Legal Regime Change and Innovation: Foreign Exchange Regulations and Pharmaceutical Sector R&D in India

Abstract

This chapter examines the impact of changes in foreign exchange legislation on the levels of R&D undertaken by pharmaceutical firms in India. Foreign exchange legislation in India was codified as the FERA, passed in 1973, and the legislation was based on the mens rea principle, assuming criminal intent on the part of transgressor. The provisions of FERA were replaced with those of new legislation, called FEMA, in 1999. The impacts of the changes have been examined.

The examination has been based on panel data of Indian pharmaceutical firms over a period of fifteen years, from 1991–1992 to 2005–2006.

The results of the analysis have shown that, controlling for a variety of other factors, a transition from FERA to FEMA has been associated with a significant rise in pharmaceutical firms’ average levels of R&D undertaken.

The research establishes that institutional changes have significantly impacted innovation performance in India. The sector examined, pharmaceuticals, is important for the Indian economy as well as for general welfare, since its products help enhance the quality of lives. How innovation can be enhanced in this sector is an important policy consideration.

The research is the first to examine the impact of changing the laws relating to foreign exchange transactions in India on capability building, via undertaking research activities, in an important sector of Indian industry.

Citation

Majumdar, S.K. (2012), "Legal Regime Change and Innovation: Foreign Exchange Regulations and Pharmaceutical Sector R&D in India", Zerbe, R.O. and Kirkwood, J.B. (Ed.) Research in Law and Economics (Research in Law and Economics, Vol. 25), Emerald Group Publishing Limited, Leeds, pp. 75-103. https://doi.org/10.1108/S0193-5895(2012)0000025008