astudyofforeigndirectinvestmentinindianpharmaceuticalindustries-140408120448-phpapp01

8/18/2019 astudyofforeigndirectinvestmentinindianpharmaceuticalindustries-140408120448-phpapp01

1/32

SCHOOL OF PHARMACY AND TECHNOLOGY MANAGEMENT (Shirpur Campus)

A Projec repor

O!

The Su"# o$ Forei%! Direc &!'esme!

a!" is &mpac o! Pharmaceuica

&!"usries i! &!"ia .

A Projec repor sumie" i! he paria $u$ime! o$ he re*uireme! $or he

"e%ree o$ M+A Pharma ech,

Sumie" o- . Sumie" #-.

Dr. Ashok Panigrahi Yashica Jain (A008)

(Associate Professor Shagun Agrawal (A001)

NMMS!Shir"ur)

1


2/32

CERTIFICATE

This is certify that Mrs. Yashica Jain and Mrs. Shagun Agrawal worked during the eriod !".#$.$#!% to !&.#'.$#!% on the de(elo)ent of the ro*ect +Study of Foreign ,irectIn(est)ent in in Indian -har)aceutical Industries/ in the artial fulfill)ent of the re0uire)entfor the degree of M1A 2Master of 1usiness Ad)inistration3 under )y guidance 4 suer(ision.To the 5est of )y knowledge/ the )atter reresented in this ro*ect is a 5onafide 4 genuine ieceof work.

,uring their association with the ro*ect I found the) to 5e sincere 4 )oti(atedindi(iduals. 6e has shown keen interest in this ro*ect 4 their conduct was e7cellent.

I wish the) all success in their career.

,ate8 Faculty Signature ,r. Ashok -anigrahi 2Associate -rofessor 9MIMS:Shirur3

#


3/32

Content

Sr, !o, Tie P%, no.

!. A5stract $

$. Introduction 5

'. 6istorical re(iew 13

%. Scoe and ;5*ecti(e of the study 19

". ,ata analysis 20


4/32

Foreign ,irect In(est)ent 2F,I3 is widely considered to 5e 5eneficial for the host econo)y sinceit can result in ositi(e e7ternalities 2sillo(er effects3 through (arious trans)ission channels/ for

instance/ transfer of technology/ increased co)etition and i)itation effects. This study analysesintra: industry sillo(er effects of F,I in the har)aceutical industry in India and the roosal of the >o(ern)ent to regulate d F,I in it.

Foreign co)anies do)inates the Indian har)acy industry due to a(aila5ility of cheala5our.The author oines that the E7enditure on Research 4 de(elo)ent is (ery low in Indiaand )arket leaders at resent in the industry sent only "to < -ercent of their re(enues onresearch 4 ,e(elo)ent. The >eneral Agree)ent on Tariffs and Trade 2>ATT3 and TradeRelated Asects of Intellectual -roerty Rights 2TRI-S3 has an ad(erse i)act on ricing of har)aceutical roducts. The study also re(eals that the har)acy industry also lacks the

acade)ic colla5oration that is crucial to ,rug,e(elo)ent.

The Indian har)aceutical industry has de(eloed through a range of go(ern)ental incenti(esand/ foreign fir)s that ha(e in(ested in the industry ha(e additionally contri5uted to the growth.Sillo(er effects are (isi5le in )any of the sillo(er channels fro) F,I and the regression resultsshow that fir)s with foreign ownershi e7erience higher roducti(ity le(els.

Introduction

$


5/32

Foreign ,irect In(est)ent 2F,I3 is often seen as a )a*or ele)ent in the host country?s industrialde(elo)ent and growth and its increasing role in international roduction has raised interest inits effects on the host econo)ies. 1esides ro(iding caital inflow/ the F,I can offer foreigntechnology/ )anagerial skills and i)ro(e)ent of the international co)etiti(eness of do)esticfir)s. Many standard )odels of Multinational Cororations 2henceforth M9Cs3 assu)e that they ossess suerior assets such as knowledge/ atents/ trade)arks and e7clusi(e technology/ which)ight +sill o(er to the host econo)y and fir)s. The ositi(e e7ternalities fro) F,I/ oftenreferred to as sillo(er effects/ are assu)ed to cause the do)estic co)anies? roducti(ity le(elto increase. 1y reason of the scoe of sillo(er effects fro) foreign fir)s/ )any go(ern)entsha(e 5een taking action to sti)ulate foreign in(est)ents. India is one of )any de(eloingcountries that ha(e started an econo)ic li5erali@ation refor) in the recent decade. -ro)otion of F,I for)s an integral art of India?s new econo)ic olicies and the inflow of F,I has increasedsince it started to li5erali@e its econo)y in the 5eginning of the !#s.

This is a study of F,I and sillo(er effects in the har)aceutical industry in India. 6ori@ontal roducti(ity sillo(er effects of M9Cs/ to the do)estic Indian har)aceutical fir)s/ areanaly@ed and otential trans)ission channels through which sillo(er effects )ight occur arestudied. The har)aceutical industry is se(erely technological and caital intensi(e and India isone of (ery few de(eloing countries that ha(e a co)arati(e ad(antage in the industry. India?s har)aceutical industry is an e7a)le of successful de(elo)ent in a highly science 5asedtechnology sector. The go(ern)ent of India has ro)oted industrial de(elo)ent through a widerange of olicies to strengthen the do)estic industry. The growth in the industry since India?sindeendence in !%= )akes it interesting to study foreign fir)s? i)act on the de(elo)ent/since they ha(e 5een a art of the foundation.

The i)act of F,I on the host econo)y is widely discussed in the acade)ic literature/ sincee)irical studies ha(e shown 5oth ositi(e and negati(e results of sillo(er effects. It istherefore i)ortant to analy@e the role of e7isting F,I in a country to )ake F,I )ore effecti(efor the local econo)y. -u5lic olicies in this field are therefore also analy@ed. India strengthenedits atent regi)e in $##" and an increase of F,I into India in the har)aceuticalsector is e7ected. The otential increase of foreign articiation in the har)aceutical industry)akes it interesting and i)ortant to study u5lic olicies/ which can 5e decisi(e for whether sillo(er effects take lace or not.

State)ent of urose8:

The urose of this aer is to analy@e what i)act F,I has on India?s do)estic har)aceuticalindustry through sillo(er effects. It will )ainly focus on the intra: industry sillo(er effects andchannels through which sillo(er effects )ight occur fro) the F,I to the local industry.Inter(iews and a literature re(iew ha(e 5een carried out for this urose. A regression analysis isalso carried out to deter)ine if foreign ownershi has any effect on the roducti(ity of thedo)estic fir)s/ i.e. if sillo(er effects e7ist in the har)aceutical industry. The second ai) is todeter)ine and analy@e India?s olicy en(iron)ent in which sillo(er effects )ight 5e

&


6/32

)ateriali@ed. 6owe(er/ the )ain focus is the sillo(er effects/ while u5lic olicies regardingF,I and sillo(er effects will 5e discussed throughout the aer. Se(eral reco))endations are)ade in the last chater.The )ain 0uestions/ that this study atte)ts to answer/ are the following8

!. Are there sillo(er effects o5ser(ed fro) F,I in the Indian har)aceutical industryB

$. hat characteristics do sillo(er effects in the Indian har)aceutical industry ha(eB'. ,oes foreign ownershi in the Indian har)aceutical sector affect the roducti(ity of do)estically owned fir)s in the industryB

%. 6ow can u5lic olicies hel to )a7i)i@e sillo(er effects in the Indian har)aceuticalindustryB

T6E;RETICAD AS-ECTS ;F F;REI>9 ,IRECT I9ESTME9T A9, S-IDD;ER EFFECTS8:

Further is gi(en the definition of Foreign ,irect In(est)ent and the theoretical asect of why

fir)s decide to in(est a5road as well as the host country?s )oti(e to attract F,I. The theory of sillo(er effects and trans)ission channels/ through which sillo(er effects )ight arise/ areidentified. Earlier e)irical research will 5e clarified and different outco)es in earlier researchare e7licated. Finally/ u5lic olicies/ which are so)eti)es used to )a7i)i@e sillo(er effects/are descri5ed.

