Towards a National Innovation System

Source: The post is based on the article Towards a National Innovation System” published in Business Standard on 18th May 2023.

Syllabus: GS 3 – Indian Economy – Growth & Development

News: Economists, focusing on the National Innovation System, believe that innovation largely happens at firms. Firm capacity is affected by both what they do themselves and the institutions around them.

What is the present situation of India in innovating its firm?

The top 2,500 firms investing in R&D worldwide account for around 90 percent of all industrial R&D. However, India has no firms in the top 2,500.

Even when Indian software companies are profitable, they invest just 1 percent of their average annual revenue in R&D, compared to a global average of 12 percent.

Therefore, India should increase its in-house R&D from 0.3 percent of GDP to match the world’s level of 1.5 percent. India also needs big R&D investors.

Where could big R&D investors in India come from?

India’s 10 most profitable non-financial firms are in software, oil refining, metals, and other industries.

They invested under $1 billion, or about 2 percent of profit, in R&D. However, companies in China invested around 29 percent of profit while companies in the US, Japan and Germany invested 37, 43 and 55 percent of profit in R&D.

Therefore, Indian industry should be present more in technology-intensive sectors to invest more in R&D. Within the industries that are already present in India, it is required that they invest closer to the world average.

These measures will then bring giant investors in R&D among the most profitable firms.

What can India learn from the world in firm innovation?

Japan, South Korea, Taiwan, Singapore, and China followed a particular sequence in building innovation capacity.

Firms in these countries first entered export markets as original equipment manufacturers (OEMs) supplying to foreign brands. This ensured world-scale capacity and brought competitiveness amongst the companies.

Later firms in these countries moved up the value chain to more technology-intensive sectors such as consumer durables, electronic assembly, etc. They also started to invest in in-house R&D in these sectors to sustain competitiveness.

These firms further moved to higher-technology sectors like semiconductors, pharmaceuticals, computers and went with increasing investments in in-house R&D.

All five East Asian governments funded R&D and followed the West in investing in public research in the higher education system to create researchers.

These researchers became the core of the in-house R&D departments of local firms.

In contrast, Indian Industry was forced to compete only after 1991 liberalisation, which was the first step of innovation in India.

The other steps in innovation have not yet happened in India as the Indian industry has been content with low R&D spending of 0.3 percent of GDP.

What can be the way ahead for India?

Pharmaceuticals and automobiles are the two technology-intensive sectors in which India has some presence in the global industrial R&D.

Pharmaceuticals dominate the R&D investments in India. It accounts for 34 percent of all Indian industrial R&D.

With this investment in R&D its sales account for 10 percent, which is lower than the world’s 16 percent. However, this ratio is decent relative to every other sector.

Therefore, India has an advantage in pharmaceuticals to build a world-class innovative industry.

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