INTRODUCTION
Recent research has placed considerable emphasis on emerging-market firms and the impact of institutional context on their strategic choices (Chari & David, Reference Chari and David2012; Chittoor, Kale, & Puranam, Reference Chittoor, Kale and Puranam2015; Cuervo-Cazurra & Dau, Reference Cuervo-Cazurra and Dau2009). Many such firms have transformed themselves to be globally competitive, responding to institutional transitions and the resulting ecosystem changes in their home markets over recent decades (Cuervo-Cazurra & Genc, Reference Cuervo-Cazurra and Genc2008; Ramamurti, Reference Ramamurti2012a). Because innovations are embedded in institutional contexts, the country-specific triggers and drivers of innovation processes are important (Chittoor, Aulakh, & Ray, Reference Chittoor, Aulakh and Ray2015; Peng, Ahlstrom, Carraher, & Shi, Reference Peng, Ahlstrom, Carraher and Shi2017; Thakur-Wernz & Samant, Reference Thakur-Wernz and Samant2017). The strength of the intellectual property (IP) regime is one such trigger, playing a key role in driving innovation in knowledge-intensive industries such as pharmaceuticals (Brandl, Darendeli, & Mudambi, Reference Brandl, Darendeli and Mudambi2019; Kale & Wield, Reference Kale and Wield2008; Papageorgiadis & McDonald, Reference Papageorgiadis and McDonald2019). The high costs of developing drugs, combined with the presence of stringent regulations, makes IP rights particularly important in this sector, in terms of the appropriation of monopoly rents by inventors (Kale, Reference Kale2010; Pisano, Reference Pisano2006; Teece, Reference Teece1986).
In recent decades, greater levels of liberalization and globalization have encouraged rapid internationalization by emerging-market firms (Ramamurti, Reference Ramamurti2012b). With home markets characterized by institutional voids (Khanna & Palepu, Reference Khanna and Palepu2000), resource constraints, and tendencies toward risk-aversion (Courtney, Kirkland, & Viguerie, Reference Courtney, Kirkland and Viguerie1997), many emerging-market firms have used catching up with advanced-economy competitors as a key motivation for their internationalization (e.g., Awate, Larsen, & Mudambi, Reference Awate, Larsen and Mudambi2015). In this regard, the knowledge-seeking motive is critically important; the literature generally suggests that this is more consistent with high-commitment internationalization, such as foreign direct investment (FDI), than lower-commitment and lower-risk approaches (e.g., exporting). However, the home context plays a role in entry mode choices. There is evidence that typologies describing a progression from lower- to higher-commitment entry modes (e.g., Buckley & Casson, Reference Buckley and Casson1998; Johanson & Vahlne, Reference Johanson and Vahlne1977) apply to emerging-market firms’ internationalization into other emerging or developing economies, which is driven more by market- or resource-seeking than a search for knowledge to transfer back home. However, the situation is different when emerging-market firms target advanced economies. In this situation, exporting may be a key strategy for market-seeking, while knowledge-seeking is the primary motivation behind FDI.[Footnote 1]
The Indian pharmaceutical industry offers a prime example of this dichotomy, with exports, to both emerging and developed markets (Chittoor, Ray, Aulakh, & Sarkar, Reference Chittoor, Ray, Aulakh and Sarkar2008), contributing over 50% of its total revenues. Though knowledge resources are recognized as key export drivers for innovation-driven pharmaceutical firms (Chittoor, Sarkar, Ray, & Aulakh, Reference Chittoor, Sarkar, Ray and Aulakh2009), less is understood about the nature of the knowledge-performance relationship in the face of a changing IP regime (Chatterjee & Sahasranamam, Reference Chatterjee and Sahasranamam2018; Nair, Guldiken, Fainshmidt, & Pezeshkan, Reference Nair, Guldiken, Fainshmidt and Pezeshkan2015). India offers a useful environment for considering how a drastically-altered innovation system affects companies’ knowledge sourcing strategies and, in turn, their international business activities.
