Factors Influencing Underinvestment in R&D by Indian Businesses

Indian businesses have been observed to underinvest in research and development (R&D). This issue is complex, involving a mix of systemic and cultural explanations.

Structural Factors

• Large Domestic Market:
  • India’s vast domestic market acts as a cushion, reducing the need for companies to innovate for competitive international markets.
  • This situation is likened to the "Dutch disease," where an abundance of resources diminishes competitive drive.
  • Firms have less incentive to innovate when the existing products sell well locally.
• Colonial Legacy:
  • Historically, Indian commercial communities focused on trading rather than manufacturing due to colonial deindustrialization.
  • The destruction of industries like textiles shifted enterprise focus from production to commerce and arbitrage.
  • Only a few families retained manufacturing capabilities, highlighting what could have been a broader trend.
• Premature Financialisation:
  • India's corporate sector prioritized financial returns over productive investment earlier than warranted by its industrial development.
  • The study by William Lazonick highlighted how the shareholder-value doctrine led to stock buybacks over R&D investments.
  • The influence of executive stock options further discouraged long-term investments like R&D.

Economic and Political Factors

• Democratic Uncertainty:
  • India’s competitive democracy introduces uncertainty about long-term investments.
  • Businesses apply high discount rates to R&D due to unpredictability in conditions that affect long-term payoffs.
  • This rational pricing of uncertainty results in underinvestment in critical areas like R&D.

The analysis reflects a combination of historical, economic, and systemic factors that explain why Indian businesses might underinvest in R&D. It emphasizes that the situation is a result of complex interactions rather than simple cultural tendencies.