Strategic Alliance in Indian Pharmaceutical Industry Essay Example

rate of more than 20% in 1997-98. Nevertheless, the scope to increase the volume of exports is tremendous. In last decade emerging economies have begun to account for an increasing flow of global FDI.

Not only have countries like India and China become important investment destinations, they are also beginning to account for an increasing flow of outward FDI (OFDI). In the Indian case while inward FDI doubled between 2004 and 2006, OFDI grew four times in the same period (UNCTAD 2007) led by increasing flows of cross border M&A activity by firms in the IT and pharmaceutical sector. The increase in overseas activity by Indian firms can be seen as their response to globalized competition since 1990s.

With liberalization and changes in trade, industry, foreign investment and technology policy regime, previously protected Indian companies have been exposed to global competition. Indian firms increasingly realized that their existing technological and other capabilities accumulated with predominant dependence on protected home markets and under the import substitution policy regime of the past were clearly inadequate to cope with this new competition unleashed by a more liberalized business environment.

This forced them to improve their competitive strength immediately and enlarge their position in the world markets. Indian companies realized that adopting a long term competencies building strategy with large investment in R&D, advertising, etc was relatively more risky and costly than pursuing the route of overseas acquisitions and alliances. This study seeks to examine the changing strategic response of the Indian pharmaceutical industry as a consequence of the opportunities generated by two significant policy changes in the 1990s viz. iberalization of the Indian economy and

the changes in the Patent Act of 1999 in its competitive environment.

It posits that the industry’s strategic positioning combines elements of collaboration with competition to cope with the changing global environment. It uses episodes of regulatory change as factors that have triggered a reorientation of firm capabilities and strategic change. Using the Resource based view (RBV) it examines the recent outward venturing experiences of the pharmaceutical industry as an indication of its strategic positioning in response to a changed competitive environment.

Although a wide variety of actions are classified as FDI this study examines substantive forms of outward FDI associated with foreign market entry in which new ventures are established. Compared to other forms of outbound venturing such as exports or the establishment of a branch office, the establishment of a new venture / takeover of an existing one requires a greater commitment (Zahra and Covin 1995; McDougall and Oviatt 2000).

The rest of the paper is organized as under: section 2 examines the framework of firm internationalization as a process of strategic renewal in the developing country perspective; section 3 traces the evolution of the Indian pharmaceutical industry and its contribution to capability development; section 4 examines recent episodes of international venturing as indicators of strategic change and section 5 concludes.

Firm Internationalization as Strategic Renewal Strategic renewal is an evolutionary concept by which organizations shed their inertia and develop new competencies that protect them from obsolescence during technological and market disruptions ( Huff, Huff and Thomas, 1992, Burgelamn 1991). It emphasizes the acquisition of new knowledge based resources and productive assets as a route to changing competencies (Floyd

and Lane 2000).

The notion of renewal thus mirrors the dynamic capabilities literature, which argues that fast changing environments require firms to engage in activities that enable them to reconfigure their resource configurations, and thereby engage in path dependant and dynamic capability acquisition processes (Teece et al 1997, Eisenhardt and Martin 2000). Since internationalization involves both development of new capabilities and changes in product market domains (Ray et al 2007) it has served as the vehicle of strategic renewal for the Indian pharmaceutical industry.

In other words, notions of renewal and dynamic capabilities focus on the need for organizations to engage in a continous process of change in products, resource, capabilities and modes of organization to generate competitive advantage as an antidote to technological and market discontinuities in fast evolving markets (Rindova and Kotha 2001). Natural, socio-economic and political events such as radical innovation, technological discontinuities and radical regulatory changes are some of the triggers which have provoked a market change through creation of new opportunities causing a strategic transition.

Organisational capability is a system of organizational routines that create firm specific and hard to imitate advantages. A firm’s organizational capability consists of (i) static capabilities to consistently outperform rivals at any given point in time and (ii) dynamic capabilities that enable a firm to improve its performance and outperform its rivals Penrose (1968), Nelson and Winter (1982), Teece (1992).

Nelson and Winter (1982) explain that a firm’s capability development depends upon access to technological and organizational knowledge and conditioned by its past learning. These capabilities are heterogeneous, conditioned by local factors and difficult to imitate or replicate. The heterogeneity of

firm capability and its stickiness are responsible for the diversity of firm strategy. Dynamic capabilities evolve over time due to endogenous market changes and exogenous shocks adding value to a firm’s existing capabilities and improving its competitive advantage.

