The Response of the Indian Pharmaceutical Industry

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Radical technological discontinuities or institutional changes have significant impact on the performance of firms, and may sometime even cause failure of established firms because even though these firms recognise the need to change in response to shifts in their external environment, they are often unable to do so (Christensen, 1997; Henderson & Clark, 1990; Tushman & Anderson, 1986; Utterback, 1994). Athreya, Kale and Ramani (2009) have argued that in absence of a radical technological discontinuity, even disruptive regulatory changes require reorientation of technological capabilities. Thus, drastic regulatory changes also call for reconfiguration of existing competencies, and creation of new knowledge by firms to remain competitive (Pai, 2007).

In highly dynamic environment, the ability of firms to realign, reconfigure and renew their existing capabilities and competencies, and create new knowledge for innovation has emerged as a critical capability for sustained performance in the industry (Dosi, 1988; Pavitt, 1991, Teece, Pisano, & Shuen, 1997). Several scholars have, therefore, examined this aspect with great interest in developed as well as developing countries. These studies claim that knowledge and ability to leverage it is the key factor for differences in performance between the firms in the industry (e.g., Henderson & Clark, 1990; Kogut & Zander, 1992; Leonard - Barton, 1995; Nonaka & Takeuchi, 1995; Teece et al., 1997). Nelson and Winter (1982) have argued that each firms' access to technological and organizational knowledge is different and conditioned upon its past learning. This kind of learning and the consequent stretching of profit possibilities in production is "localized" within firms and so is difficult to imitate by other firms. Thus, this perspective emphasizes the heterogeneity of firm capability as well as its stickiness implying that firms pursue different strategies that are optimal given their firm-specific capabilities.

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But the focus of these studies has been different in developed and developed countries. While the studies conducted on the high technology firms from developed countries have mainly examined the capabilities and knowledge creation with reference to sustaining and renewing strategic innovative capabilities that already existed (e.g., Cohen & Levinthal, 1990; Prahalad & Hamel, 1990; Kogut & Zander, 1992; Nonaka & Takeuchi, 1995; Spender, 1996), they have not looked into the important aspect of how such knowledge and capabilities were accumulated by these firms. On the other hand, the studies conducted on the firms from developing countries have primarily focussed on the process of knowledge creation and capabilities accumulation (e.g., Bell & Pavitt, 1995; Dahlman & Westphal, 1982; Hobday, 1995; Lall, 1987). These studies have mainly concentrated on examining two issues: (i) the learning process involved in building minimum knowledge base to engage in innovation activity, and (ii) the process of capabilities accumulation in firms in long-run. The extant literature has not paid much attention to a very critical aspect - capability transformation, which is particularly important in the context of developing countries because as compared to the developed countries, economic, political and social complexities in developing countries makes the capability transformation an extremely difficult and challenging process.

The effect of disruptive regulatory changes on firm strategy is a major concern of literature on capability reconfiguration, and it is to this stream that this article makes two significant contributions. First, this paper explores the process involved in the capabilities transformation to develop new competencies as a response to far-reaching changes in the regulatory environment. Second, it affirms the heterogeneity in the learning processes by showing that firm-level learning is neither automatic nor linear, and requires a deliberate and conscious learning strategy. The Indian pharmaceutical industry provides an appropriate setting for this study as the agreement on Trade Related Aspects of Intellectual Property Rights (hereinafter TRIPS Agreement) brought in drastic changes in the intellectual property right regime, which severely impacted the Indian pharmaceutical firms (Pai, 2007). The full scale compliance of TRIPS Agreement essentially represents a big step in the opposite direction, a radical regulatory break, as it effectively ended more than three decades of protection for Indian companies and terminated legal 'reverse engineering' (Rai, 2008b) The new patent regime throws a new challenge to the Indian pharmaceutical industry to maintain its competitiveness and profitability (Rai, 2008b). It has caused severe crisis for the Indian pharmaceutical sector as most of the firms had developed core rigidities in 'reverse-engineering' processes, and were unable to look beyond current market needs (Leonard-Barton, 1992). The new patent regime has, therefore, compelled the firms that which had developed knowledge and capabilities in 'reverse-engineering' based R&D to reconfigure their knowledge and capabilities for R&D-based innovation to survive and compete (Chaturvedi & Chataway, 2006). Thus, the Indian pharmaceutical industry provides a fitting context and compelling case to examine firm level learning processes in realignment, reconfiguration and renewal of their existing capabilities and competencies for innovation and to also explore inter-firm differences in the learning processes.

