Final Krishnan Nair R&D Goes International the Case of India

7/27/2019 Final Krishnan Nair R&D Goes International the Case of India

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R&D Goes International:

The Case of India

Submitted By:

Krishnan Nair

Downing College

This dissertation is submitted for the degree of Master of

Philosophy

Length: 18,252


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R&D Goes International: The Case of India

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This dissertation is the result of my own work and includes nothing which is the outcome of work done in

collaboration except where specifically indicated in the text.

The data used for the empirical portion of this dissertation is available upon request.

Email: [email protected]


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Table of ContentsTable of Contents .......................................................................................................................................... 3

Acknowledgements ....................................................................................................................................... 5

Abbreviations and Acronyms ........................................................................................................................ 6

Abstract ......................................................................................................................................................... 7

I. Introduction............................................................................................................................................... 8

II. Theoretical Background ......................................................................................................................... 10

III. Country-Level Competiveness Factors ................................................................................................. 14

A1. IP Protection ..................................................................................................................................... 14

A2. Indias IP Protection Regimen........................................................................................................... 15B1. The Availability of Scientists and Engineers ...................................................................................... 16

B2. The Availability of Scientists and Engineers in India ......................................................................... 17

C1. University Related Factors: Quality of Scientific Research Institutions and the Strength of

University-Industry Research Collaborations ......................................................................................... 20

C2. Quality of Scientific Research Institutions in India ........................................................................... 21

C3. University-Industry Collaborations in Research in India ................................................................... 22

D. Salary of R&D Personnel: Does It Give India an Advantage? ............................................................. 23

E1. Tax Burden Faced by MNCs Operating R&D Facilities Abroad ......................................................... 26

E2. Tax Burden Faced by Foreign MNCs Operating R&D Facilities in India ............................................ 26

F. Market Size and Market Growth Potential ......................................................................................... 27

IV. Methodology for the Empirical Analysis.............................................................................................. 29

A. Sample and Data Collection ................................................................................................................ 29

B. Variables ............................................................................................................................................. 30

Number of Foreign R&D Investments (Dependent Variable) ............................................................. 30

Intellectual Property Protection ......................................................................................................... 31

The Availability of Scientists and Engineers ........................................................................................ 31

University Related Factors (Strength of University-Industry Research Collaborations and the Quality

of Scientific Research Institutions) ...................................................................................................... 32

Salary of R&D Personnel ..................................................................................................................... 32

Tax Burden .......................................................................................................................................... 32


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Market Size ......................................................................................................................................... 32

Market Growth Potential .................................................................................................................... 33

C. Analysis ............................................................................................................................................... 33

V. Results .................................................................................................................................................... 34

VI. Discussion.............................................................................................................................................. 35

A. Discussion of Results ........................................................................................................................... 35

B. Policy Recommendations for the Indian Government ....................................................................... 38

C. Other Factors Important to Indias Competitiveness in Attracting R&D FDI...................................... 39

The Indian Diaspora ............................................................................................................................ 39

English Speaking Capability of Indian Workers ................................................................................... 40

D. Limitations and Future Work .............................................................................................................. 40

VII. Conclusion ............................................................................................................................................ 42

Tables and Charts ........................................................................................................................................ 44

Chart 1: Production of engineering and technology Ph.D. Degrees in the United States, China, and

India. ................................................................................................................................................... 44

Table 1: Inbound Foreign R&D Investments (2003-2008) .................................................................. 45

Table 2: Inbound Foreign R&D Facilities ............................................................................................. 45

Table 3: Outbound Foreign R&D Investments (2003-2008) ............................................................... 46

Table 4: Top 10 R&D locations for knowledge seeking (German MNCs only) .................................... 46

Table 5: Patent Applications Filed in India .......................................................................................... 47

Table 6: The Number of S&E PhD Graduates Per Year ....................................................................... 47

Table 7: Descriptive Statistics ............................................................................................................. 48

Table 8: Market Growth Potential ...................................................................................................... 49

Table 9: Correlations among Studied Variables .................................................................................. 50

Table 10: Linear Regression Models ................................................................................................... 51

Table 11: Ranking of Countries on IP protection ................................................................................ 52

Table 12: Ranking of Countries on University Related Factors ........................................................... 53

Table 13: Ranking of Countries on Market Size .................................................................................. 54

References .................................................................................................................................................. 55


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Acknowledgements

I would like to thank everyone who supported me throughout the duration of this course.

I would like to express my most sincere gratitude to Professor Jaideep Prabhu, my supervisor,for taking his valuable time, sometimes even on such short notice, to provide vital feedback and

commentary on my work. There is no doubt that his ideas and suggestions have greatly improved the

quality of this thesis. Furthermore, Professor Prabhus input and support has been crucial to my

development as a researcher and scholar during my study here at Cambridge, and I cannot thank him

enough for this. I would also like to thank my good friend, Justin George, for his valuable advice and

insights regarding the use of regression analysis, which helped me build the empirical portion of this

thesis.

I would like to acknowledge Professor Sir Christopher Bayly for all of his invaluable help and

guidance throughout the duration of the course. The scholarly discussions we had were truly

enlightening and engaging. I would like to thank Dr. Kamran for taking his precious time to provide

valuable criticism and commentary on my work. I should note that he took the time to look over andthoroughly comment upon my core essay on Pakistans identity despite it not being my primary research

topic and him not being my supervisor. I would also like to thank Ms. Barbara Roe for helping us MPhil

students even on short notice without any hesitation.

I would like to express my love and gratitude to Dilip uncle and Hima aunty who came to visit

me all the way from Dallas and gave me much needed support when I needed it the most. Last, but not

least, I would like to thank my parents and my little brother for all their love and support.


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Abbreviations and Acronyms

ARIPO- African Regional Industrial Property Organization

BRICs- Brazil, Russia, India, and China

EPC- European Patent Convention

FDI- Foreign Direct Investment(s)

GDP-Gross Domestic Product

IITs-Indian Institutes of Technology

IISC-Indian Institute of Science

IISERs- Indian Institutes of Science Education and Research

IP-Intellectual Property

IT-Information Technology

MGP-Market Growth Potential

MNC-Multinational Corporation

NAFTA- North American Free Trade Agreement

NITs- National Institutes of Technology

NSF- National Science Foundation

PPP-Purchasing Power Parity

R&D-Research and Development

S&E- Science and Engineering

TGCR-The Global Competitiveness Report

TRS- The Royal Society

TRIPS- TheAgreement on Trade Related Aspects of Intellectual Property RightsVIF-Variance Inflation Factor

WDI- World Banks World Development Indicators


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Abstract

Indias increasing relevance as a significant attractor of foreign corporate R&D has precipitated

fears in the West that developed countries may be falling behind in innovation. Are these fears justified?The primary goal of this paper is to examine Indias strengths and weaknesses in the country-level

factors that influence a nations attractiveness as a destination for corporate R&D FDI. The examined

factors include intellectual property protection, availability of scientists and engineers, quality of

scientific research institutions, strength of university-business linkages in research, salary of R&D

personnel, tax burden faced by foreign MNCs operating R&D facilities, market size, and market growth

potential. Regression analysis is used on a cross-sectional dataset consisting of 48 countries in order to

test the importance of these country-level factors to a nations ability to attract corporate R&D FDI.

Based on the results of this analysis, the paper draws the conclusion that India is currently not a major

attractor of technology intensive foreign R&D investments; Indias primary strengths are its large market

size and its enormous market growth potential, both important factors in a countrys ability to attract

sales supporting R&D investments. India must improve the quality of scientific research institutions and

the strength of university-business collaborations in research in order to compete with developed

countries in attracting innovative corporate R&D.


