Sikdar Mukopadhyay 2016

PRODUCTIVITY AND RESEARCH AND DEVELOPMENT CONTENT OF INTERMEDIATE INPUTS
- EVIDENCE FROM INDIAN INDUSTRIES

Author(s): Chandrima Sikdar and Kakali Mukhopadhyay
Source: The Journal of Developing Areas, Vol. 50, No. 3 (Summer 2016), pp. 337-356
Published by: College of Business, Tennessee State University
Stable URL: https://www.jstor.org/stable/24737434
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The Journal of Developing Areas
Volume 50 No. 3 Summer 2016
PRODUCTIVITY AND RESEARCH AND

DEVELOPMENT CONTENT OF
INTERMEDIATE INPUTS - EVIDENCE FROM
INDIAN INDUSTRIES
Chandrima Sikdar*
Narsee Monjee Institute of Management Studies, School of Business Management, India
Kakali Mukhopadhyay*
Department of Agricultural Economics, McGill University, Canada
ABSTRACT
Research and Development (R&D) investments are foundations for generating new know
through basic research and ultimately for generating products and services through applied res
and commercialization. For this pay-off to happen and innovation-driven growth to flour
successful R&D ecosystem is required. With current government support, R&D sector in In
all set to witness some robust growth in the coming years. Over the last decade researchers
emphasized the role of R&D expenditure in determining rate of growth of total factor produc
and hence in overall growth of an economy. Against this backdrop, the present study evaluate
extent to which R&D knowledge embodied in intermediate inputs is related to productivit
industry level in India. Industry-level Total Factor Productivity (TFP) with respect to R&D con
of intermediates is computed for industries as a whole and for manufacturing sectors clas
under high and low-R&D industries. A global input output matrix is used to separate total
content of intermediates into domestic and foreign R&D stocks. Using two way panel estim
variation in TFP for twenty six industries for the years 2001, 2004 and 2007 are estimate
function of variations in domestic and foreign R&D content of intermediates. The study o
much of the required data from GTAP databases - versions 6, 7 and 8 and from OECD
database, World Development indicators, India's National Sample Survey Organization a
Department of Science and Technology. Results indicate that while industries, in general, a
manufacturing have shown increased productivity due to increased R&D in intermediate input
it is the small scale low R&D sectors which are found to be the biggest beneficiaries. Particu
the results point to the fact that it is the foreign R&D stock of inputs which have mainly contr
to improved productivity in these low R&D sectors. Thus, innovation by these sectors in the f
of new machines, alternative materials, improved product quality etc. which they brought
imports has resulted in their increased productivity. This finding is a contribution to exi
literature which have mostly observed that that manufacturing output in general is responsiv
R&D stock of intermediates. Large part of India's population are employed in low R&D
(mainly unskilled) intensive sectors. Thus, more R&D and innovation in these sectors via impor
inputs may make them efficient in terms of value addition to output, employment and incom
thus make innovation more inclusive.
JEL Classifications: D24, 03, 032

Keywords: R&D, Productivity, Industry, Innovation, India
Corresponding Author's Email Address: chandrimas4@gmail.com
338
INTRODUCTION
Research and development (R&D) is conventionally defined as: '....cre

undertaken on a systematic basis in order to increase the stock of knowle
knowledge of man, culture and society, and the use of this stock of know
new applications' (OECD, 2003). Research and development is of utmos
develop a country's production potential and also its science and technolog
helps a nation to progress and bring about innovation in all sectors. Curren
investments into R&D are estimated at 1.2 trillion USD. India is ranked
total of 143 economies, as per the Global Innovation Index (Figure 1
expenditure is merely 2.1 per cent of the total global expenditure in comp
United States where R&D spending accounts for 33.6 per cent of th
expenditure and Japan and China which account for 12.6 per cent each (FI
FIGURE 1. R & D EXPENDITURE AS A PER CENT OF GDP FOR SELECTED
COUNTRIES, 2011
4.5
4.5
4 ♦ Korea, Rep.
♦ Finland
♦ Israel
Finland Israel
3.5
£ 3.5
r\
♦ Japan ♦ Sweden
G
® 3
s* ^■^•■j)enmar{r
a
«
❖ Austria Germany ♦ United States
552-52.5 ♦ Australia
♦ France ♦ Singapore
s
g" 2 ♦ Netherlands
Canada China
♦ ~ ♦ United Kingdom
=8 ♦ Czech Republic ♦ Norway
1.5
X
as
♦ Spain
Spain
•2S ♦ Brazil ♦ Hungry
Hungry "a'y
"a'y
♦ Russian Federation
;=
ß 11
♦♦India
India + South Africa
♦ South Africa
♦ Argentina
0.5 H
♦♦^Pakistan
Wexl? Pakistan
♦ Sri Lanka
0
Countries
Source: Based on World Bank, 2015
In India the overall government and industrial spending in scientific and

technological R&D has remained below 1 per cent of total GDP for more than a decade
which is far below the contributions made by the developed countries (Figure 2).
339
FIGURE 2. INDIA'S NATIONAL R&D EXPPENDITURE AND ITS

