India's policies to attract FDI in R&D

[Background] [Objectives] [Proposed Methodology] [References]

A project of:

• Institute of Technology and Innovation Management (TIM @TUHH)

Project work by: Alexandros Chatzidelis

Project supervision: Rajnish Tiwari

Start: April 2007

Proposed duration: Six months

Project Status: Project completed [Download project report, PDF, 374 KB]

Background

For the last 30 years the world has experienced a steady increase in foreign direct investment (FDI) cashflows [1]. According to UNCTAD, an intergovernmental forum for the integration of developing countries in the world economy, FDI inflows are the biggest component of net inflows to developing countries. Thus, FDI acts as a major driver for their development. Breaking these inflows down to their components according to economic activity, the service sector occupies the biggest share [2].

In India, which stands in the focus of this study, FDI in the service sector does not only aim at "business process outsourcing" (BPO), such as call centers or telemarketing, but also at much more sophisticated activities such as research and development (R&D) (in combination with other high-end services generally known as "knowledge process outsourcing" or KPO) [3]. Actually, such is the importance of India in this field that the leading business magazine The Economist claims that no big international company can do without an India strategy today [4]. Companies like General Electric, BASF, Microsoft, Oracle, SAP and IBM – to name but a few – are all pursuing R&D in India, which simply confirms the above statement [5].

Objectives

In an ever more globalizing and, thus, ever more competitive world, the effort to attract FDI in general, and in R&D in particular, cannot be left to chance. The objectives of the present study are to identify India’s policies and practices in order to attract FDI in the field of R&D. More specific, this study aims to identify :

1. The importance of R&D investment for the Indian government
2. Whether specific industries are preferred, e.g. IT, telecommunications, energy sector etc.
3. Whether specific sizes of companies are preferred, e.g. multinationals to small and medium enterprises
4. Whether specific modes of entering the Indian market are preferred, e.g. obligatory partnerships with local companies
5. Specific policies and practices to attract FDI in R&D, e.g. tax incentives, special economic zones, regulatory incentives, subsidies, deregulation of labour laws, land marketing, protection of IP rights, bilateral agreements, WTO agreements etc. ; and to
6. Assess the impact of FDI in R&D, e.g. yearly investment, number of scientists working in the field, patents filled, patents awarded, clusters built, success stories of companies etc.
7. Come up with suggestions for policy improvement, if/where applicable.

This study is a part of the project India's Innovation System: Exploring the Strengths, currently being carried out at TIM/TUHH within the framework of Research Project Global Innovation. A major objective of this research is to identify policies employed by the Indian governemnt to deal with FDI issues in the R&D sector. It would also seek to make policy recommendation to overcome any shortcomings identified during the study. Another major advantage of this study would be that it could serve as a benchmark for other countries.

Proposed Methodology

In order to collect the necessary information to meet the objectives, it is proposed to split the research process into two sections:

1. Desk research in order to obtain general (preliminary) information about the status quo of FDI in R&D in India, policies employed, industries preferred etc. To do so, the following means are proposed:
   1. Internet sites of the Indian government, e.g. Ministry of Commerce and Industry
   2. Information and statistics provided by Indian institutions such as India Brand Equity Foundation, The Council of Scientific & Industrial Research, National Association of Software and Service Companies (NASSCOM), Federation of Indian Chambers of Commerce and Industry (FICCI), etc.
   3. Information and statistics provided by international organizations, e.g. World Trade Organisation; World Bank; United Nations Conference on Trade and Development etc.
   4. Other institutions – mostly from Universities – specializing in studying India, e.g. IndiaKnowledge@Wharton; Indian Institutes of Technology; Center for the Advanced Study of India etc.
   5. Relevant academic articles and Books about India
2. Once the preliminary results from the desk research are obtained, direct contact to the closely related parties, such as ministries, organizations, firms etc, for further information and answers to specific questions is proposed.

The results of the above research will be used to meet the targets mentioned in the section Objectives and help to better understand India’s innovation system.

References

1. Steven Brakman, Harry Garretsen, Charles Van Marrewijk, Arjen Van Witteloostuijn, "Nations and Firms in the Global Economy: An Introduction to International Economics and Business", Cambridge University Press, pg 140
2. United Nations Conference on Trade and Development, "2004; Development and Globalization: Facts and Figures", chapter 2.
3. The Economist, "Survey: Business in India; If in doubt, farm it out"
4. The Economist, "Survey: Business in India; Now for the hard part"
5. Technology Information, Forecasting and Assessment Council (TIFAC), "FDI in the R&D Sector, Study for the pattern 1998-2003", New Delhi, 2006.

[ For further enquiries, please contact Rajnish Tiwari ]