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I. Introduction

Although the internationalization of research and development (R&D) has accelerated to

unprecedented levels in recent years, the establishment of R&D facilities by multinational corporations

(MNCs) away from their home countries is not a recent phenomenon. By the 1930s, large MNCs in

western countries already conducted almost 7 percent of their R&D activities abroad; by the 1980s, this

number had increased to 19 percent (Cantwell 1989). Communications and technology transfer costs

limited the further global dispersion of R&D during this time (Teece 1977). Since the 1990s, the

information technology (IT) revolution brought in a new wave of R&D internationalization. The IT

revolution decreased the supervision and control costs associated with managing globally dispersed

R&D units, making it operationally feasible for MNCs to conduct an increasing proportion of their R&D

activities abroad (Doh, 2005, Levy, 2005, Dossani and Kenney 2006, Ernst 2006). This process wasfurther aided by other factors such as the worldwide liberalization of trade policies (Lewin et al. 2009),

decreasing cost of air travel, and the unbundling of the value chain, even for knowledge intensive

activities (Takeishi 2002, Bruche 2011). New product development is now second only to IT as the most

offshored business activity (Manning et al. 2008).

While the internationalization of corporate R&D in the 1990s was largely limited to the R&D

triad of North America, Western Europe, and Japan (Florida 1997, Kuemmerle 1999b, Kumar 1996), the

last fifteen years has seen an explosion of foreign R&D facilities in emerging markets, most notably in

India and China. India and China have become global R&D hubs in a short span of time. In terms of the

total number of inbound foreign corporate R&D investments in a country (Table 1) 1, India ranks first in

the world and China ranks second. Even when comparing the total number of foreign R&D units in a

country (Table 2), a more conservative measure, India ranks fifth in the world while China ranks second.

Moreover, India is the number one foreign R&D destination for US fortune 500 companies (Tellis et al.

2009). Based on the net gains in R&D investments (calculated as inbound minus outbound R&D

investments) (Tellis et al. 2009), India ranks first in the world with 986 net R&D investments. On the

other hand, developed countries in the R&D triad continue to lead in outgoing corporate R&D

investments (Table 3).

The ability of a poor country like India to attract a substantial number of foreign R&D

investments has puzzled observers, especially considering the long held dogma that only the wealthiest

1All tables and charts are at the end of the thesis in a section titled Tables and Charts


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countries possess the scientific infrastructure necessary to conduct successful corporate R&D.

Unfortunately, Indias rise as a significant attractor of corporate R&D has caught the attention of

practitioners and the media at a much faster pace than the academic community (Asakawa and Som

2008). The dearth of academic literature examining the driving forces behind the rapid increase in

foreign R&D activity in India has contributed to uninformed views, only further reinforced by the media.

The media usually refers to lower labor costs and to a lesser extent, access to highly skilled scientists and

engineers as possible sources ofIndias attractiveness to foreign MNCs. No other factors take a

prominent place in the medias narrative (Thursby and Thursby 2006a). This is at odds with findings from

interviews of managers of large MNCs, which indicate that market growth potential is at least as

important as lower labor costs and the availability of highly skilled scientists and engineers to the

attractiveness of India as a site for foreign MNCs to conduct corporate R&D (Thursby and Thursby

2006a, Thursby and Thursby 2006b, Barrett et al. 2011).

There is also a widespread misconception that the establishment of R&D facilities by foreign

MNCs in India always constitutes offshoring. This misconception has fuelled the uncorroborated

assumption that the increasing relevance of India to corporate R&D is an indication that developed

countries, particularly in the West, may be increasingly falling behind in innovation (Liebermann 2004).

The well-established link between innovation and economic growth (Von Hippel 1988, Jones 1995,

Strulik 2005) has contributed to these concerns.

This research aims to not only add to the extant literature on R&D internationalization and

knowledge-based offshoring but also to the more recent field specifically examining R&D

internationalization in emerging markets. The focus is on Indias effectiveness in attracting R&D foreign

direct investment (FDI) rather than on the capacity of Indian MNCs to conduct R&D in India. This paper

has three major goals: to analyze Indias competitiveness in the different country-level factors discussed

in the extant literature as important to a nations attractiveness as a foreign corporate R&D destination,

to empirically test the importance of these factors using a cross-sectional dataset of 48 countries, and to

analyze the possible reasons for Indias success in attracting foreign corporate R&D investments based

on the results of the empirical analysis. The following section will give a theoretical background, briefly

discussing the different types of R&D activities and their drivers, the difference between offshored and

non-offshored foreign R&D activities, and the relevance of this discussion to the scope of the

internationalization of R&D in India. It will also briefly outline the remainder of the paper.


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II. Theoretical Background

Although scholars have used a number of methodologies to categorize the different tasks

conducted by corporate R&D units, a consensus has begun to emerge, classifying R&D unit mandates

into three major types: local adaptors, which exploit an MNCs existing technological base to adapt

products to the needs of local markets, international adaptors, which utilize the MNCs technological

base to complement an MNCs global strategy, and international creators, which conduct new science

activities to augment an MNCs technological capacity (Nobel and Birkinshaw 1998, Ambos and

Schlegelmilch 2007). In other words, research in new science and technology falls under international

creation, product development falls under international adaption, and adapting products to new

markets or gaining insights on local consumer preferences falls under local adaption. Local adaptors and

international adaptors correspond to Dunning and Narulas (1995) asset exploiting R&D units andKummerles (1999b) home-base-exploiting R&D units while international creators correspond to

Dunning and Narulas asset augmenting R&D units and Kuemmerles home-base-augmenting R&D units.

Country level factors important to a nations attractiveness as a corporate R&D destination can

be divided into four major types: intellectual property (IP) protection, scientific infrastructure, cost

related factors, and market related factors. Scientific infrastructure includes the availability of scientists

and engineers, the quality of scientific research institutions, and the strength of university-business

research linkages; cost factors include salary of R&D personnel and the tax burden faced by MNCs

establishing foreign R&D facilities; market factors include market size and market growth potential. IP

protection is a category of its own.

When MNCs contemplate where to setup an R&D facility abroad, science and technological

capabilities of the host country become a more important consideration as the scientific mandate of the

R&D unit in question increases; local adaption requires the least scientific and technological

infrastructure and international creation requires the most. This is consistent with Thursby and

Thursbys (2006b) finding that the strength of university-industry collaborations in research and faculty

expertise are the most important locational factors in determining the science and technology mandate

of a foreign R&D unit and Amboss (2005) finding that home-base-augmenting R&D units (international

creators) tend to employ more PhD qualified scientists and engineers than international adaptors and

local adaptors. IP protection seems to be most important when MNCs establish international creators on

foreign soil and less so when MNCs establish local adaptors or international adaptors with limited


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mandates (Kumar 1996, Thursby and Thursby 2006a, Zhao 2006). Market related factors do not play a

significant role in a foreign countrys attractiveness as a site for MNCs to establish international creators

or international adaptors. On the other hand, the establishment of local adaptors is primarily driven by

market growth potential. Cost factors such as the cost of hiring R&D personnel in a country or the tax

burden faced by MNCs establishing R&D facilities in a country could theoretically play a role in a

countrys attractiveness for conducting any of the three types of R&D activities (international creation,

international adaption, or local adaption). In the absence of strong market attractors or strong scientific

infrastructure, however, cost cannot play a major role in increasing a countrys attractiveness as a

foreign corporate R&D destination. This explains why India and China attract a large number of foreign

R&D projects while most other developing countries attract only a few, even despite extremely low

wages for R&D personnel in these countries.