PERCENTAGE WITH GDP (1990-2012)
NATIONAL R&D EXPENDITURE AND ITS PERCENTAGE WITH GDP

75000
70000
65000
60000
55000
Î 50000
0
H 45000
#
1 40ÖÖÖ
2
% Î 50(H)
I îOOÔÔ
ut
« 25000
x
200M
15000
»080
5000
is»» i«s* m-fi mm ««» is«« mn m<a mm am« im« imn imv mm mw imitaitwxuw
im
Source: Government of India, Department of Science & Technology, 2013
R&D expenditure in India is majorly contributed by the Government wh

accounts for over three-fourths of the expenditure followed by 20-25 per cent spent
private sector and 5 per cent by universities. India needs research and innovati
virtually all areas including energy, consumer electronics, pharmaceuticals,
processing, bio-technology and automotive. The Government is currently contempl
increase of investment on R&D in public and private sector to 2 per cent of GDP by
end of 12th Five Year Plan (2012 - 2017), through various measures, some of w
include: Higher allocation to scientific research, Setting up of new institutions for sc
education and research, Strengthening infrastructure for R&D in universiti
Encouraging public-private R&D partnerships, Grants for industrial R&D proje
Custom duty exemption on goods imported for use in Government funded R&D pro
etc. The 12th Five Year Plan estimates the total resource need for developmen
technology at INR 6,395 crores of which estimates for sectoral R&D stands at 2.81 p
cent for Water technologies; 1.42 per cent for Security; 4.69 per cent for Dru
pharmaceuticals; 15.6 per cent for Climate change programme; 3.13 per cent for So
energy research initiative and 7.82 per cent for Nano science and technology missio
(Government of India, Department of Science & Technology, 2013a, FICCI, 2013).
340
Measuring the extent of innovation and knowledge flows can be challenging

because of lack of direct indicators. Expenditure on R&D or the number of scientists and
engineers in an economy are all indicators of the strength of the effort at producing new
ideas in that economy. However, they give no indication of the degree to which this effort
actually succeeds in producing a new invention (FICCI, 2013).
Against this backdrop, the present paper seeks to evaluate the extent to which R&D
knowledge embodied in intermediate inputs is related to productivity at industry level in
India, with particular focus on manufacturing industry. R&D content of intermediates
represents the R&D stock embodied in intermediate goods. The two important features of
R&D content of intermediate as mentioned in this paper are:
• For any particular industry the R&D knowledge originating from each of the
other industries and from specific source countries can be identified.
• The R&D content of intermediate inputs includes both direct and indirect flows
of inputs across industries.
Using this concept of R&D content of intermediate inputs, the present study
computes the elasticity of industry-level TFP with respect to R&D content of
intermediates for industries as a whole as also for manufacturing sectors classified under
high and low-R&D intensive industries.
The organization of the present paper is as follows. The second section presents a
brief review of literature. The third section calibrates the methodological framework.
Data used for the empirical implementation of the theoretical framework developed in
section three is presented in section four. Results and discussion are presented in section
five. Finally, a brief conclusion along with some policy direction follows in the sixth
section.
REVIEW OF LITERATURE
There is a large volume of literature on R&D expenditure for OECD coun

