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DST-CII White Paper on Stimulating Private sector investment in R&D


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In order to fulfill India’s aspiration to emerge as one of the top five knowledge powers in the world, private sector’s investments into Research & Development need to increase from its current 0.3% of GDP that is significantly lower than those in developed and other emerging economies. A Joint Committee of CII and government was constituted to develop a white paper for stimulating investments of private sector into R&D, to reach 1% of GDP with equal contribution from the Government during 12th Five Year Plan. After evaluating the global trends, India's current scenario and studying stakeholders' inputs and aspirations, the Joint Committee has addressed the issue holistically and made six key recommendations. The Joint Committee will also oversee the implementation of these recommendations on a time bound manner.

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DST-CII White Paper on Stimulating Private sector investment in R&D

  1. 1. Stimulation of Investment of Private Sector into Research and Development in India WHITE PAPER ON Department of Science & Technology Ministry of Science & Technology Government of India Report of The Joint Committee of Industry and Government (JCIG) May 2013 Bhan MK Brahmachari SK Nayak S Ramasami T (Co-Chair) Shukla BK (Co-Member Secretary) Bhartia HS Forbes N Gopalakrishnan S Muthuraman B (Co-Chair) Das A (Co-Member Secretary)
  2. 2. Bhan MK Brahmachari SK Nayak S Ramasami T (Co-Chair) Shukla BK (Co-Member Secretary) Bhartia HS Forbes N Gopalakrishnan S Muthuraman B (Co-Chair) Das A (Co-Member Secretary)
  3. 3. Foreword 01 WHITEPAPERON StimulationofInvestmentofPrivateSectorinto ResearchandDevelopmentinIndia Aspirations of Indian Science Sector are rising. If India were to emerge as a global leader in science, private sector investments into R&D must undergo significantincreases. The Ministry of Science and Technology constituted a Joint Committee of Industry and Government (JCIG) for preparing a white paper on policy environmentforstimulationofprivatesectorinvestmentintoR&DinIndia. JCIGhasnowsubmittedawhitepaper.Ithasmadesixkeyrecommendations for stimulating the private sector investments into R&D. It is hoped that the private sector investments into R&D would match those of public sector by the end of 12th Plan period. The white paper, I see, has been prepared after wideconsultationswithmajorstakeholdersandintensivedeliberations. The white paper is now available for detailed examination by both industry and government for early implementation. I sincerely hope that the key recommendations would be acted upon in a time bound manner and their impactonIndianR&Dwouldbecometangibleandtraceable. I congratulate the Co-chairs and all distinguished members of the Joint Committee for carrying out a commendable work. I expect some transformational changes in the Indian Science Sector leading societal benefitsandwealthcreationfromR&DoutputsofIndia. ShriSJaipalReddy UnionMinisterofScience&technologyandEarthSciences 31May,2013 Shri S Jaipal Reddy Union Minister of Science & Technology and Earth Sciences, Government of India
  4. 4. Acknowledgements WHITEPAPERON StimulationofInvestmentofPrivateSectorinto ResearchandDevelopmentinIndia 02 The Joint Committee of Industry & Government would like to thank the Department of Science & Technology, Government of India for the opportunity to develop the White Paper on Stimulation of Investment of PrivateSectorintoResearch&DevelopmentinIndia. A comprehensive study of the current national scenario in private sector investment in R&D and practices adopted by many other countries in this area as well as feedback and suggestions from wide stakeholder consultationshavebeenusedasthebasisfordevelopingthiswhitepaper. The Joint Committee acknowledges with thanks all those who made important suggestions and provided inputs in the preparation of this White Paper. We are pleased to submit this report to the Ministry of Science & Technology,GovernmentofIndia. Ramasami T Muthuraman B Bhan MK Bhartia HS Brahmachari SK Gopalakrishnan S Das A Forbes N Nayak S Shukla BK
  5. 5. WHITEPAPERON StimulationofInvestmentofPrivateSectorinto ResearchandDevelopmentinIndia CONTENTS Page no. Foreword . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 01 Acknowledgments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 02 1 Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 05 2 Work Elements Behind The White Paper . . . . . . . . . . . . . . . 07 2.1 Motivation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 07 2.2 Formation and Constitution of JCIG . . . . . . . . . . . . . . . . . . . . . 08 2.3 Statement of Main Tasks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 09 2.4 Studies and Stakeholder Consultations . . . . . . . . . . . . . . . . . . 11 3 Stakeholder Aspirations and Suggestions . . . . . . . . . . . . . . 20 4 Six Key Recommendations of JCIG . . . . . . . . . . . . . . . . . . . . . 37 Annex-1 The composition of the JCIG and its Terms. . . . . . . . . . . . 42 of Reference Annex-2 Background on Global Trends . . . . . . . . . . . . . . . . . . . . . . 45 03
  6. 6. 05 WHITEPAPERON StimulationofInvestmentofPrivateSectorinto ResearchandDevelopmentinIndia 1.0 ExecutiveSummary India aspires to emerge as one of the top five knowledge powers in the world in the area of Science, Technology and Innovation. Such aspiration demands bench marking against global best practices in shaping the Indian research and development sector. While public investments meet nearly global benchmarks of 0.7% of GDP in India, private sector engagements into R&D are significantly lower than those in developed and otheremergingeconomies.A JointCommittee of Industry and Government (JCIG) has been constituted to develop a whitepaperforstimulatingtheinvestmentsofprivatesectorintoR&D. The JCIG has studied global practices, held wide consultations with stakeholders andhasmaderecommendations. After evaluating the global trends, India's current scenario and studying stakeholders' inputs and aspirations, the JCIG has addressed theissueholisticallyandmadesix keyrecommendations. a) The entire value chain of Industrial R&D includes R&D in the laboratory; Pilot production/Test beds/design & development/ Standardizations / field trials, etc.; and Pre-commercialization trial productions. Computation of expenditure of private sector into the entire value chain seems appropriate. Currently used criteria for computation of R&D investments by Indian industry do not seem to cover the entire value chain. It seems possible that the extent of private sector investments into R&D is being under- estimated. Hence, redefining private sector investments into R&D as per global norms and capturing all relevant data for reassessing privatesectorengagementsseemanecessarystep. b) Make it mandatory for all Public Sector Units and the Corporate Sector to report and declare investments into R&D in the Annual Report. c) The JCIG has recognized a need for special thrust in some priority areas and sectors for building global leadership and to develop and
  7. 7. WHITEPAPERON StimulationofInvestmentofPrivateSectorinto ResearchandDevelopmentinIndia 06 deploytechnologysolutionsofrelevancetoIndiansociety.Hencea comprehensive strategy, and implementing mechanism including risk and failure management procedures for select sectors of interesttoprivatesectorisnecessary. d) JCIG records that current indirect incentives (such as 200% Weighted Tax deductions) offered by the Indian Government are one of the best in the world already. While retaining current direct and indirect fiscal incentives, some rationalization for covering the entire value chain of industrial R&D and technology commercialization may be examined and simplification and rationalizationprocessesenacted. e) The key to research is a qualified Human Resource. It will be imperative to build a large pool of quality professionals suited for industrial R&D and create both high value and a large volume of employment intheprivatesectorforresearchorientedfunctions. f) Commercialization of R&D outputs is a key step. Public-Private- Partnerships and well designed incentive mechanisms to trigger commercialization of R&D outputs would be required to stimulate privatesectorinvestmentintoR&D.
  8. 8. 07 WHITEPAPERON StimulationofInvestmentofPrivateSectorinto ResearchandDevelopmentinIndia 2.0 The White Paper Work Elements Behind It is widely recognized that access to science-based innovations, technologies and engineering would determine the global competitiveness of Nations. Currently the global investments into Research and Development are estimated at 1.2 trillion USD, of these, the private sector is the major investor. In developed and emerging economies, the private: public investments into R&D are generally in the range of 2:1. On the other hand, in India private investments into R&D are estimated at only half of that of thepublicsector. In countries where private sector engagement into R&D is large, time to commercialization of technologies is shorter. The extent of commercialization of outputs from public funded research is generally lower. Hence, it is in the national interest of India to stimulate the private sector engagement into R&D and aim at Public : Private sector investments into R&D at levels of 1:1 by 2017. Science derived innovations and technologies based on Research and Development in India should focus on all three contributors to economic growth, viz agriculture, manufacturing and services. Intellectual Properties generated through public funded research, in the absence of a strong participation of the private sector, could tend to focus on scientific publications in peer valued journals as major outputs. In recent times, Indian Industry has started investing in R&D in overseas entities, while Multinational Companies invest into R&D in India for generation of Intellectual Properties for global exploitation. These tendencies indicate that MNCs are able to leverage expertise- arbitrage of Indian R&D systems for early leads, while Indian 2.1 Motivation
