One possible explanation for these results is the failure by Indian firms in the adoption and
mastering of new technology. Another possible explanation is that trade liberalization may have
changed the kind of technology imported by Indian firms. In particular, technology imports may
have shifted away from technology which contributes to profits and productivity within a relatively
short time lag and toward technology which makes a more direct contribution to firms’ technological
capabilities but requires a longer gestation lag. If this is the case, this shift in the kind of technology
imports may contribute to explain why most studies find that trade liberalization in India is
associated with a reduced productivity growth.
7.4 Trade liberalization and R&D effort in Indian manufacturing
Kumar and Aggarwal (2000) uses firm-level data for the period 1992-1997 to study the trend and
determinants of R&D activity in Indian manufacturing after trade liberalization. The analysis is
motivated by the concern for the declining importance of R&D activity in India. In particular,
while the proportion of world GDP devoted to R&D has steadily increased in the last decades to
reach 2.5% in the 1990s, the opposite occurred in India, where the proportion of national resources
devoted to R&D fell from 0.98% in 1988 to 0.66 in 1997. Since more than 70% of R&D expenditure
in India is financed by the government, much of this downward trend is explained by the fiscal
reform of the 1990s, which drastically reduced investment expenditure and subsidies to firms in
order to reduce the fiscal budget deficit. At the micro-level, the evidence shows different patterns
in R&D expenditure between local firms and MNE affiliates in India. In particular, while in the
1990s the average R&D intensity (the ratio of R&D spending to sales) of local firms is still slightly
higher than that of MNE affiliates (0.854% versus 0.818%, respectively), the trend for local firms is
declining (from 0.868% to 0.831%), while that for MNE affiliates is steadily increasing (from 0.766%
to 0.852%). These trends suggest an increasingly central role of MNE affiliates for technological
upgrading of Indian manufacturing.
The firm-level econometric analysis performed by Kumar and Aggarwal shows that firms’ R&D
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