R&D counter-cyclicality, technology import and re-insourcing: case study of Indian Automobile Industry

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This study analyzes the impact of economic crisis on R&D behavior of Indian automobile industry and the determinants of R&D effort, especially import of technology during pre- and post-economic crisis. The financial crisis of 2007 had a deep impact on the sales and profitability of global automotive industry, which resulted in re-insourced of many activities because of underutilized capacity during recession. This trend partly supports countercyclical behavior of R&D during recessionary period (Aghion and St.Paul 1998, Schelifer 1986). However, not much research is available on the trends and nature of R&D activity in emerging economies post economic crisis. In the Indian automobile industry, while corporate profitability suffered a setback during the 2008-09 crisis, in contrast, there was a sudden spurt in R&D investment during this period. Based on panel data from Prowess database, a fixed effects model is used to estimate relationship between R&D behavior and firm characteristics for a sample of 5000 automobile firms in the four wheeler and ancillary industries. The study finds that the sign and magnitude of some key explanatory variables change pre and post economic crisis, implying that technology import has a substitutive relationship with in-house effort during economic crisis. Case studies are used to support the findings from the econometric model.