Here, it is necessary to make a clear distinction between offshored and non-offshored corporate

R&D FDI. According to Lewin et al. (2009), offshoring refers to the process of sourcing and coordinating

tasks and business functions across national borders and supports global2 or domestic rather than

local operations. Thus, the establishment ofR&D units abroad by MNCs can be categorized as

offshoring only if the R&D unit in question performs tasks that complement an MNCs domestic or

international strategy i.e., international adaption or international creation. Market driven foreign R&D

facilities that are mandated with sales supporting activities in local markets i.e., local adaption, do not

qualify as offshoring (Lewin et al. 2009). As a result, indiscriminately referring to the establishment of

overseas R&D facilities by MNCs as offshoring as the media often does, is highly misleading.

The distinction between offshored and non-offshored R&D is relevant for two reasons. First,

fears by many in the West that the developed world may be falling behind in innovation relative to India

are only justified if a significant proportion of R&D investments coming into the country are offshored

R&D i.e., international creation or international adaption. If most R&D units established by foreign MNCs

in India are local adaptors, then it implies that MNCs are simply exploiting their existing capabilities to

take advantage Indias immense market potential and market size. On the other hand, if true R&D

offshoring to India is taking place at a significant level, this would indicate not only that developed

countries are losing science and engineering jobs that would previously have stayed within the R&D

triad but also that developed countries may have to face India as a significant competitor in terms of

2Global operations, in this case, refer to activities that complement an MNCs international strategy, domestic

operations refer to activities that complement an MNCs home market strategy, and local operations refer to

activities that complement an MNCs strategy for specific foreign markets.


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innovation in the coming years. Given the importance of innovation to economic growth, Indias ability

to attract cutting edge corporate research facilities puts the country on a path towards a prosperous

future. In this case, several factors including lower labor costs and improvements in R&D infrastructure

in recent years could be contributing towards Indias attractiveness as an R&D offshoring destination.

There is currently no clear consensus on whether India receives a significant volume of

innovative R&D offshoring FDI. Anecdotal evidence seems to suggest that India is an important attractor

of innovative corporate R&D. For example, General Electric has established technology intensive R&D

facilities in India while Adobe has developed PageMaker 7, a product used around the world, using

predominantly Indian talent. The possibility that much of the foreign R&D units coming into India are

international adaptors or international creators is further strengthened by the global trends in corporate

R&D. Although local adaptors were traditionally the most common type of overseas R&D unit in the

past (Vernon 1966), the number of international adaptors and international creators has grown at a

much faster rate than the number of local adaptors (Hkanson and Nobel 1993, Florida 1997). Ambos

(2005) found that from the 1990s to the early 2000s, the number of international adaptors and

international creators established by German MNCs in foreign countries grew by 350% while the

number of local adaptors grew by only 57%. However, the total number of foreign local adaptors

continued to outnumber the total number of international adaptors and international creators (Ambos

2005). On the other hand, von Zedtwitz and Gassmann (2002) found that foreign local adaptors and

international adaptors are more globally dispersed than international creators and that 82 percent of

foreign international creators are concentrated within the R&D triad of North America, Western Europe,

and Japan. Although some countries outside of the R&D triad host foreign international creators, von

Zedtwitz and Gassmann (2002) found that most of these countries, including South Korea and

Singapore, are developed. These results are also supported by Thursby & Thursbys (2006a) finding that

market growth potential is the most important incentive for MNCs to establish R&D facilities in

emerging markets and Thursby and Thursbys (2006b) finding that while anecdotal examples of foreign

MNCs establishing research facilities exist in abundance, most foreign R&D facilities in India are

dedicated to local adaption and to a lesser extent, international adaption. Much of the new science

R&D remains concentrated in developed countries (Thursby and Thursby 2006b).

However, there is also some evidence to the contrary. Indias prominent place as a site for

innovative R&D is corroborated by Ambos and Amboss (2011) finding that India is the 7th most sought

after location by German MNCs to setup knowledge seeking R&D facilities (international adaptors and


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international creators). No other developing country, including China, ranked in the top 10. Moreover,

aside from the United States, all other countries ranking higher than India on the list were European

countries geographically proximate to Germany (Table 4). While the generalizability of Ambos and

Amboss (2011) results are not clear as the authors used a sample of German MNCs, their research is

more recent than Thursby and Thursbys (2006a, 2006b).

As a step towards understanding Indias R&D revolution and examining its scope, a

reexamination of the pull-factors responsible for determining a countrys attractiveness as a foreign

corporate R&D destination is helpful. By doing so, it is also possible to determine whether there are

legitimate grounds for developed countries to be concerned about their own status as top innovators.

This paper will now take a three pronged approach. First, it will examine Indias competitiveness in a

number of factors that the extant literature suggests are important to a countrys attractiveness as a

destination for corporate R&D FDI. These factors include intellectual property (IP) protection (a

standalone category), science factors (the availability of scientists and engineers and the strength of

university related factors), cost factors (salary of R&D personnel and the tax burden faced by MNCs

establishing R&D facilities), and market factors (market size and market growth potential). Second, I will

examine the relative importance of these factors in determining a countrys success in attracting R&D

FDI using regression analysis on a cross-sectional dataset of 48 countries. Third, based on the results of

the regression analysis, I will analyze the scope of the internationalization of R&D in India and assess

whether it is predominantly a market driven phenomenon or whether science factors play a prominent

role. Because the data on R&D FDI coming into India does not specify the scientific mandate of the

investments, it will not be possible to directly measure the innovativeness of foreign R&D facilities being

established in India. However, the inherent differences in the driving forces behind the establishment of

local adaptors and international creators make it possible to gain insight into the innovativeness of the

type of R&D FDI India is able to attract. Science factors, intellectual property protection, and cost factors

could play a role in the attractiveness of a country as a corporate R&D destination for local adaption,

international adaption, and international creation, but market growth potential and market size only

play a major role in determining a countrys attractiveness as a site for conducting sales supporting R&D

(local adaption).

The rest of the paper is organized as follows. Section III discusses Indias competitiveness in

seven factors relevant to MNCs conducting corporate R&D: IP protection, the availability of scientists

and engineers, the strength of university related factors, salaries of R&D personnel, tax burden faced by


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foreign R&D facilities, market size, and market growth potential. Section IV describes the methodology

of the regression analysis used to test the factors discussed in section III to a countrys attractiveness as

a destination for foreign MNCs to conduct corporate R&D. Section V gives the results of the regression

analysis. Section VI discusses the results and their relevance to Indias current and future status as a

destination for corporate R&D FDI. Section VI also discusses the limitations of the paper and briefly

discusses some factors that are relevant to Indias competitiveness in attracting R&D FDI but were not

included in the regression analysis. Section VII concludes.

III. Country-Level Competiveness Factors

A1. IP Protection

Overall IP protection has strengthened around the world in recent years, both in developed

countries and in emerging markets. International and regional treaties such as the Agreement on Trade

Related Aspects of Intellectual Property Rights (TRIPS), the North American Free Trade Agreement

(NAFTA), the African Regional Industrial Property Organization (ARIPO), and the European Patent

Convention (EPC) have forced countries to revise their patent laws, effectively narrowing the gap in IP

protection between developed countries and emerging markets (Park 2008).

The increasing emphasis placed on IP protection by policy makers worldwide has not been

without criticism. Some scholars have questioned the alleged connection between a countrys IP

protection regimen and its attractiveness as an FDI destination (e.g., Ferrantino 1993). There have also

been allegations that the worldwide improvements in IP protection has disproportionately helped

developed countries like the United States at the expense of developing countries (McCalman 2001).

