Technology Spillovers from Foreign Direct Investment in the Indian Pharmaceutical Industry
Foreign direct investment in the Indian pharmaceutical industry has been largely attributed to a variety of technology spillovers. However, it is still not very clear on whether the knowledge that is generated by the foreign multinational companies that conduct local research and development activities spills over towards the benefits of domestic firms. To the extent that foreign direct investments generate the technology spillover and knowledge transfer, it can as well be said that growth is achieved.
When looking at the technology spillovers from foreign direct investment in the Indian pharmaceutical industry, it is important to note that since a new product and process technologies should enhance the domestic firms’ productivity, proper policies towards foreign direct investment would be able to stir up the development of cutting-edge technologies by the multinational. However, this may not have been practical in the case of India considering that the policies of a developing country have in most cases applied in favor of its self determination at the expense of technology spillover from foreign firms.
Since the 1960s and 1990s when the reforms started, India was mainly pegged onto policies that advocated for self reliance and import substitution. These were mainly aimed at developing national industrial capabilities, promotion of growth of indigenous capital and bringing about equitable distribution of resources in a nation that had long been cuffed by colonial policies. With regards to technology spillovers, multinationals that orchestrated foreign direct investments in the Indian pharmaceutical industry were only allowed to participate in the country’s economy if they had sophisticated technology. The argument was that domestic companies needed to develop their skills so that India would develop its own capabilities.
Only foreign direct investors with advanced technologies were allowed to venture into the Indian pharmaceutical industry. On the other hand, the government allowed domestic firms to only enter into licensing agreements and not affiliates with multinationals. There was prescription of standardized rates and royalty restraints were also put in place across all categories of technology. In fact, there was even a time when there were regulations that required Indian purchasers of technology in the form of licensing and subsidiaries of multinationals in the Indian pharmaceutical industry to sub-license the technologies that they had acquired to other local firms.
As a result of the above restraints, multinationals were induced to be very keen about the capabilities and technology spillovers into the Indian pharmaceutical sector. It was only until 1991 that the country embarked on a plan to relax the constraints and begin undertaking reforms that would enhance the growth of its industries through foreign direct investments. At this point, the government had realized that the ability of technology spillovers had been curtailed for quite a long time and this had negatively impacted the pharmaceutical and other industries across the board. The Indian pharmaceutical industry only began to reap the benefits of technology spillovers from multinationals in the 1990s. This has helped in advancing growth in the industry over the years to date.
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