With the growing requirement of new product design and
development owing to reduced product life cycles, research and development
(R&D) have become quintessential to devise new applications utilizing the
stock of knowledge. Once concentrated within developed nations or physical
boundaries of a corporate firm, now R&D centers are gradually expanding in
developing countries as more companies continue to tap newer markets. India is
rapidly becoming the R&D hotspot for multinational firms, ranging from IT
and telecommunications through pharmaceuticals and biotech, willing to
relinquish current market profits to enhance future performance. The country
offers a unique blend of massive market opportunity, favorable business
environment, highly skilled and low-cost workforce, and lucrative fiscal
benefits that make India a perfect location for cutting-edge R&D projects
for global companies across industries. Companies such as Microsoft, Oracle,
Motorola, IBM, GE, AMD, Cisco, Seimens, and more than 100 Fortune companies
have already set up their dedicated R&D facilities in India for taking up
R&D activities in new and emerging markets in high-tech areas.
What Attracts Multinational Companies to Establish R&D
Facility in India?
Highly skilled and Young Workforce
Creating and maintaining technological competitiveness requires
access to a wide range of scientific knowledge and skills. But R&D is a
labour-intensive activity that requires highly skilled engineers and
scientists. Moving R&D activities to a low-wage country like India, MNCs
gain access to a highly skilled workforce at fraction of the cost of that in
their own countries to develop innovations. India has a large population of
educated workers, including 22 million graduates but institutions do not train
them in basic research, which limits the talent pool. However, global companies
are increasingly willing to invest in human capital and build skills to bridge
the knowledge gaps required for research. Providing good infrastructure, work
environment, comparatively attractive compensation, better career options, and
exposure to frontiers of R&D, foreign firms are able to attract the skilled
labour force of India to cater to cutting-edge research across verticals.
Besides financial benefits, companies can gain 30-40% improvements in their
time to market, which increases their profitability.
Huge Domestic Market
The recent jump in local consumption with a rise in middle-class
population has led to an increased demand for creating innovations that suit emerging
local market flavours. Multinational companies are now focusing on the
development of products and solutions for the local market that could create
new opportunities for them. However, low tech penetration and price sensitivity
often make it harder to innovate for the Indian market, so global companies are
collaborating with emerging start-ups to maximize possibilities. Global giants
such as Google, Amazon, Microsoft, SAP, and ISM are investing as well as
incubating with start-ups, or collaborating with small early-stage service
providers to develop products that appeal to Indian consumers. Such
collaborations with start-ups can help multinational companies to mitigate
risks and create a large spectrum of possibilities. Also, MNCs can turn local ideas
into products that expand the knowledge base of headquarters in their home
country.
Policy Support
Since multinational companies contribute significantly to
India’s GDP growth, the government offers favourable policies to allow ease of
doing business and enable liberalized regulatory environment so that they face
fewer regulatory and infrastructural bottlenecks to set up their R&D
facilities in India. The latest survey of multinational companies revealed
India is the leading choice for foreign direct investment. To encourage R&D
investments, the government offers various tax incentives on revenue and
capital expenditures incurred by companies in carrying out R&D activities.
The government provides a super deduction of 150% on tax to manufacturing companies
on in-house R&D expenditure for filing a patent application, performing
clinical trials, and obtaining approval from authorities. A concessional tax
rate of 10% is granted on income earned by royalty for patents developed and
registered in India. Besides, custom duty exemption to in-house units of
industries and GST concession for research institutions are provided.
Well-established Intellectual Property Rights (IPR) policy
The World Trade Organization requires all its members to follow
the IPR policies stated under the agreement, ‘Trade-related Aspects of
Intellectual Property Rights (TRIPS)’, which creates a friendly business
environment for companies willing to enter a different country for expanding
their operations. Being a WTO member since 1995, India is obligated to follow
these rules and therefore foreign companies can enter India without worrying
about the safety of Intellectual Property.
