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NOTES

Sector and Cluster Effects


of FDI in R&D in India

India, and to evaluate their impact on


domestic R&D and production.

Emerging Trends

What makes MNCs outsource their R&D


to a particular location can be a strategic
consideration vis--vis their expectations
and leveraging potential (Terpstra 1977;
Kuemmerle 1999). Kuemmerles (1997)
study points out that global firms move
to other destinations to augment their
home knowledge base with the knowledge resources of the host country. This
is further substantiated by Serapio and
Dalton (1999), who evolved several theoretical frameworks based on the motivations of FDI in R&D. According to them,
recent changes in FDI in R&D are influenced more by supply-side factors influencing firms decisions to invest in R&D,
which is in contrast to 1993 and 1995 when
demand factors were the reasons for
internationalisation (Dalton and Serapio
1993, 1995). Supply-related factors have
become more important as the home
country resources of MNCs dwindle.
Under the circumstances, large pools of
skilled manpower combined with relatively low wages have become an attractive proposition to MNCs (UNCTAD 2005).
While the shifting of R&D to developed
countries has been explained in terms of
the benefits of higher knowledge in both
industry and academia, in the case of
developing countries it has been attributed to cost considerations and a vast
pool of human resources (UNCTAD 2005).
When both the home country and the
host country have comparable technological strengths, the outward FDI of
developed countries is governed by the
innovative strengths of the host country
in a particular sector or region. MNCs
engage in both research-intensive production, which is linked to local R&D
facilities, and assembly-type production,
where R&D is not a major requirement
(Cantwell 1999). Host countries with
innovative domestic industries attract
inward investment by MNCs, who also
set up their R&D facilities in the host
country to support research-intensive
production and gain from the local
science and technology (S&T) support

Literature Review

G D Sandhya, N Mrinalini, Pradosh Nath

India has been attracting foreign


direct investment in research
and development over the past
decade. This article provides a
quantitative assessment of the
FDI inflow for R&D from 2003 to
2009, and the sector and cluster
preferences of multinational
corporations investing in R&D in
India. FDI in R&D is limited to the
information technology, pharma/
biotechnology, and automotive
sectors. This inflow of FDI has not
caused growth, but rather has
chased growth-oriented sectors.

This article draws on Impact of FDI in R&D


on Indian R&D and Production System,
supported by the Technology Information,
Forecasting and Assessment Council. The
authors would like to thank the sponsoring
agency for its financial support, and
acknowledge the assistance provided by
Rammi Kapoor in project work.
G D Sandhya (gdsandhya@nistads.res.in),
N Mrinalini (nmrinalini@nistads.res.in), and
Pradosh Nath (pradoshnath@nistads.res.in)
are with the Council of Scientific and
Industrial Researchs National Institute of
Science Technology and Development Studies,
New Delhi.

182

here are shifts in the nature and


location of offshoring by multinational corporations (MNCs), from
manufacturing to research and development (R&D), and from developed economies to emerging economies. While earlier
it was manufacturing they undertook in
foreign locations, with some adaptive
research on products and processes to
suit local markets, they now undertake
cutting-edge R&D in foreign locations
to reduce the technological life cycle,
counter competitive pressures, and enjoy
cost-cutting advantages. MNCs have altered
their mode of operation by sourcing out
different stages of innovation in the last
two decades, and created global R&D
networks by pooling knowledge from
different regions. A striking change has
been that in contrast to their earlier
practice of locating R&D centres in the US
or Europe, MNCs are now moving out to
emerging economies such as India and
China (Ernst 2006). More than half the
worlds top R&D spenders are opening
centres in China, India, and Singapore. Of
the 885 R&D-oriented projects announced
in the region in 2002-04, three-fourths
(723) were in India and China.
India has emerged as an attractive
destination for MNCs to establish R&D
centres, but the extent of this spread and
its typology remains unexplored. An
attempt has been made in this paper to
analyse the extent of sectoral effects in
the inflow of foreign direct investment
(FDI) into R&D in India. Which are the
sectors that have attracted more investments in R&D and which are the clusters
that have benefited from higher R&D
investments? The analysis is based on a
study that the National Institute of
Science Technology and Development
Studies (NISTADS) undertook to assess
the number of the MNC R&D centres in
JuLY 26, 2014

vol xlix no 30

EPW

Economic & Political Weekly

NOTES

and infrastructure. Cantwell (1999) has


shown movement in the investment
pattern of the US during the late 1980s
and 1990s from sectors in which it
was technologically strong to those
in which the UK had significant technological expertise.
A similar observation has been made
by Sun in his study on sectoral and
regional investment patterns in China
(Sun 2010; Pottelsberghe and Lichtenberg 2001). The attraction of a location
is explained by the presence of centres
of excellence and other well-developed
S&T infrastructure in the host country
(Chen 2006; Chiesa 1995). Studies
report that the ease of accessing personnel and S&T resources are an important
reason for locating R&D in developing
countries. The earlier cost arbitrage
argument has been taken over by talent
augmentation. The lowering of costs,
though still a concern, is now coupled
with the need for better quality, innovation, and speed (Prahalad and Krishnan
2008). The availability of trained engineering manpower and knowledge
inputs from some academic and research
institutions in developing countries has
attracted MNCs to set up R&D centres in
them. In China, there are studies of the
high concentration of foreign R&D in
certain sectors and regions (Chen 2006;
Sun 2010; Von 2004; Sunet al 2006; Sun
and Wen 2007).
The issue of why certain sectors or
regions within a country attract more
foreign R&D investment has implications
for developing appropriate policies on
how to leverage the presence of foreign
R&D centres for strengthening the innovative capabilities of the host country.
MNCs locating their operations in knowledge-based services in India began in the
1990s, which was initially for adaptive
research. The process got a boost in the
2000s, when the internationalisation of
R&D made a quantum jump for wellknown reasons. The issue of FDI in R&D
has serious implications for the host
countrys innovation capabilities. This
requires systematic assessment and
quantitative and qualitative data on the
number of such centres and their operations. The first estimate on the number of
MNC R&D centres in India was provided
Economic & Political Weekly

