When German carmaker Volkswagen (VW) decided to double the headcount at its technology solutions team in India last year, it made a gesture to loosen the responsibility of product development away from headquarters.

“It is not the case that people think the best way in Wolfsburg, of course,” Cornelius Menig, VW’s head of application and infrastructure, says jokingly. “But it has taken us some time to recognise that.” 

VW is increasing the number of employees at its Indian in-house IT operations to 3500 by 2024, as it looks to scale up its operations which will ultimately feed into its global automotive business. VW’s India tech solutions team, which employs staff in Pune, Gurugram and Bangalore, was established in 2016.

“The organisational structure used to be horizontal where, for example, we had support in India, developers in Portugal and product managers in Germany. Now, we want the team in India to be vertical and have more ‘product responsibility’, meaning that there’s a product manager, developer and the support team all in India,” he explains.

From outsourcing to developing 

India is renowned for being an IT outsourcing country. Ever since US chip maker Texas Instruments transported a satellite dish to Bangalore on an ox cart in 1985, to establish a communication link with the company’s home base in the US, the country has been synonymous with multinationals’ IT operations.

Starting out as locations for back-office operations, cities such as Bangalore and Hyderabad have since turned into veritable tech centres with a concentration of software engineers. Amid the global tech talent wars, India now boasts an appealing talent pool with the lowest demand–supply gap for tech talent among major players, including the US, China and the UK, according to Indian trade body the National Association of Software and Service Companies.

As VW expands its IT business, Mr Menig says that one of the obstacles VW has encountered is a dearth of talent in Europe. In Germany alone, there are currently 137,000 open IT positions, according to industry association Bitkom. “It’s really difficult to get the experts we need in Europe, while India has [lots of] highly skilled IT professionals.”

Like VW, many multinationals in India set up what are known as global capability centres (GCCs) — a catch-all term describing in-house tech arms of multinationals specific to India. Some GCCs carry out back office operations, others focus on existing IT and an increasing number have extended their operations to include research and development (R&D). 

Broadly defined as the efforts made by companies to improve and develop their products and services, R&D is an integral part of any business’s bid to stay relevant, particularly in a world where digital technologies set the pace of innovation. As software becomes increasingly intertwined in products and important to all industries, from aviation and automotive to semiconductors and medical devices, India has a durable appeal.

Record R&D FDI

In 2022, India recorded the highest amount of estimated capital expenditure in R&D ($12.9bn) in 2022, up more than 400% from $2.5bn in 2021, according to fDi Markets. It supplanted the US, the number one for the past decade, as the top R&D FDI destination.

According to a 2022 Deloitte survey of 99 companies globally, India continues to be not only the destination of choice for multinationals’ engineering and research and development operations, but one that is expected to keep growing. 

Roughly 85% of the surveyed organisations already use a GCC for engineering and R&D. Additionally, more than 70% of the surveyed organisations that already use a GCC for such activities planned to increase their engineering and R&D spend. 

Manpreet Singh Ahuja, chief digital officer at PwC India, explains that around 500 R&D centres have been developed in the country over the past decade, which have, in turn, produced considerable talent pools. “With that scale, our tech centres have become some of the biggest in the world and this makes it indubitably easier for companies to make investments in India,” he says.

“If you stand in any multinational’s shoes, their need to change and digitally adapt is at an all-time high. Whether you are British, American or Singaporean, business models are shifting and companies are putting R&D dollars aside, and India emerges as a clear choice,” he says. 

Mr Ahuja estimates that a software engineer’s salary in India is between $12,000 and $18,000 per annum, compared to the US equivalent engineer’s salary of between $75,000 and $100,000, which will only strengthen the trend of multinationals building out R&D operations in India. “This kind of cost arbitrage is where this journey started, how higher value chains were created and why growth will continue in these R&D centres,” he says.

Foreign investment into R&D in India is also becoming more widespread. Bangalore has attracted more than half of the country’s R&D flows over the past decade, but R&D investments last year were more evenly spread across several of the big tech centres: Bangalore only took some 20% of the inbound R&D flows; Hyderabad took another 20%, Pune had a share of 11% and Chennai had more than 7%, according to fDi Markets.

Despite there being no single, explicit, R&D-targeted government incentive, corporations have looked at sector-specific incentives, illustrating the tailored approaches multinational companies are taking to their R&D investments in India.

India for the world; India for India

The UN estimates that India overtook China as the world’s most populous country in April 2023, with an estimated population of 1.4bn. As such, multinationals’ bet on India is, to a varying degree, also a bet on the future growth of the market.

Manoj Gidwani, vice-president of marketing at consultancy Nexdigm, draws the distinction between companies investing in “India R&D for the world” and “India R&D for the domestic market”. The former focuses on leveraging India’s talent pool and cost advantages to develop products and technologies for the global market, like VW; while the latter is a response to the business opportunities available in the country.

