Current Trends and Policies in Foreign Direct Investment in R&D in India | Science Policy Forums (2024)

The economic liberalisation of 1991 and the subsequent opening up of the domestic market to foreign direct investment (FDI) catapulted India on a path of economic growth, employment generation, access to foreign technologies and global consolidation. Yet, in the three decades that have followed, the country has failed to tap on the immense potential that research and development (R&D) provides. FDI has dropped significantly despite opening up of automatic routes, R&D spending has stagnated and productivity benefits have been inconsistent. Recently, the Government of India has shifted its focus towards building an innovation ecosystem, backed by significant investment in R&D and promoting FDI in R&D sectors. However, not much is understood about FDI in R&D. What is R&D-intensive FDI? What are the current trends in R&D-intensive FDI in India? What is the role of policy? Let us discuss these questions for a holistic understanding of the topic.

What is R&D-intensive FDI in India?

R&D-intensive FDI can be defined as a mechanism that combines inward foreign investment promotion on the one hand and innovation on the other. It is considered to be an important driver of innovation and economic growth in developing countries through better access to foreign technology, high-tech exports, capital accumulation, skill development and higher productivity (Damijan et al. 2003). In India, since the economic liberalisation of 1991 and the subsequent expansion of the domestic market, industrial investors have sought to build global consolidation through international knowledge networks and foreign ownership by multinational corporations (Kumar and Aggarwal 2005). Investment in priority sectors such as services, Information and Communications Technology (ICT), trading, construction, pharmaceuticals and automobiles have flourished with ample support from multinational corporations (MNCs), private corporations and government initiatives. Recently, the emphasis of the government has been on opening up of entry routes and increasing sectoral caps (see Consolidated FDI Policy Circular 2017). Foreign investment up to 49% under the automatic route has been permitted for the insurance and defence industry. 100% FDI is permitted via the automatic route in coal and mining, greenfield pharmaceuticals, telecom and civil aviation. 100% FDI under government route is permitted for retail trading, e-commerce, teleports and railway infrastructure and up to 74% for brownfield pharmaceuticals and private security agencies. Despite this, the scale and effectiveness of such policy intervention on the economy as a whole have been critically low.

While India has proactively undertaken FDI policies to push domestic technological productivity, its innovation ecosystem is predominantly backed by the purchase of imported technologies and technology transfer agreements. The most recent consolidated FDI newsletter published by the Department for the Promotion of Industry and Internal Trade (DPIIT) reveals a consistent inflow of FDI equity in traditional sectors such as services, ICT, pharmaceuticals/biotech and automobile during 2018. However, it accounts for only 0.2% of inward FDI in R&D. This percentage denotes the extent of R&D activities undertaken by MNCs in India, in the form of R&D centres, joint research labs and linkages established with public universities, research institutes and industry. In other words, it represents the ability of the host country to internalise foreign R&D, develop specialised network clusters and benefit from the resulting technology transfer. On a global scale, India has emerged as an attractive destination for greenfield FDI and MNC activities, primarily due to the availability of skilled human resources at lower wages (World Investment Report 2019, UNCTAD). Yet, the innovation potential of India has hardly been tapped into by foreign multinationals (Mrinalini et al. 2013). R&D-intensive manufacturing and utilising the science and technology (S&T) infrastructure by MNCs are prerequisites for strengthening the innovative capabilities of the host economy. However, India’s gross expenditure in R&D has stagnated over the last 30 years ranging between 0.6- 0.9% of Gross Domestic Product (DST R&D statistics). Furthermore, barring a few high-technology sectors, India has mostly remained at the “assembly” and “development and testing” phase of production that does not necessarily involve core R&D and capacity building. Consequently, the growth effects of R&D-intensive FDI have been limited for India’s STI ecosystem.

What are the current trends in R&D-intensive FDI in India?

FDI in India has primarily gone into services, telecommunication, machinery, electricals and construction sectors, while investment in “Make in India” sectors has contributed to less than half of total FDI received in recent years. A large part of the country’s total R&D spending is done by the government and private investment is highly concentrated in high-tech manufacturing (pharmaceuticals, biotech and automobile) and service sectors (information technology). But, the distribution of R&D-intensive FDI has been somewhat different.