EPW

JuLY 26, 2014

by the Technology Information, Forecasting and Assessment Council (TIFAC) in


2005, which estimated there were 100
MNC R&D centres by 2004. There has
been a spurt in the number of R&D centres since then but there is no official
record of it, and we have tried to fill this
crucial gap in this study. The scope of the
paper is to map out the sector and cluster
preferences of MNCs locating their R&D
centres in India.
The study has basically looked into
the primary issue of the flow of MNC FDI
into R&D. The assessment raises several
important issues, some of which we
have tried to explain and others that
need to be thoroughly looked into to
realise the implications of hosting such
R&D centres.
Data and Methodology
The quantitative assessment of the inflow
of R&D-intensive FDI to India is from
2003 to 2009. The period was chosen
because FDI for R&D seemed to pick up
from 2003 onwards. Investment before

and interactions with senior people from


industry, both domestic and global.
This study provides an assessment of
the inflow of FDI to stand-alone R&D centres, acquired firms active in R&D, and
other centres that carry out R&D for MNCs.
The foreign R&D centres include research
engineering and design centres, technical
support and testing centres, contract
research organisations (CROs), centres in
partnership with other Indian institutions, and acquired Indian firms for conducting R&D. Our attempt to provide a
typology of the inflow of FDI to R&D is
based on claims made by firms about
R&D, design and development, technical
support, and testing and standardisation.
Distribution of FDI in R&D
There has been a marked increase in the
number of foreign R&D centres in India
since 1996. Our first observation is that
23 countries were sources of FDI in R&D
in India, which received it in 23 sectors.
The sectoral spread of FDI in R&D is
given in Table 1.

Table 1: Sectoral Pattern of FDI in R&D ($ billions)


Sector

Aerospace
Auto industry
Pharma and biotechnology
Machinery and equipment
Chemicals
Electronic components
Engines and turbines
Services
Metals and minerals
Software and IT
Others
Total

2003

0.02
0.08
0.04
0.11
0.03
0.33
0.02
0.009
0.03
1.43
0.09
2.19

2004

0.12
0.12
0.15

0.37
0.08
2.21
0.13
3.18

2005

0.45
0.13
0.01
0.05
0.02
2.12
0.04
2.86

2006

2007

2008

2009

Total

3.25
0.47
1.11
0.18
0.02
0.03
0.02
0.009
0.13
4.96
0.15
10.33

0.02
0.66
0.31
0.20
0.22
0.03
0.02
0.09
0.02
1.70
0.03
3.30

0.23
0.59
0.43
0.10
0.02
0.15
0.01
0.03
0.01
1.74
0.20
3.51

0.10
0.76
0.35

3.62
2.68
2.81
0.87
0.36
0.74
0.10
0.76
0.34
14.56
2.03
28.91

0.06
0.15
0.03
0.23
0.07
0.40
1.39
3.54

Source: CSIR-NISTADS-TIFAC study 2011.

this period was sporadic, and has been


covered by the previous TIFAC study. In
this study, the data covers the spread of
FDI in R&D inflows, its magnitude, its
effect on creating jobs, and its direction.
Since there is no systematic data source on
FDI flows into R&D, several sources have
been used. The data is collated from
business news, company reports, department of industrial policy and promotion
(DIPP) information on FDI, foreign
investment promotion board (FIPB) data,
data monitor databases, the EBSCO database, Cygnus database, FDI intelligence
database, global R&D reports, economic
intelligence reports, company websites,

vol xlix no 30

The total inflow of FDI for R&D was


$29.44 billion in 2009, and it grew substantially between 2003 and 2006. The
data shows a spike in the FDI inflow for
R&D in 2006, which could be explained
by two factors. One, global flows of FDI
reached their second highest level in
2006, according to an United Nations
Conference on Trade and Development
investment brief dated 1 November
2007. This was a period of high economic growth globally, which saw large
investments going to countries such
as China and India. Two, India did well
on the economic front with its real
gross domestic product (GDP) growth
183

NOTES
Figure 1: Real GDP Growth during 2000-12

Figure 2: Industry Growth during 2002-12


16

12
GDP

Services

12
8
8

Industry

4
4

2000- 2001- 2002- 200301


02
03
04

200405

2005- 2006- 200706


07
08

Table 2: Real GDP Growth during 2000-12


(percentage)
Year

GDP

2000-01

4.35

2001-02

5.81

2002-03

3.84

2003-04

8.52

2004-05

7.60

2005-06

9.49

2006-07

9.60

200809

2009- 201010
11

0
2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09

201112

R&D-intensive FDI are the pharmabiotech and automotive sectors.


The following section examines intersectoral and inter-cluster features of
the inflow of R&D FDI by focusing on
three issues.
(1) Magnitude and direction of FDI
inflow into R&D. (2) Inter-sectoral features of FDI inflow into R&D. (3) Intercluster features of the FDI inflow.