There are also some indications that IP protection has been lessening in importance in recent years.

Some MNCs now possess internal control mechanisms by which they can overcome the low returns to

innovation associated with operating in institutional environments characterized by weak IP protection

regimens. For MNCs which possess this capability, a lack of IP protection is not a great hindrance to

conducting R&D activities in emerging markets (Zhao 2006). As a result, even in countries with weak IP

protection regimens, MNCs may still choose to establish corporate R&D facilities if other factors such as

market growth potential, labor costs, or the availability of scientists and engineers are favorable.

However, there are also limits to an MNCs ability to use internal control mechanisms to

overcome institutional environments characterized by weak IP protection regimens. A majority of MNCs


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still do not possess the internal control mechanisms necessary to overcome the costs associated with

weak IP protection in a host country (Zhao 2006). Additionally, IP protection can have an influence on

not only the scale of foreign corporate R&D conducted in a host country but also its scope; MNCs tend

to establish more international adaption and international creation R&D facilities in countries with

stronger IP protection (Kumar 1996, Thursby and Thursby 2006a, Thursby and Thursby 2006b). Kumar

(1996) found that IP protection played a more important role in an MNCs decision to establish R&D

facilities in developed countries than emerging markets; a reflection of the fundamental differences

between the types of R&D activities conducted in developed countries as opposed to developing

countries. In contrast, Thursby and Thursby (2006a, 2006b), found that IP protection is equally

important to the internationalization of R&D in both developed countries and emerging markets.

However, Thursby and Thursbys (2006) corroborated Kumars (1996) finding that IP protection plays an

important role in determining the scientific mandate of R&D activities conducted in a host country.

Despite doubts by some scholars that improvements in IP protection regimen is a significant

driver of R&D internationalization (Lanjouw 1998), it is generally accepted that IP protection plays a

prominent role in a countrys attractiveness as an R&D destination. Recent empirical research has found

that improving IP protection in host countries increases the willingness of foreign MNCs to transfer

technology to their subsidiaries in these countries (Branstetter et al. 2006). Because of its significance

as a driver of R&D spending by MNCs (Kanwar and Evenson 2003), countries with stronger IP protection

could be better equipped to attract R&D FDI.

Hypothesis 1: Holding all other factors constant, the stronger a countrys IP protection, the more R&D

FDI the country will attract.

A2. Indias IP Protection Regimen

According to the results of surveys conducted by the Economist Intelligence Unit (2004), 84% of

company executives believe that the lack of IP protection poses a challenge for MNCs operating in

emerging markets. While India has undoubtedly improved its IP protection regimen in recent years,

managers of MNCs continue to perceive IP protection in India to be poor and inadequate by

international standards. According to interviews of Indian business executives in The Global

Competitiveness Report2008-2009 and The Global Competiveness Report2011-2012, respectively, India

ranked 57th in terms of IP protection among the 134 countries surveyed in 2008 while India ranked 63rd

in the world among the 144 countries surveyed in 2012. Considering the link between the strength of IP


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protection in a country and the willingness of MNCs to establish R&D units with strong scientific

mandates, the continuing pessimism managers feel about IP protection in India is a worrying trend.

In contrast to the managerial surveys discussed previously, a number of scholars have seen

improvements in Indias IP protection regimen (Kapur and Ramamurti 2001, Mueller 2007, Park 2008,Bruche 2011). For example, according to Parks (2008) analysis of patent protection in 122 countries

using country-level data on factors such as the patentability of inventions, duration of patent

protection, and the effectiveness of enforcing patent laws, Indias IP protection has improved

considerably in recent years. Indias rank improved from 88th place in 2000 to 41st place in 2005. In the

same time period, Chinas rank improved from 61st place to 34th place. Despite Chinas better rank, some

scholars (Asakwa and Som 2008) see India as a significantly better country from an IP protection

standpoint than China.

Another indication of improvements in Indias IP protection regimen is the explosion in the

number of patents being filed in India by foreigners (Table 5). The number of patent applications by

foreigners increased from 8221 filings in 2001 to 31,338 filings in 2010, an almost fourfold increase in a

little less than a decade. Top foreign MNCs in terms of patent filing in India in 2010 included Qualcomm,

Philips, Ericsson, Sony, and Microsoft. Considering the fact that MNCs often overcome weak patent

regimens in a host country by registering patents in their home countries (Kumar 2001), the increasing

willingness of foreign MNCs to file patents in India is a testament to the strengthening of IP protection in

the country. While domestic patenting also grew during the same time period, the increases in the

absolute number of domestic patent filings paled in comparison to the growth in foreign patent filings.

B1. The Availability of Scientists and Engineers

Given the importance of human capital to technological innovation, the access to well-trained

scientists and engineers is a major incentive for MNCs to establish R&D facilities abroad (Florida 1997,

Reddy 1997, Patibandla and Petersen 2002, Thursby & Thursby 2006a, Lewin et al. 2009). The availability

of science and engineering (S&E) talent is most important to new science R&D and product

development. However, it also plays a role, albeit less important, in determining the attractiveness of

country for conducting market driven R&D activities such as product adaption (Florida 1997).

Hypothesis 2: Holding all other factors constant, the higher the availability of scientists and engineers

in a country, the more R&D FDI the country will attract.


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B2. The Availability of Scientists and Engineers in India

The continuing weakness of Indias overall educational infrastructure, even when compared to

most developing countries, has ensured that its overall labor force remains weak by international

standards (Kingdon 2007). However, as a result ofIndias enormous overall population and the

consistent investments in science and technology at the university level by the central government over

several generations (Carmel 2003), India possesses an advantage in the absolute number of scientists

and engineers. Indias best S&E universities, including the 16 Indian Institutes of Technology (IITs), 5

Indian Institutes of Science Education and Research (IISERs), numerous NITs (National Institutes of

Technology), the Indian Institute of Science, and the Birla Institute of Technology & Science provide

MNCs with a large potential pool to hire R&D personnel. Several global and domestic trends have also

contributed to Indias great success, including the decreasing interest in S&E degrees among students in

developed countries, the comparative advantage of pursuing S&E degrees for university students in

India, and the lessening of the number of visas granted to foreign S&E workers in the United States

(Lewin et al. 2009). According to surveys conducted by Thursby and Thursby (2006a), the availability of

scientists and engineers is the most important factor attracting MNCs to establish corporate R&D

facilities in India.

India graduates more scientists and engineers from its universities than any developed country.

In 2004, India graduated 350,000 engineers, ahead of the United States, which graduated 70,000

engineers, but just behind China, which graduated 600,000 engineers (Wadhwa et al. 2007). While China

easily outperforms India on the number of scientists and engineers it graduates, MNCs consider Chinese

engineers to be less employable than Indian engineers. India also suffers from the lack of employability

of some of its S&E workers albeit to a much lesser extent than China. According to a McKinsey study,

80.7 percent of engineers graduating from American universities are qualified to work at MNCs while

only 25 percent of graduates from Indian universities and 10 percent of graduates from Chinese

universities are qualified (Farrell et al. 2005). Although the fact that only 25 percent of engineering

graduates in India are employable by MNCs is an indication of the poor quality of many universities in

India, the McKinsey study clearly indicates Indias advantage in the absolute number of qualified

engineers. India graduates approximately 87,500 (350,000*25%) engineers qualified to work at MNCs

per year, while China graduates approximately 60,000 (600,000*10%) and the US graduates

approximately 56,490(70,000*80.7) qualified engineers. Additionally, India also has a clear advantage

compared to other large emerging markets in the mobility of its skilled workers. Almost half of Indias


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university graduates graduate from major metropolitan areas in the country and Indians are also more

willing to relocate than citizens of other emerging market countries. Moreover, better infrastructure and

greater airline connectivity in major cities, which are both important to foreign MNCs, give India a

stronger advantage in the availability of scientists and engineers than the pure graduation numbers

would suggest. In contrast to India, almost two thirds of Russian university graduates live outside of

major cities and are mostly unwilling to move (Farrell et al. 2005).

