Intellectual Property and Development (2005)
Carsten Fink
Section: Intellectual Property, Market Structure and Innovation
Summary
I. Introduction. II. Industry Structure. III. The Model Setup. IV. The Data. V. Model Calibration. VI. Model Simulation. VII. Simulation Results. VIII. Summary of Main Findings. References.
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Extract
Patent Protection, Transnational Corporations, and Market Structure: A Simulation Study of the Indian Pharmaceutical Industry
This chapter is adapted from an article published in 2001 in the Journal of Industry, Competition, and Trade 1(1):101-21. Helpful comments by Clive Bell, Tony Venables, Jayashree Watal, and seminar participants at the World Trade Organization and World Bank are gratefully acknowledged. Any remaining errors are the author's own responsibility.
I. Introduction The protection of patent rights is considered to be a critical precondition for private investment in pharmaceutical research and in the development of new drugs. The importance of patent protection in this industry can be attributed to the ease with which new chemical entities can be imitated in comparison with the large research and development (R&D) outlays and long product cycles associated with research-based drugs. In economic terms, new chemical entities-unless legally protected by patents-are weakly appropriable from the viewpoint of the innovating firm. The origins of the pharmaceutical industry go back to the commercialization of the first research-based drugs, Prontosil and penicillin, in the 1930s. Since the 1960s, the development and production of pharmaceuticals has been dominated by a limited number of transnational corporations (TNCs) from industrial countries (mostly from France, Germany, Japan, Switzerland, the United Kingdom, and the United States). Despite the escalating costs of R&D, the declining rate of new drug development, the expiry of patents on many blockbuster drugs in the late 1980s, and the squeezing of public health budgets, the composition of the global pharmaceutical industry remained largely the same up to the early 1990s (Tarabusi 1993).1 Pharmaceutical companies have extensive international production systems. U.S. pharmaceutical TNCs, for example, have, on average, 33.8 foreign affiliates per parent firm-a larger number than in any other U.S. manufacturing industry (Maskus 1998). This pattern fits well into the ownership-locationinternalization framework (OLI) of international production: TNCs are firms with significant knowledge-based assets-patents, trademarks, and marketing expertise in the case of the pharmaceutical industry-which are internationally often most profitably exploited by taking a direct investment position in a foreign country (Dunning 1979, 1981). This chapter examines the effect of patent protection on the behavior of pharmaceutical TNCs and market structure in India, which has traditionally been a fierce opponent of stronger intellectual property rights (IPRs). The Indian Patents Act of 1970 specifically excludes patent coverage for pharmaceutical products. To meet its obligations under the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS)-one of the outcomes of the Uruguay Round (1986-94)- India will have to amend its patent laws to allow for pharmaceutical product patents by 2005. The signing of TRIPS by the Indian government has been accompanied by forceful publicity predicting that stronger patent rights will lead to soaring prices for pharmaceuticals and to a dominance of TNCs as they "wipe out" Indian firms. This study is intended to shed some light on these issues and may also serve as a reference point for other developing countries that are introducing pharmaceutical product patents in a post-TRIPS world. The method of analysis is the calibration of a theoretical model to actual data from the Indian pharmaceutical market and a simulation exercise to answer the hypothetical question of what the market structure would be if India allowed patents for pharmaceutical products. This technique is in the same spirit ...See the full content of this document