The adoption of TRIPS[Footnote 2] in developing countries has varied over time, often depending on the roles played by global actors (Brandl et al., Reference Brandl, Darendeli and Mudambi2019). In the Indian context, it is useful to consider two distinct periods of TRIPS adoption – transitional-TRIPS (1995–2004) and post-TRIPS (2005–2014) – to understand the impact of IP changes on knowledge sourcing strategies. With non-equity-based modes[Footnote 3], firms can source knowledge either internally, through investment in research and development (Kumar & Aggarwal, Reference Kumar and Aggarwal2005), or from external resources through licenses, trade agreements, or blueprints against a royalty fee (Bhat & Narayanan, Reference Bhat and Narayanan2009; Lane & Probert, Reference Lane and Probert2007). In high-technology industries such as pharmaceuticals, firms tend to focus on developing technology internally in areas in which they have key strengths, and source other technology externally (Dunlap, McDonough, Mudambi, & Swift, Reference Dunlap, McDonough, Mudambi and Swift2016). While the distinction between internal and external knowledge has been addressed in the innovation literature (e.g., Casillas, Moreno, Acedo, Gallego, & Ramos, Reference Casillas, Moreno, Acedo, Gallego and Ramos2009), less is understood about the roles of internal and external knowledge sources in driving international business activity (Denicolai, Zucchella, & Strange, Reference Denicolai, Zucchella and Strange2014; Wang, Cao, Zhou, & Ning, Reference Wang, Cao, Zhou and Ning2013). Research has suggested that internal R&D and external knowledge acquisition represent complementary innovation strategies, but that the complementarity is sensitive to the institutional environment (Cassiman & Veugelers, Reference Cassiman and Veugelers2006). The TRIPS-induced IP reforms created fundamental changes in the institutional environment for India's pharmaceutical industry, forcing domestic firms to reconfigure their knowledge resources and capabilities, and to acquire new capabilities (Brandl et al., Reference Brandl, Darendeli and Mudambi2019; Chittoor & Ray, Reference Chittoor and Ray2007; Chittoor et al., Reference Chittoor, Sarkar, Ray and Aulakh2009). Against this background, using the perspective of IP (Pisano, Reference Pisano2006; Teece, Reference Teece1986), we discuss how changes in the IP regime influenced firms’ strategies related to internal and external knowledge sources, and speculate about the subsequent impact on their international business activities.
Many Indian industries, including pharmaceuticals, experienced an exogenous shock when India became a signatory to the World Trade Organization (WTO) on 1st January 1995. Given a transition period of 10 years to amend its patent laws, India moved from an era of process patents to honoring product patents starting from 1st January 2005.[Footnote 4] Now that over a decade has passed since the new patent regulations have taken effect, we are able to consider how IP reforms influence knowledge sourcing, by comparing the transitional- and post-TRIPS periods.
In this article, we contribute to the literatures on innovation and intellectual property in several ways. First, we use IP frameworks to illuminate the role of knowledge sources in firms’ international business activity during a period of regulatory transition. Specifically, we extend the understanding of the impact of institutional context, by focusing on the effect of IP reforms on emerging-market firms (Chittoor & Ray, Reference Chittoor and Ray2007; Chittoor et al., Reference Chittoor, Ray, Aulakh and Sarkar2008; Kale & Little, Reference Kale and Little2007; Kale & Wield, Reference Kale and Wield2008), addressing how knowledge sourcing strategies differ under different institutional environments. Considering the historical institutional context of the innovation ecosystem, we conjecture that internal knowledge sourcing strategies are less important for the international business activities of Indian pharmaceutical firms in the post-TRIPS period. However, the strong patent systems in the post-TRIPS period mean that external knowledge sourcing is likely to be influential. Second, we provide insights into the complementary aspects of internal and external knowledge sourcing, and the associated role of the innovation ecosystem (Bilgili, Kedia, & Bilgili, Reference Bilgili, Kedia and Bilgili2016; Cassiman & Veugelers, Reference Cassiman and Veugelers2006); in the face of a changing innovation ecosystem, we conjecture that Indian pharmaceutical firms draw more from external knowledge sourcing opportunities, to complement historical weaknesses in their internal knowledge sourcing. Finally, we add to the understanding of innovation management in the Indian context, which has received limited attention in prior literature (Chatterjee & Sahasranamam, Reference Chatterjee and Sahasranamam2018; Nair et al., Reference Nair, Guldiken, Fainshmidt and Pezeshkan2015). Specifically, we highlight the evolution of the Indian pharmaceutical industry in the face of multiple changes in the innovation ecosystem since 1947, especially the exogenous shock created by TRIPS, and how this history shapes firms’ knowledge sourcing strategies associated with their international business activity.