,efinition of F,I8:

A foreign in(est)ent could 5e a direct or ortfolio in(est)ent. A direct in(est)ent is anac0uisition or construction of hysical caital 5y a fir) fro) one 2source3 country in another 2host3 country. The F,I is an in(est)ent that in(ol(es a long: ter) relationshi and control 5y aresident entity of one country/ in a fir) located in a country other than that of the in(esting fir).There is )ore in(ol(ed in the direct in(est)ent than only )oney caital/ for instance/ )anagerialor technical guidance. F,I is generally defined as resident fir)s with at least !# of foreign articiation. There are nu)erous ways a )ultinational can enter a foreign )arket. ,ifferent tyes of F,I/that in(ol(e different le(els of control and risks/ are the following. >reen field in(est)ent iswhen a co)any esta5lishes a su5sidiary in a new country and starts its own roduction.>reenfield in(est)ent in(ol(es construction of a new lant/ rather than the urchase of ane7isting lant or fir). This kind of in(est)ent in(ol(es large risk and set u costs since theforeign fir) )ost likely does not ha(e an e7isting distri5ution network/ local )anage)ent skillsor enough legislation knowledge. 1ut on the other hand the foreign fir) has )ore control.1rown field in(est)ent is F,I that in(ol(es the urchase of an e7isting lant or fir)/ rather thanconstruction of a new lant. Joint (enture is an e0uity and )anage)ent artnershi 5etween theforeign fir) and a local entity in the host )arket. Many host countries encourage the for)ationof *oint (entures/ as a way to 5uild international cooeration/ and to secure technology transfer.2Tyically/ the foreign artner contri5utes financial resources/ technology or roducts and thelocal artner ro(ides the skills and knowledge re0uired for )anaging a fir) in the host country.

Factors 5ehind F,I: why fir)s decide to in(est a5road8:

'


7/32

Foreign direct in(est)ent has accelerated re)arka5ly in the last decades and )any of the )a*or cororations of )ost de(eloed countries ha(e taken their roduction of goods to )any di(erse arts of the world. In(est)ents are )ost likely to take lace where location and co)arati(ead(antages are resent and F,I will resu)a5ly 5e concentrated to the regions where the

industry in 0uestion is )ost efficiently erfor)ed. In order to co)ete in foreign )arkets/)ultinational co)anies take ad(antage of their fir): secific resources/ such as technologicaland )arketing e7ertise There are se(eral reasons for a fir) to undertake foreign directin(est)ent. F,I can 5e )arket: seeking 2hori@ontal3 or resource: seeking 2(ertical3 F,I. Market:seeking F,I takes lace when a M9C in(ests 5ecause of local )arket si@e/ rosects for )arketgrowth/ transortation costs and the need to 5e close to otential custo)ers. The ai) for theM9C is often to reduce costs 5y a(oiding tariff and transortation costs and also to 5e a5le to)eet the local )arkets? need 5etter than through e7ort. Resource: seeking F,I seeksco)arati(e ad(antages such as access to raw )aterial/ chea inut and low cost of la5or.Further)ore/ F,I is a way for fir)s to a(oid trade 5arriers in order to ser(e foreign )arkets andthe theoretical asect of F,I has traditionally regarded trade 5arriers and tariff *u)ing

.9onetheless/ the tariff *u)ing ersecti(e has 5een challenged 5y the argu)ent of internali@ingfir): secific intangi5le assets/ which is descri5ed in the ne7t section.

Sillo(er effects fro) F,I8:

F,I is often seen as a catalyst for a country?s de(elo)ent and econo)ic growth/ which is thereason for attracting F,I to the country. There is e7tensi(e econo)ic literature that stresses thei)ortance of F,I and its sillo(er effects to the host econo)y. Reasons for the i)ortance of F,I is not only the fact that the foreign in(estor finances the +hardware such as in(est)ent innew lants and e0ui)ent/ 5ut F,I can 5e a )a*or transfer of technology/ knowledge and caital

for the host industries. ith F,I co)es financial and )anagerial resources/ access to larger )arkets/ technical assistance and strategic assets/ for instanceG1rand na)e/ which can gi(e the host fir)s/ do)estic and international/ co)arati(e ad(antage.Sillo(er effects )ay take lace when the entry or resence of foreign fir)s leads to roducti(ityand efficiency 5enefits in the host country?s local fir)s. A ositi(e sillo(er occurs when +localfir)s 5enefit fro) the foreign in(est)ent enterrise suerior knowledge of roduct or rocesstechnologies or )arkets/ without incurring a cost that e7hausts the whole gain fro) their i)ro(ed erfor)ance.

,ifferent for)s of sillo(er effects8:

There are se(eral ways sillo(er effects fro) F,I ha(e 5een e7a)ined in re(ious work. ;necan study sillo(er effects fro) two )ain aroachesG the direct and the indirect aroach. ;neco))on way to e7a)ine sillo(ers is through statistical studies/ where sillo(er effects aredirectly linked to foreign resence .The ai) of the direct aroach is often to relate roducti(ity)easures of do)estic fir)s to the resence of the M9C. The )ost fre0uent )ethod used is toesti)ate roduction functions/ in order to e(aluate how foreign resence affects the roducti(ityin an industry 2industry le(el studies3 or the roducti(ity of locally owned fir)s 2)icro le(elstudies3. Econo)etric studies of sillo(er effects )ay re(eal the o(erall i)act of foreign


8/32

resence on the roducti(ity of do)estic fir)s/ 5ut they are usually general and do not say howthe effects co)e a5out .In re(ious studies different techni0ues and (aria5les ha(e 5een used for the econo)etric )odels/ which can 5e an e7lanation for the different outco)es .A case study/which identifies otential trans)ission channels of sillo(er effects/ is another way to studysillo(er effects. This way to analy@e sillo(er effects is an indirect aroach/ the o5*ecti(e 5eing

+to identify channels through which F,I sillo(ers )ight 5e reali@ed and then e(aluate thero5ustness of those channels.

Inter: and intra:industry sillo(er effects8:

The sillo(er effects of foreign fir)s to the local industries can 5e di(ided into two grousG Inter:and intra: industry sillo(er effects. Inter: industry 2(ertical3 sillo(ers occur through foreignco)anies? i)act on the local suliers. ertical sillo(ers take lace when the foreign fir) anda local sulier/ in different industries/ are engaged in a long: ter) relationshi. Inter: industrysillo(ers aear through creation of linkages 5etween the foreign co)any and do)estic fir)sand it is a rocess that is usually )ulti: sectorial. Sillo(ers occur when the local suliers ha(e

to )eet the de)and fro) the foreign fir) in the for) of higher 0uality/ rice and deli(erystandards. Another i)lication of inter: industry sillo(er effects is the increased de)and 5y theM9C for local inter)ediate inuts/ thus increasing roduction ossi5ilities in the host econo)y.If the foreign fir)s use inter)ediate goods/ roduced 5y do)estic fir)s/ sillo(er effects )ayarise when F,I allows do)estic suliers to e7and their roduction and thus reduce their a(erage costs due to increasing returns to scale. Moreo(er/ if there is a technology ga 5etweenthe foreign and the do)estic fir)s/ there is otential for technological i)ro(e)ent in the hostecono)y. The local fir)s )ust ugrade their roducts in order to )eet the foreign fir)?s de)andfor ad(anced roducts.Intra: industry 2hori@ontal3 sillo(ers result fro) the resence of M9Cs in a articular sector andits influence on the host industry?s co)etitors. Fi(e trans)ission channels/ through which intra:

industry sillo(er effects )ight occur/ are 2i3 co)etition 2ii3 de)onstration and i)itation effects2iii3 transfer of technology and R4,. 2i(3 hu)an caital and la5or turno(er 2(3 industrial)anage)ent.

Co)etition8:

It is likely that the M9C has ad(antages that o(erco)e otential entry 5arriers when entering anew )arket. Ad(antages/ such as financial )eans/ caital/ R4, and technological do)ination/conse0uently increase the co)etiti(e en(iron)ent in the host econo)y. Increased co)etitionin an industry forces less efficient do)estic fir)s to take on )ore efficient roduction/ which can 5e welfare enhancing for the econo)y. In the acade)ic literature there are )any aroaches to

ossi5le sillo(er channels fro) F,I. 6owe(er/ in this study/ fi(e of these are chosen in order toanaly@e further. For instance/ lack of knowledge of consu)er and factor )arkets/ regulations andfa(or of local go(ern)ents. E7a)le lead to new inno(ations. Since M9Cs are likely to ha(e atechnological ad(antage/ local fir)s )ight 5e forced to in(est in additional hu)an and hysicalcaital/ in order to raise roducti(ity and to 5e a5le to co)ete with the M9C. The entry of aforeign affiliate can create or intensify co)etiti(e ressure on local fir)s and sti)ulate the) touse e7isting resources )ore efficiently.