2007-08

9.30

2008-09

6.70

2009-10

8.40

Magnitude and Direction

2010-11

8.39

2011-12

6.88

Our preliminary analysis on the quantum of FDI inflow shows that roughly
70% of it in R&D has come mainly in
three sectors (Table 4). These are IT,
followed by pharma/biotech, and the
automotive sector. The majority of FDI
inflow into R&D was in Bangalore,
Hyderabad, Chennai, Mumbai/Pune,
and Delhi/National Capital Region
(NCR), which accounted for 88% of
the inflow in these sectors. During
the six years from 2003 to 2009, of a
total 706 MNCs investing in R&D in
India, 560 were in these three sectors,

Source: Planning Commission website.

doubling from 2000 to 2007 (Table 2 and


Figure 1).
Similarly, industrial growth peaked
during 2005-07, with services following
a similar trend (Table 3 and Figure 2).
Table 3: Industry Growth during 2002-12
(percentage)
Year

2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09
2009-10
2010-11
2011-12

Sector
Industry

Services

7.1
7.4
9.4
9.7
12.2
9.7
4.4
8.4
7.2
3.9

7.5
8.5
9.4
10.9
10.1
10.3
10.0
10.5
9.3
9.4

Source: Planning Commission website.

The sectoral distribution of FDI in


R&D shows that software and the information technology (IT) sector, including
telecommunications and semiconductors, attracted the highest investment
$14.56 billion. The industry following
IT was aerospace at $3.62 bn, but that
was mainly because of just one big
investment in 2006. The other sectors
that have seen a moderate amount of
184

2009-10 2010-11 2011-12

of which 495 were in the abovementioned clusters.


A similar trend is observed when
we look at investments in these sectors
and clusters. IT has outperformed other
sectors, as we see that around 50% of
the total investments were in it, followed
by the pharma/biotech and automotive
sectors, which received more than 9%
each (Table 5). The R&D investment in
the selected sectors constituted 69% of
the total, and 63% of the total investment was in these clusters.
Three sectors accounted for more
than 82.77% of the job creation, of
which IT alone accounted for 74.17%,
followed by automotive and pharma/
biotech at 5.29% and 3.31% respectively. Job creation has mainly been in
the selected clusters. The clusters provided more than 74.17% of new jobs, of
which more than 66% was in the IT,
5.28% in the automotive, and 2.89% in
the pharma/biotech sectors.
Inter-Sectoral Features

Number of MNCs investing in R&D

706

Number of MNCs in select sectors

560

This section looks at the FDI inflow in


terms of its distribution, size, and nature
in the software/IT, pharmaceutical/
biotechnology, and automotive sectors.

Total number of MNCs in select


clusters and sectors (IT, pharma,
and automotive sectors)

495

Software and Information


Technology

Table 4: Sector and Cluster-wise Break-up


of FDI in R&D

Share of the select sectors in


total FDI in R&D

69.47%

Share of the select clusters in


total FDI in R&D

88%

Source: CSIR-NISTADS-TIFAC study 2011.

Bangalore was the most favoured destination for FDI in R&D with investments
from 186 MNCs, and it also benefited
from the highest investments and the

Table 5: Magnitude of the Inflow of FDI in R&D in Select Sectors and Clusters
Sectors

% of MNCs
In Sector Sector in Clusters

Software/IT
Pharmaceuticals/biotech
Automotive
Percentage of the total

63.46
12.18
3.68
79.32

55.94
10.62
3.54
70.11

% of FDI in R&D
In Sector
Sector in Clusters

50.30
9.23
9.85
69.38

44.50
8.75
9.82
63.07

% of Jobs Created
In Sector
Sector in Clusters

74.17
3.31
5.29
82.77

66.52
2.89
5.28
74.69

Source: CSIR-NISTADS-TIFAC study 2011.

JuLY 26, 2014

vol xlix no 30

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Economic & Political Weekly

NOTES

creation of most jobs (Table 6). It was


followed by Hyderabad and Mumbai/
Pune in terms of number of inflows, but
Delhi/NCR was the second highest in
terms of quantum of investments as well
as job creation, followed by Hyderabad.
Table 6: Cluster-wise Distribution of R&D FDI in
the IT Sector
Cluster

Bangalore
Mumbai
Delhi
Chennai
Hyderabad

Number of
MNCs

Investment
($ millions)

186
60
36
44
69
395

5,214.093
1,594.4
3,092.834
1,219.964
1,885.73
13,007.02

Jobs

71,956
14,976
30,144
23,068
24,452
164,596

Source: CSIR-NISTADS-TIFAC study 2011.

Though the table presents cumulative


data for the period between 2003 and
2009, the disaggregated data shows that
Bangalore received the most FDI in IT in
various clusters (Figure 3). However, over
the years, Delhi and Hyderabad also received substantial investments (Figure 3).
The data on job creation shows that
Bangalore was in the lead, as can be
seen in Figure 4. The job data presents
estimates provided by firms and R&D
personnel, and is all-inclusive.
The inflows have been classified into
high (tier I), medium (tier II), and low
investments (tier III) (Table 7). In the first
tier of high investments, there were 45
centres, constituting 11.39% of the total.
But they fetched more than 63% of the
investment and provided 54% of the jobs
created (Table 8). Thirty-three firms set
Table 7: Distribution of Firms According to Size in
Software/IT Sector
Investment Range
(in $ Million)

1 billion-50
(Tier I)
49-20
(Tier II)
Less than 20
(Tier III)
Total

Number of
Firms

45
(11.39)
95
(24)
255
(64.55)
395

Investments

Jobs
Created

8,225.66
88,908
(63.24)
(54)
2,650.90
35,954
(20.38)
(21.84)
2,130.46
39,734
(16.37)
(24.14)
13,007.02 1,64,596

Figures in brackets are in percentage.


