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Though Indian industry lags behind the developed world on the research front, opportunities abound. Saikat Nandi explores the prospects for R&D in India
The scale and ease of globalisation has revolutionised the way businesses operate. Multinational companies now have a presence in many countries and a single product can be customised to local needs and tastes in different countries. Complex supply chains see raw material sourcing being conducted in one country, processing in another, assembly in a third, while the end product may be sold in yet another country. Globalisation has led to increased competition and innovation is the need of the hour.  The technological growth and aspirations of any country depend upon its competencies for innovation, which should match global standards. Developing the capacity for innovation is a longterm process which requires proper learning, appropriate physical infrastructure, a skilled work force and institutions that encourage research activities. An industrialised economy can support investments and actively take up R&D activities. This is evident when we look at the way developed and developing economies invest in such technological innovations.  According to the Global R&D Report 2007, in developed economies, as much as 70–80 per cent of investment in R&D is done by industry owners, whereas in the case of developing economies, the government accounts for this proportion of investment. It has been observed that in developed economies, a firm invests between 5–10 per cent of its sales in R&D, whereas very few firms in developing economies invest in R&D. Only in sectors such as information and communication technology and pharmaceuticals is R&D as a percentage of sales observed to be 1–2 per cent. Very few firms invest a greater percentage in R&D. In the case of India, protectionist barriers (fiscal and non-fiscal) stood as one of the reasons for not having the required push to invest in R&D. The country posed some important drawbacks, prominent among these being inadequate enforcement of intellectual property rights (IPR). However, conditions have improved over the past two decades. A significant shift has taken place after the 1990s. The concept of liberalisation introduced on Indian soil by the Rajiv Gandhi-led Congress government was the deciding factor in this change. In the wake of this, trade policies have been reframed, greater integration with the world economy has taken place and many firms have established global footprints. Indian companies took their place on the world stage and must now operate accordingly. For example, companies in the pharmaceutical sector have been compelled to invest in R&D due to India’s adherence to the TRIPS agreement. The ‘Declaration on the TRIPS Agreement and Public Health’ reemphasises the flexibilities that members have in implementing the TRIPS agreement, especially to achieve public-health goals. The flexibilities mentioned in the declaration include compulsory licensing, parallel imports and price controls.Using these policy options, various solutions to achieve lower drug prices in developing nations can be adopted. Says Dr Rustom Mody, Chief Scientific Officer and Director (Quality), Intas Biopharmaceuticals Ltd, “The Strategic Research initiative under way at Intas Biopharmaceuticals Ltd focuses on developing Novel Drug Delivery System (NDDS) for proteins, a cloning facility, novel production platforms, Monoclonal Antibodies and recombinant products (cytokines, hormones and blood factors) as well as facilitating the company’s foray into the molecular diagnostics market.”  R&D: The International Scenario The World Economic Forum (WEF) ranks countries in terms of competition, on a scale of 1–7 (1=least competitive, and 7=most competitive). At present, amongst 130 countries, the US scores 5.74, followed by Switzerland (5.61), Denmark (5.58), and Singapore (5.53). With a score of 4.33, India stands 49th out of 130 countries. With a score of 4.70, China ranks 30th, an improvement over its rank of 34 in 2007–08. However, India slipped down a place, from the 48th rank in 2007–08. While calculating the competitive index of a country, R&D expenditure acts as an important component.
 Though India is considered to be the fourth-largest economy of the world in terms of PPP (purchase power parity), following the US, China and Japan, it fares poorly in the world map of R&D spending. Table 1 and Table 2 highlight this aspect.