Dynamic capabilities in the context of market changes refer to a set of identifiable processes such as product development, strategic decision making and alliancing , idiosyncratic in detail and path dependant in emergence but with some common features across firms. (Eisenhardt and Martin (2000)). Radical regulatory changes such as economic liberalization and the changing IPR regime have presented firms with rapidly changing market situations. The existence of rapidly changing markets presents firms with the possibility of leveraging existing capabilities to produce lasting new competitive advantage.

The literature on technology management uses the product life cycle view of industry to explain the different capabilities necessary for success in different phases of the industry life cycle. This literature posits that firms follow strategic variety in the early stages of a technology/ industry evolution but there is a convergence of firm strategy once a dominant design is established. (Utterback 1996). Thus the emergence of a new economic or technological opportunity leads to a diversity of strategy till one of them emerges as the dominant design.

In the context of the Indian pharmaceutical industry economic liberalization and the new IPR regime opened up new global opportunities, which necessitated strategic change as firms looked towards capability enhancement in view of the changed market environment. Institutional theory (Hoskisson et al. , 2000; Scott, 1995) has been a useful tool for understanding phenomena related to emerging economies. Institutions are conceptualized as

‘the rules of the game in a society’ (North, 1990: p. ; Scott, 1995) and institutional transitions are defined (Peng, 2003, p. 276) as the ‘fundamental and comprehensive changes introduced to the formal and informal rules of the game that affect organizations as players’. One of the defining features of emerging economies is the policy of economic liberalization favored by their governments (Hoskisson et al. , 2000, Wright et al. , 2005).

Economic liberalization is a unique and powerful environmental contingency faced by firms from these developing economies ompared to firms from advanced nations, which have traditionally been more market-oriented. Firms in the countries undergoing economic liberalization face significantly different business environment characterized by increasing competition, changing regulations, increasingly demanding customers, emergence of new business opportunities, etc (Ray, 2003). The forces of economic liberalization acting on the firms from emerging economies are therefore equivalent to significant ‘institutional transitions’ (Peng, 2003).

The process of firm internationalization in India in the post liberalization era has witnessed an unprecedented number of overseas acquisitions and alliances led by the IT and pharmaceutical industry. Traditional explanations dominated by Dunning’s OLI hypothesis (1973, 1993) have focused on asset exploitation as the main motive of firm internationalization, but alternate viewpoints especially in the emerging economy context have used the asset seeking / augmenting perspective to explain overseas expansion ( Wesson 1999; Mathews 2002; Makino 2002, Li 2003).

This paper examines the main motives behind internationalization of the Indian pharmaceutical industry in its quest for strategic renewal. It builds on existing research that has studied how the ability of organizations to respond to change has critical implications for their performance

and survival. For example, the challenges faced by incumbents to adapt to technological and market disruptions, and the consequences when they fail to respond appropriately are well documented (Christensen and Bower 1996, Henderson and Clark 1990).

Thus, the ability to develop new sets of capabilities, as the basis of competitive advantage shifts over time has emerged as an underlying theme in strategy and organization research (e. g. Helfat and Peteraf 2003, Teece, Pisano, and Shuen 1997). The Indian Pharmaceutical Industry The Indian pharmaceutical industry is ideal for a study of internationalization strategies in the emerging economy context since it has been a leader in outward expansion along with the IT and auto ancillary sectors and had led the OFDI since 2000, spearheaded by the spate of cross border M&As.

It has also faced the dual impact of economic liberalization and change in intellectual property regime, threatening its very sources of competitive advantage. Despite these challenges it has seen a resurgence of incumbent firms many of whom have employed diverse strategies of internationalization (BCG 2006) to cope with changes in its competitive environment. The Indian pharmaceutical industry ranks 4th in volume and 13th in value in the world today, accounting for 8% of global production and 2% of the world pharmaceutical market (OPPI 2009).

It has a production value of approximately $4. billion and employs 5 million workers directly and 24 million workers indirectly. The industry structure is dualistic with about 90% of the 20,000 firms in the small scale sector. The industry has been governed by a radical regulatory framework including The Indian Patent Act of 1970, the Industrial Policy Act, 1991

and the signing of TRIPS in 1995, all of which have provided the opportunities for strategic change and renewal of firms in the industry. The Indian Patent and Designs Act (1911) which originally governed the industry dated back to 1856.

It authorised issuing of both process and product patents. These patents were valid for a period of sixteen years and could be extended for another period of ten years if the patent holder believed that he had not been adequately defrayed for his innovation. It was a tool in the hands of the multinational companies (MNCs) of the developed world to keep the Indian market exclusively for themselves. They held between 80 to 90% of the patents and indulged in prohibitive prices, which were among the highest in the world.