8


9/32

If )onooly or oligooly do)inates the industry/ the entry of foreign co)anies can 5reak theinefficient )arket structure. In addition/ if the co)etiti(e en(iron)ent in the host country ishigh/ the M9Cs )ust 5ring in relati(ely new and sohisticated technology fro) their arent fir)to kee their )arket share. Conse0uently/ the scoe for further sillo(er effects is increased/finds )ore e7tensi(e sillo(er effects of F,I in industries where the do)estic co)etiti(e

en(iron)ent in the industry is high. Since the M9C roduces in co)etition with do)esticfir)s/ the latter )ust use their technology )ore efficientlyG conse0uently eli)ination of inefficient fir)s is the result of F,I. 6owe(er/ increased co)etition could 5e negati(e for thedo)estic fir)s/ if the )arket is oulated with inefficient do)estic fir)s/ since the M9Cs canswee the) out.

,e)onstration and i)itation effects8:

M9Cs ha(e ad(antages due to their ossession of rorietary technology/ )anage)ent and)arketing skills. Through F,I/ these skills are 5rought into the host econo)y. ,o)estic fir)scan conse0uently o5ser(e the foreign fir)s? techni0ues and later i)itate the). ,e)onstration

and i)itation sillo(er effects reresent +learning 5y watching effect. ,ue to the foreign fir)s?suerior knowledge and technological ad(antages/ sillo(er effects can occur through adotionof such new technology and knowledge. Technological sillo(er effects )ay occur throughi)itation/ re(erse engineering and coying of foreign co)anies? roducts or roduction rocesses. Hnowledge is rarely a(aila5le on the )arket 5ut through re(ersed engineering or hiring foreign e)loyees/ with the +roer skills/ it is ossi5le for the local fir) to coy roducts and roduction rocesses. I)itation of already e7isting roducts )ight lead totechnological rogression for the local co)anies.I)itation is a ri)ary trans)ission )echanis) of F,I to local fir)s and esecially re(erseengineering for technology transfer of new roducts and rocesses in a north: south ersecti(e.Any ugrading of local technology deri(ing fro) i)itation could result in roducti(ity sillo(er

fro) foreign to the local.

Additionally/ M9Cs tend to e7ort lots of their roducts/ and thus there is scoe for sillo(er effects through i)itation of how to enter e7ort )arkets/ international )arketing techni0ues anddistri5ution networks.

Transfer of technology and R4,8:

Technology can 5e characteri@ed as +technical knowledge alied in the roduction of any articleof co))erce .Many standard )odels of M9Cs assu)e that they ossess knowledge assets/ for

instance atents/ trade)arks and e7clusi(e technology. M9Cs are usually Research and,e(elo)ent 2R4,3 and caital intensi(eG hence a otential source of intra: industry sillo(er isthe transfer of roduction and rocess technology fro) M9Cs to the do)estic co)anies. Theforeign fir)s )ake the do)estic layers aware of the e7istence of the technology and the M9Csare likely to seed u the do)estic fir)s? technology. Enhance)ent in technology ena5les fir)sto increase roducti(ity and 5uild co)etiti(eness in new areas.


10/32

Technology and roducti(ity gas 5etween the foreign and local fir) )ay sti)ulate sillo(er effects. If a technology ga e7ists we should e7ect to find so)e differences in roducti(ity andinno(ations 5etween foreign owned and do)estic fir)s. If the local fir) is less roducti(e thanthe foreign fir)/ there is scoe for it to catch u/ 5y i)itating the technology of foreign leaders.6owe(er/ there is a risk that the M9Cs? ad(anced technology is 5eyond the local fir)?s

a5sorti(e caacity/ which could lead to ad(erse conse0uences for the do)estic fir)s? )arket.

Another acti(ity/ that could sti)ulate sillo(er effects and technology transfer/ is the R4, erfor)ance that the M9C )ay undertake in the host country. The M9Cs are often (ery R4,intensi(e/ 5ut generally concentrate )ost of their research acti(ities in the arent affiliate/ whichli)its the scoe of sillo(er effects. The focus of R4, that is carried out in the foreign affiliateis often a )odification of the arent technology/ so it suits the foreign )arket. The sillo(er effects fro) R4, are therefore usually generated outside the host country and 5rought inthrough the F,I.

In(est)ent in hu)an caital and la5our turno(er8:

Foreign in(estors )ay ro(ide a for) of training for their e)loyees that cannot 5e relicated indo)estic fir)s or urchased fro) a5road. The theoretical literature on foreign in(est)ent statesthat foreign fir)s ossess intangi5le assets/ which cannot easily 5e sold/ such as )anagerialskills .E(idence indicates that M9Cs offer )ore training to )anagers and e)loyees thando)estic co)anies. A local e)loyee who has 5een trained within the M9C )ay add )ore rofita5ility to the do)estic enterrises since skilled workers/ )anagerial talent/ and scientistsare usually scarce in de(eloing countries. Therefore/ the local econo)y can gain fro) the resence of an M9C/ whose knowledge )ight 5eco)e a(aila5le to local fir)s through/ for

instance/ la5or turno(er. Da5or turno(er is a sillo(er )echanis) that )ay 5enefit the localindustry/ since circulation of the la5or force ena5les so)e original knowledge to transfer 5etweenthe foreign and do)estic fir)s.

If resources are )ore efficiently used/ than under do)estic )anage)ent/ local fir)s are likely toraise )anagerial incenti(es and )ake efficiency: enhancing in(est)ents in their fir)s/ due to therisk of a loss of )arket share to the foreign fir)s.

Additionally/ F,I can lay a significant role in the host econo)y in ter)s of introducing)arketing and ro)otional techni0ues in an industry. ell: de(eloed )arketing and distri5utionnetworks are i)ortant factors for success. Fir)s fro) de(eloing countries often lack resources

for ad(ertise)ent and ro)otional acti(itiesG su5se0uently they ha(e ro5le)s co)eting withthe )ultinationals. Fir)s fro) de(eloing countries generally co)ete in international )arketson the 5asis of rice:cutting and focus on low: end )arkets. uality consciousness is ani)ortant factor for success in the international )arkets and 5rand 5uilding is a significant artin successful )arketing and e7ansion of roduct consciousness for consu)ers. For instance/ awell:esta5lished )arketing strategy is i)ortant in e7ort acti(ities. Fir)s/ which in(est in ro)otion/ are e7ected to do 5etter in the international )arkets than others/ due to thei)ortance of 5uilding 5rands and trade na)es. Through i)itation of or colla5oration with

10


11/32

foreign co)anies/ the do)estic fir)s can learn different industrial )anage)ent techni0ues andthe i)ortance of )arketing tactics/ and thus e7and do)estically or internationally.

Moti(es to attract F,I and olicies to )a7i)i@e its effect8:

As we ha(e seen/ there are )any ways F,I can influence a host econo)y ositi(ely. The scoeof otential ositi(e sillo(er effects is one of the )ain argu)ents for u5lic suort to increaseF,I in a country. Many countries/ 5oth de(eloed and de(eloing/ co)ete to attract F,I/desite the fact that there is little e)irical e(idence of sillo(er effects. Most countries aroundthe world ha(e li5erali@ed their econo)y on the e7ectation that F,I will 5e 5eneficial for theecono)y. To encourage )ore foreign in(est)ents/ go(ern)ents ha(e lowered entry 5arriers for foreign in(estors and in addition gi(en in(est)ent incenti(es to foreign fir)s.

A good understanding of the deter)inants of the F,I sillo(er effects that )ay occur in localindustry is i)ortant to understand/ esecially for olicy )akers/ so they can create anen(iron)ent that enhances the i)act of the F,I. If F,I 5rings new knowledge to the host

econo)y and the social returns of F,I e7ceed the ri(ate returns/ F,I can 5e seen as a u5licgood and olicy ro)otion is *ustified. 1ut the M9Cs )ay in(est less than is socially oti)al for the host country. There is conse0uently su5stantial (ariation in the +0uality of F,I/ and thei)act of such inflows in the host country (aries. eak do)estic caa5ilities in a country can hinder the gain fro) foreign in(est)ents. It is in theinterest of the state to ro(ide a sound econo)ic en(iron)ent so the ossi5ility of ositi(ee7ternalities fro) the F,I is )a7i)i@ed. There are two ways in which F,I olicy can 5echaracteri@ed. Firstly/ +the degree to which foreign ownershi is constrained/ either in secificsectors or in the econo)y as a whole. Secondly/ +the degree to which 5usiness decisions of foreign in(estors are constrained or regulated/ for e7a)le for)al or infor)al re0uire)ents tocarry out certain acti(ities in the host country. Increased attention is 5eing gi(en to olicies that

can enhance the de(elo)ent 5enefits of F,I. hether the 5enefits of F,I )ateriali@e or not/ isargued to deend on the )arket structure and u5lic olicies for F,I in the host econo)y.

