Global Competition Versus Regional Interests: FDI and Pharmaceuticals in India

• Author: William O. Duperon - E. Mine Cinar
• Position: Loyola University Chicago
• Pages: 181-200

Journal of International Commercial Law and Technology Vol. 5, I ssue 4 (2010)

181

Global Competition Versus Regional Interests:

FDI and Pharmaceuticals in India

William O. Duperon

E. Mine Cinar*

Loyola University Chicago

Communicating co-author: Mine Cinar at mcinar@luc.edu

Abstract. This essay explores the economic dynamics of global competition versus regional

interests corresponding to the treatment of intellectual property rights (IPRs) in India and the relative

effects of such policies on its domestic pharmaceutical industry. The scope of considerations are

formally limited to variables implicative of the transnational flow of capital within the

pharmaceuticals industry, most specifically those pertaining to foreign direct investment (FDI).

India, as the second most populated country in the world, has been the focus of much discussion

regarding patent violations in its pharmaceutical industry. International pressures and membership

covenants of th e World Trade Organization (WTO) have succeeded in structuring policy such that

process patents are n ow legitimized. This has brought dilemmas between global and regional

conflicts of in terest to open discussion, and has become a pressing political agenda among various

industry stakeholders. This paper discusses the history of In dian internal protection in the

pharmaceutical industry and suggests ways in which India may continue to benefit when regulatory

barriers are reduced and global trade covenants are abided. The essay first examines trends in

global FDI and Knowledge Process Outsourcing (KPO). It highlights changes t o Indian policy, and

subsequently discusses other matters associated with the protection of IPRs including parallel

imports, price discrimination, and corruption. Lastly, suggestions are made for viable ways of

enabling India to comply with WTO mandates for participation in th e global marketplace, while

concurrently attending to its domestic needs as well.

1 Introduction

This essay explores the economic dynamics of global competition versus regional interests corresponding to the

treatment of intellectual property rights (IPRs) in India and the relative effects of such policies on its domestic

pharmaceutical industry. The scopes of considerations are formally limited to variables implicative of the

transnational flow of capital within the pharmaceuticals industry, most sp ecifically those pertaining to foreign

direct investment (FDI).

India, as the second most populated country in the world, has been the focus of much discussion regarding

patent violations in its pharmaceutical industry. Throughout much of th e industry’s history, neither

pharmaceutical processes nor end products (such as a pill) patents have been considered legally valid within the

internal legal structure of In dia. International pressures and membership covenants of th e World Trade

Organization (WTO) have succeeded in structuring policy such that process patents are now legitimized. In recent

years, end product patents h ave also found legitimacy in Indian rule of law. This has brought dilemmas between

global and regional conflicts of interest to open discussion, and has become a pressing political agenda among

various industry stakeholders.

This paper discusses the history of Indian internal protection in the pharmaceutical industry and suggests

ways in which India may continue to benefit when regulatory barri ers are r educed and global trade covenants are

abided. The structure of this essay is arranged as follows: it first examines trends in global FDI and Knowledge

Process Outsourcing (KPO). It highlights changes to Indian policy, and subsequently discusses other matters

associated with the protection of IPRs including parallel imports, price discrimination, and corruption. Lastly,

suggestions are made for viable ways of ena bling India to comply with WTO mandates for participation in the

global marketplace, while concurrently attending to its domestic needs as well.

* Of Loyola University Chicago, we thank Pooja Shah for her pertinent comments on an earlier draft of this paper and we are

grateful to Dr. Pallav Gupta, MD, MBA, for important comments reflecting viewpoints of Indian healthcare providers.