There are also other reasons why pure graduation numbers may be misleading. Measuring the

availability of scientists and engineers in India relative to the US using the number of qualified engineers

graduating from each country may overestimate the availability of scientists and engineers in the US

while simultaneously underestimating the availability of scientists and engineers in India. Although a

grand majority of engineering degrees in Indian universities are awarded to Indian citizens, 6 percent of

bachelors degrees in engineering, 44.1 percent of masters degrees in engineering, and 55.1 percent of

PhD degrees in engineering in the US were awarded to foreign nationals in 2010 (Gibbons 2010). 7156

(21%) of the foreign recipients of US S&E PhD degrees were Indians in 2011 (NSF 2011). This is only

slightly lower than the 7982 S&E PhD students that India graduates per year from its own universities

(NSF 2012). Although an increasing number of Indian PhD students from US universities were choosing

to settle in the US after graduation (Pandey et al. 2004) with stay rates for foreign PhD students as high

as 90 percent in 2003 (Finn 2003), this trend has largely reversed as a result of the cutback in H1B visa3

quotas in the United States since 2003. A majority of H1B visas are granted to scientists and engineers

(Lewin et al. 2009). Although the US government continued to increase the number of H1B visas granted

to foreign nationals from 65,000 in 1998 to 195,000 in 2003, in accordance with the increasing demand

for scientists and engineers by US companies, the US congress did not renew the H1B quota in 2003 for

political reasons, bringing the number of H1B visas granted back to the 1998 level (Lewin et al. 2009).

The US government has not increased the number of H1B visas from 65,000 since then. About 40

percent of non-US nationals holding 195,000 H1B visas were Indians in 2003. The US government issued

more H1B visas to Indians than to foreign nationals of any other country, with China and Canada taking a

distant second and third place (Kapur and Ramamurti 2001). The cutback of H1B visas in the US has

made it possible for India to retain more of its qualified S&E graduates and to attract a larger number of

Indian scientists and engineers trained in top universities in the United States. In interviews conducted

by Wadhwa et al. (2007), 75% of respondents believed that India possessed an adequate to large

3H1B visas allow US companies to hire foreign nationals to work for up to 6 years to work in specialty occupations

in the US. It is the main route by which these companies hire foreign scientists and engineers (Lewin et al. 2009).


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supply of well-qualified entry-level engineers while only 54% and 59%, respectively, believed the same

for China and the US.

Despite Indias strength in the availability of scientists and engineers, the country also faces

several major challenges in this dimension. The growing demand for S&E graduates in India has mostlybeen satisfied by unregulated private colleges of unknown quality, a large number of which were

established in the recent past. Private engineering colleges accounted for over 75 percent of engineering

colleges in India by 2004 (Somaiya 2005). Most private engineering colleges are unregulated as a result

of the inability of Indias central government to pass comprehensive legislation regulating private

colleges (Gereffi et al. 2008). With the exception of a few state governments, particularly in the South

and in Maharashtra, which have filled this void by passing state level legislations defining the role of

private colleges, not much has been done to tackle this issue (Gereffi et al. 2008). Even despite this fact,

MNCs seem to be comfortable with hiring top ranking students from almost any engineering college in

India (Wadhwa et al. 2007). This is in contrast to China, in which MNCs only recruit from 10 to 15

universities perceived to be of high quality (Gereffi et al. 2008).

An issue that could be a greater hindrance to Indias future attractiveness as a destination for

foreign MNCs to conduct R&D activities is the relatively small number of S&E PhDs graduating from

Indian universities. Although India witnessed a spike in the number of S&E graduates with bachelors and

masters level qualifications in recent years, the number of S&E PhD graduates has only increased very

slightly (Gereffi et al. 2008). China on the other hand, has been able to greatly increase the number of

S&E PhD students graduating from its universities. Chart 1 gives information on the change in the

number of S&E PhD graduates per year in India, China, and the US. The small number of PhD graduates

graduating from India relative to China and the US is a reflection of the lack of research focus of many of

Indias universities as well as the opportunities availability for qualified graduates to pursue PhDs in

universities in developed countries. India currently ranks seventh in the world in the annual number of

S&E PhDs awarded by its universities while China ranks second (Table 6).

Although the availability of scientists and engineers in India is currently bolstered by the return

of Indian S&E PhD graduates from universities in developed countries, this may not be sustainable. Since

more innovative R&D activities (international creation and international adaption) require a larger

number of PhD graduates than local adaption (Ambos 2005), the internationalization of R&D in India will

be limited in scope unless India can graduate more S&E PhDs.


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On the contrary it is important to note that a majority of engineering PhDs graduate from Indias

best S&E universities: the IITs (Taking IITs to Excellence 2011). The global reputation of these

institutions may imply that India graduates a number of well-trained PhD graduates. The lack of

research orientation in even Indias top universities, however, may undermine this claim. A subsequent

section on university related factors in India discusses the implications of the lack of research

orientation in Indias universities more fully.

C1. University Related Factors: Quality of Scientific Research Institutions

and the Strength of University-Industry Research Collaborations

University related factors have been widely discussed in the extant literature as both a

significant component of a countrys innovation infrastructure and as an important factor driving R&D

internationalization (Kummerle 1997, Florida 1997, Thursby and Thursby 2006a). MNCs prefer to

establish research facilities near renowned universities or scientific research institutions in order to

collaborate on corporate R&D. The most important factors for MNCs in this regard are the quality of

research conducted by researchers at an institution as well as the strength of university-industry

linkages4 in research (e.g., Berman 1990, Etzkowitz and Leydesdorff 2000, Siegel et al. 2003). Even if a

university is renowned for its research, if the research does not have a strong business orientation and if

the university does not have a strong relationship with the business community, corporate R&D facilities

will have a difficult time benefiting from collaborations. Strong university related factors in a country are

also significant in determining a foreign R&D units scientific mandate; coveted new science R&D

mandates are usually awarded to R&D units in countries with research oriented university faculty and

strong university-industry collaborations in research (Thursby & Thursby 2006b). As a result, it is

expected that countries with strong university related factors will be better suited to attracting R&D FDI.

Hypothesis 3: Holding all other factors constant, the stronger the quality of scientific research

institutions and the university-business linkages in research in a country, the more R&D FDI the

country will attract.

4University-industry collaborations as discussed in this paper could also include research relationships between

scientific research institutions and MNCs and not just research relationships between universities and MNCs.


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C2. Quality of Scientific Research Institutions in India

Since MNCs choose to establish research collaborations with universities that are deemed to be

the best in research in specific areas, a discussion of Indias strengths in university related factors should

concentrate on the best S&E universities in India in terms of research. Despite a reputation for fielding a

large number of well-trained scientists and engineers, Indias top universities, including the IITs (Indian

Institutes of Technology) suffer from a lack of serious research focus. When comparing universities in

India, IITs are among the very best; the five original IITs (IIT Bombay, IIT Madras, IIT Kanpur, IIT

Kharagpur, and IIT Delhi) rank just below the IISC (Indian Institute of Science) in a ranking of the number

of publications by science and technology institutes in India (Prathap and Gupta 2009a, Mishra 2012).