-olicies that discourage F,I8:

In(est)ent incenti(es in the for) of8 lower ta7es for foreign fir)s/ ta7 holidays/ financialincenti(es in the for) of grants and loans to the foreign co)anies/ infrastructure/ )arket reference/Create an en(iron)ent that will close off channels for sillo(er effects. Additional to thei)ortance of sound F,I oliciesG trade/ technological and intellectual roerty right oliciescan influence the scoe of otential sillo(er effects. Trade olicies are i)ortant in ter)s of the

host econo)y?s ossi5ility of caturing foreign technology sillo(ers. If the host country has anoen i)ort olicy/ co)etition in the local industry will 5e greater/ hence encouraging foreign:owned fir)s to transfer technology faster to their host country affiliates. Another asect of trade olicy i)act on sillo(ers is that lower trade 5arriers )ight encourage F,I as a su5stitute for e7orting and therefore increase the otential of sillo(er effects. Moreo(er/ technological olicyin the host econo)y is an i)ortant factor that )ight influence the i)act of F,I. If thego(ern)ent encourages do)estic R4, acti(ities/ the technical caa5ility of local fir)s shouldincrease and they should therefore 5e )ore likely to cature technology fro) foreign affiliates.

11


12/32

Additionally/ Intellectual roerty rotection is another i)ortant asect of technological olicies. ithout a well:functioning intellectual roerty regi)e there is a risk that technologicalsillo(ers )ight 5e ineffectual .An aroach the host country can take/ in order to oti)i@e thei)act of F,I/ is through so: called erfor)ance re0uire)ents for foreign fir)s. The co))ercialinterests of the M9Cs do not always coincide with the host country?s de(elo)ent goals/ and

therefore the host go(ern)ents ut conditions on the foreign in(estors/ in order to )eet certainsecific goals regarding their oeration in the host country. -erfor)ance re0uire)ents are used tosti)ulate sillo(er effects fro) the F,I and are/ in addition to other u5lic olicies/ a way to)eet de(elo)ent o5*ecti(es. The following is a descrition of erfor)ance re0uire)entsfre0uently alied 5y host countries.

E7ort re0uire)ents8:

The o5*ecti(e of e7ort erfor)ance re0uire)ents is usually to encourage e7ort: led growth. Incountries that ha(e i)ort su5stitution/ e7ort erfor)ance re0uire)ents for foreign fir)s are(ery co))on/ to co)ensate for the anti: e7ort.

Joint (enture and do)estic e0uity re0uire)ents in the F,I are used for (arious reasons. ;ne)oti(e is to enhance otential technology transfer 5etween the foreign fir) and the do)esticenterrise/ since the entities work directly together. Through not allowing !## foreign e0uity/the local fir)s ha(e a 5etter chance to share the knowledge and inuts fro) the foreign fir).

R4, re0uire)ent is a co))on for) of erfor)ance condition in order to 5uild u technologyand a5sor5 know: how fro) F,I. Re0uire)ents for the foreign fir)s could 5e/ for instance/ toset u in: house R4, facilities in the host country or to enter into long:ter) consultancyagree)ents with a rele(ant R4, institution. 6owe(er/ local knowledge and aroriate skilledla5or are i)ortant for where foreign co)anies decide to locate R4,. A foreign fir) isunlikely to set u R4, acti(ities where local caa5ilities and technical skills are low.

Technology transfer is one of the )ain goals for host countries attracting F,I. Technologytransfer re0uire)ent would therefore ersuade the foreign co)any to transfer technology andknowledge to the do)estic fir)s industry. The effecti(eness of technology transfer is howe(er li)ited and e(aluation shows li)ited success. 6owe(er/ there are ro5le)s in )onitoring andenforcing such re0uire)ents/ due to difficulties )easuring and identifying the technologytransfers.

T6E I9,IA9 -6ARMACEKTICAD I9,KSTRY I9 A 6IST;RICAD-ERS-ECTIE

1#


13/32

This chater focuses on the Indian har)aceutical industry and ri)arily on its e(olution. Thehistory of the industry is i)ortant in order to understand the growth and the i)act foreignfir)s ha(e had on the industry. The chater 5egins with an introduction to the har)aceuticalindustry fro) a glo5al ersecti(e and continues with the history and de(elo)ent of the Indian har)aceutical industry/ which can 5e di(ided into three ti)e eriods.

The glo5al har)aceutical industry8:

The har)aceutical industry is a di(ision of the che)ical industry and the first )anufacturing

units were set u in the late !th

century. So)e of the ri)ary co)anies to set u glo5ally were>la7o and 1eckha) 2KH3/ 1ayer and 6oechst 2>er)any3/ Roche and Ci5a:>eigy 2Swit@erland3

and -fi@er/ Merck and Eli Dilly 2KS3. These co)anies were engaged in 5oth )anufacturing anddrug research and are today still so)e of the industry leaders worldwide.The har)aceutical industry is classified as one of the )ost high: tech and caital:intensi(eindustries in the world. The industry is 5ased on R4, and is generally e7cetionally scienceintensi(e. A lot of the research is carried out in colla5oration with uni(ersities and is u5liclysonsored. Research in the har)aceutical industry is )ainly concentrated in the de(eloedcountries/ with the KS accounting for a5out %% of the glo5al research e7enditure 2ICRA/$##%3. ,ue to its characteristics/ the industry re0uires a highly skilled/ educated workforce andwell:de(eloed infrastructure. The inno(ations in the industry in(ol(e large and riskyin(est)ents/ where risk of failure is greater than in any other research:5ased industry. Thesuccess rate in research is lowG with one of thousands of tested roducts )aking it to the )arket .

Inno(ation and research of drugs and the following )arket introduction are (ery e7ensi(e. Awell: de(eloed atent regi)e/ which ro(ides the in(entor rights to e7clusi(ely roduce and)arket the roducts/ is i)ortant for glo5al har)aceutical co)anies since they in(est largesu)s of )oney to de(elo new roducts.

In the end of the !s/ )any har)aceutical co)anies were doing well financially/ and largein(est)ents were )ade in R4,. 6owe(er/ the glo5al har)aceutical industry is today facingdeclining R4, roducti(ity/ increasing generic< su5stitution in the rescrition area of drugs/and loss of inco)e due to atent e7iration. There has 5een a decline in rofita5ility for )any)a*or glo5al fir)s/ due to e7iry of so)e )a*or atents and also fro) increased go(ern)entalinter(entions. Therefore/ )any co)anies ha(e started to for) alliances and )erged with other

fir)s in order to strengthen their resence. ;utsourcing of roduction and research acti(ity isincreasing as fir)s are constantly looking for cheaer alternati(es. ;utsourcing is carried out incertain arts of the roduction chain and is e7ected to e7and further in the future.The technology and caital intensity of the industry/ the risk/ high costs in research acti(ities anddeendence on a well:functioning intellectual roerty regi)e/ e7lains why the har)aceuticalindustry is )ainly located to the de(eloed econo)ies. ,e(eloed countries accounted for $." of the world?s e7ort of har)aceutical roducts in $##!.

1%


14/32

The Indian har)aceutical industry8: ,ue to the har)aceutical industry?s caital and know: how intensity/ )ost of the world?s roduction is located in the de(eloed countries. India is one of the few de(eloing countrieswith a large roduction 5ase in har)aceutical roducts. India?s trade in har)aceutical roductshas increased a lot since the li5erali@ation refor)s and it has co)arati(e ad(antages in tradewith har)aceutical roducts/ 5oth 5ulk drugs and for)ulations=. The Indian har)aceuticalindustry ranks (ery high a)ong de(eloing countries/ in ter)s of technology and 0uality/ and istoday in the front rank of India?s science 5ased industries 2,I--/ $##"3.The growth of the Indian har)aceutical industry has 5een re)arka5le. The industry is today the

fourth largest glo5ally/ in ter)s of (olu)e/ and !'th

largest in ter)s of (alue. The industryaccounts for & of the glo5al sales in (olu)e 5ut in ter)s of (alue it is 5arely !. The role of the Indian har)aceutical industry in the international )arket today is as a sulier of good

0uality/ low cost generic 5ulk and for)ulation. As we can see in diagra) roduction in theIndian har)aceutical industry has increased a lot 5etween !&! and $##%.

181 18& 10 1& #000 #00$

0

&0

100

1&0

#00

#& 0

%00

*ulk +or,ulation

-otential growth of the Indian har)aceutical industry is great. 9early


15/32

The history of the Indian har)aceutical industry 8:

The first )odern har)aceutical esta5lish)ent in India started in !#! 5ut the har)aceuticalindustry was al)ost non: e7isting until !%=. Multinational fir)s ha(e 5een a art of the Indian har)aceutical industry since its initial stage/ and an o(er(iew of the history is essential in order

to further e(aluate foreign fir)s? influence on the industry. The de(elo)ent of the Indian har)aceutical industry can 5e di(ided into three hases/ which are resented 5elow.

