Fdi and impact on pharmaceutical industry in india


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Fdi and impact on pharmaceutical industry in india

  1. 1. BYSAYANI BASU(11/MBA/55)
  2. 2. Foreign direct investment, is defined as a company from one country making a physical investment into building a factory in another country. The direct investment in buildings, machinery and equipment is in contrast with making a portfolio investment, which is considered an indirect investment. In recent years, given rapid growth and change in global investment patterns, the definition has been broadened to include the acquisition of a lasting management interest in a company or enterprise outside the investing firm’s home country. As such, it may take many forms, such as a direct acquisition of a foreign firm, construction of a facility, or investment in a joint venture or strategic alliance with a local firm with attendant input of technology, licensing of intellectual property, In the past decade, FDI has come to play a major role in the internationalization of business. Reacting to changes in technology, growing liberalization of the national regulatory framework governing investment in enterprises, and changes in capital markets profound changes have occurred in the size, scope and methods of FDI.
  3. 3. The simple answer is that making a direct foreign investment allows companies to accomplish several tasks: Avoiding foreign government pressure for local production. Circumventing trade barriers, hidden and otherwise. Making the move from domestic export sales to a locally-based national sales office. Capability to increase total production capacity. Opportunities for co-production, joint ventures with local partners, joint marketing arrangements, licensing, etc; Integration into global economy - A developing country, which invites FDI, can gain a greater foothold in the world economy by getting access to a wider global market.
  4. 4.  Technology advancement - FDI can introduce world-level technology and technical know-how and processes to developing countries. Foreign expertise can be an important factor in upgrading the existing technical processes in a host country. For example, the civilian nuclear deal between India and the United States would lead to transfer of nuclear energy know-how between the two countries and allow India to upgrade its civilian nuclear facilities. Increased competition - As FDI brings in advances in technology and processes, it increases the competition in the domestic economy of the developing country, which has attracted the FDI. Other companies will also have to improve their processes and products in order to stay competitive in the market. Overall, FDI improves the quality of a products and processes in a particular sector. Improved human resources - Employees of a host country in which there is an FDI get exposure to globally valued skills. The training and skills upgradation can enhance the value of the human resources of the host country.
  5. 5. The several policy initiatives taken by the government of India inthe 1990s helped to transform the country from a restrictiveregime with regard to foreign direct investment to a liberal one.As in 2007, foreign direct investment in India is encouraged inalmost all the sectors of the countrys economy under theautomatic route. At the same time there are a few Indian sectorsin which foreign direct investment has been restricted by thegovernment. Forms through which foreign direct investment inIndia are allowed include, Euro issues, preferential allotments,technical collaborations, and financial collaborations. Theamount of foreign direct investment in India came to around US$4.7 billion in 2006 - 2007, and the next year this figureincreased more than three times to about US$ 15.7 billion.
  6. 6.  Market size: The aim of FDI in emerging developing countries is to tap the domestic market, and thus market size does matter for domestic market oriented FDI. Market size is generally measured by GDP, per capita income or size of the middle class. The size of the market or per capita income are indicators of the sophistication and breath of the domestic market. Growth prospects and positive country conditions: Along with market size, the prospect of growth (generally measured by growth rates) also has a positive influence on FDI inflows. Labour cost and availability of skilled labour: Cheap labour is another important determinant of FDI inflow to developing countries. A high wage-adjusted productivity of labour attracts efficiency-seeking FDI both aiming to produce for the host economy as well as for export from host countries. Human capital: The availability of a cheap workforce, particularly an educated one, influences investment decisions
  7. 7.  Infrastructure facilities: The availability of quality infrastructure, particularly electricity, water, transportation and telecommunications, is an important determinant of FDI. When developing countries compete for FDI, the country that is best prepared to address infrastructure bottlenecks will secure a greater amount of FDI. Government finance: Government finance is an important issue that affects capital flows. A high fiscal deficit leads to more government liabilities and therefore more taxes and defaults on international debt. Rate of return on investment: The profitability of investment is one of the major determinants of investment. Thus the rate of return on investment in a host economy influences the investment decision.