single or multiple. Literature for developing countries is not many.
Goto and Suzuki (1989) show the effect of R&D on productivity g
Japanese manufacturing industries. They determine the effect of electronics
on productivity growth of other industries through transaction of intermedia
goods with improved quality, and through diffusion of new technological k
discovered. They find that supplying industries' R&D contribute p
productivity growth of user industries. Using panel data techniques and dat
and R&D for 20 OECD and 10 Non-OECD countries for the period 1981
(2004) shows the existence of a strong positive relationship between innovat
capita GDP. Nishioka and Ripoll (2012) examine the correlation between indu
productivity and R&D knowledge contained in intermediate inputs. Using a
countries and 13 manufacturing industries the study computes the elasticity
level TFP with respect to R&D content of intermediates. They find that in h
industries, the industry-level TFP is significantly associated with R&D e
inputs purchased from own industry. Similar studies have been done
Helpman (1995), Lichtenberg and de la Potterie (1998, 2001), Xu and W
Madsen (2007, 2010). This literature documents the extent to which domestic
knowledge affect productivity at aggregate level. A common feature of the
341
that they construct measures of foreign R&D by using shares of imports on GDP as
weights for foreign R&D stocks from source countries. Some literatures focused on the
effect of imported inputs on plant productivity (Kasahara and Rodrigue, 2008; and
Halpern, Koren and Szeidl, 2011). The former uses Chilean data, while the latter uses
Hungarian data, but both studies document that using foreign inputs improve productivity
at plant level in the importing countries.
Al Azzawi (2012) investigates how flows of knowledge transmitted through FDI
affect production of knowledge in both source and recipient countries, as well as how
these flows affect productivity. Results reveal that both inward and outward FDI have
strong positive effect on domestic innovation and productivity in countries that are
technological followers. Piermartini and Rubinova (2014) study the importance of
international supply linkages for knowledge spillovers. They uses industry level R&D
and patent data for a sample of 29 countries for the period 2000-2008, and finds
statistically significant effect of supply chains on international knowledge spillovers.
In developing countries context, Lu et al. (2005) investigate the relationship between
R&D stock and productivity growth, while taking into account the effect of spatial
spillovers for Taiwan. Using panel estimation techniques they show that both R&D stock
and R&D spatial spillovers positively affect productivity growth in short-run as well as in
long-run. Wei and Liu (2006) assesses productivity spillovers from R&D, exports and
foreign direct investment in China's manufacturing sector, based on a panel of more than
10,000 indigenous and foreign-invested firms for 1998-2001. There are positive inter
industry productivity spillovers from R&D and exports, and positive intra- and inter
industry productivity spillovers from foreign presence to indigenous Chinese firms.
OECD-invested firms seem to play a much greater role in inter-industry spillovers than
overseas Chinese firms from Hong Kong, Macao and Taiwan.
There are some studies on R&D spillover effect as well as productivity in Indian
context. Basant and Flikkert (1996) estimate the impact on output of Indian firms' R&D
expenditures, their technology purchases, and international and domestic R&D spillovers
using panel data from 1974-75 to 1981-82. The private returns to technology purchases
are estimated to be high and statistically significant, while private returns to firms' own
R&D expenditures are some- what lower and are often insignificant. There is evidence of
both international and domestic R&D spillovers. Parameswaran (2007) considers inter
sectoral variation in productivity effect and the importance of firms' investment in R&D,
imported technology and plant and machinery in enhancing the effect on productivity. It
shows that R&D spillovers have a significant effect on productivity and there exists inter
sectoral variation with greater contribution to productivity in technology intensive
industries. Sharma (2012) examines the impact of R&D activities on firms' performance
for Indian pharmaceutical industry for the period (1994-2006). Regression results based
on growth accounting framework suggest that R&D intensity has a positive and
significant effect (15 per cent) on TFP. Mitra et al. (2012) revisit the issue of impact of
economic reforms in India on manufacturing performance. The study tests the effect of
import, export, in-house R&D, technology transfer and physical infrastructure to
productivity and efficiency of industries. The analysis confirms this view by establishing
infrastructure as an important determinant of manufacturing productivity and efficiency.
The present paper relates to a number of existing literature. It relates to both
theoretical and empirical literature on R&D and productivity as also the literature that
342
involves analyzing the extent to which domestic and foreign knowledge affect
productivity. But there are number of points on which the present paper differs from the
already existing literature on the topic.
1. The present paper focuses exclusively on India and on the economy's industry
level rather than aggregate data. It also considers intermediate input flows at
domestic and international level. Basant & Flikkert (1996), Parameswaran
(2007) do involve Indian firms and consider indicators like firms stock of
knowledge that is generated domestically through its own R&D and stock of
foreign technical knowledge purchased through technology licenses as also
stock of R&D spillovers from other domestic and foreign firms, but the present
paper differs in the way R&D stock and spillovers are measured. It uses the
concept of Global Input Output matrix of Trefler and Zhu (2010) to find out
separately the R&D content of domestic and foreign inputs used by industries
and then uses this data to find out the domestic and foreign R&D stock of an
industry. Nishioka and Ripoll (2012) use a similar framework which included
India but as a part of a sample of thirty two countries.
2. The paper considers twenty six India industries which include twenty two
manufacturing industries as compared to other papers where the number of
sectors considered, particularly manufacturing are much lesser.
3. Besides, manufacturing industries are further classified into low R&D and high
R&D industries and are looked upon separately.
METHODOLOGICAL FRAMEWORK
Industry Level R&D Content of Intermediate Inputs - Domestic and F
Coe and Helpman (1995) expressed the aggregate country level productivity
of a country as a function of its domestic and foreign R&D stocks. T
functional form may be expressed as
In TFPit = ff; + ß In 5$ + p In s{T + ait (1)

Where, TFP;t is productivity in country i at time t
tZj is country specific fixed effect
5$ is the domestic R&D stock of country i at time t
sf( is the foreign R&D stock of country i at time t
For the purpose of the present analysis, we rewrite equation (1) as
In TFPkt = ah+ ß in S|r + p In S {t + sht (2)

Where h denotes the industry 'h' in India
343
TFP^f denotes productivity in industry 'h' in India at time t

