Research Details

Fundamental Patent Reform and the Private Returns to R&D - The Case of Indian Pharmaceuticals

Citation:

How do private returns to inventive activity change when IPR regimes are substantially strengthened? This paper investigates this question by looking at the impact of patent reforms in India on India-based pharmaceutical companies. In a fundamental policy shift, India agreed to introduce product patents for pharmaceuticals when it signed the WTO TRIPS treaty in 1995. This policy came into effect through an enabling legislation in 2000 and a final implementation in 2005. The dataset is a panel of 315 pharmaceutical firms from 1990 to 2005. Private returns of a firm are measured using a hedonic stock market valuation of the tangible total assets (A) and intangible inventive assets (K). The intangible assets are measured by stocks of R & D expenditure at various literature specified depreciation rates. We normalize our intangibles with total assets, while using controls like firm sales and aggregate industry dummies in our estimations. The analysis covers stratified industry subsets and watershed periods to capture effects of regime changes. The method of estimation involves pooled OLS regressions with time dummies and fixed effects to account for firm-specific unobserved heterogeneity. We also use non-linear least squares with first differences as a robustness check for our results. The findings reveal a monotonic increase in private returns to inventive activity, with returns peaking around 2005, the year in which product patents were introduced in India. An increase in depreciation rates of R & D implying higher obsolescence of R & D activities results in increasing returns to R & D for various subsets of the industry. This provides early evidence of the markets positively valuing more recent R & D activities as firms shift their research capabilities with changes in the patent regime.
 


Publication Year: 2007
Type: Working Paper
Working Paper Number: 6

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