1. Global Development Conference on STI for Development 22-23 March 2018
Impact of FDI on Innovation:
A comparison of experiences of India and China
Reji K. Joseph
Associate Professor, ISID

2. Innovation: Some stylised facts
Uncertainty: technical outcomes of innovation process cannot be known ex ante.
Incremental and radical: technical and economic dimensions.
Gradual and cumulative process. All most all innovations contain new application of existing knowledge.
Innovation involves exploring and searching.
Innovation is the process of contributing to the stock of knowledge and adding economic value to the knowledge.
Innovation is interactive in nature. Interaction creates multiplier effect at national level.
National innovation capability is the ability of a country as a political, cultural and economic entity to contribute to the stock of knowledge and add economic value to the knowledge. It depends on the national innovation system.

3. Core elements of NIS Internal organisation of firms
Inter-firm relationship
Role of the public sector
Institutional set-up of the financial sector
R&D intensity and R&D organisation
Education and training system

4. What is FDI? Three approaches to FDI.
Having control or significant degree of influence on the management of an enterprise (IMF). Lasting interest (OECD).
Voting power in the rage of 10-50% - significant degree of influence; Voting power above 50% - control
10% equity shareholding is the benchmark
Includes private equity (PE) investments. PE funds accounted for one-fourth of M&As in (8% of total FDI flows in 2014).
Realistic FDI – foreign investors investing in their core business area
Exclude private equity investments
FDI supplements domestic capital. Relatively stable financing mechanism, better than external commercial borrowing.
What should be the approach to identify FDI in R&D?
Approaches of control/influence/realistic FDI ignore the aspect of dependent innovation
FDI as a source of supplementing domestic capital doesn’t contain ‘associated advantages’, but it can promote innovation by adding more capital.

5. Domestic Production and Service
Impact of FDI on National Innovation Capability (in a developing country context)
Academia
* Upgradation of Curriculum
*Scholarships
*Funding of Chair Professors
*Collaborative Research
*Contract Research
*Joint Research Centres
Domestic Production and Service
*Movement of Personnel
*Collaborative Research
*Contract Research
*Transfer of Technology
*Training of Personnel
* Financing R&D
FDI in R&D
Subsidiaries
Joint Ventures
Outcome
*Patents Granted
*Increase in the Technology Component of Exports
*Access to Global Market
*Spin-Off Firms
*Competitiveness
*Skill Development
Outcome
*Passing Out of Readily Employable Graduates
*Exposure to Global Network
*Moving Up in Human Resource Capability
*Spin-off Firms
Recruitment
Movement of Personnel
Outward FDI

6. Impact of FDI in R&D on innovation in Two Different Eras
During classical multilateralism ( )
Multi-domestic industries, MNC affiliates had an independent existence (not much impacted by what happens to affiliates in other countries)
Support laboratories, locally integrated laboratories, internationally independent laboratories.
In Global Innovation Networks
GIN refers to the “the establishment within a multinational enterprise of one or more research and development affiliate facilities at different locations around the world, along with the consequent R&D management, specialization decisions, and exchange of information among them and the parent company”.
Two Principles – R&D specialisation and cooperation in R&D
Enables MNCs to benefit from international specialisation across borders
Those participants in the chain perform certain tasks in the entire innovation process

7. R&D % of GDP

8. Any impact of FDI on R&D? China:
R&D % GDP increased from less than 1% to more than 2% in a matter of 12 years, by This “S&T take off” is similar to that of most OECD countries.
Competing Chinese firms increasing R&D spending - Huawei, Lenovo, ZTE, etc.
Larger role of private enterprises in R&D – more than 80%
JVs account for 55% of R&D expenditure by foreign funded enterprises in 2013
A study shows that:
84% of foreign R&D centres trained personnel in China and 21% trained personnel abroad
90% of those received training left the foreign funded firm to either start a new venture or to join competing Chinese firm
27% firms introduced most advanced technology of their parent firms, 2% introduced technologies which were not previously used in China and 35% introduced technologies which were considered to be most advanced level in China
Motorola engaged with about 250 local firms for supplies. In many cases, in such collaborations the foreign partner provides the designs and personnel

9. Role of Government in China
Government’s vision about the role for the indigenous sector and enhanced support for basic research
The National Guideline on China's Long-and Medium - Term Plan for Science and technology Development ( ) calls for continued openness for foreign technology and at the same time "assimilation of foreign technology inputs as a continuous means of developing indigenous technologies"
It calls for reduction of China's dependence on foreign technology to 30% in 15 years
Realising increase in the applied R&D, China’s 11th Five-Year Plan ( ) highlighted the increased funding and attention for basic research
Incentives for R&D by foreign funded enterprises
Chinese OFDI in R&D – Sweden (telecommunications), Italy (automobile design)
FDI in R&D in China was in response to government’s interventions to shape the NIS. Hence, it has strong linkages with Chinese NIS.

10. Impact of FDI in R&D on innovation in India
India has become a favourite destination among developing countries in FDI in R&D.
Bulk of FDI in R&D in in IT, followed by pharmaceuticals and laboratory level R&D.
Aimed at taking advantage of low salary of skilled personnel in India
Minimal linkages with academia and indigenous industry
Only 10% of foreign R&D centres in India take patents in India, implying that much of the R&D undertaken by FDI in R&D is not relevant for India.

11. What explains?
Chinese experience is more akin to ‘classical multilateralism’
Most of FDI in manufacturing. Initially for adapting to Chinese market and later for producing for global market.
R&D of majority owned affiliates of US parent firms – 84% in manufacturing in Declined to 49% in Does the focus of FDI in R&D follow a similar pattern as that of growing share of services in GDP of China?
India seems to be specialising in skilled services in the global network of R&D.
Nearly half (46%) of R&D of majority owned affiliates of US parent firms is in ‘R&D services’ in 2014.
The remaining half (54%) is in manufacturing and services (except R&D services). One needs to examine whether this R&D is to support participation in GPNs.