Nowadays the quartet of Brazil, Russia, India and China – the BRICs – are so often described as the future engines of the world economy, that it has become something of a cliché to say so. Yet it is obvious based on the past decade that these countries, in particular China, have huge potential for future growth and have also been outperforming major developed economies for some time. Nevertheless, they often face major stumbling blocks, many of which are of their own making.
As part of the BRIC quartet – and the second largest market in the world by population – India has seen significant annual inflow of FDI over the past 40 years, increasing from less than $45m in 1970 to more than $31bn in 2011. And for the period from 1980 to 2011, the total accumulated foreign investment grew to more than $200bn, according to data from Unctad.
FDI is, of course, an important broad measure of a country’s attractiveness for investing and doing business, and FDI into emerging economies has increased markedly since the 1980s as globalisation, as well as technological and financial advances, has allowed investment capital to move much more freely around the world.
Yet although annual inflows of FDI to India have increased since the early 1980s, they are significantly less than those of India’s BRIC peers. And on a per capita basis, they are much lower than other emerging economies. For example, Chile attracted $26.4bn in FDI in 2012 with its population of fewer than 20 million. This is only slightly less than India with its population of more than 1.2 billion, which attracted $27.3bn in 2012, according to Unctad estimates.
The decision to invest in a given economy is dependent on a number of factors that together shape an economy’s intrinsic and relative attractiveness for FDI. Viewing only one single factor in isolation is both difficult and potentially misleading. Yet over the past few decades, substantial empirical literature has been written on the effects of intellectual property rights (IPRs) on economic development, innovation, technology transfer and international trade.
Much of this literature suggests there is a strong and positive correlation between IPRs, FDI, trade and economic development. The exact impact of IPRs depends on a country’s development, income level and technical capabilities. But overall, the relationship is positive, particularly with regard to FDI.
India has been obliged since 2005 to approve patent protection and a host of other IPRs as part of its membership of the World Trade Organisation (WTO). However, after an initial period of reform and implementation of a number of important aspects of the WTO’s Agreement on Trade-Related Aspects of Intellectual Property Rights, India’s national intellectual property environment has deteriorated markedly since the late 2000s.
Indeed, compared with many other emerging markets, India’s intellectual property environment is underdeveloped, with significant weaknesses in both the availability of intellectual property protection, as well as enforcement through administrative and judicial redress. For instance, the ruling earlier this year by the Indian Supreme Court regarding the cancer drug Glivec has not only delivered a significant blow to multinational pharmaceutical companies (two sitting judges denied the granting of patent protection sought by Novartis), but has also re-affirmed India’s long-running suspicion of the importance of protecting IPRs.
Indeed, an index of IPRs recently published by the US Chamber of Commerce’s Global Intellectual Property Centre (GIPC), and developed by the Pugatch Consilium consultancy, benchmarked 11 countries, of which seven were middle-income countries. In the index, India ranked last of the 11 countries benchmarked. It achieved a total score of 6.24 out of an available 25 and ranked at or near to the bottom in all categories measured in the index. India also did noticeably worse than all its fellow BRIC economies, as well as the other middle-income countries benchmarked such as Mexico, Chile and Malaysia. In fact, these three countries achieved scores nearly double that of India.
So what potential does India have to increase its annual inflows of FDI if it strengthens its IPR environment? The OECD has estimated that improvement in a country’s national intellectual property environment could lead to an almost threefold increase in its FDI.
If we apply this relationship to India, it is likely that if India improved its IPR environment to the average level of the BRICs or other middle-income countries as measured by the GIPC Index, in other words by about 15% to 22% as measured by the index, it would see a positive and potentially even double-digit increase in inward FDI.
India’s failure to develop and adhere to international best practices in the field of IPRs appears to be holding back international investment. If India wants to catch up to its peers, adopting a stronger IPR framework and more pro-intellectual property policies is very likely to attract more FDI and help India develop more quickly as well as to grow the innovation and intellectual property-dependent sectors of its economy. If it fails to address these aspects of its economic performance, however, the Indian elephant may continue to lumber along while the rest of the emerging market tigers race ahead.
Dr David Torstensson is a senior consultant at Pugatch Consilium (www.pugatch-consilium.com) and co-author of Measuring Momentum: GIPC International IP Index.