The draft Science, Technology and Innovation Policy (STIP) 2020 has recommended that companies should be encouraged to channel their Corporate Social Responsibility (CSR) funds towards R&D activities, thus broadening the avenue for private financing of innovation. The recommendation also appears to have been made with the aim to encourage the contribution and collaboration of private enterprises in building a robust innovation ecosystem in India. In India, the Companies Act, 2013 mandates the companies fulfilling certain financial criteria to spend a portion of their net profits towards CSR activities. Thus, the draft STIP 2020 proposes a unique opportunity for the companies as they can now utilise the mandatory CSR expenditure towards R&D under specific conditions set by the government.
Separately, a recently published study on Indian Manufacturing Sector by R Jain and K. V. S. (2020) provides interesting insights about the effect of R&D or innovation expenditure on CSR spending undertaken by the companies. The study found a positive effect of R&D and other innovation expenditure on CSR spending in the case of Indian Manufacturing Firms between the period 2014 to 2017, after the implementation of Companies Act 2013. Furthermore, the study also finds the effect of innovation expenditure on CSR spending to be higher for private firms compared to state owned firms, despite state owned firms being associated with higher levels of CSR spending.
The findings of this study when viewed together with the recommendations of draft STIP 2020 offer innovative ways of thinking about private financing of innovation, we outline some important policy implications as follows:
- The draft STIP proposes a unique opportunity for the private sector firms to plan their CSR activities strategically and divert some portion, if not all, of their mandated CSR expenditure towards R&D or innovative activities. Various studies have established that those firms that undertake CSR for strategic interests tend to perform better in technological innovation (Bocquet et al. 2013; González-Ramos, Donate, and Guadamillas 2014). Thus, we propose that if firms use their CSR funds to further their strategic objective by utilising a share of the funds towards it’s own R&D spending, it would enhance their productivity and profitability which would result in more CSR funds available for other projects in the future years. This multiplier effect would enhance competitiveness and sustained performance of the firms.
- According to Kim, Brodhag and Mebratu (2014), CSR and innovation expenditure have a bidirectional relationship, and like the study by R. Jain and K.V.S. suggests, increased spending on innovative activities (incurred through utilisation of CSR funds ) could in turn lead to higher CSR spending. Higher CSR spending also has the potential to act as a positive signal to stakeholders like investors, suppliers, employees and customers, improving not only the social awareness of the firm but also its sustainability.
- Lastly, there is a need to establish better linkages between CSR and SDGs to channelise more funds towards certain SDGs like ‘Decent Work and Economic Growth (SDG 8)’. Firms can be innovative in planning their CSR spending by creating better linkages to reap maximum benefits from their CSR expenses. One such linkage could potentially be through supporting startups with CSR funds. This would fall within the ambit of SDG goal 8, of creating decent employment opportunities and would also give a firm the opportunity of investing in technology or ideas of a particular startup that it could benefit from in the future.
Studies like the one done by Poddar A, Narula SA, Zutshi A. (2019) should be carried out periodically to identify industrial sectors that are spending less than the prescribed amounts on CSR, to potentially identify the amount of CSR funds available that could be directed towards the R&D and innovation ecosystem. The study also provides a state-wise distribution of CSR spending wherein Maharashtra, Tamil Nadu, Andhra Pradesh receive a large portion of CSR funding. Policies should encourage firms to use a targeted approach and channelise their CSR funds towards public research institutions and state funded incubators. Such policies may also result in significant efforts by several state governments to develop their innovation systems to attract increased CSR funding.
References:
- Science, Technology and Innovation Policy (Draft) December 2020, Department of Science and Technology, Ministry of Science and Technology, Government of India.
- The Companies Act, 2013 ; Ministry of Corporate Affairs, Government of India.
- Ritika Jain & Krishnapriya V.S. (2020): Effect of innovation on corporate social responsibility: does ownership matter? Evidence from Indian manufacturing firms, Economics of Innovation and New Technology, DOI: 10.1080/10438599.2020.1843271
- Bocquet, Rachel, Christian Le Bas, Caroline Mothe, and Nicolas Poussing. 2013. “Are Firms with Different CSR Profiles Equally Innovative? Empirical Analysis with Survey Data.” European Management Journal 31 (6): 642–654.
- González-Ramos, María I., Mario J. Donate, and Fátima Guadamillas. 2014. “Technological Posture and Corporate Social Responsibility: Effects on Innovation Performance.” Environmental Engineering & Management Journal (EEMJ) 13 (10): 2497–2505.
- Kim, Yunhee, Christian Brodhag, and Desta Mebratu. 2014. “Corporate Social Responsibility Driven Innovation.” Innovation: The European Journal of Social Science Research 27 (2): 175–196.
- Poddar A, Narula SA, Zutshi A. (2019) A study of corporate social responsibility practices of the top Bombay Stock Exchange 500 companies in India and their alignment with the Sustainable Development Goals. Corp Soc Resp Env Ma. 2019;1–22. https://doi.org/10.1002/csr.1741