The document analyzes sector and cluster effects of foreign direct investment (FDI) in research and development (R&D) in India from 2003-2009. It finds that over half of FDI in R&D went to the software and IT sector, followed by pharmaceuticals, automotive, and others. Bangalore attracted the most investment due to its large, skilled workforce. Liberalized economic policies in India simplified business regulations and increased GDP and industry growth rates, making the country more attractive for FDI. Major sectors like IT, automotive, and pharmaceuticals received investment amounts ranging from under $20 million to over $1 billion, creating thousands of jobs but fewer per firm in IT due to its intellectual nature.

1. Sector and Cluster Effects of
FDI in R&D in India
G D Sandhya, N Mrinalini, Pradosh Nath
Economic and Political Weekly - 4 February 2015
FDI is an investment made by a company or entity based in one country, into a company
or entity based in another country.. Entities making direct investments typically have a
significant degree of influence and control over the company into which the investment is
made. Open economies with skilled workforces and good growth prospects tend to attract
larger amounts of foreign direct investment than closed, highly regulated economies.
Distribution of FDI in R&D in India
During the years 2005 -
07 , heavy inflow of FDI
by investing companies
in the field of Research
and Development were
seen. The industries in
the developed countries
invested in emerging
markets of the world
which is India and
China. In India, a large
chunk of the
investments made were
seen in the IT. Apart
from IT, Pharma and
Automotive sectors of
India were the ones that
attracted the
comparatively high
levels of investments in
the form of FDI which
are further discussed.
FDI IN R&D IN INDIA 1
Aggreate FDI from 2003 - 09
1%
1%
3%
3%3%
7%
9%
10%
13%
51%
Software and IT Aerospace Pharma and Biotechnology
Auto Industry Others Machinery and Equipment
Services Electronic Components Chemicals
Metals and minerals

2. Reasons For FDI Growth in India
The stupendous rise of the Indian GDP during the financial year 2006 - 2007 as seen above
can be credited to the simplified economic policy of the Government of India. These
economic policies simplified the process of business registration, cross-border trade, and
payment of taxes, eased access to credit and strengthened investor's interest. These liberal
economic policies of Government of India accelerated the growth of Indian industries,
especially manufacturing, construction, and service industry.
The reasons for the increase of Industry Growth Rate in India GDP, during 2006, are
that huge amounts of investments being made in the sector and this has helped the
industries to grow. Further the reasons for the rise of the Growth Rate of the Industrial
Sector in India are that the consumption of the industrial goods has increased a great deal
in the country, which in its turn has boosted the industrial sector. Also the reasons for the
increase of Industry Growth Rate in India GDP was that the industrial goods are being
exported in huge quantities from the country.
FDI IN R&D IN INDIA 2
Real GDP Growth during 2000 - 12
GDP
0.00
2.50
5.00
7.50
10.00
2000 - 01 2002 - 03 2004 - 05 2006 - 07 2008 - 09 2010 -11
GDP
Industry Growth during 2002 - 2012
0%
3.25%
6.5%
9.75%
13%
2002 - 03 2003 - 04 2004 - 05 2005 - 06 2006 - 07 2007 - 08 2008 - 09 2009 - 10 2010 -11 2011 - 12
Industry Service

