1.1 Introduction

CHAPTER-I

INTRODUCTION

Innovation by nature is a systemic phenomenon. A Systems perspective to the

innovation emphasises that interaction and interdependence among the components (actors

and institutions) in a system have a decisive impact on the innovation activities of firms.

This leads to a focus on the working of the linkages or interactions of system. Recognising

this fact, the present study explores the nature and extent of linkages or interactions among

various actors to understand innovation at the level of firm in a health biotechnology

innovation system. The basic purpose of the thesis (Study) is to advance the empirical

understanding on how the health biotechnology firms endogenise linkages in the process of

innovation and growth; and how the firm innovation initiatives are being shaped by the

institutional factors in the health biotechnology innovation system.

Four innovative biopharmaceutical firms namely Panacea, Delhi; Shantha,

Hyderabad; Dabur, Ghaziabad and Biocon, Bangalore having diverse historical and

technical attributes with variation in types of innovative initiatives were chosen for the

study. The objective of the study is guided by the answers to following questions: what are

the characteristics of linkages and other actors that firms had adopted in the course of

innovation? and how the firm specific linkages have been capitalised for innovation?

In the literature, the importance of linkages among the actors as the main stay of

innovation in the biotechnology advanced nations has been well established, with most of

the research on biotech alliances being focused in the health sector (Arora and Gambardella

1990, Link and Vonotras 2001, NSF 2001, Bowonder 2001, Feldman 2001,

1

Mackelvey 2004, Fisher 1996, Hagedoom 1996, 2002). Incidentally, the Indian

biotechnology industry like its global counterparts is also dominated by health sector and its

applications (Arora 2005) and is characterized by dynamic feature such as high technology,

global perspective, rising investments and expansions with committed government support

(See Chapter-3, p.76) which aptly constitutes the focus area of research of the present study.

The term "linkages"1 or "alliances" in the literature refer quite comprehensively to

any formal collaborative relation between independent firms that constraints ex ante their

future conducts and may pertain to any sphere of firm's activity1 (see Colombo et al 2006,

among others Contractor and Lorange 1988; Williamson 1991; Hagedoom 1993;

Hagedoom and Schakenraad 1994; Gulati 1995; Oxley 1997; Colombo 2003). The

literature is abound with studies on the firm interaction or linkages for getting 'access to

complementary and supplementary capabilities' such as knowledge or market for

successfully commercializing innovations (see Arora and Gambardella 1994, Kogut and

Zander 1992, Gulati 1999, Baum et al 2000, Liebskind et al 1996, Stuart 1998, Soh and

Roberts 2005), on the 'determinants of the inter-firm alliance formation'(see Rothaermel

2001, Colombo et al 2006) and on the 'positive impact of alliances' on the innovative

performance of firms (see Powell 1996, Shan 1994,Soh and Roberts 2005). Though

empirical findings have firmly established the interactions as the main stay of the

innovation, the innovation system has often been described in terms of the structure,

institutions and organizations as well as the interactions between organizations with little

concern or understanding on how the system changes or innovates? (Li.mdvall,

Intarakumnerd and Yang 2006 p.3). At the same time there is still a gap in the innovation

literature on the understanding of the mechanism that link innovation or knowledge to

growth (Carlsson 2004). The present study attempts to enrich our understanding of the

1 The term alliances, linkages, interactions and collaborations are being used interchangeably in the study. See for details on the terminology of linkages section 4.3.1, Chapter -4, p.l 06.

2

innovation systems as it surpasses the assumption of linkages among actors in an innovation

system rather it traces the path of innovation established through the collaboration of firms

observed nationally and/or internationally. This entails understanding innovation as a

'process' or an activity rather than as a 'result'2 which would overcome the limitations in

the approach adopted by the Community Innovation Surveys (CIS) conducted by EU to

have a better understanding of dynamics, relationships and interactions that affect

innovation.

Innovation studies so far carried out in the Indian context in the area of health

biotechnology are very far and few. The existing studies in Indian context have focused

mainly upon examining the university linkages with industry by Deepak (200 1, 2006) in

case of Delhi region and for select public research organisations in the country by

Bhattacharya and Arora (2007). Both these studies have examined the linkages among the

actors by placing university or research institutions at the centre of focus of innovation (with

industry at the periphery). Other Biotechnology Innovation studies include

commercialization of biotechnology by Ramani (2002), Visalakshi et al (1997), and of late

by Thorosteinsdottirr et al (2004) and Kumar et al (2004) on the role of the government

and success of health biotechnology sector in the Indian health biotechnology innovation

system. Recently, the case study of the private sector health biotechnology firms by

Frew et al (2006) focused on the successful innovations strategies adopted by the firms to

address local health needs in the country.

No attempt, however, has been made to analyze the interactions or linkages among

the actors and institutions underlying Indian health biotechnology innovation in a systemic

context. The present study primarily attempts, following the observations from the core

2 (See Salazar and Holbrook, 2004)

3

studies in this field, to explore and answer how, when and why the firms form linkages in

understanding the biotechnology innovation3 system in the area of human health.

Based on this understanding, the following objectives and key questions are

attempted in the study. Also discussed are the methodological issues, the scope and

limitations of the study. At the outset, the boundary and the characteristics of the health

biotechnology industry are defined in the background of global and national scenario of

biotech industry.

1.2 Characteristics of Health Biotechnology

The first step in characterizing innovation in biotechnology is a discussion of what

the technology entails.

1.2.1 Definition

Biotechnology encompasses aspects of biology, medicine, chemistry, physics,

mathematics, information science, material science and engineering. The term

Biotechnology may be defined as "Any technique that uses living organisms (or parts of

organisms) to make or modify products, to improve plants or animals, or to develop micro

organisms for specific uses" in other words it is Applied Biology. The Department of

Biotechnology (DBT), Government of India has taken a very broad definition of

biotechnology. According to this definition, "biotechnology is an application of recombinant

and non-recombinant technologies in biological resource utilization for product and process

development aimed for commercialisation" (Sharma 2002).4

3 The development of new health biotechnology products and process. 4 The definition is so wide that the classification of biotechnology commodities for data collection purposes becomes very difficult (Chaturvedi 2005). However there are attempts being made by the OECD to evolve a standard definition in this regard.

