Unleashing innovation potential: insights from India’s manufacturing sector
Staircase in a lighthouse in India (Image: Faris Mohammed via Unsplash).

Unleashing innovation potential: Insights from India’s manufacturing sector

An analysis of the challenges and opportunities to bolster the innovation ecosystem effectively.

By Christi Thomas

Innovation is a salient topic in the Indian context due to its potential to drive economic growth, enhance competitiveness and contribute to sustainable development. As a developing economy with a rapidly evolving industrial landscape, India recognizes the significance of fostering innovation to keep pace with global advancements and solidify its position on the world stage.

The Indian Manufacturing Innovation Index (IMII), based on the National Manufacturing Innovation Survey 2021-22, measures innovation performance within the manufacturing sector, together with the presence of enablers and barriers. The index highlights thereby areas where improvements are required to bolster the innovation ecosystem effectively.

 An in-depth exploration of India’s manufacturing sector

To better understand the innovation landscape within India’s vibrant manufacturing and related services sector, a comprehensive survey was conducted in 2021–22. Jointly administered by UNIDO and the Indian government’s Department of Science and Technology (DST), the survey covered 54 sectors, 28 states and 6 union territories.1 

Data was collected from 8,087 firms for the financial years 2017/18 to 2019/20. The response rate was an impressive 80%,2 with micro firms accounting for over half of the surveyed companies and recording the highest response rate of 97%. Questions focused on outcomes, processes, barriers and performance across firms of different states, industries and sizes. The survey results offer valuable insights into the state of innovation and highlight key areas for improvement.3

Assessing innovation: Introducing the Indian Manufacturing Innovation Index (IMII)

To assess the overall level of innovation, survey responses were transformed into the Indian Manufacturing Innovation Index (IMII). This index encompassed three dimensions: the presence of enablers, the absence of barriers and innovation performance.

The enablers dimension gauged the capacity of each state to foster innovation using indicators such as “‘innovation activity and investment”,’ “‘innovation capabilities”,’ and “‘innovation linkages and knowledge flows”.’ The barriers dimension measured the challenges in implementing innovation, covering “potential and capabilities”, “finance”, “policy”, and “market and linkages”. Performance, a crucial aspect, was measured through output variables, covering different types of innovation, their characteristics, their objectives and outcomes. The presence of enablers and the absence of barriers together drove innovation performance.

Unveiling opportunities for improvement: Nurturing the potential for growth

The Indian Manufacturing and associated services sector attained an overall IMII score of 28.17 out of 100, indicating room for improvement in innovation. Within the enablers dimension, the score of 20.52 reveals that there's considerable ground to cover in fostering innovation within the manufacturing sector.

However, this score is not far behind the performance score of 25.68, suggesting that the innovation enabler environment is not significantly lagging behind innovation outputs and outcomes. However, specific aspects like innovation activity and investment received a score of 14.48, emphasizing the need to prioritize these areas to amplify innovation initiatives and investments in research and development.

All-India scores of IMII 2022, inputs and outputs

Note: Enablers comprise the pillars that steer firm-level innovation in manufacturing in a state. The dimension ‘Barriers’ measures the challenges faced by firms while implementing innovation input activities. Performance is measured through the output variables under innovation incidence and characteristics and objectives and outcomes that cover the occurrence of different types of innovation, their nature and the objectives and outcomes of these innovations. Performance results in competitiveness, productivity and knowledge creation. Together, the presence of enablers and the absence of barriers lead to innovation performance among firms.

Note: No impact of a barrier on innovation input activities of a firm has been treated as 'absence' of that barrier for the firm. For instance, a firm that reported no impact of lack of funds within the firm on its innovation activities - was treated as a firm with no internal financial barriers that hindered innovation. We considered the absence of barriers so that the impact of all indicators on the index is positive. 'Presence' measures the existence of a particular enabler in the firm. For instance, if the firm reports the presence of R&D staff or an Industry 4.0 strategy, these indicators are present in the firm. 

