Determinants of R&D Behavior of Foreign Firms in India

In the recent past researchers have observed paradigm shifts in the location and nature of R&D activities undertaken by multinationals in host countries. India is one of the host countries for the R&D activities of foreign firms from developed countries like the USA. Hence, the objective of this study is to understand the factors that determine the R&D behavior of foreign firms operating in India. The data used for the analysis is secondary data extracted from Prowess database of Centre for Monitoring Indian Economy. Econometric analysis is carried out on a panel data consisting of foreign affiliated firms for a period of five year from 2011 to 2015. The preliminary results of the random effects Tobit analysis indicate that the traditional variables like size of the firm and age of the firm are important in determining R&D intensity even in the case of foreign firms. Further analysis is carried out using Heckman two-step econometric specification to understand the factors that determine the decision to invest on R&D and the factors that affect R&D intensity of the foreign firms operating in India. The results of the econometric analyses reveal that other factors like labor intensity, sales and distribution intensity, outsourcing intensity are also relevant in determining R&D activities of the foreign firms