4

Four new technologies are responsible for bringing about the recent revolution in

this field: viz. (i) Genetic engineering enabling us to identify and transfer genes from one

organism to another, (ii) Cell fusion technology and resultant monoclonal antibodies, (iii)

Bioprocess technologies to produce large quantities of important biological drugs, and (iv)

Structure-based molecular design expediting new drug development. Various combinations

and derivatives of these technologies are now available.

In fact, the new biotechnology is a rapidly expanding collection of tools,

technologies and disciplines that allow, among other things, unprecedented control over and

manipulation of the genetic material of organisms. The main areas of technology would

cover the scientific and technical disciplines such as genetic engineering (gene

manipulation), cell culture (preparation of given tissues), fermentation, bioinformatics

(storage, retrieval and analysis of DNA sequences), proteomics, etc. Alternatively, one

could list the various areas of application, such as the preparation of the biological material

for therapeutic solutions (pharmaceuticals); manipulation of animals (e.g. protein

production), plants (e.g. food production) and micro organisms (mainly viruses and

bacteria).

In other words, the "New" or "Modem" Biotechnology is defined as: "The industrial

use ofrDNA, cell fusion and novel bioprocess techniques." To relate this definition to the

world economy, according to Vivian Moses and Ronald Cape (1991) a corporate

biotechnology pioneer, it is defined as "Making money with Biology."

The development of biotechnology has distinguishing features (See Bartholomew,

1997) which make it different from the technology development in other sectors: (1)

Biotechnology has commercial application in wide variety of industrial sectors including

pharmaceuticals; (2) It has a high dependence on basic research in molecular biology. A

5

new idea is dominant and the products form i~elf around the new idea or new technology.

As a result, close connection clearly exist between scientific research and commercial

biotechnology (Mowery and Rosenberg 1993, Kenney 1986) and (3) there is a substantial

uncertainty and controversy around the commercialisation of genetic engineering research.

Regulations on the patenting of life forms (Scott-Ram 1993), and the testing of new

biopharmaceutical products, for example, are important factors in the speed by which new

scientific discoveries make it to market.

1.2.2 Health Biotechnology Characteristics

A revolution is taking place in the knowledge base of biotechnology in the area of

pharmaceuticals and human health care more broadly. Biotechnology has altered the

principles of the treatment of symptoms of the disease to the treatment of causes with

promising results in understanding the path of mechanism of the disease or its molecular

biochemistry. This has led to a radical change in the production of new or rare molecules

and drugs with lower costs, novel means for quicker and more accurate diagnostic tests, and

new and safer vaccines (Visalakshi et al 2000, Sandhya et al 2000 and Reis-Amdt 1987 and

www.Bioguide.org). The gigantic Human Genome Project started in 1990 holds enormous

potential for the health industry and is likely to provide an in-depth understanding of and

possible treatment for more than 6000 genetic diseases that currently affect man kind as well

as gynetic alterations that increase the risk of developing some common diseases. This has

led to the emergence of new fields and concepts like Functional Genomics, Proteomics,

DNA and Protein Micro array, Pharmacogenomics (Brahamchari 2002, Technology Day

5 Recombinant DNA( rONA) and genetic engineering techniques represent radical scientific breakthroughs that are being transferred to industry and reduce to practice, Mowery and Rosenberg (1993).

6

Lecture). India is endowed with ethnic groups rich in genetic diversity whose potential is

being realized for genomic research and predictive medicine for health.

Typical areas of present-day research topics range from: cryptography of the

information contained within our genes to the de novo construction of tissues and organs. It

has promoted in-depth studies as varied as the modelling of full-body physiology and the

simulation of molecular evolution. According to Sager (200 1 ), the New Biology is indeed

going through a transformation from a descriptive to predictive science, and both the

resolution and complexity of experimental questions and answers are continually increasing.

As a result, several new tools have appeared such as combinatorial chemistry,

proteomics, gene-sequencing machines, high-throughput sequencmg, biochips,

bioinformatics and anti-sense therapeutics, which are being developed and generated mostly

by small firms, leading to product and process innovations stimulating application

innovations. These have led to the creation of both radical and incremental product

innovations and brought down the costs of pharmaceutical products (OTA 1991, Ramani

2002, Bowonder 2001 ).

Burrill G S (2007)6 in his keynote speech at BIO conference described biotechnology

transforming into a massive global enterprise. It is moving away from chemistry to

biochemistry; from one-size-fits-all drugs to personalized medicine; from "aging just

happens" to "aging is optional". Therapeutics, diagnostics, and devices are becoming

"theranostics"; the focus is shifting from treating sickness to preventing sickness; and it's no

more food for survival, but food for health.

6 G Steven Burrill is CEO of Burrill & Company, US

7

1.3 · Global and National Scenario of Biotechnology Industry

1.3.1 Growth Trends

The Global Biotechnology Industry7 attained a level of US $ 73.5 bn in 2006, a

growth of 14% over its previous figure of US$ 64 bn in 2005. The global biotech market is

dominated by USA with a share of 75% followed by Europe and Canada with a share of

16% and 4% respectively, and the remaining 4% being occupied by the Asia-Pacific (Ernst

& Young 2007). India occupies a significant position in the Asia-pacific region and rank

next to Australia and China in terms of number of biotech companies in the country (Ernst

& Young 2004l India is making consistent efforts to emerge as a key player in

biotechnology and its share in the global biotechnology market has increased to 2. 7% in

2006 as compared to just 2% in the previous years. The macro features of ~he global

biotechnology industry and Indian biotechnology industry are given in Table 1-1 and Table

1-2 respectively.