  9. 9. WHITEPAPERON StimulationofInvestmentofPrivateSectorinto ResearchandDevelopmentinIndia 08 Corporate sector is focused on R&D with shorter time to market- needs. Time to market for the R&D outputs emanating from public funded R&D in India needs to be minimized and extent of commercialization of Intellectual Properties generated through publicfundedR&Dshouldbeincreasedsignificantly. Commercialization of IPs does involve several steps including significant investment and completion of the entire R&D value chain, viz. translation R&D, pilot studies, establishment of test- beds etc. These are defined to minimize risks of failure. Inclusion of investments of private sector for such risk minimization protocols as R&D costs seems justified and these are included as R&Dcostsinmanycountries. Both,theGovernmentandIndustryinIndiaareequallyconcerned that the private sector investment into R&D is less than optimum levels in comparison to the current trends in global best practices. One of the recommendations emanating from the sub- committeeonPM'sCouncilonTradeandIndustryforPPPforR&D and clean energy is that the policy environment would need to be triggeredforstimulationofinvestmentofPrivatesectorintoR&D in India. The report of the steering committee constituted for the development of the 12th Plan for S&T Sector also aims at an investment of private sector into R&D to match the levels of publicinvestmentplannedtobeinvestedduringtheplanperiods. In order to address these issues comprehensively and to arrive at an implementable plan of action, a joint committee of industry and Government has now been constituted for co-development of a white paper for stimulation of the private sector investment intoR&DinIndia. In order to step up the investments of private sector into R&D in India and to match the global standards and pursuant to the 2.2 FormationandConstitutionofJCIG
  10. 10. 09 WHITEPAPERON StimulationofInvestmentofPrivateSectorinto ResearchandDevelopmentinIndia decision taken during the interactive session with Hon'ble MOS th (S&T) with private sector CEOs on 12 November 2011 in Mumbai, the Department of Science & Technology constituted a Joint Committee of Industry and Government. The composition of the JCIGanditsTermsofReferenceisgiveninAnnexure1. Terms of Reference for the JCIG was to prepare a white paper for stimulating private sector investment in R&D and suggest policy th initiatives to the Government from time to time during the 12 Planperiod. Dr.T. Ramasami, Secretary DST and Mr.B Muthuraman are the Co- Chairsofthecommittee.OthermembersareMr.HariBhartia,Mr. Kris Gopalakrishnan, Dr. Naushad Forbs and Secretaries of DBT, DSIR and Ministry of Earth Sciences. The Committee met twice th th on 7 May and 13 July 2012 and deliberated on the subject and discussed at length on various measures needed for "Stimulation of Private Sector Investment into R&D in India". The suggestions emanating from the meetings of JCIG were captured in form of draftbackgroundnoteforfurtherconsultationsandrefinements. A larger consultation and interaction of Industry with the then th MOS, was also organized in Mumbai on 8 October, 2012. This White Paper is the final product of such consultations, and includes some actions that the industry has promised to undertake. The Government of India has laid high emphasis on attracting investment of private sector into R&D to match public investments (that is 1% of GDP each by Government and Industry) before the end of the 12th Five year plan. Hon'ble Prime Minister hasmadeseveralcallstothePrivateSectortoinvestintoR&Dand match the public investments into R&D and had added that the Government could facilitate industry to do so through policy environments and other means. One major task of JCIG will be to identify key elements for stimulation of private sector investmentsintoR&D. 2.3 Statementof MainTasks
  11. 11. WHITEPAPERON StimulationofInvestmentofPrivateSectorinto ResearchandDevelopmentinIndia 10 S&T Department /Agency 12thPlan (2012-17) Outlay (Rs. Cr) 1 Department of Atomic Energy (R&D sector) 19,878 2 M/o Earth Sciences 9,506 3 Department of Science & Technology 21,596 4 Department of Biotechnology 11,804 5 Department of Scientific and Industrial Research 17,896 including CSIR 6 Department of Space 39,750 Grand Total 1,20,430 th Indicative Outlay for 12 Five Year Plan Central Scientific Ministries/Departments/Agencies th Source: Draft 12 Five Year Plan 2012-17, Volume – 1 ,Planning Commission, GOI document ThetablebelowoutlinesanapproximatephasingofinvestmentofPublicand th PrivatesectorintoR&Dduringthe12 Plan Year 2011 2012 2013 2014 2015 2016 Share of Public investment 76% 73% 67% 61% 56% 50% as % of R&D investment in public sector. Share of industry sector 24% 27% 33% 39% 44% 50% investment as % of R&D investment. th Source: Report of the Steering Committee on S&T for the formulation of 12 Five Year Plan th The size of the 12 Plan for S&T sector has now been estimated with a public investment of Rs. 1,20,430 crores in only six departments. Additional investments are planned under Defence Research Development Organization, various other socio- economic ministries as well as academic and state sectors. The table also presents an approximate phasing to achieve the target of1%ofGDPeachasmentionedabove. Given the current levels of investment of the private sector, an approximately 8 fold increase in the engagement of the private sector into
  12. 12. 11 WHITEPAPERON StimulationofInvestmentofPrivateSectorinto ResearchandDevelopmentinIndia th R&Dwouldbecomenecessaryifthetargets of12 planforR&Dsectorswere tobefullyrealized. The JCIG is of the view that the current investment of the private sector into R&D might be underestimated and the estimate may not capture all investments being made by the non-government sectors in India. The JCIG also emphasized the importance of validating the data on investments of privatesectorintoR&Dandestablishingacontinuousupdating mechanism. The JCIG focused on the need to critically assess and agree upon various elements of the key enablers for boosting private sector's investment to match the expectations as planned during the 12th Five year plan. The JCIG resolved that if the Indian industry were to match the global benchmarks of investmentsintoR&D,thepolicyenvironmentinIndiaaswellasclassification of what qualifies for grouping under R&D in India should also match those of major countries. The global bench marking study was commissioned to CII for ensuring realistic comparisons. The JCIG decided to concentrate on the followingfivemajortasksinordertoarriveattherecommendations:. Studying global practices and classification of R&D heads as practiced globally RevalidatingthedataonprivatesectorinvestmentsintoR&DinIndia Identifying key enablers for stimulating private sector investments into R&D Studying various policy instruments deployed by other countries for maximizing the provisions and benefits of PPP for R&D as tools of change inmanufacturingand Suggesting measures for implementation with industrial sector driving thedesiredchangesintheprivatesector The JCIG assigned the CII team the task of carrying out the following studies with a view to global benchmarking of the private sector investmentintoR&DinIndia l l l l l 2.4 Studies and Stakeholder Consultations
  13. 13. WHITEPAPERON StimulationofInvestmentofPrivateSectorinto ResearchandDevelopmentinIndia 12 a) R&D Expenditure - What expenditures are considered as R&D expenditure in all three phases - Research, Development and Deployments/Applications? Find out what definitions are prevalent inIndiaandothercountries. b) R&D Classifications - What are the models, structures, investment patterns, monetization, IP ownerships, financial benefits to stakeholders etc. and examples of (a) purely private sector R&D (b) purely Public sector/Government R&D and (c) PPP R&D, prevalent inIndiaandinothercountries? c) R&D Incentives - What are the current incentives offered by the Government of India and other countries for all the above types of R&D (Private, Public & PPP) and how simple or complex are the procedures to avail such incentives. Also, how many players are availingsuchincentivesinIndiaandinothercountries? d) R&D Risks and Failure Management - How are risks of R&D covered and how failures are treated and managed in all categories (Private, Public&PPP)ofR&DinIndiaandothercountries? e) R&DHumanResource-HowR&DHumanResourcesaredeveloped, incentivized and trained on industrial R&D for delivering results through Private, Public & PPP mode of R&D in India in comparison toothercountries? In addition to using its internal knowledge base with its members and others, CII commissioned a research study to Arthur D' Little for generating inputs for the elements listed above in order to have a fuller and more authentic picture in a short time. While a detailed report on Global Trend is attached in Annexure 2 as Background Information, salient features of the research findings are summarized in this section. Regarding the information about India, remarks about such items qualified as R&D expenditure, incentives etc, are made in this section only in a brief manner. Further details about India are presented in the nextsectionwhilemaking therecommendationsofJCIG.
  14. 14. 13 WHITEPAPERON StimulationofInvestmentofPrivateSectorinto ResearchandDevelopmentinIndia 2.4.1 Governments provide support to R&D ecosystem in the form of incentives which are broadly classified into direct and indirect categories. 0.18 0.083 0.15 0.06 0.058 0.03 0.15 0.075 0.045 0.047 0.075 0.08 0.12 0.185 0.4 0.35 0.3 0.25 0.2 0.15 0.1 0.05 0 USA UK France Germany Israel Japan South Korea Finland Indirect government support through R&D tax incentives Direct Government funding of BERD Source: Arthur D. Little Analysis, OECD Website % of GDP l l l l Direct incentives include grants, credits and public procurement o VariousdirectincentiveshavedifferentialimpactontheR&Dcosts o R&D grants and loans affect the cost of performing R&D, but contracts usually awarded through competitive bidding do not directlyaffectthecostofperformingR&D o Countries such as Sweden, Finland and Germany prefer direct funding Indirect funding refers to all tax incentives related to R&D; tax credit allowances, social security contributions, reductions in R&D, labour taxes o Japan,NetherlandsandCanadarelymostlyontaxincentives Countries such as France and USA combine both instruments namely directfundingandTaxincentives India generally provides indirect incentives as 200% Weighted Tax Deduction.DirectfundingisnotacommonlyusedinstrumentinIndia.
