The Innovation-R&D Nexus- Evidence from the Indian Manufacturing Sector

While there is consensus that innovation is a prime motive force in the process of modern economic growth, there continues to be lack of clarity about how best to capture this process of innovation. Although it is relatively clear that research and development expenditure constitutes an important, perhaps even the most important, input into the innovation process, its relationship with the output of this process remains enigmatic. A sizeable literature considers this relationship in the developed country context, though primarily the US, and sheds light on a number of aspects. Evidence for developing countries, in contrast, is sparse. This study intends to fill this gap by exploring the innovation-R&D relationship as exemplified by the influence of knowledge capital on patents, in the context of the emerging economy of India. Using a relatively large sample of 380 manufacturing firms spanning 22 industries over the recent period 2001-2010, we find weak evidence at best for this relationship. A one unit (dollar or rupee) increase in the knowledge capital stock is likely to raise the expected patent count by only about 0.7%, which given the current average patent count per firm per year, is only a marginal change. In addition, we also find that patent experience and the firm’s access to resources are both strongly significant factors explaining changes in expected patent counts, although their magnitudes are equally small. Our semi-elasticity estimate w.r.t knowledge capital translates to an elasticity of about 0.02 at the means, which is in line with that for enterprises in Spanish manufacturing. However, it is an order of magnitude smaller than the 0.1 to 0.2 reported for the Dutch pharmaceuticals sector, and the 0.3 to 0.6 for firms in the US manufacturing sector. Given the many reasons why most firms appear not to patent even when they conduct some research, policy makers would have to address multiple issues to bring about a more effective conversion of research into formal intellectual property in the developing country context.