Innovation and Global Competitiveness

Case of India's Manufacturing Sector

N.S. Siddharthan, K. Narayanan

• Publisher: Routledge
• Year: 2017
• Print ISBN: 9781138937758
• eBook ISBN: 9781317383710
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

In the post-liberalization period, India has slowly but steadily tried to foster innovation to improve competitive efficiency of Indian manufacturing and thus boost global competitiveness of the industrial sector. Foreign direct investment was looked upon as a major source of technology paradigm shift; in recent times, industrial firms have been investing overseas, even in countries to which they used to export, based on their technological capabilities. Firms in Indian manufacturing industries have also attempted to bring about technological upgrades through imports of design and drawings (disembodied technology) against lump sum, royalty and technical knowhow fees, and imports of capital machinery (embodied technology) where the technology is embodied in the capital good itself.

This volume comprises empirical contributions on this emerging phenomenon, on a range of issues including the role of R&D; mergers, acquisitions and technological efforts; technological determinants of competitive advantages; the role of small and medium enterprises and regional patterns; technological efforts and global operations; and the role of industrial clusters in promoting innovation and competitiveness.

This book was originally published as a special issue of Innovation and Development.

Introduction to innovation and global competitiveness: case of India’s manufacturing sector

N. S. Siddharthan^a and K. Narayanan^b

^aMadras School of Economics, Chennai, India; ^bDepartment of Humanities and Social Sciences, Indian Institute of Technology Bombay, Mumbai, India

1. Introduction

In the post-liberalization period, India has slowly but steadily tried to foster innovation to boost global competitiveness of the industrial sector. Since innovation in Indian industries for a long time has been supported by adaptation, assimilation and incremental changes on technology transferred from overseas, reforms smoothened the progress of the inflow of foreign direct investment (FDI). Several efforts were made to facilitate technology paradigm and technology trajectory shifts, in order to improve competitive efficiency of Indian manufacturing so that they could become globally competitive. FDI was looked upon as a major source of technology paradigm shift for Indian manufacturing, especially since the research and development (R&D) intensity of majority of the firms in the manufacturing industry has been very low (less than 1%) for long period of time. Industries where R&D intensity has been higher than the national average have looked for opportunities to world markets and earned the crucial foreign exchange (Kumar 2002). Firms in Indian manufacturing industries have also attempted to bring about technological upgradation through imports of design and drawings (disembodied technology) against lump sum, royalty and technical knowhow fees, and imports of capital machinery (embodied technology), where the technology is embodied in the capital good itself. The in-house R&D efforts were often directed to adapt the imported technology to suit the local resource and market conditions.

The role played by innovation in determining global competitiveness of Indian industries has been well researched (Kumar and Siddharthan 1994; Siddharthan and Nollen 2004). Most of them report a strong positive role for technological efforts (representing innovation)] in decision to export as well as boosting export intensity (proxy for global competitiveness, Bhat and Narayanan 2009). One of the major conclusions that emerges from the literature is that the impact of FDI on export performance of industries will vary not only with respect to the conditions specific to the host economy but also according to the types of industries that FDI enter (Bhaduri and Ray 2004). Studies of the Indian economy have found that majority of the FDI in India may not have entered the export-oriented industries and therefore could have little impact on the exports of India (Aggarwal 2002). During initial stages of liberalization, Indian firms depended mainly on technology spillovers for survival (Kathuria 2002). However, in recent times, some of the Indian firms have increased their productivity, some times higher than that of developed-country MNEs. Furthermore, industrial firms from India have been investing overseas, even in countries to which they were exporting until then, based on their technological capabilities. Empirical work on this emerging phenomenon has been scarce. This special issue of Innovation and Development intends to fill this gap.

Technologically active firms have created a niche market for themselves with cost- and/or product-specific advantages. Some of these firms are based on industries which have large FDI presence in India and have faced severe competition in the domestic market. The emergence of these firms in the global market could be explained by their own technological search efforts and/or spillover effects. The R&D carried out by the firms in collaboration with multinationals may help maximize exports. The increasing trend in mergers and acquisitions (M&A) activities could also have serious implications for global competitiveness of Indian industries. Further, there could be industry, firm as well as local specific advantage for firms to emerge globally competitive in a more liberal world trade regime. These factors motivated us to invite papers in the theme of innovation and global competitiveness in the Indian industries context.