The IITs even produce a majority of the engineering PhD graduates in India (Taking IITs to Excellence

2011). Despite its high research output when compared to Indian universities, the IITs perform

miserably in international comparisons.

While highly reputed around world, the reputation of IITs is predominantly a reflection of the

quality of IIT graduates. Although IIT students are solely selected on the basis of highly competitive entry

exams with an admission rate of about 2 percent, the standards for hiring IIT faculty are lax. This

discrepancy was described by Jairam Ramesh, Indias former Environment Minister and an IIT Bombay

alumnus: There is hardly any worthwhile research from our IITs. The faculty in the IIT is not world class.

It is the students in IITs who are world class. So the IITs are excellent because of the quality of students,

not because of quality of research or faculty (Faculty of IITs not world class 2011). This is reflected in

the ranking of world universities in which the IITs, while easily ranking among the best Indian

universities, consistently perform poorly when compared to foreign universities. In the QS World

University Rankings 2012, only three Indian universities, IIT Delhi, IIT Bombay, and IIT Kanpur ranked

among the top 300 universities in the world. IIT Delhi, the best Indian university according to the

rankings, ranked 212th in the world and 36th in Asia.

Much of the blame on the lack of research orientation in Indias universities can be placed on

the government. The Indian government only spends 0.9% of its GDP on public research, compared tothe Unites States government which spends 2.7% and the Chinese government, which spends 1.97%

(TRS 2011). Out of Indias research spending, only 4 percent of government research funding goes to

universities. The corresponding figures for the US and China are 17% and 10%, respectively (Mishra

2012). The lack of funding opportunities in universities has decreased the attractiveness of research

careers for university faculty, even in Indias top universities. As a result, Indian universities have turned


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into training grounds for students rather than world class centers of high quality research. To make

matters worse, government universities in India usually follow a system by which professors and

researchers have fairly secure jobs with almost guaranteed promotions regardless of individual research

contributions (Mitra 2007). According to Prathap and Gupta (2009b), professors and researchers at

Chinese universities are on average, three times as productive as their Indian counterparts.

The lack of research orientation in Indian universities is also reflected in the small number of

S&E PhDs awarded by Indian universities. Often times having to compete with MNCs and universities in

developed countries in trying to hire S&E professors, Indian universities currently seem unable to train

enough PhDs to staff the rapid expansion of university-level S&E education in the country (Wadhwa et

al. 2007).

Despite the current weakness in the research productivity of Indian universities, there are signsof positive development. Policy makers have begun to realize the importance of transforming IITs and

other Indian universities into world-class research institutions. Indias prime minister, Dr. Manmohan

Singh recently announced that he wanted to increase government spending on public research from

0.9% to 2% of GDP by 2017 as a step towards catching up with China on research productivity (Mishra

2012). Additionally, the Anil Kakodkar Committee has recommended that the IITs should radically

increase the number of PhD graduates from the current number of about 1,000 to 10,000 by 2020

(Taking IITs to Excellence 2011) and steps have already been taken to achieve this goal (Pulakkat

2013). However, it is not clear how much quality will be sacrificed in the rapid expansion of the PhD

programs at the IITs. There are also plans to increase the research orientation of undergraduate degrees

at IITs in a bid to increase the number of IIT bachelors graduates who choose to pursue PhDs at the IITs

(Mukul 2011). Only 1 percent of bachelors graduates from the IITs currently choose to pursue PhD

degrees at an IIT after graduation (Taking the IITs to Excellence). IIT Delhi has already started a

summer program in which students can conduct scientific research in any area that they find interesting

(Mishra 2012).

C3. University-Industry Collaborations in Research in India

While there have been major improvements in recent years, India faces major challenges with

regard to the relative infrequency of university-business collaborations in R&D in the country. According

to a study by Joseph and Abraham (2009), although a majority of Indian professors and scientists believe

that university-business collaborations in research are important to innovation, only 11.27% of the firms


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surveyed claimed they collaborated with a university or public research institution in India. Joseph and

Abraham (2009) also found that the lack of entrepreneurial orientation in the research being conducted

at Indian universities is a significant limiting factor in the collaborations between business R&D units and

universities. According to Asakawa and Som (2008) the lack of business orientation in the research

conducted at Indian universities is a clear disadvantage that India faces relative to China. According to

The Global Competitiveness Report 2012-2013, India ranked 51st in the world in 2012 in the strength of

university-industry collaborations in R&D in the country. China ranked 11 places higher than India at 35th

place.

Despite the general weakness of university-industry collaborations among Indian universities,

there are also some welcome changes. Joseph and Abrahams (2009) study found that a majority of

scientists and professors saw improvements in the strength of university-industry relations in recent

years. Additionally, university-business collaborations in a number of R&D projects have been

established by the Society for Innovation and Development located at the Indian Institute of Science

(IISC) in Bangalore (DCosta 2006). The IITs have been following the recommendations of the Anil

Kakodkar Committees to create more research parks in the model of those established by IIT Bombay

and IIT Madras sometime back (Pulakkat 2013). The committee believed that research parks create the

right ecosystem to bring students, faculty and industry R&D personnel together (Taking IITs to

Excellence 2011). The Anil Kakodkar Committee also recommended that the IITs should incentivize R&D

personnel working for MNCs to take adjunct positions at the IITs or to pursue PhDs at the IITs if they do

not already possess a PhD qualification. If such plans become successful, it would increase the business

orientation of research conducted at the IITs while also building stronger formal and informal ties

between the IITs and MNCs.

D. Salary of R&D Personnel: Does It Give India an Advantage?

The mainstream media has viewed cost minimization as the primary motivation for foreign

MNCs to conduct corporate R&D in India. This view takes the simple position that MNCs, seeking to

minimize their costs, pursue science and engineering workers in developing countries where theseworkers cost less to hire. Aside from MNCs search for qualified scientists and engineers, no other factor

plays a prominent role in the medias narrative ofthe internationalization of R&D in India (Thursby and

Thursby 2006a).


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While taking a more nuanced view than the media, a number of scholars have also discussed the

importance of lower salaries for R&D personnel as an influential factor in an MNCs decision to establish

R&D facilities in India and other emerging markets (e.g. Kumar 1996, Reddy 1997, Chen 2004, Asakawa

and Som 2008). The extant empirical research, while finding labor cost savings to be an important

incentive for MNCs, does not seem to justify the media bolstered hype on the importance of lower

wages. For example, Thursby and Thursby (2006a) found that both market growth potential and the

quality of R&D personnel were more important to the attractiveness of emerging markets as

destinations to conduct corporate R&D than cost advantages; the ease of collaborations with

universities and university faculty expertise were equally important in MNC decision making. Similarly,

Lewin et al. (2009) found that the prospect of hiring well-trained scientists and engineers in foreign

countries plays a greater role in decisions to offshore product development than labor cost savings.

The medias overemphasis on lower wages as the key driver influencing the decision by MNCs to

establish R&D facilities abroad ignores a fundamental question: if cost plays such a prominent role in a

countrys attractiveness as a destination for corporate R&D, why is it that no other developing country

matches India and China in their ability to attract R&D FDI? As an answer to this question, Bunyaratavej

et al. (2007) found that even when controlling for factors such as GDP, infrastructure, and education

levels, countries with higher wage levels tend to attract a much larger number of service offshoring

projects than lower wage countries. The sole exceptions to this rule were India and China. The authors

described India and Chinas immense size and the resulting ability to field a large number ofwell-trained

workers at a low cost as a possible reason for their unique position.

