This Columbia FDI Perspective is very useful. It puts in perspective the huge global power of 'Big Pharma' relative to the rather modest scale of even the biggest of the emerging multinational pharmaceutical companies based in India.

Emerging challengers in knowledge-based industries?
The case of Indian pharmaceutical multinationals
by Gert Bruche*

The growth of outward foreign direct investment (FDI) from developing countries and of a new generation of “emerging multinational enterprises” (EMNEs) has stimulated a flurry of publications. EMNEs have been portrayed as on their way to adulthood, latecomers that leapfrog into advanced positions, emerging giants, and challengers of conventional multinational enterprises (MNEs) from advanced economies.

While some EMNE FDI can be classified as resource-seeking, often by state-owned enterprises, an increasing number of EMNEs, often in private hands, operate in knowledge-based industries. Most EMNEs in knowledge-based industries (KB EMNEs) are headquartered in India or China. They have tended to pursue interrelated asset-augmenting and market-seeking strategies in North America and Europe.

While much research has been devoted to KB EMNE’s internationalization and resource-building, the particular structural characteristics of industries in which these operate have been neglected. As the case of Indian pharmaceutical companies demonstrates, the latter factor plays a significant role in whether and how fast KB EMNEs can close the gap with their competitors from advanced economies.[1]

Some of the more prominent Indian pharmaceutical companies, such as Ranbaxy or Dr. Reddy’s Limited (DRL), have been cited as instances of a leapfrogging internationalization trajectory leading to fast catch-up in competitiveness with conventional MNEs. However, a closer look at the global pharmaceutical industry reveals a vast scale-gap between Indian pharmaceutical companies and major conventional pharmaceutical companies (“Big Pharma”) (see table 1 on the website version of this Perspective). In 2009, DRL, India’s leading pharmaceutical company by worldwide revenues, was not ranked among the global top 50 pharma companies. DRL’s worldwide revenues of US$ 1.5 billion fell far short of the US$ 45 billion generated by the market leader Pfizer (USA) or the US$ 37.6 billion by the Swiss company Roche, ranked fifth, and are still less than the US$ 1.7 billion achieved by the Swedish Meda company, placed 50th.

Research and development (R&D) expenditure is a more specific indicator of global competitive resources. In a lengthy and risky process, more than US$ 1 billion are usually required to bring a new drug to market (see table 2 on the website version of this Perspective). Indian pharmaceutical companies spend far less than Big Pharma. The 2009 research spending of US$ 99 million (Ranbaxy), US$ 89 million (DRL) and US$ 67 million (Sun Pharma) compares with US$ 8,570 million by the largest spender, Roche, US$ 6,286 million for the fifth largest (GlaxoSmithKline), and are still only roughly half of the 50th in the global ranking (Watson, a generics company).

In addition to critical mass in R&D, other factors such as a worldwide sales force, relationships with key opinion leaders, worldwide regulatory experience, and ownership of intellectual assets present formidable entry barriers into the research-based segment which still dominates the more than US$ 800 billion global pharmaceutical market. Given the valuations of Big Pharma firms, overcoming entry barriers via acquisitions does not seem to be a feasible pathway for Indian pharmaceutical companies.

In view of these barriers Indian pharmaceutical companies pursue more modest upgrading internationalization strategies. Based on location-specific cost advantages and reverse engineering, their FDI is primarily aimed at building international positions as generics (imitator) companies, often by acquiring smaller generics players in the US and Europe. So far they have not yet achieved leading positions in the global generics market partly due to rapid market consolidation and the increasing entry of Big Pharma. Most major Indian pharmaceutical companies have also engaged in manufacturing and R&D outsourcing for Big Pharma, exploiting growth and learning opportunities.

Although leading Indian pharmaceutical companies such as DRL or Lupin Labs have invested in high-risk discovery research with some success, the enormous costs and risks of global development have often led to partnering with Big Pharma. In view of the considerable barriers and uncertain outcomes, a number of family-owned Indian pharmaceutical companies have sold out to Big Pharma in recent years. This sale of India’s crown jewels has prompted consideration in Indian Government circles of restrictions on inward FDI in the pharmaceutical industry and led to calls for industry consolidation.

