Role of policies and institutions in spurring innovation: Evidence from India

Guide(s)

Subramanian, Chetan

Department

Economics

Area

Economics

University

Indian Institute of Management Bangalore

Place

Bangalore

Publication Date

3-31-2024

Year Awarded

March 2024

Year Completed

March 2024

Year Registered

June 2018

Abstract

Economists widely acknowledge the fundamental role of innovation in driving economic growth and boosting productivity (Aghion and Howitt, 1990; Romer, 1990). However, the supply of innovation by private firms is hindered by technological spillovers (Arrow, 1902), as well as significant financial constraints associated with intangible nature of Investment in innovation and uncertain returns. To address this, governments around the world implement various measures to encourage firms to Innovate. In my dissertation, I Investigate the role of fiscal policies and debt recovery institutions in promoting private sector investment in innovation in developing countries. The summary of my dissertation essays is outlined below: In the first essay, I show that the enhanced efficiency of debt contract enforcement, brought about by the implementation of debt recovery tribunals (DRTs), has a positive Impact on product innovation in India. During the sample period, debt recovery tribunals (DRTs) contribute to more than 15% of the observed growth in the number of products produced by Indian firms. Firms enter into new product lines that are new to the market and also in Industries outside of their current scope of operation suggesting bolder Innovation moves in response to DRTs. The product growth is driven by firms in the top quartile of tangible asset distribution who also experience a significant improvement in their performance as measured by sales, profitability, and productivity. In contrast, low tangible asset firms experience a decline in their sales and profitability. In the second essay, exploiting the staggered introduction of weighted tax credits for R&D spending across industries in the manufacturing sector in India, 1 provide novel causal evidence that R&D tax credits lead to an increase firm level R&D spending and induce a large decline in prices in the industries targeted by the reform. The relative Increase in R&D spending in treated industries is driven by the eligible firms while there is no significant effect on the ineligible firms, and these effects are stronger for the financially constrained firms. Further, the policy also leads to a significant decline in prices for both eligible and ineligible firms, and is primarily driven by a decline in markup, conditional on cost, as opposed to the passthrough of cost saving to prices. The policy also results in increased physical efficiency and a lower marginal cost for both the eligible and the ineligible firms. Interestingly, no significant impact is observed on firms' markups, as the competitive effects on markups counteracts any potential increase resulting from incomplete cost pass-through to prices. I provide compelling evidence that my results are not biased due to pre-existing linear trends, omitted variables, and staggered treatment of industries. My results suggest that R&D tax credits can increase competition between Brms within industries.

Pagination

x, 129p.

Copyright

Indian Institute of Management Bangalore

Document Type

Dissertation

DAC Chairperson

Subramanian, Chetan

DAC Members

Dasgupta, Kunal; Murali, Srinivasan; Thampy, Ashok

Type of Degree

Ph.D.

Relation

DIS-IIMB-FPM-P24-21

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