Journal of International Commercial Law and Technology Vol. 5, I ssue 4 (2010)

182

2. World Pharmaceutical Investments, TRIPS, and FDI

The role of pharmaceutical tra de in the global economy has increased substantially in recent years. Facilitated in

part by advancing technology and the infinite need for cures and treatment options, world pharmaceutical

industries a re growing rapidly while becoming more globalized. According to th e World Trade Organization

(WTO) (2009), the world trade volume for pharmaceutical commodities increased from approximately USD

247.991 billion in 2004, to USD 426.672 billion during 2008 [See Figure 1A].1

Figure 1A Merchandise Trade by Commodity

Units in US Dollars at Current Prices (Millions)

Reporter

Flow

Indicator

Partner

2

004

2005

2006

2007

2008

World

Exports

Pharmaceuticals

World

247991

274419

312731

372457

426672

World

Imports

Pharmaceuticals

World

251001

277146

313091

372457

426672

China

Exports

Pharmaceuticals

World

3234

3778

4486

6000

8070

China

Imports

Pharmaceuti

cals

World

1899

2309

2715

3889

5508

India

Exports

Pharmaceuticals

World

2218

2713

3436

4523

5766

India

Imports

Pharmaceuticals

World

689

970

1180

1606

1866

United States

Exports

Pharmaceuticals

World

23980

25946

29265

33610

38339

United States

Imports

Pharmaceuticals

World

35371

39323

46222

53954

59868

Source: World Trade Organization: http://stat.wto.org/Home/WSDBHome.aspx

(Table manually created using statistics database.)

Consequential of such significant growth rates, many markets in which pharmaceutical products are

developed and traded are affected by the evolving industry. Factors such as infrastructure, labour force

characteristics, the need for capital, the number of firms in a given market, competition levels, and the prices of

consumer products are only a small number of the considerations implicated by th e growing industry. Naturally,

such factors impact the behaviour of firms in the industry a s companies seek new ways to adapt to a changing

environment and remain competitive. As a result, many countries with markets affected by the trading of

pharmaceuticals have a necessary concern for how factors of industry growth impact their domestic economies.

On one hand, many nations are quite receptive to th e introduction of multinational pharmaceutical firms as

a means of facilitating the flow of capital and luring foreign direct investment (FDI) into domestic markets.

Seeking benefits often inherent of FDI such as increased efficiency in resource allocation, knowledge and

technology transfers, or infrastructural improvements, developing nations have a strong desire, in this context, to

maintain capital inflows for the cultivation of domestic in dustry.2 On the other hand, motivated efforts to draw in

FDI are often found to be associated with high drug prices in relative markets and result in an inadequate provision

of medicines to poorer demographics. This means there is often an evident trade-off between the ability of nations

to attract FDI and moderate the price of drugs to levels conducive for widespread distribution. Furthermore, there

are additional concerns for the impact of FDI on indigenous industries relative to the displacement of domestically

held equity as foreign firms enter the marketplace.

In view of such concerns regarding FDI, many nations’ policies are reflective of attempts to attract capital

to the degree that it is advantageous to domestic industries, yet restrain the inflow of FDI from reaching the extent

that it becomes detrimental to domestic industry gr owth and h ealthcare a s a result of higher competition and drug

prices. For instance, if FDI is injected into a given industry to the extent that foreign firms hold the majority of

equity in that industry, then the relative growth of domestic companies may be hindered by the inability to

compete in said market.3 As a result, many countries’ policies seem to exhibit an inward focus, reflective of the

attempt to safeguard national interests through the moderation of foreign capital in local trade and production,

1 World Trade Organization, International Trade Statistics, Annual Trade Statistics, Statistics Database, World Trade

Organization (Geneva: World Trade Organization, 2009).

2 Susan E. Feinberg and Sumit K. Majumdar, "Technology Spillovers from Foreign Direct Investment in the Indian

Pharmaceutical Industry," Journal of International Business Studies (Palgrave Macmillan Journals) 32, no. 3 (3rd Qtr. 2001):

421-437.

3 This argument assumes that all different sizes of domestic firms will suffer the same fate with FDI. However, our

observations show that large and efficient local firms go into joint ventures with foreign partners and actually benefit from FDI.

Less efficient, small sized, and small scale economy firms do suffer.