The Indian biotechnology industry has shown a significant increase in growth over

the years, the biotechnology revenues witnessed a four fold increase to US $ 2.0 bn in 2006-

07 from US $ 0.5 bn in 2002-03, with a compounded average annual growth rate (CAGR)

of 38 %9• Exports account for more than 50% of the total revenues (US $ 1.2 bn), with

biopharma comprising ofmore than 74% in 2006-07 (See Figure 1-1).

7 of public listed companies 8 The detailed list of countries in the Asia-Pacific region in terms of descending order of number of biotech companies include Australia, China, India, Taiwan, Korea, Japan, New Zealand, Singapore, Malaysia, Philippines and Thailand. 9 In contrast, the estimated size of the global leader, US biotechnology market is $55.5 billion in 2006.

8

The biotech revenues comprised of Bio Pharma, Bio Services, Agriculture, Bio

Industrial and Bio Informatics. In India, the largest market segment has been of health care

biotech products. The Bio Pharma accounted for more than 70% of the total biotech

revenues in 2006-07 (see Figure 1-2). According to an assessment10, 80% of the biotech

market consists of the following major products namely; Erythropoietin (EPO), Granulocyte

colony-stimulating factor (G-CSF or GCSF), HepB Vaccine, Human Growth Hormone

(hGH), Human Insulin and Interferon Alfa (Bowonder 2001 and Sen 2002).

Based on the current trends, the Indian biotechnology industry is estimated at US $ 5

bn revenue in 20 10 with about 100 biotech (domestic and imported) products in the market

and around 50,000 technologists working in the industry (BioSpectrum 2007)

Table 1-1. Global Biotechnology at a Glance, 2006 (US $m)

Public Company data Global us Europe Canada Asia Pacific

Revenues 73478 55458 11489 3242 3289

R&D expenses 27782 22865 3631 885 401

Net loss 5446 3466 1125 524 331

Number of Employees 1905000 130600 39740 7190 12970

Number of Companies

- Public Company 710 336 156 82 136

- Public and Private companies 4275 1452 1621 465 737

Source: Ernst & Young, 2007

Table 1-2. Indian Biotechnology at a Glance

Details 2006-07

Sales/Revenue $2bn+

Total Scientist 20,000

Companies/firms 400+ Total Institutions 240+

Source: Bto-Spectrum June, 2007 Vol5 (6)

10 Business World

9

I

Growth and Export Trends in Indian Biotechnology Industry Fig 1-1

9000

8000

7000

Ill 6000

Cll ... 5000 0 ... (.) 4000 Ill

0:: 3000

2000

1000

0 2002-03 2003-04 2004-05 2005-06 2006-07

Year

[IIIII Biotech Export - Bio Alarrrn Export ----6--- Biotech Industry Revenues

Source: Bio-Spectrum, Various Issues

Growth of Bio Pharma in Indian Biotechnology Industry Fig 1-2

9000

8000

7000

6000 , Cll 5000 ... 0 ...

(.) 4000 Ill

0:: 3000

2000

1000

0 2002-03 2003-04 2004-05 2005-06 2006-07

Year

[!Biotech ndustry Revenues • Bio Alarrra Revenues I

Source: Bio-Spectrum, Various Issues

10

1.3.2 Innovative Potential of Biotechnology Industry

Biotechnology is a knowledge intensive industry with high dependence on science

and research, the innovative potential of the sector determined in terms of the scientific

paper citations and the growth in the patents is crucial for the overall growth and

performance of the industry. Table 1.3 gives the scientific competitiveness indicators of

select countries in the area ofbiotechnology.

Table-1-3. Scientific Competitiveness Indicators

Country Scientific Paper citations Share of global Growth in Biotechnology Biotechnology Patents patent applications

Number Rank % Rank % Rank

us 37822 I 43.3 1 1.5 20 UK 7565 2 5.3 4 2.8 19 Germany 7497 3 9.6 3 . 10.1 . 6 Japan 6298 4 14.1 2 8.2 9 France 5172 5 3.6 5 6.3 14 Canada 4194 6 2.7 6 5.2 16 Italy 3363 7 1.0 15 8.1 10 Netherlands 2665 8 1.7 9 5.8 15 Australia 2273 9 2.1 7 3.9 17 Switzerland 2168 10 1.4 12 9.0 8 Spain 2042 11 0.8 16 12.9 5

Sweden 1960 12 1.2 13 7.8 11 China 1481 13 1.7 9 49.3 1 Belgium 1206 14 l.l 14 6.4 13 Denmark 1052 15 1.8 8 7.6 12 Israel 1039 16 1.6 11 10.0 7 Russia 1019 17 0.2 19 19.6 4 Finland· 893 18 0.5 18 3.1 18 Korea 841 19 - 22.4 3 India 789 below20 0.8 16 30.4 2

Data Sources: Beyond Borders, Global Biotechnology Report 2007, Ernst & Young, Organisation for Economic Cooperation and Development (OECD) and Thomson Scientific

Note : I. "Scientific Paper Citations"- Shows the number of citations in Scientific papers (in thousands), between I st Jan, 1996 - 31st August, 2006, from Thomson Scientific Essential Science Indicators

2. Share of Global Biotechnology patents- shows country's share of biotechnology patents filed under the Patent Cooperation Treaty (PCT), 2003, from the OECD Patent Database, Sept, 2006

3. Growth in Biotechnology Patent Applications- Shows growth in biotechnology patent's applications .to the European Patent Office (EPO), 1995 - 2003 from the OECD Patent Data base, Sept, 2006

4. - Data not available

11

It may be seen from the Table 1-3 that the leading countries are USA, UK, Germany,

France and Canada both in terms of scientific paper citations and in the share of global

biotechnology patents. Though India stands at a lowest rank in terms scientific paper

citations, but it is ranked second in the growth of biotechnology patent applications next to

China. Conversely, USA ranks at the bottom in terms of growth of biotechnology patents

. applications.

