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IMPACT OF FDI ON THE ADVANCEMENT OF INDIAN PHARMACEUTICAL SECTOR 

Author: Shradha Suman Rath

ABSTRACT

The fundamental needs of individuals encompass essential elements such as Food, Clothing, and Shelter. Additionally, in modern society, Healthcare, Education, and Sanitation are integral components of necessities. Historically, access to healthcare facilities was largely inadequate for the majority of citizens in the country until independence. However, there has been a significant transformation in this scenario, primarily due to the facilitation of Foreign Direct Investment (FDI) by the Government of India.

Foreign Direct Investment serves as a crucial and strategic source of funding, essential for the development of both developed and developing nations. FDI inflows are characterized by their long-term nature, contributing to non-debt finance. Furthermore, they are pivotal in introducing modern and innovative technologies to the country and establishing international networks that foster growth and progress. India has positioned itself prominently in the global pharmaceutical landscape, experiencing rapid growth. The prevailing circumstances underscore the opportunity for various stakeholders, including the government, academia, and industry, to invest in this sector. Pharmaceutical companies can achieve their economic goals by taking calculated risks, capitalizing on opportunities, and operating efficiently. Harnessing digital technologies can help manage risks and optimize drug development processes, making them faster and more cost-effective.

KEYWORDS: Foreign direct investment, Education, Pharmaceutical Sector, Capitalization

Introduction

Interest in the impacts of foreign direct investment (FDI) on host economies has grown as FDI is increasingly recognised as a key factor in the industrial development and expansion of the host nation and global output. In addition to bringing in capital, the FDI can provide foreign technology, and managerial expertise, and boost home companies’ global competitiveness. Due to their superior assets—knowledge, patents, trademarks, and exclusive technology—many standard models of multinational corporations (henceforth MNCs) assume that they may “spill over” to the host economy and businesses. The increased productivity of domestic enterprises is thought to result from the positive externalities from foreign direct investment, often known as spillover effects. Here, Spillover effects, a form of network impact, have grown in prominence with the heightened globalisation of trade and deepening financial ties between economies, particularly evident in stock markets. The Canada-U.S. trade dynamics serve as an illustration of such spillover effects. Given that the United States significantly dominates Canada’s major export-oriented sectors, any slight economic deceleration in the U.S. has a magnified impact on Canada due to its heavy dependence on the U.S. market for economic expansion.

This study examines the implications of foreign direct investment (FDI) on the Indian pharmaceutical sector. Horizontal productivity spillover effects of multinational corporations (MNCs) on domestic Indian pharmaceutical enterprises are examined, and several pathways of transmission by which the impacts could be transmitted are investigated. In the very capital- and technology-intensive pharmaceutical sector, India is one of the very few emerging nations with a comparative edge. A notable instance of development in a highly science-based technology sector is the pharmaceutical industry in India. 

Human beings have fundamental requirements, including Food, Clothing, and Shelter. In addition to these, Healthcare, Education, and Sanitation have become integral components of necessities in modern society. In the realm of these essential needs, access to healthcare facilities was largely unavailable for the majority of citizens until independence, leading to high mortality rates and substantial human capital loss. However, over the past four decades, this scenario has undergone a profound transformation, primarily due to the facilitation of Foreign Direct Investment (FDI) by the Government of India. 

Foreign direct investment in the pharmaceutical sector

-An Indian Overview

 Foreign direct investment (FDI) has demonstrated its durability during financial crises, exemplified by its stability in East Asian nations during the global economic downturn of 1997-98. In stark contrast, alternative forms of private capital inflows, such as portfolio equity and debt flows, especially short-term ones, experienced significant reversals during the same. The resilience of FDI during financial crises was also observable in the Mexican crisis of 1994-95 and the Latin American debt crisis in the 1980s. Foreign Direct Investment (FDI) occurs when a foreign organization acquires control of another organization in a different nation. This type of investment happens when an investor, usually from another country, makes a significant investment to acquire primary ownership in a foreign firm. Companies frequently use FDI as a strategic strategy to expand their operations into overseas markets. India plays a crucial role in the worldwide pharmaceutical sector, boasting a substantial pool of scientists and engineers capable of advancing the industry further. India holds the top position in global generic medicine production. The Indian pharmaceutical sector is responsible for meeting 50% of the world’s vaccine needs, fulfilling 40% of the generic demand in the United States, and supplying 25% of all medications in the United Kingdom. The International Monetary Fund (IMF) defines Foreign Direct Investment (FDI) as the process wherein residents of one country, known as the home country, acquire ownership of assets to control the production, distribution, and other activities of a firm situated in another country, referred to as the host country.

