Risk Tolerance & Innovation in India - A cultural insight

Indian businesses are known for their low risk tolerance. Even in a high competitive, research oriented industry such as Pharma, Indian firms: Cipla, Ranbaxy, Dr Reddy Labs, Sun Pharma etc., thrived on reverse engineering and producing generic versions of patented drugs.

Things changed in 2005, when India switched to product patent regime. Indian pharma companies promptly adopted by hiving off their R&D divisions into separate ventures. Their main rationale to spin of the R&D centers:- "Reduce Risks"; Drug research is expensive and returns are not guaranteed, therefore investments in R&D will affect the profitability of the company and will reduce share holder value, thus by spinning of the R&D unit into a separate venture, the R&D expenses will be off the books. Since the Indian investors are looking for immediate returns - which will be met by selling generics, companies were happy to spin off their R&D wings.

For more information see: http://www.thehindubusinessline.com/2007/12/05/stories/2007120554120900.htm

The other rationale for spinning off the R&D part of the business is to capitalize on India’s R&D strengths by having tie-ups with global pharma firm’s R&D efforts.

"Four major drug firms -- Dr Reddy's Laboratory, Sun Pharmaceuticals, Nicholas Piramal India Ltd and Ranbaxy Laboratories -- spun off their research and development and drug discovery operations into separate units to unlock better value for shareholders and attract funds for new products. The collective market capitalization of new research entities is estimated to touch $120 billion in less than a decade."

For more information see: Indian pharma cos on R&D drive in 2007

What can we learn for this?

The collective exercise of Indian pharma companies gives us insights into the workings of the Indian culture and its attitude towards innovation:

• Indian companies will invest in product innovation only when they are forced to do so.
• Protecting shareholder value is most important. I.e., Companies are not high on risk tolerance, unlike the American businesses, Indians will not bet the company on any product innovation.
• Indian companies are high on leveraging their strengths - Spin off their R&D units and get external investors to fund the R&D part of the business. Thus attracting a different set of investors who have higher risk tolerance