3. Automotive Sector
From the above table we observe that the number of jobs created is relatively high and the
majority firms are willing to invest upto $500 million in this particular sector. The Indian
government allows 100% FDI under the automatic route. It is a fully delicensed industry
and free imports of automotive components are allowed. Moreover, the government has
not laid down any minimum investment criteria for the automobile industry. On the other
hand, the firms can hire highly skilled labour at comparatively lower fees. The automotive
industry is growing fast and so are the opportunities for firms as India is an attractive
growing market. The opening of the automotive sector to international competition, the
arrival of Maruti Suzuki and other players, and growing domestic demand have led to
strengthening of the India automobile and auto components industry. Domestic firms
have developed capabilities for cost cutting, productivity improvements, quality
improvements, and design and development as a result to level up with the global
standards and competition, peaking interests of foreign investors to invest in this sector.
IT and Software
From the above table we observe that the amount of money invested in the IT sector is the
highest of all. Bangalore being the cluster which outperformed because of the presence of
larger number of highly skilled manpower provided by academic and research
Distribution of Firms in Automotive Sector
INVESTMENT RANGE ( $
MILLIONS)
NUMBER OF
FIRMS
INVESTEMENT JOBS CREATED
0 - 19 5 9.30 65
20 - 49 5 161.60 642
50 - 500 15 2,700.15 12,369
TOTAL 25 2,871 13,076
Distribution of Firms in Software and IT Sector
INVESTMENT RANGE ( $
MILLIONS)
NUMBER OF FIRMS INVESTEMENT JOBS CREATED
0 - 19 225 2,130.46 39,734
20 - 49 95 2,650.90 35,954
50 - 1000 45 8,225.66 88,908
TOTAL 365 13,007 1,64,596
FDI IN R&D IN INDIA 3

4. institutions in Bangalore. We see that a larger number of firms with smaller volumes of
money have invested in the sector. A striking factor was that, in the year 2006, FDI upto
100% was permitted for E-commerce activities subject to the condition that such
companies would divest 26% of their equity in favour of the Indian public in five years, if
these companies are listed in other parts of the world. Such companies would engage only
in business to business (B2B) e-commerce and not in retail trading. Further, the
intensiveness of the R & D in the sector can be gauged by their patenting behaviour.
Majority of the patents granted were engage in development, engineering, product
development and testing and support work.. However, in the years to come, in
comparison to the number of firms that invested in the IT sector the number of job created
is comparatively low as the nature of the job is such that an highly intellectual person can
accomplish majority of the job.
Pharmaceutical Sector
FDI in pharmaceutical sector has been more or less constant over the period of time.The
biggest share of outsourcing in pharmaceuticals was for clinical trials since in India there
did not exist many restrictions. In addition, the MNCs are primarily use Indian
capabilities for contract research. MNCs tie - up with research intensive Indian firms
having core competencies in research, but Indian firms do not enjoy ownership of any
intellectual property benefits in these tie ups. Indian capabilities are used to fill slots in
value chain of drug manufacturing by the foreign pharmaceutical companies. Hence in
the year 2011, the Government of India elucidated its stand on foreign direct investment in
the pharmaceutical industry and presented certain amendments. While FDI upto 100 per
cent in greenfield projects remained under the automatic route, FDI upto 100 per cent in
brownfield investment (i.e. investments in existing companies), would now need to go via
the Government approval route. This meant scrutiny and approval presently by the
Foreign Investment Promotion Board (FIPB) and by the Competition Commission of India
(CCI). The amendment came into immediate effect. However, FDI in this sector has
evidently increased the number of job opportunities. Mumbai and Pune have emerged as
the clusters attracting the largest investment due to its large population of pharmaceutical
and bio-tech firms.
Distribution of Firms in Pharmaceutical Sector
INVESTMENT RANGE ( $
MILLIONS)
NUMBER OF FIRMS INVESTEMENT JOBS CREATED
0 - 19 42 130.086 532
20 - 49 24 764.28 2,270
50 - 500 9 1,662.36 4,349
FDI IN R&D IN INDIA 4

5. Conclusion
MNCs have targeted the most dynamic growth-intensive, high technology sectors for
locating R & D in India. Globally too, FDI in R & D has moved towards growth and
innovation driven industries cause they are essential too improve productivity. The vast
majority of investments have been in Bangalore, which has outperformed other clusters
in economic terms. In India, locational decisions are primarily driven by the industrial
concentration in a particular cluster, in addition to the availability of human resources.
Presented by:
Himay Shah A020
Niki Gala A031
FDI IN R&D IN INDIA 5