Working Paper Series

Working Paper Series #2008-051 Internationalising to create Firm Specific Advantages: Leapfrogging strategies of U.S. Pharmaceutical firms in the 1930s and 1940s & Indian Pharmaceutical firms in the 1990s and 2000s. Suma Athreye and Andrew Godley November 2007 United Nations University - Maastricht Economic and social Research and training centre on Innovation and Technology Keizer Karelplein 19, 6211 TC Maastricht, The Netherlands Tel: (31) (43) 388 4400, Fax: (31) (43) 388 4499, e-mail: [email protected], URL: http://www.merit.unu.edu 2 Internationalising to create Firm Specific Advantages: Leapfrogging strategies of U.S. Pharmaceutical firms in the 1930s and 1940s & Indian Pharmaceutical firms in the 1990s and 2000s. Suma Athreye Brunel Business School Brunel University, Uxbridge Middlesex, UK. UB8 3PH e-mail: [email protected] Andrew Godley The Department of Management University of Reading Business School PO Box 218, Whiteknights Reading, UK RG6 6AA e-mail: [email protected] Abstract Internationalisation is a useful strategy to gain firm specific advantages during periods of technological discontinuity. The pharmaceutical industry offers us two such episodes as examples: when the antibiotics revolution was beginning and when the possibilities of genetic routes to new drug discovery were realised. This paper compares the strategies adopted by laggard U.S. firms scrambling to gain capabilities in antibiotics, and Indian firms equally eager to acquire positions in new biotechnology based drugs and shows that both groups used internationalisation strategies to gain technological advantages and build up their firm specific advantages. Key words: Technological leapfrogging, Internationalisation Strategies, Indian Pharmaceutical industry, Antibiotics revolution, US Pharmaceuticals. JEL codes: F2, L2, L6,N8, O3 UNU-MERIT Working Papers ISSN 1871-9872 Maastricht Economic and social Research and training centre on Innovation and Technology, UNU-MERIT UNU-MERIT Working Papers intend to disseminate preliminary results of research carried out at the Centre to stimulate discussion on the issues raised. 3 4 Internationalising to create Firm Specific Advantages: Leapfrogging strategies of U.S. Pharmaceutical firms in the 1930s and 1940s & Indian Pharmaceutical firms in the 1990s and 2000s. The global pharmaceuticals industry is more dependent upon commercializing new scientific innovations than any other sector and has grown in a non-linear fashion, following the cycles of particular paths of scientific discovery. The early alkaloids (plant- based therapies) of the late nineteenth century gave rise to many products and companies of varying levels of scientific veracity and efficacy. From the 1890s scientific discoveries in antitoxins and sera enabled new firms to emerge that acquired capabilities here. By the 1920s new therapies were emerging through synthetic chemistry, but the truly revolutionary change came in the 1930s and 1940s, when the early sulphas and anti- infectives first emerged. Antibiotics required new science and different manufacturing techniques, enabling a window of opportunity for new entrants to grow and acquire market share rapidly. Pfizer, for example, the world’s leading producer of penicillin from the end of World War 2 through to the 1960s, had not even had any presence in pharmaceuticals before 1942. In more recent times, the potential of biotechnology to produce novel drugs and therapies also represents a Kuhnian shift from one paradigm of pharmaceuticals production to a new one, allowing new entrants into global pharmaceuticals. Combined with advances in information technology which have allowed the use of genomic databases and simulated trial and error stages (Gambardella 1989), the use of rDNA methods to discover new remedies and therapies has fundamentally shifted the scientific base of pharmaceutical production from a knowledge of chemistry alone to a more nuanced understanding of the 5 interaction between chemistry and biology. The emergence of genomics has thus once again opened a new technological trajectory allowing new entrants the opportunity to challenge the market shares of established firms, as was the case with antibiotics in the 1940s. A small number of Indian pharmaceuticals firms with existing capabilities in the bulk manufacturing of generic drugs have attempted to upgrade their research capabilities in attempts to discover and commercialise New Chemical Entities (NCEs) and so compete directly with the world’s major pharmaceuticals firms for the most profitable segment of the sector (Athreye, Kale and Ramani, 2008). Such aggressive attempts by these few firms have attracted considerable attention although the jury is still out on whether they will register any success. The role of