Naushad’s opinion column in the Business Standard: Innovation, Competition and Ambition

Innovation, Competition and Ambition 

Building world-leading firms requires the ambition to compete with the best, worldwide.  

I have often written about the need for Indian industry to invest more in in-house R&D.  Indian industry invests 0.3 per cent of GDP in in-house R&D, to a world average of 1.5  per cent. Why do we invest so little in R&D? As the table below shows, India has  relatively few firms (23) in the top 2500 firms that invest in R&D.  

Table: Leading Sectors for Top 2500 firms investing globally in R&D, by country (2022) 

Source: EU Industrial R&D Investment Scoreboard (2023), with some correction for India.  

Note: Figures in euros were converted to dollars using the EUR-USD exchange rate of 1.06 as of  December 2022. This scoreboard reports R&D data consolidated at the firm level regardless of which  country it is done in. 

We have four challenges:

– We have no presence in six of the top ten industries that invest in R&D:  Technology Hardware, Electronics, Construction, Health Care, General  Industrials, and Industrial Engineering. 

– Where Indian firms are present, they invest less in R&D than the world average.  In Auto, the four Indian firms (Tata Motors, M&M, Bajaj, TVS) that figure in the  top 2500 R&D investors spend 3.8 per cent of their global turnover on R&D,  which drops to just over 1 per cent without Tata Motors’ JLR subsidiary in the  UK. The world average for Auto is 4.8 per cent. In Software, the top Indian  firms (TCS, Infosys, HCL) invest 1 per cent of turnover in R&D, compared to a  top 2500 average of 14 per cent. 

– In Pharmaceuticals, the top 5 Indian firms invest 6 per cent of sales in R&D.  This is less than the world average of 17 per cent, but higher than any other  industrial sector in India. The problem is that our pharmaceutical firms are  relatively small. The average turnover of our five largest pharmaceutical  companies (Sun, DRL, Aurobindo, Lupin, Cipla) at $3 billion, is a fraction of the  $45 billion average of the top 20 pharmaceutical firms worldwide. Our top five  firms invest an average of $200 million in R&D compared to an international Top  20 average of $7 billion. 

– We have a serious gap for our most successful firms (see my “India’s Missing  Giants”, Business Standard, March 23, 2023). Our ten most profitable non financial firms make an average profit of 16 per cent of sales, and invest 2 per cent of profit in R&D. The ten most profitable non-financial firms in the US,  China, Japan and Germany make an average profit between 9 and 25 per cent  of sales, and invest between 29 and 55 per cent of profit in R&D. The difference  in R&D spending proportional to profit (twenty times) is simply huge. The  problem is not one of sector, profitability, or size. Our most successful firms just  invest little in R&D. 

These four challenges – a missing presence in the most technology-intensive sectors,  a lower R&D intensity in the remaining sectors, a limited scale in our most R&D  intensive sector, and a small investment in R&D by our most successful firms – between them result in Indian industry’s low investment in in-house R&D. What can  be done?

Laveesh Bhandari argued in these pages earlier this month (‘Innovation is key: Why  does India’s private sector not spend more on R&D?’, Business Standard, September  2, 2024) that the problem was competition. He says that Indian firms do not have an  incentive to invest in in-house R&D as they already have continuing high growth in  earnings by operating in a protected market. They need not cope with the uncertainty  of R&D outcomes. This is a persuasive argument, but I would argue that the quality of  competition is what really matters. Simply having more competition can drive  efficiency; it need not drive product innovation. The nature of competition must change,  and come from innovative firms that compete on better products, not price.  

Where a firm currently stands also matters. One of the better recent books on  innovation is The Power of Creative Destruction, by Philippe Aghion, Celine Antonin  and Simon Bunel. In a chapter titled “Is competition a good thing”, they argue that firms  react to increased competition differently depending on how far from the technology  frontier (economist-speak for cutting-edge) they are. If they are far from the frontier,  firms don’t even try to compete. If they are near the frontier, they respond by innovating  more to escape competition.  

The other side of protection from imports is competing in export markets. Selling to  international markets has many advantages. First is scale. The Indian market may be  large, but it is puny relative to the rest of the world. The fifteen Asian countries that  make up the RCEP free-trade area are eight times our GDP. The ten-country subset  in Southeast Asia alone would itself double India’s market. There are more  advantages: selling in international markets provides great learning opportunities.  Competing with the world’s best is a spur to innovation like no other. But Aghion & Co  argue that an expansion of export markets enhances innovation for firms close to the  frontier. Export orientation does not enhance innovation much for firms far from the  frontier. 

After hearing Manmohan Singh’s landmark budget in June 1991, Forbes Marshall  decided two things. First, we figured that the world’s best firms would soon be coming  to India, and if we could beat them overseas, we would easily beat them on our home  ground. So we began exports to drive learning. And, second, we committed to  investing strongly in R&D and develop products we could sell worldwide. We used the  time we had as the Indian market opened up to get as close to the technology frontier 

as possible. This opportunity still exists for much of Indian industry. Learning to  innovate is a long haul; it helps to have the luxury of time, with the cushion that some  protection provides to make mistakes.  

When I talk to my friends about why Indian firms invest little in R&D, I often hear a  cultural argument, that it is our “trader mentality” or that we are short-sighted and do  not see the merit in the long-term play that is R&D. I think the issue is different. Many  industrialists think there isn’t a problem to solve, that they actually do invest adequately  in R&D. So I’ve made it my mission to show the huge gaps we have in comparisons  of R&D in industrial sectors, in our most successful firms, and overall R&D investment  in the country and all of Indian industry. Maybe this helps, but what can really have  impact is the increasing visibility of R&D in the success of some leading firms. When  this combines with a strong export strategy that shows Indian firms succeeding around  the world, it becomes really powerful. The success story of a few dozen firms could  fire Indian industry to build proprietary technology and deploy it worldwide. It is time  we had hundreds of highly ambitious firms, operating at the technology frontier, and  seeking enhanced competition from imports and in export markets as a spur to  innovate yet more. 

Naushad Forbes 

ndforbes@forbesmarshall.com 

Co-Chairman Forbes Marshall, Past President CII, Chairman of Centre for Technology  Innovation and Economic Research and Ananta Aspen Centre. His book, The Struggle  and the Promise has been published by HarperCollins. 

(Published in Business Standard dated 19th September 2024)