Collaborations in foreign direct investments (FDI) between multinational corporations and Indian entities have facilitated the introduction of novel products, pharmaceuticals, technological innovations, and quality control mechanisms, thereby improving regulatory frameworks and yielding mutual advantages for all stakeholders, including the broader society. These partnerships capitalize on the local market insights, cost efficiencies, and scientific expertise of Indian firms while simultaneously granting access to international capital markets, financial assets, expanded consumer demographics, and emerging markets. Additionally, they stimulate competitive dynamics, generate job prospects, catalyse research and development initiatives, and augment foreign currency inflows.

Nonetheless, alterations in FDI regulations, notably the imposition of prerequisite government endorsement for investments from neighbouring nations such as China, prompted by economic instabilities exacerbated by the COVID-19 pandemic, have presented hurdles for Indian investors, particularly those in the pharmaceutical domain. Mandated governmental requisites for disclosures about direct and indirect investments and beneficial ownership from neighbouring countries have compounded intricacies and elongated the approval procedures, thereby engendering uncertainties surrounding ongoing and prospective transactions.

FDI typically takes three primary forms when entering an industry:

a. Greenfield investment involves a company establishing a subsidiary in a new country and initiating its production.

b. Brownfield investment refers to FDI that encompasses acquiring an existing plant or firm rather than constructing a new plant.

c. Joint venture entails an equity and management partnership between a foreign firm and a local entity in the host market.

India’s pharmaceutical sector stands as a key global contributor to producing affordable generic medicines and vaccines, meeting 20 per cent of the worldwide demand in terms of volume and a significant 60 per cent of the global vaccine demand. The industry enjoys liberal foreign investment regulations, permitting 100% Foreign Direct Investment (FDI).

 According to the India Brand Equity Foundation, the Indian pharmaceutical market holds the third position globally in terms of volume and the thirteenth in terms of value. In just 75 years since gaining independence, India has emerged as a prominent global pharmaceutical manufacturing and research hub. The availability of raw materials and a skilled workforce provides a competitive edge to the Indian pharmaceutical industry. Furthermore, the sector is experiencing robust growth with a Compound Annual Growth Rate (CAGR) of 22.4%. Generic medicines dominate the Indian pharmaceutical market, constituting 70%, while over-the-counter medicines and Patented drugs make up 21% and 9%, respectively.

India’s pharma is ranked third globally in pharmaceutical production by volume and 14th by value. The robust industry comprises approximately 3,000 drug companies and over 10,500 manufacturing units. With projections indicating that the Indian pharmaceutical products market is set to reach around US$130 billion by 2030, the industry’s future looks optimistic. At the same time, the global pharmaceutical products market is expected to exceed the US$1 trillion mark in 2023. The industry’s continued growth is poised to benefit both the domestic economy and international healthcare markets. The sector commands a market share valued at around US$50 billion, with industry analysts forecasting a compound annual growth rate (CAGR) of 10.7 per cent until 2030. Projections indicate that the pharmaceutical market in India is poised to escalate to US$65 billion by 2024 and is expected to witness a twofold increase by 2030, reaching US$130 billion.

The progress of the Indian pharmaceutical industry is nothing short of remarkable. From a virtually non-existent state at the time of independence, it has become a significant contributor to global healthcare. Today, the Indian pharmaceutical market ranks as the world’s third-largest in volume and the fourteenth-largest in value. In 2009, the industry surpassed the Rs.1,00,000 Crore turnover milestone, with exports accounting for 40% of its revenue. This indicates the widespread presence of Indian pharmaceutical companies in the global market.  The pharmaceutical industry grapples with significant challenges related to the pricing of products and the consequences of international agreements. One major issue is the impact of the GATT-TRIPS agreement, which restricts pharmaceutical companies from replicating existing drugs and altering their production processes without significant investments in research. This places strain on industry revenues and necessitates measures to mitigate losses.

Another challenge lies in the pricing regulations enforced by the Drug Price Control Order (DPCO)-1995, which currently controls the prices of 74 essential drugs and their formulations. Despite discussions about reducing regulatory control, no concrete steps have been taken, hindering industry growth. Streamlining the number of regulated drugs could foster a more conducive environment for pharmaceutical companies.