Source: CSIR-NISTADS-TIFAC study 2011.

up full-fledged R&D Figure 3: Investment in IT in Various Clusters


centres and 11 set up 6,000
developmental centres. Sixteen of them 4,000
had more than one
R&D centre in India,
and in more than 2,000
seven, the India centre was second to
0
Bangalore
Mumbai
Delhi
Chennai
Hyderabad
the parent firm. Nine Source: CSIR-NISTADS-TIFAC
study 2011.
firms were partners Figure 4: Job Creation in Various Clusters in IT
with Indian firms, 80,000
and there were nine
development centres. 60,000
The second tier 40,000
had a higher proportion of firms at 24%, 20,000
creating a more or
0
less similar proporBangalore
Mumbai
Delhi
Chennai
Hyderabad
tion of investments Source: CSIR-NISTADS-TIFAC study 2011.
and jobs. Of 95 firms, there were developmental centres, centres of excel51 research centres, with 10 of them lence, training centres, and technical suphaving more than one R&D centre in port centres. They undertake a range
India (Table 8). More than five of these of activities, with many of them doing
centres were the largest outside the cutting-edge R&D. The intensiveness of
parent firms location. There were 30 R&D by the centres established in India
development centres in this tier and or their productive output can be gauged
five catered for technical support and by their patenting behaviour. We looked
testing requirements. Six were partners at the patent profile of the centres that
with Indian firms and two with Indian have filed patents in the US. For instance,
institutions, while three acquired in tier I, of 45 firms, 33 were active in
Indian firms.
patenting and nine had filed more than
The third tier had the highest pro- 50 patents in the US patent office. There
portion of firms at 64.55%, which were 10 firms that had filed less than
contributed 16.37% of the investment and 10 patents. Twelve firms were out of the
24.14% of job creation. There were 97 ambit of patenting, but were major
full-fledged centres in this category and training centres, development centres,
eight of them had more than one R&D technical support centres, and service
centre. In addition, 100 development providers. The major patent applicants
centres and 28 centres catered for tech- are shown in Table 9. IBM topped the
nical support and testing requirements list with more than 400 patents, and
(Table 8). Eight centres were partners Table 9: Patents Filed and Granted to Major Firms
with Indian firms and three with other from 2003-09
Number of
Number of
institutions. Eight inflows were directed Name of Firm
Patents
Patents
Filed
Granted
to Indian firms for contract research.
The typology of R&D centres in the IBM
444
297
306
278
IT sector includes MNC global centres, Texas Instruments

Table 8: Typology of the Nature of R&D FDI Inflow Software and IT


Research
Firms Development Technical
Contract
Contract
Centres in
Engineering with More Centre Part Support and
Research
Research to Partnership
and Design Than One
of the
Testing
Organisations Indian Firms/ with Indian
Centres
Centre
Set-up
Centre
Institutions
Firms

Tier I (45)
33
Tier II (95)
51
Tier III (255) 97
Total*
181

16
10
8
34

11
30
100
141

5
5
28
38

0
0
0
0

0
0
8
8

0
6
8
14

Centres in
Partnership
with Indian
Institutions

Acquiring
Indian
Firms

9
2
3
14

1
3
2
6

* The sum of all columns may not correspond with the total in column 1 as a firm may be represented in more than one column.
Source: CSIR-NISTADS-TIFAC study 2011.
Economic & Political Weekly

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JuLY 26, 2014

vol xlix no 30

Microsoft Corporation
ST Microelectronics
Oracle International
Cisco Technology
Hewlett-Packard Development
Yahoo
Motorola
Intel
Sun Microsystems

274
200
173
107
104
65
51
43
43

61
142
31
106
66
15
23
100
52

Source: CSIR-NISTADS-TIFAC study 2011.

185

NOTES

the firms listed had received repeated


investments in the last six years.
A similar analysis was done for firms
that had been granted patents during
the same period. The output performance in terms of patents granted is given
in Table 9. In the second tier, of 95 firms,
only 24 firms were active in patenting.
Of them, only seven had filed patents
and the number granted was between 10
and 50. The rest had less than 10 patents.
The third tier had 255 centres, of which
40 had been active in patenting. A few
noteworthy cases in this category were
Cadence, Google, Lucent, Novell, Avaya,
AirTight Networks, Accenture, and NXP
Semiconductors. The majority in this
category were engaged in developmental, engineering, product development,
and testing and support work.
Pharmaceuticals/Biotech Sector
A dominant feature of R&D-intensive FDI
in the pharmaceuticals/biotech sector is
that of 86 inflows, 23 were to Indian
firms for doing contract research and
seven to CROs to deal with different
stages of drug manufacturing. The rest
was for stand-alone R&D centres, either
through collaborations with Indian partners or the acquisition of Indian firms,
but even there, the inflow was intended
to help MNCs contract out different
stages of drug development. The biggest
share of outsourcing in biopharmaceuticals was for clinical trials.
The reasons for outsourcing are obvious as different stages of drug manufacturing are complex and cost-intensive.
Even after a drug molecule is developed,
drug trials, marketing, and legalities
make drug companies outsource different stages. Besides, the drying pipeline
of molecules has brought global firms to
other locations to exploit alternative
possibilities. With regulatory changes,
complex patent laws, global clinical trials, and the compulsion to minimise the
development time of new drugs, global
firms have resorted to outsourcing.
However, what India has attracted so far
in the name of R&D mainly relates to
contract research for different stages of
drug development. Clinical development,
which costs up to two-thirds of the total
money spent on new drug development,
186

