Title: The impact of patents on innovation, technology transfer and health: a pre- and post-TRIPs analysis of India’s pharmaceutical industry
Author:
Rory Horner
PhD Candidate
Graduate School of Geography
ClarkUniversity
950 Main Street
Worcester, MA01610-1477, USA
Email:
New Political Economy
Accepted: March 2013.
Notes:The National Science Foundation’s Geography and Regional Science Program’s Doctoral DissertationResearch Improvement Grant (no. 1103231) and the Association of American Geographers’ Economic GeographySpecialty Group Graduate Student Research Award 2012 are gratefully acknowledged for supporting thefieldwork on which this paper is based. The comments of Colin Hay, the journal referees and editorial board,Yuko Aoyama, James T. Murphy and Seth Schindler are also gratefully acknowledged. The usual disclaimersapply.
The impact of patents on innovation, technology transfer and health: a pre- and post-TRIPs analysis of India’s pharmaceutical industry
Abstract
The debate surrounding the World Trade Organisation’s Trade-Related Aspects of Intellectual Property Rights (TRIPs) Agreement indicates that patents matter for development. Yet literature on the geography of knowledge transfer shows that knowledge is spatially sticky, suggesting that the impact of patents can be exaggerated. Using interview evidence, this paper explores how Indian pharmaceutical firms have responded to changes in patent law, including the introduction of more extensive patent protection in 2005 as a condition of TRIPs. A regime of limited patent protection for over three decades prior to TRIPs facilitated informal knowledge transfer and the emergence of a pharmaceutical industry with significant domestic capabilities. Contrary to some expectations, the Indian pharmaceutical industry has continued to grow post-TRIPs, with large domestic firms becoming involved in more formal technology transfer as part of an increasingly collaborative relationship withmultinationals. This trend is also driven by a focus on the markets of developed countries, raising questions for the future sustainability of India’s low-priced medicines. While changes in patent law can facilitate or inhibit a variety of aspects of development, the adaptation of the Indian pharmaceutical industry suggests that their impact must be related to the broader institutional setting, particularly the underlying domestic capabilities.
- Introduction
Since the late 1980s, the lead up to, formation and subsequent implementation of, the Trade-Related Aspects of Intellectual Property Rights (TRIPs) Agreementhas generated considerable debateover the impact of patent regulations on development (e.g. Drahos with Braithwaite 2003; Sell and Prakash 2004; Muzaka 2009).After a long period of lobbying, particularly driven by the United States and the pharmaceutical industry, TRIPs became a condition of membership of the World Trade Organisation (WTO) on its formation in 1994. Proponents, largely in the global North, argued that the agreement would lead to increased innovation and technology transfer, thus promoting economic growth in developing countries (Ryan 1998). But this interpretation was strongly contested, particularly in the global South. In 1988, the South Commission on the Uruguay Round forecast that TRIPs would “severely inhibit technical change and act as a major barrier to the development of the third world”, while Patel (1989) argued it might be a “disaster for the south”.Kumar later suggested that TRIPscould significantly augment North-South inequalities, “choking the knowledge spillovers from industrialized countries to developing countries” (2003: 209).A variety of other scholars have also critiqued TRIPs, citing itas an example of “institutional monocropping” (Evans 2004), a “simple tax” on poor countries’ use of knowledge (Bhagwati 2002), and “like telling them [i.e. developing countries] that the only way to develop is to become developed” (Rodrik 2006: 980).The debate has been particularly heated around the pharmaceutical industry, where knowledge is highly codified after a new drug is introduced (Muzaka 2009).Arguments about TRIPs have consequently extended beyond economic development to public health.
The Indian patent system, particularly that relating to pharmaceuticals, has held a prominent role in the debate over the impact of patents on development. Widely credited (e.g. Chaudhuri 2005; Kale and Little 2007; Chittooret al. 2008; Athreyeet al. 2009) as crucialto the expansion of what is now the third largest such industry in the world (Maira Committee 2011), the absence of product patent protection from 1972 until 2005 raised the ire of the global pharmaceutical industry.The Indian patent system was even cited as “the most direct motivation for US efforts in the Uruguay Round negotiations relating to patents” (PhRMA 1999, cited in Roemer-Mahler 2013: 131).In 2005, following the 10 year adjustment period allowed after joining the WTO, and in line with the TRIPs Agreement, product patents were reintroduced to India as part of a substantial revision of the patent law. By then the industry had experienced such expansion that it had come to be known as the “pharmacy of the developing world”. With a reputation for cheap drugs, its fortunes had significant implications for access to medicines and for public health generally. The change in India’s patent law in 2005 was thus subject to global interest and debate, being subject to an editorial in The New York Times which noted that “seldom has India's Parliament considered anything of such global import” (March 5 2005).Notwithstanding this radical regulatory change, the industry has continued to grow, raising questions aboutthe exact impact of patents on economic development and on public health.
