Foreign direct investment (FDI) in India's pharmaceutical industry has increased since liberalization began in the 1990s. While equity restrictions helped local firms form joint ventures, today 100% foreign ownership is allowed. While research and development requirements were once imposed on foreign firms, there are now no performance standards. Skilled labor costs and supply chains attract multinational pharmaceutical firms to India for production. Overall FDI and competition in the industry are necessary for its growth and to provide affordable healthcare to Indians.

1. BY
SAYANI BASU(11/MBA/55)

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. 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.  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. The several policy initiatives taken by the government of India in
the 1990s helped to transform the country from a restrictive
regime with regard to foreign direct investment to a liberal one.
As in 2007, foreign direct investment in India is encouraged in
almost all the sectors of the country's economy under the
automatic route. At the same time there are a few Indian sectors
in which foreign direct investment has been restricted by the
government. Forms through which foreign direct investment in
India are allowed include, Euro issues, preferential allotments,
technical collaborations, and financial collaborations. The
amount of foreign direct investment in India came to around US$
4.7 billion in 2006 - 2007, and the next year this figure
increased more than three times to about US$ 15.7 billion.

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.  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.  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. 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 world's pharmaceutical company in very
cheap price and land. Every pharma company can grow in India very easily.

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. 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.  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. 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 .