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Rest of the paper is organized into ___ sections. In the second section, I trace the evolution and development of the Indian pharmaceutical industry to get an in-depth understanding of the impact of regulatory changes on organizational transformations and learning processes. In the next section, I briefly discuss the theoretical underpinning regarding the mechanisms through which firms can transform themselves in response to environmental challenges. I also develop a theoretical framework which guides this study. In the fourth section, I describe the methodology of the study and rationale behind using such a research design. In fifth section, I look at how Indian firms are strategizing for innovation-based post-TRIPs competition; describe key observations of a few firms chosen for this study, and point out the mechanisms by which these firms have moved away from being imitative to becoming innovative. In the penultimate section, while discussing the key observations of this study, I map the transformation of Indian firms as they move from process engineering (working at the lower end) to drug discovery (the higher end of pharmaceutical value chain). I conclude this paper with a few final thoughts, including a summary of firm-level strategies and theoretical and managerial implications of the study.

An overview of the Indian pharmaceutical industry

The Indian pharmaceutical industry today is in the front rank of India's science-based industries with wide ranging capabilities in the complex field of drug manufacture and technology. It ranks 4th in volume and 13th in value in the world today, accounting for 8% of global production and 2% of the world pharmaceutical market (OPPI, 2009). It has a production value of approximately $4.5 billion and employs 5 million workers directly and 24 million workers indirectly (OPPI, 2009). The Indian pharmaceutical sector is, however, highly fragmented with more than 5,500 registered units (Sampath, 2005). The path of growth and development of the Indian pharmaceutical industry has been very torturous and eventful. Thus, in order to understand how changes in policy regimes have influenced technological choices and trajectories of Indian firms over time, it is crucial to look at them in the context of key historical factors.

The origin of Indian pharmaceutical industry can be traced back to 1903 with the formation of Bengal Chemical and Pharmaceutical Works in Calcutta by Professor P.C. Roy (Smith, 2000). In spite of modest efforts on the part of the colonial Government to spur domestic production, India mostly remained dependent on the UK, France, and Germany for medicines during the first half of the twentieth century (Smith, 2000). After the independence in 1947, even though the Government's emphasis was on rapid industrialisation and invested heavily in core sectors, including pharmaceuticals, it did not discourage multi-national companies (herein after MNCs) from competing in India as there was no viable alternative for MNCs (Chaturvedi & Chataway, 2006). Thus, even well after independence, the MNCs dominated the Indian pharmaceutical industry and drug prices in India were among the highest in the world (Kefauver Senate Committee Report, 1962).

The situation today is diametrically opposite; the life-savings and other essential drugs are available at affordable prices (Chaturvedi & Chataway, 2006). This accomplishment is mainly attributed to critical changes in the policy and technology advancement consciously followed by the Indian Government due its socialist vision (Rai, 2008a). The evolution Indian pharmaceutical industry can be traced back under four major policy and time-frames.

