Global Development Institute Blog

By Rory Horner

Rory Horner observes in an article in the current issue of Journal of Economic Geography how better development opportunities can be available outside global lead firms’ production networks, and how some regions and countries may benefit from restricting engagement with global lead firms.

Integration into the global economy has widely been regarded as a necessary component of economic development strategy since the 1980s. Often drawing on the successful East Asian experience, much research has emphasised how industrial upgrading can depend on participating in the value chains/production networks of the most significant lead firms in an industry.

Yet many places have struggled to achieve positive results from integration into global production networks, and have experienced more adverse forms of incorporation. Among other issues, integration into GPNs can potentially crowd out domestic enterprises, have limited upgrading opportunities, marginalise workers and involve dependent relationships with global lead firms.

In an article appearing in the current issue of Journal of Economic Geography, I seek to question the prominent emphasis on, and often advocacy for, integration into the production networks of global lead firms. Such a focus can overlook how the initial capabilities of some successful industries today were established, and underestimate the opportunities for firms from operating outside of lead firm networks. The article draws on my on in-depth fieldwork and secondary research at the intersection of economic, and broader health, social and political, dimensions of development. I argue the Indian pharmaceutical industry, recognised today as the “pharmacy of the world” for its crucial role in supplying low-cost medicines, benefited at crucial stages from operation outside of lead firms’ GPNs.

From Indian independence in 1947 until 1970, India was largely reliant on foreign pharmaceutical multinational companies (MNCs) for medicines. Few MNCs engaged in local production, with most supply imported. Domestic firms faced a number of technical, marketing and legal barriers vis-à-vis MNCs. Medicines in India at the time were amongst the most expensive in the world.

From 1970, a period of what I call “strategic decoupling”, involving exit from global markets and firms leading to positive development outcomes, was initiated. Patent protection on pharmaceutical products was removed, while ownership restrictions were placed on foreign companies. With MNCs constrained, domestic firms faced lower entry barriers and began copying and selling in the domestic market the drugs that MNCs had been producing. With the development of substantial capabilities among the domestically-owned pharmaceutical firms in the 1970s and 1980s, Indian-owned firms took back a majority-owned share in the domestic market.

Since the introduction of new economic policies in 1991, the policy environment surrounding pharmaceuticals in India has changed dramatically, with price controls reduced and 100% inward and outward FDI allowed. Some large Indian pharmaceutical firms could now even be considered emerging global generic firms, meeting the quality requirements to enter markets in North America and Europe. At the same time, a wider array of medium and even small-sized Indian pharmaceutical firms have joined these firms in participating in production networks and relationships across the global South. With entry barriers and quality requirements less stringent in these markets, these South-based pharmaceutical producers are largely independent of lead firms from the North.

Operating outside of global lead firms’ production networks has played a key role in the development of the Indian pharmaceutical industry and continues to do so today. In the era of the World Trade Organisation, despite well-known limitations on policy scope, variations of strategic decoupling can still be considered. Restrictions on engagement with MNCs can be implemented in the form of limits on FDI, requirements to hire local labour, technology transfer, R&D, and domestic subsidies. Moreover, growing end markets in the global South continue to offer new opportunities, for revenue generation, industrial learning and upgrading.

In two new projects, I am now researching more deeply the nature of South-South production networks and their development implications, through an investigation of the economic, social and political relationships that constitute India’s “pharmacy to the developing world”. In South Africa, I am exploring the various engagements of Indian firms in the market and their local implications. In East Africa (specifically Uganda, Kenya and Tanzania), I am investigating the challenges for local pharmaceutical production and its viability vis-à-vis competition from Indian supply. The initial stages of the research confirm comparatively lower entry barriers in such production networks, and find quite variegated implications for local stakeholders – with key differences, for example, between local industrial and consumer interests. Such outcomes fall in various positions along the spectrum between the two polar extremes of the discourse on South-South relations – as “win-win” development cooperation or neo-colonialism.

Much more research is needed into the development outcomes from the various production networks that exist in the emerging, more multipolar world.


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