  15. 15. WHITEPAPERON StimulationofInvestmentofPrivateSectorinto ResearchandDevelopmentinIndia 14 In India, the indirect incentives are to be claimed as Weighted Tax Deduction with the Income Tax Department. However, processes for special approval/authentication from Ministry of Science & Technology are sought, which makes the process complex and long drawn. It is particularly difficult for small and medium companies and even big industries require considerable specialeffortstoavailtheincentivesfrompublicfund. 2.4.2 Incentives are generally based on Government approval guidelines on nature and jurisdiction of R&D activities, which in turndecidetheownershipoftheIPgenerated USA Income tax Plain No Carry forward No Yes No at the federal deduction & state levels and tax credit UK Income tax Super No Refundable No Anywhere Yes/No* & cash deduction and carry subsidy forward and carry back France Income tax Tax credit off No Refundable No Yes No set against and carry tax forward Germany Cash subsidy Cash Yes Not applicable Yes Yes Yes subsidy Israel Income tax Super Yes Refundable Yes Anywhere Yes & cash deduction (for tax subsidy benefits For grants (only Israel) Japan Income tax Tax credits No Carry forward Yes Anywhere Yes South Income tax Tax credit No Carry forward No Anywhere No Korea & cash subsidy Nature of Extent of Specific Refundable/ Any cap R&D to be IP to benefit income tax approval carry forward on benefit physically reside available benefit required performed in the available from within the country government jurisdiction
  16. 16. 15 WHITEPAPERON StimulationofInvestmentofPrivateSectorinto ResearchandDevelopmentinIndia 2.4.3 Qualified expenditures heads for R&D are broadly classified in fivemajorcategories R&D Personnel Land & Building Materials & Equipment Services /Pilot Plan /Prototypes Others Prototyping Cost Standardi expenses zation Pilot Plant Cost Technology watch expenses Annual wages and salaries and all associated costs or fringe benefits, such as bonus payments, holiday pay, contributions to pension funds and other social security payments, payroll taxes, etc. For PhD candidates, students who are on the payroll of universities or R&D units (e.g. as research assistants) and/or receive external funds for R&D (such as research scholarships) are included in the statistics Total costs of acquiring equipment and machinery that are used exclusively for R&D activities; elsethe proportion of expenditure accounted for by R&D activities is estimated according to use This comprises land acquired for R&D (e.g. testing grounds, sites for laboratories and pilot plants) and buildings constructed or purchased, including major improvements, modifications and repairs. This covers major instruments and equipment acquired for use in the performance of R&D including embodied software Fees for patent filing, patent maintenance and plant variety protection certificates Utilities, such as telephone, telex, electricity, water, and gas Cost of computer software used in R&D activities Expenses incurred for the protection of patents and plant variety protection certificates The R&D share of the expenditures for new buildings is often difficult to quantify, and many countries ignore this element of R&D expenditure (in the higher education sector) or at best estimate it on the basis of scheduled use. There are certain border line items, as listed below that are treated differentlyinOECDcountries,ascomparedtoothercountries. Item Treatment Remarks Industrial design and drawing Divided Design during R&D is included and design during production is excluded. Trial production Divided Included if testing involves full time testing and subsequent further design and engineering Industrial engineering and tooling up Divided Include feedback R&D and subsequent improvements in processes of production Patent and license work Excluded After sales service and troubleshooting Excluded Except feedback R&D Routine tests and data collection Excluded Public inspection, control, enforcements of standards Excluded
  17. 17. WHITEPAPERON StimulationofInvestmentofPrivateSectorinto ResearchandDevelopmentinIndia 16 In India the qualified expenditure is mostly around R&D personnel, material&equipment,costofcomputersoftwareandutilities&services used for R&D. Prototypes / pilot plants and items listed in other categories in Table 2.4.3 are rarely included as items for computing R&D expenditure. 2.4.4 Certain incentive schemes are specifically directed towards human resource development, which are a set of both direct and indirectincentives Countries Incentives Finland Allowable expenses related to costs incurred for maintenance of professional or vocational skills Study loan allowances France Income tax credits for educational expenses in higher education and in secondary education Tax credit on interest burden of loans incurred by students in higher education to finance their studies Income tax exemption on wages earned by apprentices Income tax exemption on wages earned by pupils and students working during school or university holidays Germany Deduction of education/training costs as income related expense Deduction of education/training costs as a special expense Deduction of tuition fees for own children in private schools USA Loans up to $30000 given by various state universities for doctoral students with a payment period of up to 15 years Waiver up to 20 per centon loans if the candidate joins the same university Tuition deduction of up to $4000 for expenses on higher education of children, spouse or any other dependant Interest deduction on student loans or payment of loans by the government during college. Japan Full or partial remission of tuition fees is granted on meritocracy and need basis in both national and private universities Japan Student Services Organization (JASSO) gives loans (interest free and low interest) to students with outstanding academic achievements in post graduate programs. South Korea Talent development program supporting and mentoring students. International scholarship policy forum which collaborates with world bodies and institutions for donation. Separate national scholarship for science and engineering l l l l l l l l l l l l l l l l l l
  18. 18. 17 WHITEPAPERON StimulationofInvestmentofPrivateSectorinto ResearchandDevelopmentinIndia In India, such clear-cut provisions do not exist. Tax deductions exist for contribution to educational institutions but they are not to be linked withindustry'smainR&Dneeds. 2.4.5 Treatment of failure predominantly revolves around 'Loan GuaranteeSchemes’ Countries Scheme Features Guarantor USA State Small Enable small businesses to The state provides collateral Business obtain loans and lines of credit and accepts burden of Credit Businesses of all types - repayment to the financial Initiative corporations, partnerships and institution (SSBCI) proprietorships - eligible for loans Reserve fund is established Loans of size $5 million to $20 to pay loans million Guarantees loans from private institutions to businesses UK National Loan Helps businesses access cheaper Guarantor does not Guarantee finance by reducing the cost guarantee loans to Scheme of bank loans businesses (NLGS) Specific banks participate in Individual is liable for the scheme repayment of NLGS loans, Businesses are eligible by: the government holds no vHaving less than £50 million in collateral revenue vA business contributing to the UK economy vIs not in financial difficulty Businesses in NLGS receive a discount of 1% on their loan compared to the interest rate they would normally have Individual banks determine max/min amounts that can be borrowed NLGS qualifies as state aid to businesses as per European Commission regulations Germany German United Improves collateral situation and Government provides Loan financial credibility financial guarantees for Guarantees Provides lower interest rates loans should the firm Help banks lower credit risk be unable to repay l l l l l l l l l l l l l l l l l l
  19. 19. WHITEPAPERON StimulationofInvestmentofPrivateSectorinto ResearchandDevelopmentinIndia 18 Countries Scheme Features Guarantor Germany German Criteria United Loan vYoung industries without history Guarantees vDynamic companies in difficult industries vCrisis situation requiring venture/equity capital vProjects must contribute to economic development of Germany vManaged by PwC with a local partnership Israel Israeli R&D The main OCS program (the The state automatically policy R&D Fund) supports R&D becomes the guarantor in projects of Israeli companies this case. by offering conditional grants of up to 50% of the approved R&D expenditure. If the project is commercially successful, the company shall be under the obligation to repay the grant by royalty payments. If not successful, the company is not obligated to return the funding and it becomes a grant. Japan Japan Bank for Provide investment loans, Government organization International financing overseas investment guarantees and accepts Cooperation and resource development by burden Loan Japanese firms Guarantee Credit guarantee enables CGC scheme to guarantee financial institution against risk associated with loans to SMEs Credit insurance funded by public money reinsures credit guarantees CGC's guarantee loans, provide deposit Scheme provides vFund for credit insurance vSubsidies for CGC funds vDeposits vCompensation for loss l l l l l l l l l l
  20. 20. 19 WHITEPAPERON StimulationofInvestmentofPrivateSectorinto ResearchandDevelopmentinIndia South Korea Credit Public finance institution By guaranteeing the Korea Guarantee providing support specifically loans, KODIT agrees to Fund (KODIT) for SMEs in the form of accept the burden of vGuarantee for Bank Loans payment should the vCommercial bills guarantee company be unable to vGuarantee for bidding, repay debts contract Capital fund of $3.2 vTax payment guarantee billion for Credit Guarantees for SME’s vP-CBO guarantee KODIT guarantees loans from private banks Has helped SMEs out of oil crises and the recent financial crisis l l l l l In India, direct funding is rare. For instance, funding is through the TechnologyDevelopmentBoardandsomeschemesoftheMinistryofS&T.In such cases each failure is treated as a separate case and goes through complex procedures and legal processes, even when the genuineness of failureisevident. Countries Scheme Features Guarantor
  21. 21. WHITEPAPERON StimulationofInvestmentofPrivateSectorinto ResearchandDevelopmentinIndia 20 3.0 Suggestions Stakeholder Aspirations and JCIG deliberated in depth on all the parameters that impact industrial R&D and analyzed the global best practices. CII had reached out to many industry captains and received their recommendations for stimulation of private sector investment into R&D. A special interactive session with the then MoS was also organized in Mumbai byCII. This section captures the deliberations, analysis and the recommendations received from many stakeholders on various aspects.Thefinalkeyrecommendationsofthiswhitepaperareofhigh priority demanding early actions. However, all inputs received from stakeholders are listed here. They are of equal importance and merit considerationforimplementationinmidandlongtermperiods. Estimates of current data on private sector investments into R&D in India originate from the R&D statistics brought out periodically by the National Science and Technology Management Information System (NSTMIS) of the Department of Science and Technology. The methodology adopted by NSTMIS involves generation of primary data from industrial housesthroughsurveymode.Inthismodeofdatacompilation,a lower bound value is feasible and the lag time involved in gatheringandreportingistoolong foreffectivepolicybuilding. During the last few years, fiscal incentives for private sector investmentsintoR&DhavebeenannouncedbytheGovernment of India. Changes in response to such alterations in policy environmentinthecountryarenotwelldefined. 3.1 Data validation of private sector's investment in R&DinIndia
  22. 22. 21 WHITEPAPERON StimulationofInvestmentofPrivateSectorinto ResearchandDevelopmentinIndia 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 (estimate) Tax foregone under 2000 2526 2416 4685 5745 6335 current policy regime for supporting R&D (Rs. in Crores) Computed investments 6060 7654 7321 14196 17409 19197 of Private Sector into R&D based on tax foregone estimates (Rs. in Crores) Tax foregone in R&D Source : Ministry of Finance, Govt of India website The computed investments are gross estimates and would not include the direct investments of private sectors which are not covered by Section 35 (2AA) and Section 35 (2AB). R&D investments are meant for 100% write-off in the first year. Reliable estimates of investment which are actually eligible for 100% write- off in the first year are not known. Current CAGR of tax foregone since 2 years is 16.3%. Based on CAGR it is estimated that private sector investment into R&D, eligible for being considered under Section 35 (2AA) and Section 35 (2AB) are estimated to be Rs. 40,844Croresby2017. 1 However, published report of a team of Administrative Staff College of India as observed from Prowess database reveals interesting trends and changes. The study reveals that for a group of companies with turnover of about 70% of India's manufacturing base, there has been doubling of turn over between the annual figures of 2010 relative to 2005 while the reported R&D investments by them have undergone a change of 2.5 times. In other words, the published study of ASCI reports an R&D investment of Rs. 17,500 crores in 2010 by the private sector units studied,registeringanincreaseofoverRs.10,000croresrelativeto 2005. 1 Published research by Dr. Bagchi, ASCI, Hyderabad