Such low investments in R&D indicate that India is involved in activities that are not creating higher value at different levels. Expenditure in research is an indication of the commitment of a firm or research organisation to search for innovative solutions to produce and create new products.  It can also be observed from Table 1 that India’s spending has remained constant from 2006 to 2008, whereas China’s has shown an upward trend. The Gross Domestic Expenditure on R&D (GERD) indicator acts as a tool to measure the commitment of a country in R&D. This indicator is measured in terms of R&D spending as a percentage of GDP for a country. Table 3 shows the activity of some developed and developing economies in this indicator (in PPP $ billion). Unsurprisingly, the US stands as the global leader. At the same, it is surprising to see the strong positive commitment by China, which ranked second in 2007. However, India is the favoured destination of global R&D firms because of the attractive cost factor and the availability of skilled researchers and engineers here. Many Indian firms have established global footprints. India is one of the few emerging economies to make its presence felt. Only sectors such as ICT and biotechnology are doing well when it comes to R&D. Still, as noted before, the R&D concept is in a very nascent stage in India and the country compares poorly with industrial economies in terms of R&D spending. In developed economies, the major driver of R&D investment comes from the industry itself, which is not the case in India. This holds true even with China, where industry accounts for 57 per cent of R&D investment. India’s R&D investment from industry was 23 per cent in 2007. The figure was even less than the industrial investment in Brazil (38.2 per cent).
Investment in R&D drives the innovation process. It can be gauged from patenting activity and the creation of value-added products. In India, technology exports and patenting activities are considerably lower than in other countries. In India, the pharma and chemical sector were the dominant sectors for firms making R&D investments. Automobiles, food and beverages and instrumentation are the other sectors in which firms undertook R&D investment. Recent years have shown growth in the number of software firms and increasing interest in R&D activities in the software segment. Small firms with sales figure under Rs 100 crore devote almost 6 per cent of their sales to R&D as compared to 0.45 to 1 per cent of firms with sales figures above Rs 100 crore. R&D intensity is high in the pharmaceutical sector (6.7 per cent) and for chemicals (2.42 per cent). Sectors such as textiles (0.19 per cent), basic metals (0.15 per cent) and non-metallics (0.16 per cent) contribute very little to R&D. The software sector has shown moderate investment intensity (1.15 per cent). Sector-wise R&D in India
A look at the recent developments in Indian industry reveals that although R&D in India may lag behind that of other countries, the outlook isn’t very grim. On the contrary, the outlook for Indian industry is promising. As the world discovers India’s cost advantages, stable poiltical climate and skilled workforce, foreign companies are entering the country, bringing their R&D expertise with them. A few sectors are at the forefront of these developments.
Automotive Sector The automotive sector is witnessing a host of changes, and the R&D arena is no exception. Automotive supplier Continental AG has opened a new electronic manufacturing facility and R&D centre in Bangalore. With an investment of approximately $51 million, the new facility will develop and produce electronic components for the growing auto electronic market in India. The company will manufacture instrument clusters for passenger cars, commercial vehicles and twowheelers, immobilisers, engine management systems for diesel and gasoline engines, electronic control units for power assisted steering and body control units out of the interior division. Similarly, HUSCO International, one of the world’s largest manufacturers of hydraulic and electrohydraulic controls for construction, industrial, automotive and agricultural equipment, commenced their R&D activity in Pune. The Pune facility will support HUSCO’s engineering needs worldwide.
 Industry forecasts suggest that from 2012 onwards, nearly one out of two cars produced worldwide will be manufactured in Asia. India and China will contribute in a major way to the growing Asian auto market. The next decade will see the rise of the megatrend of ‘affordable cars’, especially in growing markets like India and China. Indian emission norms and safety legislations are getting stricter by the day, the vehicles of tomorrow will have more and more electronics built into them. Experts believe that the Indian automotive market will grow at a CAGR of 15 per cent. This phenomenal growth opportunity has made it strategically important to translate extensive manufacturing expertise into vehicle technology to provide affordable components and systems to the Indian market. Localisation of the entire value chain of R&D, sourcing, and manufacturing is the key focus for success in this market. Pharmaceuticals industry Faced with increasing cost and marketing pressures, global pharmaceutical companies are considering how to tap India’s fastgrowing domestic market and offer a faster and cheaper value proposition in manufacturing and R&D.
