R&D spillovers & productivity growth: evidence from Indian manufacturing.

AuthorSingh, Awadhesh Pratap
PositionReport - Statistical data

This paper explores the linkage between R&D spillovers and productivity for a sample of Indian manufacturing firms for the period 2001-2012. The R&D spillovers is defined as the function of R&D (R&D, royalty and technical know-how) and information and communication technology (ICT). We consider two measures of productivity, namely total factor productivity (TFP) and labor productivity for analysis. Our results show that ICT, R&D and technical know-how impact TFP. For labor productivity, our results demonstrate that firms that are engaged in ICT and invest in technical know-how, are more productive than others. Thus, Indian manufacturing firms need to invest in information and communication technology, R&D and technical know-how to enhance their productivity. There are strong linkages among ICT, R&D, technical know-how and productivity


That the growth of total factor productivity (TFP) is energized by labor, capital and technology is a well-established fact in economics. Besides, new studies suggest that innovations, information & communication technology (ICT), learning and knowledge, trade and R&D spillovers also enhance the productivity within and across industries. Many studies indicated that international trade, FDI, ICT, R&D are the major channels of R&D spillovers (Miller & Upadhyay, 2000; Blalock & Simon, 2009, Mitra et al., 2016); however the findings have been mixed and do not establish a strong connection among these variables and productivity.

R&D Spillover & Productivity Growth

The linkage between R&D and productivity growth has been brought into focus by Griliches (1984; 1995). The empirical literature has analyzed R&D and its spillovers across countries, regions and industries. Across industries and firms level, the relationship between total factor productivity growth and R&D expenditure in the presence of inter-industry and international spillovers of technology was demonstrated by Hanel (2000) who stated that investing in R&D helps firms to innovate, increase the engineering capabilities and boost the absorption capacity to imbibe the industry-wide technologies and expertise. Essentially, R&D knowledge is typically set as an important driver of productivity growth, though this assumption has been challenged by Keller (1998). At macro level, Grossman & Helpman, (1990) showed that economic growth and productivity across countries can be enhanced through the adoption of new technology and its spillovers. Interestingly, these studies also revealed that technology gap between two parties drives the knowledge and R&D spillovers. They further demonstrated that absorptive capacity needs to exist in the form of R&D to bridge this gap. Clemes, Arifa and Gani (2003) stressed and brought the focus on developing human capital that can act as a catalyst for R&D spillovers.

The most interesting observation was given by Jaffe (1986) who demonstrated some empirical evidence on spillovers by creating a series on patent applications. This measure was used to evaluate homogeneity of research activities in the group of firms. Jaffe stated that external and in-house R&D efforts drive and impact the quantity of patent applications and the market value of the firm. Unfortunately this kind of measure cannot be constructed for the developing countries like India due to lack of data of patent and intellectual properties related information.

Cohen and Levinthal (1989) among others observed that to utilize the industry-wide R&D spillovers, a firm must invest in their own R&D center. They further indicated, if a firm in a less developed country would like to tap the benefit from the international R&D spillovers, they must purchase sophisticated technology from abroad, and above all perform in-house R&D to understand and improve upon the foreign technology. Park (2004) analyzed the relationship among productivity growth, trade and R&D spillovers and found that foreign R&D capital impacts more than the domestic R&D to promote total factor productivity. Besides, productivity is reported to be higher in export and more open industries, and the impact of foreign R&D capital is found to be stronger in the industries that have larger import stakes or large intra-industry trade portions.

Miller and Upadhyay (2000) demonstrated the roles played by R&D and human capital in stimulating productivity growth. It was found that R&D promotes innovation whereas human capital catalyzes output by private rates of returns.

Especially in the case of India, while R&D investments had not been very significant in local firms, the state is changing rapidly following the market reforms and trade liberalization in the last couple of years. In the context of India, Raut (1988) established the linkage among various R&D inputs like R&D expenditure, technical imports from developed countries and buying technical know-how from numerous sources. Further Raut (1995) worked on a production function by including R&D capital stock by terming it as the proxy of spillovers. Goldar (1986) worked out panel data of textile industry to evaluate the impact of market concentration and rate of protection on total factor productivity.

On the contrary, many researchers either do not find any concrete linkage between R&D and productivity (Basant& Fikkert, 1996; Sharma& Mishra, 2011) or find a relatively small influence of R&D spending on firms' productivity. Therefore, it is intended here to re-estimate the role of R&D intensity (R&D), calculated as the ratio of in-house R&D expenditure to total industrial sales, as a proxy of research and innovation in India. Besides, it is also intended to take royalty and technical know-how fees as the proxy of R&D. The reason for this is that only those firms, who invest more than 1% of their sales into R&D, announce their expenditure. This will lead us to find the indirect commitment of the firms in research and development activities.

Information & Communication Technology

Today firms face a complex and highly dynamic environment. Information and communication technology (ICT) helps managers to gather market intelligence about their competitors, consumers, regulators and partners. ICT helps disseminate information within and outside of the firms that lead to improve quality and faster turnaround. While it was Solow (1958) who observed that sustained long run growth is obtained through innovations, as per latest literature on growth (Grossman & Helpman, 1990; Frankel & Romer, 1999) latest technological tools and processes emerged as the most important drivers that fuel innovation and productivity. Jorgenson (2001) and Stiroh (2002) termed ICT as the key component of economic development through augmenting the contributions to enhance productivity. They cited neoclassical growth theory and termed ICT as an important input similar to capital and labor in the production process which contribute to the output at the organizational level (Brynjolfsson & Hitt, 1995) and also promote gross domestic product (GDP) at the national level (Dewan & Kraemer, 2000). Apparently ICT is treated as a commodity and not a niche technology, given the evolution it has gone through in recent years which made it more affordable (Lin & Shao, 2006). While the technology evolution in ICT has been fast paced that impacted the TFP to a greater degree, its adoption has been equally quicker (Oliner & Sichel, 2000). Demeter et al. (2011) observed that ICT promotes efficient consumption of inputs through various means such as leveraging ERP or SCM software, leveraging better communication within firms and outside using phone, webcam, internet and external facing applications. This promotes the economic output and thus TFP.

Atrostic et al (2002) made several observations on ICT and its impact on productivity. They demonstrated that measurement of ICT is often done by ICT investments in firms. These investments facilitate faster information dispensation, new ways of communicating with vendors and customers and streamline the internal and external distribution and supply chain through sophisticated techniques. This can further reduce the capital needs, enhance the better utilization of production equipment and processes, manage the inventories in a better way and eventually lead to higher total factor productivity. Arvanitis and Loukis (2009) and Atrostic et al (2002) made a similar observation that ICT facilitates better communication, well-timed and extensive transfer of information; requires lesser staff to carry out the similar amount of work with much better decision making. Brynjolfsson and Saunders (2010) found that ICT helps to catalyze the productivity as lesser communication and IT costs promote firms to innovate through new products and services. Norton (1992) argued that not only firms, also the individuals enjoy the benefits of ICT by utilizing the price comparison techniques, acquiring the information at a lower price and faster way and leveraging the better jobs for themselves by employing new communication technology. Apparently this improves the overall economy.

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