  23. 23. WHITEPAPERON StimulationofInvestmentofPrivateSectorinto ResearchandDevelopmentinIndia 22 Multiple mechanisms are being explored for revalidating the data on investments of private sector into R&D in India. There are three major groups of private investors into R&D, who need to be considered.Theyare a) MultinationalcompaniesinvestingintoR&D b) Nationalinvestmentsofprivatesectorintoin-houseR&D c) National investments of private sector into public funded R&D entities A study of annual reports of various companies in the country employing Prowess database as source reveals that transportation, electronics, non-electronics, drugs and pharma and mineral sectors are major investors into R&D in the country. It is not clear from the available data as to whether companies invested into resident research or funded some foreign entities abroad. Itmightbeuseful toassessprivatesectorinvestmentsintoR&Dby th the end of the 12 plan if business-as-usual approaches under the present policy regimes of the country were adopted. CII has also initiated a parallel study of their member units for assessing their th R&D investment plans for the 12 plan period. Data validation within the structure of classification of what constitutes R&D investmentsiscurrentlyinprogress. 3.1.1 Current initiative of Technology Development Board to capture investment by private sector through CII and other industry associations should be concluded at the earliest and theeffortstocontinueregularly 3.1.2 Reporting by companies in the annual report / balance sheet indicating their expenditure in R&D from Financial Year 2013- 14onwardsmaybemandated. 3.1.3 GlobalInnovation&TechnologyAlliancemaycapturethedata and publish Annual Reports on Private Sector's investment intoR&D Inputs/Suggestions receivedfromstakeholders
  24. 24. 23 WHITEPAPERON StimulationofInvestmentofPrivateSectorinto ResearchandDevelopmentinIndia 3.2 What expenditure of private sector should be consideredasR&Dexpenditure Inputs/ Suggestions receivedfromstakeholders Currently, the following expenditures incurred at the designated in-house R&D units of private sectors are considered as R&D expenditureforthepurposeofTaxbenefits. a) Plant&Machinery b) Materials&Consumables c) Utilities&Services d) HumanResources Apart from the current practice of consideration of R&D expenditure, the following expenditure of private sector may be considered as "R&D expenditure" for the purpose of availing tax and/or other benefits from 2013-14. Infrastructure 3.2.1 CostoflandandbuildingforsettingupR&Dlaboratories 3.2.2 CostofusingR&Dinfrastructureofpublicinstitutions HumanResource 3.2.3 Fees / Remuneration for National and overseas experts / expert organizations 3.2.4 Fund provided by industry to PhD scholars in institutions for industrialresearch 3.2.5 CostofhumanresourcedevelopmentforR&D Technologyadoption 3.2.6 Cost of Intellectual Property purchased as sub-components of final R&Doutput
  25. 25. WHITEPAPERON StimulationofInvestmentofPrivateSectorinto ResearchandDevelopmentinIndia 24 IPProtectionandmanagement 3.2.7 Cost of Patent filing / maintaining and license work (in-house & out- sourced) PreCommercializationactivities 3.2.8 Cost of Prototyping, Industrial design and drawing (in-house & out- sourced) 3.2.9 Cost of Trial production from R&D / Test Beds (in-house & out- sourced) 3.2.10 Cost of Clinical drug trials and/or bio equivalence studies (in-house & inotherlocations) 3.2.11 Cost of Quality Control & Certification Expenses (in-house & out- sourced) 3.2.12 CostofIndustrialengineeringandtooling(in-house&out-sourced) 3.2.13 Cost of Tests and data collection for Quality standardization (in- house&out-sourced) 3.2.14 Cost of Public inspection, control, enforcements of standards (in- house&out-sourced) 3.2.15 CostoffirstmarketingofR&Doutputs InvestmentbyVentureCapitalistandnon-manufacturingorganizations 3.2.16 Investment (by Venture Capital industry) of VC funds in technologyventures 3.2.17 Investment (by non-manufacturing Design firms) in design activities 3.2.18 Investment (by non-manufacturing R&D firms) in R&D activities byre-introducingSection80-IB(8A)oftheIncometax1961 Currently following indirect incentives are provided to private sectorforR&D. 3.3 IndirectIncentivestoprivatesector
  26. 26. 25 WHITEPAPERON StimulationofInvestmentofPrivateSectorinto ResearchandDevelopmentinIndia 100% write off of revenue expenditure on R&D; (Section 35(1) (i) of IncomeTaxAct). 100% write off of capital expenditure on R&D in the year the expenditureisincurred;(Sec.35(1)(iv)ofIncomeTaxAct). Weighted tax deduction @200% for sponsored research programs in approved national laboratories, Universities and IITs, available to the sponsor.(Section35(2AA)ofIncomeTaxAct). Weighted tax deduction @200% on in-house R&D expenditure to companies engaged in the business of bio-technology or in the business of manufacture or production of any article or thing not being an article or thing specified in the list of the eleventh schedule. (Section35(2AB)oftheIncomeTaxAct). Income-tax exemption @175% to donations made to approved non- commercialScientificandIndustrialResearchOrganizations(Section 35(1)(ii)and35(1)(iii)oftheIncomeTaxAct). Accelerated depreciation allowance for investment on plant and machinery, made on the basis of indigenous technology (Rule 5(2) of IncomeTaxRules,1962). Customs duty exemption to R&D institutions and scientific & industrial research organizations, both for capital equipment and consumables needed for R&D. (Notification No.51/96-Customs, dated23July1996). Central Excise duty exemption to R&D institutions and scientific & industrial research organizations, both for capital equipment and consumablesneededforR&D.(NotificationNo.10/97-CentralExcise, dated1stMarch1997). Central Excise duty waiver for 3 years on goods designed and developed by a wholly owned Indian company and patented in any two countries out of: India, USA, Japan and any one country of the European Union (Notification No.15/96-CE dated July 23, 1996, amendedvideNotificationNo.13/99-CEdated28February,1999). l l l l l l l l l
  27. 27. WHITEPAPERON StimulationofInvestmentofPrivateSectorinto ResearchandDevelopmentinIndia 26 Exemption from customs duty on imports made for R&D projects funded by the Government in industry. (Notification No.50/96- Customsdated23July1996). Pharmaceutical reference standards allowed to be imported duty free {notification No. 26/2003-Customs dated 1 March 2003 (entry substitutedatS.No138ofthetableinthesaidnotification)}. Goods specified in List-28 (comprising of analytical and specialty equipment) for use in the pharmaceutical and biotechnology sector allowed to be imported duty free {notification No. 26/2003-Customs dated 1 March 2003 (entry substituted at S.No 248 of the table in the saidnotification)}provided: o The goods are imported for research & development purposed by an importer registered with DSIR for installation in the R&D wing of the importer within six months of the date of importation on submission of a certificate from the jurisdictional assistant commissioner of central excise or the Deputy commissioner of central excise to the assistant commissioner of customs or the Deputy commissioner of customs at the port of importation. The goods imported should not be transferred or sold for a period of sevenyearsfromthedateofinstallation. o The goods are imported for use in the manufacture of commodities and the total value of goods imported does not exceed 25% of the FOB value of exports made during the preceding financial year and installation in the factory of the importer within six months of the date of importation on submission of a certificate from the jurisdictional assistant commissioner of central excise or the Deputy commissioner of central excise to the assistant commissioner of customs or the Deputy commissioner of customs at the port of importation. The goods imported should not be transferred or sold for a period of sevenyearsfromthedateofinstallation. Apart from the current indirect incentives to private sectors for R&D expenditure, the following indirect incentives may be provided to the privatesectorfrom2013-14: l l l Inputs/ Suggestions receivedfromstakeholders
  28. 28. 27 WHITEPAPERON StimulationofInvestmentofPrivateSectorinto ResearchandDevelopmentinIndia SpecialIncentives 3.3.1 Special incentives of additional 50% weighted tax deduction on the R&DexpenditureforproductsandservicesdevelopedthroughR&D andareexported. 3.3.2 A provision may be made where the profit generated from the revenues of new products from IPR acquired from Public Funded Institutionswouldbetaxexemptfor1-2years. PublicProcurementandstandards 3.3.3 20% public procurement from Indian MSMEs on the products and servicescommercializedfrompublicfundedR&D. 3.3.4 L1 Criteria and insistence on Past Track Record (PTR) discourages innovations. Weightage by way of price preference or otherwise may be given for indigenously developed products and technology. Incentivize industry to use indigenous products and technology to helpcreatePTR. 3.3.5 Standards and their compliance should be used effectively to give advantage to indigenous products and technology. This practice is followedbymostofthedevelopedcountries. IncentivizePublicfundedInstitutions 3.3.6 Provide Government grants to public funded R&D entities equal to twice the sum of investments of private sector into joint research intothoseentities 3.3.7 Balance roles of public funded research between autonomous institutesandhighereducationsystemandimprovethevibrancyof thepublicresearchsystemingeneral. 3.3.8 A robust confidentiality structure needs to be built in the institutionsfordoingjointindustrialandcontractresearchtoavoid pilferageofknowhow.
  29. 29. WHITEPAPERON StimulationofInvestmentofPrivateSectorinto ResearchandDevelopmentinIndia 28 EstablishIncubationCentres 3.3.9 Incubation centres should be created where there is a high concentration of educational institutions as these centres will create new companies and jobs. A performance based incentive approach for promotion of Technology Business Incubators (TBIs) under PPP model is the next best step for service economy based growthmodelofIndia. IncentivizeR&Dprofessionals 3.3.10 Special income tax incentives to Indian professionals who work in R&Dbothinprivateandpublicsectors 3.3.11 Special Income tax incentives to Indian Diaspora (Scientists/ Technologists) who come back to work with private sector R&D in India IPasmortgage-ableasset 3.3.12 At present knowhow is treated as an intangible asset by banks and financial institutions, making it difficult for the companies, especially SMEs, to get loans against their Intellectual Property. Credit guarantee by government to Financial Institutions to consider Industry's Intellectual Property as a mortgage-able asset wouldencourageindustry. Currently, the following direct incentives are provided to private sector forR&Dandcommercializationoftechnologies. Grant by the Department of Scientific and Industrial Research (DSIR), Govt. of India, for up-scaling technologies, under its TePP andTDDPschemes 3.4 DirectIncentivestoprivatesector l
  30. 30. 29 WHITEPAPERON StimulationofInvestmentofPrivateSectorinto ResearchandDevelopmentinIndia l l l l l l Inputs/ receivedfromstakeholders Loan/Equity by the Technology Development Board (TDB), under the Department of Science & Technology, DST, for manufacturing andcommercializingofalltechnology-basedproducts. Loan/Grant by the Department of Science & Technology (DST) as a R&D support fund for undertaking Special Projects on: DevelopmentofDrugsandPharmaceuticalproducts Loan/Grant by the Technology Information, Forecasting, Assessment Council (TIFAC), as a R&D support fund for undertaking Special Projects on: Technology missions' projects for Sugar, Fly- ash,AdvancedCompositesandBamboo. Financial support by the Indian Renewable Energy Development Agency (IREDA), under the Ministry of New and Renewable Energy (MNRE), for the development of non-conventional sources of energy,besidesenergyefficiencyandconservationstrategies. Financial support by the Department of Biotechnology (DBT), under SBIRI and BIPP programmes for the development of bio- techrelatedproducts,etc. Financial support by the Council of Scientific and Industrial Research (CSIR), for the development and production of products and processes in new and emerging fields, under the New MillenniumIndiaTechnologyLeadershipInitiatives(NMITLI). Apart from the current direct incentives to the private sector for R&D, thefollowingdirectincentiveswillbeprovidedfrom2013-14: BudgetAllocationofPublicfundforprivatesector'sR&D 3.4.1 A proper budget allocation with certain proportion of public funds earmarked for R&D by private sector may be done on a grant basis. Some percentages (progressively in the 12th five year plan period to reach 25% in 2016-17) of public spending can be allocated for investing in private sector R&D and PPP R&D with matching investment from privatesectors. Suggestions
  31. 31. WHITEPAPERON StimulationofInvestmentofPrivateSectorinto ResearchandDevelopmentinIndia 30 3.4.2 A 50:50 PPP fund may be created to provide 75% support to private sector for R&D and deployment/commercialization of technologies withpublicinstitutions(publicor privateuniversities/colleges)in the sectors/areas of social welfare such as affordable healthcare, renewable energy, water treatment/purification, waste treatment/ processingetc. 3.4.3 Aspecialfund(generatedfromR&DCessreceivedbyGovernment)on Global Partnerships may be launched where the Indian industry will partner with global partners for R&D, technology acquisitions, deployment/commercialization of technologies and, capacity building of human resources. This fund may be administered by Global Innovation & Technology Alliance on a 50:50 funding mechanismonacasetocasebasis. PrioritysectorsforPPPR&D 3.4.4 Prioritize about 5 sectors/areas based on social relevance and global competitiveness for PPP R&D. Currently, sectors that seem to invest are a) transportation, b) electronics, c) non-electronics, d) drugs and pharma, e) minerals f) metallurgy. Sector specific road maps for stimulating investments into these sectors complete with monitoringsystemsmaybepositionedsoon,forimplementation. 3.4.5 PPPmodelforR&Dasinfrastructureprojectsneedstobeworkedout. Renewable and clean energy is a nationally important sector. PPP for such sectors for R&D may need new instruments of partnerships. Public procurement from R&D based manufacturing is a globally acceptedpolicyforconsideration. IncentivizeJointR&D 3.4.6 Investment by private sector for R&D with public institutions in any sector/areamaybematchedona50:50basisormorebypublicfunds. Theproportionofpublicfundmaygoupto75%incaseofMSMEs.
