Inward FDI and Innovation in the Indian Service Sector

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Inward FDI and innovation in the Indian service sector

Bikramjit Sinha

This section analyses the linkage between inward FDI flows and innovation activity in Indian service sector. The focus is on service sector since there has been unprecedented inflow of FDI in services in recent years.

FDI in Services In 2000, share of FDI in services to total FDI inflows in India was just 1.8% and afterwards it grew steadily to reach a record all-time high of 34.7% during 2006 but declined afterwards. Of the cumulative FDI in services during 2000-2010, financial services accounted for bulk of the inflows (41.7%) followed by banking services (9.6%), and both non-financial services and R&D sharing 9.5% each (Table 1). Share of financial services, banking services and insurance have decreased in the latter half of the decade while those of non-financial services, outsourcing and R&D services have increased (Fig. 1).

Table 1: FDI in India in the service sector 2000-2005 Amount Share (US$ (%) million) 856.1 50.9 31.4 1.9 280.3 16.7 275.3 16.4 14.6 0.9 2006-2010* Amount Share (US$ (%) million) 10054.9 41.1 2454.3 10.0 2242.7 9.2 1685.9 6.9 834.5 3.4 2000-2010* Amount Share (US$ (%) million) 10911.0 41.7 2485.7 9.5 2523.0 9.6 1961.2 7.5 849.1 3.2

Category Financial Non-Financial Services Banking Services Insurance Outsourcing

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24.0 1.4 9.8 10.1 2493.8 Res & Dev. s. 2469 Oth hers 200.1 11 1.9 4734 4.8 19.3 3 4935.0 Serv vices Total 1681.8 1 100 24476 6.9 100 26158.7 7 * up November 2010 pto r Sou urce: SIA New wsletters, da for 2000-2004 adapted from NCA ata d AER 2010

9.5 18.9 100

Fig 1. Share of service sub-sector FD inflows in total service FDI inflow (%)* e DI es ws * upto N November 201 10 Source: SIA News sletters, data fo 2000-2004 a or adapted from N NCAER 2010

vation in ser rvices Innov In me easuring inn novation ac ctivity, we have emplo oyed follow wing three indicators o of innova ation activity: (a) ratio of R&D ex xpenditure to sales (R&D intensity) (b) ratio o o ); of royalti technica know-how & license fees paid t sales (RT intensity) and (c) rati ies, al w’s to TL ) io of FO OREX spend ding on roy yalties, techn nical know-h how’s & lic cense fees p paid to sale es (FRTL intensity). Yearly num L mber of bus siness enterp prises (BEs) has been arrived at b ) by counti ing all thos BEs who reported some activ se o vity in any of the ma ajor financia al param meters such as income, expenses, a assets e and etc. The so ource of dat is CMIE’ ta ’s Prowe database and we have followed D ess e DIPP classifi ication of ser rvices.

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Table 2: Innovation parameters of the services sector Criteria 2001 2002 2003 2004 2005 2006 2007 BEs doing R&D 33 39 41 35 36 36 34 R&D BEs/total BEs (%) 1.67 1.63 1.31 0.95 0.90 0.87 0.81 R&D intensity (%) 0.49 0.53 0.44 0.45 0.46 0.50 0.53 RTL BEs/all BEs (%) RTL intensity (%) FRTL BEs/all BEs (%) FRTL intensity (%) 3.50 3.26 3.06 0.46 0.45 0.56 1.17 1.09 0.77 0.19 0.44 0.23 2.68 0.61 0.49 0.17 2.72 0.54 0.42 0.23 2.57 0.50 0.39 0.34 2.92 0.47 0.43 0.32 2008 2009 2010 34 34 27 0.82 0.86 1.02 0.39 0.40 0.56 3.12 0.70 0.46 0.41 3.20 0.35 0.41 0.05 4.01 0.40 0.57 0.08

R&D intensity has hovered around 0.4-0.5% recording the lowest during 2008-09 (Table 2).Outsourcing services which mainly comprises of computer programming, consultancy and related activities is the only service sub-sector with an R&D intensity higher than the sectoral average throughout the period (Fig. 2). R&D intensity of rest of the services is either less than the sectoral intensity or very inconsistent.

0.7

Financial Insurance

Non Financial Outsourcing

Banking R&D

0.5

0.3

0.1 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

0.1

Fig 2. Trend of R&D intensity in the services sector

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20.0

Financial Insurance Others

Non Financial Outsourcing SERVICES

Banking R&D

15.0

10.0

5.0

0.0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010...
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