EVOLUTION OF THE INDIAN PHARMACEUTICAL INDUSTRY AND KEY INSTITUTIONAL CHANGES
The evolution of the Indian pharmaceutical industry in the post-independence period, and the ensuing institutional changes, can be divided into three phases (Chaturvedi, Chataway, & Wield, Reference Chaturvedi, Chataway and Wield2007). The first phase (1947–1970) corresponds to the regulations according to the Patents and Designs Act of 1911, which was a holdover from the pre-independence period of British rule. This patent regime provided protection for all inventions, apart from those related to atomic energy, offering exclusive rights for a period of 16 years from the date of application (Pradhan, Reference Pradhan2007). The regime is viewed as having had a negative effect on the growth of the domestic pharmaceutical industry, resulting in high drug prices (Mohammad & Kamaiah, Reference Mohammad and Kamaiah2014), leading to domestic pressure to move to a less restrictive patent regime (Desai, Reference Desai1980).
The second phase (1970–1995) covers the period after India introduced its own Patents Act in 1970, which was operational until the country became a signatory to the WTO on 1st January 1995. During this phase, product patents were offered for most inventions; exceptions were food, medicine, drugs, and substances produced by chemical processes, for which only process patents were available (Pradhan, Reference Pradhan2007). This change in the innovation ecosystem led to rapid growth in the Indian pharmaceutical industry, boosting local innovation in the form of adaptation and reverse engineering. The number of Indian pharmaceutical firms grew from 2,257 in 1970 to over 23,000 by 2005 (Haley & Haley, Reference Haley and Haley2012); by the 2000s, domestic pharmaceutical companies enjoyed a market share of 60–70%, compared to 10% during the 1970s (Kale, Reference Kale2010). To the benefit of domestic firms, foreign pharmaceutical multinationals in India were disadvantaged on two counts. First, the weak product patent regime offered foreign firms little incentive to market their patented products. Second, they were losing market share to price-competitive Indian firms in global markets, due to the patent regime that allowed Indian firms to reverse engineer drugs’ chemical molecules (Chittoor et al., Reference Chittoor, Sarkar, Ray and Aulakh2009).
This pre-TRIPS period also witnessed a stark fragmentation of the pharmaceutical industry, between Indian firms and foreign multinationals, based on their divergent views on the trade regime. In particular, the Indian firms generally perceived the TRIPS agreement as a threat to their continued success. This fragmentation led to the rise of two industry associations (Sinha, Reference Sinha2016). The Indian Drug Manufacturers Association (IDMA) had been formed in 1961 to represent the interests of domestic firms (including Ranbaxy and Cipla) to the Indian government. Foreign and multinational companies had established the other association – the Organization of the Pharmaceutical Producers from India (OPPI) – in 1965. By the late 1990s, the interests of eight large, research-oriented Indian companies, which had developed a more positive view on the TRIPS patent regime (Sinha, Reference Sinha2016), diverged from the views of the IDMA, leading to the formation of a separate coalition – the Indian Pharmaceutical Alliance (IPA) – to interact with the government. Still, the clearly-divergent interests of domestic firms and foreign subsidiaries meant that there was little knowledge spillover between them during this pre-TRIPS period (Brandl, Mudambi, & Scalera, Reference Brandl, Mudambi and Scalera2015).
The third phase began in 1995. In the pre-TRIPS era, the Indian pharmaceutical industry was supported by favorable government policies and soft patent regimes. When India joined the WTO and became a signatory of TRIPS, Indian pharmaceutical firms were forced to make the transition from protection under process patents to protection based on product patents (Chittoor et al., Reference Chittoor, Sarkar, Ray and Aulakh2009). The introduction of product patents was expected to have a negative impact on the Indian pharmaceutical industry, blocking the Indian firms’ main source of chemical molecules (Watal & Mathai, Reference Watal and Mathai1995). Under the process patent regime, Indian firms had been free to reverse-engineer new technologies or molecules without formal licenses from patent holders (Kale & Wield, Reference Kale and Wield2008). As the TRIPS era came closer, during 1994–1995, multiple camps arose within the domestic pharmaceutical industry, comprising some in favor of the regime change, some who wanted to oppose it at any cost, and some in denial of its potential impact (Sinha, Reference Sinha2016). The broad consensus view was, however, that TRIPS was essentially a necessary evil (Sinha, Reference Sinha2016).
