When one door closes, another door opens … for some: Evidence from the post‐TRIPS Indian pharmaceutical industry

• DOI: http://doi.org/10.1002/smj.3140
• Author: Shinjinee Chattopadhyay,Janet Bercovitz
• Published date: 01 June 2020
• Date: 01 June 2020

RESEARCH ARTICLE

When one door closes, another door opens …for

some: Evidence from the post-TRIPS Indian

pharmaceutical industry

Shinjinee Chattopadhyay

1

| Janet Bercovitz

2

1

Gies College of Business, University of Illinois at Urbana-Champaign, Champaign, Illinois, USA

2

Leeds School of Business, University of Colorado Boulder, Boulder, Colorado, USA

Correspondence

Shinjinee Chattopadhyay, Gies College of

Business, University of Illinois at Urbana-

Champaign, 1206 South Sixth Street

#308, Champaign, IL 61821.

Email: schattop@illinois.edu

Abstract

Research Summary: Firms' strategy choices are con-

textually dependent, yet internally delimited. A radical

shift in institutional context forces firms to reevaluate

the desirability and suitability of current strategies and

assess the potential of new strategic opportunities.

From 1970 to 1995, the Indian pharmaceutical industry

operated under a process-focused intellectual property

regime and enjoyed legal protection to reverse engineer

brand name drugs. In 1995, this protection ended with

the introduction of the trade-related aspects of intellec-

tual property rights (TRIPS) Act. We examine the inno-

vation response of Indian pharmaceutical firms in light

of this regime shift focusing on the underlying internal

factors influencing firms' strategic choices. We find that

the scope and balance of firms' knowledge bases, which

set capabilities and influence decision framing, dictate

firms' innovative response. We further document how

firms' strategic choices contribute to firm financial per-

formance and the reshaping of the Indian pharmaceuti-

cal industry.

Managerial Summary: From 1970 to 1995, the Indian

pharmaceutical industry operated under a process-

focused intellectual property regime and enjoyed legal

protection to reverse engineer brand name drugs. Fol-

lowing TRIPS in 1995, the intellectual property regime

Received: 30 November 2017 Revised: 31 October 2019 Accepted: 26 November 2019 Published on: 17 March 2020

DOI: 10.1002/smj.3140

988 © 2020 John Wiley & Sons, Ltd. Strat Mgmt J. 2020;41:988–1022.wileyonlinelibrary.com/journal/smj

in India became stronger, with product patent enforce-

ment being recognized. Indian pharmaceutical firms

had to make strategic choices on the kind of innovation

they would pursue under this new IP regime. This arti-

cle shows that having broad and nonspecialized knowl-

edge assets allowed firms to pursue the most novel

innovation and engage in new product development.

Having T-shaped assets, that is, broad knowledge scope

yet narrowly focused knowledge expertise, allowed

firms to pursue process-based innovation in areas close

to their existing areas of expertise but not necessarily

engage in new product development. The findings of

this article shed light on what kind of knowledge base

and workforce allows firms to adjust to technological

and contextual changes.

KEYWORDS

process and product innovation, recombination, specialization,

TRIPS, T-shape

1|INTRODUCTION

Firms' strategy selection is contextually dependent, yet internally delimited. Whenever there is

a significant shift in the institutional, competitive, or technological environment, firms are

called upon to reevaluate the viability and appropriateness of their current strategies and proac-

tively assess the potential of new strategic opportunities (Li & Tallman, 2011; Meyer, 1982;

Tushman & Anderson, 1986; Wang & Myles Shaver, 2014). Contextual changes often lead to a

reordering of the economic value associated with different strategic options; however, a firm's

choice among strategic alternatives is rarely unconstrained. Rather, strategy selection is argu-

ably shaped by the firm's unique “subjective productive opportunity set,”a set determined by

the firm's extant resources and prior experiences (Penrose, 1959).

