Research in India Part 2: Does R&D hold the key to fuelling economic development?

Most of the contemporary economists have attributed the sustained growth in developed nations to their intensive research and development activities.

By S D Shibulal

The topic of research and development in India is an oft-debated one. There are plenty of views suggesting that the country is simply not doing enough to justify its place in the global economy vis-à-vis research or to achieve its own ambitions, particularly in light of the 'Make in India' initiative. The following is the second in a three-part series on research in India. You can read the first and third parts part here and here respectively.

Economists like Adam Smith had long established a relationship between scientific research and economic growth. Most of the contemporary economists have attributed the sustained growth in developed nations to their intensive research and development (R and D) activities.  In this article, I will discuss, the correlation of science and research to economic development and the role of public expenditure as an impetus on research and development and the flow of scientific knowledge between sectors.

Several studies confirm a positive correlation between R and D and economic development. The economic growth seen in Germany at an average of two percent each year, with the automotive industry being the leading contributor, is testimony to this phenomenon. Germany’s automotive industry invested more than €19.6 billion (in 2014, according to German Trade and Investment) which accounts for more than a third of the country’s R and D expenditure. The automotive industry also regularly engages in joint research activities with some of the world’s leading automotive technology research institutes and universities.

In a study covering 66 developing countries between 2000 to 2009, it was seen that R and D expenditures had a positive impact on economic growth in countries with higher and medium-income levels, while there is no significant relationship between the two variables in the countries with lower and medium-income levels (Procedia - Social and Behavioural Sciences). While countries with lower and medium-income levels may benefit more from using innovative technologies developed elsewhere, even they need to develop a better understanding and a more conducive environment for basic science in order to exploit those discoveries.

As far as funds for expenditure on R and D is concerned, India's main agency for disbursing research grants, the ministry of science and technology, received Rs 9,5oo crore ($1.5 billion) in 2015-2016, an eight percent hike over the previous year’s pledged funds. But owing to cuts in research spending in other departments, the overall allocation for science (which includes seven other ministries that undertake research: Agriculture, defence, earth sciences, health, renewable energy, space and atomic energy), stood at Rs 41,900 crore, only 3.4 percent more than what was pledged the previous year. India spends less than one percent of its GDP on R and D spending; whereas for the US and China, the numbers stand at 2.7 percent and 2.04 percent respectively (source: World Bank).

Although there is empirical evidence linking R and D and economic growth, we have to look into the kind of research that is being done and how it translates into innovative products, services or processes. India is among the world’s top 10 nations in the number of scientific publications, and is ranked 17th in the number of citations received (among nations publishing 50,000 or more papers). Also, it is ranked ninth globally in the number of scientific publications and 12th in the number of patents filed. However, whether this knowledge is translated into growth rates remains to be seen.

In the meantime, expenditure on R and D should be considered as an investment that leads to more efficient and optimal production methods and use of resources. One invention or innovation can fuel many more. Take for example how the GPS has led to many Location Based Services (LBS) using the smartphone. It is interesting to note that today’s GPS receiver uses formulae based on the General Theory of Relativity, postulated by Albert Einstein more than 100 years ago! These LBS include services to identify a location of a person or object, discovering the nearest ATM, parcel tracking, vehicle tracking, and mobile commerce  — advertising directed at customers based on their current location. The growth of transport aggregators like Uber and Ola is yet another example of how GPS has provided employment and convenience to so many people. Increasing the level of R and D will have a positive impact on growth rates in the economy in the near or long term. As Klaus Jaffe puts it, “The most important thing is to invest in basic sciences. Those who try to skip this step fail.”

It is interesting to note though, that the countries that benefit the most from research may not always be the countries that perform the research. Owing to a spill-over effect, the potential benefits of new ideas may not accrue to the people who innovate them. Perhaps that is why the private sector may be less motivated to spend on R and D activities. In order to encourage R and D activities of the private sector, the government needs to provide interventions such as tax incentives and protection of intellectual property rights, as well as providing direct support such as supply and finance conveniences (OECD, 2004). Public and private investment can play different but often complementary roles in providing an impetus to research. A recent economic report about the investment trend analysis in the United Kingdom estimates that a one percent increase in public expenditure on R and D will lead to 0.48 percent to 0.68 percent increase in private expenditure on R and D (Economic Insight report April 2015).

Another way to do this could be that public investment can focus on basic research as it generally does not have an immediate payoff but often inspires and sets the stage for further ideas. As an example, Nasa's quest to put a man on the moon inspired them to develop better sound recording and reading technologies. Private investments can be focused on developmental and applied research.

Coming back to the spillover effect, studies suggest that scientific knowledge flows within and between sectors of the economy. However, there are lags between scientific research and its market impact that hampers this flow. Nonetheless, when they do happen, such spillovers help increase the overall GDP of a country, thereby contributing to economic development. As firms engage in R and D to make profits, and part of this R and D is appropriated by other firms, it creates increasing returns to scale and long-term growth.  It is important that there are no boundaries and there is an open environment, so that spillover is facilitated.

The author is Trustee, Infosys Science Foundation

Part 1: Local solutions needed to deal with unique problems

Part 3: Ecosystems are the key to nurturing an innovation economy

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