Post-independence technology efforts (early years)

The Indian government's vision to reduce dependency on multinational firms for drugs, especially antibiotics, marked the starting point of building self-sufficient local production facilities in the pharmaceutical sector (Rai, 2008a). The government took its first concrete step towards self-reliance in pharmaceuticals and healthcare in 1954 with the establishment of Hindustan Antibiotics Limited (HAL), followed by Indian Drugs and Pharmaceutical Ltd. (IDPL) in 1961 (Smith, 2000). Although, the government held pharmaceutical companies were grossly inefficient, they helped self-reliance in many ways. First, it showed that it was possible to produce drugs in India at competitive costs. Second, it developed human and physical capital. Third, it stimulated the existence of a network of support institutes, pharmacy colleges, and up and down stream businesses (Smith, 2000). In addition, these two enterprises played important role in diffusing significant spill-overs in terms of technical know-how, technology transfer and the technology innovation process/system itself, and more importantly in generating entrepreneurs (Chaturvedi & Chataway, 2006).

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Despite the above initiatives, even two decades after the independence, the Indian pharmaceutical industry was dominated MNCs, most of which had minimal physical operations in India (Smith, 2000). Though the MNCs did not contribute to the local industry, the regulatory environment provided dual benefits to the MNCs: firstly, they could operate in a free a market; and secondly, they enjoyed exclusive rights over the patents for 16 years under the Patents and Design Act, 1911 (Chaturvedi & Chataway, 2006). The combination of these provisions had a negative impact on the industry. The government companies alone were not sufficient to jumpstart local production because they needed a way to compete with more experienced and better endowed foreign firms (Rai, 2008a).

Post-1970 technological progress

Before 1970, patent protection provided under the Patents and Design Act, 1911 encouraged foreign inventors and foreign R&D. MNCs patented their inventions in India, but did not produce locally, using the patents to establish a protected foreign market in the country (Justice Ayyangar, 1959). Given the strong product patent regime, there was little international transfer of technology to the industry and most of the patent holding MNCs engaged merely in importing bulk drugs and processing them into formulations (Rai, 2008b). The indigenous pharmaceutical industry was virtually non-existent in 1970, with 15% of Indian firms as against 85% MNCs in the local market (Pai, 2007). In this backdrop, the need for a policy instrument, which facilitated technology acquisition and transfer, development, diffusion and incremental innovation, was felt (Rai, 2008b). This imperative requirement was facilitated by the Indian Patent Act, 1970.

In the 1970s, in addition to enacting the Indian Patent Act, 1970, Indian government introduced an array complex laws and policies primarily to achieve three objectives: firstly, to regulate the pharmaceutical industry; secondly, to thwart monopoly abuses by multinationals; and thirdly, to promote local industry. The measures included changes to foreign exchange regulations, restriction on FDI, Drug Price Control Order (DPCO), industrial licensing and, most significant of all, the recognition of patent on processes and not on products (Rai, 2008b). This enabled local firms to legally produce compounds that were patented elsewhere through reverse-engineering processes and cheaply sell copies of all major drugs (Rai, 2008b). The Patents Act, 1970, which came into effect in 1972, represented a significant change in the legal and technological regime and had an enormous impact on the technological evolution of the pharmaceutical industry in India (Chaturvedi & Chataway, 2006). The stated objective of the Act was to foster development of an indigenous Indian pharmaceutical industry and to guarantee access to low-cost drugs to the Indian public Rai, 2008b). These reforms set the foundation for generic drug production and also enabled the emergence of a competitive domestic pharmaceutical industry.

Technological progress in the liberalised economy

Before liberalisation began, protection of domestic production and local technological efforts enabled India to build up a diverse and fairly sophisticated base in the pharmaceutical sector. This ratio of 15% Indian firms to 85% foreign firms in 1970 grew to 50% each of Indian and foreign firms by 1982, which further increased to 61% Indian firms versus 39% foreign firms by the year 1999 (Sampath, 2005). Of the top 10 firms in 2001, eight were Indian firms and only two were subsidiaries of multinational companies (IBEF, 2004). This trend of having Indian companies dominate the list of top ten companies in the market continues even today. However, the indigenous firms still lacked in technological advancement and genuine innovative products (Chaturvedi & Chataway, 2006). The series of major economic liberalization measures taken by the Indian Government in 1990s led to significant policy changes such as de-licensing, liberalization of imports, etc. in the pharmaceutical sector also. Opening of Indian market to foreign firms and imported goods stimulated the demand for improved manufacturing processes and new products drove the need for new technology and innovative products at par with international products (Chaturvedi & Chataway, 2006).