In case of India, a study by Kumar et al (2004) has shown an increasing trend/

growth both in the patents (at USPTO) and papers published in the biotechnology domain.

The rising trend of the Indian patents in biotechnology is also witnessed in the database of

the Indian Patent Office (see Table 1-4).

More particularly in case of health biotechnology, a study by Thorsteinsdottir et al

(2006) on the papers published shows a rising trend over the years (see Tablel-5) with an

average annual growth rate much greater than some of the developed countries such as

USA, Germany, Denmark, Australia, Spain etc during the period 1999-2002. The study also

showed a large number of papers published by India during 1991-93 as compared to other

developing countries such as China, Brazil and South Korea etc. This reflects India's early

prioritisation of biotechnology owing to the formation of a dedicated Department of

Biotechnology (DBT) by the government during the 61h Five Year Plan (1980-85) to

address the health needs of the country (see also Kumar et al2004) 11•

The study of the Biotechnology Patents (at USPTO) by Quach, U et al (2006) for

the select developing countries namely South Korea, India, China," Brazil, Cuba, South

Africa and Egypt revealed a high proportion of the total patents being accounted by the

11 Beyond mid -1990s, health biotechnology seemed to be taking off in South Korea and China, surging ahead oflndia despite an overall increase by several of the developing countries (see Thorsteinsdottir eta! 2006).

12

health sector (See Table 1-7). In case of India, 74% of the patents were in the health sector

while Cuba and Korea had more than 80% of the patents in the health domain. Interestingly

both the studies (Quach, U et al (2006) and Thorsteinsdottir et al 2006) showed that a

significant number, around 74% of both the papers and patents12 in health biotechnology

were held by the public sector research organisations comprising of Government research

labs and Universities. This confirms the findings of McMillan et al (2000) about the role of

the public science in the development of US biotechnology industry and thus provides

strong support for continued public sector research for the development of health

biotechnology in India. The role of the public sector research organisations supported by the

government in the development of Indian biotechnology industry forms a later part of the

discussion in the thesis (See Chapter 4, p.99 and Chapter 6, p.l91). The innovation trends

show that India has built a considerable technological capability in certain areas of health

biotechnology with public science playing a critical role.

T bl 1-4 T d . B" t h I p t t 1995 2006 a e . ren s m 10 ec no 02Y a en s -Year Number of Patents filed at Number of Patents granted

Indian Patent Office at US Patent Office 1995 172 5 1996 193 3 1997 279 7 1998 287 10 1999 162 8 2000 265 9 2001 451 19 2002 395 28 2003 23 36 2004 1214 31 2005 1525 24 2006 2774 32

Source: Data from 1995-2002 taken from Asian Biotechnology and Development ReVIew, Vol. 7(2), March 2005, for the period 2003 onwards data taken from Annual Report 2006-07, Indian Patent Office US PTO data - Science & Engineering Indicators 2008, NSF

Note: For India the year refers to the fiscal year

12 even more than 80%

13

T bl 1 5 T d . H I h B. a e - ren s m eat Iotec no OJ :y h I p ~ers m n Ia, -. I d. 1991 2002 Time Period Number of Papers

1991-1993 300

1994-1996 380

1997-1999 442

2000-2002 600

Total 1722

Source: Thorstemsdottir et al (2006), Int. J. biOtechnology, Vol. 8, Nos 112, 2006

Table 1-6. Percentage of papers in Health Biotechnology by Sector, 1991-2002

Country University(%) Govt Research Lab(%) Brazil 70 25

China 65 30

Cuba 7 90

Egypt 70 25

India 50 35

South Africa 75 20

South Korea 80 15

Source: Sc1ence-Metnx (data from Science CitatiOn Index Expanded,© Thomson lSI) in Int. J. Biotechnology, Vol. 8, Nos 112, 2006.

Note: 'Others' comprise of research by 'Clinics and Hospitals' and 'Company' %derived is indicative only;'-' Negligible

Others

-------

Table 1-7. Proportion of Health Biotechnology Patents Granted by USPTO, 1990-2003

Country Biotechnology Health Biotechnology Percentage Patents Patents (B/A)

(A) (B)

South Korea 337 198 59

India 178 132 74

China 98 68 69

Brazil 44 24 55

Cuba 29 27 93

South Africa 29 14 48

Egypt 12 3 25

Source: Quach et al. 2006 InternatiOnal Journal of BIOtechnology, Vol-8 Nos.112, pp 43-59

14

Table 1-8. Sectoral Break-up of Health Biotechnology Patents Granted by USPTO from 1990 to 2003

Country Patents Sectoral break-up(%) Granted

Industry Research Others Ind./Res.

South Korea 337 64 17 14 5

India 178 7 81 11 1 China 98 16 49 35 0 Brazil 44 29 54 0 17 Cuba 29 0 100 0 0 South Africa 29 47 33 20 0 Egypt 12 17 50 0 33

Source: Quach, U eta!. 2006 InternatiOnal Journal of BIOtechnology, Vol-8 Nos.l/2, pp 43-59

1. 4 Framework and structure of the study

1.4.1 Objective

A Country's innovation system consists of several actors such as Firms,

Government, Universities, Research Labs/Institutions etc. engaged in an innovation pursuit.

Each actor plays an important role and is involved in producing, distributing and using

technological learning and knowledge in the innovation system.

The innovation system model places the innovative private firms at the centre of

innovation and it rests on the premise that understanding the linkages among the actors

involved in innovation is the key to improving technological performance. The actors or

organisations and their inter-dependencies are further shaped by the institutions in an

innovation system (Lundval 1992, Nelson 1993, Malerba 2002, 2004 and 2005, Edquist

1997). Most of the innovations have occurred in firms in the developed countries (Edquist

1999, Nelson and Winter, 1982, Andersen, 1994). Studies on Indian health biotechnology

sector have further emphasized the role of private firms in addressing local health needs

(Thorsteinsdottir et al., 2004, Frew et a12006, The Rockefeller Foundation 2004).