The initial stage 2!%=: !=#3 8:

Fro) !%= to !=#G the Indian har)aceutical industry was s)all in ter)s of nu)5er of fir)sand roduction caacities. In the !"#s the Indian har)aceutical industry was )ainly 5ased oni)orted 5ulk/ which was later rocessed into for)ulations in India. The Indian go(ern)entwanted to get rid of the industry?s deendency on the i)ort of 5ulk drugs and encouragedindigenous roduction of new drugs in order to 5eco)e self: sufficient. After indeendence theIndian go(ern)ent o5*ecti(e was to industriali@e the country and +The Indian -olicy Resolution

2I-R3 was declared in !%&. The new olicy was to increase the li(ing standard of the eole/and the har)aceutical industry was considered an i)ortant industry/ which re0uiredconsidera5le in(est)ent or a high degree of technical skills.

The go(ern)ent in(ested a lot in the har)aceutical industry and the u5lic sector is a large artof the industry. India recei(ed technical assistance and financial )eans fro) internationalorgani@ations/ such as the 6; and K9ICEF/ to set u lants and strengthen the do)esticindustry. The u5lic unit 6industan Anti5iotics Dtd. was esta5lished in !"% and was ro(idedwith technical suort/ urchasing of e0ui)ent and )achinery fro) the 6; and K9ICEF.Indian ,rugs and -har)aceuticals Dtd. 2I,-D3/ another u5lic sector fir)/ got free access toi)ort technology fro) o(erseas and de(eloed )ore )odern )anufacturing facilities. A large

)ass of technology was i)orted into India 5etween !"#: !=#. Many leading entrereneursgot their training in u5lic sector units and institutions. For instance/ the founder of ,r. Reddy?s/one of the largest har)aceutical fir)s in India today/ worked at the I,-D/ 5efore he took off tostart his own fir).

Multinationals are/ in addition to the u5lic sector/ a art of India?s har)aceutical foundation.Foreign co)anies entered the Indian )arket )erely as trading co)anies with s)allin(est)ents. The new industrial olicies e)hasi@ed the i)ortance of foreign caital andindustrial know: how. The Indian go(ern)ent carried out li5eral F,I olicies and incenti(es toin(ite foreign fir)s to start )anufacturing facilities in order to get an inflow of know: how in the

sector. The leading har)aceutical co)anies fro) the est ca)e to India and esta5lished)anufacturing facilities. Su5se0uently/ the )ultinationals 5rought in technology andinternational )anufacturing ractices. ,o)estic fir)s were encouraged to tie u with foreignfir)s/ with articiation in caital/ and there were colla5oration agree)ents in the ri(ate sector.The foreign fir) 6oechst esta5lished a research Centre/ which enhanced 5asic research in India.,uring this ti)e roduct atent laws/ which were fa(ora5le for the M9Cs/ were in force.India was attracti(e to foreign fir)s )ainly due to its large )arket and increasing de)and for drugs. At that ti)e there was lack of co)etition in the Indian har)aceutical industry and the

1&


16/32

M9Cs did well in India. They had good knowledge and technology to de(elo anti5iotics andsynthetic drugs and ad(antage of their financial assets and )anage)ent a5ilities. Consu)er reference for foreign world: wide known drugs was also an ad(antage for the M9Cs in India.They were aggressi(e in )arketing and )anaged to create a )arket for the)sel(es in 5randed roducts. The foreign co)anies had/ )ore or less/ a )onooly in the Indian har)aceutical

)arket at this ti)e.

The i)ort su5stitution stage 2!=#: !&"38:

Kntil !=#/ )ultinational cororations do)inated the Indian har)aceutical industry. ,uring the!=#s/ there were new drug olicies introduced in India/ which created a )a*or oortunity for Indian do)estic fir)s to grow. I)ort su5stitution and self: reliance were the o5*ecti(e in the har)aceutical industry in the years to co)e. A nu)5er of olicies and regulations were carriedout to e7and the do)estic har)aceutical industry in order to 5eco)e self: relying and to kee rices of har)aceuticals low. The following olicies created a new scenario in the har)aceutical industry8

The -atent Act !=#8

This new atent act/ with less restricti(e atent laws/ was a go(ern)ental initiati(e that laid thefoundation of the )odern har)aceutical industry in India. The new atent act included8 a3 atents could 5e taken only for rocesses and not for roducts 53 A atent ter) was fi(e yearsfro) its 5eing granted. This new aroach to atents on har)aceutical roducts encouragedre(erse engineering and de(elo)ent of alternati(e rocessesG roduction of generic drugsco))enced. The fact that the atent ti)e was (ery short discouraged research and de(elo)entof new drugs/ and there was a decline in the nu)5er of drug atents in India after the act wasi)le)ented. The o5*ecti(e 5ehind the new atent laws was to 5reak the foreign co)anies?

)onooly and encourage the do)estic har)aceutical fir)s to grow. The foreign fir)s in Indiahad little incenti(e to take out atents in India/ and after the new regulation was i)le)entedthere was an o5(ious decline in atents on foreign drugs.

,rug -rice Control ;rder 2,-C;3 !=#8

-rice control on har)aceutical roducts was introduced during this ti)e. The ai) was to ensurethe consu)er a decent rice for har)aceutical roducts.

Foreign E7change Regulation Act 2FERA3 !='8

India 5eca)e )ore rotecti(e during the !=#s and new olicies toward foreign caital wereenforced. The entry of foreign fir)s was restricted to riority industries/ which could contri5utetechnological ad(antages to do)estic fir)s 2Aggarwal/ $##%3. The ai) of the FERA was also to

1'


17/32

reduce foreign ownershi in co)anies/ which did not contri5ute +enough to the do)esticindustry.

,rug -olicy !=&8

A new drug olicy was introduced in !=&/ with the ai) of e7anding the industry through thefollowing o5*ecti(e8 a3 to de(elo a strong Indian sector with the u5lic sector laying theleading role 53 to channel the foreign fir)s? acti(ities to suit national riorities c3 assure do)estic roduction of drugs to take lace fro) as 5asic a stage as ossi5le d3 encourage R4, andi)ro(e do)estic technological a5ility in the industry e3 to ro(ide har)aceuticals toconsu)ers at afforda5le rices.

The go(ern)ent )ade a distinction 5etween do)estic and foreign fir)s/ where Indian fir)swere gi(en roduction incenti(es while the foreign fir)s faced tighter control. The !=& drug olicy i)osed conditions on foreign: controlled fir)s to )ake sure they created linkages withinthe econo)y. There will 5e a further descrition of the linkages 5etween foreign and do)estic

fir)s in chater four.

In this eriod/ the roduction of 5oth 5ulk and for)ulation increased/ and the industry )ore thandou5led during the !=#s. The Indian co)anies took ad(antage of the new olicies and roduced )olecules that were still under atent elsewhere. The Indian fir)s de(eloed 5etter roduction and )arketing skillsG conse0uently the )ultinationals? )arket share started to decline.,esite the tighter controls for foreign fir)s/ they still had a large share of the roduction inIndia during this ti)e.

The li5erali@ation stage 2!&": today38:

In the !s/ Indian olicy )akers reali@ed that the co)etiti(eness of the har)aceutical fir)ssuffered fro) growing technological o5solescence due to the highly rotected )arket. Thego(ern)ent therefore highlighted the i)ortance of )oderni@ation of the industry. Another li)iting factor for the do)estic industry was the )arketing channels/ which were )ainlydo)inated 5y the M9Cs. In the )id:!s/ the Indian go(ern)ent atte)ted to i)ro(eefficiency in the industry. A new drug olicy was i)le)ented in !&


18/32

Industry the go(ern)ent changed the ,-C; and reduced the nu)5er of drugs under ricecontrol fro) '%= in !=# to =% in !".

In the last decade/ a new direction in the Indian har)aceutical industry has taken lace. In!"/ India *oined the T; TRI-s agree)ent with enforce)ent of Intellectual -roerty Rights2I-R3. India was granted a transition eriod of ten years to i)le)ent the new atent laws. In$##$ a new drug olicy was ut into ractice to fit the TRI-s o5ligations. The 5usiness focusshifted a)ong )any Indian co)anies and the trend of focusing on R4,.The T;?s TRI-s Agree)ent is an atte)t to narrow the gas in the way standard intellectualrights are rotected around the world/ and to 5ring the) under co))on international rules. Itesta5lishes a )ini)u) le(el of rotection that each go(ern)ent has to gi(e to the intellectual roerty of T; )e)5ers. -atent rotection is acti(e twenty years fro) the filing day. The new atent regi)e is argued to ha(e a large i)act on the future of the Indian har)aceuticalindustry.

