Dr Reddy's Laboratories' chairman, G V Prasad, called for the Indian pharmaceutical industry to move up the value chain from generics through investing in research and innovation, reported the Business Standard last week. Mr Prasad's aspirational call to action is, however, a sad reminder of how the government's policies create a hostile environment for investment and hobble Indian creativity. A salient example of these counterproductive policies are the attacks on some 15 medicine patents over the past 18 months. While hailed often as victories, these manoeuvres jeopardise the investment India needs to build intellectual capital, foster growth and employment, and develop medicines relevant to Indian needs.
The idea underpinning intellectual property (IP) protections is to encourage innovation. With an assurance of temporary exclusivity, people will invest resources to create new products and technologies, knowing that if they achieve a breakthrough their efforts will be rewarded. (It typically takes a decade and over $1 billion to develop a successful new drug.)
Creating incentives for innovation is an idea reaching back hundreds of years. In the 18th century the framers of the US Constitution included a provision that calls on the Congress to grant authors and inventors "the exclusive Right to their respective Writings and Discoveries" in order to promote progress in science and the arts.
In the intervening years, robust IP rights have helped spark innovation and growth in countries - both developed and developing - throughout the world. As much as 40 per cent of US growth in the 20th century was a result of innovations, according to Nobel laureate Robert Solow. And one of India's most successful companies - Tata - has prospered on the strength of its IP. As of 2012, Tata Motors held 833 patents and Tata Steel had 1,230 patents.
Just as countries with strong IP rights have a foundation for prosperity, countries lacking such protections find innovation and growth more daunting. It is sadly unsurprising that India receives low marks on innovation scorecards. As President Pranab Mukherjee pointed out in his National Technology Day speech in May, "India's innovation bottom line is not very encouraging." He observed that the US and China receive 12 times as many patent applications as India.
Regrettably, he did not elaborate on how IP rights foster innovation - nor did he dwell on how these protections encourage foreign direct investment (FDI). It is well established that such investment brings with it new technologies, higher productivity and wages, and spillovers to other firms that spur modernisation. International businesses also bring R&D to countries that provide supportive environments. That increased R&D is often aimed at unmet local needs, such as drug company investment in tropical disease research. Weak IP protection directly discourages such R&D.
While India did revise its IP laws in 2005, enforcement has been inconsistent, at best, and carve-outs for generic drugs have compromised its integrity to the short-term benefit of the owners of generic companies. These shortcomings help explain why India attracts a mere three per cent of global R&D spending. (China, with its stronger IP law, attracts about 14 per cent and Japan about 11 per cent, reports the Battelle Institute.) These data reinforce the World Bank's findings that multinational firms locate R&D in developing countries with effective IP rights.
As noted, corporations consider IP protections when making decisions about where to direct their FDI. The Organisation for Economic Cooperation and Development has found that a one per cent change in the strength of a country's IP rights environment is associated with a 2.8 per cent increase in FDI inflows. That's bad news for India. From 2010 to 2012, the United Nations reports, India's stock of FDI totalled just 11.8 per cent of its GDP. The average for all developing economies was 30 per cent.
While these data underscore India's failure to attract foreign investment, some argue that IP conflicts with Indian interests. The reality is quite different, as explained by Kiran Mazumdar-Shaw, chairman of Bangalore-based Biocon. "We must understand that intellectual property is important for India to embrace and respect and protect," she told the Press Trust of India. "If you cannot demonstrate that IP is safe in the country, I think you are not sending the right message, you are not going to find people investing in India."
Moreover, IP is not the obstacle to access to healthcare that some officials and activists allege. The Supreme Court's recent decision denying Novartis's rights to Glivec, a patent recognised in over 40 countries, has been acclaimed as an advance in patient access. However, Novartis was already ensuring that 95 per cent of the Indians who were prescribed Glivec received the cancer medicine for free.
The very real obstacles to medical access in India stem principally from the government's failings. It devotes a mere 1.2 per cent of GDP to health care, a level lower than in Haiti, and India lacks the insurance, doctors, clinics and hospitals necessary to make use of the full potential of modern medicine. These monumental challenges won't be addressed by headline-catching patent revocations, but will require sustained investment and reform.
If India is serious about attracting FDI and becoming an innovation hub, it should reform its IP law to ensure the protections that are a mainstay of the world's advanced economies. Absent such protections, R&D will regrettably go elsewhere, India's "innovation bottom line" will continue to disappoint, and, most troubling, the Indian people will be denied new opportunities, new knowledge, and new medicines.
The writer, a senior vice president of the Pharmaceutical Research Manufacturers of America, served as a senior director for international economics at the White House's National Security Council under US President George W Bush
Disclaimer: These are personal views of the writer. They do not necessarily reflect the opinion of www.business-standard.com or the Business Standard newspaper
