[This article was published by Mint on 6th June 2018. It was written in collaboration with Anmol Agarwal, a colleague at CAFRAL. To read the article on the Mint website, please click here]

Bill Gates, the co-founder of Microsoft, had once said: “Software is a great combination between artistry and engineering.” Today this combination of art and science is ubiquitous, used in a variety of everyday products. However, has software really affected the production process in traditional manufacturing industries, like automobiles and aerospace?

A recent working paper, “Get With the Program: Software-driven Innovation in Traditional Manufacturing” by Lee G. Bransetter and Namho Kwan (Carnegie Melon University), and Matej Drev (Georgia Institute of Technology), has documented the increasing prevalence of software in traditional manufacturing industries, at the cost of traditional processes like mechanical and chemical engineering, to develop and innovate products.

The importance of software in the innovation process has been measured by the patents citing software-based technologies in these industries. These have seen a large uptick over the last few decades. In the US, for example, the share of software patents has increased threefold over a 20-year period, from only 5% of all patents in the 1980s to around 15% in 2005. More importantly, the share of patents citing previous software patents has also doubled over this period. These are patents in non-software industries like automobiles, and these are an important measure of software intensity in traditional manufacturing.

Does this mean that traditional manufacturing industries are increasingly using software? The researchers use some insightful anecdotes to give the readers an idea. Up to 40% of the cost of a new car is determined by electronics and software content, and most premium cars are equipped with 70-80 microprocessors. The Boeing 777 contains no less than 1,280 on-board processors that use more than four million lines of computer code. More than 50% of medical devices contain software, with a modern pacemaker containing up to 80,000 lines of computer code.

The researchers find that firms resistant to adopting software-based techniques are being outperformed by their peers. As a result, the researchers observe an “R&D (research and development) productivity gap” in the traditional manufacturing sector where highly software-intensive firms produce more patents for each dollar invested in R&D than less software-intensive firms. They also find evidence that equity markets tend to value software-intensive firms more than others.

These findings beg the question: If there are so many benefits of being software-intensive, why aren’t all firms using more software? Why are some firms lagging behind? Armed with the fact that US firms tend to be much more software-intensive than European and Japanese firms, the researchers argue that availability of talented human resources is a crucial reason why this phenomenon exists. In fact, they argue, the availability of talented and inexpensive software engineers from India is one of the key reasons the US has a competitive advantage over these other nations.

Implications for Manufacturing in India

This research provides important cues for Indian firms and policymakers. First, it is important to check whether the results hold for India. One of the key claims of the paper is that more software- intensive firms generate more patents as compared to their less software-intensive counterparts. India has rapidly expanded its software capabilities, with regions like Bengaluru, Pune, Mumbai, Chennai, Delhi and Hyderabad leading the charge. The five states containing these cities, unsurprisingly, accounted for 69% of the total patent applications by Indian residents in the year 2016-17, in line with the research findings.

A focus on software intensity in a country with surplus labour like India may raise a few eyebrows. But, a look at some recent trends highlights the importance of patents. Manufacturing growth and patent filing growth by Indian residents has shown strong positive correlation over the last decade, with a correlation coefficient of 0.62. Both of them plummeted to the 2% mark in 2008-09, followed by a period of resurgence, where patent and manufacturing growth increased to 17% and 8.5%, respectively, in 2010-11. Both shrank sharply in 2011-12, and since then have stabilised and continued to move in tandem.

The relationship between growth of patent filing by Indian citizens and growth in gross domestic product shows a similar picture, with a positive correlation coefficient of 0.53. Further, the growth rates almost converged in 2015-16, indicating a crucial role played by software and patents in assessing the health of an economy.

Software, as an input to production, deserves more attention. With 45,444 applications in 2016-17, India was ranked seventh in the world in terms of patent applications filed. Worryingly, the number declined by 3% from 2015-16, whereas it has grown considerably over the past few years in China and the US, which are already ranked higher than India. The patent-grant rate, hovering around 21% in India, has also been comparatively low.

India’s quest to become a manufacturing powerhouse will, to a large extent, depend on how it embraces software and technology. India is already losing its low-cost advantage in employment generating sectors, like textiles and electronic equipment, to Bangladesh and Vietnam, respectively. But it can certainly take the lead in software engineers’ labour market. Information technology (IT) and software professionals from India are regarded among the best in the world. But hardly any of the most skilled professionals stay back in India. The US has earned great dividends by attracting and retaining the top software talent from India, and around the world, through its prestigious universities and attractive STEM (science, technology, engineering and mathematics) visa programmes.

It’s about time this drift of our software professionals to the West was curtailed through the creation of world-class research facilities and remunerative opportunities. Software can allow India to differentiate its products from the low-end products of its competitors and enjoy a lasting manufacturing boom.

Anmol Agarwal and Sujan Bandyopadhyay are research associates at CAFRAL, Reserve Bank of India. These are their personal views.