Even if lower personnel related costs does play a significant role in the internationalization of

R&D in India, escalating wages as a result of labor demand (Farrell 2006, Bruche 2011) ensures the

unsustainability of cost related factors in driving R&D internationalization. As a result, India must build a

competitive advantage outside simply providing MNCs with labor cost savings in hiring scientists and

engineers. According to Bruche (2011), the Great Recession has slowed down the escalation of wages in

India, and in effect, has given India the time to strengthen its scientific infrastructure to stay competitive

as a destination for conducting corporate R&D.

At best, lower cost can serve as an initial attractor for MNCs to establish R&D facilities in India.

Improvements in Indias scientific infrastructure as well as the sustenance of its economic growth are

the factors that could continue to attract MNCs to establish research facilities even after India loses its

cost advantage. This process may already be at play if the trends in service offshoring discussed in


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Dossani and Kenneys aptly titled paper "Went for Cost, Stayed for Quality?: Moving the Back Office to

India applies to Indias attractiveness as an R&D destination.

The factors discussed above are well documented in Indias success in software. Similar to

corporate R&D, software is also a highly skill intensive activity. Although lower personnel related costsinitially aided Indias success in software, this competitive advantage was soon diminished by increasing

wages for software workers in the country. Other developing countries such as Indonesia and Vietnam

soon boasted lower wage levels in software than India (Arora et al. 2001, Carmel 2003). India grew to

become a software superpower only because it was able to expand from its cost based advantage to its

advantage in possessing a large number of skilled workers.

Finally, it is important to note that while some managers from MNCs and the mainstream media

may see lower labor costs for hiring qualified labor in emerging markets as a strong advantage for India,this view is not universal. From the point of view of underpaid scientists and engineers in India, lower

wages, even for highly skilled workers, continues to be a point of frustration. It is one of the main

reasons why many of the most qualified S&E workers leave India in search of better opportunities in

developed countries. While the contributions of the Indian diaspora towards Indias economic growth

may partially counteract this trend, it is nevertheless undeniable that for much of Indias history, the

exodus of well-trained workers to developed countries substantially decreased the availability of highly

skilled scientists and engineers in India. It could be possible that increasing wages among scientists and

engineers will incentivize nonresident Indians to return to India. If science factors are more important to

Indias ability to attract foreign corporate R&D than cost factors, this return of highly skilled S&E workers

to India can offset the negative effects that India may face from losing its cost advantage.

While lower costs in emerging markets clearly do not play as great of a role as the media claims,

it could incentivize foreign MNCs to make R&D investments in countries with lower salaries for R&D

personnel. As a result, the relationship between the salary of R&D personnel in a country and a

countrys attractiveness as a site for conducting corporate R&D can be expected to be negative.

Hypothesis 4: Holding all other factors constant, countries in which R&D personnel are paid lower

salaries will attract more R&D FDI.


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E1. Tax Burden Faced by MNCs Operating R&D Facilities Abroad

Previous research has shown that lower corporate tax rates in general and R&D tax credits more

specifically increase R&D intensity; this finding also seems to be uniform across most countries (Bloom

2002). This is consistent with the notion that MNCs would naturally prefer to conduct corporate R&D in

countries in which they are least burdened by corporate taxes.

However, studies specifically examining country level factors influencing MNCs to establish R&D

facilities abroad do not find tax considerations to be a major factor (Thursby & Thursby 2006a). This may

be because the other factors discussed elsewhere in this paper are much more important to MNCs.

While tax burden is not expected to be as significant of a driving force in the internationalization of R&D

as the other discussed factors, it is nevertheless included as a variable in the regression analysis later in

this paper. The relationship between a countrys attractiveness as a destination for corporate R&D and

the tax burden imposed by a country is expected to be negative.

Hypothesis 5: Holding all other factors constant, countries which place a lower tax burden on foreign

MNCs establishing and operating R&D facilities will attract more R&D FDI.

E2. Tax Burden Faced by Foreign MNCs Operating R&D Facilities in India

India currently ranks poorly in international comparisons of overall corporate tax rates. India

ranks 123rd in the world out of the 141 countries for which the data is available in The Global

Competitiveness Report 2012-2013. Although to my knowledge, there is no available data on the

corporate tax burden net of R&D tax credits faced by MNCs operating R&D facilities, the 2012 Global

Survey of R&D Tax Incentives by Deloitte found that the Indian government actively uses tax credits to

attract foreign MNCs to conduct R&D in the country. According to the study, India provides 200% super

deductions for R&D related expenditure other than for land and buildings and 100% deductions for land.

The government also provides tax deductions for R&D personnel salaries. These type of incentives

influence MNCs to increase the wages of R&D personnel (Lokshin and Mohnen 2013) and as a result, can

help attract well-trained Indian scientists and engineers who resettled abroad to return to work in India.

Realizing that local adaption R&D activities contribute the least to technological progress and economic

growth (when compared to international adaption and international creation), the Indian government

does not provide tax benefits to R&D facilities established exclusively for sales promotion or market

research. Over all, the Deloitte study indicates that while corporate taxes in India are burdensome to


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MNCs wanting to conduct sales operations, India offers compelling tax credits to foreign R&D units that

are unmatched by most countries in the world.

F.Market Size and Market Growth PotentialBoth market growth potential and market size have been cited in the extant literature as

important incentives for MNCs to establish R&D facilities abroad (Kuemmerle 1999b, Patel and Vega

1999, Von Zedtwitz and Gassmann 2002, Thursby and Thursby 2006a). The emphasis on market size and

market growth potential decreased somewhat with the acceleration of the IT revolution in the 1990s. As

the costs to manage globally dispersed R&D units began to decrease, MNCs started to conduct an

increasing proportion of foreign R&D activities to take advantage of host countries scientific

infrastructure rather than market size or market potential (Hkanson and Nobel 1993, Florida 1997,

Ambos 2005). However, as corporate R&D activities by MNCs began to expand outside of the R&D triad

and towards India and China, this trend seems to have changed. The considerably weaker R&D

infrastructure in India and China relative to other top attractors of R&D FDI like the UK, the US, Japan

France, Germany, etc., have made market related factors the strongest candidates as the main drivers of

R&D internationalization in these countries. Indias large population as well as its consistently high

economic growth rate gives the country two strengths important to an MNCs decision to conduct local

adaption R&D: market size and market growth potential. By setting up local adaption R&D facilities in

India, a foreign MNC can gain access to the tastes and preferences of Indian consumers, decide whether

to release a product to the Indian market based on this information, and finally, modify products the

MNC sells elsewhere to the needs of specific consumer segments in India.

The notion that market related factors are Indias primary attractive characteristic from an R&D

point of view is consistent with some recent studies. According to Thursby & Thursby (2006a), market

growth potential is cited by managers as the primary reason why MNCs decide to establish corporate

R&D facilities in emerging markets. Thursby and Thursby (2006b) found that because most of the foreign

R&D activities in India and China are market driven, most foreign R&D facilities in these countries

perform local adaption activities; much of the technologically and scientifically sophisticatedinternational adaption and international creation activities are mainly performed by R&D facilities in

developed countries. Results from the 2011 McKinsey Global Survey on R&D indicate that while a

majority of R&D activities conducted by foreign MNCs in India are market driven local adaption R&D,

international adaption R&D is also pursued by foreign MNCs to some extent. The study also found that

India is not a significant attractor of international creation R&D FDI and that market growth potential is


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one of the primary reasons why MNCs choose to conduct R&D in India (Barrett et al. 2011). Despite

some differences in findings, these results based on interviews of managers of MNCs seem to indicate

that the most compelling reason for MNCs to conduct R&D operations in India are market related

factors.