The Patent Enquiry Committee (1948) specified that “the Indian patent system had failed in its main purpose of stimulating inventions among Indians and encouraging the development and exploitation of new inventions for industrial purposes in the country so as to secure the benefits thereof to the largest section of the public. ” The Indian Patent Act of 1970, aimed to strengthen the domestic pharmaceutical industry which provided legal sanction to process patents for pharmaceutical products.

Instead of granting patents to end-products as is done in developed countries, the Indian Patent Act allowed patents of the manufacturing process. This regulation, coupled with special incentives to small scale units, enabled the Indian pharmaceutical firms to thrive and take away the dominant share of the market from the multinationals. Thus, until the early nineteen nineties, the Indian pharmaceutical industry was one of the most inward-looking,

highly protected industries, completely dominated by firms of Indian origin.

The IPA 1970 brought in a number of radical changes in the patent regime by reducing the scope of patenting to only processes and not pharmaceutical products and also for a short period of seven years from the earlier period of 16 years. It also recognized compulsory licensing after three years of the granting of the patent. The enactment of the process patent regime contributed significantly to the local technological development via adaptation, reverse engineering and new process development (Aggarwal, 2007; Pradhan and Alakshendra, 2006).

These measures along with investment in a network of universities and research institutions created a huge pool of qualified labour in the form of chemists, pharmacists, engineers and managers which infused new life into the industry. (Athreya et al 2008) and helped to develop its technological capability. The market opportunities opened by the Indian Patent Act of 1970, the constraints for expanding the manufacturing base under the license Raj and the endogenous evolution of the market together determined the capabilities of the industry in this period.

The knowledge base of the industry was firmly embedded in organic and synthetic chemistry. The change in regulation opened the floodgates for the development of the generics market through new, cost efficient process technologies as Indian firms adopted “duplicative imitation” and “creative imitation” as strategies for technology capability development. ( Kale and Little 2007). The market was led by firms that had the competence in chemical process technologies necessary for re-engineering targeted drugs and the ability to withstand technology races in process improvements through pursuing a diversified product portfolio.

By

the mid 1980s most Indian pharmaceutical firms were producing bulk drugs and formulations for the domestic market and leading firms like Ranbaxy had begun to explore Asian and African markets. The focus of the industry was on innovation for cost-efficient or quality enhancing processes, direct commercialization of innovation in countries where the product patent regime was not recognized and licensing and market technology agreements with Western multinationals. The comparative advantage of the Indian firm in reverse engineering and process improvements enabled it to access the US and European markets for generics.

The Indian firm’s capabilities had been developed in the middle stages of the product life cycle but had been excluded from the new drug discovery and clinical trial stages. The decade of the 80s witnessed technological upheaval and radical regulatory reform in western markets. Significant among these was the Hatch – Waxman Act passed in 1984 in the USA to stimulate the market for generics, lower prices and enable greater accessibility to healthcare for its citizens.

Economic liberalization measures by the Indian government in 1991 aimed to establish stronger linkages with global economy and resulted in profound policy changes for Indian industry in general and the Indian pharmaceutical industry in particular. India signed the General Agreement on Tariffs and Trade (now WTO) agreement on intellectual property in 1994 making it mandatory to introduce product patents and provide legal protection to Trade Related Intellectual Property Rights (TRIPS) by 2005. Liberalization of the economy was accompanied by delicensing of the pharmaceutical sector.

In 1995 50% drugs were removed from price control and by 2004 only 76 drugs (26%) remained under price control. TRIPS

changed the competitive landscape of the pharmaceutical industry. Its provisions specifically banned the production and sales of re-engineered pharmaceutical products, extended the product patent regime upto 2005 and forbade discrimination between imported and domestic products. This was the chance for global MNEs to bring in their best products to India resulting in a steep increase in competition.

This marked a dramatic strategic change for the Indian pharmaceutical industry and was the trigger for a change in its internationalization strategy. It targeted the western regulated markets for R&D in the context of drugs, vaccines and diagnostics that were off patent or about to be off patent. It also entered into contract research and custom manufacturing, bioinformatics for genomics based drug research and clinical trials for the larger western MNCs. At the same time some firms were investing in the development of new drugs for global diseases such as diabetes.

This led the industry on the path of internationalization through cross border M&As which were motivated by capability enhancement for drug creation and performing preclinical and clinical trials to cope with a changed competitive landscape. It also simultaneously entered into collaborations and alliances creating an environment of co-opetition. The following section examines recent episodes of internationalization to understand the motives and strategies of the pharmaceutical industry in its changed global environment.