Strategic integration of knowledge in Indian pharmaceutical firms: creating competencies for innovation

TLDR: In this paper, the authors examined the contemporary strategic approaches adopted by Indian leaders for integrating new knowledge and capabilities in order to develop innovation competencies for tomorrow using empirical evidence from firm-level investigations, showing how Indian firms are evolving from reverse engineering outfits catering to domestic market to technologically advanced and sophisticated organisations capable of catering to diverse markets.

Abstract: Trade liberalisation and changes in the Intellectual Property Rights (IPR) have fashioned new dynamics in the pharmaceutical industry across the globe. Firms are forced to bring changes to their research, innovation, technology and marketing practices by a reconfiguration of their competencies and resources. The most common strategic concern that Trade Related Aspects of Intellectual Property Rights (TRIPs) has raised for Indian firms is the perceived need for R&D and technological strength. For firms that have given little attention to research and innovation in the past, this transition is very difficult. Indian firms have responded to these changes in novel and complex ways. Employing firm-level case studies, this paper examines the contemporary strategic approaches adopted by Indian leaders for integrating new knowledge and capabilities in order to develop innovation competencies for tomorrow. Using empirical evidence from firm-level investigations, this paper shows how Indian firms are evolving from reverse engineering outfits catering to domestic market to technologically advanced and sophisticated organisations capable of catering to diverse markets.

Figures

Table 1 Ranbaxy’s pipeline of new chemical entities

Table 5 Forms of collaboration and knowledge diffusion

Figure 1 Progressive drug discovery paradigm of Indian firms

Table 4 Patents filings by Indian pharmaceutical firms

Table 3 R&D investments in selected Indian pharmaceutical firms

Table 2 Dr. Reddy’s R&D pipeline

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Strategic integration of knowledge in Indian
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Chaturvedi, Kalpana and Chataway, Joanna (2006). Strategic integration of knowledge in Indian pharmaceutical firms:
creating competencies for innovation. International Journal of Business Innovation and Research, 1(1-2) pp. 27–50.
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Int. J. Business Innovation and Research, Vol. 1, Nos. 1/2, 2006 2
7
Copyright © 2006 Inderscience Enterprises Ltd.
Strategic integration of knowledge in Indian
pharmaceutical firms: creating competencies
for innovation
Kalpana Chaturvedi*
Development, Policy and Practice
Faculty of Technology, The Open University
Walton Hall, Milton Keynes, MK7 6AA, UK
Fax: (01908) 654825
E-mail: K.Chaturvedi@open.ac.uk
*Corresponding author
Joanna Chataway
ESRC INNOGEN Research Centre
The Open University
Walton Hall, Milton Keynes, MK7 6AA, UK
Fax: (01908) 654825
E-mail: J.C.Chataway@open.ac.uk
Abstract: Trade liberalisation and changes in the Intellectual Property Rights
(IPR) have fashioned new dynamics in the pharmaceutical industry across
the globe. Firms are forced to bring changes to their research, innovation,
technology and marketing practices by a reconfiguration of their competencies
and resources. The most common strategic concern that Trade Related Aspects
of Intellectual Property Rights (TRIPs) has raised for Indian firms is the
perceived need for R&D and technological strength. For firms that have given
little attention to research and innovation in the past, this transition is very
difficult. Indian firms have responded to these changes in novel and complex
ways. Employing firm-level case studies, this paper examines the contemporary
strategic approaches adopted by Indian leaders for integrating new knowledge
and capabilities in order to develop innovation competencies for tomorrow.
Using empirical evidence from firm-level investigations, this paper shows
how Indian firms are evolving from reverse engineering outfits catering to
domestic market to technologically advanced and sophisticated organisations
capable of catering to diverse markets.
Keywords: knowledge; innovation competencies; Indian pharmaceutical
firms; strategies.
Reference to this paper should be made as follows: Chaturvedi, K. and
Chataway, J. (2006) ‘Strategic integration of knowledge in Indian
pharmaceutical firms: creating competencies for innovation’, Int. J. Business
Innovation and Research, Vol. 1, Nos. 1/2, pp.27–50.
Biographical notes: Kalpana Chaturvedi has recently completed her PhD
on Innovation and Knowledge Management in Pharmaceuticals. Her
research interests and work include corporate strategy; knowledge-based
competition; innovation, knowledge and learning in technology institutions
and firms in developing countries; and strategic knowledge management
and dynamic capabilities of firms. Some of her current research focuses on