The transitional-TRIPS period of 1995–2004 saw the changeover from process to product patents, through a series of three legislative amendments. In 1999, the Indian government enacted a patent-reform amendment to the Patents Act of 1970. Retroactive to 1995, this amendment provided for a ‘mailbox system’ of patent applications, enabling firms to file patents for future approval. This allowed companies to file for patents that would be approved upon implementation of the product-patent regime in 2005 (Haley & Haley, Reference Haley and Haley2012). A second amendment was enacted in 2002, extending the patent duration to 20 years for existing and pending applications. The third amendment came into effect from April 2005, providing for product patent protection for pharmaceuticals (Pradhan, Reference Pradhan2007).
Despite the radical change in the IP regime and the necessary transformations in the innovation ecosystem, the Indian pharmaceutical industry's revenues – both domestic and from exports – continued to grow. By 2013, it had become the world's third-largest, in terms of value (Horner, Reference Horner2014), partly attributable to the evolution of firms’ dynamic capabilities as strategic responses to the regulatory changes (Athreye, Kale, & Ramani, Reference Athreye, Kale and Ramani2009). Manufacturers of generic drugs remained the dominant players in the industry, with patented drugs accounting for only 1% of India's pharmaceutical market (Kochhar, Reference Kochhar2014).
Exports played – and continue to play – a key role in the Indian pharmaceutical industry, contributing over 50% of its total revenues in 2013, and the industry's balance of trade changed dramatically during 2005–2014, as shown in Figure 1.
Figure 1. Indian pharmaceutical exports and imports during transitional-TRIPS (1995–2004) and post-TRIPS (2005–2014) periods
The post-TRIPS period has seen greater investment in R&D (Chittoor et al., Reference Chittoor, Sarkar, Ray and Aulakh2009; Jagadeesh & Sasidharan, Reference Jagadeesh and Sasidharan2014), which has led to product patents related to new dosage forms and an increased focus on new drug discovery (Agarwal, Gupta, & Dayal, Reference Agarwal, Gupta and Dayal2007; Basant & Srinivasan, Reference Basant and Srinivasan2015). The government-run Council of Scientific and Industrial Research (CSIR) has played a crucial role in this regard; CSIR was responsible for gaining 540 new US patents during 1995–2015, compared with 27 between 1950 and 1993 (Brandl et al., Reference Brandl, Mudambi and Scalera2015). Many domestic firms followed the government's lead by investing more resources into R&D. With the largest number of USFDA-approved manufacturing plants outside of the US (Balakrishnan, Reference Balakrishnan2014), the Indian pharmaceutical industry experienced improvements that enabled it to target lucrative western markets via exporting.
The change in the nature of the patents, from process to product, makes it important to study the transitional-TRIPS (1995–2004) and post-TRIPS (2005–2014) periods separately (Brandl et al., Reference Brandl, Darendeli and Mudambi2019). Thus, we consider the two timeframes, and explore the effect of IP reform on the relationship between knowledge sources and international business activities in the context of the Indian pharmaceutical industry.
THEORY AND LITERATURE REVIEW
Innovation Ecosystems, Intellectual Property Rights, and Emerging Markets
A focus on institutions and ecosystems has been a dominant feature of innovation and entrepreneurship research in India (Chatterjee & Sahasranamam, Reference Chatterjee and Sahasranamam2014; Sahasranamam & Ball, Reference Sahasranamam, Ball, Spence, Frynas, Muthuri and Navare2018; Schøtt, Madhavan, Jensen, & Li, Reference Schøtt, Madhavan, Jensen and Li2019). The innovation ecosystems view incorporates private firms and public organizations, and investigates their mutual interactions as well as their relationships with the social and institutional framework in which they are embedded (Lundvall, Reference Lundvall1999).
A key issue in research involving innovation ecosystems pertains to how the selection of a particular appropriation mechanism influences the distribution of value across innovating firms, rivals, consumers, and suppliers (Papageorgiadis & McDonald, Reference Papageorgiadis and McDonald2019). Teece (Reference Teece1986: 287) acknowledges the need for strong appropriability for capturing value from innovations, noting that the ‘regime of appropriability refers to the environmental factors, excluding firm and market structure, that govern an innovator's ability to capture the profits generated by an innovation’. In the absence of such protection, imitation is relatively easy, and the profits from innovation tend to accrue to the owners of key complementary assets, rather than the innovator.