2. Focus

The set of six papers published in this special issue were originally presented at the Seventh Annual Conference of the Forum for Global Knowledge Sharing (Knowledge Forum http://fgks.in), held in Pune, November 2012. The six papers deal with several issues relating to this theme. The issues relate to

• the role of R&D;

• mergers, acquisitions and technological efforts;

• technological determinants of competitive advantages;

• the role of small and medium enterprises and regional patterns;

• technological efforts and global operations;

• the role of industrial clusters in promoting innovation and competitiveness.

The papers included in this issue cover pharmaceuticals (two papers), automobile sector (two papers), industrial machinery (one paper), and regional innovation systems and small and medium firms.

While discussing global competitiveness of Indian firms, most scholars mainly refer to the Information Technology (IT) sector. In our view, the Indian pharmaceutical sector is equally competitive and export intensive. Firms from this industry have also been investing in other countries. This sector, unlike the IT sector, is under-researched and its innovative nature is not fully recognized. This special issue of Innovation and Development will bridge this gap. Likewise, India is emerging as an important location for automobiles industry. In this industry, the Indian firms have emerged as multinationals and have been investing and establishing manufacturing facilities in other countries. After India launched liberalization measures in the early 1990s, the Indian machine-making industry suffered a severe setback. However, soon several firms recovered and started holding their own despite stiff global competition. Appropriately this special issue cover this feature as well. Regional innovation systems and regional pattern of exports within a country is also a neglected area. One of the papers discusses this important aspect from the point of view of small and medium enterprises (SMEs). Accordingly the special issue focuses on under-researched Indian manufacturing sectors that have emerged globally competitive.

3. Liberalized regime and the Indian high technology industries

When India liberalized its trade and investment regime during early 1990s and joined the World Trade Organisation (WTO) in mid-1990s, it reduced import tariffs radically and abolished most of the quantitative restrictions on imports. Before the WTO regime came into existence, India did not grant product patents for pharmaceutical products. It granted only process patents and that too for a limited period. Under the WTO regime, India has to grant product patents for 20 years from the date of filing. Furthermore, copyrights are now protected for 50 years, and they cover several items like software, databases, recordings, performances and broadcasts (20 years). Trademarks and service marks are protected for seven years and are renewable indefinitely. Moreover, compulsory licensing and linking of foreign and domestic trademarks are prohibited. Furthermore, India could not continue with the policy of imposing domestic procurement requirements on multinational enterprises (MNEs). Several scholars felt that the policy changes introduced to fulfil WTO requirements would harm Indian industry, in particular, pharmaceuticals, automobiles and industrial machinery. It could also adversely affect the small and medium firms (SMEs).

During initial stages, liberalization did adversely affect some of the firms in these sectors. However, soon some of the firms recovered and succeeded at a global scale. There were gainers and losers due to liberalization. On the whole on hindsight, it is clear that these industries benefited by liberalization. In the case of the Indian pharmaceutical industry, critics of WTO regime painted a grim picture and vehemently argued against India agreeing to the new intellectual property protection regime. However, the data presented in this issue show a rapid growth of the industry after 1995. Thus during 1980–1995, the pharmaceutical industry grew at the rate of 6–7% per annum. Its growth rate accelerated to 13% per annum during the post-WTO regime of 2005–2011. In addition, the export intensity (exports to sales) of this industry increased from 18% during 1996 to 41% during 2010. The leading firms exported more than 50% of the output. Post-WTO regime M&A have assumed importance globally. In the Indian manufacturing industry, a maximum number of M&A have taken place in the pharmaceutical sector. Firms have been adopting corporate strategies like M&A to acquire technological and export capabilities.

In this context, the following questions assume importance:

(1) What are the causes of the success of the Indian pharmaceutical industry in the post-WTO phase?

(2) What was the role of R&D and productivity in the success of the sector?

(3) What role technological strategies play in explaining inter-firm performance?

(4) How did the Indian pharmaceutical firms developed to become MNEs?

(5) What role does M&A play in the acquisition of technology and in promoting exports?

These are some of the issues discussed in this special issue.

India also emerges as an important producer and consumer of automobiles. As the papers included in this special issue show, currently India is the second largest market for two wheelers, ninth for cars and eighth for commercial vehicles. Most of the Indian demand is met by domestic production. There are very few imports of vehicles. The growth rate of the export of Indian vehicles has also been impressive. It has been more than 20% per annum during the last decade. Like the pharmaceutical firms, Indian automobile firms have also been investing abroad. There have also been many M&A.