Su))ary8:

India?s econo)ic olicy was/ for se(eral decades/ i)ort su5stitution to strengthen the do)esticindustry. The rotecti(e u5lic olices undertaken in the !=#s see) to ha(e 5een fa(ora5le for growth in the do)estic industry. Three factors that ha(e 5een i)ortant for the de(elo)ent of the industry areG firstly/ the suort to u5lic fir)s. The u5lic fir)s got a lot of technology ro(ided 5y international organi@ations and foreign technology i)orts. The u5lic fir)s workedas a training ground for eole that later started their own fir)s in the ri(ate sector.

Secondly/ 5y reason of li)ited technological a5ility and financial resources in India/ the new

atent regi)e was i)le)ented in order to strengthen the do)estic industry. This settingencouraged the do)estic co)anies to i)itate already e7isting drugs/ which )ight ha(e had anegati(e i)act on technology transfer fro) foreign fir)s/ 5ut it definitely heled the do)esticindustry to grow.

Thirdly/ foreign co)anies ha(e also contri5uted to the growth of the Indian har)aceuticalindustry. The following chater focuses on F,I in the industry and chater fi(e discusses howforeign fir)s ha(e contri5uted to the Indian har)aceutical industry through sillo(er effects.

;5*ecti(e and Scoe of the Study

18


19/32

The urose of this aer is to analy@e what i)act F,I has on India?s ,o)estic har)aceutical

industry through sillo(er effects. It will )ainly focus on the intra:industry sillo(er effects andchannels through which Sillo(er effects )ight occur fro) the F,I to the local industry.Inter(iews and a literature re(iew ha(e 5een carried out for this urose. A regression Analysis isalso carried out to deter)ine if foreign ownershi has any effect on the roducti(ity of thedo)estic fir)s/ i.e. if sillo(er effects e7ist in the har)aceutical industry.

The )ain 0uestions/ that this study atte)ts to answer/ are the following8:

Are there sillo(er effects o5ser(ed fro) F,I in the Indian -har)aceutical industryB

hat characteristics do sillo(er effects in the Indian har)aceutical Industries ha(eB

,oes foreign ownershi in the Indian har)aceutical sector affect the -roducti(ity of do)estically owned fir)sB

;1JECTIES ;F T6E STK,Y8:

!. To study the Foreign ,irect In(est)ent flows into (arious Sectors of the econo)y.

!. To study the E7ort and i)ort trends in ter)s of ,rugs and -har)aceuticals.

$. To study the challenges faced 5y the Indian -har)aceutical Industry.

,ata Analysis

1


20/32

F,I I9 T6E I9,IA9 -6ARMACEKTICAD I9,KSTRY 8:

The inflow of foreign direct in(est)ents into India has increased since the li5erali@ation refor)started. In the following chater the F,I in the har)aceutical industry is re(iewed. An o(er(iewof the F,I olicies in the har)aceutical industry and the reasons why M9Cs in(est in India aregi(en. Additionally/ a descrition of the current )arket structure in the industry and aco)arison 5etween do)estic and foreign har)aceutical fir)s are ro(ided.

-olicies regarding F,I in the har)aceutical sector 8:

As we saw in the re(ious chater/ the foreign har)aceutical fir)s in India ha(e )et arestricti(e en(iron)ent. There used to 5e erfor)ance re0uire)ents for the foreign fir)sin(esting in the Indian har)aceutical industry/ in order create linkages 5etween foreign anddo)estic fir)s. A su))ary of which erfor)ance re0uire)ents ha(e 5een i)osed on foreignfir)s o(er the years in India is found in ta5le8 :

-erfor)ance re0uire)ents for foreign fir)s in the har)aceutical industry

-erfor)ance Re0uire)ents !"#:!=# !=#:!# Today

E7ort 9o 9o 9o

E0uity share Yes Yes 9o

R4, 9o Yes 9o

Technology transfer 9o Yes 9o

E)loy)ent and training 9o 9o 9o

As one can see/ all the erfor)ance re0uire)ents for foreign fir)s/ e7cet e7ort ande)loy)ent/ ha(e 5een in force during the de(elo)ent of the Indian har)aceutical industry.The re0uire)ents were redo)inantly in lace during the +second hase in the history of theIndian har)aceutical industry/ when the industry was )ost rotecti(e. The !=& ,rug olicywas intended to use the foreign fir)s? strength and to generate linkages within the industry andsuort the do)estic industry.

E7ort or e)loy)ent training re0uire)ents for foreign har)aceutical fir)s ha(e not 5eeni)osed in India. 9e(ertheless/ Joint (enture and e0uity ownershi re0uire)ents were in force

#0


21/32

during the first and second hase. Through not allowing !## foreign e0uity/ the local fir)sha(e a 5etter chance to share the knowledge and inuts fro) the foreign fir). In India do)estice0uity re0uire)ents ha(e heled to ro)ote the for)ation of *oint (entures and generatee7ternalities in the for) of local learning and a5sortion of knowledge 5rought in 5y the foreign artners. For instance/ Ran5a7y and Eli Dilly for)ed a *oint (enture 5ecause of the re0uire)ent.

Today/ F,I u to !## foreign ownershi is allowed in the har)aceutical industry through theauto)atic aro(al route.

R4, re0uire)ents ha(e 5een a condition for foreign fir)s in India. For instance/ it wasco)ulsory for foreign har)aceutical co)anies to set u R4, facilities and send at least % ercent on R4, of their turno(er annually/ if their turno(er was )ore than Rs. " Crores. To enter into long:ter) consultancy agree)ents with rele(ant R4, institution in the country/ within $years of F,I aro(al/ was also an otion. Further)ore/ technology transfer is one of the )aino5*ecti(es for host countries attracting F,I. The >o(ern)ent of India encouraged technologytransfer 5ut did not adot any re0uire)ents. 6owe(er/ foreign fir)s faced constraints regardingthe i)ort of technologyG +The i)ort of technology for new 5ulk drugs 5y foreign co)anies

will ha(e to 5e on such ter)s deter)ined 5y the go(ern)ent. The foreign drug co)anies shouldundertake to transfer technology laterally to u5lic sector units where national interests *ustifythe setting u of additional caacity.

Today/ there are no erfor)ance re0uire)ents in the har)aceutical industry. The Foreign ,irectIn(est)ent olicy in India is li5erali@ed and the go(ern)ent tries to get less in(ol(ed in the ri(ate sector and lea(e it to )arket forces. -olicy initiati(es that ha(e 5een i)osed to li5erali@ethe econo)y in resect of F,I are for e7a)leG industrial decontrol/ si)lifications of in(est)ent rocedures and co))it)ent to safeguarding intellectual roerty rights.

Foreign ,irect In(est)ents in the har)aceutical industry 8:

The inflow of F,I into India has increased a great deal in the last fifteen years. The har)aceutical industry attracted $.!! of total F,I inflows during these years. In diagra) we

can see the industries that attract )ost F,I in India. The har)aceutical industry was the &th

largest sector attracting F,I inflows 5etween !! and $##'. The F,I stock in the har)aceutical industry was ' of the total F,I stock in India in $##!.

,iagra) reresenting Sectors attracting highest F,I in India !!: $##'8:

#1


22/32

0

500

1000

1500

2000

2500

3000

3500

4000

4500

5000

Sectors attracting highest FDI inflow

There are )any factors that are i)ortant to M9Cs when deciding where to locate new affiliatesand roduction. In a high technology industry/ such as the har)aceutical/ factors such asGskilled se)i:skilled la5or/ well: de(eloed local suly chains/ well:functioning infrastructure

and knowledge roducing institutions are i)ortant for a fir) to consider. So)e of these factorsare reasons why har)aceutical )ultinationals ha(e in(ested in India.

The F,I in the Indian har)aceutical industry is )ainly )arket: seeking. India?s ad(antage for M9Cs in the har)aceutical industry is/ first of all/ the large do)estic )arket with a !.! 5illion oulation and an annual increase of $.$. India?s large oulation and wide disease attern)ake the country attracti(e for har)aceutical fir)s. Relati(ely chea )anower and skilledla5or are other factors that attract foreign in(estors. India has an e7cetional ad(antage in har)aceuticals due to its good hu)an resources and highly skilled work force. English iswidely soken/ which )akes co))unication easy for foreign in(estors. The roduction of har)aceuticals is also relati(ely chea in India and there is a strong roduction 5ase in the

country. It is easy to get good 0uality 5ulk drugs/ which is attracti(e for foreign fir)s. 1ecause of India?s focus on re(erse engineering and de(elo)ent of roduction rocesses/ it has hightechnical co)etence in roduction in the har)aceutical industry/ which )akes its industryattracti(e for foreign in(estors. The industry is also (ery highly co)etiti(e a)ong suliers/which gi(es the M9Cs a good 5argaining osition. India has )any ad(antages for foreignin(estors and conse0uently/ the country has future otential to 5eco)e an attracti(e destinationfor outsourcing in drug disco(ery and clinical research.