15

The emphasis on participation of the private sector firms in the Indian health

biotechnology innovation is also being addressed through various policy instruments (Draft

National Biotechnology Strategy 2005 13, Science and Technology Policy 2003).

Thus the firm as the core actor, the innovation initiatives are paved by

interdependence it builds up with various other actors for gaining access to knowledge on

one hand and market on another. Market here means both the market for final product and

market for financial resources, human resources and physical resources. It is the efficiency

of building up appropriate network through various linkages forged between different actors

in the innovation process that define the efficacy of the interdependencies in the process of

innovation. It is this process that the study proposes to investigate for the health

biotechnology sector of India.

More categorically the objectives of the study is to understand the extent of

innovativeness of the firms in the health biotechnology sector in India through the linkages

they have built-up and pursued to capitalize such linkages to create entry and hold on the

final product market at national and international levels. The course of the study, therefore,

is guided by the answers to following questions:

l. What are the characteristics of linkages and other actors that firms had adopted as

the course of innovation?

2. How the firm specific linkages enabled the firm to the gains from innovation?

3. What is the institutional set-up within which firms in the Indian health care

biotechnology sector had to act, and how that had shaped the nature and extent of

technological learning or innovation initiatives in the sector?

In short, the thesis addresses the 'central' issue of tracing the innovative behaviour

and gains of firms through linkages.

13 The Draft National Biotechnology Development Strategy was approved by the Government in Nov 2007 .(Draft version was applicable at the time of chapter writing)

16

1.4.2 Conceptual Framework of the study

The National System of Innovation (NSI) and Sectoral System of Innovation (SSI)

are the conceptual frameworks in the literature on Innovation System that have emerged

during the last decade. Both the frameworks place interaction and learning among varied

actors at the centre for examining the innovation and technological change in a systemic

framework. According to SSI, Innovation in a sector is influenced mainly by three groups

of variables: knowledge and technologies; actors and networks; and institutions. SSI places

firm at the centre of innovation while NIS lays more emphasis on the non-firm

organizations and institutions affecting innovation and are bounded by the national domain

(see Malerba 2002, 2004, Edquist 1997,2004, Lundvall1992, 2002).

However, the innovation activities of firm (central actor) in both the frameworks

namely NSI and SSI are affected by the spatial dimension or scale of the system at the

international level termed as International System of Innovation {lSI), though SSI being an

'open' system itself. The new dimension of International System of Innovation {lSI) takes

into account an extended view of innovation by a firm and its dependency on international

information exchange and collaboration (See Niosi and Bellon 1994, Hotz- Hart, 2000,

Bunnel and Coe 2001). This is in line with the seminal work by Teece (1986) which reveals

that in some cases, when the innovation is systemic, "the successful commercialisation of

innovation by a firm requires complementary assets or capabilities which may be ot~er parts

of a system". This entails exploring the boundaries of the firm with regard to the national

innovation system as opposed to the sectoral innovation system.

1"7

J

- The international dimension of innovation is an emerging concept that has been

under-emphasised in the NSI literature which holds importance in case of less developed

countries where reverse technology transfer is often the major way to acquire know- how

(Chowdhuri and Islam 1993, Mowery and Oxley 1995). In the recent literature, a model

combining different spatial dimensions of innovation system namely regional, national and

international has been proposed in combination with Science Technology & Innovation

(STI) policies to understand innovation systems for newly industrialised countries in Asia

(See Fromhold- Eisebith 2006). Also, with the increasing complexities of emerging

technologies like ICT, biotechnology and nanotechnology and the multiplying convergence

between them, a greater need is felt for international S&T collaborations. Other scholars

(Desai 2007) argue that the linkages among the different spatial scales of innovation system

would provide a better understanding of the interactions between the international

institutional factors, R&D collaborations, and other linkages.

Influenced by the literature, a novel schematic model incorporating the various

spatial dimensions of innovation system namely national, sectoral and international has been

proposed for analysing the interactions of the innovative firm with other actors and

institutions to understand the health biotechnology innovation (See Fig 1-3). The schematic

model presents a system of innovation at super national level (Fromhold- Eisebith 2006),

where the national level or NSI is interpreted as a strong politically determined context with

a set of strategic STI promotion instruments influencing both the international and sectoral

system of innovation.

18

N A T I 0 N A L

B 0 R D E R

(NSI)

/ , , , /

International System of Innovation (lSI)

i

t::::)-= ~ j

-~G<i==C> ~

Local needs versus exporting

Fig 1-3

\ \

\

Fig 1-3. Own source, Schematic Diagram ofFirtn in a Health Biotechnology Innovation System, (influenced from Thoresteindottir et al 2004; Fromhold- Eisebith 2006)

Linkages/ Interdependencies

Determining and implementing framework (Policies and Institutions)

Influencing and contributing to performance

19

The model places the innovative firm at the centre of innovation with focus on

interactions with other actors and institutions in a systemic context to investigate the

innovation process. The conceptual model covers all the aspects of novelty, learning and

change apart from the market environment and the social context of the organization for the

study of the health biotechnology innovation in India.

Firms become the principal agent for examining the linkages while the institutions

have an important role in building the innovation in national context. The literature

suggests that there are two approaches to study NSI. The narrow approach of Nelson and

Rosenberg (1993) focuses on the set of formal institutions which are more directly involved

with the scientific and technological activities while the broader approach of Lundvall

(1992) encompasses also the process of organizational and institutional learning. The

narrow approach places emphasis on innovation as an outcome of the processes of learning-

by-searching of private institutions and learning-by- exploring of public institutions. The

broad approach places emphasis on the learning rather creation of knowledge and includes

all parts and aspects of the economic structure and the institutional set up which affect

I . b d f d . . . . 14 15 earnmg as a y-pro uct o pro uction activities · .