technological discontinuities in creative destruction and the emergence of new leaders in the pharmaceutical sector is well researched and documented, however little attention has hitherto focussed on the critical issue of if and how internationalisation can help firms to achieve leadership during moments of technological discontinuity. Exploiting the two crucial moments of technological discontinuity in the pharmaceutical sector (viz. the antibiotics revolution and the emerging potential of biotechnology in new drug discovery), this paper seeks to identify the leapfrogging strategies used by U.S. pharmaceuticals firms in the late 1930s and 1940s to overcome their disadvantages in the early years of the antibiotics era and then systematically compare and contrast these to the leapfrogging strategies used by Indian firms since 1990. Our focus is on identifying which internationalisation strategies have played a role and how they were used for the building of technological capability and lasting competitive advantages by US firms in the 1930s and Indian firms in the 1990s. 6 The remainder of the paper is organised in the following way: Section 1 briefly reviews the literature technological discontinuity and role of internationalisation in technological leapfrogging; Section 2 sets out the similarities and differences in the market conditions of the pharmaceutical industry in the 1930s and in the 1990s. These sections set the stage for a more detailed comparison of the patterns of internationalisation and knowledge acquisition among U.S. firms in the late 1930s and 1940s and Indian firms in the 1990s in sections 3 and 4. Section 5 concludes with some implications for host economies of such internationalisation behaviour. 1. Technological discontinuity, Internationalisation and Technological leapfrogging The idea that technological discontinuities could be moments when new entrepreneurs could take over leadership in markets is at the heart of the Schumpeterian ‘creative destruction’ thesis. There is some debate on whether new firms are the harbingers of radical technologies (the original Schumpeterian thesis challenged by Arrow 1975) or simply better positioned to exploit new technologies, as the innovation management literature suggests (Tushman and Andersen, 1986). The reasoning here is that radical innovations require managerial, organisational and marketing competences, which take time to build. Incumbent firms would thus, prefer to adopt innovations that enhance existing competences rather than radical innovations, which are likely to need new competences or destroy the value from existing ones. In contrast, new entrants would have had no such baggage from the past and were more likely to adopt radical technologies. Other work in this tradition has qualified the early optimism. Market knowledge (Abernathy and Clark, 1985), the important role of system architectures (Henderson and Clark 1990) and the role played by the ownership of complementary assets (Teece, 1985) – 7 have all been identified as factors favouring incumbent firms in the adoption of radically new technologies. The idea that laggard nations could better exploit new technologies from around the world during periods of technological discontinuity was first suggested in a prescient paper by Soete (1985). In the context of the newly emerging microelectronics revolution, he argued that globalisation permitted newly industrialising countries to ‘leapfrog’ into newer technologies and higher rates of growth. The idea is that globalisation presents firms in a technologically laggard nation with the opportunity to gain competitive advantage over incumbent firms in technologically dominant nations through the rapid adoption of superior new technologies. The East Asian success story in semiconductors and microelectronics certainly appeared to confirm his intuition, though studies on successful leapfrogging in East Asia (Kim 1997, Hobday 1995, Amsden 1989) also highlighted the role of domestic absorptive capacity and firm capabilities. However, until relatively recently, the East Asian success was thought to rest on one form of internationalisation viz. large export markets which provided the production scale on the basis of which domestic firms built their capabilities. More recent work has significantly altered our perception of the role of internationalisation in the leapfrogging strategies of Korean firms. Sachwald (2001) used empirical tests and case studies, to show that Korean groups had invested in developed countries not only to jump over trade barriers, but also to source advanced technology and marketing capabilities throughout the 1990s. Moreover, their ambitious strategies were often stimulated by oligopolistic rivalry among

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