The new patent regime (TRIPs) and challenges ahead

The growth of the Indian pharmaceutical industry over the last four decades has largely been due to various policy initiatives taken by the Government, especially the Indian Patent Act, 1970, which allowed the domestic manufacturing and marketing of patented products without a licence (Rai, 2008b). The Act enabled the Indian companies to develop competence in applied research for developing production-process technologies, particularly for synthetic bulk drugs (Rai, 2008b).

The rules of the game, however, have completely changed for the Indian pharmaceutical industry with the implementation of TRIPS Agreement, which obligates the member countries to recognize and enforce product patents in all fields of technology, including pharmaceuticals (Rai, 2008b). To meet its obligations under the TRIPS Agreement, India has amended its patent law in 2005, abolishing its 'process' patents law and reintroduced 'product' patents for pharmaceuticals, food, and chemicals (Sampath, 2005). With the end of transition period in January 2005, the pharmaceutical firms have now obtained full scale patent protection on their products in major markets in developing countries, such as, India, and prevent local firms from manufacturing generic copies of their patented products.

At the national level, these challenges require a change in emphasis in the current pharmaceutical policy and the need for new initiatives beyond those enumerated in the Drug Policy 1985, and modified in 1994, so that policy inputs are directed more towards promoting accelerated growth of the pharmaceutical industry and towards making it more internationally competitive (Chaturvedi & Chataway, 2006). The Drug Policy, 2002 was framed to address some of these issues. Correspondingly, changes are required at the firm level, with more emphasis and focus on technology and innovation. Indian pharmaceutical firms need to enhance innovation efforts and increase R&D investments to produce quality drugs, whether generics or new, to remain competitive in the liberalized market and to enhance exports to the developed world (Rai, 2008b; Sampath, 2005). The new product patent regime demands reconfiguration of their knowledge and capabilities and for indigenous research to enable the industry to achieve sustainable growth.

Capability Reconfiguration: Theoretical Underpinnings

How does rapid environment change affect the nature of organizational capabilities required to maintain competitive advantage? How do incumbent firms reconfigure their capabilities in response to such change? These questions have drawn vast attention from the researchers and they have looked it from many different angles how environmental factors such as policy, knowledge and market dynamics can affect firm-level strategies. Schumpeter (1947), with his 'gales of creative destruction', gave a rich description of the dynamism of innovation and its effects on industrial and world economy. Many authors further elaborated on this theory, notably Rosenberg (1969), Nelson and Winter (1977) and Freeman and Perez (1988). A very different and dominant paradigm that emerged in strategy during the 1980s was the competitive forces model developed by Porter (1990), wherein he argued that industry structure strongly influences the competitive rules of the game as well as the strategies.

Another distinct class of approaches that link firm-specific capabilities and assets with its strategies, often referred to as the resource-based perspective, have their roots in the much older work of Penrose (1959) and Selznick (1957). Recently there has been a resurgence of interest in the role of firm's resources and capabilities as the foundation for firm strategy (Teece et al., 1997). Modern literature on innovation management has identified knowledge as a critical resource, and research and innovation as firms' core competencies (Leonard-Barton, 1992; Malerba & Orsenigo, 2001; Pavitt, 1990). Keller (2004), in a recent review of the resource-based model of the firm, noted that researchers are increasingly focusing on the intangible resources of diverse knowledge bases and capabilities which differentiate firms and lead to superior performance.

