |
Cotton & blended yarn |
5 |
2 |
Drugs & pharmaceuticals |
2 |
Drugs & pharmaceuticals |
3 |
3 |
Cloth |
2 |
Synthetic textiles |
3 |
4 |
Dairy products |
2 |
Cloth |
2 |
5 |
Automobile ancillaries |
2 |
Dairy products |
1 |
6 |
Sugar |
2 |
Automobile ancillaries |
1 |
7 |
Diversified |
1 |
Sugar |
1 |
8 |
Paper |
1 |
Diversified |
1 |
9 |
Other electronics |
1 |
Paper |
1 |
10 |
Securities and stock traders |
1 |
Other electronics |
1 |
In Punjab, the sector of cotton and blended yarn dominates the industrial sector in terms of number of companies doing R&D. The top 10 sectors have remained same both during 1995 and in 2005 except the synthetic textile sector which comes from behind the scene and occupies the 3rd position in the top 10 sectors in 2005.
Additional Readings
- Dutz MA. 2007. Unleashing India's Innovation: Toward Sustainable and Inclusive Growth. The World Bank Publications, 2007. 224 pages.
- Planning Commission. 2006. Report of the committee on Technology Innovation and Venture Capital. Available at planningcommission.nic.in/reports/genrep/rep_vcr.pdf.
- Industrial R&D - India is slow but on the Right Track. http://www.rndindia.info/newslet/newsletter_8.htm
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