The efficacy of IP protection varies across contexts (Papageorgiadis, Cross, & Alexiou, Reference Papageorgiadis, Cross and Alexiou2014; Papageorgiadis & McDonald, Reference Papageorgiadis and McDonald2019), and the value capture literature discusses legal protection as a critical context-dependent institutional factor (Lanjouw & Schankerman, Reference Lanjouw and Schankerman2001; Sahasranamam & Nandakumar, Reference Sahasranamam and Nandakumar2018). The strength of the legal protection regime affects the cost of imitation; weak regimes, with lower penalties, are characterized by greater likelihood of patent infringement (Papageorgiadis, Cross, & Alexiou, Reference Papageorgiadis, Cross and Alexiou2013; Papageorgiadis et al., Reference Papageorgiadis, Cross and Alexiou2014). Strong appropriability regimes allow firms to identify, and defend against, infringement (Lanjouw & Schankerman, Reference Lanjouw and Schankerman2004). In countries with weaker appropriability regimes, including many emerging markets, firms face greater difficulty in defending against infringement (Krug & Hendrischke, Reference Krug and Hendrischke2003; Sahasranamam & Raman, Reference Sahasranamam and Raman2018).
KNOWLEDGE SOURCING AND INTERNATIONAL BUSINESS ACTIVITY
For firms from emerging markets, including India, internationalization is a particularly risky strategy, considering the extent of resource investment needed and the firms’ often-limited prior experience with competing in global markets (Contractor, Kumar, & Kundu, Reference Contractor, Kumar and Kundu2007; Luo & Tung, Reference Luo and Tung2007). Until economic liberalization in 1991, the heavily-regulated home market did not encourage Indian firms to explore foreign options, and the large domestic population meant that international expansion was not an imperative (Kumaraswamy, Mudambi, Saranga, & Tripathy, Reference Kumaraswamy, Mudambi, Saranga and Tripathy2012). However, post–1991, Indian firms have internationalized and become globally competitive. Consistent with the literature (e.g., Agnihotri & Bhattacharya, Reference Agnihotri and Bhattacharya2015; Buckley & Casson, Reference Buckley and Casson1998; Johanson & Vahlne, Reference Johanson and Vahlne1977), exporting is often the initial internationalization strategy for Indian firms, and remains key today.
Access to knowledge is essential for enhancing product quality, identifying new opportunities, and increasing competitiveness (Grant, Reference Grant1996; Zhou & Li, Reference Zhou and Li2012). In the absence of equity-based relationships, knowledge acquisition is most likely to occur through internal mechanisms, such as R&D, or externally through royalties and licenses. The TRIPS regime gave greater protection to inventors, leading to a two-pronged reaction by Indian firms: (1) augmenting their own research capabilities in order to transition from core process research to new drug development, and (2) sourcing external knowledge by forging commercial alliances with global companies (Khan & Nasim, Reference Khan and Nasim2016).
Table 1 presents a summary of key quantitative studies of the relationship between exporting and both internal and external knowledge sourcing in the Indian context. While the results are mixed, and reflect little research pertaining to the post-TRIPS period, there is some evidence of the impact of TRIPS, especially on the relationship between R&D and exporting.[Footnote 5] This suggests that a more nuanced consideration of different periods in the TRIPS adoption process – e.g., transitional-TRIPS and post-TRIPS – is necessary to explore how changes in the IP regime may affect the relationship between knowledge sourcing and international activity.
Table 1. Summary of quantitative studies on the relationship between exporting and knowledge sourcing in Indian firms
Notes: Effect size (r) is calculated as the square root of t 2/(t 2 + (n − k − 1), where t is the test statistic for assessing the significance of the estimated coefficient (Durlak, Reference Durlak2009). The interpretation of r, per Cohen (Reference Cohen1988) and Rosenthal (Reference Rosenthal1996), is: 0.1: small, 0.3: medium, 0.5: large, 0.7: very large.
Types of external knowledge sourcing: aRoyalties paid, bLicenses, cTechnology imports, dRaw materials imports, eCapital goods imports, fInternational technical resources (including capital goods, royalties, know-how, and raw materials), gSpares and stores imports
Internal Knowledge Sourcing
R&D investment levels provide a broad indication of the priority that firms give to developing new products using internal sources of knowledge (Kumar & Siddharthan, Reference Kumar and Siddharthan1994; Lall & Kumar, Reference Lall and Kumar1981). High R&D investment suggests a focus on internal exploration for developing new products and/or markets (Chittoor & Ray, Reference Chittoor and Ray2007), and has been identified as influential for gaining market share and helping firms to be more globally competitive (Boso, Story, Cadogan, Micevski, & Kadic-Maglajlic, Reference Boso, Story, Cadogan, Micevski and Kadic-Maglajlic2013).