Yet another stream of scholars, the evolutionary economists, emphasize that the capacity of the firm to renew or reconfigure technological capabilities is based on the ability of that firm to develop new competencies, by acquiring new knowledge and integrating or combining it with existing knowledge bases (Cohen & Levinthal, 1990; Teece et al, 1997; Eisenhardt & Martin, 2000). The firm's ability to develop new competencies depends upon its learning capacity, and Cohen and Levinthal (1990) refer this organizational ability as 'absorptive capacity.' I have used the Teece et al.'s (1977) 'dynamic capability' and Cohen and Leviathal's (1990) 'absorptive capacity' frameworks to develop a theoretical model for this study.

Absorptive capacity as a dynamic capability: A theoretical model

Teece et al. (1997) have proposed a dynamic capabilities framework comprising a triad of forces, which influence the development of firms' competitive advantage: (i) internal processes of the firm - both organizational and managerial; (ii) asset positioning of the firm in the market; and the (iii) paths open to it consequent on the first two factors. Often the paths open to firms may be quite narrow making value-augmenting strategic change slow and incremental (Athreya, 2009). According to Cohen and Levinthal (1990), absorptive capacity tends to be cumulative and path dependent as it builds on prior knowledge base and experience which is firm specific. This accumulated prior knowledge is essential to a firm's absorptive capacity as it increases the ability to make sense of, assimilate and exploit new knowledge bases (Cohen & Levinthal, 1990). Research shows that the firms that conduct their own R&D are better able to use externally available information (e.g., Tilton, 1971; Allen, 1977; Mowery, 1983 as cited in Cohen & Levinthal, 1990), which implies that absorptive capacity may be created as a byproduct of a firm's R&D investment (Cohen & Levinthal, 1990).

Although according to the RBV, the firms who build their capabilities on knowledge that are rare, costly and difficult to imitate gain a competitive advantage and deliver superior performance (Barney, 1991), in rapidly changing environment, due to radical technological changes, drastic policy change, etc., these capabilities tend to erode over time. . Hence, firms need to adapt and respond to the changing environments either by reconfiguring their existing capabilities or developing new capabilities from existing organizational knowledge (Leonard-Barton, 1992). And if reconfiguration of existing capabilities is found to be inadequate, a firm may turn to external sources of knowledge to develop desired capability reconfiguration that may be different from its current set of capabilities (Lane & Lubatkin, 1998).

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Figure 1 about here

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In addition, firms seek to augment their absorptive capacity by entering into collaborative ventures with other firms, academic institutes, research institutes, universities, etc. in areas complementing their own knowledge base (Senkar & Li, 1999). Thus, absorptive capacity of a firm depends upon following interrelated dimensions: (i) firm's prior knowledge base acquired by it over the past years, (ii) firm's ability to acquire knowledge relevant to the new technological or policy paradigm, (iii) firm's ability enter into collaborative alliances with external resources and acquire knowledge in complementary area rather than solely searching for knowledge, which is identical to the existing knowledge base, (iv) firm's ability to integrate the newly acquired knowledge into existing capability, and (v) firm's ability to exploit externally acquired or assimilated knowledge (Cohen & Levinthal, 1990; Eisenhardt & Martin, 2000; Pennings & Harianto, 1992, Jansen, 2005).

Building upon the dynamic capabilities view of the firm (e.g. Eisenhardt & Martin, 2000), Zahra and George (2002) reviewed, re-conceptualized, and extended the absorptive capacity construct by distinguishing between potential and realized absorptive capacity. Potential absorptive capacity, which includes knowledge acquisition and assimilation, captures efforts expended in identifying and acquiring new external knowledge and in assimilating knowledge obtained from external sources (Zahra & George, 2002). Realized absorptive capacity, which includes knowledge transformation and exploitation, encompasses deriving new insights and consequences from the combination of existing and newly acquired knowledge, and incorporating transformed knowledge into operations (Zahra & George, 2002). Based on Zahra and George (2002), Liao, Welsch, and Stoica (2003) posited that a firm's absorptive capacity consists of two major components: external knowledge acquisition and intra-firm knowledge dissemination. External knowledge acquisition refers to a firm's ability to identify and acquire new external knowledge that is critical to a firm's operations. Intra-firm knowledge dissemination involves the communication of the newly acquired knowledge to all relevant departments and individuals (Cohen & Levinthal, 1990).