  8. 8.  FDI Restrictions in Indian Sectors have been imposed on a few sectors by the Indian government. FDI Restrictions in Indian Sectors have been imposed in order to protect the interests of the country, as these sectors either relate to national security or sensitive enough to keep apart the foreign companies. Foreign direct investment restrictions in Indian sectors have also been imposed in order to allow the domestic companies to make more profits with less competition, than that of in the presence of rivalry international firms. The various Indian Sectors having restrictions of foreign direct investment are: Atomic energy Betting and gambling Chit fund business Plantation or agricultural activities Real estate business Business in Transferable Development Rights Lottery business Retail trading Railway transport Mining of chrome, zinc, gold, diamonds, copper, iron, gypsum, manganese, and sulphur Ammunition and arms
  9. 9. The number of purely Indian pharma companies is fairly low. Indian pharma industry is mainly operated as well as controlled by dominant foreign companies having subsidiaries in India due to availability of cheap labour in India at lowest cost. In 2002, over 20,000 registered drug manufacturers in India sold $9 billion worth of formulations and bulk drugs. 85% of these formulations were sold in India while over 60% of the bulk drugs were exported, mostly to the United States and Russia. Most of the players in the market are small-to-medium enterprises; 250 of the largest companies control 70% of the Indian market.Thanks to the 1970 Patent Act, multinationals represent only 35% of the market, down from 70% thirty years ago.Most pharma companies operating in India, even the multinationals, employ Indians almost exclusively from the lowest ranks to high level management. Mirroring the social structure, firms are very hierarchical. Homegrown pharmaceuticals, like many other businesses in India, are often a mix of public and private enterprise. Although many of these companies are publicly owned, leadership passes from father to son and the founding family holds a majority share.In terms of the global market, India currently holds a modest 1-2% share, but it has been growing at approximately 10% per year. India gained its foothold on the global scene with its innovatively engineered generic drugs and active pharmaceutical ingredients (API), and it is now seeking to become a major player in outsourced clinical research as well as contract manufacturing and research. There are 74 U.S. FDA-approved manufacturing facilities in India, more than in any other country outside the U.S, and in 2010, almost 20% of all Abbreviated New Drug Applications (ANDA) to the FDA are expected to be filed by Indian companies. Growth in other fields notwithstanding, generics are still a large part of the picture. London research company Global Insight estimates that India’s share of the global generics market will have risen from 4% to 33% by 2011. India has play a greatest role & plate form for worlds pharmaceutical company in very cheap price and land. Every pharma company can grow in India very easily.
  10. 10. India has many attractions for FDI, such as; skilled labour, large population and a strong production base in the pharmaceutical industry. The pharmaceutical industry has been the eighth largest sector in India attracting FDI since 1991. Despite liberalization and deregulation of the pharmaceutical industry, foreign capital in the industry is still quite low. The majority of the global pharmaceutical firms have invested in India, but due to the weak patent regime, price control and rigid labour laws, the firms tend to outsource a large part of their production and do not invest much in R&D. The government of India wants to increase the FDI inflow into the industry, and they hope to attract more foreign capital with further liberalization of policies regarding the pharmaceutical industry. The Indian government implemented performance requirements for foreign pharmaceutical firms in order to create linkages and spillover effects between the foreign firms and the host economy. However, today there are no performance requirements for foreign firms that invest in the pharmaceutical industry in India.
  11. 11. The inflow of foreign direct investments into India has increased since the liberalization reform started. An overview of the FDI policies in the pharmaceutical industry and the reasons why MNCs invest in India are given.Export or employment/ training requirements for foreign pharmaceutical firms have not been imposed in India. Nevertheless, Joint venture and equity ownership requirements were in force during the first and second phase. Through not allowing 100% foreign equity, the local firms have a better chance to share the knowledge and inputs from the foreign firm. In India domestic equity requirements have helped to promote the formation of joint ventures and generate externalities in the form of local learning and absorption of knowledge brought in by the foreign partners. For instance, Ranbaxy and Eli Lilly formed a joint venture because of the requirement. Today, FDI up to 100% foreign ownership is allowed in the pharmaceutical industry through the automatic approval route.
  12. 12.  R&D requirements have been a condition for foreign firms in India. For instance, it was compulsory for foreign pharmaceutical companies to set up R&D facilities and spend at least 4 percent on R&D of their turnover annually, if their turnover was more than Rs. 5 Crores (Dhar & Rao, 2007). To enter into long-term consultancy agreements with relevant R&D institution in the country, within 2 years of FDI approval, was also an option. Furthermore, technology transfer is one of the main objectives for host countries attracting FDI. The Government of India encouraged technology transfer but did not adopt any requirements. However, foreign firms faced constraints regarding the import of technology. Today, there are no performance requirements in the pharmaceutical industry. The Foreign Direct Investment policy in India is liberalized and the government tries to get less involved in the private sector and leave it to market forces. Policy initiatives that have been imposed to liberalize the economy in respect of FDI are for example; industrial decontrol, simplifications of investment procedures and commitment to safeguarding intellectual property rights.There are many factors that are important to MNCs when deciding where to locate new affiliates and production. In a high technology industry, such as the pharmaceutical, factors such as; skilled/ semi skilled labour, well- developed local supply chains, well functioning infrastructure and knowledge producing institutions are important for a firm to consider. Some of these factors are reasons why pharmaceutical multinationals have invested in India.
  13. 13. Pharmaceutical industry in India plays a very crucial role in implementing the welfare state of the people. The economic growth of the industry along with the availability of generic goods and healthy competition is the need of the hour for India. After analyzing the pros and cons of the FDI in the Indian Pharmaceutical Industry, it is established that India needs adequate FDI and its spillovers for the growth of the industry. Thus there has been increase in the number of medicines packs in the last years as against perceived decrease in the number of medicines by the Health Department .