Following a reviewofthe impact of patents on development, I consider three main areas of the debate – innovation, technology transfer and health.Ifirst exploreliterature onthe geography of capabilities and knowledge transfer to demonstrate the different actors involved in, and the variety offormal and informal mechanisms for, innovation and technology transfer. With the aid of interviews with more than 80 stakeholders, I then reviewthe impact of patents on the pharmaceutical industry in India, both pre- and post-TRIPs. Finally, I considerthe implications of the Indian pharmaceutical experience for the broader debate on patents and development.
2.A contested issue: patents and development
Historically, the debate on patents and development hasrevolved aroundinnovation and technology transfer.The objectives of the TRIPs Agreementprovide that“the protection and enforcement of intellectual property rights should contribute to the promotion of technological innovation and to the transfer and dissemination of technology” (WTO 1994: Article 7). Public health is a crucial further area of the debate, withthe 2001 Doha Declaration on the TRIPs Agreement and Public Health stating that the agreement “does not and should not prevent Members from taking measures to protect public health" (WTO 2001: 1). At that time, the addition of public health to the debates around IP was a change from the established focus on innovation and technology transfer (Shadlen 2004).
Proponents of the TRIPs Agreement have argued that,by creating an incentive to innovate by establishing an exclusive right to sell through privatising IP, stronger patents would benefit developing countries on several fronts (Ryan 1998;Maskus 2000).Most vividly expressed by Abraham Lincoln (1859), who stated that "the patent system added the fuel of interest to the fire of genius", this argument has continued toshape the US perspective on IP protection both domesticallyand, during the TRIPs negotiations, internationally (Khan and Sokoloff2001). Through their influence on technology transfer via foreign direct investment (FDI) and licensing, patents may also impact oneconomic development (Chang 2001; Kumar 2003; Fink and Maskus 2005). By lowering the occurrence of imitation and therefore reducing transaction costs, a stronger IP protection is likely to lead to increased international licensing of technology (Fink and Maskus 2005). In the mid-1990s, ahighly-cited and influential survey found that for high technology industries the strength of the IP protectionhas beena major determinant of US corporations’ willingness to invest in joint ventures (Mansfield 1994). During the late 1990s and early 2000s, the EU and United States put pressure on many developing countries by claiming they would lose FDIif they provided flexibilities in patent law, such as by legislating for compulsory licenses (D’Adesky 2004: 67).
Particularly leading up to its final implementation in most developing countries in 2005,the TRIPs Agreementattracted persistent criticism with many questions being asked about the learningbenefits of extensive patent protectionfor developing countries (e.g. Chang 2001; Bhagwati 2002). Technological learning is crucial in developing economies wherethe emphasis has usually been on the absorption and incremental improvement of already existing technologies (Viotti 2001).In East Asia, for example, weak IP protection has played a role in encouraging learning (Kumar 2003). By choking off learning through imitation, strengthening IP protection could have a negative effect on R&Das it is unlikely to stimulate domestic innovation if few innovative capabilities are present (Lall 2003). Moreover, in relation to technology transfer, the impact of patent protection on FDI is far from clear. With extensive protection, firms may switch to other forms of market entry such as licensing (Rai 2008), in which case FDI may not necessarily increase. Even with low levels of IP protection, many countries (for example, Brazil and Thailand in the 1970s and 1980s, and China more recently) have received considerable quantities of FDI. Brazil and Italy even attracted sizable FDI in the pharmaceutical industry without product patent protection (Correa 2000; Kumar 2003).
In addition to innovation and technology transfer, developing countries were offered the prospect of public health benefits through the greater availability of medicines, particularly for neglected diseases. With a 10/90 gap in health research, whereby 90% of the research is targeted towards diseases affecting 10% of the population (Trouiller et al. 2002), theextension of IP rights to developing countries was suggested as holding the potential to address this global health problem. The World Development Report 1991 has observed that “intellectual property protection is most critical for areas in which industrializing countries would benefit from industrial country research, such as the prevention of tropical diseases” (1991: 92). However, where there is little market demand, a strong patent regime may not act as an incentive for public health research (Stiglitz 2009). Moreover, increased patent protection may actually be detrimental to public health, through leading to higher prices of drugs and a loss of consumer welfare (Kumar 2003). Prices of drugs offpatent are usually substantially lower, provided there is generic competition (Commission on Intellectual Property Rights 2002). Although just one factor in access to medicines (others being the rational selection of medicines, the sustainable financing of healthcare and reliable health and supply systems (Gray 2004), pricing is particularly important in developing countries with a lack of health insurance or public supply and where an estimated 50-90% of spending on medicines can be by patients themselves (Quick 2003).