Zahra and George (2002) have distinguished four dimensions of absorptive capacity, namely, acquisition, assimilation, transformation and exploitation, each having a crucial role in explaining how absorptive capacity can influence innovation. Acquisition refers to a firm's capability to identify external information through interaction with the external environment (Yli-Renko, Autio, & Sapienza, 2001). Assimilation refers to a firm's routines and processes that allow it to process interpret and understand the information obtained from external sources (Zahra & George, 2002). This is an important aspect of absorptive capacity as slow assimilation can undermine a firm's ability to achieve sustainable advantage (Rindova & Fombrun, 1999). Transformation entails combining the assimilated external knowledge with existing and internally generated knowledge (Zahra & George, 2002). Finally, exploitation refers to the ability to transform this knowledge into a competitive advantage to meet the environmental demands (Lane & Lubatkin, 1998).

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Figure 2 about here

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Based on the dimensions of absorptive capacity discussed above, I develop a theoretical framework for this study (Figure 3), which focuses how a firm responds to a change in the external environment for development, reconfiguration and transformation of new capabilities and competencies. The proposed framework essentially covers six mechanisms: (i) knowledge accumulation mechanism, which essentially represents the prior knowledge base, i.e. the content and location of knowledge in the firm prior to the environmental change; (ii) knowledge transfer mechanism, which represents the transfer of knowledge between the external and internal sources of knowledge; (iii) knowledge acquisition mechanism, which represents firms capability to identify interaction with the external environment; (iv) knowledge assimilation mechanism, which represents the way in which firms internalize the newly accessed knowledge; (v) knowledge transformation mechanism, which represents how firms integrate the assimilated external knowledge with the prior knowledge base; and (vi) knowledge exploitation mechanism, which represents the ability to transform this knowledge into a competitive advantage, and use it for decision making to effectively respond to the environmental changes.

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Figure 3 about here

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Conclusion

This research contributes to the neglected area of research in developing countries literature by investigating transformation of capabilities and development of new capabilities in firms from developing country. It shows that development of new capabilities involved removal of capabilities which were redundant in new era, acquisition of new knowledge and combination of new knowledge with existing relevant capabilities. The analysis revealed that in case of Indian pharmaceutical firms the main rigidities that emerged are a. imitative R&D organisational routines, b. in-house nature of R&D and c. organisational mindset shaped by short term vision of R&D investments and domestic market approach.

This study also shows that development of new capabilities not only includes acquirement of new knowledge and technology but also removal of redundant capabilities. The study reveals that some Indian firms have created knowledge and acquired innovative abilities through in-house activities and, through alliances with Indian and overseas research institutes.

Indian pharmaceutical firms hired product R&D experienced scientists working overseas in MNC pharmaceutical R&D firms or universities to acquire the know-how in innovative product R&D. These firms developed linkages with Indian as well as international research institutes to fill the knowledge gaps and train its scientific workforce. However analysis also shows differences in functioning and implementation of learning processes in each firm suggesting that at firm level learning is neither automatic nor linear and requires a deliberate learning strategy.

The accumulation of technological knowledge is complex and often a costly process of technological and organisational learning. Bell et al., (1984) point out that absence of sustained efforts to acquire and use the capabilities necessary for continuous technological change often results in failure of learning processes in firms from developing countries.

It is sometimes suggested that firms in developing countries have accumulated technological capabilities in particular sequences, moving through definable stages (Dhalman, et al., 1987). The learning hierarchy model suggests that developing countries progresses from learning to produce, learning to produce efficiently, learning to improve production, learning to improve products and finally culminates in learning to develop new products. It has even been suggested that these sequences and stages can provide guidelines for both firm level strategies and government policies.

