By Robert J. Shapiro
India's modest improvement in the World Bank's "Doing Business Index" this year, along with the Bank's projection that the economy will continue to experience merely moderate growth, were not the boosts that Indian officials hoped for. The Bank's assessment, however, highlights several persistent shortcomings that continue to dampen investment, perhaps most notably the need to improve India's intellectual property (IP) regime.
IP rights provide the foundation for innovation and the investments that drive it, which economists have long recognized as most important factors that can raise a country's trend growth rate. Robust IP rights and enforcement protect individuals and companies willing to risk their sweat and capital to develop next technologies and products by ensuring that they can enjoy the returns from those labours. And in the advanced industries that drive a country's modernization, a strong IP regime protects the revenue streams that support continuing R&D investments, creating the virtuous circle that characterizes the world's most successful economies today. In the end, nations that provide an environment that promotes substantial R&D, starting with a strong IP regime, generate more growth and more productivity gains, which ultimately produces higher incomes.
Robust IP rights and enforcement also help countries like India attract more foreign direct investment (FDI) and the advanced technologies and business methods which accompany those investments. A strong IP regime also encourages those foreign direct investors to undertake their own R&D in the developing economies that host those investments. In so doing, strong IP rights provide a path to more rapid economic modernization. Moreover, without such protections, foreign companies will look elsewhere to invest.
Recently, along with my colleague Dr. Aparna Mathur, I analyzed India's IP rights regime and projected how improvements in those rights and protections could stimulate growth and employment, as well as FDI, in India's most advanced and R&D intensive industries.
First, we assessed the strength of India's IP regime based on a range of international indicators, and found that India trails not only countries such as the United States, Germany, France and the Netherlands but also China, Chile, and Singapore.
Next, we built an economic model that projected the consequences for India's most advanced industries if India were to upgrade its IP rights and enforcement to the level of China, Asia's other large economy at roughly the same stage of development as India. The results were notable. For example, in India's IT industry, R&D investments were estimated to grow by nearly 80 percent. Furthermore, FDI inflows were projected to increase by 43 percent in the automobile industry and by 33 percent in the drugs and pharmaceutical sector.
Over five-to-10 years, the value added per-employee in the auto and truck industries would be expected to increase by as much as 22 percent.
We also analyzed the effects of India upgrading its IP regime to the level of the United States, the global standard for IP rights and enforcement and, by most measures, the world's most successful large economy. We estimate that US-level IP protections in India would lead to increases of nearly 200 percent in R&D investments in the IT industry as well as dramatic gains in the R&D investments by Indian companies in the country's scientific instruments industry, transportation sector, and in drugs and pharmaceuticals.
Similarly, if India adopted an IP regime equivalent to America's, FDI inflows to India would grow by more than 100 percent in the country's automobile industry and by 83 percent in India's drugs and pharmaceuticals sector. Over five-to-10 years, the value-added per-employee would jump by more than half in India's transportation sector, by about one-third in the scientific instruments industry and by about 25 percent in pharmaceuticals and biotech. Ultimately, these changes would boost wages in India's IT industry by nearly 10 percent and the workers in India's other advanced industries would also see rising compensation.
Our analysis shows clearly the potential to spur faster growth and development in India, especially in its most advanced industries, by strengthening IP rights and protections; and that progress would quickly produce more jobs and higher wages. By so doing, India could finally see dramatic improvements in both its rankings by the World Bank and its investment rate.