  32. 32. 31 WHITEPAPERON StimulationofInvestmentofPrivateSectorinto ResearchandDevelopmentinIndia SupportPre-commercializationphase 3.4.7 Investments into pilot plants and semi-commercial level plant infrastructures into public funded institutions do not often provide adequate returns. Therefore, schemes for joint investments into test bedscouldbeconsideredinstead. 3.4.8 IPR assets owned by public funded entities could be valorized using modern management practices. Private sector could be encouraged to invest into test beds for evaluating the commercialization potentials of such IPR assets which are not exploited for periods longer than 5 years. A sweat equity mechanism for the public entity with commercialization rights for the private sector could be considered. 3.4.9 Private sector investments into in-house R&D enjoy fiscal benefits. Expertise manpower required for carrying out translatable R&D is special and not easily available in the country. Especially in areas such as drug discovery, a pool of such expertise needs to be developed. International expertise also seems necessary. Sector specific schemes for part supporting expert manpower for R&D through publicfundsmaybeconsidered. SupportHumanResource 3.4.10 Government grant up to 50% of the salary of (a) PhD scholars from Indian institutions appointed by industry and (b) PhD scholars of Indianoriginfromoverseasappointedbyindustry. 3.4.11 Mobility scheme for Scientists/Engineers from public funded bodies to industry may be worked out with a provision of a 3 year pay- protectionfordoingR&Dinindustry. 3.4.12 Mobility of R&D professionals from Industry to public funded R&D institutions with a 3 year pay-protection needs to be met from the Government or part of it. Industry needs to top up the salary of the R&Dprofessionals. 3.4.13 Doctoral fellowships in Public Private Partnerships may be consideredforgreaterIndustry-Academiainteraction.
  33. 33. WHITEPAPERON StimulationofInvestmentofPrivateSectorinto ResearchandDevelopmentinIndia 32 SupportInfrastructure 3.4.14 Governmentgrantupto50%oftheR&Dinfrastructurecostincurred bytheindustry. SupportStart-ups 3.4.15 AspecialendtoendpackageforTechnologydrivenStartupsmaybe developed to fuel technology-driven entrepreneurship in the country. Currently, the following sectors/products, manufactured by the IndianindustryarenotpermittedtoavailtheR&Dincentives. Beer,wineandotheralcoholicspirits. Tobacco and tobacco preparations, such as, cigars and cheroots, cigarettes, biris, smoking mixtures for pipes and cigarettes,chewingtobaccoandsnuff. Cosmeticsandtoiletpreparations. Toothpaste,dentalcream,toothpowderandsoap. Aerated waters in the manufacture of which blended flavouring concentratesinanyformareused. Confectioneryandchocolates. Gramophones, including record-players and gramophone records. Projectors. Photographicapparatusandgoods. Office machines and apparatus such as typewriters, calculating machines, cash registering machines, cheque writing machines, intercommachinesandTele-printers. Steelfurniture,whethermadepartlyorwhollyofsteel. 3.5 IndustrySectorsthatcanavailR&DIncentives l l l l l l l l l l l
  34. 34. 33 WHITEPAPERON StimulationofInvestmentofPrivateSectorinto ResearchandDevelopmentinIndia Safes, strong boxes, cash and deed boxes and strong room doors. Latexfoamspongeandpolyurethanefoam. Crown corks, or other fittings of cork, rubber, polyethylene or anyothermaterial. Pilfer-proof caps for packaging or other fittings of cork, rubber, polyethyleneoranyothermaterial. 3.5.1 The items listed in the "restricted items" are no longer "low- technology" items. Most of the items are either imported in India or Indian companies are paying a heavy royalty to foreign suppliers. Hence, all sectors and areas of industry except for (1) Beer,wineandotheralcoholicspiritsand(2)Tobaccoandtobacco preparations, such as, cigars and cheroots, cigarettes, biris, smoking mixtures for pipes and cigarettes, chewing tobacco and snuff, should be eligible for availing both direct and indirect R&D incentives. 3.5.2 Multinational companies operating from India in other areas may be treated at par with Indian companies for availing R&D incentives provided that (1) R&D and manufacturing are done in India and (2) they have R&D partnership and further production & marketing arrangement with Indian companies with a target of minimumof50%exportsfromsuchproducts. Currently, the following procedures exist for the industry to avail tax benefits. a) TheR&DcentresshouldholdvalidrecognitionbyDSIR. b) ThecompanyshouldhavewelldefinedR&Dprograms.; c) The company maintains proper documentation for the R&D programstakenup.; l l l l Inputs/ Suggestions receivedfromstakeholders 3.6 ProceduretoavailTaxincentives
  35. 35. WHITEPAPERON StimulationofInvestmentofPrivateSectorinto ResearchandDevelopmentinIndia 34 d) The in-house R&D centre is located in a separate earmarked area/buildingandhasexclusiveR&Dmanpowerofitsown.; e) The R&D centres are exclusively engaged in research and development for the production of any article or thing not being an article or thing specified in the list of the eleventh schedule of the IncomeTaxAct. f) All applications need to be sent to the Secretary, DSIR (each set of applications should be tagged on the left corner and should not be spiralbound). g) DocumentsrequiredtobesubmittedforinitialapprovalinForm3CM (3sets):- i. Application in Income Tax prescribed Form 3CK giving address of each in-house R&D Centre recognized by DSIR duly signed by the ManagingDirectorandawitness. ii. CopyofDSIRrecognitionletterforeachin-houseR&DCentre. iii. ClearlydefinedobjectivesofR&Dnotexceeding6lines. iv. Latestauditedfinancialstatementalongwiththeannualreport. v. Additionalinformationasperannexure-IIIoftheguidelines vi. Additionalinformationforseedcompanies. vii.One page write-up clearly summarizing the R&D activities taken upseparatelyateachoftheR&DCentre/srecognizedbyDSIR. viii. Confirmation that the company does not manufacture any productlistedinSchedule11ofITAct. ix. Total capital cost of in-house research facility, giving break-up of the expenditure of the complete research facility including cost of equipment, land & building as on 31st March of the last completedfinancialyear. x. An undertaking that the company shall reflect the capital and revenue expenditure on R&D in the audited financial statement of the company prepared for the purpose of published annual reportaswellasforthepurposeofIncomeTaxreturns.
  36. 36. 35 WHITEPAPERON StimulationofInvestmentofPrivateSectorinto ResearchandDevelopmentinIndia xi. A commitment that the company shall submit the desired information as per DSIR Guidelines every year for the approved periodwhilefilingtheIncomeTaxreturns. h) Documents required to be submitted for extension of approval in Form3CM(2sets):- i. Income Tax prescribed Form 3CK giving address of each in-house R&D centre recognized by DSIR and duly signed by the Managing Directorandawitness. ii. CopyoftherenewalofrecognitionletterissuedbyDSIR. i) Documents required to be submitted by 31st October of each succeeding year of approved period to facilitate submission of ReportinForm3CL(2sets): i. CompletedetailsasperDSIRguidelines. 3.6.1 ProceduretoavailTaxincentivesneedscompleteoverhaul. 3.6.2 As an immediateand interimstep, the proceduresmay be extremely simplifiedandhassle-free. 3.6.3 As step 2, a professional expert group may be constituted for studyingtheexistingproceduresandrecommendforrationalization towards accreditation of private sector's R&D activities by professional accrediting agencies and this being used for tax claims directly from the tax authorities. This is crucial to provide a hassle free environment for private sector to invest in R&D and create innovativeproductsfromIndiafordomesticandglobalmarkets. Current financial audit procedures are risk averse and prohibit risky ventures. In the deployment of public funds and loans from banks especially,R&Dledinnovationsdonotreceiveadequatesupport. Inputs/ Suggestions receivedfromstakeholders 3.7 R&DRisksandFailureManagement
  37. 37. WHITEPAPERON StimulationofInvestmentofPrivateSectorinto ResearchandDevelopmentinIndia 36 Inputs/ Suggestions receivedfromstakeholders 3.7.1 Work out provisions for writing off government loans/grants for private sector R&D failures. Caps may be defined for small, medium andlargefirms. 3.7.2 Institute a simple and one-window apex system in the Ministries to clearsuchitemsexpeditiously. 3.7.3 A professional expert group involving financial experts may be commissioned to study the Israel and Singapore models for adaptationtosuitthenationalinnovationecosystem.
