Innovation & Technology
The Innovation Race: How Enterprise Size & Policy Shape India’s Pharmaceutical Future
A Tale of Transformation
Picture India’s pharmaceutical industry in the early 1990s – a protected market where thousands of small companies thrived by making low-cost generic drugs. Then came 1991, bringing winds of change through economic liberalization. The industry faced a stark choice: innovate or fade away. This is the story of how Indian pharma companies responded to this challenge, and what their experience teaches us about innovation in emerging markets.
The Size Puzzle
Like a small startup competing against tech giants, size matters immensely in pharmaceutical innovation. The study reveals a fascinating pattern:
- Small Companies (<Rs 20 crore): Make up nearly half the industry but struggle to invest in R&D
- Medium Companies (Rs 20-700 crore): Show the most dramatic improvement in R&D intensity
- Large Companies (>Rs 700 crore): Initially lead in R&D but hit diminishing returns
The magic number? Rs 710 crore – that’s when a company reaches optimal scale for R&D investment. Below this, companies struggle to fund research; above it, bureaucracy begins to stifle innovation.
Three Surprising Discoveries
- The Liberalization Effect: Contrary to fears, opening up the economy actually pushed Indian companies to innovate more, not less. R&D spending jumped significantly after 1991.
- The Foreign Connection: Foreign companies, despite their global resources, invested less in local R&D than Indian firms. The study found domestic companies spent 2.6% of sales on R&D versus 0.74% for multinational corporations.
- The Export Advantage: Companies that ventured into international markets through exports or foreign investments showed higher innovation rates. Global exposure seemed to fuel the drive to innovate.
The Innovation Recipe
The study reveals five key ingredients that make a pharmaceutical company more likely to innovate:
- Sufficient size (optimal around Rs 710 crore)
- Export market presence
- Strong brands and intangible assets
- Healthy profit margins
- Accumulated experience (older firms generally innovate more)
Looking Ahead: Policy Implications
For policymakers hoping to boost pharmaceutical innovation, the study suggests a three-pronged approach:
- Support Smart Growth: Help small companies reach the optimal size through clusters and collaborations
- Enable Global Connections: Make it easier for companies to export and invest abroad
- Protect the Small: Create special R&D support schemes for small companies that keep medicines affordable
The Human Side
Behind these numbers lies a human story: India’s journey from being dependent on Western medicines to becoming the “pharmacy of the world.” It’s about scientists in modest labs finding clever ways to make life-saving drugs affordable, and entrepreneurs building global companies from scratch.
The Bottom Line
The study teaches us that in pharmaceutical innovation, bigger isn’t always better – it’s about finding the right size. More importantly, it shows that with the right policies, developing countries can build innovative industries that serve both commercial and social goals.
What’s your take on this transformation? How can other industries learn from the pharmaceutical sector’s experience with innovation?
Academic Abstract:
In the present paper, an attempt is made to empirically verify the impact of economic liberalisation on the R&D hehaviour of Indian pharmaceutical firms, controlling for the effects of several firm specific characteristics including firm size. The results from the Tobit analysis for a sample of firms over the period 1989-90 to 2000-01 indicate that competitive pressure generated by liberalisation has worked effectively in pushing Indian pharmaceutical firms into R&D activity. A host of firm characteristics like age, size, profitability, intangible assets, export orientation and outward foreign direct investment of the firm are also found to be important determinants of innovative activity in the industry. The study suggest several policy measures to further indigenous technological efforts of pharmaceutical firms, which include removing obstacles that inhibit outward orientation of firms, providing special scheme for small size firms in the overall technology policy for the industry, intensifying collaborative research efforts between private sectors and government research institution, and utilising flexibilities in the TRIMs agreements to persuade foreign firms to relocate their R&D units into the country.
Learn More:
Full citation: Pradhan, Jaya Prakash (2002), ‘Liberalization, Firm Size and R&D performance: A Firm Level Study of Indian Pharmaceutical Industry’, Journal of Indian School of Political Economy, 14(4), pp. 647–666, Publisher: Indian School of Political Economy.
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