Indian companies have ably demonstrated their expertise in scale manufacturing operations, and often have years of experience in producing active pharmaceutical ingredients (APIs), oral solids and liquids and simple vaccines. This knowledge has helped in the development of world-class Indian contract manufacturers working within globally competitive cost structures. Manufacturing costs in India are 30–40 per cent less than those in developed markets, mainly due to lower personnel and capital construction costs. The country’s specialisation in producing small molecules has contributed to the development of approximately 100 FDA-approved plants in the country, the largest number outside the US, and almost double the number present in China. India at present enjoys a three- to five-year head start over China in the areas of dosage form and complex API manufacturing. Indian companies are also actively sourcing cheaper, mass-produced simple APIs from China. Indian companies are also spending a major chunk in drugs that are complex to manufacture such as injectables, biologics and oncology therapeutics. With its manufacturing credentials firmly established, India is also setting out to conquer the R&D space. Indian companies have begun investing in developing new capabilities and pipelines for innovative drugs. India adopted WTO’s TRIPS in 2005, and subsequently instituted legal protection for products. Recently, several global companies have entered into research alliances with Indian companies to benefit from India’s skilled scientists and chemists and lower labour costs. India is a country on the road to modernisation, and more than 100 million people will suffer from chronic lifestyle diseases such as cardiovascular illnesses and diabetes by 2015. India’s rapidly growing domestic market is also significant for companies who want to invest here. India’s domestic pharmaceutical market is expected to be worth $20 billion by 2015, which would be the third-largest increase in market size after the United States and China. GlaxoSmithKline Plc is a leader in the Indian pharmaceutical market because of its customised approach, and the India-specific pricing models for some of its drugs to increase accessibility. At 1 per cent, India has low R&D spending in terms of share of GDP, as compared to 1.2 per cent for Brazil, 1.4 per cent for China and 2.5 per cent for the US. However, India has the potential to be an attractive market for commercialisation. Global investment will by and large depend on how quickly the government amends rules, improves patent protection, and upgrades infrastructure to develop India’s talent pipeline.  Household technology Over the last five years, home appliances company LG has invested about Rs 200 crore in R&D. Haier, a manufacturer of freezers, washing machines, televisions, water heaters, air conditioners, and microwave ovens, upgraded its manufacturing facility with stateof-the-art equipment to create a R&D facility for refrigerators. Gigabyte Technology, a Taiwanese technology manufacturer of motherboards, announced India as a hub for the company’s Asia-Pacific operations, The company will invest up to Rs 132.66 crore ($30 million) in manufacturing and R&D in India.
Daniel Sundelius, Head of Ericsson Supply Site, Jaipur, Ericsson India Pvt Ltd, says, “Ericsson has a centralised and extremely stringent manufacturing process. As an industry leader in telecom, our products are standardised from all perspectives. Any new product is first industrialised at our master site and is then replicated to our clone sites.” Ericsson Supply Site Jaipur, a clone site, provides critical inputs on processes relating to the quality and cost of products that are manufactured locally. Going forward
Globalisation has made it possible for companies to conduct R&D operations anywhere in the world. Advanced technology makes it possible for people across continents to collaborate in real time, while information and innovations spread quickly. This allows researchers and companies to make use of various facilities without spending time and money to develop their own capabilities. R&D is not limited to developed countries; developing countries like India are also emerging as prominent players.
Overall, the internationalisation of innovative activities brings benefits such as greater cost efficiency in the innovation process, greater ability to learn about research conducted by others, a reduction in the time to market new technologies and products and a positive impact on the innovation capacity of the firm. R&D investment will increase the manufacturing capacity of the country; the numbers speak for themselves. India would do well to take a leaf out of the book of successful developed countries and focus on R&D spends. In the long run, this will boost GDP and better the standard of living in the country. |