With very contrasting arguments, considerable uncertainty still surrounds the precise impact of patents on development.The historical record shows that, with few exceptions (e.g. Shadlen 2012), countries with greater levels of economic development tend to have a higher level of IP protection (Chang 2001), yet the causality in this relationship is far from clear. As with much of the literature on economic development which has struggled to explain how and when institutions matter (Faroleet al. 2011: 15), the specific impact of patents needs to be considered at several scales of organisation. In seeking to address this issue, I draw on some literature on the geography of knowledge transfer, which questions an uncritical acceptance of the mobility of knowledge in the TRIPs debate, instead articulating other constraints operating even without patents. Such literature also provides insights into the processes of innovation and knowledge transfer, and how they are influenced by patents.
3. Geography of knowledge transfer, capabilities and the influence of patents
As the idea and discourse of the knowledge economy took hold in the global North from the 1970s onwards (Harris 2001; Carlaw et al. 2006), the geographical mobility of knowledge and the legal environment surrounding its appropriation,became a key concern. Proponents of the TRIPs agreement have observed that “because intellectual property is intangible, and can be transported easily across national boundaries, international agreement on the enforcement of these rights is critical to its protection” (WDR 2005: 84).Embedded in this comment is an acceptance of the ‘death of geography’ argument that improved transport and communication technologies will facilitate a more complete geographical dispersal of economic activity around the world. Yet, much knowledge is tacit, defying articulation, and therefore spatially sticky (Morgan 2004; Malecki 2010; Howells 2012). A considerable degree of knowledge transfer takes place locally through face-to-face, often informal, interaction (Bathelt et al. 2004). Even codified knowledge, which is potentially mobile, is normally used in conjunction with tacit knowledge and is most often transferred only locally (Gertler2003).Following the pioneering use of patents as the “paper trail of innovation” (Jaffe et al. 1993), citation analysis has measured innovation and knowledge transfer, mostly in a global North institutional environment, and has demonstrated that the ‘spatial bounding’ of codified knowledge is especially marked at the cross-border, country and regional levelsof transfer (Fischer et al. 2009, Perkins and Neumayer 2011).
Further constraints on the mobility of knowledge arise fromvariations in absorptive capacity – the ability to “recognise the value of new, external information, assimilate it, and apply it to commercial ends” (Cohen and Levinthal 1990: 128).While international differences in technological capabilities have been notedin the debate over TRIPs (Lall 2003;Cimoliet al. 2011), sub-national variations are present in the role of different actors in both imitative and innovative learning(e.g. Malmberg and Maskell 2002; Batheltet al. 2004; Cooke 2005). As multinational companies (MNCs) tend to introduce ‘static’ capabilities, in contrast to the more dynamic, learning activities of domestic firms (Cimoli et al. 2008),regulating foreign investment can complementthe promotion of domestic capabilities in developing countries (Chang 2004).Nationally-formulated industrial policies, such as assisting public-research institutions, creating state-owned firms and selecting privately-owned firms (Cimoliet al.2011: 11), may produce an appropriate environment for those domestic firms and regions with the capability to use, and to access, external knowledge. Whereas lead firms, or gatekeepers, with a high level of absorptive capacity as well as relational capital, access information arriving through ‘pipelines’ and apply it to commercial ends (Batheltet al. 2004; Morrison 2008), firms and regions with weak absorptive capacity have difficulty in accessing external knowledge and are also less likely to be able to invest in innovative capability.
Mechanisms used by firms to access knowledge includethe formal conduits of licensing and FDI, and such codified sources asbooks, journals and the Internet. In addition, much embodied knowledge can be accessed by such mechanisms as developing communities of practice (Amin and Cohendet 2005), transnational communities (Saxenian and Hsu 2001), and hiring workers with experience abroad (Gertler and Levitte 2005). Although usually applied for understanding the geography of innovation in the global North (Howells 2002), these mechanisms of knowledge transferinevitablyplay a crucial role, especially inthe sourcing of knowledge for imitation (as well as innovation), in the global South. While patent law may not directly influence all of these mechanisms, some of which are informal and difficult to statistically analyse, it does shape the legal environment surrounding the use of this knowledge.