The automobile components sector could be divided into three groups: original equipment manufacturing (OEM) firms and first-tier suppliers and second-tire suppliers. The determinants of exports of the three groups of firms could be different and one uniform policy might not have the same effect on the three groups. There are three main auto-clusters in India. They are located in the National Capital Region; Chennai – Bangalore belt; and the Pune cluster. Studies have shown that firms located in the clusters perform better in terms of profit margins and productivities compared to firms that operate outside these clusters (Okada and Siddharthan 2008). The papers included here will discuss the following issues:

• The role of auto-clusters in promoting knowledge sharing.

• Auto-clusters and technology spillovers.

• Spillovers due to labour mobility and interaction among workers.

• Differential export behaviour of the three groups of firms, namely original equipment manu facturers and first- and second-tier suppliers.

• FDI outflows and exports – are they substitutes or complementary?

The Indian machinery industry was developed mainly in the strict import substitution regime and with huge public investments. After liberalization imports were freely allowed and the import tariffs drastically reduced. Many MNEs also established units in India. Under these conditions domestic firms could survive only if they are technically efficient and operate in the technology frontier (Ray 2006). The study included in this special issue show that out of the top five firms that are close to the technology frontier three were domestic firms. This is welcome news from the point of view of Indian firms. This leads to the analysis of the determinants of technical efficiency of firms. The paper included in this issue identifies the main determinants.

Another important issue relates to the globalization of SMEs. These enterprises play a prominent role in employment generation, value addition and exports. In this context, it is important to find out whether regional differences in accumulated technological knowledge, FDI inflows and industrial agglomeration influence export activities of SMEs. In other words, whether regional factors play a notable role in SME globalization? Studies on the impact of local resource base in terms of stock of knowledge and information in a given region has been scarce. The paper included in this issue fills this gap in the literature. In addition, there are some emerging SMEs that are ‘global born’ in the sense they were started with the purpose of serving the global market. These emerging features will also be studied in the paper.

4. Guided Tour of Papers

The first two papers of the special issue analyse the export behaviour of the Indian pharmaceutical industry. The first paper by Goldar concentrates on the impact of R&D intensity and productivity advantages on export intensities of firms. The second paper by Vidhisha, Narayanan and Ramanathan emphasizes the role of M&A and in particular the acquisition of foreign firms by Indian enterprises in promoting exports. The next two papers (papers 3 and 4) deal with the automobile sector in India. The paper by More and Jain focuses on industrial cluster and agglomeration advantages in influencing the competitive advantages of firms operating in the cluster. The paper mainly deals with the Pune automobile cluster. It uses innovation systems and global value chain perspectives to develop a framework for evaluating innovation performance and maintaining competitiveness of firms. The paper by Neelam Singh highlights the differential export behaviour of automobile firms belonging to different categories of exports, namely original equipment manufacturers and first-tier and second-tier exporters. In addition, it also explores the role of outward FDI (OFDI) of Indian firms in promoting exports. In this context, the paper extends the ‘substitutability versus complementarity’ hypothesis. The paper by Kesari estimates the technical efficiency of the machinery manufacturing firms and analyses their main determinants. The main argument being inefficient firms will not be able to withstand global competition, and hence, it is important to identify the determinants of technical efficiency. The last paper by Pradhan and Das investigates the importance of agglomeration and FDI on the performance of SMEs. While doing so they also bring in the role of networking and R&D facilities available in the agglomeration and access to information.

The first paper by Goldar links the R&D efforts of firms to productivity in explaining exports. He argues that a more productive firm is more likely to self-select itself into the export market. Furthermore, the impact of R&D on exports would depend on the level of pro...

Table of contents

• Cover
• Half Title
• Title
• Copyright
• Contents
• Citation Information
• Notes on Contributors
• Preface
• 1. Introduction to innovation and global competitiveness: case of India’s manufacturing sector
• 2. R&D intensity and exports: a study of Indian pharmaceutical firms
• 3. Mergers and acquisitions, technological efforts and exports: a study of pharmaceutical sector in India
• 4. Innovation and competitiveness among the firms in the Indian automobile cluster
• 5. Influence of outward-foreign direct investment and technological efforts on exports: Indian auto component firms
• 6. Technological determinants of firm-level technical efficiency in the Indian machinery industry
• 7. Exporting by Indian small and medium enterprises: role of regional technological knowledge, agglomeration and foreign direct investment
• Index