«h is industry specific fixed effect
Sftt is domestic R&D stock in industry h in India at time t
Sfö is foreign R&D stock in industry h in India at time t
Thus, the initial task in this analysis is to measure both domestic and foreign R&D
stocks of the country as mentioned in equation 2. For this we use a framework which
borrows the concept of global input output matrix as developed by Trefler and Zhu
(2010).
Trefler & Zhu (2010) in trying to measure factor content of trade of a country
developed the concept of global input output matrix. An element of this matrix describes
how a particular good, produced with different combinations of factors in different
countries, is used to produce itself and other goods in different countries of the world. A
column of this matrix gives the pattern by which each good of the world, differentiated
by countries in terms of factor content, is used to produce country i's version of good n.
A row of A, on the other, shows how good n produced by country 'i' is allocated to
producing itself and other goods. Using this concept of global input output matrix we
develop a technique to measure the R&D content of factor inputs used by different
industries in India. The technique we develop is described as follows:
Let g and h =1,...,G index goods, i and j=l,...,N index countries. Then A is the (NG x
NG) global input output matrix with a typical element given as Ay (g, h). Ay (g, h) is the
amount of intermediate input 'g' sourced from country 'i' that is used for production of
one unit of gross output of good 'h' in country j. And Q is the (NG x NG) diagonal
matrix of gross output whose typical diagonal element Qj is a G x G diagonal matrix for
country 'i's gross output.
r r
An An A IN Qi o
Ä21 A22 &2N 0 02
Q=
*N1 An2 *NN
Given matrices A and Q we define the (NG x NG) global country by industry input
output matrix AQ.
We now construct the recursive input demand for production of intermediate goods
AQ. Matrix A x AQ gives the inputs required directly to produce AQ. Using the recursive
algorithm to obtain the intermediate inputs required to produce AQ, we find that the
344
direct and indirect inputs required to produce AQ is given by
AQ + 2 A%*Q) = (I-A)-1 AQ
n=i n=i
Further, let S1 be defined as (lxG) row vector whose g1 element re

stock used directly to produce good 'g' in country 'i'. Now a (1 x G
constructed whose gth element shows the R&D stock per unit o
construction is based on the assumption of full employment of resourc
S = Si D = D, Do Du
and
Di=SiQ-L
Now the R& D content of intermediate inputs is given by a 1 x NG vector F which is

defined as
F = D (I — (3)
A typical element Fih of this vector F gives the domestic and foreign R&D embodied
in the intermediate inputs used in sector/industry 'h' of country 'i' by sourcing it from all
sectors and all countries.
The measure of R & D content of intermediate inputs as given by (3) has the following
unique features:
• It captures in a single framework all R&D contained in domestic and foreign
inputs. Thus, for any industry's R&D stock the origin sector and source country
can be easily identified
• The R&D is weighed properly taking into account the purchase of inputs across
industries and countries. For industry level productivity analysis this is very
important
• Both direct and indirect input usage across industries is taken into account.
The features above definitely present relative improvement over other established
ways used in literature to measure the R&D content of intermediates used by industries.
Industry Level TFP
Next, the industry level Total Productivity (TFP) is calculated. This is done following the
methodology of Caves et al (1982) as follows:
In TFPht= [In Ykt - l/N&i InYkt)] - '/2(vht+ 1/N ÖLaht))[ In Lht - I/N&iIr&kt). 1
- [I-'MOht + 1/N (IgTkt)][ In Kkt - I/N(liInKkt)]
345
Where Y-Rt is the real value added in industry 'h ' in period't'
a-nt is labor compensation shares in industry 'h ' in period't'
ifct is labor in industry 'h' in period't'
K-m is physical capital in industry 'h' in period't'
The TFP index above is constructed by expressing value added, capital and labor
relative to their respective averages for each of the twenty six industries for the select
three years. The TPF index thus constructed is normalized and hence helps to lower to
some extent the influence of trend that is usually observed in absolute TFP. Further, the
study considers data only for three discrete years 2001, 2004 and 2007 and hence issues
in relation to panel data like stationarity, cointegration and serial correlation may not
arise. But this may, however, lead to only determining the short term impact of R&D
variations on industry level productivity. The decision to use only the three discrete years
is based on the availability of input-output matrices for India and other countries for these
three years and also the availability of data on industry level R&D expenditures for the
countries
Average labor share in the above equation is also computed taking into account labor
share of each industry and average labor share across cross section of industries. The
calculation of labor shares as above along with normalization of TFP index lends
substantial structure to the construction of TFP. This is important as it helps to reduce the
simultaneity issue that needs to be addressed in order to get consistent estimates in an
estimation process.
Industry Level TFP and R&D Content of Intermediate Inputs
Next the relation between industry level total factor productivity (TFP) and the R&D
content of intermediates is estimated using the benchmark equation:
In TFPht = ah+ at + ß JnSht + *ht (2')
This is the same as equation (2) except that R&D conte

separated into domestic and foreign R &D content.
The data is on TFP for twenty six sectors in India f
case of panel data estimation. We take it to be a ca
industry specific effects which is time invariant as i
effect as captured by at This takes care of other variab
productivity like institutions, extent of human resou
industry specific and also any measurement error in th
First, a two way Random Effect model of panel estima
be random. But the Correlated Random Effect Hausman test indicates that fixed effect is
the right model. So a two way fixed effect model is done in each of the following four
cases.
Case 1 :
Benchmark equation (2') and equation (2) involving all twenty six sectors
Case 2:
346
Benchmark equation (2') and equation (2) involving only manufacturing sectors (refer
Appendix)
Case 3:
Benchmark equation (2') and equation (2) involving only high R&D manufacturing
sectors (refer Appendix)
Case 4:
Benchmark equation (2') and equation (2) involving only low R&D manufacturing
sectors (refer Appendix)
DATA
The empirical implementation of the framework developed in section 3 considers tw

