Global position of Sri Lanka in Research and Development spending

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Chosen Topic

"Recommendations to national policymakers in Sri Lanka on ways to raise levels of Research and Development (R&D) activity in the country's businesses"

Background of the study

This study was carried out according to module of International Business Environment, Masters in Business Administration (MBA) program of University of Sunderland.

Rational and significance

R&D is crucial to a person, firm and country as a whole to acquire new knowledge, exercise them and achieve their needs in a competitive world. The government of a country has the power to direct the R&D programs in a country. The policy-making institutions work behalf of the government.

Aim/Objective of the study

To identify position of Sri Lanka in the global in spending on R&D

To identify the areas where R&D should focused on

Research methodology

The study was performed using secondary data. Following sources include in the secondary data collection method.

Journals, magazines and other periodical press releases

Articles publish in web sites: internet

Study texts

Introduction

According to the Investorwords1 R&D defined as "Discovering new knowledge about products, processes and services, and then applying that knowledge to create new and improved products, processes and services that fill market needs"

The definition of R&D as per investorglossary2 is moreover less similar to Investorword's definition. According to it, "Research and development is a phrase used to describe the activities associated with the creation or discovery of new processes, methods, products and/or services and using the newly discovered knowledge to fulfill a market need or demand. Techniques that involve science, technology and mathematics are used in research and development"

"R&D is a term, which covers three activities: Basic research, applied research and experimental development. Basic research is experimental or theoretical work undertaken primarily to acquire new knowledge of the underlying foundation of phenomena and observable facts, without any particular application or use in view. Applied research is also original investigation undertaken in order to acquire new knowledge. However, it is direct primarily towards a specific practical aim or objective. Experimental development is systematic work, drawing on existing knowledge gained from research and/or practical experience that is direct to producing new materials, products or devices, to installing new processes, systems and services, or to improving substantially those already produced or installed". OECD Factbook 2008: Economic, Environmental and Social Statistics

[1]Investorword is a business dictionary http://www.investorwords.com/4200/research_and_development.html

[2] Investorglossary is a business dictionary http://www.investorglossary.com/research-and-development.html

Why countries need R&D?

R&D of a country is likely to conducts in individual level, firm's level and from the government bodies in a country. The individuals persuade by eager and curiosity for explorations might conduct R&D activities. The firms consist of private profit motive organizations, Non Government Organizations, Organizations funded by public and other donations etc. Government institutions consist of schools, universities, other educational bodies, departments and any other institutions funded by treasury of the government. As an individual, institution or government cannot grow unless seek for innovations. R&D is the media for exploring new knowledge and way finding to apply in the market to launch the product, process or service. The person or body who highly sensitive to environment changes only can identify the potential rooms for their developments. Companies wish to explore new products, marketing approaches and other services to maximize the wealth of the owners through enhancing the competencies among other companies. Researchers have revealed that persistent R&D strategy performed than irregular or no R&D program.

Government agencies usually establish specialized research and development centers or departments. Organizations often devote a specific percentage of their annual budgets to research and development. R&D has a special economic significance apart from its conventional association with scientific and technological development. R&D investment generally reflects a government or organization's willingness to forgo current operations or profit to improve future performance or returns and its abilities to conduct research and development.

Where is Sri Lanka in spending on R&D?

Prevailing development of a country is an absolute measure of the magnitude of R&D expenses incurred. The most appropriate methods of international comparison and year on year comparison are Gross Domestic Expenditure on R&D or Gross Domestic Production on R&D. This can present as a percentage. R&D expenditure consists with total expenditure incurred by all resident companies, universities, research institutes, government laboratories, other nongovernmental organizations carried on researches etc. It excludes expenditures financed by domestic firms but performed abroad.

As a developing country, expenditure on R&D of Sri Lanka is relatively lower than other countries. This percentage is significantly high in developed countries. Top eight countries in term of percentage of GDP were Israel (4.53%), Sweden (3.73%), Finland (3.45%) Japan (3.39%), South Korea (3.23%), Switzerland (2.9%), Iceland (2.78%) and United States (2.62%) (Available in www.wikipedia.com). R&D intensity of Japan is increasing since 2000. This rate is rapidly increasing in China, even faster than GDP from 0.9% in 2000 to 1.4% in 2006. The type of research area might change from country to country.