Mr Gidwani points out that as the Indian government is still trying to promote the country as a manufacturing hub, some companies are looking to avail themselves of those kinds of incentives on offer.

Earlier this year, German medical devices company Siemens Healthineers invested in its campus in Bangalore that integrates R&D, manufacturing, its innovation hub and its country headquarters.

Vivek Kanade, managing director of Siemens Healthineers India, tells fDi that the company chose Bangalore as the location for its innovation hub on account of favourable government policies, availability of talent and technological integration. 

He explains that the government initiative aimed at boosting domestic manufacturing, the ‘Production Linked Incentive Scheme for Medical Devices 2020’, is one reason that makes India appealing to the healthcare sector. 

As the market for medical devices develops, Mr Kanade is confident that the “support in research and development, alongside innovation, will act as a catalyst to the ever-evolving healthcare infrastructure in the country”.

Kamala Raman, vice-president of supply chain research at management consultant company Gartner, says that “if you’re investing in India for the domestic market without R&D, you’re stuck”.

As the domestic market grows and Indian domestic manufacturers also invest in R&D, foreign multinationals are compelled to increase the quality of their products, she explains.

With a population where some 40% are younger than 25 years old, according to Pew Research Center, there is much hope that India — and any foreign business invested in it — will reap the rewards of its demographic dividend.

Keerthi Kumar, partner at Deloitte, says that within a global macroeconomic environment defined by ageing demographics, geographical derisking and digitalisation, India stands to gain.

Yet, he stresses that within R&D, multinationals’ attention on India is less on research and more on development — or specifically the design, simulation, modelling and testing of a product. “India already does very well on the ‘D’ part, but I expect there to be more of a move towards the ‘R’ over the next few decades, and then it will make sense to call India the true R&D capital or hub of the world.”

Not yet the world’s R&D capital

There are several additional factors that throw India’s burgeoning status as the world’s R&D capital into question, namely the government’s role required in boosting R&D spending and ensuring that its population keeps up with the all-encompassing needs of digitalisation.

As a share of gross domestic product (GDP), the overall Indian private and public spend on R&D hovers at 0.7%, while the R&D spend as a proportion of GDP for the US and China stand at 3.4% and 2.6%, respectively, according to the latest government figures.

Reema Bhattacharya, head of Asia research at consultancy Verisk Maplecroft, points out that beyond the government’s low domestic spending on R&D, relative to other countries, India has a “weak and unreliable patenting and intellectual property rights regime, which, in most cases, has failed to safeguard commercial innovations”.

“India would need to overhaul its current resource allocation system, reprioritise public expenditure, and protect and incentivise private sector innovation to fully realise its R&D potential across critical sectors and compete with the likes of China in the next decade,” she says.

On top of this, India’s tech talent landscape, which has become one of the country’s main draws for multinationals, proves to be a more complicated picture. A recent report by AWS and Gallup illustrates that as more jobs require digital skills in India, it will become more difficult to fill them.

Some 88% of Indian employers said it is challenging to find the talent they need for job openings that require digital skills, the report says. “A possible barrier is that 60% of Indian organisations prefer a bachelor’s degree, even for entry-level IT staff,” it states, adding however that “many are starting to recognise that accepting industry certifications can ease their hiring challenges”.

Still, for companies like VW, India holds other pathways to innovation that remain more cumbersome in Europe. Mr Menig says that European legislation like the EU’s General Data Protection Regulation is hampering innovation and creativity back in Germany due to bureaucratic processes and disparities in the ways that states implement the regulation.

“By contrast, in India there is less paperwork, less regulation and more of a ‘start-up mentality’, he adds. 

In contrast to the Chinese market where the German automaker is forced to comply with cyber security laws and where any R&D has to stay within China, India is a market VW has identified as important for the company’s future growth, he says.

“China is a market where we want to stay strong and India is an emerging market where we want to grow,” Mr Menig says.

VW is already targeting 20% research or innovation in every product at its India operations, as part of its “product responsibility”. VW said that they did not have any concerns regarding patenting in India.

From his last visit to India in November, Mr Menig sees a country in flux and an arm of Germany’s VW that is becoming more embedded in the local community. “I see a market and a country that is really evolving in a way I haven’t seen elsewhere and there’s a great atmosphere in [our] workplace with fresh graduates joining our offices,” he says. 

“This would have been unthinkable 10 years ago,” he stresses. “There wouldn’t have been this community of experts.”

Now, much like the rest of the world, India looks ahead to a future defined by even greater digital penetration and filled with the yet unrealised full power of artificial intelligence (AI) — a far cry from an ox cart carrying a satellite dish back in the 1980s.

This article first appeared in the June/July 2023 print edition of fDi Intelligence