Innovation & Imitation in an Industrial Organization – Pharmaceutical Industry

Innovation is widely recognized having sequential and complementary nature, especially in research-oriented industries. Gort and Klepper (1982) found that on an average 19 sequential improvements occurred to 23 major innovations and there were many more uncounted improvements. Analysis has revealed that most of the productivity gain is achieved through improvements to the original innovation. A firm that patents its product to protect its innovation can thwart its competitors from using that product (or sufficiently similar ideas) to further develop the innovations.

Since these competitors may have important ideas not available to the original firm about how to achieve such innovations, the patent may therefore slow down the pace of invention. Further, a firm may well be better off if other firms imitate and compete with it. Although imitation reduces the firm’s current profit, it raises the probability of further innovation and thereby improves the prospect that this firm will make another profitable discovery later on. In short, when innovation is sequential and complementary, normal reasoning about patents and imitation may change.

Imitation becomes a driving force to innovation, while strong patents become an obstacle. Pharmaceuticals are traditionally a highly R&D intensive sector that has undergone a series of radical technological and institutional shocks. However, the core of leading innovative firms and countries has remained quite small and stable for a very long period of time, but the degree of concentration has been consistently low, whatever the level of aggregation is considered. The above stated patterns of industrial dynamics are intimately linked to two main factors.

First is the nature of the processes of drug discovery, and second is the fragmentation of the relevant markets. Specifically, innovation processes have been characterized for a very long time by low degree of cumulativeness and by “quasi-random” procedures of search (random screening). Thus, innovation in one market (a therapeutic category) does not entail higher probabilities of success in another one. Moreover, pharmaceuticals represent a case where competition is less dissimilar to the model of patent races.

Understanding if these intuitive factors can indeed explain the observed patterns of industrial dynamics and articulating the mechanisms through which they exert their impact is in itself an interesting challenge. (Malerba, Orsenigo; 2001 p. 2) A second reason why the pharmaceutical industry is particularly interesting is that this sector is usually considered as strongly science-based. However, science has influenced industrial research in quite different ways over time.

Indeed, in the recent past the advent of a new science – molecular biology – has had a dramatic impact on industry structure, the organization of innovative activities and the competitiveness of firms and countries. Thus, the analysis of the pharmaceutical industry lends itself to a study of a classical and extremely important chapter of the economics of innovation, i. e. the relationships between scientific research and industrial innovation. Further, there is a social cause associated with the pharma industry in the form of life saving drugs and in most of the countries; there exists price regulation in the larger interests of the society.

Imitation exists at a large scale in the form of generic formulations. Once the salt composition in case of a new product becomes public, other firms immediately imitate the product getting the same end result may be using a different process. Thus imitation may result in further innovation of new processes, which may be more cost effective. (Malerba, Orsenigo; 2001 p. 2)

Third, the pharmaceutical industry, ever since its inception, has been deeply affected by a large variety of institutional factors and policies, ranging from patents, different forms of regulation (procedures for product approval, price controls, etc.), organization of the public research systems, etc. As the industry develops new products as well as there is imitation of products when the patent period expires, generic drugs flood the market reducing the market share of the original and setting in new market dynamics.

Usually the innovators are left wondering whether they were even able to recover the cost of research. From this perspective, pharmaceuticals constitute an ideal case for studying the innovation and imitation in an Industrial organization. (Malerba, Orsenigo; 2001 p. 2)