has attracted the maximum investment


in India. Most MNCs have outsourced
this to CROs as this allows them to save
25% to 40% of the costs. It would be
relevant to look at the nature of R&D
work that is being subcontracted to
India in the light of the strengths developed by the Indian pharmaceutical
industry in the last three decades.
India has developed capabilities in
chemistry-based research over the last
few decades. This is reflected in the large
number of process patents taken by the
Indian pharmaceutical industry. This
was facilitated by the introduction of the
Patents Act in 1970. The countrys
increasing skills in IT have witnessed the
birth of CROs and pharmaceutical firms
venturing out into data management
outsourcing. Indian firms are trying to
develop capabilities to cater for the requirements of MNCs. For instance, firms
such as Asian Clinical Trials, ClinInvent,
and DnO, all Mumbai-based CROs, have
invested in Oracle clinical software
management to provide data services to
global pharmaceutical firms. There are
firms providing end-to-end solutions as
CROs, including synthesis, isolation, process development, and toxicology and
clinical trials for new drug development.
A large number of Indian firms are into
developing molecules to provide discovery research services. Several CROs have
created the data management infrastructure to provide a range of services,
including clinical trials management
and data management. The big CROs
have extended their data management
business by allowing their counterparts
in India to use their global server, which
allows them to save costs on hardware
and software. We find that major pharmaceutical and biotech companies either
subcontract a part of R&D such as clinical trials data management, statistical
analysis, and bioinformatics, to Indian
firms, or set up a subsidiary or a
centre here.
There are four ways in which the
modalities of MNC entry to outsourcing
are worked out. The first is setting up
R&D centres, mostly through collaborations. For instance, Merck has a tie-up
with Orchid to develop drugs, GlaxoSmithKline with Wyeth, and Eli Lily with
JuLY 26, 2014

Suven Life Sciences. Some MNCs have


acquired Indian firms, such as Actavis
taking over Lotus Labs. Some global
firms have set up centres here, and examples include Viziphar, Cellworks, Invitrogen, and Centre for Medical Innovation.
The second route is investments flowing
to the subsidiaries of MNCs, both existing
and newly set up. Existing MNC subsidiaries have become active in R&D, more so
in clinical research. For instance, Pfizer
invested $15.75 million in India for the
largest among its global data management networks, and it involves 300
Indian employees. They have an in-house
team of 100 members and 200 in CROs
such as SIRO Clinpharm, and Cognizant
Technologies. J&J has set up a research
facility for developing new chemical entities and a global centre for clinical trials.
The third route is using Indian firms for
contract research for various stages of
drug manufacturing. The fourth route is
some firms registering themselves abroad, but setting up centres here to do
research. Examples of this are EPR, Gangagen, Escientia, and AJ Organica.
Of 86 R&D FDI inflows from 2003 to
2009, 75 were in the pharmaceuticals/
biotech sector in the Bangalore, Mumbai/
Pune, Hyderabad, Delhi/NCR, and Chennai
clusters (Table 10).
Table 10: Distribution of FDI Inflow in R&D in
Pharmaceutical Sector in Select Clusters
Cluster

Bangalore
Mumbai/Pune
Delhi/NCR
Chennai
Hyderabad

Number of
MNCs

20
21
4
7
23
75

Investment
($ Millions)

375.68
1,560.373
61.03
11.762
547.881
2,556.723

Jobs

1,232
4,362
181
92
1,284
7,151

Source: CSIR-NISTADS-TIFAC study 2011.

The three main clusters that have


attracted FDI in R&D are Mumbai/Pune,
Hyderabad and Bangalore.
Though Hyderabad topped in attracting a larger number of investments
(Table 10), it was Mumbai/Pune that was
in the lead with a larger volume of
investments (Figure 5, p 187). This cluster, with its concentration of pharmaceutical companies, emerged as the most
attractive destination for FDI in R&D.
Mumbai/Pune also led in creating the
highest number of jobs, as can be seen in
Figure 6 (p 187).
vol xlix no 30