##


23/32

Most of the )a*or har)aceutical M9Cs ha(e a resence in the country. 9onetheless/ F,I in the har)aceutical industry is rather low. The in(est)ent cli)ate according to so)e of the M9Cs isnot co)lete/ which e7lains why F,I in the har)aceutical industry in India is li)ited.According to -fi@er 2$##"3 there has 5een a erceti5le difference in the cli)ate for in(est)entduring the last decade/ 5ut )ore needs to 5e done to )ake the olicy en(iron)ent )ore in(estor

friendly. There are se(eral factors that e7lain the lack of in(est)ents. +The har)aceuticalindustry suffers fro) traditional 5iases rooted in the Indian olitical and 5ureaucratic )ilieu.These translate into unrealistic rice controls/ and other reressi(e laws that re(ent the industryfro) ro5ust growth. Intellectual roerty laws also need to 5e a)ended further to re)o(erestrictions on atenting of incre)ental inno(ations

Dee and Mansfield 2!


24/32

The Indian har)aceutical industry ranks a)ong the to fi(e countries 5y (olu)e 2roduction3and accounts for a5out !# of glo5al roduction. The industry?s turno(er has grown fro) a )ereKSL #.' 5n in ! to a5out KSL $!.=' 5n in $##:!#. Dow cost of skilled )anower andinno(ation are so)e of the )ain factors suorting this growth. According to the ,eart)ent of -har)aceuticals/ the Indian har)aceutical industry e)loys a5out '%#/### eole and an

esti)ated %##/### doctors and '##/### che)ists.

Industry structure8:

The Indian har)aceutical industry is frag)ented with )ore than !#/### )anufacturers in theorgani@ed and unorgani@ed seg)ents. The roducts )anufactured 5y the Indian har)aceuticalindustry can 5e 5roadly classified into 5ulk drugs 2acti(e har)aceutical ingredients : A-I3 andfor)ulations. ;f the total nu)5er of har)aceutical )anufacturers/ a5out == roducefor)ulations/ while the re)aining $' )anufacture 5ulk drugs. 1ulk drug is an acti(econstituent with )edicinal roerties/ which acts as 5asic raw )aterial for for)ulations.For)ulations are secific dosage for)s of a 5ulk drug or a co)5ination of 5ulk drugs. ,rugs are

sold as syrus/ in*ections/ ta5lets and casules.

1ased on the har)aceutical custo)er 5ase/ the Indian A-I )anufacturing seg)ent can 5edi(ided into two sectors

Inno(ati(e or 5randed and generic or un5randed. In $##/ the glo5al generic drug )arket wasesti)ated to 5e KSL &% 5n/ of which the KS accounted for %$. India?s generic drug industry isesti)ated to 5e KSL ! 5n and it ranks third glo5ally/ contri5uting a5out !# to glo5al har)aceutical roduction.-har)aceutical )anufacturing units are largely concentrated in Maharashtra and >u*arat. Thesestates account for a5out %" of the total nu)5er of har)aceutical )anufacturing units in India.

Concentration of har)aceutical )anufacturing units in India 23

#.

1$.&'. .#

&.$

%'.$Maharashtra

-uarat

An/hra "ra/esh

west *engal

a,il na/u

others

#$


25/32

SMEs in the har) industry8:

According to the Confederation of Indian Industries 2CII3/ there are around &/### s)all and)ediu) enterrises 2SME3 units/ accounting for a5out =# of the total nu)5er of the har)aunits in India. Indian SMEs are also oening u for e)erging oortunities in the har)aceuticalindustry in the field of CRAMS/ clinical research etc. These would dri(e the) to lay adefiniti(e role in the transitional glo5al har)aceutical en(iron)ent/ where a si@ea5le nu)5er of drugs are e7ected to go off atent in the co)ing years. The Indian go(ern)ent has 5een )akinge(ery atte)t to suort SMEs through se(eral incenti(es. ;ne such effort is the de(elo)ent of SME clusters in (arious arts of the country. In(est)ent in the Indian har)aceutical industry!## foreign direct in(est)ent 2F,I3 is allowed under auto)atic route in the drugs and har)aceuticals sector/ including those in(ol(ing use of reco)5inant technology. Also/ F,I uto !## is er)itted for 5rownfield in(est)ents 2i.e. in(est)ents in e7isting co)anies3/ in the

har)aceuticals sector/ under the >o(ern)ent aro(al route. The drugs and har)aceuticalsindustry attracted foreign direct in(est)ent to the tune of KSL .!= 5n for the eriod 5etweenAril $### and January $#!$.

F,I inflow in the drugs and har)aceutical industry 2KSL )n38:

0

1000

2000

3000

4000

5000

6000

7000

8000

9000

10000

48.4 90.7 52.3 60.7 341.4 116.3 216.1 72 213

513

3208

9170

#&


26/32

The Indian har)aceutical industry en*oys certain ad(antages/ which attracts F,Iin the country8

!3 Dow cost of inno(ation and caital e7enditure 2to oerate good )anufacturing ractices:co)liant facilities3 which ro(ides le(erage in ricing of drugs.

$3 Transarency in the regulatory fra)ework

'3 -ro(en track record in 5ulk drug and for)ulation atents

%3 Strong do)estic suort in roduction/ fro) raw )aterial re0uire)ents to finished goods and

"3 India e)erging as a hu5 for contract research/ 5io:technology/ clinical research and clinicaldata )anage)ent.

Factors influencing growth of the industry8:

The Indian har)aceutical industry ranks !%th in the world 5y (alue of har)aceutical roducts.ith a well:esta5lished do)estic )anufacturing 5ase and low:cost skilled )anower/ India ise)erging as a glo5al hu5 for har)a roducts and the industry continues to 5e on a growthtra*ectory. Moreo(er/ India is significantly ahead in ro(iding che)istry ser(ices such asanalogue rearation/ analytical che)istry and structural drug design/ which will ro(ide it

a)le scoe in contract research and other e)erging seg)ents in the har)aceutical industry.

So)e of the )a*or factors that would dri(e growth in the industry are as follows8

N Increase in do)estic de)and8 More than half of IndiaOs oulation does not ha(e access toad(anced )edical ser(ices/ as they usually deend on traditional )edicine ractices. 6owe(er/with increase in awareness le(els/ rising er caita inco)e/ change in lifestyle due tour5ani@ation and increase in literacy le(els/ de)and for ad(anced )edical treat)ent is e7ectedto rise. Moreo(er/ growth in the )iddle class oulation would further influence de)and for har)aceutical roducts.

N Rise in outsourcing acti(ities8 Increase in the outsourcing 5usiness to India would alsodri(e growth of the Indian har)aceutical industry. So)e of the factors that are likely toinfluence clinical data )anage)ent and 5io:statistics )arkets in India in the near future include8!3 cost efficient research (is:P:(is other countries $3 highly:skilled la5or 5ase '3 cheaer cost of skilled la5or %3 resence in end:to:end solutions across the drug:de(elo)ent sectru) and "3Ro5ust growth in the IT industry.

#'


27/32

N >rowth in healthcare financing roducts8 ,e(elo)ent in the Indian financial industryhas eased healthcare financing with introduction of roducts such as health insurance olicy/ lifeinsurance olicy and cashless clai)s. This has resulted in increase in healthcare sending/ whichin turn/ has 5enefitted the har)aceutical industry.

N ,e)and in the generics )arket8 ,uring $##&:$#!"/ rescrition drugs worth a5out KSL'## 5n are e7ected to go off atent/ )ostly fro) the KS. -rior e7erience of Indian har)aceutical co)anies in generic drugs would ro(ide an edge to the).

N ,e)and fro) e)erging seg)ents8 So)e of the e)erging seg)ents such as contractresearch and de(elo)ent/ 5iohar)a/ clinical trials/ 5io:generics/ )edical touris) and har)a ackaging are also e7ected to dri(e growth of the Indian har)aceutical industry.