A combination of the two approaches of NSI was taken to study linkages at the firm

level and the impact of institutions on the innovation activity of firms. Nevertheless, our

conceptual framework has more pronounced features of the narrow approach of Nelson and

Rosenberg (1993), and at the same time it combines elements of the Lundvall (1992) broad

14 This include learning- by- doing, learning- by- using and learning- by- interacting as well the formal process of learning -by-searching and learning -by-exploring. 15 According to Anderson (1992), the more general definition by Lundvall (1992) extend to comprehend the process of learning as a by product of firm's normal activities, leads to the explicit consideration of the production system among the elements ofNSI.

20

approach to the NSI. The study explores all the basic dimensions of NSI as proposed by

Nelson and Rosenberg (1993) namely: i) the allocation of R&D activity and the sources of

its funding, ii) the characteristics of health biotechnology firms including their evolution and

growth, iii) the role of the public research organizations and iv) government policies and

instruments aimed to incentivise and regulate industrial innovation. This approach is in

agreement with the observations of Edquist (1997) that NSI focuses mainly on the features

of technological change despite the recognition of the importance of institutional and

organizational change with in a given institutional set up.

Apart from analysing the firm's linkages, it becomes equally interesting and

important to explore the capitalisation of the linkages by the firm with other firms and

public research organisations in building the innovation capability. The knowledge and

learning, built up through these interactions, have a complementary and supplementary role

in the innovation process of a firm.

The study uses a comparative case study analysis or approach, where the entity being

analysed is defined as a health biotechnology firm from the domestic private sector in the

country. In addition to the private firms, other actors engaged in interaction with the firms

are covered namely; government, universities, research institutions/labs engaged in

knowledge production; institutions and policy mechanisms involved in transfer of

technology and it's application leading to new products and processes in the human health

biotechnology sector.

The scope of the thesis is restricted to the biotechnology companies that use modem

biological techniques and tools 16 to develop products or services for human health care. The

study includes the companies involved in the development of health products using plant as

16 This includes genome-related technologies and tools such as bioinformatics and proteomics.

21

a source material. However, the biotechnology companies in the area of animal health,

agriculture, industrial manufacturing or environmental management are excluded from the

study. Further, the companies engaged in the medical devices/instruments, large

pharmaceutical firms, and medical Hospitals are also outside the scope of this study.

1.5. Methodology

The literature review draws our attention to the importance of linkages or

interactions and co-existence of actors and institutions within an innovation system. The

behaviour of a firm in an innovation system is influenced by large number of other actors

and institutions being set up by the government such as policy instruments, technical

standards, governing laws and regulations etc. The thesis aims at mapping the interactions

or linkages in the health biotechnology innovation system to the innovative performance of

firms.

The thesis primarily argues that the study of linkages in a systemic context is crucial

to understanding the transformation of knowledge or innovation at the firm level. The

intensity of interactions is a determinant of the innovative performance of the innovation

system. This constitutes the raison d'etre of choosing the innovation system perspective or

framework for analysing the problem or objective of the thesis.

The specific theoretical questions in the thesis about linkages and their empirical

validation in the health biotechnology innovation system require an in-depth analysis of the

occurrence, frequency and direction of the formal collaboration of a firm or a set of firms

(under study) with other firms and public research organisations, involving both market and

non-market interactions. The core question in the study is how linkages built-up by a firm

22

lead to innovation and gains from innovation. The question, therefore, is not regarding how

many firms adopt a particular type and extent of linkages. It is rather regarding how a firm

builds up linkages and derives benefit out of it. From the methodological point of view, the

reliability of the investigation is not dependent on the sample size of the firms studied.

Instead it is dependent on detailed understanding of the behaviour of a particular firm. The

proposed study, therefore, demands a systematic study either of a firm or set of firms, and as

such the investigation is neutral of number of firms studied. This is unlike the empirical

studies in the literature that focus on the firm specific determinants (see Shan 1990 and

Shan et al 1994) or the social capital (Walker et al 1997, Hsu 2006) on the alliance

formation in the biotechnology sector, requiring larger sample of firms and rather long

longitudinal dataset.

The advantage with the methodology is that it does not assume, a priori, the

existence of any innovation system. On the contrary, it traces the extent to which such a

system is created through firm's (central actor) initiatives for collaborations or linkages,

which may in tum, be observed to run regionally, nationally, and/or internationally, finally

to shape an innovation system. The suggested methodology clearly relates to the literature

on the benefits or disadvantages of having knowledge partners to develop new types of

knowledge and/or innovate (see Almand McKelvey 2000, McKelvey et al2003). Based on

the above understanding, the subsequent sections will discuss the study design and various

types of linkages that would be the mainstay of the study.

23

1.5.1 Study Design

1.5.1.1 Firm as an Innovative agent

Firms are the key innovative agents influencing Biotechnology innovation in

' developed countries. {UNCTAD 2004, Bartholomew 1997, Reiss et al 2004, NSF 2001,

and Ernst and Young 2006). Firms are considered unique in having the requirement to

combine and articulate the multiple kinds of knowledge to innovate and build the

capabilities to develop a commitment to a particular kind of solution (Malerba 2004 p. 428).

According to Cohen and Levinthal (1990) though each firm has its own internal capabilities,

what is important is the ability to connect this with organizations that are external to the

firm, which, collectively comprise the innovation system relevant for innovative

performance in a specific context. Evolutionary economists have argued that one should

consider firm as the unit of analysis in innovation studies as they carry innovations and

compete in the markets (Nelson and Winter 1982, Anderson 1994).

The literature on the health biotechnology innovation in developing countries

(Thoresteindottir et al 2004, UNCTAD 2004, Frew et al 2006 and UNDP 2004) has also

emphasized upon the role of private sector firms to m~et the local health needs. Thus, the

firm as a unit of the analysis or central actor in the innovation system assumes importance in

Indian context too, in harmony with the evolutionary economists view.

1.5.1.2 Choice of firms for case study

The private firms chosen as the unit of analysis are at the core of the innovation and

are essentially responsible for integrating various sources of knowledge in health

biotechnology and turning them into products and services. The recent study by

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Thoresteindottir et al. (2004) has argued that despite the common problems 17 the successful

innovation in health biotechnology has been taking place in several developing countries

including India.