Note: Pink and blue colors cover inputs, and green color covers outputs.

Source: Author.

Conversely, the (absence of) barriers dimension garnered a score of 38.31, signifying a relatively conducive landscape for businesses to innovate. Although the share of firms reporting barriers is comparatively low, there remains potential to further enhance the conversion of innovation inputs into impactful outcomes. This underscores the significance of translating innovative endeavours into successful and meaningful innovations, contributing to the growth and competitiveness of the manufacturing sector.

Variations across India: pioneers and untapped potential

The survey analysis unveiled intriguing variations across states. Telangana, Karnataka and Tamil Nadu emerged as frontrunners with the highest share of innovative firms, while Odisha, Bihar, and Jharkhand lagged behind with the lowest share of innovative firms. In fact, Karnataka emerged as the top-performing state, securing an impressive IMII score of 33.41. In contrast, the North-eastern states (excluding Assam) scored only 19.69.

IMII 2022 score, by state

Source: Authors:

At the firm level, approximately 25% of surveyed firms were classified as innovative: just over 14% were identified as product innovators and just over 18% were business process innovators. Interestingly, the results also showed that larger firms were more likely to be innovative, hinting at the importance of scale and resource availability.

Policy directions for fostering innovation: paving the way to success

These findings offer unique insights into the innovation landscape across different states and firm characteristics, offering ideas for targeted policies and supports.

Learning from frontrunner states

In the survey, Karnataka and Telangana emerge as frontrunners in innovation, scoring high on the IMII. Policymakers should closely analyse the innovation ecosystem of these states to identify key success factors. Factors such as supportive government policies, strong industry–academia collaborations, availability of skilled talent and robust R&D infrastructure could be transferable to other regions. By promoting knowledge-sharing platforms and facilitating collaboration between successful and laggard states, policymakers can foster a culture of learning and accelerate innovation growth across the country.

Addressing challenges in laggard states

The survey identifies the need for focused interventions in underperforming states, particularly in the North-eastern regions. Policymakers should conduct a detailed analysis of the barriers hindering innovation in these states and develop targeted strategies to address them. These may include facilitating access to funding, and supporting R&D infrastructure and skills development.

Empowering micro, small and medium enterprises (MSMEs) and small and micro enterprises (SMEs)

The survey shows that firm size has a positive correlation with innovation. MSMEs form a significant portion of India's manufacturing sector, but often face resource constraints limiting their ability to invest in innovation. With targeted support, MSMEs can be empowered to overcome these challenges and actively contribute to the innovation landscape.

Harnessing digitalization for innovation

The survey emphasizes the importance of digital infrastructure and access to advanced technologies. Policymakers should focus on enhancing digital infrastructure and promoting technology adoption among manufacturing firms. Providing incentives for implementing Industry 4.0 technologies, supporting research in digital innovation, and encouraging the development of indigenous technology solutions can all boost the innovation potential of the sector.

Strengthening industry–academia collaboration

Collaboration between industry and academia is crucial for promoting research and development activities. Policymakers can facilitate partnerships between manufacturing firms and educational institutions to encourage joint projects, knowledge exchange, and skill-building initiatives. By bridging the gap between academia and industry, India can drive innovation through research, technological advancements and a skilled workforce.

Continuous monitoring and evaluation

Regular monitoring and evaluation of innovation policies and interventions are essential to gauge their effectiveness and make necessary adjustments. Policymakers should establish mechanisms for ongoing assessment of policy impacts to ensure that initiatives are yielding positive outcomes. This iterative approach will enable the government to refine strategies and allocate resources more efficiently, maximizing the benefits of innovation-driven growth in the manufacturing sector.

  • Christi Thomas is Technology and Digital Advisor at the British Deputy High Commission, Bengaluru.

Disclaimer: The views expressed in this article are those of the authors based on their experience and on prior research and do not necessarily reflect the views of UNIDO (read more).

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