Retentions, relations and innovation: the financing of R&D in India

Based on data for a panel of several thousand Indian firms covering a period of 15 years, between 1991-1992 and 2005-2006, this article has examined the impact of financial retentions and debt types on the levels of R&D undertaken by firms. Retentions by firms clearly influence firms' R&D spending levels. The results show that the important relational debt types, such as bank borrowing, corporate borrowings and deferred payments, have a positive and significant impact in influencing levels of R&D undertaken by firms in India. The economic impact of such debt in impacting R&D spending levels is also substantial. For Indian firms, where relational borrowings, especially from banks, have been very substantial, such borrowings have influenced their capability-building activities. Conversely, debt that is of the transactional variety has no material impact on firms' R&D spending levels. These results hold consistently across specifications and data stratification.