Furthermore, the industry faces difficulties with drug diversions by institutions such as government hospitals, defence services, and private hospitals. The defence sector, for instance, is obligated to procure drug stocks through tenders in quantities exceeding actual demand at discounted rates. Surpluses accumulated throughout the year are then channelled back into regular distribution channels at lower prices, leading to losses for pharmaceutical companies. Addressing these challenges requires a balanced approach that considers industry sustainability while meeting regulatory and institutional requirements.

Investing in the pharmaceutical sector: A prescription for long-term growth

Investing in the Indian Pharmaceutical sector offers compelling advantages. The country serves as a cost-efficient manufacturing hub, benefiting from lower production costs and a vast pool of scientific expertise. The sector demonstrated economic resilience during the COVID-19 pandemic, contributing significantly to global vaccine production and boosting India’s economic growth. This surge enhanced public spending on health insurance, creating a favourable environment for investment. Government initiatives like Pharma Vision 2020 aim to position India as a global leader in drug discovery and generic medicine production. Favourable foreign investment laws further underscore the government’s commitment to fostering the growth of the Indian pharmaceutical industry, making it an attractive and well-supported investment choice.

Multinational pharmaceutical companies (MNCs) and their Indian counterparts have engaged in collaborative efforts that have yielded innovative products, state-of-the-art technologies, augmented investment levels, resilient quality systems, and an extensive comprehension of regulatory procedures. Indian companies make significant contributions to these partnerships by offering cost advantages, local market insights, and access to highly qualified scientific personnel. These alliances can generate significant benefits for all parties concerned, thereby augmenting the overall value of society. The combined endeavours facilitate the introduction of novel pharmaceuticals and treatments to the market, while simultaneously increasing patients’ knowledge about a range of ailments and broadening the spectrum of treatment alternatives.

In conclusion, recent measures taken by India to restrict Chinese applications and scrutinize investments and trade interactions with China have exacerbated uncertainties, notably within the pharmaceutical sector, which is heavily dependent on raw materials and ingredients sourced from China. This, coupled with the slowdown in foreign direct investment due to prevailing global economic adversities and diminished investor confidence, has hindered the progression of the pharmaceutical industry. These circumstances underscore the significance of mergers and acquisitions as strategic tools for consolidation and resilience in navigating market volatility.

Conclusion

In the past decade, the Indian Pharmaceutical sector has witnessed notable shifts in its Foreign Direct Investment (FDI) policies. Supplying essential healthcare products to satisfy the needs of the populace, the pharmaceutical sector is an indispensable and knowledge-based industry in every nation.To accomplish this, policies must be updated and refined regularly. The paper analyzes the current state of foreign direct investment (FDI) in the pharmaceutical industry and the policies that currently regulate FDI in this sector. FDI, akin to a coin, possesses both benefits and drawbacks, which are further elaborated upon in the paper. Consequently, it is critical to consistently enhance policies and optimise the advantages of FDI in this particular sector.

Findings

The Indian pharmaceutical industry has emerged as an immensely attractive investment opportunity globally, characterized by rising returns, reduced risks, and projected exponential growth. Initially renowned for generic drug manufacturing, it has now expanded its scope to encompass various activities such as research and development (R&D), production of branded and generic drugs, manufacturing active pharmaceutical ingredients (APIs), laboratory testing, and clinical research.  In contrast to some other nations, the Indian government has significantly and sometimes controversially involved itself in the pharmaceutical industry. Various governmental initiatives have been launched to foster organized industry growth. Notably, the Pharma Vision 2020 aims to propel India to global leadership in end-to-end drug manufacturing by streamlining approval processes for new facilities to attract investments. Additionally, regulatory measures such as the Drug (Prices Control) Orders and the National Pharmaceutical Pricing Authority (NPPA) have been established to ensure medication affordability and availability, addressing crucial healthcare concerns.

Suggestions

It is widely recognized that the influx of foreign investment into the pharmaceutical sector can bring about numerous positive outcomes for the country and its society. Therefore, it is imperative to regulate Foreign Direct Investment (FDI) flows in this sector in a manner that maximizes benefits while minimizing potential drawbacks. To achieve this goal, several key suggestions have been put forward. Firstly, there is a need for FDI policies to be harmonized with the evolving medical needs of society, ensuring consistency and long-term sustainability to instil investor confidence.  Furthermore, increasing healthcare expenditure, particularly on improving infrastructure, is essential for enhancing overall healthcare services. However, the successful implementation of these suggestions requires a holistic approach involving collaboration among all stakeholders, including the government, with a commitment to transparency and genuine intent. By adopting such measures, the pharmaceutical sector can realize its full potential, contributing significantly to national development and societal well-being.

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