No Such Thing As A Free Lunch: Invenstment, Technnological Upgrading, and Exports in Indian Pharmaceuticals

The Indian pharmaceutical industry’s exports began to exceed its imports in the late 1980s. Since then, exports have grown rapidly, and the leading Indian firms have become significant exporters of generic drugs to the most advanced markets, including the U.S. As the Indian pharmaceutical industry increases its R&D spending and innovative efforts, leading firms clearly hope to export new products and processes to the U.S. and other advanced markets. Because it constitutes a (rare) example of a high tech exporting industry in a developing country, the Indian pharmaceutical industry provides an interesting context in which to explore the relationship between exports and technological upgrading. We investigate these linkages in this paper. The received literature has suggested that the exposure to advanced country technologies achieved through exports should lead to technological improvements in the exporting firms’ products and processes. Researchers have generally tried to measure these improvements by looking for changes in exporting firms’ measured total factor productivity that could be ascribed to increase in exports. The conceptual association in the literature between technological learning or upgrading through exports and increases in TFP is so strong that the phrase “learning by exporting” has come to mean an increase in TFP following an increase in exports. We find that there is not much learning effect (from exports) observed for the overall industry. Some apparent learning effect is observed for a section of the industry, but only for firms who appear to be technologically backward within the industry. The leading firms that have undertaken the most technological upgrading and have had the most success exporting to the most advanced markets appear to show no signs of “learning by exporting.” The concentration of apparent “learning by exporting” effects in technologically backward firms would appear to be highly problematic. Given the narrow way the received literature has conceptualized learning by exporting effects, we might be lead to conclude that these either do not exist in the Indian pharmaceutical industry or are unimportant for its significant firms. We disagree with this assessment, and our disagreement is partly founded on our belief that the received literature has conceptualized the “learning by exporting” phenomenon too narrowly. Exports can induce technological upgrading even if conventionally measured TFP fails to rise after exports start. In making this criticism, we are contributing to a stream of recent papers which also argue that past work has looked for the effects of exporting on technological upgrading in the wrong places. Recent work by Trefler (2008) and Javorcik et.al (2008) argue that the learning by exporting literature should take a more inclusive view of the phenomenon. They argue that exporting often follows substantial (costly) investment by the firm that allows it to raise its product/process quality to the levels required by more advanced markets. In the Indian pharmaceutical industry, while we find only weak evidence of TFP growth after exporting, we find strong evidence of significant increases in capital investment prior to exporting, and this is especially true for firms exporting to the most advanced markets. We refer to this as a “getting ready to export” effect, following Javorcik et al. (2008), and present arguments supporting the view that these investments can be viewed as a form of costly technological upgrading.