EPW

Economic & Political Weekly

NOTES

partnerships remain the


major mode of operation. For instance, Act1,500
avis, a fully-integrated
1,200
company, came to India
in 2001 and entered into
900
collaborations
with
600
Emcure and others to
ensure its products had
300
a low cost base. It then
0
acquired Lotus, a leadBangalore Mumbai/Pune Delhi/NCR
Chennai
Hyderabad
ing CRO, in 2005 with
Figure 6: Job Creation in the Pharma/Biotech Sector
230 employees. Now
5,000
the firm uses its centre
4,000
for the management of
clinical trials that study
3,000
the bioequivalence and
2,000
bioavailability of drugs.
Some MNCs used their
1,000
existing manufacturing
0
set-up and expanded
Bangalore Mumbai/Pune Delhi/NCR
Chennai
Hyderabad
into R&D, as in the case
Table 11 depicts the distribution of of Merck, but this had mostly been done
firms in the pharma/biotech sector in to engage in clinical trials.
In the second tier, the investment cateterms of numbers, investment, and job
creation. There were only nine inflows gory between $20 million and $49 million,
between $50 mn and $500 mn in the there were 24 investments amounting
first tier. This constituted only 12% of to 32% of the total. A similar proportion
the total inflow, but created more than of jobs were also created. In the case of
60% of the jobs in R&D. A few examples 11 firms, the focus was on contract
in this tier are Actis Biologics, Albany, research and clinical trials. Four firms had
and the Lonza Creative Choice Group. entered into partnerships with Indian
Six firms in this category have full- firms for drug development, such as
fledged R&D centres (Table 12), but Amgen with Jubilant Biosys, and Bristol
Myers with Biocon and Accentures Centre
Table 11: Distribution of Firms in the
of Excellence. Icon Clinical Research
Pharmaceutical/Biotech Sector
Investment Range
Number of Firms Investment Jobs Created
had acquired Chennai-based data man(in $ Million)
(of the Total) (of the Total) (of the Total)
agement company Biomines Research
500-50 (Tier I)
9
1,662.36
4,349
Solutions to focus on data management
(12)
(65) (60.81)
and biometric services, while AstraZeneca
49-20 (Tier II)
24
764.28
2,270
was focusing on tropical diseases.
(32)
(29.90) (31.74)
The third tier had the largest chunk
Less than 19 (Tier III)
42
130.086
532
(56)
(5.10)
(7.44)
of 41 investments. This is the category
Total
75 2,556.723
7,151
where the maximum investments
Figures in brackets are in percentage.
were for contract research, and they
Source: CSIR-NISTADS-TIFAC study 2011.
accounted for a minuscule investment
Table 12: Typology of the Nature of R&D FDI Inflow
of 5% and around 7% of job creation
Research Contract Contract Centres in Acquiring
(Table 11). There were 11 inflows for
Engineering Research Research Partnership Indian
and Design Organi- to Indian
with
Firms
R&D centres, and four for the creation
Centres sations Firms/
Indian
of CROs, which wanted to establish a
Institutions Firms
base in India. This category had 23
Tier I (9)
6
0
1
1
1
Tier II (24)
15
3
0
4
0
investments coming to Indian firms for
Tier III (42) 12
4
23
0
0
contract research.
Total *
33
7
25
5
1
FDI has also witnessed repetitive
* The sum of all the columns may not correspond with the
infl
ows. Six firms made more than one
total in column 1 as a firm may be represented in more than
one column.
investment. Two firms, Albany Molecular
Figure 5: Investment in Pharma/Biotech Sector
1,800

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JuLY 26, 2014

vol xlix no 30

and Quintles, made investments three


times, while four, Astra, Cryo Cell, Icon,
and Altana, made R&D investments
twice. Repeated investments were made
for contract research by Indian firms
such as SIRO, Clinpharm, and Avesthagen.
To gauge the intensiveness of R&D by
the centres established in India we
looked at the profile of firms that have
filed patents in the US. Of 63 firms that
came to India, only 10 filed patents
between 2003 and 2009, and it included
GE (Medical), Actavis, Teva, Amgen, and
Bristol Myers. Of these 10, seven had
filed one to six patents. Only GE and
AstraZeneca had filed more than 10
patents. Only five firms had been granted
patents, and GE (Medical) topped the
list with 41.
If we look at Indian firms such as
DRL, Ranbaxy, Orchid, Nicholas Piramal, Wockhardt, Cadilla, Lupin, Panacea, Glenmark, Biocon, and Torrent, we
see that they have been pretty active
and granted a bigger basket of patents.
New firms have come up in the R&D
space doing contract research alongside working on patent portfolios, and
they include Aurobindo Pharma, Reliance Life Sciences, Jubilant Organosys,
Suven Life Sciences, Syngene, Clingene, and Clintech. We also see the
emergence of Indian CROs such as TCG
Life Sciences and GVK Biosciences,
which cater for the whole chain of
integrated services.
One of our major observations on FDI
in R&D in the pharmaceutical/biotech
sector is that MNCs are primarily
using Indian capabilities for contract
research. The service that is contracted
out is mainly clinical research. MNCs tie
up with research-intensive Indian firms
having core competencies in research,
but the Indian firms do not enjoy ownership of any intellectual property benefits
in these tie-ups. Indian capabilities are
primarily used to fill slots in the value
chain of drug manufacturing by the foreign pharmaceutical companies.
Automotive Sector
There were 25 investments in the automotive sector by original equipment
manufacturers (OEMs) and auto component manufacturers. More than half of
187

NOTES

major R&D centres outside their parent loca1,200


tions. Volvo, Bosch, and
Renault had major
800
design centres, while
400
GM had collaborations
0
with Indian academic
Bangalore
Mumbai/Pune
Delhi/NCR
Chennai
Hyderabad
and research instituthe investments were in Bangalore and tions, and worked in collaboration with
Mumbai/Pune Delhi/NCR and Chennai the US centre as a global technology lab.
received five and three inflows, while
There were five firms in tier II, and
Hyderabad had just one (Table 13, four of them had R&D centres, mostly
Figure 7).
for design work (Table 14). Two firms
were partners with Indian firms in
Table 13: Distribution of FDI Inflow in R&D in
Automotive Sector in Select Clusters
joint ventures.
Figure 7: Investment in Automotive Sector in Select Clusters
1,600

Cluster

Number of
MNCs

Investment Range
(in $ Million)

8
8
5
3
1
25

1,475.78
344.48
381.29
226
443.5
2,871.05

Bangalore
Mumbai/Pune
Delhi
Chennai
Hyderabad

Jobs

7,195
1,041
1,170
778
2,892
3,076

Bangalore led in investments, followed by Hyderabad, which had only one


firm, but a major one, Hyundai Motors.
They were followed by Mumbai/Pune,
which is emerging as a hub of auto
components.
Job creation reflects a similar pattern
(Figure 8). A point to be made here
is that it is mostly design and engineering services that are offshored to
India by MNCs. These are related to
manufacturing components for their
tier I suppliers.
Figure 8: Job Creation in the Automotive Sector
8,000