Rise in Global Capability Centres
Global capability centres resulting from the globalization trend
have played an essential role in the evolution of software development and
generic innovations in India. The centres currently employ more than a million
technically qualified people, out of which 40% staff work in engineering,
research and development, and business process management roles. Even new
generation fully digital companies who have shifted their operation from the
traditional approach to big data are heavily investing to set up GCCs in India
rather than relying on third-party outsourcing. US-origin GCCs based in India
are at the forefront of helping multinational companies to implement robotic
process automation.
Different modes for forming industrial R&D alliances
Contract Research
Clinical trials take up most of the time in R&D activities
as it is a tedious and time-consuming process that involves exorbitant expenses
on part of research organizations. To reduce the financial burden, foreign
companies are opting for strategic outsourcing, and thereby collaborating with
contract research organizations (CRO) in India. CRO acts as a feasible channel
that facilitates the integration of local R&D capabilities into global
discovery and development to meet the demands of evolving medical device and
pharma industry. CROs are already set up with all the necessary tools and
resources required for conducting trials and research support services. Thus,
foreign companies hiring CROs get access to the most advanced software and
hardware IT capabilities to facilitate the acceleration of clinical trials
while maintaining comprehensive quality control at a reduced cost.
Custom Synthesis
India dominates the custom synthesis market as it is a preferred
destination for pharmaceutical outsourcing by both drug innovators and
manufacturers due to improved process engineering, the development of new
chemical processes, and low labour costs. Custom synthesis is a high-value and
innovative business that requires multi-year expertise and knowledge. With
custom synthesis, foreign companies can order exclusive synthesis of products
with the purity and specifications or methods they require. Custom synthesis
enhances flexibility and efficiency of manufacturing processes for
pharmaceutical industries, willing to cut down R&D costs, turning fixed
costs into variable ones.
Challenges for MNCs to Set-Up R&D Facility in India
Recruitment of Suitable Candidates
Although there is a large pool of E&T graduates in India who
are eager to work for foreign companies, many MNCs face difficulty in finding
suitable graduates for their R&D positions. The primary reason for
substantial dissatisfaction is that most E&T graduates in emerging
countries are not qualified to the same quality level as graduates in developed
countries or do not have the right engineering skills. Due to the lack of quality
labs and libraries, up-to-date curriculum and faculty, and other necessary
infrastructure in the educational institutions of developing countries,
graduates are not able to acquire the required skills that can satisfy the
demand of R&D positions for MNCs. Due to stiff competition for high-quality
graduates, MNCs are recruiting inadequate or low-quality graduates and prepare
them for R&D positions through ‘in-house/on-the-job’ training. Besides,
many foreign companies have started collaborating with educational institutes
to offer courses/projects and establish hi-tech laboratories so that at the end
of formal education, the company receives industry-ready graduates.
Talent Retention
R&D employees are valuable and non-substitutable assets as
they carry innovation-related information, essential for technology-intensive
corporations. Replacing a highly trained and skilled employee with an
inadequately skilled employee that needs to be trained to the same level of
technical know-how would cost the company time as well as money. When R&D
employees move out and join competitors, the source firms’ trade secrets are at
danger of leaks, which may compromise future innovations of the company. The
confidential innovation knowledge possessed by the subsidiaries could be highly
critical to MNC’s business in host countries for local as well as global
operations. The outward mobility rate of R&D employees in emerging
countries is higher than that in developed countries. Besides, non-disclosure
agreements are highly legally enforceable in developed countries due to strong
IPR regimes so R&D employees would be more reluctant to share confidential
information to prevent fighting lawsuits against large corporations.
Conclusion
India has emerged as one of the key markets for path-breaking
innovations. The increasing personal disposable incomes, rising skilled youth
population, country’s economic growth over the years have made India an
attractive market with world-class potential. A historical scarcity of
resources in combination with constraints in the emerging country has led to an
increased focus on frugal innovations that can withstand a tough economic
environment. In the coming years, more international companies are
planning to enter the India market for R&D activities, which could further
strengthen the country’s foothold in research arena.
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