28 K. Chaturvedi and J. Chataway
the study of policy, knowledge and market influences in shaping up
firm-level technological trajectories and changing innovation dynamics. In her
professional work spanning research, industry and government experience,
she has dealt with different facets of basic research, technology development,
transfer and commercialisation, particularly in the pharmaceutical and
biotechnology sectors.
Joanna Chataway’s research focuses on biotechnology, science and technology
capacity building, North-South Public Partnerships (PPPs), innovation and
development. Chataway is part of the Senior Management Team for the
ESRC Innogen Centre, which conducts research on the social and economic
aspects of life science innovation. She is currently the Principal Investigator
(PI) for two Innogen centre projects investigating technology and knowledge
flows in biotechnology and genomics between North and South and PI
for another project funded by the ESRC Science in Society Programme
looking at capacities to manage risks of agricultural biotechnology in several
African countries.
This paper is based on a recently completed and unpublished PhD thesis titled
‘The dynamics of technology innovation in The Indian Pharmaceutical
Industry: firm strategy and policy interactions’ (Faculty of Technology,
Development Policy and Practice, The Open University, Milton Keynes).
The paper was first presented at The 3rd Asialics International Conference
2006, in Shanghai, China, 16–19 April 2006.
1 Introduction
How and why do firms adapt and succeed in times of rapid change? Theoretically, there
are a number of mechanisms through which firms can transform themselves in response
to environmental challenges. Researchers have looked from very different angles at
how environmental factors such as policy, knowledge and market dynamics can affect
firm-level strategies. Schumpeter (1947), with his ‘gales of creative destruction’, gave a
vivid description of the dynamism of innovation and its effects on industrial and world
economy. Many authors further elaborated on this theory, notably Rosenberg (1969),
Nelson and Winter (1977) and Freeman and Perez (1988). A very different and dominant
paradigm that emerged in strategy during the 1980s was the competitive forces approach
developed by Porter (1990), wherein he argued that industry structure strongly influences
the competitive rules of the game as well as the strategies.
Another distinct class of approaches that link firm-specific capabilities and assets
with its strategies, often referred to as the resource-based perspective, have their roots
in the much older work of Penrose (1959) and Selznick (1957). Recently there has been
a resurgence of interest in the role of firm’s resources and capabilities as the foundation
for firm strategy (Teece et al., 1997). Modern literature on innovation management has
identified knowledge as a critical resource, and research and innovation as firms’ core
competencies (Pavitt, 1990; Leonard-Barton,
1992; Malerba and Orsenigo, 2001). Keller
(2004), in a recent review of the resource-based model of the firm, noted that researchers
are increasingly focusing on the intangible resources of diverse knowledge bases and
capabilities which differentiate firms and lead to superior performance. From this
perspective, technology development ought to be considered as a knowledge-led process
and knowledge-management as a strategic necessity for firms.

Strategic integration of knowledge in Indian pharmaceutical firms 2
9
Evolutionary economists emphasise the cumulative and dependent nature of technical
and organisational change within firms. The particularities of the way different firms
incorporate new technology and new processes need to be understood in the context of
their previous trajectories and their capacity to absorb new knowledge (Cohen and
Levinthal, 1990).
A number of studies have recently looked at the impact of knowledge-related policy
changes coupled with enhanced knowledge levels on the social, economic and
technological development of developing countries. Lanjouw (1997), Kumar (2002) and
Correa (2000) have studied the impact of stringent patent regimes on the social,
technological and economic development of India. Halemane and Dongen (2003)
investigated innovation management in the Indian pharmaceutical industry as a response
to environmental changes based on the theories of strategic groups from industrial
economics. But most of these studies have focused on the relationships between the
actions that firms have taken and the outcomes (success and failures) and have paid less
attention to the strategies underlying those actions.
In parallel to the academic literature, firms in developed and developing countries
have increasingly seen knowledge capabilities and knowledge management as key
resources. In part, this is driven by new policy developments in intellectual property
protection and Trade Related Aspects of Intellectual Property Rights (TRIPs).
Picking up from where others have left off, this paper analyses the technology
development, innovation and wealth creation approaches (strategies) being adopted by
Indian pharmaceutical firms in the wake of a rapidly changing technology and policy
environment. The terms ‘innovation’ and ‘knowledge’ in this paper are not restricted to
technology alone, but encompass other business and management processes as well. In
practice also, the R&D function in business firms has shifted focus to the strategic
integration of the R&D effort with the overall business goal (Madanmohan and Krishnan,
2003; Sakakibara and Dodgson, 2003; Bower and Sulej, 2005). These shifts reflect the
increasing complexity and maturity in which companies are tackling the management
of their technology, products and markets. The paper analyses the key elements of
the strategic trajectories of leading Indian pharmaceutical firms which have been
demonstrably successful in the domestic as well as western markets in the past and
are currently aggressively expanding their activities to build innovation competencies
for tomorrow.
Structure of the paper
This research coincides with a period of rapid restructuring in the regulatory framework,
patent laws and market dynamics across the globe. The principal objective of this
paper is to look at the effects of TRIPs on the research and innovation strategies of
Indian pharmaceutical firms. Section 2 presents the research context and the theoretical
framework which guides the research. This section also describes the methodology of the
study and rationale behind using such a research design. In order to understand Indian
firms’ response, it is crucial to look at them in the context of key historical factors.
Section 3, as historical background, explains capacities and capabilities created within the
Indian pharmaceutical industry in the process patent regime and shows how changes in
policy regimes have influenced technological choices and trajectories of Indian firms
over time. Section 4 looks at how firms are strategising for innovation-based post-TRIPs
competition. Section 5, while discussing the key observations of this study, maps the