In line with the objective of the thesis, a comparative case study analysis of four

successful health biotechnology firms in the country was considered an ideal choice for

examining linkages or interactions among other actors and institutions to study health

biotechnology innovation in a systemic perspective18• The firms selected for case study were

involved in the broad area of medical biotechnology or overlap between biotechnology-

pharmaceuticals. The systemic case study approach will enable capturing the quality,

content, type and the significance of the interactions, appropriate in the context of our study

which otherwise is difficult as per the empirical studies on internationalisation/ inter-

dependence of innovation systems for USA, Japan and leading European countries by Niosi

and Bellon (1994,1996).

The guiding rationale behind the selection of the four successful firms comprised of

variety of indicators or heterogeneous attributes such as market position of firms (in terms

of sales turnover), geographical location, engagement in active knowledge generation ( high

R&D intensity), and the specialized knowledge-product focus or product portfolio coupled

with historical factors such as establishment year, family business or first generation

entrepreneur etc. Further, consultations were also held with the domain experts19 for the

selection of appropriate firms for the case study.

17 The common problems in developing countries include shortage of financing mechanism, resources for fostering startup creation and sustainability etc 18 Despite the thesis being firm 'number neutral'( see section 1.4.2) 19 Expert consultations were held in the Drug and Pharmaceutical Programme, Department of Science

and Technology, New Delhi and with scientists at Indian Institute of Science, Bangalore.

25

The above guiding principle/rationale led to the selection of four successful firms

each with differences and similarities within well defined product groups in the Indian

health biotechnology sector. The four successful health biotechnology firms selected were

Biocon Ltd., Bangalore, Panacea Biotech Ltd., Delhi, Shantha Biotechnics Pvt. Ltd.,

Hyderabad, and Dabur Pharma Ltd., Ghaziabad.

Three firms namely Biocon, Bangalore; Panacea Biotech, New Delhi and Shantha

Biotechnics, Hyderabad are among the list of Top 20 private firms in the Indian

Biotechnology Industry as per the list published by the Biospectrum Magazine20• The firm

'Biocon' being an established leader in the biotechnology business is the first integrated

biotechnology company, has risen from producing and selling enzymes to

biopharmaceutical products in the oncology/diabetes segment. The firm 'Panacea' though

started with the pharmaceutical products in pain management and diabetes segment and

later got diversified into biopharmaceuticals, has established its name in the polio vaccines

and is engaged in the new combined vaccines segment. Similarly, 'Shantha' though a late

entrant, started with the vaccines segment and shot to fame for developing the first

indigenous recombinant Hepatitis-B vaccine. This drastically brought down the cost of the

Hepatitis-B vaccine to make it more affordable for the masses which earned the company

national recognition/ award.

While the fourth firm 'Dabur', though not included in the Top 20 list of

biotechnology firms21, has been actively involved for more than 15 years in the drug

20 The successful firms are ranked based upon their annual Sales Turnover figures. 21 According to the Editor Biospectrum Magazine, biotechnology companies using plant as source in making

the health products were excluded in the survey and there are now attempts in the latest survey to incorporate them as well.

26

discovery/ research in oncology segment, and has intense involvement with the public

research organisations through the government programme namely 'Drugs and

Pharmaceuticals Research Programme (DPRP)'. The details of the firms and their historical

dimensions may be seen in Table 1-9.

Table 1-9 Firms Historical Dimensions Firm, Place & State Establish- Business Biotechnology Product Segment Category

ment Promoter Integration in Year to the business

(Year) Biotech. Based Panacea Biotech Public 1984 family 1993 rDNA Vaccines, Ltd., Okhla, business new combined

Delhi Vaccines

Dabur Pharma Public 1883 ($) family 1994 new oncology Ltd., Ghaziabad , business drugs (under Uttar Pradesh development) Shantha Biotechnics Pvt. 1993 first 1993 rDNA Vaccines, Ltd., Hyderabad, generation New combined Andhra Pradesh entrepreneur Vaccines,

Cancer drug, Growth hormone, MAB

Biocon Public Ltd., 1978 first 1978 Enzymes, Statins, Bangalore, generation rDNA- MAB, Kama taka entrepreneur EPO,

Streptokinase, Insulin

($) - Dabur phanna was mcorporated m 2003 to look after mamly the specialized Oncology Segment. Dabur started working in the Oncology area in 1991 •- Started as a Indo-Oman Joint Venture (50:50) **- Started as joint venture with Ireland based Biocon Biophannaceuticals Ltd. MAB- Monoclonal antibodies; rONA- recombinant DNA

· -- Not Applicable

Other Seg_ment Pain management, Diabetes,

Cardiovascular, anti-diabetic, anti-bacterial

--

--

Incidentally, all the case study firms at the time of the study were recognized or have

applied for recognition of R&D unit with the government. The successful firms had

consistently high R&D intensity apart from the high sales turnover figures (see Fig 5-1, 5-3

and Table 5-11, 5-18 Chapter-5). According to Cohen & Levinthal (1989, 1990), the high

R&D intensity firms apart from generating innovations, have the high absorptive capacity to

exploit external knowledge and establish linkages with the external actors or organisations.

Thus, despite the dissimilarities, the case study firms have exhibited stability ie.,

27

consistency and continuity over time in innovative activity, with a high potential or

tendency of linkages formation, central to the study of the thesis.

1.5.1.3 Institutional aspect

To explore the role of the institutions, the study covers S&T policies and other

regulatory instruments introduced by the government from time to time in fostering the

growth of health Biotechnology in India. The policies and regulatory instruments effective

for the growth of S&T in general are categorized as 'Horizontal' and those in particular for

the biotechnology domain are categorized as 'Vertical'. Also included for an in-depth

examination are the nature and extent of interactions of the case study firms with various

public research organisations working in various S&T disciplines including health

biotechnology. The institutional factors like IPR, ethical issues and other regulations etc.

which gained importance particularly in the Post-WTO scenario (since 1 Jan 2005), have

become an independent domain and subject matter of specialized enquiry and are covered

only as a part of the general discussion being primarily restricted in the context of the case

study firms in the thesis.

