Originally published in Business Standard
Earlier this year, the market capitalisation of Apple surpassed $700 billion - marking the first time a US company had ever reached that milestone. One of the factors contributing to Apple's strong performance has been its investments in research and development. And the company is doubling down on those investments. Its R&D spending surged to $1.9 billion in the second quarter of its fiscal year - a 36 per cent increase relative to a year earlier. Apple says R&D investments are "critical" to its "future growth and competitive position in the marketplace and are directly related to timely development of new and enhanced products that are central to the Company's core business strategy."
Apple's willingness to allocate billions to R&D reflects an under-appreciated reality about the US economy: industries with higher levels of R&D spending than the average across all manufacturing industries ("IP-intensive") perform better than industries that spend less than average on R&D ("non-IP-intensive"). Moreover, there's a well-documented correlation between spending on R&D in major markets around the world and the quality of IP protections in those markets. In short, the more robust the protections, the greater the likelihood that businesses - domestic and foreign - will make investments.
These conclusions are contained in two recent reports showcasing the nexus between R&D spending, IP protections, and performance indicators for companies and countries. The first report, by NDP Analytics, shows that from 2000-2012, IP-intensive industries in the United States outperformed non-IP-intensive industries across a number of economic measures. For example, IP-intensive industries produced more than triple the exports per employee than non-IP-intensive industries. And output per employee in IP-intensive industries was double that of non-IP-intensive industries. Employee income in IP-intensive industries was also 50 per cent higher than the wages of counterparts in non-IP-intensive industries.
Underpinning the R&D investments in all industries, but particularly those that are IP-intensive, is confidence that the IP regimes in the countries receiving investment will protect IP rights. The reality of R&D is that it is costly and risky, and in order for companies to justify investments, they need some confidence they can achieve a strong return on these investments. A climate in which innovators do not enjoy legal protections will not be conducive to attracting investment. Srinivas Reddy, a director at Hetero Pharma, estimates that India has sacrificed nearly $10 billion in investment because it does not respect IP norms.
India's history of IP violations being tolerated - or even encouraged as industrial policy - explains why R&D spending has traditionally been quite low in the country. In 2011, R&D expenditures were just 0.8 per cent of GDP - the equivalent figure was 1.2 per cent in Brazil and 1.8 per cent in China. And in 2013, India attracted a mere 2.7 per cent of global spending on R&D; China, with stronger IP rights, attracted close to 18 per cent; and the US brought in more than 30 per cent.
The weak IP protections have also undermined innovation and invention in India. Patent filings, a rough proxy for innovation, tell the story. Data from the World Intellectual Property Organisation show that India accounted for a small portion of the patents filed from Asia. While there were close to 1,400 patent applications filed from India, there were nearly 24,000 filed from China, more than 45,000 filed from Japan, and more than 63,000 from the US.
As noted in a recent speech by Infosys co-founder N R Narayana Murthy, "Is there one invention from India that has become a household name in the globe? Is there one technology that has transformed the productivity of global corporations? Is there is one idea that has led to an earth-shaking invention to delight global citizens? Folks, the reality is that there is no such contribution from India in the last sixty years."
This is not a problem of Indian creativity, but of Indian government policy. If India adopted more robust IP protections, greater R&D and innovation would follow, by both foreign and Indian companies. A 2015 study by economists Robert Shapiro and Aparna Mathur shows that upgrading India's IP protections to China's level would increase the R&D intensity of India's domestic information technology firms, over time, by more than 80 per cent.
What's more, according to Drs Shapiro and Mathur, the R&D intensity of foreign firms in India's auto, aerospace, and IT industries would increase by between 13 per cent and 41 per cent if India upgraded its IP regime to the levels of China; or by between 33 per cent and more than 100 per cent if upgrading to the level of the US. The strengthened IP protections and higher levels of R&D would also lead to stronger growth, employment and wages across a number of industries in India. Rising to the level of China's IP regime would, for example, increases wages nearly four per cent in the IT industry, while rising to the level of the US IP regime would increases wages nearly 10 per cent.
Prime Minister Modi has championed around the world his "Make in India" programme, seeking to attract investment to power growth and job creation. A broad reform agenda will be essential to securing his vision. An essential component of that agenda is the creation of a reliable IP environment to spur R&D spending by domestic and foreign investors. And that spending can contribute to higher performance by companies while also helping to deliver jobs, rising wages and accelerated growth.
The writer, a senior vice president at the Pharmaceutical Research and Manufacturers of America, served as a senior director at the White House's National Security Council under President George W Bush