30 K. Chaturvedi and J. Chataway
transformation of Indian firms as they move from process engineering (working at the
lower end) to drug discovery (the higher end of pharmaceutical value chain). The paper
concludes with a few final thoughts and a summary of firm-level strategies in Section 6.
2 Context, framework and methodology
2.1 The research context
It is well established in the literature (Kumar, 2002; Watal, 2000; Rasiah, 2002) that the
technological advance achieved by the Indian pharmaceutical industry owes much to the
1970 Patents Act. In the 1970s, India introduced complex laws and policies to regulate
the pharmaceutical industry, to counteract monopoly abuses by multinationals and to
promote local industry. The reforms included changes to foreign exchange regulations,
price controls, industrial licensing and most important of all, the non-recognition of
pharmaceutical product patents that legalised reverse engineering of patented molecules.
The reforms contributed to many tangible benefits such as the creation of manufacturing
capacities, lower drug prices, and availability of modern drugs to the masses.
From an Indian perspective, the lack of Intellectual Property Rights (IPR) laid the
foundation for a strong domestic industry. The recent signing of the TRIPs agreement,
however, reverses the patent law followed since the 1970s. The firms that have developed
knowledge and capabilities in reverse engineering-based R&D in the past are required to
reorient themselves for R&D-based innovation to survive and compete in a regulated and
open market. This has serious implications for the Indian pharmaceutical firms. Apart
from upsetting their balance sheets and profits earned through exports of cheaper versions
of patented drugs, access to new knowledge and technology is envisaged to be even
more difficult in the stricter patent regime. Given this context, this paper examines the
organisational processes employed to manage knowledge and innovation by Indian firms
involved in a complex change process today.
2.2 Theoretical framework
The theoretical framework for this research is based upon the theories of co-evolution
of policy and technology, and dynamic capabilities of firms and strategic knowledge
management.
2.2.1 Policy analysis for research and innovation
This research proposes a novel application of the ‘content, context and process’
framework for policy analysis in the pharmaceutical sector. The research argues that
much health policy wrongly focuses attention on the content of reform, and neglects
the actors involved in policy reform (at the international, national, sub-national levels),
the processes contingent on developing and implementing change, and the context within
which policy is developed. Exclusive focus on policy content can divert attention from
understanding the processes which explain why desired policy outcomes fail to emerge,
for example, failure of strong IPRs in facilitating knowledge and technology transfer
from developed to developing countries in the past. Focusing on the role of ‘firms’ in
‘making’ policy work, this research examines how policy analysis can be used not only
to analyse the policy process, but also to better think about research, innovation and
business strategies at the firm level.

Frequently asked questions

Q1. What contributions have the authors mentioned in the paper "Strategic integration of knowledge in indian pharmaceutical firms: creating competencies for innovation" ?

Employing firm-level case studies, this paper examines the contemporary strategic approaches adopted by Indian leaders for integrating new knowledge and capabilities in order to develop innovation competencies for tomorrow. Using empirical evidence from firm-level investigations, this paper shows how Indian firms are evolving from reverse engineering outfits catering to domestic market to technologically advanced and sophisticated organisations capable of catering to diverse markets. 