countries, namely, India and Rest of the World (comprising of all other countries of
World) and twenty six industries (details provided in Appendix) for three years - 20
2004 and 2007. The following are the data required for the twenty six sectors both
Indian and Rest of the World and for each of 2001, 2004 and 2007: R&D stock;
Domestic and foreign input matrices; Real Value added; Labor compensation shares;
Physical capital stocks and Employment data
R&D Stock
Data on nominal R&D expenditures (PPP dollars, current prices) for all sec
2001 to 2007 are obtained for Rest of the World from OECD STAN Database. F
the same (in Rs. Crores) is available from Research and Development Statistics
issues (Government of India, Department of Science and Technology, vario
Using PPP dollars - current prices conversion rates from World Development
(The World Bank, 2015) these are converted into R&D expenditures at PP
current prices and then domestic R&D stock for each of the twenty six sectors
regions for period't' are computed using the perpetual inventory method formu
Sikt = (1 — 8) + -Rifcf
Where S is the depreciation rate of knowledge obsolescence. Following Coe & H

(1995) this is taken as 0.15
V_. is R & D stock of industry 'i' in period't'
Rjht is the R & D expenditure by industry 'i' in period t
The initial stock of R & D considered for India is the value of 1999 while that for Rest of
the World is the value of 2000. These values are used to calculate the respective R&D
stocks for the regions for the required three years. The choice of these initial years is
based on earliest available data of R&D expenditures for the regions. The initial R&D
values for some sectors are set to zero as these values are missing. If values between two
years are unreported, then the figures are interpolated from the average annual growth
rates of these two years.
347
Domestic and Foreign Input Matrices
Both these matrices for the three years for the two regions are extracted from GTAP
databases - versions 6, 7 and 8 (GTAP, 2015).
Real Value Added
The data for value added by the twenty six sectors in the two regions during each of t
three years are extracted from GTAP databases - versions 6, 7 and 8. These are th
converted into real value added by using GDP deflators for these regions for the thr
years as obtained from World Development Indicators (The World Bank, 2015).
Labor Compensation Shares and Capital Stock
The data for share of labor compensation and capital stock in each of the twenty six
sectors for the regions during the three years are extracted from GTAP database
versions 6,7 and 8.
Employment
The sectoral employment data for India are compiled from various rounds of
quinquennial Employment and Unemployment Surveys (EUS) of the National Sample
Survey Organization (NSSO). The EUS of 50th round, 1993-94 (Government of India,
NSSO, 1997), 55th round, 1999-2000 (Government of India, NSSO, 2001), 60th round,
2004 (Government of India, NSSO, 2005) and 64th round, 2007-2008 (Government of
India, NSSO, 2010) are used for compiling employment data for the years 2001-2, 2003
04 and 2007-08 respectively. For Rest of the World labor data is obtained from OECD
STAN database and World Development Indicators.
RESULTS AND DISCUSSION
This section presents the results of the empirical model. Table 1 reports the res
benchmark model in each of the 4 cases mentioned in section 3.2.
TABLE 1. RESULTS FROM BENCHMARK EQUATION
Industries Variable (7n5j,f) Observations

Observations Adjusted
Adjusted R2
R2
All twenty six 0.20 (.06)* 78 0.95

Only twenty two manufacturing 0.18 (.06)* 66 0.95
Only high R&D manufacturing 0.07 (.07) 33 0.94
Only low R&D manufacturing 0.53(0.12)* 33 0.95
Source: Based on Author's calculation.

Notes: Dependent variable: In TFPh„ t: 2001, 2004, 2007.
Standard errors are in parenthesis.
Significance: *p < 0.05, **p < 0.01, ***p < 0.1.
348
The results in the table 1 indicate that R&D content of intermediate inputs have been
a significant variable explaining industry level productivity for all twenty six sectors
considered in the present study, for all of manufacturing as also for sectors identified as
low R&D manufacturing. However, for high R&D manufacturing sectors the R&D
content of intermediates do not seem to be an important factor explaining industry level
productivity. The elasticity of industry level productivity with respect to R&D is highest
in low R&D sectors. It is as much as 0.53.
Equation 2 is estimated only for cases 1, 2 & 4 i.e., it is not estimated for high R&D
industries. This is because for these industries the R&D content of intermediates has been
found not to be a significant variable explaining their productivity. Thus, though these
manufacturing sectors have high R&D stocks as compared to sectors classified as low
R&D industries, yet their R&D stocks have not been the reason for the increase in their
productivity over time.
Estimation of equation 2 in all three cases show high multi-collinearity between
foreign and domestic R&D content (correlation as high as 0.98) of the intermediates used
by the industries. Hence, following the usual practice of dropping the variable with high p
value it is found that for cases 1 & 2, the domestic R&D content of intermediates is more
important in explaining variations in industry level productivity. On the other, for low
R&D industries, it is the foreign R&D stock in intermediates which have explained much
of the industry level variations in productivity. This time too, the productivity of low
R&D industry is found to be most responsive to changes in R&D stock in intermediates,
but to the foreign component of the stock. Table 2 reports these results.
TABLE 2. RESULTS FROM EQUATION (2)
Industries Variable InS§

Variable In S§ Observations
ObservationsAdjusted
Adjusted R2
R2
or In sft
All twenty six 0.18
0.18 (.06)* (.06)* 0.95
78 78 0.95
Only twenty two manufacturing 0.16
0.16 (.07)* (.07)* 66 66 0.95
0.95
Only low R&D manufacturing 0.31
0.31 33
(0.12)* (0.12)* 0.94
33 0.94
Source: Based on Author's calculation.