6,000

4,000

2,000

0
Mumbai/Pune

Delhi/NCR

A majority of investments in the automotive sector were in the tier I category


(Table 14). Fifteen firms invested more
than 94% of the total. Twelve firms in
tier 1 had full-fledged R&D centres in
India (Table 15). There were two auto
component manufacturers among them.
Many of the OEMs were in the high-end
category, with India being one of their
188

Investment Range Number of


(in $ Million)
Firms

500-50

15
(60)
5
(20)
5
(20)
25

49-20
Less than 20

Source: CSIR-NISTADS-TIFAC study 2011.

Bangalore

Table 14: Distribution of Firms in Automotive


Sector
Investments

Jobs Created

2,700.15
(94.04)
161.6
(5.62)
9.3
(0.32)
2,871.05

12,369
(94.59)
642
(4.90)
65
(0.49)
13,076

Figures in brackets are in percentage.


Source: CSIR-NISTADS-TIFAC study 2011.

Tier III had five firms that brought in


only 0.32% of the investment and a very
small number of jobs (Table 14). These
were basically low-end services, which
were outsourced to auto part makers.
It is important to look at developments
in the Indian automotive industry to
understand the growth of R&D-intensive
FDI. The automotive industry has grown
fast, and so have opportunities for firms
as India is an attractive growing market.
The opening up of the
automotive sector to
international competition, the arrival of
Maruti Suzuki and
other players, and
growing domestic
demand have led to
consolidation of the
Chennai
Hyderabad

Indian automobile and auto components industry. Domestic firms have


developed capabilities for cost-cutting,
productivity improvements, quality
improvements, and design and development (Sandhya and Mrinalini 2002).
Over the years, India has gained manufacturing and design skills. While in
the 1990s many MNCs outsourced component manufacturing to India for both
their operations here and exports, the
last decade has seen them setting up
R&D centres. In the automotive sector,
investments have come from both OEMs
and major component suppliers, and
design is a dominant area of interest.
This is also a focus area of the government as the Automotive Mission Plan,
2006-16 envisages making India a
choice destination for designing and
manufacturing automobiles and auto
components. R&D-intensive FDI has mainly
come in for design and development,
but there are firms doing high-end R&D,
such as GM, Hyundai, and Delphi. GM
has made India its global technology
lab. Other MNCs trying to move up the
value chain are firms such as Caterpillar,
which has collaborations with various
Indian Institutes of Technology (IITs).
Becoming partners with Indian firms
through joint ventures is yet another
mode, and examples of this are Magna
and Plastic Omnium.
Among MNCs in this sector, the most
prolific patentee was GM, which had filed
35 patents from 2003 to 2009, and been
granted five. Bosch had been granted
seven patents, and seven firms had been
granted patents in the range of one
to four.
Inter-cluster Features
This section sums up the data to give a
complete picture of R&D offshoring in
various locations in India. Bangalore
has emerged as the most sought-after

Table 15: Typology of the Nature of R&D FDI Inflow Automotive Sector
Research
Firms Development Technical
Contract
Contract
Centres in
Engineering with More Centre a Part Support and
Research
Research to Partnership
and Design than One
of the
Testing
Organisations Indian Firms/ with Indian
Centres
Centre
Set-up
Centre
Institutions
Firms

Centres in
Partnership
with Indian
Institutions

Acquiring
Indian
Firms

Tier I (15)

12

Tier II (5)

19

Tier III (5)


Total

Source: CSIR-NISTADS-TIFAC study 2011.

JuLY 26, 2014

vol xlix no 30

EPW

Economic & Political Weekly

NOTES

destination by MNCs for setting up R&D


centres (Table 16). The reasons are a
bounty of institutions and human
resources. Highly skilled manpower
plays a very important role in the development of any industry, and it is particularly crucial in R&D. Bangalore has
received the highest number of inflows,
and has been the most employmentintensive by creating more than 43% of
new jobs. The city has science and
technology-related research institutions such as the Defence Research and
Development Organisation, Indian
Space Research Organisation, Indian
Institute of Science, Indian Institute of
Infor mation Technology, Indian Institute of Management, and a large network of engineering colleges. Bangalore also has the largest cluster of software firms in the country, including
Indian majors such as Infosys and
Wipro. The city has undergone a transformation from a region that developed
software for global markets to one that
now defines new products and new
technologies (Parthasarathy 2004).

Delhi/NCR has attracted large investments in the IT sector.


Summing Up
The literature on the internationalisation of R&D suggests that locating R&D in
developed countries is driven by the
higher knowledge potential of both
industry and academia. But it is cost
considerations and the availability of a
vast pool of human resources that bring
MNCs to developing countries. Our main
concern was to assess the quantum and
spread of the flow of FDI into R&D in
India. We have presented an overview of
the preferences that MNCs have for sectors and clusters in locating their R&D.
What emerges is that India has become
an important location for this inflow in
the past decade, and there has been a
gradual growth in it.
MNCs have targeted the most dynamic
growth-intensive, high-technology sectors for locating R&D in India. Globally
too, FDI in R&D has moved towards
growth- and innovation-driven industries. In the case of India, the flow of FDI

Table 16: Distribution of FDI Inflow in Chosen Sectors and Clusters


IT
Pharma/BT
Automotive
Total

Bangalore
186 (47)
20(26)
8(32)
214

Mumbai/Pune
60 (15.18)
21 (28)
8 (32)
89

Delhi/NCR
36 (9.11)
4 (5.33)
5 (6.66)
45

Chennai
44(11.13)
7(9.33)
3 (4)
54

Hyderabad
69 (17.50)
23 (30.66)
1(1.33)
93

Total
395
75
25
495

Figures in brackets are in percentage.