While market size is a measure of the current size of an economy, market growth potential as

described in this research represents an economys future potential, especially to MNCs wanting to sell

their goods and services to growing markets. Market growth potential has two main components:

potential market size and consumption growth.

Potential market size is different from market size in that it represents the potential size of

markets that MNCs tend to target. In computing indexes of market potential, authors have typically

used urban population as a proxy for this variable (Cavusgil 1997, Cavusgil et al. 2004). Holding all otherfactors constant, MNCs prefer to operate in markets where they face the least liability of foreignness.

As a result, MNCs tend to target markets within a country that they feel the most cultural affinity

towards. For MNCs from developed countries, this usually involves urban areas (Beugelsdijk et al. 2012).

A revised version of modernization theory, which has recently gained strong empirical backing (Inglehart

and Baker 2000), suggests that while some cultural traits persist regardless of a societys level of

economic development, economic development causes countries to converge on some cultural values

(Inglehart and Baker 2000). In the case of a developing country like India, which is characterized by a

clear developmental divide between richer urban areas and poorer rural areas, it could be expected that

foreign MNCs from developed countries have cultural values that are more similar to values of urban

Indians than to rural Indians. The extant marketing literature discusses the importance of societal

culture to a number of business processes significant to MNCs including product development (Nakata

and Sivakumar 1996), consumer innovativeness (Steenkamp et al. 1999), and advertising (e.g., Alden et

al. 1993, Albers-Miller and Gelb 1996). The relatively lower cultural distance foreign MNCs have to face

when operating in urban areas of India allows these MNCs to decrease the risks associated with

introducing products to unfamiliar markets. Other strong incentives for MNCs to target urban markets

include better public infrastructure in these markets and better connectivity (especially by airplane) to

these markets.

A common measure for the growth in consumer spending is the growth in per capita household

consumption. Per capita household consumption growth measures the growth in household spending

on goods and services in a given period of time. An increase in this variable could be an indication of the


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increasing purchasing power of consumers or the increasing willingness of consumers to allocate a

greater proportion of their income to saving. Both cases indicate an increase in incentives for foreign

MNCs to operate in a given market and to conduct complementary R&D activities associated with

market research and product adaption. Indias accelerated economic growth since the 1990s has

increased consumer spending substantially; household consumption expenditure (in constant 2000 US

dollars) increased from $ 351,784,000,000 in 2003 to $607,510,000,000 in 2011. The average annual per

capita growth in household consumption expenditure during the same time period was 6.07% (World

Development Indicators).

Market growth potential and market size are expected to positively influence a countrys

attractiveness as a site for MNCs to conduct corporate R&D. I compute a measure of market growth

potential and show Indias relative ranking compared to the rest of the world in the methodology

section.

Hypothesis 6: Holding all other factors constant, countries with a larger market size will attract more

R&D FDI.

Hypothesis 7: Holding all other factors constant, countries with a greater market growth potential will

attract more R&D FDI.

IV. Methodology for the Empirical Analysis

A. Sample and Data Collection

By using regression analysis, this study now tests the importance of the country-level factors

discussed in section III in influencing a nations success in attracting corporate R&D FDI. Because the

available data on R&D FDI is from 2003 to 2008, this will be the time period under consideration. The 50

largest economies by average GDP PPP from 2003-2008 were chosen for the analysis. Due to data

limitations, two countries (Nigeria and Taiwan) were dropped from the sample. The final sample

consisted of 48 countries: Algeria, Argentina, Australia, Austria, Bangladesh, Belgium, Brazil, Canada,

Chile, China, Colombia, Czech Republic, Denmark, Egypt, France, Germany, Greece, Hungary, India,

Indonesia, Iran, Italy, Japan, South Korea, Malaysia, Mexico, Netherlands, Norway, Pakistan, Peru,

Philippines, Poland, Portugal, Romania, Russia, Saudi Arabia, Singapore, South Africa, Spain, Sweden,

Switzerland, Thailand, Turkey, Ukraine, United Kingdom, United States, Venezuela, and Vietnam. The

sample size of 48 is retained for all of the tested variables except the availability of scientists and


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engineers and the salary of R&D personnel. Because of missing data, the sample size decreases from 48

to 37 when including the availability of scientists and engineers in a model. The countries dropped from

the sample are Bangladesh, Columbia, Egypt, Indonesia, Pakistan, Peru, Philippines, Singapore, South

Africa, Thailand, and Venezuela. On the other hand, adding the salary of R&D personnel to a model

decreases the sample size to 42. The countries dropped are Algeria, Bangladesh, Iran, Pakistan,

Romania, and Saudi Arabia. The sample size decreases to 33 when both the availability of scientists and

engineers and the salary of R&D personnel are included in the same model.

The data for the regression analysis was collected from multiple sources and relies on hard data5

rather than survey data whenever possible. By doing so, I attempt to avoid the many pitfalls associated

with survey data including low response rates, social desirability bias, common methods bias, and

perception bias (e.g., Feldman and Lynch 1988, Podsakoff et al. 2003). Data used for the regression are

from a large number of sources including the IBM-PLI GILD database, The Global Competiveness Report6

(TGCR), the World Banks World Development Indicators (WDI), the National Science Foundations (NSF)

Science and Engineering Indicators 2012, Walter G. Parks International Patent Protection: 19602005,

and Andrew M. Warners International Wage Determination and Globalization. Proxy variables were

used when direct measures of certain variables were not available. Table 7 gives the descriptive

statistics for all variables used in the analysis.

B. Variables

Number of Foreign R&D Investments (Dependent Variable)

The sum of the total number of yearly inbound foreign R&D investments from 2003-2008 was

used to measure a countrys competitiveness in attracting foreign corporate R&D. The data is from the

IBM-PLI GLID database. The total number of inbound R&D FDI ranges from 1175 for India to 0 for

Bangladesh and Columbia. A natural log transformation was used on the number of foreign R&D FDI in

order to normalize the right skew of the data. The transformed variable was computed as the natural log

of one plus the number of inbound foreign R&D investments coming into a country from 2003-2008.

One was added before computing the natural log to prevent undefined values for the observations for

which the number of inbound R&D FDI is 0.

5Hard data, in this case, refers to information that has a factual basis. This is in contrast to survey data, which is

based on the perception of the interviewees being surveyed.6The Global Competitiveness Report 2008-2009 is used for the relevant variables. The sole exception to this is the

data for Iran, which was not included in the 2008-2009 report. In this case, data from The Global Competitiveness

Report 2010-2011 is used instead.


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Intellectual Property Protection

2005 data from Parks (2008) index of patent rights was used to measure the strength of IP

protection in a country. The factors considered in building the index include the patentability of

innovation in different industrial sectors, membership in international treaties, duration of patent

protection, effectiveness of enforcement, and explicit patent rights restrictions (Ginarte and Park 1997).

The Availability of Scientists and Engineers

The number of S&E PhD graduates per year as compiled by the NSFs Science and Engineering

Indicators 2012 is used to measure the availability of scientists and engineers. Tellis et al. (2009) had

also used the same method to measure this variable. Observations for the number of science and

engineering PhDs are from the year 2008 in most cases. The earliest observation is for the Philippines

from 2004.

The number of PhD graduates, as opposed to the number

Final Krishnan Nair R&D Goes International the Case of India

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