Theconsiderations outlined above suggest that the impact of patents on innovation and technology transfer reaches beyond the debate surrounding the TRIPs Agreement to the broader context of the codifiability of knowledge and national capabilities (cf. Cimoliet al. 2011).In addition, atthelevel of firms and regions,the role of patents can be related toindividual actors and a wide variety of mechanisms of knowledge transfer. In relation to public health,thekey impact of patents is likely to be on the prices of medicines. Drawing on these considerations, I now appraisethe influence of patents on the development of India’s pharmaceutical industry as the intellectual property regime shifted with the introduction of TRIPs. Debates on patents have tended to split on macro-level lines between the global North and South.This study examines the changing role of patents among individual industries and countries, particularly at the firm level, an aspect that has received less attention (Fink and Maskus 2005: 9).
3.1 Research methods and context
The Indian pharmaceutical industry is the third largest in the world today in volume and 14th largest in value terms, comprising approximately 10% of the global pharmaceutical market in volume and 1.5% in value, and is by far the largest such industry in the global South (Maira Committee 2011).The output of the industry rose from 3,500 Crore[1] Rupees (US$63.1 mn) in 1971-72 (Narayana 1984) to 104,209 Crore Rupees ($US18.8 bn) in 2010 (Department of Pharmaceuticals 2012), with the domestic market 62,055 Crore Rupees ($11.2 bn) and exports 42,154 Crore Rupees (US$7.6 bn). In value, the majority of India’s exports are to Europe and America (57.8%) (Chaudhuriet al. 2010: 453), yet in volume terms, the majority of India’s pharmaceutical exports are outside those regions. The chemistry-based pharmaceutical industry is significantly larger than the bio-pharma industry, which was worth $1.9 billion in 2010-11 (EBTC 2012).
The influence of patent law on India’s pharmaceutical industry is a highly contested issue. The domestically-owned industry was initially strongly opposed to India joining a global agreement on IP, fearing its negative consequences (Ramanna 2004). Hamied (1988), for example, argued that “patent protection will cripple R&D”. Much of the concern was also driven by the potential effects on the consumer, especially from increased prices and the possibility of a greater focus on developed country markets. Patel, for example, warned that “the prices of drugs and pharmaceuticals, currently the lowest in the world, will sky-rocket" (1992: 105).The wider impact was also feared, with Abbott et al. (2005) claiming that “Indian generic manufactures are too crucial for India, and for the world, to be allowed by a misguided patent law to be wiped out”. Others, however, predicted that the industry might adapt (Smith 2000; Lall 2003)and some of the larger Indian pharmaceutical firms, starting with Delhi-based Ranbaxy (Hamied 1988), even began to support a change in patent law.
The impact of TRIPs on the Indian pharmaceutical industry has been reviewed in relation to R&D activity (Abrolet al. 2011, Joseph 2011; Kiran and Mishra 2011; Haakonssonet al. forthcoming), FDI (Rai 2008) and the overall response of the industry (Chaudhuriet al. 2010). This paper in contrast offers a firm-based assessment, both pre- and post-TRIPs, drawing on a variety of secondary sources, as well as field research in India involving more than 85 interviews with various stakeholders in the pharmaceutical industry (firms, industry association groups, policymakers and civil society groups). The majority (78) of the interviews were conducted from September to December 2011, with a small number also in July 2009 and May 2012. The firms were identified from the National Pharmaceutical Pricing Authority’s (NPPA) 2007 list of over 10,000 pharmaceutical manufacturing units in India. The interviews, with senior managers from small, medium and large scale firms, including both bulk drugs and formulations enterprises, were conducted across the main pharmaceutical centres – Delhi, Ahmedabad, Baroda, Mumbai, Hyderabad, Visakhapatnam and Bangalore. Mostly taking between 40 minutes and an hour, the interviews were conducted in person[2], and have provided a first-hand account of the influence of patents from the perspective of a variety of stakeholders. The questions especially related to the effects on firms, particularly their production activities and processes of learning,of the two major patent actsof 1970 and 2005. Interviews with civil society activists helped to provide a further understanding of the impact of patents, going beyond a focus on innovation and transfer of technology, to include public health. The secondary literature consulted (academic literature, policy documents, corporate literature, corporate websites, media reports) provides an additional macro-level perspective and adds greater historical depth.