Source: CSIR-NISTADS-TIFAC study 2011.

Mumbai/Pune attracted 18% of the


R&D inflow. The distribution of inflow
was 15.18% to the IT sector, 28% to
pharma, and 32% to automotive. Even
though it lagged behind Hyderabad in
terms of inflow numbers, it superseded
Hyderabad in terms of value. It has
emerged as a preferred destination for
the pharma/biotech and automotive
sectors. The Mumbai and Pune industrial belt is a vibrant zone that has given
birth to a large number of established
pharmaceutical firms. It has the largest
number of pharmaceutical units in India
and is a major cluster for bulk drugs and
formulations.
Hyderabad is emerging as a preferred
destination for both the IT and pharma/
biotech sectors. Though there has been
only one investment in the automotive
segment, it has a high-end R&D centre.
Economic & Political Weekly

EPW

JuLY 26, 2014

in R&D has been to sectors in which the


country has done well in terms of developing significant research, design, or
technological capabilities in the last two
to three decades. The three major sectors that have attracted R&D-intensive
FDI are software and IT, including telecommunications and semiconductors,
followed by the pharma/biotech and
automotive sectors. Almost all the top
global players in IT such as IBM, Microsoft, and Cisco have set up R&D centres
in India in the last 10 years. The vast
majority of investments have been in
Bangalore, which has outperformed
other clusters in economic terms. Software in general and R&D in particular in
the IT sector are highly dependent on the
availability of highly skilled manpower,
which is provided by the large number
of academic and research institutions in

vol xlix no 30

Bangalore. While India figures in the


R&D landscape of a large number of
MNCs, it has mainly emerged as a human
resource hub for their global operations
(Mrinalini et al 2012).
In the pharmaceutical sector, India
had major MNCs involved in drug formulation in the 1960s, with only a few of
them being involved in serious R&D.
While the subsidiaries of MNCs rooted
themselves in India during the 1960s,
not much serious R&D was done by them.
Indian firms, on the other hand, developed strengths in all stages of drug manufacturing after the 1970s owing to a
suitable policy environment and through
collaborations with Indian academic
and research institutions (Sandhya and
Visalakshi 2000). The current wave of
globalisation has brought many of the
MNCs back into action either through
collaborating with Indian partners or
contracting out certain stages of drug
manufacture to Indian firms. Over the
last decade, India has seen the birth of
small firms with adequate research
strengths in medicinal chemistry and
biotechnology, and skills in discovery
research, data management, and clinical trials. We find several CROs coming
to India to take advantage of these capabilities. This type of activity does not
benefit us in terms of intellectual gains,
but leads to the exploitation of the capabilities of firms, which may have longterm implications. Interestingly MNC tieups are with Indian firms that have
secured patent rights. However, this
highly R&D-intensive sector has failed to
produce significant outputs, such as patents, from these centres. Mumbai/Pune
has emerged as the cluster attracting the
largest investments, but these are
mainly for its large population of pharmaceutical and biotech firms. In the
automotive sector, FDI in R&D has followed FDI in manufacturing. The Indian
market has seen the entry of major auto
manufacturers in the last 15 years. However, at this juncture, it is Indian design
capabilities that are being harnessed.
In India, locational decisions are primarily driven by the industrial concentration in a particular cluster, in addition
to the availability of human resources.
Bangalore had emerged as an IT hub of
189

NOTES

Indian firms and this attracted MNCs to


locate their R&D facilities there.
Mumbai/Pune has traditionally been a
chemical-based/pharmaceutical industry
belt. MNCs have basically chased sectors
in cities that were strong in certain
industries.
India has emerged as an attractive
destination for R&D in its high-growth
sectors, but has it resulted in growth? It
is known that FDI follows a host countrys growth trajectory and its growthintensive sectors. MNCs investing in India
have preferred sectors and clusters that
have witnessed high growth rates. Our
analysis suggests that at present it is
human resources that has brought in
MNCs. India has not emerged as a key
destination for cutting-edge R&D, which
is reflected by the patent output of these
centres. There are a large number of
small investments and these centres
mostly collaborate with educational institutions for training human resources,
implying that the availability of manpower is a main factor in MNCs establishing centres in India.
There are several questions, which
revolve around Indian specificities,
related to the sector and cluster preferences of MNCs; the nature of job creation
and R&D; the implications of these centres on the availability of skills for
domestic firms; the impact of their presence on domestic innovation capabilities, and so on that require systematic
investigation. For instance, in the pharmaceutical sector, domestic research
capabilities are being harnessed by MNCs
and India gains monetarily, but loses in
terms of intellectual property gains.
Devising appropriate policies for synergising indigenous strengths for national
gains is inevitable if India wishes to see
itself among the worlds technological
leaders. India has skilled manpower in
IT, has made substantial progress in biotechnology, and has ample research and
manufacturing capabilities in pharmaceuticals. It is important to have policies
and strategies that will help Indian firms
gain a competitive advantage and turn
them into major centres of innovation.
This study provides a typology that can
be used to further examine the dynamics of internationalisation of R&D.
190

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