Internationalisation of R&D and opening up of R&D centres by MNCs in India have followed a steady trajectory in the last decade with overall FDI equity inflows consistently above 70% (Mrinalini et al. 2013). The majority of MNC R&D centres have been set up by the United States, followed by the United Kingdom, Japan, Germany and France. Looking at total R&D investments by US MNCs in India, 65% has been in software development and 15% in hardware production (Mrinalini, Sandhya and Nath 2011). Several R&D centres have been established by IT giants Oracle, IBM, Microsoft, CISCO, Intel and Texas Instruments. By and large, MNCs in India are found to consistently invest in core R&D activities in high-growth sectors such as biotech, pharmaceuticals, consumer electronics and machinery. In automotive, minerals, textiles, aerospace and electronics sectors, FDI investments are mainly non-core R&D in nature (fDi markets). The sectoral and regional composition of FDI in R&D for manufacturing and non-manufacturing sectors are given in Tables 1 and 2 respectively. Unfortunately, data on MNC R&D centres is largely constrained in terms of the years covered (latest data until 2015) and is limited to in-house R&D units recognized by DSIR. This is the only government data infrastructure available for benchmarking industrial R&D, and no other official source exists that provides disaggregated data on MNC R&D centres by industry. This significantly limits our understanding of the global R&D ecosystem in the country and makes policy intervention difficult.

Table 1: Top five sectors attracting highest FDI in R&D in India in 2015

Source: DSIR- Directory of Recognised In‐House R&D Units 2015, FDI Newsletters

Joseph, Dhar and Singh (2019)

As Table 1 indicates, the sectors attracting highest FDI in R&D in India in 2015 are ICT with 28% of total FDI in R&D share, followed by natural sciences and engineering, pharmaceuticals and biotech, clinical research and chemicals. The most attractive MNC destinations by regional hubs are Bengaluru, National Capital Region (NCR), Mumbai, Hyderabad and Kolkata (Table 2). According to Mrinalini et al. (2013), the primary driving forces to MNC locational decisions and generation of regional clusters are technological proximity to inventors coupled with availability of high-skilled manpower. Without the presence of skilled expertise, learning and diffusion of research capabilities through local universities, efficient integration of MNC R&D activities will be impossible to achieve.

Table 2: Top five regions attracting highest FDI in R&D in India in 2015

Source: DSIR- Directory of Recognised In‐House R&D Units 2015

Innovation networks also form an important component of FDI in R&D. In recent years, linkages of MNCs with public universities, research institutes, private firms, government agencies, suppliers and clients have been established particularly in the ICT sector. These linkages have mostly taken the form of collaborative R&D, joint product development, human resource development and arm-length interactions. Table 3 gives an overview of collaboration networks in ICT by foreign MNCs in India.

Table 3: Types of linkages of MNCs in India across various domains of the ICT sector

Source: Author’s compilation from various sources like Lexis Nexis; Patra and Krishna (2015)

What is the role of policy?

As noted earlier, FDI in R&D policy lies at the intersection between innovation policy and FDI policy[i]. Accordingly, the Government of India (GoI) in recent years has introduced several policies for creating a conducive environment for foreign investment and attracting MNC operations. The Industrial R&D Promotion Programme (IRDPP) of the Department of Scientific and Industrial Research (DSIR) aims at encouraging R&D in industry, government funded R&D institutions, and scientific and industrial research organisations. GOI also offers several fiscal and financial incentive schemes to support R&D and scientific research in the country. Major policy intervention in this regard include (i) tax benefits in R&D expenditure in DSIR-recognised R&D centres, (ii) exemption of customs duty on goods imported for R&D by private and public research institutions, and (iii) exemption of central excise duty on purchase of goods for R&D. Currently, there are about 1880 DSIR-recognised corporate R&D units in operation in India. Private R&D expenditure has exponentially grown from Rs 3000 million in 1980-81 to Rs 345000 million in 2016-17. High-technology and high-growth sectors such as ICT, biotech and automotive have emerged as successful case studies for FDI in R&D. But the question remains, ‘is it sufficient?’