Notes: Dependent variable: In TFPh„ t: 2001, 2004, 2007.
Standard errors are in parenthesis.
Significance: *p < 0.05, **p < 0.01, ***p < 0.1.
Thus, total R&D stock (both domestic and foreign as embodied in direct and indirect
input purchases by an industry) is found to be a significant variable in explaining
improvement in productivity of Indian industries, other than the industries characterized
as high R&D intensive industries.
The elasticity of industry level TFP with respect to R&D contents of intermediates is
calculated from the estimated equations 2 and 2'. For obtaining consistent estimate of 'ß'
the issues related to serial correlation, simultaneity and endogeneity are taken care of.
While serial correlation is ruled out as the present study involves panel data that spans
more across industries than across years. The simultaneity issue is reduced considerably
by the way the TFP index is constructed following the elaborate structure of Caves et al
349
(1982). Besides, the study also goes on to estimate equations which distinguish R&D by
sources. This obviously reduces the possibility that R&D content and TFP are subject to
common shocks. Ideally, to handle endogeneity, instrumental variables for R&D
measures are required, but it was difficult to find one. The estimation exercise done in
this section, thus provides with robust estimates.
The study comes up with very important and relevant results for policy analysis.
Much of the R&D stocks embodied in intermediates used by Indian industries have
contributed to their productivity growth. Particularly, noteworthy is the elasticity of
industry level productivity in low R&D industries to changes in R&D content of
intermediates. The result that manufacturing output in general is responsive to R&D
stock of intermediate inputs is consistent with much of the studies on Indian economy
(Flikkert, 1996; Parameswaran 2007; Mitra 2012) relating productivity growth to R&D
embodied in intermediate inputs. Ulku (2004) also found a similar result for both OECD
and non OECD countries. However, the finding that output in low R&D intensive
manufacturing sectors are more responsive to R&D embodied in foreign inputs is a major
departure from the results of Nishioka and Ripoll (2012). The latter find that though
R&D content of intermediate inputs sourced domestically or from abroad are
significantly associated with industry level productivity yet trade does not appear to be a
significant channel of R&D diffusion among low R&D sectors. Studies on Indian
industries do not focus on low R&D sectors in particular. Thus, while the present results
are much in conformity to those found in literature, there is also some departure/addition
from/to literature that it presents.
Recent literature has pointed to the fact that it may not be a good idea to assess the
extent of knowledge spillovers from foreign countries by looking at R&D's contribution
to productivity growth. Rather the focus should be on R&D productivity. This is because
total factor productivity is directly affected by use of foreign intermediate inputs in
production and by technology lending while R&D productivity is not. If a country
imports high-tech inputs, domestic TFP may increase because these inputs have higher
price-adjusted quality. But, this increase in TFP does not reflect the fact that the
importing country has acquired the knowledge embodied in these goods (Piermartini &
Rubinova, 2014). In the present paper, it is the low R&D sectors in which the level of
productivity has been highly responsive to imported inputs. A closer study of the
imported input matrix of each of these sectors reveals that the inputs imported by them
have mostly been primary and items of small scale production and not really high tech
inputs. Hence, possibility of total productivity of these sectors merely increasing due to
input imports without any knowledge acquisition does not hold good here. Thus, the
finding that the elasticity of industry level productivity in low R&D industries to changes
in the R&D content of intermediates is substantially high is very important. It has
important implications for policy making as India is a developing economy and most of
its population operates in labor intensive (refer appendix table Al) industrial sectors
classified under low R&D industry1 in the present study.
Of late, a major focus of India's macroeconomic policy has been inclusive
innovation. A way to make more innovations possible is R&D activities. Irrespective of
whether domestic R&D activities lead to innovation or knowledge acquisitions by way of
imports make it possible, the bigger concern that has been making rounds at policy level
in India is - if this innovation is inclusive? Innovation is inclusive if it results in
350
FIGURE 3. SCHEMATIC VIEW OF INNOVATION
Source: Arora, 2015
affordable access of quality goods and services thereby connecting

population of a country to the nation's innovative system. It complem
innovation by improving the purchasing power and enhancing opportuni
generation for the poorer in the population (The World Bank, 2013).
Inclusive Innovation and R&D
National Knowledge Commission of India defines innovation as a process by whi