In comparing Indian pharmaceutical companies with other Indian and Chinese knowledge-based EMNEs, it may be useful to distinguish two extremes on a continuum. At one end, there are leapfrogging industries such as telecommunications equipment and IT services, in which knowledge-based EMNEs have captured globally competitive positions in relatively shorter time spans (Huawei or Tata Consultancy Services are prominent examples). At the other end, we have “fortress industries” such as pharmaceuticals, packaged software or certain branded consumer goods segments where, due to the interaction of global oligopolistic structures, complex and multiple complementary resource and capability requirements or intellectual property and brand walls, the catch-up process – if left to market forces – may take much longer.

Emerging market government policies may influence this scenario. Massive support of selected state-owned champions may support a faster “invasion” into fortress industries, as the examples of China in wide-bodied aircraft or high-speed trains may indicate. Governments may also pursue infant industry protection of national private champions. Both cases raise important governance issues and may eventually trigger political reactions in the developed world.

* Gert Bruche (Gert.Bruche@hwr-berlin.de) is Professor of International Management at Berlin School of Economics and Law. The author wishes to thank Florian Becker-Ritterspach, Christoph Doerrenbaecher and Peter Gammeltoft for their helpful comments on this Perspective. The views expressed by the individual authors of this Perspective do not necessarily reflect the opinions of Columbia University or its partners and supporters. Columbia FDI Perspectives (ISSN 2158-3579) is a peer-reviewed series. [1] For a more thorough discussion see Gert Bruche, “Emerging Indian pharma multinationals: Latecomer catch-up strategies in a globalised high-tech industry,” European Journal of International Management (forthcoming May 2012).

The material in this Perspective may be reprinted if accompanied by the following acknowledgment: “Gert Bruche, ‘Emerging challengers in knowledge-based industries? The Case of Indian Pharma Multinationals,’ Columbia FDI Perspectives, No. 41, July 1, 2011. Reprinted with permission from the Vale Columbia Center on Sustainable International Investment (www.vcc.columbia.edu).”

A copy should kindly be sent to the Vale Columbia Center at vcc@law.columbia.edu.

For further information please contact: Vale Columbia Center on Sustainable International Investment, Ken Davies, Kenneth.Davies@law.columbia.edu.

The Vale Columbia Center on Sustainable International Investment (VCC), led by Dr. Karl P. Sauvant, is a joint center of Columbia Law School and The Earth Institute at Columbia University. It seeks to be a leader on issues related to foreign direct investment (FDI) in the global economy. VCC focuses on the analysis and teaching of the implications of FDI for public policy and international investment law.

Most recent Columbia FDI Perspectives
· No. 40, Ken Davies, “Why and how least developed countries can receive more FDI to meet their development goals,” June 20, 2011.
· No. 39, Terutomo Ozawa, “The role of multinationals in sparking industrialization: From ‘infant industry protection’ to ‘FDI-led industrial take-off’,” June 6, 2011.
· No. 38, Nicolás Marcelo Perrone, “Responsible agricultural investment: is there a significant role for the law to promote sustainability?” May 23, 2011.
· No. 37, Daniel M. Firger, “The coming harmonization of climate change policy and international investment law,” May 9, 2011.
· No. 36, Nilgün Gökgür, “Are resurging state-owned enterprises impeding competition overseas?” April 25, 2011.
· No. 35, Giorgio Sacerdoti, “Is the party-appointed arbitrator a “pernicious institution”? A reply to Professor Hans Smit,” April 15, 2011.
· No. 34, Harry G. Broadman, “The backstory of China and India’s growing investment and trade with Africa: Separating the wheat from the chaff,” February 17, 2011.
· No. 33, Hans Smit, “The pernicious institution of the party-appointed arbitrator,” December 14, 2010.
· No. 32, Michael D. Nolan and Frédéric G. Sourgens, “State-controlled entities as claimants in international investment arbitration: an early assessment,” December 2, 2010.
· No. 31, Jason Yackee, “How much do U.S. corporations know (and care) about bilateral investment treaties? Some hints from new survey evidence,” November 23, 2010.
· No. 30, Karl P. Sauvant and Ken Davies, “What will an appreciation of China’s currency do to inward and outward FDI?” October 18, 2010.

All previous FDI Perspectives are available at http://www.vcc.columbia.edu/content/fdi-perspectives
Please visit our website - http://www.vcc.columbia.edu