It is reasonable to assume that the relationship between R&D and international business activity – export intensity in particular, for the Indian pharmaceutical industry – evolves under a changing IP regime. Pharmaceutical firms face a protracted process of moving from drug discovery to commercialization, and very expensive R&D makes IP protection crucial for knowledge ownership (Kale & Wield, Reference Kale and Wield2008). However, the impact of IP protection on the relationship between R&D investment and export intensity in high-technology Indian industries is complex. On one hand, considering the expropriation protection argument (Teece, Reference Teece1986), the stronger IP protection post-TRIPS might incentivize R&D investment, leading to improved international performance. In addition, greater competition from foreign MNEs in a stronger IP regime (Hu, Reference Hu2010) may make domestic firms upgrade their internal knowledge capabilities through R&D, to survive and then compete globally (Chatterjee & Sahasranamam, Reference Chatterjee and Sahasranamam2018; Kumaraswamy et al., Reference Kumaraswamy, Mudambi, Saranga and Tripathy2012). Such increased R&D investment helps to translate resources into innovative products, which may give firms temporary monopoly positions (Roberts, Reference Roberts2001) or reduce entry barriers (Harris & Li, Reference Harris and Li2009), enabling them to capture new opportunities in international markets (Hasan & Raturi, Reference Hasan and Raturi2003).
On the other hand, the Indian pharmaceutical industry's focus on generic drugs may mean that firms struggle to benefit from increased investment in R&D, at least in the short term; the capabilities associated with generic drugs are not necessarily useful for developing higher-value, breakthrough drugs (Dunlap-Hinkler, Kotabe, & Mudambi, Reference Dunlap-Hinkler, Kotabe and Mudambi2010). Translating R&D investment into innovation requires both substantial expertise in therapeutic areas and strong communication across disciplines. However, the traditional specialization of Indian pharmaceutical firms – generic drugs based on reverse engineering (Haley & Haley, Reference Haley and Haley2012) – is based on different types of expertise, lower cost, and less extensive need for cross-disciplinary interaction (Henderson, Orsenigo, & Pisano, Reference Henderson, Orsenigo, Pisano, Mowery and Nelson1999). The Indian firms’ more limited prior experience with developing new molecules may delay the translation of R&D investments into new drug formulations, competitive advantage, and export intensity (Tyagi, Mahajan, & Nauriyal, Reference Tyagi, Mahajan and Nauriyal2014). Given these short-term disadvantages related to developing capabilities associated with the new focus on product-related patent protection, we propose:
Proposition 1:
Among Indian pharmaceutical firms, the relationship between internal knowledge sources and international business activity will be weaker post-TRIPS than in the transitional-TRIPS period.
External Knowledge Sourcing
With the TRIPS agreement changing the nature of the IP regime, Indian pharmaceutical firms began to forge commercial alliances with foreign inventors, aimed at sourcing knowledge (Khan & Nasim, Reference Khan and Nasim2016). India's emerging-market status and the technological nature of the industry made external knowledge sourcing particularly important for international competitiveness for several reasons. First, technology accessed solely from within an emerging-market firm, or from domestic sources, may be insufficient to support international success in a rapidly-changing technological environment (Chatterjee & Sahasranamam, Reference Chatterjee and Sahasranamam2018; Li, Chen, & Shapiro, Reference Li, Chen and Shapiro2010). Hence, firms seek external knowledge for developing new innovations (Awate et al., Reference Awate, Larsen and Mudambi2015; Thakur-Wernz & Samant, Reference Thakur-Wernz and Samant2017). Second, because new inventions emerge from a recombinative process using different streams of knowledge (Fleming, Reference Fleming2001), external sources are especially valuable for helping emerging-market firms to develop internationally-exploitable innovations (Wang et al., Reference Wang, Cao, Zhou and Ning2013). Third, external knowledge sourcing offers opportunities for close interaction with foreign partners, enabling emerging-market firms to develop deeper insights into the nature of international markets and build a valuable network of foreign contacts. As emerging-market firms tend to be later internationalizers, these benefits are crucial for increasing export intensity (Gaur & Kumar, Reference Gaur and Kumar2010; Singh & Gaur, Reference Singh and Gaur2013). Finally, external knowledge acquisition can accelerate firms’ innovation processes, facilitating catch-up in both domestic and international markets (Awate, Larsen, & Mudambi, Reference Awate, Larsen and Mudambi2012; Kumaraswamy et al., Reference Kumaraswamy, Mudambi, Saranga and Tripathy2012).