varying degrees of measurable value enhancement is planned and achieved, in an
commercial activity. This process may either be real through or incremental, and ma
occur systematically or sporadically in a company; it may be achieved in the followin
ways: (i) introducing new or improved goods and services and/or, (ii) implementing n
or improved operational processes and/or, (iii) implementing new or improved
organizational/managerial processes" (Government of India, National Knowledg
Commission, 2007).
351
Schematically, innovation may be viewed as in Figure 3.
Thus, R&D is an important activity leading to innovation. In India, there was a national
innovation survey conducted based on Annual Survey of Industries 2009-10 databases for
a sample of 9001 firms. Of these, 3184 or 32.7 per cent of the firms were found to be
innovative (Figure 4). However, 86 per cent of these firms with innovative potential were
found to have workforce less than 100 and as such qualified as MSEMs (Medium and
Small scale enterprises). Thus, small firms were found to dominate all types of
innovation (Arora, 2015). This observation is much aligned to the results obtained in the
present study.
FIGURE 4. TYPES OF INNOVATION (INNOVATIVE FIRMS' PER CENT)
80 68.0
70
60
50 42^L_
42^L_
40
32.7 34.6
~25:5~
"2575""
30
20
10
0
(j
o
j^jj 3.6
xsi O
.§ ^
.2 .6 "a-a
■è
3 C3
« C3
« '3 3 C3
C3 "C
'C
-ë
~a
g
P oo
8g
U S
pp
ë §
3 "O
3 "3
C E
s I|
3
c O
o
C i-i
c- 5 3 (S =
S™
3 ™
cc
0
o ;—
; —
^i) oo
TTd | 11
|
.E o
~o c« o
t-
fc-C3
1
s 3
s z
rJî
C/2
Source: Arora, 2015
The results of the study indicate that while industries, in general (including primary
sectors- Agriculture, fishing, forestry and mining) as also manufacturing as a whole have
shown increased productivity due to increased R&D in intermediate inputs, but it is the
small scale low R&D sectors which are found to have experienced the maximum growth
in productivity due to increase in R&D content of its inputs. Thus, increase in R&D
content of inputs used by these sectors may have enabled them to bring in much
innovation in their production structures and this in turn made them significantly
productive. Particularly, the results point to the fact that it is the foreign R&D stock of
inputs which have mainly contributed to improved productivity in these sectors. Thus,
innovation by these sectors in the form of new machines, alternative materials, improved
product quality etc. which they brought in via imports has resulted in increasing their
productivity. This seems rather obvious as doing R&D in- house is mostly limited to
large scale industries which have more R&D stocks to begin with.
352
TABLE 3. FACTOR SHARES IN INDUSTRY FACTOR COST AND LOW R&D

INDUSTRIES
Sectors Factor
Factorshares
sharesin in
industry
industry
factor
factor
cost cost
Skilled labor
Skilled labor Unskilled
Unskilled labor
laborCapital
Ca
Capital
Processed food 9.79.7 52.7
52.7 0.38
0.38
Textile and wearing apparels 7.37.3 48.3
48.3 0.44
0.44
Leather products 9.59.5 62.9
62.9 0.28
0.28
Wood products 7.67.6 61.7
61.7 0.31
0.31
Paper Products 9.89.8 54.04
54.04 0.36
0.36
Nonmetallic minerals 8.78.7 47.9
47.9 0.43
0.43
Metals 8.48.4 46.1
46.1 0.46
0.46
Motor vehicles 4.74.7 28.2
28.2 0.67
0.67
Transport equipment 3.73.7 20.6
20.6 0.76
0.76
Utility consumption 27.4
27.4 37.5
37.5 0.35
0.35
Business Services 11.7
11.7 56.7
56.7 0.32
0.32
Source: Based on GTAP database 8
As is reflected by the factor shares in industry factor cost (table 3) all these low
R&D industries are intensive in labor and particularly unskilled labor. Thus, any
improvement in their productivity is much likely to bring about improvements in the
level of income and employment conditions they offer and thus, help India in furthering
its recent policy initiative towards inclusive innovation.
CONCLUSIONS
Given the importance allotted by the Government of India to R&D and innovat
present study computes the elasticity of industry-level TFP with respect to R&D
of intermediates used by the industries, particularly for the two catego
manufacturing sector - the high and the low-R&D intensive industries. The res
that much of the R&D stocks embodied in intermediate inputs used by Indian i
have contributed to their productivity growth. Particularly, noteworthy is the el
industry level productivity in low R&D industries to changes in R&D con
intermediate inputs. This has very important implications for policy making i
most of its population operates in labor intensive industrial sectors classified u
R&D industry. These sectors are not only labor intensive, but they are particular
intensive in unskilled labor. Since productivity in these sectors are found to be
responsive to increased R&D stocks, an important way to make them efficient in
value addition in output, employment and income generation would be to ensur
R&D in these sectors. This is where innovation has to play a big role and i
successfully execute this role, this innovation would truly qualify as inclusive in
However, given the scale on which these sectors operate, fostering in-house R&
not be much feasible. Thus, innovation by the way of imported new and
materials and techniques may have to be encouraged.
35B
APPENDIX
The twenty six sectors considered in the present study are:
Grain Crops, Meat and livestock, Forestry and fishing, Extraction, Processed food, Text
wearing apparels, Leather products, Wood products, Paper products, Petroleum and coal prod
Other Manufacturing, Metal products, Chemicals, rubber and plastic, Non-metallic minerals,
metals, Other Metals, Electronic Equipment, Machinery equipment, Motor vehicles, Tran
equipment, Utility consumption, Transportation, Communication, Business Services,
defence, health and education services and Other Services.
The manufacturing sectors starting from Processed food to Other Services are further classif
High R&D and Low R&D sectors.
TABLE Al. CLAASIFICATION OF MANUFACTURING INDUSTRIES INTO