  38. 38. 37 WHITEPAPERON StimulationofInvestmentofPrivateSectorinto ResearchandDevelopmentinIndia 4.0SixKeyRecommendationsofJCIG The Joint Committee on Industry and Government (JCIG) has received several inputs from various stakeholders. They have been compiled in the previous chapters. The major observation emanating from various inputsfromstakeholdersisthatthecurrentestimateofprivatesector's investment into R&D may be generally under-estimated. Global practices for computing private sector investment into R&D may seem toextendbeyondthoseheadsofaccountsrelatingtodirectresearchor R&D costs. Translation and pre-commercialization activities which receive considerable investment from the private sector seem to be included as R&D investment in many other countries. The current Indianpracticemay,therefore,needtobereviewed. The JCIG has grouped various recommendations with inputs received for computing R&D investment into three verticals, namely, i) direct R&D cost currently qualified for tax deduction under section 35 (2AA)and 35 (2AB); ii) Translation of R&D and pre-commercialization trials and iii) human resource development which could qualify under Corporate Social Responsibility also. Current policies make provisions for 100% write-off of indirect costs associated with R&D as indicated in the report. After due deliberation, the JCIG has grouped various recommendations and inputs from stakeholders, as given in figures below: Direct R&D l lMaterials & consumables lUtilities & services lHuman Resource Plant & Machinery Trial Production of finite numbers of bulk IPR Acquisition / Protection Design Scholarships to PhD Scholars For Appropriate AccountingFor Fiscal Benefits Skills Development Employment Generation Technology Business/ Incubation of Start-ups Training / Education of Industry Personnel Education Under CSR R&D Expenditure by Industry Land & Building Prototyping Test Beds Clinical drug trials and Bioequivalence studies
  39. 39. WHITEPAPERON StimulationofInvestmentofPrivateSectorinto ResearchandDevelopmentinIndia 38 The JCIG, after studying various factors, has made six key recommendations forconsiderationoftheGovernmentforcreatingapolicyenvironmentwhich could stimulate higher investments by private sector into R&D consistent with the goal of Science, Technology and Innovation Policy, 2013, released in January 2013. One of the goals of the 12thFive Year Plan is to trigger and stimulate private sector investments for matching those by the Government by the end of 2017. In order to achieve such targets, JCIG considers that the recommendationsmadebelowmaybeofvalue: Current estimates of private sector investment into R&D are generally limited to those incurred for direct research in a laboratory in the form of plant and machinery, manpower, consumables and utilities. They do not cover costs relating to translation of R&D like test-bed, design and development, standardization, field costs, etc., as well as pre-commercialization trial production. These pre- commercialization trails and field trials could be performed either in- house or in any other organization in India. These are not currently considered as R&D investment. JCIG recommends that the translation expenditure incurred on translation and pre- commercialization trials could be included as apart of R&D costs. Inclusion of such costs could be notified by the Government after examination. Industry could submit a specific proposal for consideration. Currently companies are not mandated to disclose expenditure incurred on R&D in their balance sheets and Annual Reports. Some voluntary disclosures provide access to information. Since current mechanism does not enable a realistic estimation of investment of private sector into R&D, the Government may mandate disclosure of R&D investment in public domain as an obligation. This would help in properquantificationofinvestmentofprivatesectorintoR&D. 4.1.RedefineprivatesectorR&Dinvestmentasperglobal normsandpractices 4.2.Mandatory disclosure of R&D investment by Private Sector
  40. 40. 39 WHITEPAPERON StimulationofInvestmentofPrivateSectorinto ResearchandDevelopmentinIndia 4.3.Constitution of an Expert Committee for rationalizationofHeadsofR&Dinvestmentfordirect andindirectfacilitation 4.4.Valuing IPR assets and Provide for demand pool for R&D outputs through provisions for public procurement: JCIG has grouped various heads of accounts for computing R&D investment including those incurred for translation, pre- commercialization trials. A suitable Expert Committee may be constituted by the Government to study the recommendations emanating from the stakeholders, provide inputs to JCIG and examine the possibilities of inclusion of some of the heads of accounts grouped by the JCIG for extending the provisions of 100% write-off for inclusion in the section 35 (2AA) and 35 (2AB). The professional expert group may also study the existing procedures and recommend rationalization towards accreditation of private sector R&D activity by an accredited agency or self-declaration of companiesforavailingbenefits. To encourage Micro, Small and Medium Enterprises for participation in R&D and generation of IP, a special Credit Guarantee Scheme may be provided by the Government to banks and financial institutions to considerIPasamortgage-ableasset. All investments made in procurement of IPR through a formal mechanism of private sector enterprises from either public funded institutions in India or abroad may be considered as R&D investment as included for consideration for tax benefits under section 35 (2AA) and35(2AB). Public procurement system may be rationalized including a relaxation of past track records for MSME when the products are developed through indigenous R&D or technology developed from publicfundedinstitutionsarecommercialized. In order to cover the risk failures of IP in commercialization, provide two year income-tax holiday on the sales proceeds of products and servicesemanatingfromnewIPRs.
  41. 41. WHITEPAPERON StimulationofInvestmentofPrivateSectorinto ResearchandDevelopmentinIndia 40 Dedicated sector-specific funds may be allocated from the Government's budget for building technology depth in 5 priority sectors: a) transportation b) electronics c) Pharmaceutical and Biotechnology d) minerals, materials & metallurgy e) Next generation manufacturing technologies f) Heavy industries. Similarly, dedicated area-specific funds may be allocated from the Government's budget for investments into PPP for developing and deploying technology solutions in 5 national priority sectors: a) affordable healthcare b) renewable energy c) water treatment/purification d) sanitation & waste management e) homeland & cyber security f) Business of data. The fund will be used as grants from the government to match (50:50) the industry's investment on flagship projects. The projects under the priority sectors will cover all the Capex and Opex for doing research or adopting state-of-the-art technologies developed by others across the globe, development activities during pre-commercialization phase and finally setting up and producing products on a commercial scale.Earlyestablishmentofthefundisrecommended. The recently incorporated PPP Section 25 Company, Global Innovation & Technology Alliance (GITA) may be entrusted with the responsibility of managing this initiative under duly constituted Joint ApexCouncil.Aprofessionalexpertgroupinvolvingfinancialexperts may be commissioned to come out with a recommendation at the earliest, on the provisions for writing off government loans/grants for private sector R&D failures by instituting a simple and one- window apex system in the Ministries to clear such items expeditiously. 4.5.Build Technology Depth of Industry in Priority Sectors and usher an era of PPP R&D and Technology Deployments for providing technology solutions to NationalPriorityAreas
  42. 42. 41 WHITEPAPERON StimulationofInvestmentofPrivateSectorinto ResearchandDevelopmentinIndia Note: It may be noted that many suggestions and recommendations mentioned in the Chapter 3 ofthisreport,couldnotfindplaceinthefinalsixkeyrecommendations.Whileallthesuggestions have been found important and necessary, the JCIG felt that immediate actions should start with a few items to be implemented in 2013-14. However, the JCIG will look at all other suggestions; those are important and will take appropriate recommendations to the Government for considerationinlateryears. The JCIG recommends an incentive system for stimulating individual inventors, public funded institutions and private sector for commercialization on R&D outputs. The Committee recommends positioningofaninternalsystemaspresentedinthetablebelow: 4.6.IncentivesforcommercializationonR&D: For Individual Inventors For Public Funded R&D For Private Sector R&D Institutions A percentage of payments Increase commercialization of Introduce a scheme for received from the industry R&D outputs from public conditional grant to industry to be shared with individual funded R&D through for commercialization of IPs inventors in the line of existing performance related incentive from public funded R&D by guidelines of IITs, IISc and system the private sector CSIR Link R&D grants released to Link R&D plan grant to the Introduce a Small Business individual inventors with institution with the value of Innovation Research commercialization of their payments received through Scheme similar to that of outputs royalty, know-how etc. contract SBIR of USA research grants and other direct payments received for commercialization of intellectual property generated from public funded R&D Encourage inventors to spin Link Incentive to R&D plan Encourage private sector to off companies grant for basic research, share equity and long term matching the receipt equivalent differed royalty with R&D to the external funding from institutions against non-budgetary sources technology transfer in lieu of cash payment Provide additional R&D Introduce a Research Award Introduce a cash subsidy incentive grant to inventors Scheme for institutions for scheme similar to that of matching the value of commercialization of public Germany and Israel payments received from the funded R&D with values of the industry for commercialization order of Rs. 5, 3, 1 crores
  43. 43. Sub: Constitution of "Joint Committee of Industry and Government for stimulatingprivatesectorinvestmentintoR&D". Pursuant to the decision taken during the interactive session with Hon'ble th MOS (S&T) with private sector CEOs on 12 November 2011 in Mumbai, the Department of Science & Technology has decided to constitute a "Joint Committee of Industry and Government for stimulating private sector investmentintoR&D".ThecompositionoftheJointCommitteeisasunder: 1. Dr. T Ramasami Co-chairman Secretary Department of Science & Technology New Delhi 2. Mr. B Muthuraman Co-Chairman President, CII Vice Chairman, Tata Steel Limited Chairman, Tata International Limited 3. Mr. S Gopalakrishnan Member Vice President, CII Executive Chairman, Infosys Technologies Limited No. l6/1/2011-NEB Government of India Ministry of Science & Technology Department of Science & Technology Annexure - 1 Technology Bhawan New Mehrauli Road New Delhi-II 00 16 Dated: 30th November 2011 OFFICE ORDER
  44. 44. 4. Secretary or his representative Member Deptt. of Scientific & Industrial Research New Delhi 5. Mr.Hari S Bhartia Member Co-Chairman & MD Jubilant Life Sciences Ltd, Noida 6. Secretary or his representative Member Deptt. of Biotechnology New Delhi 7. Dr.Naushad Forbes Member Director Forbes Marshall Pvt. Ltd., Pune 8. Secretary or his representative Member Ministry of Earth Sciences New Delhi 9. Mr. Anjan Das Co-Member Secretary Executive Director Confederation of Indian Industry 10. Dr. B. K. Shukla Co-Member Secretary Scientist G Department of Science & Technology 2. The terms of reference and tenure of the joint committee is as follows:- (i) Prepare a white paper for stimulating private sector investment into R&D. (ii) Select appropriate institutions/agencies/consultants for commissioning studies which would facilitate preparation of the white paper. (iii) Suggest policy initiatives to the Government from time to time th during the 12 Plan Period.
  45. 45. (iv) Co-chairmen can co-opt additional Members from the Industry/Government as special invitees depending on the specific requirement. (v) The tenure of the Joint Committee would be for 3 years from the date of constitution. 3. Travel expenses and honorarium etc. would be paid to non-official Members of the Committee as per norms by Technology Development Board for holding Joint Committee Meetings. (Dr. B K Shukla) Scientist G Copy to:- 1. Co-chairmen & all the Members of the Committee. 2. PPS to Secretary, DST, 3. Mr. H K Mittal, Secretary, Technology Development Board, New Delhi 4. Mr. Anjan Das, Executive Director, CII, New Delhi.