In the absence of effective patent protection (e.g., during the pre- and transitional-TRIPS periods), fear of imitation impedes external knowledge sourcing (Kale, Reference Kale2010). Foreign firms with the potential to offer external knowledge support may be reluctant to share their proprietary know-how, due to concern about reverse engineering of their licensed technologies (Horner, Reference Horner2014). However, stronger patent protection (e.g., in the post-TRIPS period) should promote technological development by encouraging the acquisition of knowledge through market mechanisms such as technology licensing and royalty agreements (Arora, Fosfuri, & Rønde, Reference Arora, Fosfuri and Rønde2013; Smith, Reference Smith2001). Advanced-economy universities and research institutions may also be valuable sources of external knowledge for emerging-market firms (Perri, Scalera, & Mudambi, Reference Perri, Scalera and Mudambi2017), with knowledge transfer facilitated by stronger IP regimes (Papageorgiadis et al., Reference Papageorgiadis, Cross and Alexiou2013). Considering the increased importance of external knowledge sources, and the more conducive conditions for sourcing knowledge in an enhanced IP regime, we propose:
Proposition 2:
Among Indian pharmaceutical firms, the relationship between external knowledge sources and international business activity will be stronger post-TRIPS than in the transitional-TRIPS period.
DISCUSSION
The IP reforms initiated in 1995 changed the Indian pharmaceutical industry's innovation ecosystem substantially (Bouet, Reference Bouet2015; Chittoor & Ray, Reference Chittoor and Ray2007; Chittoor et al., Reference Chittoor, Sarkar, Ray and Aulakh2009). We argue that understanding the impact of this change requires distinguishing between internal and external sources of knowledge (Cassiman & Veugelers, Reference Cassiman and Veugelers2006), and their relative importance for firms’ international activities, in the distinct IP regimes of the transitional-TRIPS and post-TRIPS periods. Kale and Wield (Reference Kale and Wield2008) concluded that Indian pharmaceutical firms adopted an ambidextrous capability development approach (O'Reilly III & Tushman, Reference O'Reilly and Tushman2011), involving both exploitation and exploration, to adapt to the post-1995 IP environment. This entailed entering advanced markets (US and Europe), exploiting existing process-related R&D skills, and investing in explorative capability development for R&D aimed at innovation. Bouet (Reference Bouet2015) found that, while necessary for innovation, TRIPS compliance is not sufficient for increasing the value of exports. We suggest that Indian pharmaceutical firms’ explorative capabilities may be more dependent on the market for external knowledge that was created by TRIPS compliance, rather than on internal knowledge generated through R&D. In addition, during the transitional-TRIPS period, Indian firms would likely have had limited access to high-quality external knowledge.[Footnote 6]
However, the historical development of the Indian pharmaceutical industry complicates the story. The strong pre-TRIPS focus on generics, reverse engineering, and government dependence meant less focus on developing breakthrough drugs, relative to many foreign competitors. The Indian pharmaceutical firms’ relatively low investments in R&D may have been insufficient for transforming internally-developed knowledge into the types of innovations needed to increase exports, especially for higher-value drugs. Indian pharmaceutical firms did increase their R&D investments substantially after 1995. Ranbaxy's R&D spending rose from INR 36 crores (~USD 11 million) in 1994–1995 to INR 486 crores (~USD 112 million) in 2005. Similarly, Dr. Reddy's Labs’ increased its R&D spending from INR 13 crores (~USD 3 million) in 1999 to 437 crores (~USD 101 million) in 2008. However, this spending is still quite low, relative to established global pharmaceutical firms (Bedi, Bedi, & Sooch, Reference Bedi, Bedi and Sooch2013), and suggests that the Indian pharmaceutical industry may have stalled in a consolidation phase, moving slowly towards a mature phase in which R&D investments are likely to deliver substantial returns (Kumaraswamy et al., Reference Kumaraswamy, Mudambi, Saranga and Tripathy2012).