Much of the existing literature on firm strategic adaptation has examined the response of

firms to technological changes. While this past literature has focused on actions firms take to

change or update capabilities—such as reconfiguring and recombining resources (Helfat &

Peteraf, 2003; 2015; Kapoor & Klueter, 2015; Karim & Capron, 2015; Sosa, 2009, 2011) and

embarking on search processes (Cyert & March, 1963; Fleming, 2001; Katila & Ahuja, 2002;

Rosenkopf & Nerkar, 2001)—less attention has been given to strategic choice: how firms

leverage existing resources, while simultaneously being constrained by this same portfolio of

resources, as they seek to develop or move to a new strate gic path in response to environ-

mental changes. As Uhlenbruck, Meyer, and Hitt (2003) and Lavie, Stettner, and Tushman

(2010) point out, there is a dearth of work that looks at underlying factors that determine

firms' specific strategies in the face of contextual changes. This article seeks to inform

this gap.

CHATTOPADHYAY AND BERCOVITZ 989

We submit that, following a contextual shift, the set of feasible strategic alternatives open to

firms will differ as this set is determined by firm-specific attributes including the firms' current

resources (Argyres, Bigelow, & Nickerson, 2015), integrative, recombination and

reconfiguration capabilities (Fleming, 2001; Fleming & Sorenson, 2001, 2004; Rosenkopf &

Nerkar, 2001; Karim, 2009; Karim & Kaul, 2015; Moeen, 2017), and dominant logics and per-

ceptions (Kaplan & Tripsas, 2008; Penrose, 1959; Prahalad & Bettis, 1986, 1995). We explore the

influence of these three factors on the innovation strategies firms adopt following a significant

institutional change in the Indian pharmaceutical industry—the introduction of the trade-

related aspects of intellectual property rights (TRIPS) Act that required migration from a

process-patent intellectual property (IP) regime to a product-patent IP regime. The introduction

of TRIPS opened up a different strategic opportunity centered on product-based innovation,

which offered the potential of gaining monopoly rents for firms that did product-based innova-

tion. At the same time, TRIPS made the then dominant strategy of process-based reverse engi-

neering of drugs less economically attractive as it was no longer “legal”to introduce generics

for currently under-patent drugs. Strategic attractiveness, however, does not necessarily trans-

late or equate to strategic accessibility. In this study, we examine the knowledge dimensions

that facilitate or foreclose the movement of firms to newly available strategic opportunities

against the backdrop of the change in patent regime.

While it has long been noted that knowledge scope or breadth is important for a firm to

chart a new innovation path, we argue that, at any point in time, it is the firms' existing balance

(or lack of specialization) across knowledge components that drives the relative salience of

these components and thus the subsequent accessibility of strategic alternatives. Broadly, firms'

strategic innovation choices are shaped dually by existing knowledge assets and prevailing orga-

nizational focus. We submit that scope of knowledge base determines the range of

recombination-worthy elements the firm possesses, but ultimately, the firm's ability to recom-

bine, and hence its innovation strategy, is shaped by its balance, which is reflective of manage-

rial attention across the firms knowledge assets. A firm with a broad scope, but balanced

innovative emphasis, will have a larger set of salient knowledge elements that can be used for

recombination than a firm with similar scope but unbalanced (or highly specialized) innovative

focus and thus will be better situated to pursue emerging high-rent strategic opportunities.

Using hand-collected Indian patent data on incumbent Indian pharmaceutical firms from

1995 to 2013, we find that having competencies and balance across a broad knowledge set is

associated with firms embarking on the ambitious, high-rent innovation strategy of developing

new chemical entities and engaging in product innovation. Broad scope in combination with a

less balanced, specialized (or a T-shape) set of knowledge is associated with firms pursuing a

“new-generics”strategy—leveraging existing re-engineering capabilities to capture moderate

rents from the provision of generic versions of drugs soon after they come off patent. Narrow

scope is associated with firms pursuing low-rent strategies of re-engineering long off-patent,

generic drugs. Having broad scope and balance enables firms to make choices largely based on

the evaluation of a wide set of viable options with selection driven by perceived risk-adjusted

rent potential. Broad scope and limited balance associated with a specialized set of assets, how-

ever, entail a condition where serendipity is more central—the firm faces a smaller set of oppor-

tunities and relies on its existing knowledge aligning with the available opportunities. A narrow

set of knowledge limits the firm's strategic alternatives and, in our context, is associated with

firms that remain followers of their old established strategy.

While there were concerns about the welfare implications of TRIPS within the Indian phar-

maceutical industry, we find that following the regime change it became viable for certain firms

990 CHATTOPADHYAY AND BERCOVITZ