India essentially needs a structural transformation steered by innovation and investment in R&D to attain long-term sustainable and inclusive growth. The challenge is not only to depend on foreign technologies and innovation processes through FDI, but also to design business R&D models[ii] based on the resources of the domestic economy to come up with an integrated outlook for innovation. While FDI inflow leads to absorption and diffusion of foreign technology through the upgradation of local skills, a host country’s levels of human capital and R&D determine the level of FDI it attracts. In other words, countries with greater skilled human resources and a robust R&D ecosystem will attract more technologically intensive FDI and MNC operations as compared to weaker economies. However, Keeping this in mind, several policy recommendations to promote FDI in R&D in India can be put forward:

1. Providing financial incentives to not only conduct basic research, but also to innovate i.e. encouraging commercialisation of research output in the form of patents or publications. This is relevant not only for the industry, but also for academia where faculties should be encouraged and rewarded for participation in joint research projects. Training should also be given for getting accustomed with drafting and filing of patents.
2. Building government-supported industry specific R&D consortia (such as BIRAC in India, SEMATECH in the US) in high-technology R&D-intensive manufacturing sectors where FDI equity inflows are high (Table 1).
3. Attracting foreign talent and skilled personnel -“brain-gain”. This can be achieved through greater emphasis on postdoctoral scholarships and fellowships, R&D grants, provision of adjunct faculty positions in science and technology such as the Visiting Advanced Joint Research (VAJRA) Faculty Scheme and effectively utilising the 100% FDI in higher education in India. The National Education Policy 2020 (see https://www.mhrd.gov.in/nep-new) has been a first step towards achieving this goal, nevertheless much more needs to be done.
4. Recognising technology parks, entrepreneurship hubs and knowledge centres as key actors in national and regional innovation systems[iii].
5. Establishing network linkages and R&D collaborations with universities and research institutes in technologically proximate agglomerations (Table 2)
6. Making the Intellectual Property Rights (IPR) regime in India efficient and transparent, thereby strengthening the confidence of domestic innovators and increasing the likelihood of technology transfer between India and other developed countries[iv].
7. Understanding the crucial significance of data and accordingly, updating R&D related data on MNC R&D centres, R&D-intensive FDI by NSTMIS and DSIR for correct evaluation and policy recommendations.

While several policy instruments for attracting R&D-intensive FDI in India can be discussed at length, the challenge lies in the implementation. Due to the involvement of multiple government ministries and departments, a coherent approach is often difficult to design. Furthermore, given the dynamic nature of FDI in R&D, critical evaluation of policy instruments needs to be carried out. This necessitates significant inter-ministerial cooperation, policy mix, active participation of industry and an overall positive outlook towards research and development.

References:

Damijan, J. P., Knell, M., Majcen, B., & Rojec, M. (2003). The role of FDI, R&D accumulation and trade in transferring technology to transition countries: evidence from firm panel data for eight transition countries. Economic systems, 27(2), 189-204

Joseph, R. K., Dhar, B., & Singh, A. A. (2019). FDI in R&D in India: An Analysis of Recent Trends, ISID Working Papers

Kumar, N., & Aggarwal, A. (2005). Liberalization, outward orientation and in-house R&D activity of multinational and local firms: A quantitative exploration for Indian manufacturing. Research Policy, 34(4), 441-460

Mrinalini, N., Nath, P., & Sandhya, G. D. (2013). Foreign direct investment in R&D in India. Current Science, 767-773.

Mrinalini, N., Sandhya G. D. & Nath, P. (2011), Impact of FDI in R&D on Indian R&D and Production System, Study conducted by NISTADS for Technology Information Forecasting and Assessment Council (TIFAC), New Delhi

Patra, S. K., & Krishna, V. V. (2015). Globalization of R&D and open innovation: linkages of foreign R&D centers in India. Journal of Open Innovation: Technology, Market, and Complexity, 1(1), 7

UNCTAD (2019). World Investment Report. Accessed on June 26, 2020 from
https://unctad.org/en/PublicationsLibrary/wir2019_overview_en.pdf

[i] FDI policy relates to investment made by firms or individual investors in one country into business operations in a foreign country with the purpose of gaining ownership; R&D policy relates to the research and development activities undertaken by government and public entities in a country; innovation policy relates to understanding the process of generating new products or processes for commercialisation and its underlying socio-economic impact

[ii] Models of open innovation (Chesbrough 2003), complementarity in innovation strategy (Cassiman and Veugelers 2006).

[iii] See Leydesdorff and Fritsch (2006) for an overview on German innovation system.

[iv] See Dutta and Sharme (2008) and Kapoor and Sharma (2015) for an overview on IPR for innovation in India