Technological innovations and firms’ productivity in new patent regime: Evidences from Indian pharmaceutical industry

• Published date: 01 February 2021
• Author: Madan Dhanora,Mohd Shadab Danish,Ruchi Sharma
• Date: 01 February 2021
• DOI: http://doi.org/10.1002/pa.2136

ACADEMIC PAPER

Technological innovations and firms’productivity in new

patent regime: Evidences from Indian pharmaceutical industry

MadanDhanora| MohdShadabDanish| RuchiSharma

School of Humanities and Social Sciences,

Indian Institute of Technology Indore, Indore,

India

Correspondence

Madan Dhanora, School of Humanities and

Social Sciences, Indian Institute of Technology

Indore, Simrol, Indore 453552, India.

Email: bhu.madan@gmail.com

Innovative firms enjoy more market benefits by conducting both technological

(product and process) and nontechnological (organizational and marketing) innova-

tions. This study aims to examine the relationship between technological innovations

and firms’productivity in Indian pharmaceutical industry in new patent regime. In

particular, we analyze the direct impact of product and process innovation on the

productivity of 168 Indian pharmaceutical firms over 2000–2013. Findings of this

study reveal that technological innovations are positive source of firms’productivity.

However, this relationship varies with types of technological innovations and also

ownership structure of firms. Moreover, this study also finds that the impact of tech-

nological innovation is stronger for multinational enterprises.

JEL CLASSIFICATION

L10O30O38

1|INTRODUCTION

This study analyzes the relationship between technological innovation

(product and process innovation) and firms’productivity in the

context of Indian pharmaceutical industry. The relationship between

innovation and firms’performance is well established in the seminal

work of Schumpeter (1942), who argues that innovative firms create a tem-

porary monopoly in the market, which eventually leads to higher market

performance for firms. Technological innovations are source of economies

of scale and efficiency (Davies & Geroski, 1997; Gruber, 2000; Mueller &

Tilton, 1969; Phillips, 1966). A firm always looks for better production tech-

niques and differentiated products because the expansion and contraction

of a firm depend upon its technological advancements. According to the

CDM model, a firm improves its productivity by conductingmore R&D and

patenting (Crépon, Duguet, & Mairessec, 1998).

1

Most of the studieson innovation and firms’performance relation-

ship use patent (patent application and grant) and R&D expenditure as

output- and input-based measures of innovation (Artz, Norman,

Hatfield, & Cardinal, 2010). However,Gunday, Ulusoy, Kilic,and Alpkan

(2011), and Nemlioglu and Mallick (2017) discuss that the relationship

between innovationand firms’performance varies with different types

of technological(product and process) and nontechnological (marketing

and organizational) innovations. The product innovation is responsible

for the increase in the price of the product and it also improves firms’

market share. On the other hand, process innovation improves firms’

performance through reduction in the production cost (Cohen &

Klepper, 1996;Klepper, 1996; Lunn, 1986; Vives,2008).

Indian pharmaceutical industry provides an interesting research

context to explore the impact of product and process patents on

firms’productivity. This sector witnessed many structural changes in

thelast50 yearslikepatentpolicyreformsthathavealteredthe

industry's competitive pressures. Until the 1970's, this industry was

dominated by Multinational enterprises (MNEs), where both product

and process patents were allowed (Duggan, Garthwaite, & Goyal,

2016; Kale & Little, 2007). 1970 marked a watershed year with policy

change whereby only process innovation could only be patented in

the fields of food, drug, and agro-chemicals for 7 years. Following this,

MNEs left the market while domestic firms improved their capabilities

by conducting adaptive R&D (Duggan et al., 2016; Goldar, 2013;

Kale & Little, 2007). The next major change occurswith the

reintroduction ofproduct patents in 2005 to comply with the Agree-

ment on Trade-Related Aspects of Intellectual Property Rights (TRIPs).

As a founder member ofthe World Trade Organization (WTO) India

also made many changes in its domestic patent policy to comply with

the TRIPs agreements. With the Patent (Amendment) Act 2005, Indian

reintroduced product patent in all fields of technology. This change in

Received: 29 May 2019Revised: 30 October 2019Accepted: 8 March 2020

DOI: 10.1002/pa.2136

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https://doi.org/10.1002/pa.2136