A macroeconomic consideration also complicates the interplay between R&D and international activities, as the post-TRIPS period is characterized by increased regulatory barriers. A global study of 450 new chemical entities approved by the US Food and Drug Administration (USFDA) found that substantially fewer drugs were approved during 2005–2010, relative to 1996–2004, despite the doubling of R&D expenditure (Grogan, Reference Grogan2011). Given the stringent USFDA approval process, Indian firms, with their short-term focus and reverse engineering skills, may have made the strategic choice to continue producing generic and incrementally-modified drugs, rather than chasing innovations aimed at developing new chemical entities.
Considering the innovation ecosystem, the presence of more foreign multinationals in India, post-TRIPS, will have created greater competition for R&D talent (Chatterjee & Sahasranamam, Reference Chatterjee and Sahasranamam2018), with the lower concentration of such talent in domestic firms potentially decreasing their innovative capabilities and subsequent international competitiveness. Stronger IP protection also incentivizes individuals to capitalize on their intellectual capital through new ventures, rather than within established firms (Autio & Acs, Reference Autio and Acs2010); this is consistent with India's substantial increase in general entrepreneurship rates during the post-TRIPS period (Sahasranamam & Sud, Reference Sahasranamam and Sud2016).
Given opportunities for short-term gains, Indian pharmaceutical firms appear to have avoided competing with major global rivals on the basis of R&D-led innovations (Abrol, Reference Abrol2004). While the industry's R&D investment increased substantially during 1995–2014, the largest growth occurred during 2000–2005, just before, and at the start of, the product-patent regime's coming into effect. Indian firms may have raced to accumulate reverse-engineering-based patents before the restrictions of the TRIPS agreement (Haley & Haley, Reference Haley and Haley2012). Post-TRIPS, growth in R&D investments has been much lower (even negative in some years). During the same period, however, the number of innovation-driven joint ventures between Indian and western pharmaceutical firms increased (Haley & Haley, Reference Haley and Haley2012), suggesting that Indian firms have relied more on technology transfer and external knowledge sourced from foreign firms, rather than internal R&D. This is consistent with Abrol's (Reference Abrol2004) argument that most Indian pharmaceutical firms would likely be junior partners to global firms during the product-patent regime.
All of this offers directions for future research. First, our propositions can be developed into testable hypotheses, using fine-grained measures of international business activity that consider both breadth (e.g., accounting for countries from which the export earnings are received) and depth (e.g., accounting for the relative importance of each market). It would also be interesting to explore the role of knowledge sourcing strategies on higher-commitment, equity-based entry modes.
Second, R&D investments require time to translate into measurable outcomes. A mix of qualitative and quantitative methods may be useful for developing an in-depth understanding of the effects that process-level improvements from internal R&D have had in Indian pharmaceutical firms following the transition to a product-patent regime. Past research suggests that high-technology firms tend to rely on internal knowledge for areas in which they already have strengths and on external sources to supplement areas of weakness (Dunlap et al., Reference Dunlap, McDonough, Mudambi and Swift2016), emphasizing the importance of exploring, simultaneously, the process-level changes related to internal and external knowledge sourcing.
Finally, further research is needed to understand the various mechanisms that Indian pharmaceutical firms employed to overcome weak institutional support during the transitional-TRIPS period. Zhao (Reference Zhao2006) found that Chinese firms used internal organizations to substitute for inadequate external institutions when conducting R&D. Exploring similar research questions in other emerging markets will offer a comparative basis. It would also be interesting to investigate how changes in the innovation ecosystem have influenced knowledge sourcing strategies in two other industries in which Indian firms have earned global recognition: automotive and information technology services (Chatterjee & Sahasranamam, Reference Chatterjee and Sahasranamam2018).
CONCLUSION
To conclude, we develop theoretical arguments regarding the differential effects of the IP regime changes of the transitional- and post-TRIPS periods with respect to firm-level knowledge sourcing strategies in Indian pharmaceutical firms. Integrating intellectual property arguments with contextually-embedded aspects of the innovation ecosystem, we conjecture that TRIPS compliance seems to have led these firms to rely more on the market for external knowledge, rather than on internal knowledge, in the quest to increase their international activities, especially exporting. This implies that the change in the innovation ecosystem created by the IP regime shift has had very different effects with respect to internal and external knowledge sourcing strategies in this key Indian industry.
