Productivity and research and development content of intermediate inputs - evidence from Indian industries

Research and Development (R&D) investments are foundations for generating new knowledge through basic research and ultimately for generating products and services through applied research and commercialization. For this pay-off to happen and innovation-driven growth to flourish a successful R&D ecosystem is required. With current government support, R&D sector in India is all set to witness some robust growth in the coming years. Over the last decade researchers have emphasized the role of R&D expenditure in determining rate of growth of total factor productivity and hence in overall growth of an economy. Against this backdrop, the present study evaluates the extent to which R&D knowledge embodied in intermediate inputs is related to productivity at industry level in India. Industry-level Total Factor Productivity (TFP) with respect to R&D content of intermediates is computed for industries as a whole and for manufacturing sectors classified under high and low-R&D industries. A global input output matrix is used to separate total R&D content of intermediates into domestic and foreign R&D stocks. Using two way panel estimation, variation in TFP for twenty six industries for the years 2001, 2004 and 2007 are estimated as function of variations in domestic and foreign R&D content of intermediates. The study obtains much of the required data from GTAP databases – versions 6, 7 and 8 and from OECD Stan database, World Development indicators, India’s National Sample Survey Organization and its Department of Science and Technology. Results indicate that while industries, in general, as also manufacturing have shown increased productivity due to increased R&D in intermediate inputs, but it is the small scale low R&D sectors which are found to be the biggest beneficiaries. Particularly, the results point to the fact that it is the foreign R&D stock of inputs which have mainly contributed to improved productivity in these low R&D sectors. Thus, innovation by these sectors in the form of new machines, alternative materials, improved product quality etc. which they brought in via imports has resulted in their increased productivity. This finding is a contribution to existing literature which have mostly observed that that manufacturing output in general is responsive to R&D stock of intermediates. Large part of India’s population are employed in low R&D labor (mainly unskilled) intensive sectors. Thus, more R&D and innovation in these sectors via imported inputs may make them efficient in terms of value addition to output, employment and income and thus make innovation more inclusive.