  46. 46. 45 WHITEPAPERON StimulationofInvestmentofPrivateSectorinto ResearchandDevelopmentinIndia The Nation's economic development (GDP per capita) and its journey towards Innovation driven economies (currently 35 nations in this bracket having GDP per capita of more than 17,000 USD) has been largely dictated by the outputs of nations' robust Science, Technology & Innovation (STI) ecosystem. The key pillar of nation's competitiveness is technological innovation. Although substantial gains can be obtained by improving institutions, building infrastructure, reducing macroeconomic instability, or improving human capital, all these factors eventually seem to run into diminishing returns. The same is true for the efficiency of the labor, financial, and goods markets. In the long run, standards of living can be enhanced only by technologicalinnovation.Thisisparticularlyimportantforeconomiesasthey approach the frontiers of knowledge and the possibility of integrating and adapting exogenous technologies tends to disappear. Although less- advanced countries can still improve their productivity by adopting existing technologies or making incremental improvements in other areas, for those that have reached the innovation stage of development this is no longer sufficient for increasing productivity. Firms in these countries must design and develop cutting-edge products and processes to maintain a competitive edge. This progression requires an environment that is conducive to innovative activity, supported by both the public and the private sectors. In particular, it means sufficient investment in research and development (R&D),especiallyby the privatesector;the presenceof high-qualityscientific research institutions; extensive collaboration in research between universities and industry; and the protection of intellectual property. In light of the recent sluggish recovery and rising fiscal pressures faced by advanced economies, it is important that public and private sectors resist pressures to cut back on the R&D spending that will be so critical for sustainable growth goingintothefuture. Annexure - II 2 Background - Global Trends 2 This paper is compiled from OECD Science, Technology & Industry Outlook 2010
  47. 47. WHITEPAPERON StimulationofInvestmentofPrivateSectorinto ResearchandDevelopmentinIndia 46 The main trends in national science, technology and innovation policies, introduced by many nations towards public-sector research, government support for business R&D and innovation, collaboration and networking amonginnovatingorganizations,globalizsationofR&Dandopeninnovation, human resources for S&T, and the evaluation of research and innovation policiesareasfollows: One of the key enablers of a country's strong STI ecosystem is improving the industry'scompetenciesandenhancingincentivesforBusinessR&D. Increasing public support to R&D: Despite the slowdown in economic growthand the resultingfall in tax revenue,governmentinvestmentsin R&D have outpaced outlays in other areas. Government investments or spending and tax cuts, taken together, have represented on average more than 3% of GDP in the OECD area and up to 5% of GDP in the United States and Korea.
  48. 48. 47 WHITEPAPERON StimulationofInvestmentofPrivateSectorinto ResearchandDevelopmentinIndia Recognizing that innovation is a source of long-term growth, many governments have policies to improve infrastructure, support basic science, R&D and innovation, strengthen human capital, and promote green 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 7% 77% 7% 28% 68% 4% 6% 65% 29% 45% 23% 32% 9% 52% 38% 68% 30% 2% Japan Germany USA Uk France India Others (% of Total Exp) Private Expenditure in R&D (% of Total Exp) Public Expenditure in R&D (% of Total Exp) technology and innovation, and foster entrepreneurship. Israel spends more than 4% of GDP in Research & Development (R&D) while. Japan, South Korea and Scandinavian countries spend more than 3%. US, France, Germany spend more than 2% and. China spends more than 1.50%. But the most important pointis,inallthesecountries,industryspendsmorethangovernmentinR&D - in some countries 3 times more than Government spending. In India, while total spending in R&D is around 1%, Government's spending is 2 to 3 times morethanthatofIndustry's.Anumberofspecificmeasureshavebeentaken to stimulate the recovery from the recent economic crisis. The European Union has urged member states to increase planned investments in R&D and consider ways to increase private-sector R&D investments. As part of the American Reinvestment and Recovery Act of 2009, the United States government has increased its spending on R&D related to climate change by USD 26.1 billion, and to energy by USD 6.36 billion. An additional USD 10 billion was allocated for biomedical research funded by the US National Institutes of Health and an additional USD 2.3 billion was allocated to research funded by the National Science Foundation. The response to the crisishasalsogivenaboosttoefforts.
  49. 49. WHITEPAPERON StimulationofInvestmentofPrivateSectorinto ResearchandDevelopmentinIndia 48 Fostering business R&D and innovation: Business enterprises are the main sourceofinnovation.TheyplayaprimaryroleinfundingandperformingR&D in most countries and, more than ever, governments seek to increase business investment in R&D and innovation. Global competition has led countries to seek to boost the innovative capacity of the business sector. In the EU, another catalyst has been the EU's 3% R&D spending target, which is to be achieved primarily by increasing business expenditures on R&D (BERD) to 2% of GDP. The intensity of BERD indicates the financial effort devoted by the business sector to advance research. Japan and Sweden, for example, have high BERD and patenting intensities. The shares of the services sector and SMEs in BERD tend to mirror the structure of business R&D systems and the relative contribution of non-manufacturing and SMEs to R&D performance. Triadic patenting is an indicator of the ability of innovation systems to generate new inventions that may be exploited globally. In addition to framework conditions such as competition policy and access to capital markets, a broad range of direct policy instruments, such as block grants or competition based schemes, are used to stimulate business R&D and innovation. Increasingly, many direct support R&D schemes are being oriented or targeted to strategic sectors/technologies in order to foster competitiveness but also to help firms in their specialization strategies. Soft support, such as assistance in firm creation, counselling and entrepreneurship measures, is also being used to complement direct R&D support and to encourage risk-taking attitudes. While the general tax system is used to foster investment in innovation by firms, specific R&D tax incentives remain important in many economies, even if their design and scope continues to evolve. Finally, many governments increasingly look to use public procurement as a way to accelerate the diffusion of innovative products or services in the business sector while meeting public demand for goods and services. It is clear that direct support to business innovation, in theformofcompetitivegrantsorsubsidiszedandguaranteedloans,remains important and has increased in some countries, especially for key industrial sectorssuchasrenewableenergy,advancedmanufacturing,ICTs andhealth. However, the balance between merit-based and block instruments varies
  50. 50. 49 WHITEPAPERON StimulationofInvestmentofPrivateSectorinto ResearchandDevelopmentinIndia considerably according to factors such as industrial structure, existence of largeR&D-intensivefirms,R&Dintensityandspecialization. United States Korea France Sweden Germany United Kingdom Finland Denmark Switzerland Japan CanadaIndirect Govt support thru R&D Tax incentives (% of GDP) Direct Government Funding of BERD (% of GDP) Netherlands 0.4 0.35 0.3 0.25 0.2 0.15 0.1 0.05 0 Direct & Indirect Government funding (% of GDP) of Business Expenditure on R&D (BERD) and tax incentives for R&D Stimulate private investments in R&D and innovation: As mentioned above, direct public funding through grants, subsidies and loans remains the most frequentformofsupporttobusinessR&D,withcompetitiveandmeritbased grant programmes having gained ground. However tax relief for R&D continues to complement more direct measures in many countries. Tax credits on social charges for researchers engaged in R&D have recently been introduced as a subsidy for highly skilled human capital, especially in small research intensive firms. There are broadly three major forms of R&D tax incentives: i) R&D tax credits that allow a deduction from the tax payable; ii) R&D allowances that represent an additional deduction from taxable income; and iii) depreciation allowances. Depending on the country, tax concessions are calculated either on a volume share of R&D expenditure, an incremental share (marginal R&D performed above a certain threshold of qualified expenditures), or a mix of both. Moreover, differences in country practices (e.g. eligible R&D activities, expenses base, rolling base versus
  51. 51. WHITEPAPERON StimulationofInvestmentofPrivateSectorinto ResearchandDevelopmentinIndia 50 fixed base for incremental credits, carry forward of unused R&D tax credits, tax credit refund mechanisms) add to the great variety of fiscal schemes. In addition to the three major types of schemes, the Belgian and Dutch systems represent a fourth category, as tax incentives in those countries aim at lowering the cost of researchers either by diminishing wage tax and social contributions or just the taxes on wages. While tax credits for R&D are particularly widespread in many countries, where over 80% of public support to business R&D is provided in the form of fiscal incentives, in countries like the United States (through competitive R&D contracts), direct support remains the main vehicle for public funding of business R&D. The wider issue of how many firms take part in public support schemes for innovation (as opposed to R&D) is not well documented. It is estimated that between one- tenth and one-third of innovating firms participate in public support programmes for innovation, with large firms receiving support more frequently than SMEs. Although some countries do not offer any tax incentives for R&D or innovation, R&D tax subsidies have become more generousoverthedecadeto2008inmanycountries. Support for R&D and innovation in SMEs and start-ups: Although large firms tend to introduce more "novel" innovations than SMEs, which tend instead to be adopters, SMEs form the bulk of businesses and play a key role in knowledge diffusion. Their contribution is more significant in marketing or organizational innovation than in technological innovation. SMEs typically have more limited access to finance than large firms and fewer resources for generating and stocking knowledge. The credit crunch caused by the crisis has raised serious concerns about their capacity to remain innovative. Consequently, many countries have developed specific policy instruments to foster innovation among SMEs. Direct financial support to small firms is used to subsidize R&D, finance technology investments, and help them develop human capital or access knowledge-intensive services. Innovation vouchers aim to encourage and help SMEs to access and use knowledge from the higher education and research sectors. At the same time, innovation vouchers help firms to formalize their knowledge needs and allow knowledge institutions to identify business demand and make public
  52. 52. 51 WHITEPAPERON StimulationofInvestmentofPrivateSectorinto ResearchandDevelopmentinIndia research more relevant. Innovation vouchers have already been implemented in many countries and policy makers have tended to simplify their use and to extend their scope. Venture capital (VC) plays a crucial role in promoting innovation and is a key determinant of entrepreneurship. But venture capital is highly sensitive to economic downturns and the appetite in markets for new technology-based firms. Most private venture capital funding concerns expansionary capital in higher-technology industries. Consequently, governments have tended to provide funds for early-stage and seed financing, often along a "fund of funds" model in which government invests along with private actors and the fund is privately managed. Support for R&D and innovation in specific industries and technological areas: The Government has a key role to play in sustaining industrial competitiveness and promoting cutting-edge research in advanced technology areas. Canada has maintained individual programmes, such as the Strategic Aerospace and Defence Initiative (SADI), which offers repayable investments for industrial research and pre-competitive developmentinaerospace,defence,securityandspaceindustries(uptoCAD 225 million a year). In 2009, France implemented the Pacte Automobile, a national plan for the automobile industry which involves EUR 6.5 billion in participative loans for car manufacturers, an upto-90% guarantee fund managed by OSEO, a EUR 600 million sectoral fund, higher partial unemployment compensation, and support schemes to innovation. To address its lag in expanding fields, such as nanotechnology and biotechnology, France has boosted funding for nanotechnology research by EUR 70 million. Japan has allocated funds to research on advanced and innovative technologies such as regenerative biology. More broadly, the Japanese New Growth Strategy aims to address the issues of an ageing society and long life expectancy by promoting innovative pharmaceuticals and medical and nursing care technologies and fostering drug development ventures. Korea announced a Green New Deal and government investment ingreentechnologyR&DforatotalofUSD4.7billionoverfouryears.
