Innovation policy for a globalising India

Innovative activity is widely seen as an important influence on a country?s international competitiveness in an increasingly globalising and knowledge-based world economy. It is with R&D activity geared to development of cost effective processes of known chemical entities that Indian pharmaceutical companies have emerged as leaders in the global generics market. Indian automakers have employed R&D activity to develop world-class vehicles such as Indica, Indigo, Scorpio and a host of two-wheelers that are sold in a number of countries.

There has been a large volume of theoretical literature on the role of technological capability in explaining growth and trade performance. Technology has been assigned an important place in the policy framework of most of the industrialised and newly-industrialising economies. As a result of the huge R&D subsidies given by the governments in developed countries, R&D expenditure as a proportion of GNP has risen for the world from 1.85 % in 1980 to 2.55 % in the 1990s.

In many advanced economies, direct subsidies given to business enterprises by national governments account for a substantial proportion of R&D performed by business enterprises, e.g. 28.3% in the US and nearly 20% in Germany. Govern-ment?s share of total R&D expenditure in both the countries was close to half. The EU runs multi-billion euro framework programmes like Euram, Espirit and Eureka, which are geared towards strengthening the technological edge of European enterprises. They also jealously guard the technological capability of national enterprises through various means, including strengthening of intellectual property protection worldwide. These trends have been described as techno-nationalism, or techno-protectionism.

Against this backdrop, the proportion of national resources spent on R&D by India has declined steadily, from a peak of 0.98% in 1988 to 0.66% in 1997, before recovering slightly to 0.8% in 2000. This decline is a matter of grave concern. It threatens to widen the already serious technology gap between India and the world economy. Industry spends only 23% of national R&D expenditure and the bulk comes from public-funded institutions. Hence, the decline may largely be due to the budgetary squeeze. However, even the rate of growth of R&D expenditure in industry has declined in the 1990s.

An RIS study shows that the motivations for R&D activity in the post-reform period have changed. Motivation has shifted from tax incentives in the pre-reform period to knowledge imports and enterprises? outward expansion in the post-reform period. The evidence, therefore, generally confirms that R&D activity of Indian enterprises in the post-reform period, even though lower, is more focused towards building their technological capability and competitiveness. It appears that reforms may have pushed the Indian enterprises towards rationalising their R&D activity.

Keeping in mind the innovation-based rivalry in the globalising world economy, India needs to boost R&D activity of Indian enterprises in a big manner. As observed earlier, developed country governments spend billions of dollars in R&D subsidies given to national enterprises to shore their competitiveness. Such subsidies upto 50% of project costs have been made non-actionable under WTO rules. In India, R&D activity has been en-couraged mainly through weighted tax deductions in certain industries. It is arguable that a more direct support in the form of R&D subsidies for specific projects for development of products or processes may be desirable.

Furthermore, in the case of subsidies, it is possible to direct the R&D effort of enterprises in a desirable direction or field. For instance, it may be used to promote capability building for new product, or process innovations for local markets or internationalisation, rather than customisation of imported technologies and products. It is also possible to achieve other desirable objectives, such as promoting industry?s linkages with the public-funded research laboratories and universities, through more direct subsidies.

In recent times, the government has set up funds for specific industries, such as pharmaceuticals, to assist R&D activity. These funds have remained under-utilised due to onerous conditions. There is obvious need for a generous programme to boost R&D activity, through subsidies for viable R&D proposals of industry. Furthermore, products based on indigenously developed technology could be provided production tax concessions (such as those extended to products of small-scale industry) and income tax concessions (such as those enjoyed by export turnover) to encourage innovations.

Another policy could be protection accorded to minor innovations, through utility models and industrial designs protection, as seen in East Asian countries like Japan, South Korea and Taiwan. The patent system fails to encourage minor innovations, as the criteria for inventiveness tends to look at the novelty in the invention. The East Asian experience suggests that petty patents and industrial design patents could be effective means of encouraging domestic enterprises to undertake minor adaptive innovations and foster innovation-based rivalry among them.

With the revival of India?s manufacturing, it is time to promote innovation-based rivalry here. In this task, we may take lessons from successful countries in the west and east in promoting innovations and protecting them.

The writer is director-general, Research and Information System for Developing Countries (RIS). These are his personal views