Su))ary8:

India has )any attractions for F,I/ such asG skilled la5our/ large oulation and a strong roduction 5ase in the har)aceutical industry. The har)aceutical industry has 5een the eighthlargest sector in India attracting F,I since !!. ,esite li5erali@ation and deregulation of the har)aceutical industry/ foreign caital in the industry is still 0uite low. The )a*ority of theglo5al har)aceutical fir)s ha(e in(ested in India/ 5ut due to the weak atent regi)e/ ricecontrol and rigid la5or laws/ the fir)s tend to outsource a large art of their roduction and donot in(est )uch in R4,. The go(ern)ent of India wants to increase the F,I inflow into theindustry/ and they hoe to attract )ore foreign caital with further li5erali@ation of oliciesregarding the har)aceutical industry. The Indian go(ern)ent i)le)ented erfor)ancere0uire)ents for foreign har)aceutical fir)s in order to create linkages and sillo(er effects

5etween the foreign fir)s and the host econo)y. 6owe(er/ today there are no erfor)ancere0uire)ents for foreign fir)s that in(est in the har)aceutical industry in India.

#


28/32

Findings and Conclusion

The )ain o5*ecti(e of this study is to e7a)ine sillo(er effects fro) F,I in the har)aceuticalindustry in India. The host econo)y can 5enefit fro) F,I since it can lay an i)ortant role in ro)oting econo)ic growth and raising the technological le(el in industries. This study shows)i7ed results in ter)s of e7isting sillo(er effects. To answer the first 0uestion stated in this aer8 +Are there sillo(er effects o5ser(ed fro) M9Cs in the Indian har)aceutical industryBYes/ there has 5een ositi(e i)act fro) F,I in the har)aceutical industry. Fro) literaturestudies and inter(iews with eole fro) the industry and go(ern)ental officials/ the conclusionis that the har)aceutical M9Cs in India ha(e ositi(ely contri5uted to the growth andde(elo)ent of the industry. In accordance with the case study of the trans)ission channels inindustry/ there see) to 5e a few clear sillo(er effects fro) F,I. 6owe(er/ the scoe and

e7istence of sillo(er effects see) to (ary o(er ti)e/ deending on the de(elo)ent stage of theindustry.The second 0uestion this study atte)ts to answer is +hat characteristics do sillo(er effectsfro) F,I in the Indian har)aceutical industry ha(eB Sillo(er effects through i)itation/industrial )anage)ent skills and co)etition are articularly o5ser(a5le in the industry. After India?s indeendence/ the har)aceutical industry was (ery s)all 5ut started to grow through thego(ern)ent?s initiati(e to de(elo a strong indigenous sector. The M9Cs were welco)e andthey contri5uted to the industry in ter)s of technology and introduced new drugs in the country.India?s success in the har)aceutical industry is )ainly 5ased on its caa5ility to de(elofor)ulations of already disco(ered drugs and the industry has grown due to ossi5ilities of i)itating foreign de(eloed )olecules. Sillo(er effects in ter)s of i)itation are therefore

generated/ not only in roduct de(elo)ent 5ut also in )arketing and docu)entation techni0ues.The M9Cs 5rought in new )anage)ent and ro)otion ractices that were e(entually i)itated 5y do)estic layers. The foreign fir)s? resence has indirectly encouraged the do)estic fir)s toincrease their )anagerial efforts and to adot so)e of the )arketing techni0ues used 5y M9Cs.They ha(e gi(en incenti(es for layers in the industry to ugrade and standardi@e rocesses suchas 0uality control and docu)entation techni0ues. In addition/ the e7istence of foreign fir)ssee)s to ha(e intensified the co)etiti(e ressure in the industry and sti)ulated local fir)s touse accessi5le resources )ore efficiently. Co)etiti(e ressure has led to a consolidation in theindustry/ with )any )ergers and ac0uisitions taking lace/ se(eral 5etween foreign and do)esticfir)s in the industry. This calls for future sillo(er effects 5eing generated.

The regression analysis indicates that fir)s with foreign ownershi e7hi5it higher roducti(itygrowth than do)estically owned fir)s. Accordingly/ there is a s)all roducti(ity ga in the industryand hence incenti(es for the do)estic fir)s to catch u. 6owe(er/ the see)ingly ositi(e i)act of F,I in the har)aceutical industry is not suorted 5y the insignificant results of the econo)etricanalysis of roducti(ity sillo(er effects in the industry. The answer to the third 0uestion +,oesforeign ownershi in the Indian har)aceutical sector affect the roducti(ity of do)estically ownedfir)s in the industryB is conse0uently no. There is an insignificant relationshi 5etween higher

#8


29/32

roducti(ity growth in do)estic fir)s and foreign resence in the sector. Therefore/ we cannotconclude fro) the regression that there are any roducti(ity sillo(ers in the industry.

e find (aried results in this study of sillo(er effects in the Indian har)aceutical industry. The ositi(e e7ternalities fro) F,I we o5ser(ed fro) analysing each trans)ission channel )ight not 5e large enough to affect the roducti(ity of do)estic fir)s in the industry. Earlier e)iricalstudies of hori@ontal sillo(er effects ha(e also showed insignificant results. There are )anye7lanations 5rought to light in order to clarify these results/ which are alica5le in the Indian har)aceutical industry as well. The e7lanation )ay 5e that the M9Cs ha(e not in(ested+enough fi7ed caital in the industry. Many of the M9Cs ha(e 5ought already e7isting lants or outsource arts or all of their roduction. Moreo(er/ the insignificant results indicate that thetechnology ga )ight 5e too s)all to cature significant sillo(er effects. Today/ the largedo)estic fir)s and the M9Cs in India are e0ually de(eloed and the technology ga hasnarrowed down. >i(en that the sa)le )ainly includes large fir)s/ the sillo(er effects that e7istin the industry )ay not ha(e 5een catured. As we ha(e seen in the discussion a5o(e/ there arenu)erous e7lanations for the insignificant result concerning sillo(er effects in the Indian har)aceutical industry. Sillo(er effects of F,I are difficult to co)ute and it is therefore goodto include a 0ualitati(e analysis in addition to the statistical to get a deeer understanding of theeffects of foreign fir)s in an industry. e can conclude that the resence of foreign har)aceutical fir)s in India has to so)e e7tent contri5uted to the de(elo)ent of the industryo(er the years/ 5ut to what le(el is difficult to state. 9e(ertheless/ *udging 5y results fro) thisand earlier studies/ ositi(e roducti(ity sillo(ers fro) F,I should not 5e o(eresti)ated or taken for granted The last 0uestion was +6ow can u5lic olicies hel to )a7i)i@e sillo(er effects in the har)aceutical industry in IndiaB Sillo(er effects are not an auto)atic outco)eof F,I as they deend on the de(elo)ent of the host industries and the do)estic fir)s. Effortsof local fir)s to in(est in new technology and knowledge are crucial for sillo(er effects. 6ence/the fir)?s a5sorti(e caa5ility and )oti(ation to learn are essential. It is in the interest of thestate to ro(ide a sound econo)ic en(iron)ent and u5lic olicies to 5enefit fro) F,I. In order to encourage sillo(er effects/ the go(ern)ent of India has acti(ely tried to create linkageswithin the industry/ through erfor)ance re0uire)ents for foreign fir)s. Esecially during the=#s/ the M9Cs faced se(eral olicies designed to encourage colla5oration with Indian fir)s andalso roduction constraint with the ai) of roducing )ore ad(anced drugs. This differentiationand encourage)ent/ 5etween foreign and do)estic fir)s/ see) to ha(e heled the do)esticindustry to take off. The olicies in the industry were rotecti(e and the do)estic industry couldde(elo through the restrictions and re0uire)ents for M9Cs

Today the scenario is changed since India is a )e)5er of the T; and the econo)y has oenedu. India?s har)aceutical industry is facing enhanced international co)etition and thei)le)entation of the TRI-s shows that the do)estic industry is facing a new challenging

setting. India as a glo5al layer in the har)aceutical industry re0uires therefore that thego(ern)ent ro)ote an international co)etiti(e en(iron)ent and a dyna)ic do)estic industry.This should also 5e the case in the har)aceutical industry in India. Although the result of theregression does not suort our findings in the 0ualitati(e study/ the M9Cs ha(e to so)e degreecontri5uted to the de(elo)ent of the industry/ and further sillo(er effects are e7ected in thefuture. The do)estic industry is highly de(eloed and an increased le(el of F,I in the sector should only sti)ulate the industry further and hence generate )ore sillo(er effects. This calls

#


30/32

for increased ro)otional acti(ities of the industry to encourage an increased inflow of F,I inthe har)aceutical industry.In order to ro)ote F,I and )a7i)i@e future sillo(er effects/ olicies should 5e in(estor friendly with a clear de(eloing strategy. The go(ern)ent of India is trying to )ake the har)aceutical industry as in(estor friendly as ossi5le. 6owe(er/ there are still factors

discouraging F,I/ which calls for i)ro(e)ent of the institutional setting. hether the


31/32

References

,eart)ent of Che)icals and -etroche)icals 2$##":!!: !


32/32

Documents

astudyofforeigndirectinvestmentinindianpharmaceuticalindustries-140408120448-phpapp01