Cultural Interests vs. Modernization: Robert Shapiro on IPR & Innovation in India

The closed door round-table discussion had been organized by policy research and advocacy organization, The Takshashila Institute, and hosted by Cobalt, a recently opened co-working space in Bangalore. The event's speaker, Robert Shapiro, has advised U.S. President Bill Clinton, British Prime Ministers Tony Blair and Gordon Brown, and U.S. Vice President Albert Gore, as well as AT&T, Exxon-Mobil and Google, on economic policy and security matters. Recently he co-authored an economic research paper, titled, How India Can Attract More Foreign Direct Investment, Create Jobs and Increase GDP, which can be accessed here.

Within this paper, Shapiro and Dr. Aparna Mathur of the American Enterprise Institute argue that the most effective way for India to attract “further investment and job creation for improving the innovation environment in India” is by respecting the intellectual property rights of foreign investors—specifically within the pharmaceutical sector. The main points made by Shapiro within his session and research paper will be looked at closer to follow.

FDI to spur innovation

Shapiro started the session by introducing the controversy over the role of innovation in economic processes. Contrary to the belief that the majority of economists share—that innovation happens outside the economy incidentally “because someone happens to have a bright idea”—Shapiro suggests that innovation plays a much more integral role within an economy, and even goes as far as considering innovation the most powerful underlying factor (possibly more so than education). Shapiro asserts that without innovation, “every economy has to stall out,” and what prevents this is new capital changing productivity and growth rates; and in India's case: through foreign direct investment (FDI).

With reference to China's manufacturing sectors, Shapiro depicts the immense benefits stemming from FDI. As a direct effect, he states that not only do new technologies come in but new ways of financing and management are brought in as well. The bulk of the impact of FDI, however, is an indirect function, resulting from a “spillover effect” at a regional level as more and more companies begin to adopt the ways of the new enterprises. The impact of innovation, however, is an exclusive function of how effectively it is applied. In order to maximize foreign investment, Shapiro stresses the need to eradicate any barriers to new businesses so that they may adopt and adapt to the new incoming technologies.

On several occasions within his address and the accompanying discussion, Shapiro had asserted India as being an outlier in terms of FDI, with emphasis on India's FDI rates being half of those of Malaysia and Thailand (countries implied to be incomparable to India in an economic sense). He admits that he does not understand the reasons for this discrepancy, as standard economic factors alone cannot explain this; such as a country's market size, availability of labour, and quality of infrastructure (despite India's room for improvement here).

In order to understand India's FDI rates then, Shapiro offers the importance of considering the political factors at play to the same extent as the economic ones (if not, more) with some of such factors being: the state's attitudes towards property rights, bankruptcy regime, levels of corruption, and the enforcement of contracts and intellectual property rights.

And it is supposedly here, at this last factor, where the central issue lies for India.

IP as a product of cultural decisions

As new ideas continue to dwarf the value of physical capital, economies are increasingly composite of these intangible assets (intellectual property)—such as patents, copyright, software and name brands—or at least within the US economy anyway. These intellectual asset-intensive economies are not limited to industries such as pharmaceuticals, software, and IT hardware (as one might initially suspect); rather, those of media, automobiles, beverages and tobacco and other consumer goods. In 2011, Shapiro states, half of US industries equalled or exceeded the three former industries in intellectual assets. These industries, which had formerly been sectors based on production, have now outsourced their production schemes to India and China.

Shapiro explains these economic trends as a function of a repeated set of choices in support of American values of growth, prosperity, and individualism. He continues in saying that cultural values are also important to consider when trying to undergo modernization. A country with more traditional values would be wrong to strive to modernize at the same rate as that of the US, for example. In such a case, modernizing at a much slower rate is advisable, and if this is unfavourable, Shapiro alternatively suggests that “you can sometimes change culture by changing the law.”

But how are US and Indian industries comparable, then, if India's economy is arguably a platform for production of US-owned intellectual assets? What are the odds that Indian companies will actually own their resulting innovations stemming from foreign investments? Presumably not very high.

And what sets of choices has India made to reflect its own sets of cultural values and principles in contrast to those of the US?

Consequences of a weak IP regime  and over-regulation

Within his recent research paper, Shapiro recounts Indian laws related to IPR over the years and how the country's weak international IP regime has paved the way for its thriving generic pharmaceutical industry. Through enforcing restrictions on patent filings, shorter patent terms, and compulsory licensing, the Indian Patent Office enabled the manufacturing of domestic pharmaceutical products without having to pay outgoing royalty (or to a lesser degree) in promotion of increased access to medicines for Indians at much more affordable prices.