1.5.1.4 Data Collection

Data was collected for the central innovative agents (firms in our study), and other

actors or organisations namely Government, public research organisations (universities/

research labs) engaged in the health biotechnology innovation in the country. In addition,

the data on Government policies and other regulatory measures introduced at various points

of time was also collected, and their impact assessed. As a result, the data base on the firm

linkages since their inception upto the period 2005 along with other relevant innovation

parameters was developed involving both primary and secondary sources.

28

The primary data on case study private firms was collected from multiple sources,

namely key documents, survey questionnaire and interviews with experts. The key

documents include company's Annual Reports, brochures and business plans that describe

the philosophy and business practices of each firm. A suitable semi-structured (open-ended)

questionnaire was designed (see Appendix- A) followed by a personal visit to each of the

firm's site (including manufacturing plant) to elicit information on various quantitative and

qualitative innovation parameters in the health biotechnology. An in-depth interview was

held with R&D chiefs and other key persons of the study firms. The questionnaire sought

information from the respondent firms for the period 1999-00 to 2003-04, which was

divided into various sections namely general information, innovation and research

infrastructure and S&T knowledge base including human resources, linkages, output of the

innovation and innovation environment. The primary firm level information was further

supplemented and complemented through the relevant secondary sources like Ernst and

Young Report, Newspaper reports, Chronicle Pharmabiz weekly reports, Websites,

Directory of Bio-technology Industries and Institutions (BCIL), Govt. of India, and CMIE

Firm profile database (Capital Line) to trace the information on linkages and other

historical/ macro details since inception upto 2005.

The data pertaining to the government policies, programmes and instruments

introduced at various points of time by the Government was collected from the published

literature such as Annual Reports of Ministry of Science & Technology, Website and other

related documents. In addition, personal interactions in three major scientific departments

were held with the programme coordinators/officials involved with the Drugs &

Pharmaceutical Research Programme (DPRP), Department of Science and Technology

(DST); erstwhile Programme Aimed at Technological SelfReliance (PATSER), Department

29

of Scientific and Industrial Research(DSIR); Small Innovation Business Research Initiative

(SffiRI), Department of Biotechnology (DBT) and New India Millennium Technology

Initiative (NIMTLI), CSIR to have an updated and informed picture in the area of national

biotechnology innovation. Further, personal interactions with the expert scientists in public

research organisations having interaction with the study firms namely National Institute of

Immunology {Nil), New Delhi; Jawaharlal Nehru University (JNU), New Delhi; Institute of

Genomics and Integrative Biology (!Gill), Delhi University Campus, Indian Institute of

Science (liSe), Bangalore; Centre for Cellular and Molecular Biology (CCMB), Hyderabad

etc were also held to have an informed picture of the advanced research, technology

development and industrial linkages or consultancies being undertaken by these institutes.

1.6 Organisation of the Research Study

The study is organised in 7 chapters, chapter 1 being the introductory chapter. The

key theoretical questions of the study guide us to the review of literature, detailed in

Chapter 2. The chapter reviews the innovation literature with focus on the theoretical

foundation useful for analysing innovation in system perspective in general and in the area

of health biotechnology in particular. The National System of Innovation (NSI) and Sectoral

System of Innovation (SSI), the two complementary conceptual frameworks that emerged

during the last decade to analyse the innovation system, place interaction and learning

among varied actors at the centre for examining the innovation and technological change in

a systemic framework are discussed in the chapter. Also, the empirical studies on innovation

and technological change in health biotechnology segment utilizing the innovation system

perspective in general and with special emphasis on linkages or interactions in particular

both in the context of developed and developing countries are also reviewed. The empirical

literature findings throw light on the role of the various actors and institutions involved in

the health biotechnology innovation in the specific context which form a basis for guiding

the future course of action in the subsequent chapters. The prime actor in the innovation

system, the 'firm' is a boundedly rational agent. The firm cognition- beliefs, objectives and

expectations are being affected by the history or previous learning and experience, industry

structure including the environment. In this context, Chapter 3 presents an overview of the

health biotechnology industry in India. It discusses the evolution, structure and growth of

health biotechnology firms and contributed in guiding the selection of firms for undertaking

the case study. Chapter 4 deals with the central question of the thesis, the interactions or

linkages among the actors or case study firms in the national health biotechnology

innovation. The chapter provides and in-depth understanding of the varied market and non­

market interactions or linkages and their subdivisions in to technological, production and

marketing. It also analyses the complementarities between the market and non-market

interactions of firms. In addition, the historical features influencing the firm's linkage

characteristics and their innovation behaviour are also analysed. Chapter 5 addresses

another central question, capitalization of linkages by the firms in building or enhancing

their capability for innovation.

The literature shows that the institutional set-up is the fundamental dimension of the

NSI. The uncertainties that characterize the innovation obscures the rational decision

making and thus makes it essential to include institutions22 in understanding the behaviour

or decision of the firms in relation to innovation and innovation systems. Chapter 6

addresses the key research question about the role of the government while discussing the

dynamic perspective of institutional change crucial for the development of biotechnology

innovation system in India. It primarily analyzes the policies, organisations, institutions and

instruments introduced by the government that have shaped the nature and extent of

22 The institutions are understood as rules, norms and habits, for details see North, D.C. (1990).

31

innovation activities in this sector. The chapter also addresses the essential determinants of

the biotechnology innovation system namely the issues of knowledge support,

commercialization of research, collaborative research, financial support, regulation and IPR

in the area of health biotechnology in Indian context. Chapter 7 presents the summary,

conclusions and policy implications of the research study. The chapter also discusses the

scope for the future research.

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