TRIPs impact on R&D: Facts, facets and implications for Indian pharma industry
The post-TRIPs scenario offers a viable option in terms of
partnerships with MNCs, which indigenous firms need to capitalise upon, say
Mohd. Arif Khan, Imran Parvez, Anand Sharma and Parikshit Bansal
The Trade Related aspects of Intellectual Property Rights (TRIPs) was the outcome
of a very important treaty called General Agreement on Tariffs and Trade (GATT).
GATT for the first time after World War II, in 1947 brought together several
countries (23) including India, on a common platform with the sole aim of reducing
barriers to trade, so that polarisation could be prevented and world economy
made stronger. Different rounds of GATT were quite successful in removing trade
barriers and promoting world trade.
To overcome the fears of developed countries that their goods if sold in developing
countries would be illegally copied, the agreement on TRIPs was signed under
the 8th round of GATT also known as the Uruguay Round under which
intellectual property rights were brought within the scope of GATT for the first
Under TRIPs, rules for protection of intellectual property were made uniform
in all member countries. Since rules for IP protection were governed by national
laws, these could be changed only by legislation, which obviously was a difficult
task for governments.
Accordingly, a ten-year transition period was allowed to all countries to make
their laws compliant with TRIPs agreement. India, too, was a signatory to TRIPs
and this period ended on December 31, 2004. What will be the post TRIPs R&D
scenario? Will technology transfer be facilitated? Will TRIPs encourage or hinder
growth of domestic pharma firms? What are the facts, facets and implications?
These are some of the questions which the article attempts to address.
TRIPs and R&D
TRIPs establish minimum standards of protection for a wide variety of intellectual
property such as patents and industrial designs. It is widely celebrated by
industrialised countries e.g. USA as being the instrument with which to stimulate
innovation and inventive activity. Apart from its many facets pertaining to
protection of intellectual property, it also allows direct investment in domestic
firms, by multinationals.
Foreign direct investment (FDI) is a necessity in developing countries simply
because most of these countries do not have the capital to fund expensive innovations
on their own. FDI has to accrue to the developing countries in order to promote
According to Article 7 of the TRIPs Agreement, The protection and
enforcement of intellectual property rights should contribute to the promotion
of technological innovation and to the transfer and dissemination of technology,
to the mutual advantage of producers and users of technological knowledge and
in a manner conducive to social and economic welfare, and to a balance of rights
and obligations. This is what should happen if the substantive provisions
of the TRIPs Agreement are followed.
Transfer of technology is another aspect of innovation that TRIPs claims to
stimulate. This is also important in creating an environment conducive to innovation
because without new technologies being made available to developing countries,
they will simply cease to compete effectively on global markets. They will also
be handicapped when trying to develop cutting edge technology with what may
be extremely primitive tools.
Introduction of strong IPR places pharmaceutical multinationals advantageously
for exploiting knowledge diffusion and integrating the local capabilities of
a developing country like India. Though the global pharmaceutical market is
accelerated with the vast majority of market dominated by developed countries
of Europe, Japan, United States but African, Indian and Australasian producers
account now for just 4.4 per cent of total world production.
Technology transfer in post-TRIPs scenario
A number of factors have come into play following the TRIPs agreement, which
have an important bearing on not only R&D, but also technology transfer
for domestic firms. These factors are briefly discussed below:
Enhanced freedom to MNCs: In post TRIPs period pharmaceutical multinationals
have certainly far more freedom to operate in developing countries. The link
between strong patent regime and technology transfer is not easy to determine.
This is because aspect of weak capacity of the buyer in a developing country
to absorb technology can supersede the availability of strong patent protection.
However, strength of Indian pharma firms coupled with the technological superiority
of MNCs can lead to mutually beneficial partnerships. Tie-ups of Orchid Pharma
with a number of MNCs is a positive outcome in this regard. Also, greater freedom
definitely encourages faster techno-economic evaluation and newer business strategies.
FDI as an instrument of control: FDI in pharmaceuticals functions for the benefit
of merger, acquisition and takeover so as to facilitate parent firms to increase
their control over operations located in India. Stronger control over investment
is the main motive driver of merger and acquisition activity for pharmaceutical
MNCs in India.
Technology acquisition options: MNC investing in pharmaceutical sector prefer
green field investment to joint venture. However domestic pharmaceutical firms
can improve considerably their technical capabilities by going in for technology
buying rather than indigenous technology generation, which can take long.
Contract manufacturing: India today provides competent outsourcing opportunities
to MNCs to subcontract manufacture of bulk drugs in short run. This segment
can be best exploited for industrial upgrading. Current bulk outsourcing market
is of the order of $14 billion and will be touching $ 27 billion in 2007.
Focus on selective R&D: Only a handful of MNCs currently conduct R&D
in India and strengthening of IPR laws is unlikely to change this situation.
The R&D intensity of MNCs is 0.74 per cent, which is three, and half times
lower than the domestic firms which is 2.6 per cent. Further, R&D which
is being taken by MNCs, emphasises more on formulation R&D compared to bulk
There lies a more hard fact that acceptance of TRIPs agreement has not led the
MNCs to make higher R&D investments for the neglected diseases.
More benefits for well-established firms: Big pharmaceutical firms are expected
to gain most from the introduction of strong patent regime than small and medium-sized
domestic firms, which hardly invest in research. Research and patenting in pharmaceutical
multinational companies, is essentially driven by the motive of obtaining a
high level of rent incomes out of existing patents and demolishing competition
through new and innovative patents.
The post-TRIPs scenario has important implications for the Indian pharma industry.
In fact, the use of strategy of strong IPRs is one of the most profound institutional
changes that the Indian policymakers can expect to come in the way of knowledge
diffusion. It is unlikely that the developed world will invest more in developing
countries now that competition is considerably reduced.
The decisions are likely to be based on practical considerations why
make massive capital expenditure on R&D when the relative cheap method of
exporting to developing countries will do the job? MNCs are most likely to benefit
from economies of scale if they increase the size and capacity of existing plants
and export goods to developing countries. This strongly suggests that in the
post-TRIPS scenario less FDI is likely to be spent on R&D, technology transfer
or improving production facilities in developing countries and major benefits
are unlikely to accrue to domestic firms unless they aggressively focus on strengthening
their own technological capabilities.
Based on the above, some recommendation can be made.
Firstly, need to focus on strategic alliances and partnerships with MNCs as
a tool for strengthening technological capabilities. The post-TRIPs scenario
offers a viable option in terms of partnerships with MNCs, which indigenous
firms need to capitalise upon. The excellent pool of trained human resources,
infrastructure for bulk drugs etc are strengths that can pave the way for mutually
Secondly, tapping the existing R&D infrastructure of public funded academic
and research institutes already existing in the country. R&D is not cheap.
It involves a lot of investment, without any guarantee of return.
This is one of the prime reasons why most of the Indian firms feel shy of locking
up precious financial resources in R&D and instead adopt the path of producing
tried and tested products than new and innovative ones. But without
R&D, how can there be innovation? How can there be global competitiveness?
A low-cost and practically viable option is to go in for technology sourcing
from research institutes and also sponsor innovation by way of industry
funded research projects, contract research, industrial scholarships in new
and challenging areas and a host of other activities in which industry and public
funded institutes work together and emerge as winners.
Mohd. Arif Khan, Imran Parvez and Anand Sharma are with department
of pharmaceutical management, while Parikshit Bansal
(email: email@example.com) is with IPR cell at NIPER, Punjab