Institute for Social and Economic Change

Established in 1972 by Professor V K R V Rao, ISEC is an All-India Institute for Interdisciplinary Research and Training in the Social Sciences

Determinants of Foreign Direct Investment in theIndian Pharmaceutical Industry with Special Reference to Intellectual Property Rights: Evidence from a Time-Series Analysis (1990-2019) – isec

Determinants of Foreign Direct Investment in theIndian Pharmaceutical Industry with Special Reference to Intellectual Property Rights: Evidence from a Time-Series Analysis (1990-2019)

Abstract

The Indian pharmaceutical industry is playing an important role to combat the Covid-19 pandemic and other important illnesses. However, to have enough capital to carry out R&D and bring forth innovation, FDI is essential. The signing of the TRIPS agreement saw a global harmonization of intellectual property rights underpinned by the theory that stronger IPRs spur increased foreign direct investment inflows by reducing the threat of imitation. Following an ARDL approach and using time series data for India between 1990 and 2019, this study examines the impact of IPRs on FDI inflows into the Indian pharmaceutical industry. We consider two measures of IPR protection- implementation of TRIPS and strengthening of the IPR regime through the construction of a new pharmaceutical patent index for India. We also take into account the impact of industry characteristics and host-country conditions on FDI flows into the country. Furthermore, as governments in developing countries seek more FDI, they open their economies and adapt market-friendly policies that ensures a global process of competition. While such competition is indeed widespread, given that the Chinese pharmaceutical industry is India’s biggest competitor, due to its cost-competitive manufacturing sector producing the largest number of active pharmaceutical ingredients, we take into consideration the competition offered by China through the FDI confidence index. Our results show that while the implementation of TRIPS in the country has increased the FDI inflow into the pharmaceutical sector, the enforcement of the IPR regime, as measured by the pharmaceutical patent index has led to the reduction of FDI inflow. We also find that institutional factors such as corruption and political instability in the economy along with the degree of trade openness are major determinants of investment decisions in India, while the competition from China does not play a significant role.

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