Identification of areas that government should focus on spending R&D

In this section author, tries to identify the areas, which should weighted based on the economic structure. Economic structure consists with Agricultural sector, Industrial sector, and Service sector. Whatever the Gross Domestic Expenditure incurred may fall in to one of these sectors.

R&D on Agricultural sector

Significance of the Agricultural sector in the economy.

Sri Lanka is an agricultural country enriched with developed irrigation system from its history.

It has contributed to a sum of Rs.294,921Mn a 12.1% of GDP in 2009 (Table 02,03 in appendix). Percentage Contribution from agriculture sector has a declining trend since several decades. However, the current market price of agricultural sector has an increasing trend in that period. Tea, coconut and rubber are the three main cultivations contribute to 1%, 1.4%, and 0.3% of GDP in 2009 respectively. Agricultural products are the second largest contributor amounted to Rs.1690.3Mn and 24% from total export income in 2009. Tea exports are the predominant export income which possesses 15% of total export income in 2009. Paddy cultivation is another segment that contributes to 1.2% of GDP in 2009. 32.8% of labour force has depended on agricultural sector in 2004. These factual findings reveal that agriculture sector is crucial sector that should make new innovations enhance the contribution to the economy. Following recent phenomena's are crucial to decide the magnitude of spending on R&D on agricultural sector.

Tea production was adversely affected by the drought. Quality of tea was in a problem due to malpractices of using fertilizer, insecticides, law quality plants etc. Sri Lanka drop from the market leadership to the second place of world exporters after arriving of Kenya in to the market.

Coconut production declined largely due to uprooting of trees due to the unavoidable insect affections, deceases and bad weather conditions. This lead to import coconuts, reduce the income of landowners and decline of the life style of dependents.

Paddy price was increased and even had to import in large amounts from India, and Pakistan due to shortage of production. Usually low production of paddy in "Yala"1 season has impact on increasing the living cost of people.

There is an opportunity of exporting other agricultural products due to increasing international demand might contribute to enhance the domestic income. There is an opportunity of expanding coconut, paddy and other agricultural products in North and East area after liberalization.

The country import fish, dry fish, and other fishery products from Maldives, India while being an island in the Indian Ocean.

The recent phenomena might able to address with new researches and development programs. There are separate research institutions for major cultivations of tea, rubber, and coconut. However, the continuous problems in healthy of cultivation could not solved by those research institutions. No enhancement in funding by central government, limited resources: equipments, human resource, research expertise may have lead this research institutions to become white elephants. There are only few institutions researched on paddy cultivations. Therefore, it is suggest government to attempt for R&D as discussed in the last section in this report

Yala - Sri Lanka receives low rainfall from May to November from North East monsoon which is usually name as "yala". Country receives rain mainly from the monsoons and the rainfall impacts on the cultivation.

R&D on Industrial sector

Significance of the Industrial sector in the economy.

Industrial sector is the second largest sector of the economy contributes to 28.6% of GDP in 2009 (Table 02, 03 in appendix). The percentage of contribution is continuously increasing due to the increase of industrialization all over the world. Manufacturing is the predominant subsector contributes to 17.5% of GDP in year 2009. Construction subsector contributes to 6.5% while electricity, gas and water contribute to 2.4% of GDP in 2009. Food, beverage and tobacco production contribute to 46% of manufacturing sub sector. Textile, wearing apparel and leather products amount of Rs.87,762 Mn in 2009 is the second largest contributor of industrial sector. However textile and garment export possess the largest contribution, amount of Rs3,468.7 Mn income and 42.8% of total export income in 2009. Further 26% of total employed depend on this sector. The following phenomena's should be considered to stimulate researches on this sector.

The global economic recession from 2007 to 2009 has caused the international market demand to shrink substantially. Domestic demand also narrowed mainly due to the contraction of disposable income and slowdown in domestic economic activities.

Removing of GSP plus given to apparel industry by European Union by 2010. This will be a reason to decline the markets due to weak competition among low cost countries like China, India, and Bangladesh etc.

