1. The Market Valuation of Innovation: The Case of Indian Manufacturing Sunil Kanwar Delhi School of Economics Bronwyn H. Hall UC Berkeley, NBER, IFS, and NIESR

2. 1. Motivation Innovation prime motive force behind economic growth Firms spend large amounts of scare resources on innovative activities Desirable to know whether financial markets value innovation-intensive firms differentially Persuasive evidence that developed country stock markets value innovative activity by firms Can we expect the same in less developed economies? Major reason for incredulity is the fact that predominant share of intellectual capital is generated in a handful of developed economies

3. A few developing countries do some innovation (Bogliacino et al. 2012) – process patents, utility models, smaller innovations. Often for imitation and diffusion, but generate profits and hence market value Hence, stock market’s valuation of innovation also relevant in developing country context: Are more innovative firms valued more highly than less innovative ones? Is market valuation responsive to the quality of innovation spending? Is market value responsive to market risk? Does the market value-innovation relation vary across industries; and if so, how? We explore such issues in the context of manufacturing industries in India.

4. 2. Prior literature Very informative, but mostly pertains to developed countries: Griliches (1981); Bloom and Van Reenen (2002); Hall, Jaffe and Trajtenberg (2005); Greenhalgh and Rogers (2006); Griffiths and Webster (2006); Hall and Oriani (2006); exception Chadha and Oriani (2010) Our study broad-bases the available evidence by providing further evidence on a developing country, namely India. Number of distinguishing features, including the context - mostly no product patents; few process patents, limited to certain industries; utility models never an option Far from obvious that stock market would value such innovation as does occur

6. 4. Sample and Variables Firm-level data for Indian manufacturing sector (‘Prowess‘; CMIE) Sample: 380 firms, 3494 observations, over 2001-2010, covering 22 industries (mostly 2-digit, some 3-digit levels): Auto ancillaries, automobiles, cement, chemicals, (other) construction material, (other) consumer goods, domestic appliances, drugs and pharmaceuticals, electrical machinery, electronics, food and agro-products, gems and jewellery, glass and glassware, leather and leather products, metals, non-electrical machinery, paper and paper products, personal care, petroleum, plastics and plastic products, rubber and rubber products, and textiles and textile products.

14. Economic Significance: Elasticity w.r.t Knowledge Capital: 0.14 (Hall-Oriani 2006) France: 24% Germany: 22% Italy: 18% US: 42% UK: 24% Semi-elasticity w.r.t Knowledge Capital: 1.75 France: 0.66 Germany: 0.56 Italy: 0.94 US: 0.80 UK: 1.92 Evidence of under-investment

15. Sectoral Heterogeneity (Pavitt 1984) 1: supplier dominated - leather, textiles & textile products, rubber, gems & jewellery 2: production intensive (scale intensive) – automobiles, cement, (other) construction material, (other) consumer goods, domestic appliances, food & agro-products, glass & glassware, metals & metal products, personal care, paper & paper products 3: production intensive (specialised suppliers) - automobile ancillaries, non-electrical machinery 4: science-based - chemicals, drugs & pharmaceuticals, electrical machinery, electronics, petroleum products, & plastic products

20. Conclusions Where most firms do not patent, or have utility models, we find that: Stock market places greater value on more innovative firms, ceteris paribus Rate of return appears to be larger than that in developed countries, excepting UK Depreciation rate too high? Probably not Firms underinvest in R&D. Probably R&D-intensive firms valued more for option value of R&D programmes Market value-innovation relation appears to vary between supplier-dominated & other industry groups, but few firms in former group, & differences insignificant.