Q2. What future works have the authors mentioned in the paper "Strategic integration of knowledge in indian pharmaceutical firms: creating competencies for innovation" ?

Firms are formulating future research and business strategies in different combinations and permutations of NCEs, NDDS, generics, contract manufacturing, conducting of clinical trials, and in-and out-licensing agreements. 

Q3. What is the key strategy adopted by the firm to address the rapidly changing technology and business environments?

Coordinating and redeploying internal and external sources appears to be the key strategy adopted by the firm to address the rapidly changing technology and business environments. 

Q4. How has Cipla made rapid progress during the last three decades?

With its reverse-engineering strengths facilitated by the Patents Act of 1970, Cipla has made rapid progress during the last three decades. 

Q5. What countries were the primary markets for generics?

As the domestic market became saturated, other developing countries and Russia served as the primary markets for finished formulations. 

Q6. What is the theoretical framework for this research?

The theoretical framework for this research is based upon the theories of co-evolution of policy and technology, and dynamic capabilities of firms and strategic knowledge management. 

Q7. What is the key strategy to move up the value chain incrementally and manage risks?

The key strategy to move up the value chain incrementally and manage risks is to out-license new molecules to larger pharmaceuticals with resources to take it to the market faster. 

Q8. What is the fundamental question in the field of strategic management of R&D?

The fundamental question in the field of strategic management of R&D is how firms achieve and sustain competitive advantage in rapidly changing scenarios. 

Q9. What were the reforms that led to the legalisation of reverse engineering?

The reforms included changes to foreign exchange regulations, price controls, industrial licensing and most important of all, the non-recognition of pharmaceutical product patents that legalised reverse engineering of patented molecules. 

Q10. What did the two enterprises play in the development of the pharmaceutical industry?

These two enterprises played an important role not only in starting domestic production of key bulk drugs but also in diffusing substantial spillovers in terms of technical know-how, technology transfer and the technology innovation process/system itself, and more importantly in generating entrepreneurs. 

Q11. What did the company do to gain control over a key raw material?

Ranbaxy bought a 30% stake in Vorin Laboratories in order to gain control over a key raw material and an intermediate supplier for its famous product Ciprofloxacin. 

Q12. What is the strategy of Ranbaxy to enter the bio-generics?

Having identified bio-generics as a significant market area, the company’s strategy to enter this market is to have a portfolio of bio-generics in key therapeutic segments by leveraging core competencies and focusing on efficiencies along the value chain (from development to marketing). 

Q13. What was the role of the process patent regime in the development of the pharmaceutical industry?

During the process patent regime, Indian firms developed competence in applied research for developing production-process technologies, particularly for synthetic bulk drugs. 

Q14. Why did Ranbaxy choose to use DMFs?

other firms like Cipla, Cadila, Lupin, Sun and Zydus have opted for DMFs to gain cheaper and faster entry to regulated markets. 

Q15. What other firms have combined their traditional strategies with research?

Other firms that have now combined their traditional strategies with research are Dabur, Lupin, Wockhardt, Torrent, Cadila Alembic, and NPIL. 

Q16. What was the history of reverse engineering?

Beginning in the late 1970s and early 1980s, legal reverse engineering made new technologies and new drugs available easily and at an affordable price. 

Q17. What is the evidence that facilitated a research tradition in the Indian pharmaceutical industry?

Their evidence indicates that the combined effect of policy and market shifts has facilitated a ‘research tradition’ in the Indian pharmaceutical firms to a very large extent. 

Q18. What was the first step towards self-reliance in pharmaceuticals and healthcare?

The government took its first concrete steps towards self-reliance in pharmaceuticals and healthcare in 1954 with the establishment of Hindustan Antibiotics Limited (HAL), followed by Indian Drugs and Pharmaceutical Ltd. (IDPL) in 1961. 

Q19. What is the level of expertise achieved by the Indian firms?

The level of expertise achieved is so high that most of the firms appear to be well prepared for providing services to multinationals, and in turn the missing links in the drug discovery and innovation chain are strategically organised from external sources for in-house research. 

Q20. What was the impact of the patents act on the Indian pharmaceutical industry?

The Patents Act, 1970, which came into effect in 1972, represented a significant change in the legal and technological regime and had an enormous impact on the technological evolution of the pharmaceutical industry in India. 

Q21. How long did MNCs have to contribute to the local industry?

MNCs had the benefit of operating in a free market with exclusive privileges for 16 years (under the Patents and Design Act, 1911) without having to contribute anything to the local industry.