The decline in international demand adversely affected the small and medium scale garment manufacturers. Cautious lending of banks, high interest rates and bank collaterals also affected these industries.

The chemical, petroleum, coal, rubber and plastic products category registered a lower growth of 1.8% in 2009 compared with 6.4% growth in 2008. This was driven by the declining of demand in USA industry sector, escalation of production cost etc.

There is an opportunity to expand the factories in North East areas where low cost labor available.

Increasing of crude oil price has impact to increase the commodity price.

These phenomena's urged government to stimulate the industry through R&D. The measures suggest from identifying stringent of importance was depicted in the last section of this report.

R&D on Service sector

Significance of the service sector in the economy

Service sector is the key contributor of GDP. 59.3% of GDP consist with service sector contributions (Table 02,03 in appendix) . Wholesale, transport and communication, and Banking, Insurance and real estate sectors are the main areas consists in service sector contribute to 23.3%, 13.5%, and 8.9% of GDP in 2009. 41.2% of total employed depend on this sector. Accordingly, service sector is a crucial area that should give the priority to develop through R&D programs. The following phenomena's should be considered in planning of R&D.

The slowdown in the Services Sector was mainly due to the setback in external trade activities, particularly the contraction in the import trade sub-sector.

The slowdown in the external trade activities was mainly because of the unfavorable demand conditions due to the global economic crisis.

Cargo handling-ports and civil aviation subsector registered a growth of 3.4% amidst the slowdown in external trade activities.

There is a favorable environment to expand tourism, telecommunication, transport etc.

Government policies recommended stimulating R&D in service sector after considering the above phenomena's are pointed in the latter part of this report.

Recent government approaches on enhancing Research and Development programs.

Recently the government has emphasis on enhancing R&D in useful manner to alliance with human needs. Several institutions, funding ways and new proposals were made in recently to achieve this target. Investment on innovations and usage of new technologies is imperative to boost the growth of the industrial sector. Setting up the Sri Lanka Institute of Nanotechnology (SLINTec) as a collaborative effort by the government and the private sector will add value to Sri Lankan products and enhance their competitiveness in the international market. These initiatives are aimed at transforming academic knowledge in research and development into innovative commercially viable products and services. Central Bank Annual Report, 2009, Sri Lanka.

Following suggestions have made though the 2011 budget in Sri Lanka to enhance R&D.

Customs duty will be removed on instruments and apparatus for health, education and scientific research, covered under the Chapter 90 of the Harmonized System with effect from November 23, 2010

Sri Lankan government is planning to spend Rs1,000 million on the Innovation and Technology Development Fund and their aim is to spent this money on improving the quality and stands of the R&D activities in the department.

proposed to grant a further Rs. 600 million to transform Peradenia, Moratuwa, Colombo, Sri Jayawardanapura, Kelania and Ruhuna universities to become world class universities in their chosen fields.

Proposed to increase the specific professional allowances to university academic staff, medical professionals and other specific professionals based on their professional and research specialties, to 25% of their salaries and to extend concessionary duty to import motor vehicles for professional and managerial categories of public servants working in the Government and public enterprises

Recommendations suggest to policy makers.

This section is link with the discussions "Identification of areas that government should focus on spending R&D". The significance of the sector to economy and recent phenomena's to be aware when developing Research and Development programs were discussed in that section. Set below is the proposed recommendations to said discussions.

Recommendation for agricultural sector R&D

Enhance the finance through government budget. Obtain sponsorships, financings, other research resources from private cultivation institutions and enhance the alliance with them. Those private institutions may be plantation companies, agro business companies etc. The alliance process would be simultaneously advantage to these companies as well.

Select the best researcher and implementation thereon for a year and encourage doing researches in the private sector.

The special Agriculture degree carried by universities should be focused on new researches; and the graduates must link with the production process.

Marketing researches should be carried to capture new markets for tea, rubber and other food crops.

The University of Marine Study should keep alliance with the Ministry of Fisheries. The researches conduct by both institutions should amalgamate and make implementation.

