Liberalisation, outward orientation and in-house R & D activity of multinational and local firms: A quantitative exploration for Indian manufacturing

In an increasingly globalizing and knowledge-based world economy, the declining importance of R&D activity in India is a matter of concern. This paper analyzes the determinants of R&D behaviour of Indian enterprises over the 1990s in the context of reforms of 1991 and their impact on the R&D behaviour of MNE affiliates and local enterprises. The analysis suggests that although average levels of spending have gone down, increased competition due to liberalization seems to have pushed local firms to rationalize their R&D activity and make it more meaningful. After controlling for extraneous factors, MNE affiliates reveal a lower R&D intensity compared to local firms, presumably on account of their captive access to the laboratories of their parents and associated companies. The analysis also brings out differences in the nature of R&D activity of MNE affiliates and local firms. Local firms direct their R&D activity towards absorption of imported knowledge and to provide a backup to their outward expansion. MNE affiliates, on the other hand, either focus on customization of their parents' technology for the local market or on exploiting the advantages of India as an R&D platform for their parents. The paper is concluded with some policy implications of the findings.