Naushad’s opinion column in Business Standard: Innovation needs the right firms

Innovation needs the right firms 

The RDI scheme should fund firms with adequate absorptive capacity—but which  firms and how will be key 

The Research, Development and Innovation (RDI) scheme has been cleared by the  cabinet. The scheme allocates ~ Rs1 trillion (or $12 billion) to funding R&D in Indian  industry. Of this, ~ Rs 20,000 Cr is in this year’s budget. Initial comments on how  the funds will flow suggest that much of it will be provided in the form of low or zero  interest loans to a mix of Funds of Funds and directly to firms. My eyes glaze over in  incomprehension when I hear the phrase “Fund of Funds” – I just do not know how  they will be held accountable for directly enhancing innovation. I would argue for the  bulk of the funding going directly to firms. Why to firms? Which firms? How should  they be funded? 

Why fund firms: Innovation happens in firms. There are nuances to that statement,  but the fact remains. Get everything else right – publicly funded research done  perfectly in higher education, the right national missions, the speedy and  unbureaucratic flow of abundant funding – and get what happens in firms wrong and  the entire effort will come to nought. I cannot emphasise this enough: innovation,  everywhere in the world, largely happens in firms. Consider the now classic Kline  chain-linked model of innovation (see figure).

The central innovation activities – market finding, design, and distribution – are all in  firms. Research and new knowledge can be invaluable, but they are an input to the  innovation system, not its heart. Getting firms to invest more in R&D, to translate that  R&D into innovative products and services, and to build businesses around proprietary  technology that is deployed internationally is the key to a vibrant national innovation  system. So firms must be the focus of any scheme that seeks to enhance innovation.  The right R&D pipeline in firms will act as a pull on the public research system like no  other. It is inadequate investment in innovation and R&D by Indian industry that is the  single factor hindering our national innovation system. That is what RDI must target,  and it is best done directly and without intermediaries like Funds of Funds. 

Which firms to fund is about Absorptive Capacity: Start with the facts. As I have  long argued in this column, in my book and to anyone I can capture for more than two  minutes, Indian industry invests too little in R&D. We invest 0.3 per cent of GDP in  inhouse R&D to a world average of 1.5 per cent. Our ten most successful non-financial  firms (highly profitable firms in refining, IT services and consumer goods) invest 2  percent of profit in R&D; whereas their ten most successful peers in the US, China,  Japan and Germany invest between 29 and 55 percent. And Indian firms are 

completely missing in five of the ten most technology-intensive industrial sectors  worldwide.  

The net effect is that the great bulk of Indian industry does not do enough R&D to  immediately absorb any substantive increase in funding. Budget’s allocation of ~Rs  20,000 Cr is a decent sum. R&D spending is largely about people – equipment and  materials, on average, are less than a third of total spending. An outlay of ~Rs 20,000  Cr could add around 20,000 more people in R&D. Which firms, between them, would  be able to expand at scale in one year? We need a set of firms that already invest a  large amount in R&D and employ R&D teams of international strength. The firms we  pick should be those which are already reasonably R&D intensive— at, say, half the  R&D intensity (R&D as a percent of sales) of their international peers. This data is  easily available for the top 2500 firms in the world and for us; the table shows our top  five firms in the six sectors — pharmaceuticals, chemicals, autos, defence, industrial  engineering and food — on average have an R&D intensity that is above half of global  levels. The top few R&D investing firms in these six sectors should have the highest  absorptive capacity to rapidly expand their R&D teams. 

Table 1: Comparison of Top 10 Indian R&D Sectors’ Average R&D Intensity  with Respective Global Averages (2023)

Aerospace & Defence 6.9 4.4 

Source: CTIER Handbook: Technology and Innovation in India 2025 (forthcoming) 

How we should fund firms: Competition begets quality, so a generous direct funding  scheme should seek to attract many more applications than there are funds available.  Get applications from many of the top, say, 300 Indian R&D investors. Our hundredth  largest spending firm invested Rs 97 Cr in R&D in 2022-23 , our two-hundredth largest  Rs 33 Cr and three-hundredth largest Rs 16 Cr. These are small numbers relative to  the world’s leading firms. The RDI scheme should directly aim to change this. I would  suggest that we require the firms we fund by RDI to expand R&D in terms of the  number of people employed in R&D by one-half in the next twelve months.  Successfully doing so could lead to another similar tranche of funding, and so on.  (Conversely, expanding by under one-third should result in the firm dropping out in the  next round.) In five years, the consistently successful firms should be investing eight  times as much in in-house R&D – enough to show in India’s aggregate R&D statistics  and to build a solid R&D pipeline of new products and services that begin to flow out  into the world. 

We should have a second requirement. Firms that get funded by RDI should deepen  the R&D they do. “Deepen” means they should be investing in lower Technology  Readiness Levels. In the jargon of the field, where TRL 7 – 9 is the development that  firms typically do and TRL 1 – 3 the best research done in academia, firms should 

begin to “pull” in publicly funded research to deepen their innovation effort. That would  mean investing in the TRL 4 – 6 space where research findings move onto proof of  concepts that then start translating into products and services that are commercially  viable. We do also need transparent metrics to objectively assess TRLs, keeping our  goal of deepening the R&D we do constantly in focus. 

What good looks like: We today have no firms that match their world leading peers  in both the percentage of turnover and absolute amount invested in R&D. Five years  out, we should expect over 100 Indian firms that do so. These firms will, in turn, act  as role models for many others, and we will be on our way to a vibrant, world-leading  national innovation system. 

Naushad Forbes 

ndforbes@forbesmarshall.com 

Co-Chairman Forbes Marshall, Founding member of Nayanta University, Past  President CII, Chairman of Centre for Technology Innovation and Economic Research.  His book, The Struggle and the Promise has been published by HarperCollins. 

(Published in Business Standard dated 17th July 2025)