  53. 53. WHITEPAPERON StimulationofInvestmentofPrivateSectorinto ResearchandDevelopmentinIndia 52 R&D and innovation in services and non-technological innovation: While many economies are services-based, services still contribute a much smaller share of R&D activity. It represents less than 10% of total business R&D expenditures in France, Germany, Japan or Korea. Services firms contribute substantially to non-technological innovation. In some countries, more than halfofthefirmsintheservicessectorintroducedorganizationalormarketing innovations and appear to be even more innovative than the manufacturing sector leading to more services than manufacturing firms have introduced non-technological innovation. Policy makers have paid increasing attention to promoting innovation in the services sector. Health services have particularlybenefittedfromtheincreasedpolicyfocus. Demand-sideinnovationpolicies:Demand-orientedinnovationpolicieshave recently attracted much attention from policy makers, partly in response to interest in increasing market demand and uptake of innovation that can address certain societal needs while improving economic performance. The existence of market or system failures which stunt market demand for innovation (e.g. information asymmetries, spillovers, externalities or appropriability of public goods) may justify policy action, especially in areas for which the public sector is a provider of goods and services. Targeted demand-oriented innovation policies include public procurement, lead markets,regulationsandstandards,pricingschemesandconsumerpolicies. Encourage the development of STI platforms and open infrastructures: It is widely recognized that the effectiveness and efficiency of innovation systemsaredeterminedtoaconsiderableextentbythedegreeandqualityof linkages and interactions among various actors, including firms, universities, research institutes and government agencies. Four indicators can be used to measure the connectivity of innovation infrastructures: i) the regional concentration of patenting as a percentage of Patent Cooperation Treaty (PCT) patent applications; ii) the number of broadband subscribers per 100 inhabitants; iii) the share of innovative firms engaged in collaboration on innovation and iv) the degree of collaboration on scientific publications (per capita). The regional concentration of patents indicates the presence of
  54. 54. 53 WHITEPAPERON StimulationofInvestmentofPrivateSectorinto ResearchandDevelopmentinIndia research hubs that host public labs, leading research universities and innovative firms. The broadband penetration rate reflects how widespread are high-speed networks that serve as a platform supporting innovation. Broadband has become the leading delivery system for a wide range of content and has dramatically changed personal and business practices. The share of innovative firms engaged in collaboration and the degree of collaboration on research publications provide direct measures of collaboration in industry and in science. Virtually all countries give high priority to policies aiming to improve the physical STI infrastructure and to link public research to industry and society. In fact, the development of STI platforms and infrastructures ranks as a top priority for Canada and Japan, where collaboration in industry for the former and in both industry and science for the latter, are weaker than in many other countries. Finland and SwedenseemtoshowthebestperformanceintermsofSTIinfrastructure. Nurture world-class nodes and bridge industry and science: Reinforcing industry-science linkages continues to be a major thrust of innovation policies. Linkages between public research institutes and industry occur in many ways, from the most direct - joint research projects or joint ventures (spin-offs) - to the more indirect - training, consultancy, staff mobility - to informal co-operation. Public-Private Partnerships have been encouraged at different levels and by different levers. Reforms in general policy, regulation or changes in organizational structures have created new areas of co- operation. Governments have increased financial support to collaborative schemesandresearchprojectsinvolvingpublicandprivatepartners. Clusters:Strengtheningexistingordevelopingclustershasbecomeapillarof national innovation policy. Clusters group together enterprises, higher education institutions and public research institutes that collaborate in a certain area. In many countries, innovation is geographically concentrated owing to the existence of local clusters and the dynamics of regional economies. Since the early 1990s many countries have promoted a cluster- based approach to innovation in parallel with a traditional sectoral R&D programmes policy. More recently, health, energy, natural resources and foodproductionhavebeenparticularlytargeted.
  55. 55. WHITEPAPERON StimulationofInvestmentofPrivateSectorinto ResearchandDevelopmentinIndia 54 Strengthen physical infrastructures for STI: Sound physical infrastructure, especially high-speed broadband access and powerful IT equipment, are essential to support knowledge advancement, communication and cooperation. As part of their stimulus packages many countries have made large investments in ICT infrastructure and applications. These investments will have lasting effects on STI infrastructures by closing the broadband gap andextendingaccesstoremoteareaswithoutconnectivity,ontheonehand, andbyupgradingtheexistingnetworkandacceleratingtheadoptionofhigh- speed technologies, on the other. Several countries are reinforcing their IT systems to permit faster communication and wider information disseminationamongpublicandprivateagents. Encouraging innovation diffusion and enhancing access to scientific information: Governments foster diffusion of public research results to enhance firms' productivity. In the Netherlands, the Act of Higher Education entrusts Dutch universities with the task of ensuring the transfer of knowledge transfer, in addition to their mission of research and education. Many countries have promoted wider dissemination of public data in centralizing public research output and developing ICT-based information systems that enhance access to information. Improving the access to public information ensures that public research has a broader impact in the economy. IPRs and knowledge diffusion: Appropriate IPR regimes and practices are necessary to secure returns on investments in innovation and to encourage knowledge sharing. A key issue for policy is finding a balance between rights to control use of an invention via IPR and the diffusion of knowledge about the invention (through licensing, publication, open networks, etc.). Getting the balance "right" is the key goal of the knowledge networks and markets that are emerging as a means to trade and exchange knowledge within more open networked systems of innovation. Although few internationally comparable data are available at this stage, three indicators may reflect the emergence and spread of knowledge networks and markets, or at least the parts of these that focus on patent development and exchange: i) the
  56. 56. 55 WHITEPAPERON StimulationofInvestmentofPrivateSectorinto ResearchandDevelopmentinIndia average share of patents filed by public research institutes in a specific time span; ii) the country share in total exports of royalties and license fees, compared to the country share in total services exports; and iii) the growth index of triadic patent families over a specific time frame. The share of patents filed by public research institutes shows the degree to which inventionsresultingfrompublicresearcharemarketable.Acountry'srelative share in exports of royalties and license fees highlights its capacity to market internationally inventions that are developed locally (inventions as codified in patents). The rise in patenting is a direct measure of the expansion of patentingactivities. Reforms to IPR: In the Netherlands, reforms of patent legislation came into force in 2009 with a change in the fee structure that meant lower entrance costs, the abolition of the so-called six-year (non-examined) patent and the introduction of the possibility of filing (national) patent applications in English. In 2009, France adopted a new decree relative to IPRs and implemented the specialization of IP jurisdictions that would enforce guarantees offered to claimants. In Germany, since 2008 SIGNO has been supporting higher education institutions, SMEs, start-up entrepreneurs and inventorsforlegallyprotectingandcommercializingtheirinnovativeideas.In addition IPRs have been enforced by law with the Act on Better Enforcement of Intellectual Property Rights that came into force in 2008. Israel has recently undertaken to enhance and strengthen its IPR mechanisms. Steps were taken to streamline the patent registration process and shorten the examination period. A new Exposure Bill requires the publication of patent applications promptly after the expiration of an 18-month period from the filing date at Israel's Patents Authority. Furthermore, a draft is under preparation to amend the Patent Law to reduce the number of reference countries (from 21 to the five major EU countries and the United States). Israel is also about to extend the term of protection of pharmaceuticals tests aftermarketingapproval.Inthecontextoftheeconomiccrisis,theEuropean Union urged its member states to reduce fees for patent applications and maintenance by up to 75%. Furthermore. the European Commission adopted in2009arecommendationtotheCouncilthatwouldprovidetheCommission
  57. 57. WHITEPAPERON StimulationofInvestmentofPrivateSectorinto ResearchandDevelopmentinIndia 56 with negotiating directives for the conclusion of an agreement creating a UnifiedPatentLitigationSystem(UPLS).ThisEuropeanandEUPatentsCourt (EEUPC) would lead to significant savings compared to the costs of piecemeal litigation. Such reductions in legal costs could permit many SMEs toenforcetheirpatentrightsinallEUandEuropeanPatentConvention(EPC) countries. Japan has tested the Super Accelerated Examination System on a pilot basis since 2008. Green-technology-related patent applications have been eligible for treatment under the conventional accelerated examination system on a pilot basis since 2009. In addition, examination guidelines have been revised in order to expand the patentable subject in advanced medical technologies and the Patent Law was amended in spring 2009 to revise the registrationsystemfornon-exclusivelicensesandtoexpandtheclaimperiod duringwhichonemayrequestanappealagainstarefusal.EncouragingSMEs to patent innovations and build IP capacity is another goal of policies. The Japan Patent Office (JPO) provides aid to SMEs for overseas development through the SME support centres of prefectural governments. Sweden has implemented a pilot action to fund SMEs for professional IP consultancy. The Netherlands allows the use of innovation vouchers to cover (part of) the costsinvolvedinanSME'sfirstpatentapplication. Facilitating the commercialization of public research: The commercialization of the results of public R&D, through patenting or spin- offs, is an important channel for transferringknowledge. Recent initiatives in this area include some countries that have added funding schemes to support technology transfer and commercialization in academia. Countries have also provided public research institutes with infrastructure and nonfinancialsupport. Adjusting to the globalization of R&D and innovation: The globalization of R&D and innovation also affects the scope for national policy intervention. Consequently, more economies increasingly take into account recent trends intheglobalizationofR&Dwhenformulatingtheirnationalstrategies.Levels of policy priority given to the internationalization of national STI vary markedly from one country to another. In Finland, Japan and Norway, this
  58. 58. 57 WHITEPAPERON StimulationofInvestmentofPrivateSectorinto ResearchandDevelopmentinIndia ranks high among STI policy priorities; it ranks lower in Austria, the Netherlands and the United States, countries that at the same time are open and internationalized. Three indicators reflect the internationalization of STI and the extent to which a country may access international knowledge: i) foreign direct investment as a percentage of GDP, ii) the share of internationalstudentsintertiaryenrolment;andiii)thepercentageofpatent applications filed under the Patent Cooperation Treaty (PCT) with co- inventors located abroad. The intensity of FDI inflows reflects the degree to which a country may benefit from knowledge spillovers and additional R&D investment from multinationals. The presence of many international students suggests the contribution of foreign talent to research and the building of connections with international university networks. The share of PCT patents with foreign co-inventors is a direct measure of international cooperation in research. Linking domestic firms to foreign sources of knowledge, attracting knowledge intensive businesses and foreign highly skilled workers, providing opportunities for inward and outward international mobility are key aims of policies to adjust to and benefit from globalization. Encouraging the internationalization of innovation actors: With the continuing internationalization of science and innovation, tapping into foreign sources of knowledge becomes more important. This has led to a range of policy initiatives in various countries. Regional, cultural and historical dynamics are efficient drivers of R&D internationalization and international co-operation. Enhancing the internationalization of the national innovation system requires governments to reinforce their own capacities. Direct funding, fiscal incentives and provision of infrastructures are also used to promote the involvement of national firms in international co-operation. Countries are also seeking to improve their attractiveness to foreign firms. In Finland, registered foreign-owned companies are also eligible for public funding, and foreign entities, firms or research institutions are treated on equal terms with Finnish ones. Finland has also created the Fin Node Innovation Centre Network as a gateway for international enterprises lookingforbusinesscontacts,cutting-edgeresearchorR&Dresourcestolink