Governments have always occupied the commanding heights of the economy through which they have had a colossal impact on the evolution of industries. It would seem rather improbable that a full-fledged industry could thrive while being on the adverse side of regulation. The rise and the fall of Napsteris a good example. While Uber may seem to be at the other extreme, it is worth remembering that this revolution could easily be quashed if the Californian states government had been more sympathetic to the concerns of the taxi unions. We would probably not had a company commanding a $40Bn valuation and an ever expanding global presence.
Government’s role in the developmental stages of an industry is no different from that of a parent in shaping the future of their child. An open playground with no rules enhances the creative aspect of the child. A mild set of rules coupled with incentives can help the child attain traditional definitions of “success” while very stringent rules often destroy the potential.
The Govt. of India has been notorious for its red tape and “License Raj”. This created bottlenecks for flow of capital and stifled the creative zeal of Indian entrepreneurs. On the other hand certain policies of the government created tremendous business opportunities. These were lapped onto by few first generation entrepreneurs, now running successful global businesses worth billions. Dilip Sanghvi (founder Sun Pharma) – now the richest Indian, was one such pioneer.
Indian Pharmaceutical industry before the 70’s was nothing but a bunch of MNC’s dumping expensive drugs with very limited supply. Most Indians had limited access to life saving drugs. In 1972, the Indira government stepped in and amended a law, which would forever change the landscape of pharmaceutical industry in India.
The government introduced the new Patents Act, which excluded pharmaceuticals and agrochemical products from being eligible for patents (this was amended later in 2005 under pressure from the WTO). This exclusion was introduced to structurally cure India’s chronic dependence on the import of bulk drugs and to facilitate the development of a self-reliant indigenous pharmaceutical industry. What this essentially meant was that patents held by pharmaceutical companies (which they spent billions on for R&D) were no longer applicable to the Indian market.
At the same time pharmaceutical companies were filing for patents in other markets, invariably exposing their composition to the world. Lack of patent protection in India meant that anyone in India could copy them, without having to spend a single dime on research. Overnight, Indian companies had access to complex compositions of several life saving drugs and were legally able to start manufacturing those drugs. This resulted in the development of considerable expertise in reverse engineering of these drugs.
The absence of product patent protection forced many multinationals to limit their Indian portfolios to patent expired products or a few selected patented products. Indian manufacturers were able to aggressively wrest market share from the incumbents. The foreign firms were required to pay royalties for international drugs, while Indian companies could access the newest molecules from all over the world and reformulate them for sale in the domestic market. Their formulations couldn’t compete with the cheap, reverse engineered Indian variants.
But these MNC’s did enjoy patent protection in their foreign markets, so how did Indian Pharmaceutical companies go global? Well, patent protection is offered to companies for a maximum period of 20 years. During this period the Indian pharmaceutical industry grew rapidly by developing cheaper versions of a number of drugs for the domestic market. Eventually, when the international patents did expire, they moved aggressively into the international market with generic drugs. With a tried and tested domestic market, they got expedited approvals. Faster product cycles, lower employee costs and no R&D costs ensured that their products were 20% – 90% cheaper than the original drugs and thus were lapped up by consumers in the international markets. Today Pharmaceutical exports clock over $20B annually and are one of the major contributors to the GDP.
The growth of the Information Technology (IT) industry presents quite a stark contrast to what the Pharma companies enjoyed in their nascent stages. It may be argued that the IT industry’s rise in size and stature is partly attributable to government neglect during its initial growth phase.
Infosys, a company recognized as the pioneer in the software outsourcing industry, did in no way receive any government support during its formative years. In the early years, Mr. Murthy (co-founder & CEO) faced immense hurdles, which would have been enough to deter the resolve of the strongest willed individuals. Infosys had to wait for a full year for the government to allow purchase of the company’s first computer. It is believed that Mr. Murthy was forced to make over 300 trips to the Govt. offices in Delhi to obtain necessary approvals.
Lack of efficient communication channels meant that Mr. Murthy and his colleagues had to travel very often to work alongside their clients, most of whom were located in the US. The by-product of this seemingly inconvenient exercise was that they gained key insights into the US markets and were able to develop strong relations which turned out to be instrumental over the next few years.
In the late 80’s and early 90’s, stringent Government rules ensured that US visas were very hard to acquire. Infosys was forced to establish its first direct communications link to the US in ’89, which later validated that offshore outsourcing could infact work.
This is not to say that the Government had no positive role to play in making the IT industry the largest export revenue generator for India. For instance, in the early 90’s the Govt deregulated the telecom industry, following which massive investments were made in setting up communications links to the rest of the world. Costs of using these services declined dramatically, and the economic potential of Infosys’s GDM (Global Delivery Model) grew manifold. All of a sudden it was possible to send software back and forth in the blink of an eye. Infosys could connect to mainframes in the US from terminals in India. This enabled a new range of services to be delivered remotely, including ongoing maintenance and user support. The rest was history….
While the success stories of entrepreneurs who found themselves on the receiving end of the political machinery cannot be discounted, it is evident that creating new, innovative and disruptive businesses could go a long way with ‘minimum’ government intervention. They are the custodians bearing the responsibility of encouraging innovative culture and providing a legal framework on which the entrepreneurial spirit can prosper.