Shapiro argues that this disregard for foreign IPR discourages foreign companies from wanting to enter the Indian market in the future for fear of imitation products coming about to their detriment. Shapiro argues that if India adopted stronger IP rights and enforcement, FDI to the country's pharmaceutical industry would increase drastically; more so, if India adopted an IP system comparable to the US, FDI flows could even rise by 83 per cent per year, making it a centre for innovative pharmaceutical R&D. Just as well its access to new innovative drugs would increase by 5 per cent, contributing to a higher life expectancy and a larger work force (Shapiro, p. 3, 2014).

An IP regime comparable to the US and Europe, Shapiro suggests, promotes both endogenous and exogenous growth while bringing about competitive markets “with pockets of monopolies throughout.” Such [patent] regimes have evolved over decades and “simply work well,” he states. Also, in requiring patent applicants to publish all secrets—that which makes the invention novel—others are given the ability to benefit from such knowledge.

So then, is India wrong in making decisions in accordance with its own set of cultural values and principles if they are not necessarily in accordance with those of the US?

Arguably not. However, as Shapiro demonstrates, such decisions may bare consequence in India's pursuit to modernize as a member of the World Trade Organization (WTO) that is not exactly in compliance with Trade Related Aspects of Intellectual Property (TRIPS) standards. India may also be missing out on greater importation of technologies if foreign companies fear that their products will be imitated by local companies. According to Shapiro, India's services sector (including banking, insurance, outsourcing, R&D, courier and technology testing services) contribute to 60 per cent of the country's GDP, yet have declined in FDI for several reasons including the country's weak IP regime, as well as government regulations capping the maximum investments of foreign companies (Shapiro, p. 37, 2014).

Which brings us to the notion of market deregulation as a mechanism of promoting FDI. Shapiro suggests this to be essential for India to enable a more even playing ground for new and emerging players to compete. A regulatory issue arises when new companies are up against companies receiving government subsidies. In this way, such regulations may also prohibit companies from reorganizing to implement new technologies or practices, undermining the spillover effects that FDI can bring about.

IPR adoption vs. innovation

Shapiro stresses the importance in not only allowing companies to implement new technologies, but to encourage them to do so as well. A common mistake developing countries make, he says, is trying to be the source of innovation: “Although it's nice to be the source of innovation, what is more important is to adopt innovation of others.” In response, a contribution to discussion made by a fellow attendee commented on the inclination of developing countries to first duplicate, then adapt, and then innovate for themselves.

So what is India left to do then? How do Indian companies navigate along the fine line distinguishing between adopting new technologies and duplicating them? And if innovation is so integral to a country's economy, will merely adopting and adapting to emerging foreign technologies suffice for the country's economy? Or can India only progress away from “duplication” with stricter IPR enforcement?

While citing studies based in Europe, Shapiro illustrates the relationship between IP regimes and inventions. The study's findings displayed that while there is no relationship between IPR and occurrences of inventions, there is correlation between IPR and the kinds of inventions. Jurisdictions with strict IP laws and greater IP protection were likelier to bring about inventions with significant business value, while the inventions of other jurisdictions without IPR did not entail the same level of business value—one cannot simply reverse-engineer a food invention for study, he says.

This is not as to say that Indian companies cannot innovate. “India has a lot of innovators,” Shapiro says, “but they're in California and New York and Washington.” Even in these hubs for innovation, the Indian demographic is highly disproportionate, and estimated to be 20-40 per cent of the workforce, suggesting the potential of Indians in terms of innovation. Shapiro poses the question: “Why are they leaving?” and stresses the importance in India understanding this phenomenon.

The modernization tradeoff

Is the departure of some of India's innovators another consequence of the country's path to modernization whilst maintaining cultural values? Just as some foreign pharmaceutical companies may stay far away from the Indian market?

If so, is India truly better off in striving for redemption from under the close watch of the US and in pursuit of foreign direct investment? What opportunities or cultural values might be abandoned within the domestic market in favour of foreign bodies, then? And more specifically, what would a stricter IP regime mean for the future of the generic pharmaceutical industry, and in turn, the cost of access for medicines that are presently only affordable through the bypassing of international IP standards?

Just as Shapiro gives importance to the consideration of political and cultural factors at play within one's economy, it is, then, essential to look beyond what the US wants for India economically to factor in what India wants for its own economy and the cultural and political reasons for such. I think we can both agree on the significance of India considering the consequences of resulting economic decisions (i.e., regarding market regulating and IP enforcement) from proxies inclusive of Indian consumers, as well as international bodies to the extent of the global systems that India is implicated in.

But what about the question of innovation for India's economy? In the tradeoff between innovation (and prosperity) versus duplication (and accessibility), is a country of 1.2 billion people with different cultural values and economic needs really fair game to be idealized as “comparable to the US” in terms of its economic laws? Economist Robert Shapiro seems to think so.