It is required to invest for improvements in food processing techniques, packaging and post-harvest techniques through R&D activities.

The Department of Agriculture has to implement research and development projects, extension services, seed production and quality improvement programs.

Recommendation for industrial sector R&D

Conduct market researches to identify new markets for international trade. Especially for the textile products, dependence on USA market is highly risky on the going concern.

New researches should conduct on increasing the domestic value addition of the productions. As an example, limonite should used in the final products within Sri Lanka and exports a high domestic value added product rather than exporting limonite itself.

Government should stimulate R&D in industrial zones by facilitating them.

The expenses incurred for R&D should allow for income tax purpose.

The researches and excavation of crude oil in Mannar should speedup.

Recommendation for service sector R&D

Banking and finance sector is a crucial sector that can use in development process. The micro finance facilities should be expanded to overcome the poverty in rural areas. The Central Bank should carried researches of this sector since all the possible social economic downturns report from rural areas.

Carry researches on expanding telecommunication, electricity, and transport in low cost manner is enhancing the productivity of entire country.

Perform market researches on ports and aviation sector to attract more ships and air busses in to the country.

Development programs should be carried on coastal area including North and East, cultural triangle to attract tourism.

Other suggestions and considerations

The expenditure, including capital expenditure incurred by a person in carrying on any scientific, industrial, agricultural or any other research for the upgrading of any trade or business carried on by such person which should allowable in terms of section 25(i) of the Inland Revenue Act should be extended by allowing a double deduction, so far as such research is conducted within Sri Lanka through an institution established for research purposes.

To encourage enterprises to undertake Research and Development, registration of patent, trademarks and designs, automation through technology and training of their work force. Such enterprises are encouraged to get assistance from universities, research and technology institutions and skills development agencies.

To encourage partnerships between Government and private sector research centers and universities to undertake joint R&D initiatives for high productive economic activities and to relax administrative procedures obstructing the two sectors to work together.

Tea Research Institute should promote technology and research to improve quality tea, propagate high yielding varieties and minimize post harvest losses.

Dairy products-The Department of Animal Production and Health should engage in veterinary research to provide quality services to farmers

To propose to introduce a Presidential Awards System to our national universities to be assessed based on their academic and research performances.

Suggestion of weight of government on each sector

In this section author identify the weight should give by the government though the fiscal Policy. The weight on agriculture, industrial, and service sector depends on several factors. The economic contribution given to the country, future expectations of a country in its development process, number of people depends on each sector are certain factors among several quantitative and qualitative factors. The Table 01, given below is a basic estimation of the author to identify the weight should give by the government on each sector. The percentage of GDP is actual amounts in 2009. Employment by sector is for 2004. Author has given a hypothetical estimation to represent rest of the factors effects on weight given by the government. The proportionate weight is the sum of factors in three fields. The proportionate weight as a percentage has computed based on the said aggregate weight. Accordingly government should give 23% weight of agricultural sector, 30% for Industrial sector, and 47% for service sector when spending and planning on R&D.

Conclusion

The study was carried to identify recommendations to give for national policymakers in Sri Lanka to raise levels of R&D activities in the country's businesses. Accordingly, the significance of business was identified linked with agricultural, industry, and service sectors. The recommendations were given separately in to the each sector after considering the available problems and potential opportunities in the market. The basic estimation was revealed that government should focus on spending R&D for service sector than other sectors. It is 47% while industrial sector should be given 30% of weight. The lowest weight 27% is needed for agricultural sector. It was proven that, as a developing country with limited resources, the R&D plans and expenditures should bearable to the economy as well as it should be benefitted to people.

Reference

Budget Highlights 2011, Gajma & Company-Tax consultants, Sri Lanka

Budget Proposal 2011, 22 November 2010, PricewaterhouseCoopers-Chartered Accountants, Sri Lanka

Central Bank, 2009, Annual report, Sri Lanka

Institute of research and development in Sri Lanka, http://www.irdsrilanka.org (Accessed on January 04, 2010)

Jayasundara P.B., Budget to introduce fiscal reforms 2011, 02 May 2010, President Media Unit.

OECD Factbook, 2008, Science and technology: Research & Development

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