In a very general sense, such sequences do reflect realities. For example firms in different industries seeking to improve their technologies generally have to build on what already exists. Beyond such guidelines however rigid ideas about sequences and stages may be misleading, especially at the firm level. This research shows that the learning processes which underlie accumulation and development of knowledge require technical as well as organisational knowledge management capabilities. The important aspect of this learning involves discarding the competencies which might have been useful in an earlier era but not relevant in new environments. The doing aspect (the link to production experience) remains necessary but not sufficient to development of innovative capabilities. Thus this research points out that the move from basic to intermediate and to advance level capabilities is neither linear nor automatic. It requires a deliberate effort from firms to invest in different mechanisms of learning. This finding supports observations made by researchers like Bell and Pavitt (1993), Forbes and Wield (2002) that technological learning is neither automatic nor linear and depends upon the decisions firms make.

Inter firm comparative analysis shows the subtle differences in learning processes in each firm. For example in the case of hiring the product R&D scientists, the nature of scientists targeted for recruitment as well as sources used by firms for recruiting new scientists differed a lot. Similarly inter firm differences emerged in supportive learning mechanisms which influenced the creation of the environment that encourages interaction among distributed knowledge systems and facilitates the development of collective knowledge. The learning mechanisms like incentive policies, top management commitment and emphasis on collaboration and networking differed across the firms. The rate at which a firm moved in accumulating capabilities and the subsequent level of sophistication varied as does the potential sequencing of capability development among different functional areas. Firms need a diverse set of learning mechanisms and reliance on a single mechanism is unlikely to yield any effective organisational learning (Figueiredo, 2003). The evidence suggests that functioning and implementation of a diverse set of learning processes plays a crucial role in technology capability accumulation and a continuous effort should be made to improve the learning processes particularly their functioning and implementation. Therefore, firms need a consistent and continuous strategy to manage and organise the diverse set of learning processes.

The variability of the technological accumulation patterns suggest that the need for care and clarity in choosing specific strategies for accumulating technologies at firm level. Knowledge acquisition through practice often happens in social contexts (Lave and Wenger, 1991). Much of the knowledge generated through R&D activity is of a tacit nature and located in the specific context in which it was developed (Nelson and Winter, 1982). Chataway et al., (2003) suggest that the challenge faced by social knowledge is that it may not be acknowledged by management. Bell and Pavitt (1993) pointed out that there are few guidelines for firms to follow in designing strategies to move from the basic level to the advanced level of capabilities.

In this regard the findings of this research provide insights for R&D managers in terms of activities involved in creating an environment that facilitate the development of a knowledge creation capability for innovation. This research emphasised the importance of organisational mechanisms in innovative new product development and showed the distinct role of knowledge management strategies in shaping the learning environment that facilitated transformations of technological capabilities in Indian pharmaceutical firms. To larger extent knowledge creation depends on absorptive capacities but as the Indian pharmaceutical industry's example shows some things like firm based strategies, mechanisms of knowledge management and their networks make the difference. The Indian pharmaceutical firms' development of innovative R&D capability suggests that the firms and networks can become more adept at creating learning environments which enhance sense making and sourcing capacities.

The importance of these internal activities in the capability development process raises an important implication for firms in Indian industries as well as other developing countries. The limited resources typical in many firms in developing countries hinders their ability to provide necessary environments in terms of recruitment of talented personnel, extensive knowledge sources, training and organisational mechanisms to facilitate capability development. Hence in the future, emphasis of the technology policy should be on providing mechanisms that will help firms increase their awareness and access to external knowledge. Technology policy should assist firms in creating linkages between their internal capabilities and external knowledge and help in assimilating these associations into business opportunities.

Figure 1. Model of sources of firm's technological knowledge (Cohen & Levinthal, 1990)

Figure 2. Absorptive capacity and innovation outcomes (Adapted from Fosfuri and Tribo (2006); Jansen (2005))