Innovation strategy of latecomer firms under tight appropriability regimes: The Indian pharmaceuticals industry

Abstract

As emerging economies joined the World Trade Organisation (WTO) and became signatories to the TRIPs (Trade Related Intellectual Property Rights) Agreement, their enterprises face a new institutional environment governed by a tight appropriability regime. A tight appropriability regime demands that latecomer firms (LFs) from emerging economies transform from being technology followers to knowledge producers and innovators. We test if this hypothesis is valid for developing countries which have a different set of initial endowments and institutions. The central research question guiding this study is how LFs are adapting their innovation practices in response to an institutional shift from a weak to a tight intellectual property regime. We harbour a few hypotheses that predict how a shift from a weak to a tight appropriability regime is likely to affect innovation practices of LFs. Using econometric analysis on a panel data from 480 Indian firms from 1994 to 2012, the innovation practices of LFs are compared over two time periods – corresponding to a weak and tight appropriability regime. Discriminant Analysis and LOGIT tests suggest that institutional transition increases the propensity of LFs to engage in exploratory innovation and develop their human capital and codified knowledge base. But what is interesting and contrary to what was predicted, LFs appear to be less likely to forge formal and informal linkages with foreign firms under the tight IPR regime as compared with a weak IPR regime.