An Economic Analysis of Innovation and Productivity Growth in Manufacturing Sector in India

K, Seenaiah and Rath, Badri Narayan (2018) An Economic Analysis of Innovation and Productivity Growth in Manufacturing Sector in India. PhD thesis, Indian institute of technology Hyderabad.

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Abstract

In the recent past, innovation and technological activities have been recognized as major sources of economic growth and have been prioritizing with a greater attention in academia and public policy. The advantage of innovation has become a critical ingredient in achieving the higher growth rates (Solow, 1956; Romer, 1994; and Aghion and Howittt, 1998). Innovation is a buzz word in Indian context, and national innovation council of India has declared 2010-2020 as the roadmap to decade of innovations. Make in India program was launched by the Government of India to further emphasize on the importance of innovation, particularly for manufacturing sector in India. In this backdrop, this thesis has made an attempt to examine the following objectives. First, this study examines the linkage between innovation and total factor productivity growth, both for aggregate economy and manufacturing firms. Second, the key determinants that affect the innovation in manufacturing sector are identified. Lastly, this study examines the major obstacles for pursuing innovation activities in manufacturing firms. To examine these objectives, this thesis collected the data from both primary and secondary sources. For macro level analysis, the annual data of India is collected from the World Development Indicators (WDI) and for micro analysis, apart from the primary survey (from Bengaluru and Hyderabad), the PROWESS data base, ASI and annual reports and publications of the companies included in the sample are used. The first objective of the thesis intended to examine the effects of innovation at both macro and micro levels on the TFP growth of India. First, at the macro level ARDL bound testing co-integration approach was used, wherein the results indicated a cointegrating relationship between innovation (such as patents, scientific journal articles, trade mark applications and the share of high technology exports of manufacturing sector) and TFP growth. The estimated results indicate a cointegrating relationship between innovation and TFP growth; but the openness has a detrimental effect on the TFP growth, which is largely generating from the excess import activities. Further, coefficients of long-run elasticities show that the rise in overall innovation activities improves the TFP growth, which also holds true in the short run along with human capital variable. Also, the results are consistent and stable that stood against several diagnostic tests. In the next level, this thesis explored the same research question by focusing on the relationship between innovation and growth at firm level productivity by taking a closer look at different types of innovations (product, process, marketing and organizational innovations) in case of Indian manufacturing sector. The empirical results based on random effect model found that the productivity of firms involved in innovation is more as compared to non-innovative firms. Finally, we examined the effects of various types of innovation on TFP growth, and found that the process and marketing innovations are the significant facilitators of the TFP growth of Indian manufacturing sector. The Second objective of the study explores the factors that determine the innovation activities in Indian manufacturing firms. After applying the panel probit models, it was revealed that the exports and R&D expenditure have a positive and significant effect on determining the innovation in case of manufacturing sector. Other key factors such as import intensity, manager’s prior experience, and conducting training sessions for the employees at firm level have a positive impact on the innovation activities. However, firm age and capital intensity affect negatively to innovation. To check the robustness of our results, this study further examined the determinants of innovation by considering capital intensive firms and found similar results. The findings of our results suggest that the policymakers need to concentrate more on export orientation policies and invest in R&D through subsidizing or create more R&D incentive projects, which would significantly boost innovations in India. Further, by using the same firm level data, the study carried out the primary analysis on the factors that actually slowed down or hampered innovations in Indian firms. The survey revealed that the factors such as uncertain outcomes from the future innovations, cost of innovation (R&D expenditure), lack of qualified labor, and lack of appropriate source of finance were largely noticed while attempting innovations. Based on different models, we treated obstacles to innovation as dependent variables (considered major three obstacles and run three separate probit equations). In all the models, it is observed that the negative sign of the marginal effects suggests that export oriented firms are more likely to reduce the obstacles as compared to nonexport oriented firms by around 2%. This implies that such export oriented firms might be able to generate high profits or would gain other beneficial effects from international markets. In contrary to this, the import oriented firms suggests that these firms are likely to face more obstacles than that of non-import oriented firms. However, the firm age and size of the firm are not significant, but export and import variables have some effect on influencing the factors that negatively effects innovation activities in Indian firms. The overall findings of the study is a wakeup call for the policy makers to not only plan for investing in R&D projects but also provide avenue to manufacturing firms for accessing finance. Apart from the R&D constraints and lack of skilled labor, we must not ignore the role of government/ academic institutions for directly helping the manufacturing firms, particularly medium and small firms, by providing them with support. The present study suggest the policymakers to concentrate more on export orientation policies and invest in R&D through subsidizing or creating more R&D incentive projects, which would significantly boost innovations in India.

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