HIGH R&D AND LOW R&D INSUTRIES AND THEIR LABOR
COMPENSATION SHARES (PER CENT)
Sectors
Sectors Share (per cent) of labor compensations
Low R&D sectors
Processed food 62.4
Textile and wearing apparels 55.51
Leather products 72.35
Wood products 69.26
Paper products 63.8
Nonmetallic minerals 32.89
Metals 24.33
Motor vehicles 56.66
Transport equipment 54.48

Utility consumption 68.41
Business Services 64.82
High R&D sectors
Petroleum and coal products 6.48
Other Manufacturing 50.86

Metal products 56.79
Chemicals, rubber and plastic 32.15

Basic metals 27.65
Electronic Equipment, 41.95
Machinery equipment 46.04
Transportation 46.14
Communication 24.92
Public, defense, health and education services 83.75
Other Services. 24.37
Source: Based on Authors ' calculation
354
ENDNOTES
1 The classification of industries into low and high R&D industries is based on - 1. R&
of these industries in the years - 2001, 2004 and 2007 and 2. Other studies- Connoll
Hasan (2002) and Parameswaran (2007)
* TEXT OF ACKNOWLEDGEMENT
1 This is a revised version of the paper presented at the 8th Conference on Micro Evid
Innovation and Development organised by UNU-MERIT, OECD and World Bank held
Delhi, India February 10-12, 2015. Authors would like to thank the participants of the con
for their comments.
2 Authors would like to acknowledge Late Prof. Debesh Chakraborty for his inspirat
encouragement at initial stages of the work. We dedicate this paper to his heavenly soul. A
would also like to thank Dr. Paramita Dasgupta for her help in data preparation. Respon
for errors, if any, remains entirely to us.
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PRODUCTIVITY AND RESEARCH AND DEVELOPMENT CONTENT OF INTERMEDIATE INPUTS

- EVIDENCE FROM INDIAN INDUSTRIES

College of Business, Tennessee State University is collaborating with JSTOR to digitize,

PRODUCTIVITY AND RESEARCH AND

JEL Classifications: D24, 03, 032

Research and development (R&D) is conventionally defined as: '....cre

FIGURE 1. R & D EXPENDITURE AS A PER CENT OF GDP FOR SELECTED

Source: Based on World Bank, 2015

In India the overall government and industrial spending in scientific and

FIGURE 2. INDIA'S NATIONAL R&D EXPPENDITURE AND ITS

NATIONAL R&D EXPENDITURE AND ITS PERCENTAGE WITH GDP

Source: Government of India, Department of Science & Technology, 2013

R&D expenditure in India is majorly contributed by the Government wh

Measuring the extent of innovation and knowledge flows can be challenging

There is a large volume of literature on R&D expenditure for OECD coun

Industry Level R&D Content of Intermediate Inputs - Domestic and F

In TFPit = ff; + ß In 5$ + p In s{T + ait (1)

sf( is the foreign R&D stock of country i at time t

For the purpose of the present analysis, we rewrite equation (1) as

In TFPkt = ah+ ß in S|r + p In S {t + sht (2)

TFP^f denotes productivity in industry 'h' in India at time t

Sfö is foreign R&D stock in industry h in India at time t

Ä21 A22 &2N 0 02

*N1 An2 *NN

direct and indirect inputs required to produce AQ is given by

Further, let S1 be defined as (lxG) row vector whose g1 element re

Now the R& D content of intermediate inputs is given by a 1 x NG vector F which is

Industry Level TFP

Industry Level TFP and R&D Content of Intermediate Inputs

In TFPht = ah+ at + ß JnSht + *ht (2')

This is the same as equation (2) except that R&D conte

The empirical implementation of the framework developed in section 3 considers tw

Where S is the depreciation rate of knowledge obsolescence. Following Coe & H

Domestic and Foreign Input Matrices

Real Value Added

Labor Compensation Shares and Capital Stock

TABLE 1. RESULTS FROM BENCHMARK EQUATION

Industries Variable (7n5j,f) Observations

All twenty six 0.20 (.06)* 78 0.95

Source: Based on Author's calculation.

TABLE 2. RESULTS FROM EQUATION (2)

Industries Variable InS§

Source: Based on Author's calculation.

FIGURE 3. SCHEMATIC VIEW OF INNOVATION

Source: Arora, 2015

affordable access of quality goods and services thereby connecting

Inclusive Innovation and R&D

National Knowledge Commission of India defines innovation as a process by whi

Schematically, innovation may be viewed as in Figure 3.

FIGURE 4. TYPES OF INNOVATION (INNOVATIVE FIRMS' PER CENT)

Source: Arora, 2015

TABLE 3. FACTOR SHARES IN INDUSTRY FACTOR COST AND LOW R&D

Source: Based on GTAP database 8

The twenty six sectors considered in the present study are:

TABLE Al. CLAASIFICATION OF MANUFACTURING INDUSTRIES INTO

Transport equipment 54.48

Other Manufacturing 50.86

Chemicals, rubber and plastic 32.15

Machinery equipment 46.04

Source: Based on Authors ' calculation

AlAzzawi, S 2012, 'Innovation, productivity and foreign direct investmen

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